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2002

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

F O R M  1 0 - K

For the Fiscal Year Ended December 31, 2002

OR

Commission File Number 1-983

National Steel Corporation

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:    574-273-7000

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

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

None

(Title of class)

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

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

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

At June 28, 2002, there were 41,288,240 shares of the registrant’s common stock outstanding consisting of 22,100,000 shares of Class A Common Stock and 19,188,240 shares of Class B Common Stock.

Aggregate market value of voting stock held by non-affiliates: $2,601,015

The amount shown is based on the closing price of National Steel Corporation’s Common Stock on the OTC Bulletin Board on June 28, 2002. Voting stock held by officers and directors is not included in the computation. However, National Steel Corporation has made no determination that such individuals are “affiliates” within the meaning of Rule 405 under the Securities Act of 1933.

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National Steel Corporation

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PART I

Item 1.    Business

Introduction

National Steel Corporation, a Delaware corporation (together with its consolidated subsidiaries, the “Company”), is one of the largest integrated steel producers in the United States and is engaged in the manufacture and sale of a wide variety of flat rolled carbon steel products, including hot-rolled, cold-rolled, galvanized, tin and chrome plated steels. We target high value-added applications of flat rolled carbon steel for sale primarily to the automotive, construction and container markets. Our principal executive offices are located at 4100 Edison Lakes Parkway, Mishawaka, Indiana 46545-3440; telephone (574) 273-7000.

National Steel Corporation was formed through the merger of Great Lakes Steel Corporation, Weirton Steel Corporation and Hanna Iron Ore Company and was incorporated in Delaware on November 7, 1929. Following are the major events impacting our ownership since incorporation:

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Proceedings Under Chapter 11 of the Bankruptcy Code

On March 6, 2002, National Steel Corporation and forty-one of its domestic subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the “Bankruptcy Court”). Certain majority owned subsidiaries of National Steel Corporation have been excluded from the Chapter 11 filings. The case was assigned to Judge John H. Squires and is being jointly administered under case number  02-08699. We also obtained Bankruptcy Court approval of a $450 million Secured Super Priority Debtor In Possession Credit Agreement with the existing senior secured bank group, which combined with other actions has been used to fund post-petition operating expenses as well as supplier and employee obligations.

Historically low steel selling prices in 2001 and a weak economy impeded our ability to service our debt and make investments in the business necessary for continued growth. We worked diligently to reduce costs during these difficult times. In 2001, we reduced our costs by approximately $150 million compared to the prior year and inventory reductions exceeded $130 million. Despite our cost reduction activities, idling of production facilities, and focus on value-added shipments, these efforts were not enough to overcome the injury to us and the steel industry caused by depressed steel selling prices. We filed for protection under Chapter 11 in order to obtain the necessary time to stabilize our finances and to attempt to develop a plan of reorganization.

Under bankruptcy law, actions by creditors to collect amounts owed by us at the filing date are stayed and other pre-petition contractual obligations may not be enforced against us, without approval by the Bankruptcy Court to settle these claims. At the outset of the Chapter 11 cases we received approval from the Bankruptcy Court to pay certain of our pre-petition claims, including employee wages and certain employee benefits. In addition, we have the right, subject to Bankruptcy Court approval and other conditions, to assume or reject any pre-petition executory contracts and unexpired leases On May 24, 2002, we filed with the Bankruptcy Court schedules and statements of financial affairs setting forth, among other things, the assets and liabilities of the Debtors as shown by our books and records, subject to the assumptions contained in certain notes filed in connection therewith. All of the schedules are subject to further amendment or modification. The Bankruptcy Court set August 15, 2002 as the deadline for creditors (other than Governmental units) to file proofs of claim. Differences between amounts scheduled by National and claims by creditors will be investigated and resolved in connection with our claims resolution process. That process has commenced, but in light of the number of claims filed, may take considerable time to complete. Accordingly, the ultimate number and amount of allowed claims is not presently known and, because the settlement terms of such allowed claims are subject to a confirmed plan of reorganization, the ultimate distribution with respect to allowed claims is not presently ascertainable. On November 5, 2002, the Bankruptcy Court entered an order that extended the exclusive period within which only the debtor can file a plan of reorganization through April 7, 2003.

Recent Events

On December 6, 2002 The Pension Benefit Guaranty Corporation (the “PBGC”) filed a complaint in the United States District Court for the Northern District of Illinois (the “District Court”) alleging there was sufficient cause under applicable laws to terminate seven of the eight pension plans of National Steel Corporation and its subsidiaries (the “Plans”). The complaint requests, among other things, that the PBGC be appointed as the Plans’ trustee and December 6, 2002 be established as the Plans’ termination date. We have filed an answer and certain unions representing employees of National Steel have filed motions to intervene. The Court has stayed all other proceedings in the litigation pending its decision on the motions to intervene. The District Court has not yet set a date to rule on the PBGC complaint. In accordance with the Financial Accounting Standards Board Statement No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (“SFAS 88”), the PBGC’s actions require us to recognize a curtailment loss in the first quarter of 2003 of approximately $106 million. Should the PBGC be successful in terminating the Plans, we would be required to transfer administration responsibilities for the plans and transfer ownership of the plans’

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assets to the PBGC. If the courts uphold the PBGC’s decision to involuntarily terminate these pension plans, SFAS 88-settlement accounting would also be triggered. Recognition of a SFAS 88 gain or loss resulting from a plan termination is reflected in earnings when incurred with no delayed measurement. While the timing of the courts’ decision would impact the exact amount of the SFAS 88 settlement gain to be recognized, it is expected to fall between $280.0 and $320.0 million. Under these circumstances, the PBGC will concurrently submit claims against the Company for the unfunded pension benefit obligations assumed. The Bankruptcy Court is projected to place a value on the PBGC’s total claims in the range of $760.0 million to $1.6 billion. This would result in a net settlement loss ranging from $440 million to $1.32 billion. Upon termination of the Plans, the Company expects that the vast majority of claims asserted by the PBGC will be unsecured claims, and will be subject to a plan of reorganization.

On January 9, 2003, we entered into an Asset Purchase Agreement with United States Steel Corporation (“US Steel”) for the sale of substantially all of our principal steel making and finishing assets. This transaction was valued at approximately $950 million, consisting primarily of cash, but including up to $100 million of US Steel common stock and the assumption of certain liabilities approximating $200 million. This transaction was subject to a number of conditions, including approval of the Bankruptcy Court, and the execution and ratification of a new collective bargaining agreement by the United Steelworkers of America satisfactory to US Steel for the National Steel employees who would become employees of US Steel. A motion to approve procedures related to this transaction was scheduled to be held in the Bankruptcy Court on January 30, 2003. Prior to that hearing, we received a competing bid from AK Steel Corporation (“AK Steel”). Following further negotiations among the parties, on January 30, 2003, we entered into an Asset Purchase Agreement with AK Steel for the sale of substantially all of our principal steelmaking and finishing assets, as well as National Steel Pellet Company, our iron ore pellet operations in Keewatin, Minnesota. This transaction is valued at approximately $1.125 billion, consisting of $925 million of cash and the assumption of certain liabilities approximating $200 million. The transaction is subject to a number of conditions, including approval of the Bankruptcy Court, and the execution and ratification of a new collective bargaining agreement by the United Steelworkers of America satisfactory to AK Steel for the National Steel employees who would become employees of AK Steel. The Asset Purchase Agreement is also subject to higher and better offers submitted in accordance with the bidding procedures approved by the Bankruptcy Court under Sections 363 and 365 of the Bankruptcy Code on February 6, 2003, as modified by the Bankruptcy Court on March 25, 2003. Under these bidding procedures, bids must be submitted no later than April 10, 2003, and if one or more bids are determined to be Qualified Bids under the bidding procedures an auction is expected to be conducted on April 16, 2003. On February 26, 2003, we were notified that the Justice Department was terminating the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act for the AK Steel transaction.

On February 28, 2003, we entered into an agreement to sell our equity interest in National Robinson, L.L.C. to Robinson Steel Co., Inc. for approximately $3.5 million of cash.

On March 18, 2003, the Bankruptcy Court approved our motion to terminate the Pension Plan for Hourly Employees of American Steel Corporation. An application has been submitted to the Internal Revenue Service and the PBGC for approval of the plan termination. SFAS 88 curtailment and settlement charges upon termination are currently estimated to be $0.6 million.

Customers

Automotive. We are a major supplier of hot and cold-rolled steel and higher value-added galvanized coils to the automotive industry, one of the most demanding markets of steel consumption. Our steel has been used in a variety of automotive applications including exposed and unexposed panels, underbody and structural components, wheels and bumpers. Automotive manufacturers require wide sheets of steel, rolled to exact dimensions and properties under strict tolerances. In addition, strength, formability, weldability and defect-free surfaces are critical. Over the years, we have consistently demonstrated the ability to successfully meet these demands.

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Construction. We are also a leading supplier of steel to the construction market. Painted and bare roof and building panels and components are the principal applications for galvanized and Galvalume^® steel in this market. Due to cost and environmental issues, steel framing is experiencing growth and will continue to gain popularity with contractors. We believe that demand for Galvalume^® steel will exhibit strong growth for the next several years, partially as a result of a trend away from traditional building products. We are well positioned to profit from this growth as a result of our position and capability in this market.

Container. We produce chrome and tin plated steels to exacting tolerances of gauge, shape, surface flatness and cleanliness for the container industry. Tin and chrome plated steels are used to produce a wide variety of food and non-food containers. In recent years, the market for tin and chrome plated steels has been relatively stable and profitable.

Pipe and Tube. We supply the pipe and tube market with hot-rolled, cold-rolled and coated sheet. We are a key supplier to transmission pipeline, downhole casing and structural pipe producers.

Service Centers. We also supply the service center market with hot-rolled, cold-rolled and coated sheet. Service centers generally purchase steel coils for a variety of applications and markets and may further process them or sell them directly to third parties without further processing.

The following table sets forth the percentage of our revenues from various markets for the past three years.

In 2002, one customer, within the automotive market, accounted for $267.0 million or 10.2% of net sales. No customer accounted for more than 10% of net sales in 2001 or 2000. Export sales accounted for approximately 3.8% of revenues in 2002, 3.4% in 2001 and 3.6% in 2000.

Our products are sold through sales offices and resident sales employees located in Chicago, Detroit, Houston, Nashville, Granite City Operations, Midwest Steel Operations and at National Steel Headquarters in Mishawaka, Indiana. Substantially all of our orders are for short-term delivery even though approximately one-half of our products are sold under long-term sales arrangements. Accordingly, backlog is not meaningful when assessing future results of operations.

Any sales arrangements with a term of six months or more are considered to be “long-term” most of which are negotiated on an annual basis. A significant amount of our flat rolled steel sales to larger customers in the automotive and container markets are made pursuant to such sales arrangements. Our sales arrangements generally provide for set base prices for the products ordered during the period that they are in effect. As a result, we may experience a delay in realizing price changes related to our long-term business. Much of the remainder of our products are sold under contracts covering shorter periods at the then prevailing market prices for such product.

Customer Partnership. Our customer technical partnerships program provides our customers with superior products, quality, and service through differentiated product development, technical assistance, and local customer service and sales support. We further differentiate our products and promote customer loyalty by establishing close relationships through early customer involvement, providing focused services and support through our technical resources, and broad interaction between customers and our technical personnel.

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Our customer technical partnerships are supported by the scientific and engineering personnel located at our Center for Product and Applications Development (“CPAD”) in Trenton, MI, near Great Lakes. The CPAD, established in late 2001, consolidates the customer applications development function of our former Product Application Center in Livonia, MI and the product development function of our former Technical Research Center in the present Trenton facility. We believe that locating these activities in the same facility enables faster development and application of new products.

The CPAD comprises Applications Development, Advanced Forming and Structural Modeling, and Product Development groups. Together, these groups identify new customer product requirements, design manufacturing process routes for our mills, and promote customer application of these products with design and product characterization support. The CPAD recently developed a family of advanced high strength steels to support emerging automotive customer initiatives to reduce the weight, improve fuel economy, and improve the crash-worthiness performance of their vehicles. Many of these will shortly enter commercial production on North American vehicles. Technical partnerships with our automotive customers’ vehicle design and computer-aided engineering analysis departments are utilized to conduct pioneering research on methods to improve the accuracy of crash safety computer models, and to select and implement our new advanced steels for optimum vehicle performance.

We spent $6.8 million, $8.6 million and $9.6 million for research and development in 2002, 2001 and 2000, respectively. In addition, we participate in various research efforts through the American Iron and Steel Institute (the “AISI”).

Operations

We operate three principal facilities: two integrated steel plants, Great Lakes in Ecorse and River Rouge, Michigan, near Detroit, and the Granite City Division in Granite City, Illinois, near St. Louis and a finishing facility, Midwest in Portage, Indiana, near Chicago. Great Lakes and Midwest operate as the Regional Division, a single business enterprise, in order to improve the planning and coordination of production at both plants and enhance our ability to monitor costs and utilize our resources, thereby allowing us to more effectively meet our customers’ needs.

Our centralized corporate structure, the close proximity of our principal steel facilities and the complementary balance of processing equipment shared by them, enable us to closely coordinate the operations of these facilities in order to maintain high operating rates throughout our processing facilities and to maximize the return on our capital investments.

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The following table details our effective steelmaking capacity, actual production, effective capacity utilization and percentage of steel continuously cast and that of the domestic steel industry for the years indicated.

In 2002, effective capacity was 6,620,000 net tons primarily as a result of the “A” blast furnace at Great Lakes being idled throughout the entire year. In 2001, effective capacity was 6,662,000 net tons primarily as a result of the “B” blast furnace at Great Lakes being idled until February of 2001, and the “A” blast furnace at Great Lakes being idled from October through the end of the year. The idling of these blast furnaces was done in an effort to more closely match production with forecasted demand. In 2000, effective capacity was 6,580,000 net tons primarily as a result of the scheduled “B” blast furnace reline at Great Lakes that was completed in the third quarter and was left idle during the remainder of the year in order to reduce our steel inventory levels. In 1999, effective capacity was 6,450,000 net tons primarily as a result of a planned blast furnace reline at the Granite City Division and the idling of the Great Lakes “D” furnace in the early part of the year as a result of decreased business primarily due to the high levels of imported steel experienced in the second half of 1998. In 1998, effective capacity was 6,600,000 net tons primarily as a result of the scheduled “A” blast furnace reline at Great Lakes.

Raw Materials

Iron Ore. Our metallic iron requirements are supplied primarily from iron ore pellets that are produced from a concentration of low grade ore. We have reserves of iron ore adequate to produce approximately 331.1 million gross tons of iron ore pellets through our wholly owned subsidiary, National Steel Pellet Company (“NSPC”). These iron ore reserves are located in Minnesota and Michigan. A significant portion of our average annual consumption of iron ore pellets was obtained from the deposits at NSPC during the last five years. The remaining consumption of iron ore pellets were purchased from third parties. Iron ore pellets available to us from our own deposits and outside suppliers are expected to be sufficient to meet our total iron ore requirements at competitive market prices for the foreseeable future.

Coal. All of our coal requirements are purchased from third parties. We believe that supplies of coal, adequate to meet our needs, are readily available from third parties at competitive market prices.

Coke. We operate and maintain the Great Lakes No. 5 coke battery on a contract basis and purchase all of the coke produced from the battery under a requirements contract, with the price being adjusted during the term

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of the contract, primarily to reflect changes in production costs. We also operate two efficient coke batteries servicing the Granite City Division. Approximately 60% of our annual coke requirements can be supplied by the Great Lakes and Granite City coke batteries. Our remaining coke requirements are met through market purchases. In addition, our coal injection process at Great Lakes continues to reduce our dependency on outside coke supplies.

Limestone. Prior to its sale in 2000, the majority of our average annual consumption of limestone was acquired from the reserves of an affiliated company at competitive market prices. All limestone requirements are now purchased at competitive market prices from unaffiliated third parties.

Scrap and Other Materials. Supplies of steel scrap, tin, zinc and other alloying and coating materials are readily available at competitive market prices.

Patents and Trademarks

We have the patents and licenses necessary for the operation of our business as now conducted. We do not consider our patents and trademarks to be material to our business.

Employees

As of December 31, 2002, we employed 8,229 people. We have labor agreements with the United Steelworkers of America (“USWA”), the International Chemical Workers Council of the United Food and Commercial Workers and other labor organizations which collectively represent approximately 83% of our employees. In 1999, we entered into labor agreements, which expire on or after July 31, 2004, with these various labor organizations.

Competition

We are in direct competition 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. Steel industry participants compete primarily on price, service and quality. We believe we are able to differentiate our products from those of our competitors by, among other things, providing technical services and support, utilizing our CPAD facility, and by focusing on improving product quality through, among other things, capital investment and research and development, as previously described. We compete with domestic integrated and mini-mill steel producers, some of which have greater resources than us.

Imports. Domestic steel producers face significant competition from foreign producers and, from time to time, have been adversely affected by what we believe to be unfairly traded imports. The intensity of foreign competition is substantially affected by the relative strength of foreign economies and fluctuations in the value of the United States dollar against foreign currencies. Steel imports increase when the value of the dollar is strong in relation to foreign currencies. The recent economic slowdown in certain foreign markets resulted in an increase in imports at depressed prices. Some foreign steel producers are owned, controlled or subsidized by their governments. Decisions by these foreign 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. On March 5, 2002, President Bush ordered relief in the form of increased tariffs on imports of some steel products and a tariff-rate quota on imports of slabs. See the discussion under the caption “Trade Litigation” in Item 3, “Legal Proceedings”.

Mini-mills. Mini-mills provide significant competition in certain product lines, including hot-rolled and cold-rolled sheets that represented, in the aggregate, approximately 51% of our shipments in 2002. Mini-mills also compete to a lesser extent with our galvanized products focused towards the automotive market. Mini-mills are relatively efficient, low-cost producers which make steel from scrap in electric furnaces, with lower employment and environmental costs. Thin slab casting technologies have allowed mini-mills to enter certain

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sheet markets which have traditionally been supplied by integrated producers. Certain companies have announced plans for, or have indicated that they are currently considering, additional mini-mill plants for sheet products in the United States.

Steel Substitutes. In the case of many steel products, there is substantial competition from manufacturers of other products, including plastics, aluminum, ceramics, glass, wood and concrete. Conversely, along with other manufacturers of steel products, we have begun to compete in recent years in markets not traditionally served by steel producers.

NKK

Since 1984, we have had an alliance with our principal stockholder, NKK, one of the largest steel companies in Japan and in the world as measured by production. Our relationship has materialized in a number of business contracts in such areas as engineering and construction, slab purchasing, employee transfers, research and development support and financial support. All such contracts with NKK were unanimously approved by all directors of the Company who were not then, and never have been, employees of NKK. On September 27, 2002, NKK and Kawasaki Steel Corporation (“KSC”), another large steel company in Japan, jointly established JFE Holdings, Incorporated (“JFE”) and became wholly-owned subsidiaries of JFE by the “stock-for-stock” exchange method.

Environmental Matters

Our operations are subject to numerous laws and regulations relating to the protection of human health and the environment. We have made capital expenditures of $0.6 million in connection with matters relating to environmental control during 2002. Our current estimates indicate that we will incur capital expenditures in connection with matters relating to environmental control of approximately $6 million and $3 million for 2003 and 2004, respectively. In addition, we have recorded expenses for environmental compliance, including depreciation, of approximately $60 million in 2002 and expect to record expenses of approximately $58 million in each of 2003 and 2004. Since environmental laws and regulations are becoming increasingly stringent, our environmental capital expenditures and costs for environmental compliance may increase in the future. In addition, due to the possibility of future changes in circumstances or regulatory requirements, the amount and timing of future environmental expenditures could vary substantially from those currently anticipated. The costs for environmental compliance may also place us at a competitive disadvantage with respect to foreign steel producers, as well as manufacturers of steel substitutes, that are subject to less stringent environmental requirements.

In 1990, Congress passed amendments to the Clean Air Act, which impose stringent standards on air emissions. The Clean Air Act amendments directly affect the operations of many of our facilities, including the coke ovens. Under such amendments, coke ovens generally will be required to comply with progressively more stringent standards over the thirty-year period beginning on the date of enactment of the amendments. We believe that the costs for complying with the Clean Air Act amendments will not have a material adverse effect on our financial position, results of operations or liquidity.

The Resource Conservation Recovery Act of 1976, as amended (“RCRA”), imposes certain investigative and corrective action obligations on facilities that are operating under a permit, or are seeking a permit, to treat, store or dispose of hazardous waste. As of December 31, 2002, we have recorded $6.5 million as a liability for certain corrective actions which are expected to be necessary at Midwest and other facilities.

We have recorded an aggregate liability of $0.8 million at December 31, 2002 for the reclamation costs to restore our coal and iron ore mines at our shut down locations to their original and natural state, as required by various federal and state mining statutes.

The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), and similar state statutes generally impose joint and several liability on present and former

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owners, operators, transporters and generators for remediation of contaminated properties, regardless of fault. We have been conducting steel manufacturing and related operations at numerous locations, including our present facilities, for over seventy years. Although we believe that we have utilized operating practices that were standard in the industry at the time, hazardous materials may have been released on or under these currently or previously owned sites. Consequently, we potentially may be required to remediate contamination at some of these sites. However, based on our past experience and the nature of environmental remediation proceedings, we believe that if any such remediation is required at a site, it will likely occur over an extended period of time.

Pursuant to an indemnity provision contained in the agreements with Weirton Steel Corporation (“Weirton Steel”) which were entered into at the time that we sold the assets of our former Weirton Steel Division to Weirton Steel, we have reimbursed Weirton Steel for the costs of certain remediation activities undertaken by Weirton Steel at our former manufacturing site in Weirton, West Virginia. Additional claims for indemnification by Weirton Steel are possible. In addition, our subsidiary, the Hanna Furnace Corporation is currently involved in remediation activities at the site of the former Donner Hanna coke plant in Buffalo, New York (which was operated as a joint venture with LTV Steel Company, Inc.). See the discussion under the caption “Donner Hanna Coke Plant” in Item 3, “Legal Proceedings”.

In addition to the remediation of current and former manufacturing sites, we are also involved as potentially responsible parties (“PRPs”) in a number of off-site CERCLA and other environmental cleanup proceedings.

We have accrued an aggregate liability of $6.9 million as of December 31, 2002, exclusive of accruals for Midwest and the coal and iron ore mines, for CERCLA and other environmental cleanup liabilities at our current and former manufacturing sites and off site disposal facilities. The outcome of these remediation activities and cleanup proceedings is not expected to have a material adverse effect on our financial position, results of operations or liquidity.

As a result of the settlement of a lawsuit we had previously filed against certain of our comprehensive general liability insurance carriers, we have partial insurance coverage for certain existing and future major environmental liabilities.

Forward Looking Statements

Statements made by us in this Form 10-K that are not historical facts constitute “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements, by their nature, involve risk and uncertainty. A variety of factors could cause business conditions and our actual results and experiences to differ materially from those expected or expressed in our forward looking statements. These factors include, but are not limited to, the following:

General Factors:

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Bankruptcy Related Factors:

Item 2.    Properties

The Granite City Division

The Granite City Division is an integrated steelmaking facility, located in Granite City, Illinois and, has an annual hot-rolled band production capacity of approximately 3.2 million tons. All steel at Granite City is continuous cast. Granite City also uses ladle metallurgy to refine the steel chemistry to enable it to meet the exacting specifications of its customers. The facility’s ironmaking facilities consist of two coke batteries and two blast furnaces. Finishing facilities include an 80-inch hot strip mill, a hot-rolled coil processing line, a continuous pickler, a tandem mill and two hot dip galvanizing lines. Granite City ships approximately 15% of its total production to Midwest for finishing. Principal products of the Granite City Division include hot-rolled, hot-dipped galvanized and Galvalume^® steel, grain bin and high strength, low alloy steels.

The Granite City Division is located on 1,540 acres and employs approximately 2,700 people. The Division’s proximity to the Mississippi River and other interstate transit systems, both rail and highway, provides easy accessibility for receiving raw materials and supplying finished steel products to customers.

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The Regional Division

Great Lakes Operations

Great Lakes, located in Ecorse and River Rouge, Michigan, is an integrated facility engaged in steelmaking primarily for use in the automotive market with an annual hot-rolled band production capacity of approximately 3.7 million tons. All steel at this location is continuous cast. Great Lakes ironmaking facilities consist of three blast furnaces and a rebuilt 85-oven coke battery which was sold in 1997 to a subsidiary of DTE Energy Company. Great Lakes also operates two basic oxygen process vessels, a vacuum degasser and a ladle metallurgy facility. Finishing facilities include a hot strip mill, a skinpass mill, a high speed pickle line, a tandem mill, a batch annealing station, a temper mill, one customer service line and an electrolytic galvanizing line. Additionally, a new automotive hot dip galvanizing line began production during the second quarter of 2000. Great Lakes ships approximately 40% of its production to Midwest and to joint venture coating operations for value-added processing. Principal products include hot-rolled, cold-rolled, electrolytic galvanized, hot dip galvanized, and high strength, low alloy steels.

Great Lakes is located on 650 acres and employs approximately 3,100 people. The facility is strategically located with easy access to water, rail and highway transit systems for receiving raw materials and supplying finished steel products to customers.

Midwest Operations

Midwest, located in Portage, Indiana, finishes hot-rolled bands produced at Great Lakes and Granite City primarily for use in the automotive, construction and container markets. All of the processes performed at Midwest help enhance our profitability by turning commodity grades of hot-rolled steel into higher value-added products. Midwest facilities include a continuous pickling line, two cold reduction mills and three continuous galvanizing lines: a 48 inch wide line (that has been indefinitely idled) which can produce galvanized or Galvalume^® steel products and which services the construction market; a 72 inch wide line which services the automotive market; and a Galvalume^® line which services the construction market. Additionally, Midwest includes finishing facilities for cold-rolled products consisting of a batch annealing station, a sheet temper mill and a continuous stretcher leveling line. The facility also includes an electrolytic cleaning line, a continuous annealing line, two tin temper mills, two tin recoil lines, an electrolytic tinning line and a chrome line, all of which service the container market. Principal products include tin mill products, hot-dipped galvanized and Galvalume^® steel, cold-rolled and electrical lamination steels.

Midwest is located on 650 acres and employs approximately 1,300 people. Its location provides excellent access to rail, water and highway transit systems for receiving raw materials and supplying finished steel products to customers.

National Steel Pellet Company

NSPC, a wholly-owned subsidiary, is located on the western end of the Mesabi Iron Ore Range in Keewatin, Minnesota. NSPC mines, crushes, concentrates and pelletizes low grade taconite ore into iron ore pellets. NSPC operations include two primary crushers, ten primary mills, five secondary mills, a concentrator and a pelletizer. The facility has a current annual effective iron ore pellet capacity of over five million gross tons and has a combination of rail and vessel access to our integrated steel mills. NSPC is located on 24,000 acres and employs approximately 480 people.

ProCoil Corporation

ProCoil, a wholly-owned subsidiary, is located in Canton, Michigan. ProCoil operates a steel processing facility which began operations in 1988 and a warehousing facility which began operations in 1993. ProCoil blanks, slits and cuts steel coils to desired specifications to service automotive market customers and provides laser welding services. In addition, ProCoil warehouses material to assist us in providing just-in-time delivery to our automotive customers. ProCoil is located on 30 acres and employs approximately 165 people.

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Joint Ventures and Equity Investments

DNN Galvanizing Limited Partnership. On August 13, 2002, we sold our 10% ownership interest in DNN Galvanizing Limited Partnership (“DNN”) to an affiliate of NKK, our majority shareholder, and we received proceeds of $3.8 million in the third quarter. In connection with this transaction, we entered into agreements with affiliates of NKK and Dofasco whereby we obtain the right to process material at DNN during the next 12 months. Over that period we will be reducing the tons processed at DNN and move the material to our own galvanizing lines. We anticipate no disruption to our customers in supply, delivery or quality as a result of this transition.

Double G Coatings, L.P. We own a 50% equity interest in Double G Coatings, L.P. (“Double G”), a 300,000 ton per year hot dip galvanizing and Galvalume^® steel facility near Jackson, Mississippi. Bethlehem Steel Corporation owns the remaining 50%. The facility is capable of coating steel coils with zinc to produce a product known as galvanized steel and with a zinc and aluminum coating to produce a product known as Galvalume^® steel. Double G primarily serves the metal buildings segment of the construction market in the south central United States. We are committed to utilize 50% of the available line time of the facility and pay a tolling fee designed to cover fixed and variable costs with respect to 50% of the available line time, whether or not such line time is utilized. The joint venture commenced production in the second quarter of 1994 and reached full operating capacity in 1995. Our steel substrate requirements are currently provided to Double G by Great Lakes and Granite City. On March 13, 2003, Bethlehem Steel Corporation announced that it had signed an asset purchase agreement to sell substantially all of its assets including its interest in joint ventures. We are uncertain what effect, if any, this will have on our future earnings and financial position.

Tinplate Holdings, Inc. In April 1997, one of our wholly-owned subsidiaries purchased 25% of the outstanding common stock of Tinplate Holdings, Inc. (“Tinplate”). During 2000, our ownership interest increased to 42%. Tinplate owns 100% of the outstanding stock of Tinplate Partners International, Inc. (“TPI”) which operated a tinmill service center in Gary, Indiana that purchased tin mill products from us. In March 2002, TPI filed for bankruptcy and subsequently sold all of its’ assets. Our equity investment at December 31, 2002 was valued at zero.

National Robinson LLC. In February 1998, National Steel Corporation entered into an agreement with Robinson Steel Co., Inc. to form a joint venture company, named National Robinson LLC. We own a 50% equity interest in National Robinson LLC. This company operates a temper mill, leveler and cut to length facility in Granite City, Illinois to produce high value added cut-to-length steel plates and sheets with superior quality, flatness and dimensional tolerances. National Robinson LLC processes approximately 200,000 tons of hot-rolled steel annually which is supplied by Granite City. On February 28, 2003, we entered into an agreement to sell our 50% equity interest to Robinson Steel Co., Inc. for approximately $3.5 million in cash. In connection with that transaction, we also agreed to terminate our steel supply agreement with National Robinson LLC. See the discussion under Note 10 to the consolidated financial statements.

Other Information With Respect to Our Properties

In addition to the properties described above, we own our corporate headquarters facility in Mishawaka, Indiana. Our properties are well maintained, considered adequate and are being utilized for their intended purposes. Our steel production facilities are owned in fee by us except for:

Each of these facilities is owned by third parties and leased to us pursuant to the terms of operating leases. The coke battery lease, the electrolytic galvanizing line lease and the continuous caster and related metallurgy

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facility lease are scheduled to expire in 2004, 2005 and 2008, respectively. Upon expiration, we have the option to extend the respective lease or purchase the facility at fair market value, or return the facility to the third party owner.

Substantially all of the land (excluding certain unimproved land), buildings and equipment (excluding, generally, mobile equipment) that are owned in fee by us at the Granite City Division and the Regional Division are subject to a lien securing the First Mortgage Bonds, 8 ³/8% Series due 2006 and 9 ⁷/8% Series due 2009 (“First Mortgage Bonds”). Included among the items which are not subject to this lien are a vacuum degassing facility and a pickle line which service Great Lakes and a continuous caster facility which services the Granite City Division. However, the pickle line and continuous caster facility are subject to a mortgage granted to the respective lenders who financed the construction of the facilities. We have also agreed to grant to the Voluntary Employees’ Benefit Association Trust (“VEBA Trust”) a second mortgage on that portion of the property which is covered by the lien securing the First Mortgage Bonds and which is located at Great Lakes. The VEBA Trust was established in connection with the 1993 Settlement Agreement with the USWA for the purpose of prefunding certain postretirement employee benefit obligations for USWA represented employees.

For a description of certain properties related to our production of raw materials, see the discussion under the caption “Raw Materials” in Item 1, “Business”.

Item 3.    Legal Proceedings

In addition to the matters discussed below, the Company is involved in various legal proceedings occurring in the normal course of its business. In the opinion of the Company’s management, adequate provision has been made for losses that are likely to result from these actions.

Chapter 11 Bankruptcy Proceedings

On March 6, 2002, National Steel Corporation and forty-one of its wholly owned subsidiaries filed voluntary petitions in the Bankruptcy Court for reorganization relief under Chapter 11 of the Bankruptcy Code. The case was assigned to the Hon. John H. Squires of the Bankruptcy Court and is being jointly administered under case number 02-08699. National Steel and our subsidiaries continue to manage and operate our businesses as debtors and debtors in possession pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code.

We obtained Bankruptcy Court approval of a new debtor-in-possession credit facility that provides for up to $450 million in financing from the existing senior secured bank group, which combined with other actions, has been used to fund post-petition operating expenses as well as supplier and employee obligations.

Under bankruptcy law, actions by creditors to collect amounts owed by us at the filing date are stayed and other pre-petition contractual obligations may not be enforced against us, without approval by the Bankruptcy Court. At the outset of the Chapter 11 cases we received approval from the Bankruptcy Court to pay certain of our pre-petition claims, including employee wages and certain employee benefits. In addition, we have the right, subject to Bankruptcy Court approval and other conditions, to assume or reject any pre-petition executory contracts and unexpired leases. Parties to contracts that we rejected may file claims with the Bankruptcy Court.

We have submitted the schedules setting forth all of our assets and liabilities as of the date of the petition as reflected in our accounting records. The amounts of claims filed by creditors could be significantly different from the recorded amounts. The last date for filing claims by creditors other than governmental units was August 15, 2002 and for governmental units was September 6, 2002.

On November 5, 2002, the Bankruptcy Court entered an order that extended the exclusive period within which only we can file a plan of reorganization through April 7, 2003.

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On January 9, 2003, we entered into an Asset Purchase Agreement with US Steel for the sale of substantially all of our principal steel making and finishing assets. This transaction was valued at approximately $950 million, consisting primarily of cash, but including up to $100 million of US Steel common stock and the assumption of certain liabilities approximating $200 million. This transaction was subject to a number of conditions, including approval of the Bankruptcy Court, and the execution and ratification of a new collective bargaining agreement by the United Steelworkers of America satisfactory to US Steel for the National Steel employees who would become employees of US Steel. A motion to approve procedures related to this transaction was scheduled to be held in the Bankruptcy Court on January 30, 2003. Prior to that hearing, we received a competing bid from AK Steel. Following further negotiations among the parties, on January 30, 2003, we entered into an Asset Purchase Agreement with AK Steel for the sale of substantially all of our principal steelmaking and finishing assets, as well as National Steel Pellet Company, our iron ore pellet operations in Keewatin, Minnesota. This transaction is valued at approximately $1.125 billion, consisting of $925 million of cash and the assumption of certain liabilities approximating $200 million. The transaction is subject to a number of conditions, including approval of the Bankruptcy Court, and the execution and ratification of a new collective bargaining agreement by the United Steelworkers of America satisfactory to AK Steel for the National Steel employees who would become employees of AK Steel. The Asset Purchase Agreement is also subject to higher and better offers submitted in accordance with the bidding procedures approved by the Bankruptcy Court under Sections 363 and 365 of the Bankruptcy Code on February 6, 2003, as modified by the Bankruptcy Court on March 25, 2003. Under these bidding procedures, bids must be submitted no later than April 10, 2003, and if one or more bids are determined to be Qualified Bids under the bidding procedures, an auction is expected to be conducted on April 16, 2003. On February 26, 2003, we were notified that the Justice Department was terminating the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act for the AK Steel transaction.

Due to material uncertainties, it is not possible to predict the length of time we will operate under Chapter 11 protection, the outcome of the proceedings in general, whether we will continue to operate under our current organizational structure, the effect of the proceedings on our businesses or the recovery by our creditors and equity holders.

Trade Litigation

National Steel Corporation is a party to on-going trade proceedings concerning imports of hot-rolled carbon steel flat products (“Hot-Rolled Steel”), cold-rolled carbon steel flat products (“Cold-Rolled Steel”), and corrosion-resistant carbon steel flat products (“Corrosion-Resistant Steel”). Such imports affect the steel industry generally. These trade proceedings relate to unfair trade practices for which the remedy is the imposition of antidumping and countervailing duties, which are designed to offset dumping and foreign government subsidies to create a level competitive playing field for domestic producers. In these proceedings, the Department of Commerce (the “DOC”) and the International Trade Commission (the “ITC”) initially conduct an investigation to determine whether to issue an antidumping or countervailing duty order. If an order is issued, the duty rate is then subject to change in subsequent annual administrative reviews. In addition, in five-year reviews, the DOC may revoke an order if it determines that revocation would not be likely to lead to continuation or recurrence of dumping or a countervailable subsidy or if the ITC determines that revocation would not be likely to lead to continuation or recurrence of material injury.

On September 30, 1998, a number of U.S. steel producers filed petitions alleging dumping of imported Hot-Rolled Steel from Brazil, Japan, and Russia. The U.S. steel producers also alleged subsidization of Hot-Rolled Steel from Brazil. We joined in the Russian and Brazilian petitions. The resulting investigations led to the imposition of an antidumping duty order on Japanese imports on June 29, 1999. In July 1999, certain Japanese and U.S. steel producers commenced challenges to the DOC’s final dumping determination in the U.S. Court of International Trade (the “CIT”). The CIT upheld all but one aspect of the DOC’s dumping determination. On February 25, 2002, the United States and certain U.S. steel producers commenced an appeal of the CIT’s decision to the U.S. Court of Appeals for the Federal Circuit (the “CAFC”). Oral argument was conducted before the CAFC in January 2003. A decision is expected later this year. In addition, on February 11, 2000, the Japanese

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government requested the establishment of a dispute settlement panel to review the antidumping duty order on Hot-Rolled Steel from Japan pursuant to the dispute settlement mechanism of the World Trade Organization (“WTO”). The WTO Panel publicly issued its final report on February 28, 2001. The Panel upheld the determinations by the ITC and the DOC that dumped imports had injured the domestic industry. However, the Panel also found that certain aspects of the DOC’s calculation of the dumping margins violated the United States’ international obligations. On April 25, 2001, the United States appealed these findings to the WTO’s Appellate Body. Japan commenced a cross-appeal on May 10, 2001. On July 24, 2001, the Appellate Body affirmed in part and reversed in part the findings by the WTO Panel that certain aspects of the DOC’s calculation of the dumping margins violated the United States’ international obligations. The Appellate Body also found that certain aspects of the ITC’s injury determination violated the United States’ international obligations. On November 22, 2002, the DOC issued a final determination implementing the Appellate Body’s decision by revising its calculation of the dumping margins. The United States now has until December 31, 2003 or the end of the current legislative session, whichever comes first, to implement those aspects of the Appellate Body’s decision relating to the U.S. antidumping statute.

In July 1999, in lieu of issuing antidumping and countervailing duty orders, the DOC entered into suspension agreements with Russia, Brazil, and three Brazilian steel producers to impose volume and price restrictions on imports of Hot-Rolled Steel from Russia and Brazil. In August 1999, challenges to the suspension agreements were commenced in the CIT by several U.S. steel producers, including us. In addition, affected foreign steel producers challenged the DOC’s final subsidization determination regarding Brazil in the CIT. On May 29, 2001 and August 3, 2001, respectively, the CIT remanded to the DOC its determinations to suspend the antidumping duty investigation and the countervailing duty investigation of Hot-Rolled Steel from Brazil. On February 4, 2002, upon finding that Brazilian steel producers had violated the antidumping suspension agreement, the DOC terminated that agreement and imposed an antidumping duty order. Based on these actions, on April 2, 2002, the CIT granted voluntary dismissal of the appeal of the antidumping suspension agreement. The challenge to the countervailing duty suspension agreement on Hot-Rolled Steel from Brazil is still pending before the CIT. In addition, regarding the challenge by affected foreign steel producers of the DOC’s final subsidization determination, on April 19, 2002, the CIT dismissed that action for lack of subject matter jurisdiction. On June 2, 1999, a number of U.S. steel producers filed petitions alleging dumping of Cold-Rolled Steel from Argentina, Brazil, China, Indonesia, Japan, Russia, South Africa, Slovakia, Taiwan, Thailand, Turkey, and Venezuela and subsidization of Cold-Rolled Steel from Brazil, Indonesia, Thailand, and Venezuela. We joined in all of these petitions, except the one against Japan. The resulting subsidy investigations of Indonesia, Thailand, and Venezuela were terminated on July 19, 1999, when the ITC found that imports from those countries were negligible. In Spring and Summer 2000, the ITC made negative final injury determinations with respect to the other cases. In April, June, and September 2000, several U.S. steel producers, including us, commenced challenges in the CIT to the negative final injury determinations of the ITC. Oral argument was conducted before the CIT in December 2001. A decision is expected at any time.

On September 1, 1999, the DOC and the ITC published notices initiating five-year reviews of antidumping and/or countervailing duty orders entered in 1993 on (i) Corrosion-Resistant Steel from Australia, Canada, France, Germany, Japan, and Korea and (ii) Cold-Rolled Steel from Germany, Korea, the Netherlands, and Sweden. In March and July 2000, the DOC determined that revocation of the orders would likely lead to continuation or recurrence of dumping and/or subsidization. And in November 2000, the ITC determined that revocation of the orders on Corrosion-Resistant Steel would be likely to lead to continuation or recurrence of material injury. Therefore, these orders remain in effect. However, the ITC voted to revoke the orders on Cold-Rolled Steel. Several foreign steel producers commenced challenges to the determinations of the DOC and the ITC regarding Corrosion-Resistant Steel either in the CIT or before a North American Free Trade Agreement (“NAFTA”) Binational Panel. On July 19, 2002, the CIT remanded the ITC’s determinations regarding Corrosion-Resistant Steel from France and Germany. On remand, the ITC again determined that revocation of the orders would be likely to lead to continuation or recurrence of material injury. A decision from the CIT on the ITC’s remand determination is expected later this year. And with respect to the NAFTA Binational Panel proceeding regarding Corrosion-Resistant Steel from Canada, all briefs have been filed and the parties are

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currently awaiting the appointment of a Panel. In addition, on July 30, 2002, the European Communities requested consultations with the United States regarding both the DOC and ITC determinations with respect to Corrosion-Resistant Steel from France and Germany pursuant to the dispute settlement mechanism of the WTO. Furthermore, on April 4, 2002, the Japanese government requested the establishment of a WTO dispute settlement panel to review the DOC and ITC determinations with respect to Corrosion-Resistant Steel from Japan. Pursuant to Japan’s request, a panel was appointed by the WTO on July 17, 2002 and is scheduled to issue its report publicly on April 25, 2003.

On November 13, 2000, a number of U.S. steel producers filed petitions alleging dumping of Hot-Rolled Steel from Argentina, China, India, Indonesia, Kazakhstan, the Netherlands, Romania, South Africa, Taiwan, Thailand, and the Ukraine and subsidization of Hot-Rolled Steel from Argentina, India, Indonesia, South Africa, and Thailand. We joined in all of these petitions. On July 16, 2001, the DOC made a final determination that Hot-Rolled Steel from Argentina had been dumped and subsidized and that Hot-Rolled Steel from South Africa had been dumped. On August 31, 2001, the ITC made a final determination that Hot-Rolled Steel from Argentina and South Africa had injured the domestic industry. The DOC published an antidumping duty order with respect to these two countries and a countervailing duty order with respect to Argentina on September 11, 2001. On September 21, 2001, the DOC made final determinations that Hot-Rolled Steel from India, Indonesia, Kazakhstan, the Netherlands, the People’s Republic of China, Romania, Taiwan, and Thailand had been dumped and that Hot-Rolled Steel from India, Indonesia, South Africa, and Thailand had been subsidized. On November 2, 2001, the ITC made a final determination that Hot-Rolled Steel from these countries had injured the domestic industry. An antidumping duty order was issued by the DOC on Hot-Rolled Steel from Kazakhstan on November 21, 2001. On November 29, 2001, the DOC issued antidumping duty orders on Hot-Rolled Steel from China, the Netherlands, Romania, Taiwan, Thailand, and the Ukraine. Finally, the DOC issued antidumping and countervailing duty orders on Hot-Rolled Steel from India and Indonesia and countervailing duty orders on Hot-Rolled Steel from South Africa and Thailand on December 3, 2001. In December 2001 and January 2002, several foreign steel producers commenced challenges in the CIT to the final injury determinations of the ITC. In addition, in December 2001, a steel producer in the Netherlands and several U.S. steel producers, including us, commenced challenges to the DOC’s final dumping determination on Hot-Rolled Steel from the Netherlands in the CIT. Oral argument was conducted before the CIT in the appeals of both the ITC and DOC determinations in December 2002. Decisions are expected in those appeals later this year.

On September 28, 2001, a number of U.S. steel producers filed petitions alleging dumping of Cold-Rolled Steel from Argentina, Australia, Belgium, Brazil, France, Germany, India, Japan, Korea, the Netherlands, New Zealand, the People’s Republic of China, the Russian Federation, South Africa, Spain, Sweden, Taiwan, Thailand, Turkey, and Venezuela and subsidization of Cold-Rolled Steel from Argentina, Brazil, France, and the Republic of Korea. We joined in all of the petitions, except the one regarding Japan. On July 10, 2002, the DOC made final determinations that Cold-Rolled Steel from Australia, India, Japan, Sweden, and Thailand had been dumped. And on October 3, 2002, the DOC made final determinations that Cold-Rolled Steel from Argentina, Belgium, Brazil, France, Germany, Korea, the Netherlands, New Zealand, the People’s Republic of China, the Russian Federation, South Africa, Spain, Taiwan, Turkey, and Venezuela had been dumped and that Cold-Rolled Steel from Brazil, France, and Korea had been subsidized. The DOC also determined that Cold-Rolled Steel from Argentina was not being subsidized. In September and October 2002, the ITC made negative final injury determinations with respect to Cold-Rolled Steel from all of the foregoing countries. These determinations mean that no antidumping or countervailing duties will be assessed against Cold-Rolled Steel imported from those countries. However, in September, October, and November 2002, several U.S. steel producers, including us, appealed the ITC’s negative final injury determinations to the CIT. Moreover, on December 12, 2002, several U.S. steel producers, including us, appealed the DOC’s final dumping determination with respect to Cold-Rolled Steel from Taiwan to the CIT.

In addition to the foregoing antidumping and countervailing duty proceedings to which we have been a party, on March 5, 2002, the President ordered relief in the form of increased tariffs on imports of cut-to-length plate, Hot-Rolled Steel, Cold-Rolled Steel, Corrosion-Resistant Steel, and tin-mill products and a tariff-rate quota on imports of slab pursuant to Section 201 of the Trade Act of 1974. The President excluded imports from certain

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of our Free Trade Agreement partners and certain developing countries from the relief ordered. Moreover, numerous parties have requested exclusions of specific products from the relief. Proceedings for the consideration of such exclusion requests will be conducted in each year in which the relief remains in effect. In the first round of exclusion requests, a number of the requests were granted, which resulted in a weakening of the effectiveness of the relief for certain product areas. A second round of exclusion requests is currently underway. We are participating in all phases of the proceedings before the United States Trade Representative and the DOC in which parties are requesting such exclusions and remains active in opposing unjustified requests. Furthermore, the governments of the European Communities, Japan, Korea, the People’s Republic of China, Switzerland, Norway, New Zealand, and Brazil all requested the establishment of a dispute settlement panel to review the relief ordered by the President pursuant to the WTO’s dispute settlement mechanism. On July 25, 2002, the WTO appointed a single panel to rule on all of these challenges to the relief. The WTO panel is currently scheduled to issue its final report by the end of April 2003. On November 11, 2002, Taiwan also requested WTO consultations with the United States regarding the relief ordered by the President. However, Taiwan has not yet requested the establishment of a dispute settlement panel to rule on its challenge. Additionally, one foreign steel producer commenced a challenge against the relief ordered by the President with respect to tin-mill products in the CIT. In that case, the CIT dismissed one count of the complaint on August 9, 2002 and dismissed the remaining count on September 5, 2002. On October 8, 2002, the foreign producer that commenced the challenge in question appealed the CIT’s August 9, 2002 decision to the CAFC.

Pension Benefit Guaranty Corporation v. National Steel Corporation

On December 6, 2002 the PBGC filed a Complaint in the District Court against National Steel Corporation seeking an order (i) terminating certain pension plans sponsored by us, (ii) appointing the PBGC as the statutory trustee of these pension plans, (iii) establishing December 6, 2002 as the termination date of the pension plans and (iv) requiring us to deliver to the PBGC all records, assets, property and documents related to these pension plans. The pension plans covered by the litigation are the National Steel Corporation Retirement Program; the National Steel Corporation Pension Plan—Hourly Employees; the Granite City United Steelworkers of America Pension Plan; the Granite City Pension Plan for Chemical Workers, Bricklayers, Hodcarriers, Blacksmiths and Watchmans Union; the Weirton Retirement Program; the National Steel Pellet Company Pension Plan for Hourly Wage Employees; and the Pension Plan for Salaried Employees of National Steel Pellet Company. We have filed an answer and certain unions representing employees of National Steel have filed motions to intervene. The Court has stayed all other proceedings in the litigation pending its decision on the motions to intervene. If the PBGC succeeds in having the pension plans terminated, certain preliminary claims made by the PBGC in our Chapter 11 Bankruptcy Case that were contingent upon termination of the plans would become actual claims. These claims would be processed in the normal course of the Chapter 11 Bankruptcy Case. While the amount of the PBGC’s claims is subject to several variables in connection with the proceedings, the Bankruptcy Court could place a value on the claims in the range of $760 million to $1.6 billion. Upon termination of the Plans, the Company expects that the vast majority of claims asserted by the PBGC will be unsecured claims, and will be subject to a plan of reorganization.

Donner Hanna Coke Plant

The Donner Hanna coke plant was operated from approximately 1920 to 1982, for the majority of that time as a corporation jointly owned by The Hanna Furnace Corporation (“Hanna Furnace”), a subsidiary of National Steel Corporation, and LTV Steel Company, Inc. (or its predecessor) (collectively “LTV”). In 1989 and 1990, the plant was demolished and, until the third quarter of 2002, Hanna Furnace and LTV each had a 50% ownership share in the property.

For years, Hanna Furnace participated in a voluntary effort with LTV to perform a site cleanup at Donner Hanna, with a goal of eventually transferring ownership of the property to either the City of Buffalo (the “City”) or a third party. A significant amount of site assessment work was completed during this time.

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In the spring of 1999, contamination was discovered on certain properties in the vicinity of the Donner Hanna coke plant which had been transferred by LTV and Hanna Furnace to the Buffalo Urban Renewal Agency (“BURA”) in 1992. These properties are located in a residential housing development commonly known as the Hickory Woods Subdivision. Several of the properties have had houses constructed on them, while several others remain vacant. Contamination also was discovered on a berm constructed on the Donner Hanna coke plant property by BURA pursuant to an easement granted by LTV and Hanna Furnace.

On September 3, 1999, Hanna Furnace and LTV filed suit in the U.S. District Court for the Western District of New York against the City and BURA (the “WDNY Litigation”) arising from defendants’ placement of hazardous substances within a berm on the site of the former Donner Hanna coke plant. Hanna Furnace and LTV sought $3 million to remove the berm and an unspecified amount of other damages, response costs, attorneys fees, and injunctive relief and asserted claims under CERCLA, breach of contract, and common law. On December 13, 1999, the City and BURA asserted counterclaims, alleging that Hanna Furnace and LTV disposed of wastes both on the coke plant property and on properties in the Hickory Woods Subdivision. The City and BURA’s counterclaims sought an unspecified amount of response costs, compensatory damages, injunctive relief and attorney fees, plus punitive damages of $250 million, based on CERCLA and New York statutory and common law.

In the spring of 2000, Hanna Furnace, LTV, and BURA entered into an Administrative Order on Consent with the United States Environmental Protection Agency (“EPA”), wherein they agreed to conduct a removal action on certain vacant lots in the Hickory Woods Subdivision sold to BURA by LTV and Hanna Furnace and to reimburse EPA for certain oversight costs. The cost estimate to conduct the removal action is approximately $600,000, and the estimated oversight costs are approximately $30,000. Hanna Furnace, LTV, BURA, and the City entered into a cost allocation agreement describing the parties’ responsibilities, as between themselves, for the removal costs and the oversight costs. Under the terms of that agreement, BURA and/or the City must pay $100,000 of the first $600,000 of removal costs, and Hanna Furnace and LTV are responsible for the other $500,000 of the first $600,000 of removal costs. If the removal costs exceed $600,000, then BURA and/or the City pay one-half of all removal costs in excess of $600,000, and Hanna Furnace and LTV are responsible for the other one-half of the excess removal costs. With regard to EPA response and oversight costs, BURA and/or the City pay one-third of such costs, and LTV and Hanna Furnace are responsible for the other two-thirds of such costs. As between LTV and Hanna Furnace, they are each responsible to pay one-half of the companies’ obligation under the agreement. To date, the vacant lots have been stabilized, but EPA has not required the parties to implement the removal action.

During the second half of 2000, EPA conducted a soil sampling program for more than 80 properties in the Hickory Woods Subdivision, including some of the properties that were transferred by LTV and Hanna Furnace. The data from this sampling program was evaluated by the New York State Department of Health (“DOH”). DOH concluded that a few of the properties merit further investigation, but generally the soils in the Hickory Woods Subdivision do not pose an unacceptable risk to human health. The City and BURA retained an independent group of scientists to conduct a peer review of the DOH study. It appears that the peer review generally supports the DOH study, but believes that there are several areas of potential exposure that merit further study.

In August 2001, National Steel Corporation was named as a defendant, along with Hanna Furnace, LTV, the City, BURA and Donner-Hanna Coke Corporation in four lawsuits in the State of New York Supreme Court, Erie County, initiated by persons residing in more than 80 houses in the vicinity of the former Donner-Hanna coke plant. Plaintiffs allege that defendants are responsible for contamination of plaintiffs’ properties, and their claims are based on various common law theories. In the Blake case, the Blake family seeks punitive damages of $160 million in addition to alleged property and personal injury damages of $80 million. In the other three cases (Acuff, Andriaccio and Gilmour), the remaining plaintiffs claim property and personal injury damages totaling at least $33 million. On March 12, 2002, National Steel Corporation and Hanna Furnace filed a Suggestion of Bankruptcy and Notice of Automatic Stay in all four cases.

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On October 23, 2002, the U.S. District Court for the Western District of New York entered a Consent Order among LTV, Hanna Furnace, the City, and BURA. In accordance with this Consent Order:

Environmental Regulatory Enforcement Proceedings

From time to time, we are involved in proceedings with various regulatory authorities relating to violations of environmental laws and regulations which may require us to pay various fines and penalties, comply with applicable standards or other requirements or incur capital expenditures to add or change certain pollution control equipment or processes. The more significant of these proceedings which are currently pending are described below:

Granite City Division—IEPA Violation Notice. On October 18, 1996, the IEPA issued a Violation Notice alleging (1) releases to the environment between 1990 and 1996; (2) violations of solid waste requirements; and (3) violations of the NPDES water permit limitations, at our Granite City Division. No demand or proposal for penalties or other sanctions was contained in the Notice; however, the Notice does contain a recommendation by IEPA that we conduct an investigation of these releases and, if necessary, remediate any contamination discovered during that investigation. We submitted a written response to the Notice on December 4, 1996 and met with IEPA on December 18, 1996. We submitted certain additional information requested by IEPA in 1997. IEPA has not responded to us since receiving this additional information.

Release of Acid to Granite City Regional Wastewater Treatment Plant. On October 14, 1999 the Granite City Regional Wastewater Treatment Plant (the “Granite City POTW”) issued a Notice of Violation (“NOV”) to our Granite City Division. The NOV alleges that we discharged significant quantities of concentrated acid into the Granite City POTW without a permit and in violation of the Granite City POTW’s Sewer Use Ordinance. No penalty demand was included in the NOV, although it alleges that we are responsible for (i) all costs incurred by the Granite City POTW in investigating and monitoring these alleged violations and (ii) all costs to inspect, repair or replace any portion of the Granite City POTW facility that was damaged by these discharges. We have implemented actions to minimize the potential for the release of process wastewater to the Granite City POTW and submitted a response to the NOV on

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Detroit Water and Sewerage Department NOVs. From November 25, 1998 to September 6, 2001 the Detroit Water and Sewerage Department (“DWSD”) issued numerous NOVs to our Great Lakes Division alleging that our discharge to the DWSD contained levels of zinc, cyanide and mercury in excess of the permitted limits. On November 9, 2001, this matter was resolved through the execution of an Administrative Consent Order between National Steel and DWSD. Pursuant to the terms of this Order, we developed and submitted a plan for further control of mercury discharges through the installation of additional controls, while simultaneously working to reduce mercury in the discharge through maintenance and operational changes. National Steel and DWSD have recently reached an agreement in principle to enter into an new Administrative Consent Order pursuant to which we would have a three month period to demonstrate compliance with the mercury standard following completion of the scheduled maintenance and operational changes. If compliance is not achieved through these means, we would submit a compliance plan involving additional control equipment. In either case, we have agreed to evaluate additional mercury controls in anticipation of more stringent mercury limits potentially being mandated in the future.

Proofs of Claim—United States Environmental Protection Agency. On November 6, 2002, the Department of Justice, on behalf of the United States Environmental Protection Agency, filed Proofs of Claim against National Steel and certain of our subsidiaries. The Proofs of Claim include alleged violations at our Great Lakes, Midwest and Granite City Divisions of the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the Emergency Planning and Community Right to Know Act (“EPCRA”), the Clean Air Act (“CAA”), the Resource Conservation and Recovery Act (“RCRA”), the Clean Water Act (“CWA”) and the Toxic Substances Control Act (“TSCA”) and alleged liability for environmental oversight costs and response costs under CERCLA. The Proofs of Claim for the above referenced violations assert claims for civil penalties in an amount up to the penalty amount provided for under the applicable statute and also seek certain injunctive relief. The Proofs of Claim also allege that our Great Lakes and Granite City Divisions are hazardous waste treatment, storage, management and/or disposal facilities, which would trigger RCRA permitting and corrective action for these Divisions. We deny these specific allegations and are in the process of attempting to negotiate a resolution of all claims raised in the Proofs of Claim.

For a discussion of our Superfund and other cleanup liabilities see “Environmental Matters” under Item 1, “Business”.

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 2002.

Executive Officers of the Registrant

The following sets forth certain information with respect to our executive officers. Executive officers are elected by our Board of Directors, generally at their first meeting after each annual meeting of stockholders. Our officers serve at the discretion of the Board of Directors and are subject to removal at any time.

Mineo Shimura, Chairman and Chief Executive Officer. Mr. Shimura, age 51, has been a director of the Company since April 21, 1997. He was elected Chairman of the Board and Chief Executive Officer effective as of September 27, 2002. Prior to being elected to that position, Mr. Shimura served as a senior executive for various U.S. affiliates of NKK and held the following positions with NKK affiliates: President of NUF LLC (a finance company), President of NKK America, Inc. (a service company), President of NKK U.S.A. Corporation (a holding company), President of NKK Windsor Corporation (a finance company) and President of Galvatek Ontario Corporation (a holding company).

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John A. Maczuzak, President and Chief Operating Officer. Mr. Maczuzak, age 61, joined National Steel as Vice President and General Manager—Granite City Division in May 1996. He was elected Executive Vice President and Acting Chief Operating Officer in August 1996 and assumed his present position in December 1996. Mr. Maczuzak was formerly employed by ProTec Coating Company as General Manager and USS/Kobe Steel Company as Vice President of Operations and has more than 37 years of broad-based experience in the steel industry.

Kirk A. Sobecki, Senior Vice President and Chief Financial Officer. Mr. Sobecki, age 41, joined National Steel in January 1999 as Corporate Controller. He was elected Vice President and Corporate Controller in November 2001 and assumed his present position in March 2002. From September 1997 to December 1998, he served as Chief Financial Officer of Luitpold Pharmaceuticals, Inc. From June 1986 to August 1997 Mr. Sobecki held various positions with Zimmer, Inc., a Division of Bristol-Myers Squibb, including Director of Finance/Controller from 1995 to 1997.

Ronald J. Werhnyak, Senior Vice President, General Counsel and Secretary. Mr. Werhnyak, age 57, became National Steel’s Senior Counsel in January 1996. He was elected Acting General Counsel and Secretary in August 1998, Vice President, General Counsel and Secretary in December 1998, and to his current position in March 2002.

John L. Davis, Vice President—Purchasing, Information Technology and Engineering. Mr. Davis, age 48, joined National Steel Corporation in 1995. He has held various positions of increasing responsibility including Director—Strategic Planning, Coordinating Director—Environmental and Technology Services and General Manager—Information Technology and Engineering. Mr. Davis assumed the responsibility for the purchasing function in January 2001. He was elected to his current position in March 2001.

Stephen G. Denner, Vice President—Research and Technology. Dr. Denner, age 52, began his career with National Steel Corporation in 1983. His most recent positions have been General Manager of Technology from March 1995 to December 1999 and General Manager of Technology Planning and Coordination from December 1999 until May 2000. Dr. Denner assumed his current position in May 2000.

Tamara J. Freeman, Vice President Administration. Ms. Freeman, age 45, began her career with National Steel in 1980. She has held various positions in the Financial and Human Resource organizations including Director—Personal Services and Employee Benefits from August 1996 to October 2000 and General Manager—Safety, Health and Employee Welfare from November 2000 to June 2002. Ms. Freeman was appointed to her present position in July 2002.

Michael D. Gibbons, Vice President and General Manager—Granite City Division. Mr. Gibbons, age 52, joined National Steel Corporation in 1973. He served in various capacities at the Company’s Granite City Division including Controller from February 1995 to May 2000. Mr. Gibbons served as the Company’s Acting Chief Financial Officer from December 1997 to August 1998 and assumed his current position in May 2000.

Daniel B. Joeright, Vice President and General Manager—Regional Division. Mr. Joeright, age 56, joined National Steel Corporation in May 1991. He served as Director—Cold Roll Operations until December 1998 when he was appointed to the position of Plant Manager—Finishing for the Regional Operations. Mr. Joeright had twenty years of experience with another steel producer prior to joining National Steel Corporation. He was elected to his current position in May 2000.

William E. McDonough, Vice President and Treasurer. Mr. McDonough, age 44, began his career with National Steel in 1985 in the Financial Department. He has held various positions of increasing responsibility including Manager, Treasury Operations, Assistant Treasurer and Treasurer and was elected to his present position in November 2001.

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Scott J. Montross, Vice President Sales. Mr. Montross, age 38, began his career with National Steel in 1990. He has held various positions in the Commercial organization, including Manager Sheet Sales—Chicago DSO from July 1997 to September 2000 and General Manager of Sheet Sales from October 2000 to July 2002. Mr. Montross was appointed to his present position in July 2002.

Lawrence F. Zizzo, Jr., Vice President Human Resources. Mr. Zizzo, age 54, began his career with National Steel in 1978. He has held various positions in the Human Resources organization, including Director of Human Resources at the Great Lakes Division from March 1991 to November 1998 and Regional Director of Human Resources from December 1998 to January 2000. Mr. Zizzo was appointed to his present position in February 2000.

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PART II

Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters

National Steel Corporation’s Class B Common Stock was traded on the New York Stock Exchange (“NYSE”) until March 12, 2002 under the symbol “NS”. After the NYSE delisted our Class B common stock, the stock began being quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “NSTLB.” OTCBB quotations reflect inter-dealer prices, without mark-up, mark-down or commission and may not necessarily represent actual transactions. The following table sets forth, for the periods indicated, the high and low sales prices of the Class B Common Stock on a quarterly basis as reported on the NYSE Composite Tape and the OTCBB.

As of December 31, 2002, there were approximately 235 registered holders of Class B Common Stock. (See Note 3 to the Consolidated Financial Statements for further discussion.) During the first three quarters of 2000, we paid quarterly dividends of $0.07 per common share (or an annual total of $0.21 per common share). We did not pay dividends in the fourth quarter of 2000 or during 2001 and 2002. We will not pay dividends during 2003. Dividends are restricted under the Company’s debtor-in-possession credit facility.

Prior to August 1, 1999, any dividend payments were required to be matched by a like contribution into the VEBA Trust, the amount of which was calculated under the terms of the 1993 Settlement Agreement between the Company and the USWA, until the asset value of the VEBA Trust exceeded $100.0 million. On August 1, 1999, a new five year Basic Labor Agreement became effective between the Company and the USWA. This new agreement provides that if the assets in the VEBA Trust equal or exceed $100 million (1) we will not be required to make contributions to the VEBA Trust and (2) we may withdraw up to $5.5 million from the VEBA Trust in each calendar year to fund current retiree medical and life insurance benefits.

The asset value of the VEBA Trust was $75.9 million at December 31, 2002 and $97.2 million at December 31, 2001. No matching dividend contribution to the VEBA Trust was required for the years ended December 31, 2002, 2001 and 2000 and $5.5 million was withdrawn from the VEBA Trust in 2001 and 2000.

Certain debt and lease agreements include restrictions on the amount of stockholders’ equity available for the payment of dividends. Under these agreements, the Company was prohibited from declaring or paying dividends at December 31, 2002.

Currently, it is not possible to predict with certainty the length of time that we will operate under the protection of Chapter 11, the outcome of the Chapter 11 proceedings in general, or the effect of the proceedings on the business of the Company or on the interests of the various creditors and stakeholders. Under the priority scheme established by the Bankruptcy Code, certain post-petition liabilities and pre-petition liabilities need to be satisfied before shareholders can receive any distribution. National believes that any recovery by its stockholders under any Chapter 11 plan appears unlikely.

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Equity Compensation Plan Information

The following table presents certain information about the Company’s equity compensation plan as of December 31, 2002:

Item 6.    Selected Financial Data

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

National Steel Corporation is a domestic manufacturer engaged in a single line of business, the production and processing of steel. We target high value-added applications of flat rolled carbon steel for sale primarily to the automotive, construction and container markets. We have two principal divisions: The Granite City Division which is a fully integrated steelmaking facility located near St. Louis; and The Regional Division comprised of Great Lakes, a fully integrated steelmaking facility located near Detroit, and Midwest, a steel finishing facility located near Chicago. These two divisions have been aggregated for financial reporting purposes and represent our only reportable segment—Steel (See Note 4 to the Consolidated Financial Statements for further discussion.)

Overview

On March 6, 2002, National Steel Corporation and forty-one of its domestic subsidiaries filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code in the Bankruptcy Court. The case was assigned to Judge John H. Squires and is being jointly administered under case number 02-08699. Certain majority owned subsidiaries of National Steel Corporation have been excluded from the Chapter 11 filings. We also obtained Bankruptcy Court approval of a $450 million Secured Super Priority Debtor In Possession (“DIP”) Credit Agreement with the existing senior secured bank group, which combined with other actions has been used to fund post-petition operating expenses as well as supplier and employee obligations.

Historically low steel selling prices in 2001 and a weak economy impeded our ability to service our debt and make investments in the business necessary for continued growth. We worked diligently to reduce costs during these difficult times. In 2001, we reduced our costs by approximately $150 million compared to the prior year and inventory reductions exceeded $130 million. Despite our cost reduction activities, idling of production facilities, and our focus on value-added shipments, these efforts were not enough to overcome the injury to us and the steel industry caused by the lingering effects of the record levels of unfairly traded steel imports and the downturn in the economy that have led to depressed steel selling prices. We filed for protection under Chapter 11 in order to obtain the necessary time to stabilize our finances and to attempt to develop a plan of reorganization.

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Our financial results discussed below have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and settlement of liabilities in the normal course of business and do not reflect adjustments that may result if we are unable to continue as a going concern. The Consolidated Financial Statements contained herein have been prepared in accordance with the AICPA’s Statement of Position No. 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (“SOP 90-7”). SOP 90-7 requires us to segregate liabilities subject to compromise by the Court as of the bankruptcy filing date and to identify all transactions and events that are directly associated with our reorganization. A significant portion of the liabilities recorded at December 31, 2002 is reflected as subject to compromise. Also in accordance with SOP 90-7, after the filing date, interest expense will only be recognized on long-term obligations that are believed to be fully secured.

Under bankruptcy law, actions by creditors to collect amounts owed by us at the filing date are stayed and other pre-petition contractual obligations may not be enforced against us, without approval by the Bankruptcy Court to settle these claims. At the outset of the Chapter 11 cases, we received approval from the Bankruptcy Court to pay certain of our pre-petition claims, including employee wages and certain employee benefits. In addition, we have the right, subject to Bankruptcy Court approval and other conditions, to assume or reject any pre-petition executory contracts and unexpired leases. On May 24, 2002, we filed with the Bankruptcy Court schedules and statements of financial affairs setting forth, among other things, the assets and liabilities of the Debtors as shown by our books and records, subject to the assumptions contained in certain notes filed in connection therewith. All of the schedules are subject to further amendment or modification. The Bankruptcy Court set August 15, 2002 as the deadline for creditors (other than governmental units) to file proofs of claim. Differences between amounts scheduled by National Steel Corporation and claims by creditors will be investigated and resolved in connection with our claims resultion process. That process has commenced, but in light of the number of claims filed, may take considerable time to complete. Accordingly, the ultimate number and amount of allowed claims is not presently known and, because the settlement terms of such allowed claims are subject to a confirmed plan of reorganization, the ultimate distribution with respect to allowed claims is not presently ascertainable.

The United States Trustee has appointed an unsecured creditors committee. An Ad Hoc Committee of First Mortgage Bondholders has also been formed. These committees and their legal representatives have a right to be heard on all matters that come before the Court, and are the primary entities with which we will negotiate the terms of a plan of reorganization. There can be no assurance that these committees will support our positions in the bankruptcy proceedings or the plan of reorganization once proposed, and disagreements between us and these committees could protract the bankruptcy proceedings, could negatively impact our ability to operate during bankruptcy and could delay our emergence from bankruptcy.

At this time, it is not possible to predict the effect of the Chapter 11 reorganization on our business, various creditors and security holders or when we will be able to emerge from Chapter 11. Our future results are dependent upon our confirming and implementing, on a timely basis, a plan of reorganization.

On December 6, 2002, the PBGC filed a complaint in District Court alleging there was sufficient cause under applicable laws to terminate seven of the eight pension plans of National Steel Corporation and its subsidiaries. The complaint requests, among other things, that the PBGC be appointed as the Plans’ trustee and December 6, 2002 be established as the Plans’ termination date. We and other parties are contesting the PBGC’s proposed actions. The District Court has not yet set a date to rule on the PBGC complaint. In accordance with the Financial Accounting Standards Board Statement No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (“SFAS 88”), the PBGC’s actions require us to recognize a curtailment loss in the first quarter of 2003 of approximately $106 million. Should the PBGC be successful in terminating the Plans, we would be required to transfer administration responsibilities for the plans and transfer ownership of the plans’ assets to the PBGC. SFAS 88 would require us to record a settlement loss upon termination estimated to be $760 million to $1.6 billion. Upon termination of the Plans, the Company expects that the vast majority of claims asserted by the PBGC will be unsecured claims, and will be subject to a plan of reorganization.

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On January 9, 2003, we entered into an Asset Purchase Agreement with US Steel for the sale of substantially all of our principal steel making and finishing assets. This transaction was valued at approximately $950 million, consisting primarily of cash, but including up to $100 million of US Steel common stock and the assumption of certain liabilities approximating $200 million. This transaction was subject to a number of conditions, including approval of the Bankruptcy Court, and the execution and ratification of a new collective bargaining agreement by the United Steelworkers of America satisfactory to US Steel for the National Steel employees who would become employees of US Steel. A motion to approve procedures related to this transaction was scheduled to be held in the Bankruptcy Court on January 30, 2003. Prior to that hearing, we received a competing bid from AK Steel. Following further negotiations among the parties, on January 30, 2003, we entered into an Asset Purchase Agreement with AK Steel for the sale of substantially all of our principal steelmaking and finishing assets, as well as National Steel Pellet Company, the Company’s iron ore pellet operations in Keewatin, Minnesota. This transaction is valued at approximately $1.125 billion, consisting of $925 million of cash and the assumption of certain liabilities approximating $200 million. The transaction is subject to a number of conditions, including approval of the Bankruptcy Court, and the execution and ratification of a new collective bargaining agreement by the United Steelworkers of America satisfactory to AK Steel for the National Steel employees who would become employees of AK Steel. The Asset Purchase Agreement is also subject to higher and better offers submitted in accordance with the bidding procedures approved by the Bankruptcy Court under Sections 363 and 365 of the Bankruptcy Code on February 6, 2003, as modified by the Bankruptcy Court on March 25, 2003. Under these bidding procedures, bids must be submitted no later than April 10, 2003, and if one or more bids are determined to be Qualified bids under the bidding procedures, an auction is expected to be conducted on April 16, 2003. On February 26, 2003, we were notified that the Justice Department was terminating the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act for the AK Steel transaction.

On February 28, 2003, the Company entered into an agreement to sell its equity interest in National Robinson, L.L.C. to Robinson Steel Co., Inc. for approximately $3.5 million of cash.

On March 18 2003, the Bankruptcy Court approved our motion to terminate the Pension Plan for Hourly Employees of American Steel Corporation. An application has been submitted to the Internal Revenue Service and the Pension Benefit Guaranty Corporation for approval of the plan termination. SFAS 88 curtailment and settlement charges upon termination are currently estimated to be $0.6 million.

Results of Operations

Comparative operating results for the three years ended December 31, are as follows:

Year ended December 31, 2002 as compared to 2001

Net Sales

Net sales for 2002 increased $117.1 million, or 4.7%, compared to the prior year. This increase resulted from a $65 per ton, or 16.3%, increase in average selling prices. This increase was partially offset by a 585,000 ton, or 9.9%, decrease in shipment volume. Average selling prices increased throughout the year primarily due to a combination of higher market prices, and a shift in our mix of products toward value-added coated product and away from commodity grade hot-rolled and non-prime products.

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Loss from Operations

We reported an operating loss of $134.5 million for 2002 compared to an operating loss of $454.5 million in the prior year. Several factors contributed to the improvement as shown below:

Reorganization Items

Reorganization items are comprised of items of income, expense and loss that were realized or incurred by us as a direct result of our decision to reorganize under Chapter 11 of the Bankruptcy Code. Such items for the year 2002 consisted of the following:

Net Gain on Disposal of Non-Core Assets

During 2002 and 2001, we sold certain non-core assets and recorded net gains on the disposals. During 2002, we sold undeveloped land located in Corpus Christi, Texas. The net gain that we recognized in 2002 was $3.3 million. During 2001, we received a final payment related to the sale of our equity interest in the Presque Isle Corporation (“Presque Isle”), sold property and certain assets related to an idled pickling operation, and sold property and certain assets related to our Granite City Division building products line and certain trademarks used in that business. The combined net gain that we recognized in 2001 was $3.0 million.

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Net Financing Costs

Net financing costs decreased $42.2 million in 2002 as compared to the prior year. The decrease relates primarily to interest on unsecured debt that was not charged to earnings in 2002 in accordance with SOP 90-7.

Income Taxes

During 2002, we recorded an income tax benefit of $57.9 million. On March 9, 2002, President Bush signed the Job Creation and Work Assistance Act of 2002 (the “Act”). This new act, among other provisions, provides for the carryback of net operating losses (“NOLs”) from two years to five years for NOLs arising in 2001 and 2002. We were able to carry back our loss recorded during 2001 to the 1996 through 1998 tax years when we paid an alternative minimum tax. This carryback allowed us to recover the entire amount of alternative minimum taxes paid during those prior taxable years resulting in a refund of $53.2 million. A tax benefit was also recorded in 2002 upon the closure of open tax years and the conclusion of a federal tax audit.

During 2001, we recorded a non-cash expense of $148.8 million. After reviewing our future taxable income and tax planning strategies, we determined that a decrease in our deferred tax assets was necessary.

Extraordinary Item

During 2001, we closed on a new $465 million Credit Facility secured by both accounts receivable and inventory which was scheduled to expire in September 2004. The Credit Facility replaced our previous $200 million Receivable Purchase Agreement with an expiration date of September 2002 and the $200 million Inventory Facility with an expiration date of November 2004. As a result, we recorded an extraordinary charge of $2.0 million with respect to the write-off of unamortized debt issuance costs in connection with the extinguishment of debt. (See Note 9 to the consolidated financial statements for additional information.)

Change in Accounting Principle

Effective January 1, 2001, we changed our method of accounting for investment gains and losses on pension assets used in the calculation of net periodic pension cost. The cumulative effect of this change on prior periods was a benefit of $17.2 million. (See Note 9 to the consolidated financial statements for additional information.)

Year ended December 31, 2001 as compared to 2000

Net Sales

Net sales for 2001 decreased $486.6 million, or 16%, compared to the prior year. This decrease resulted from a $57 per ton, or 13%, reduction in average selling prices and a 350,000 ton, or 6%, decrease in shipment volume. Average selling prices continued to decline throughout the year primarily due to a combination of depressed market prices and, to a lesser extent, a shift in our mix of products sold away from higher-priced value-added coated product toward lower-priced commodity grade hot-rolled and non-prime products. General economic conditions as well as the continuing impact of high levels of low-priced imported steel products and the resulting high inventory levels at our customers adversely affected the demand, mix, and market price for our steel products.

Loss from Operations

We reported an operating loss of $454.5 million for 2001 compared to an operating loss of $114.4 million in the prior year. Several factors contributed to the increased loss from operations:

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Our successful cost reduction activities served to partially offset these unfavorable impacts. Our cost reduction efforts resulted in savings of approximately $150 million or $25 per ton shipped compared to our performance in the prior year. Our production costs were reduced by approximately $117 million and Selling, General and Administrative expenses were reduced by approximately $17 million (excluding the unfavorable charge for uncollectible accounts receivable). Labor costs, material expenses, and other spending were the primary drivers of the reduction. Some of our accomplishments include the reduction of overtime by over 32% compared to average levels in the prior year, the reduction of approximately 1,000 employees, which is 11% of our workforce, and reductions in other spending. In addition, we recognized an aggregate of $15.9 million of unusual credits during 2001. These credits related to the sale of a natural gas derivative contract and favorable property tax settlements, partially offset by certain expenses related to a Staff Retirement Incentive Program for Salaried Non-Represented Employees and the write-off of a portion of a partially installed computer system (See Note 9 to the consolidated financial statements for additional information.)

Net Gain on Disposal of Non-Core Assets

During 2001 and 2000, we sold certain non-core assets and recorded net gains on the disposals. During 2001, we received a final payment related to the sale of our equity interest in the Presque Isle Corporation (“Presque Isle”), sold property and certain assets related to an idled pickling operation, and sold property and certain assets related to our Granite City Division building products line and certain trademarks used in that business. The combined net gain that we recognized in 2001 was $3.0 million. During 2000, we sold our 30% equity interest in Presque Isle and received proceeds of $16.9 million (net of expenses) and recognized a net gain of $15.1 million.

Net Financing Costs

Net financing costs increased $29.7 million in 2001 as compared to the prior year. Approximately $15.3 million of the increase relates to lower capitalized interest in 2001 as compared to the year earlier period during

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which time the new hot dip galvanizing facility was under construction. Additionally, higher levels of borrowing under our credit facilities increased our interest costs and lower levels of cash and cash equivalents reduced our interest income during 2001.

Income Taxes

During 2001, we recorded a non-cash tax expense of $148.8 million. After reviewing our future taxable income and tax planning strategies, we determined that a decrease in our deferred tax assets was necessary. We recorded an income tax benefit of $6.8 million in 2000, utilizing an effective tax rate of 5%.

Extraordinary Item

During 2001, we closed on a new $465 million Credit Facility secured by both accounts receivable and inventory which was scheduled to expire in September 2004. The Credit Facility replaced our previous $200 million Receivable Purchase Agreement with an expiration date of September 2002 and the $200 million Inventory Facility with an expiration date of November 2004. As a result, we recorded an extraordinary charge of $2.0 million with respect to the write-off of unamortized debt issuance costs in connection with the extinguishment of debt. (See Note 9 to the consolidated financial statements for additional information.)

Change in Accounting Principle

Effective January 1, 2001, we changed our method of accounting for investment gains and losses on pension assets used in the calculation of net periodic pension cost. The cumulative effect of this change on prior periods was a benefit of $17.2 million. The net loss in 2001 was reduced by $6.7 million or $0.16 per share (basic and diluted) as a result of lower pension expense due to this accounting change. The net loss in 2000 would have been negatively impacted by $1.8 million or $0.04 per share (basic and diluted) had this accounting change been applied retroactively. (See Note 9 to the consolidated financial statements for additional information.)

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period (See Note 2 to the Consolidated Financial Statements for further discussion). On an on-going basis, we evaluate these estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that of our significant accounting policies (See Note 2 to the consolidated financial statements), the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Asset Impairment

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), we periodically evaluate our long-lived assets for impairment whenever indicators of impairment exist. Generally, we group assets at the facility level, which is the lowest level of the organization for which identifiable cash flows are independent of the cash flows of other assets and liabilities of the Company, for impairment testing.

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We compared the estimated undiscounted future cash flows to the carrying value of the attributable long-lived assets. Our average long-lived assets are already two-thirds depreciated, accordingly the levels of cash flows necessary for recoverability are greatly reduced.

Our recoverability estimates are based essentially on static volume while pricing levels continue to grow at approximately 1-2% per annum through 2006 and then remain constant over the remaining average useful life of the long-lived assets. The highest annual average selling price per ton in this impairment model is approximately 2% lower than the average price per ton experienced before the high levels of low-priced imported steel began to flood the market in 1998. We further assume that cost reduction activities and improved efficiencies will reduce cost per ton by approximately 4% through 2003 and hold constant for the remainder of the assets’ average useful lives.

Additionally, the impairment analysis does not contemplate the asset purchase agreement with AK Steel or related fair value of long-lived assets which may be derived therefrom.

Pensions

We account for our defined benefit pension plans in accordance with SFAS No. 87, Employers’ Accounting for Pensions (“SFAS 87”), which requires that amounts recognized in financial statements be determined on an actuarial basis. Required cash contributions not made in 2002 were $230.3 million. No cash contributions were required under the Employee Retirement Income Security Act of 1974 for our pension plans during 2001. SFAS 87 and the policies we use, including the delayed recognition of gains and losses and the use of a calculated value of plan assets (which is further described below), generally reduce the volatility of pension expense due to changes in pension liability assumptions, demographic experience, and the market performance of the pension plan’s assets.

Our pension expense is significantly affected by the expected return on plan assets. We have assumed that the expected long-term rate of return on plan assets will be 9.25%, a reduction of 0.50% from the prior year. This assumption is based on reasonable long-term expectations as to the returns available on the underlying asset classes held by the pension trust. The assumed long-term rate of return on assets is applied to the market-related value of assets. This produces the expected return on plan assets component included in the pension expense. The difference between this expected return and the actual return on plan assets will be deferred in accordance with the amortization provisions of SFAS 87. Should actual returns be less than the expected returns, future pension expense would likely increase.

We use a September 30 measurement date. The discount rate, which is used to discount plan liabilities, reflects the current rate at which the pension liabilities could be effectively settled at the measurement date. In estimating this rate, we look to the Moody’s Average Aa-Rated Corporate Bonds index. At September 30, 2002, we determined this rate to be 6.75%, a reduction of 0.75% from the prior year.

On December 6, 2002, the PBGC informed National Steel Corporation that it would terminate all of the Company’s qualified pension plans, other than American Steel. The PBGC’s decision effectively eliminates the accrual of qualified defined benefits for all National Steel Corporation employees, which triggers curtailment accounting under SFAS 88. Since the event is probable, its effects are reasonably estimatable, and it produces a loss, the curtailment is to be recognized three months after the event. The SFAS 88 curtailment loss to be recognized during the first quarter of fiscal 2003 is estimated to be $106 million.

If the courts uphold the PBGC’s decision to involuntarily terminate these pension plans, SFAS 88 settlement accounting would also be triggered. Recognition of a SFAS 88 gain or loss resulting from a plan termination is not subject to the three month lag from the delayed measurement date. While the timing of the courts’ decision would impact the exact amount of the SFAS 88 settlement gain to be recognized, it is expected to fall between $280 and $320 million. Under these circumstances, the PBGC will concurrently submit claims against the

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Company for the unfunded pension benefit obligations assumed. The bankruptcy court is projected to place a value on the PBGC’s total claims in the range of $760 million to $1.6 billion. Upon termination of the Plans, the Company expects that the vast majority of claims asserted by the PBGC will be unsecured claims, and will be subject to a plan of reorganization.

Other Postretirement Benefits

We provide retiree health care benefits for certain salaried and represented employees that retire under our pension plans. Our retiree health care plans provide health care benefits to approximately 23,000 of our former employees and their dependents. We account for these other postretirement benefit plans in accordance with SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other than Pensions (“SFAS 106”), which requires that amounts recognized in financial statements be determined on an actuarial basis. SFAS 106 and the policies we use, including the delayed recognition of gains and losses, generally reduce the volatility of retiree health care expense due to changes in assumptions, claims experience, demographic experience, and the market performance of the plan’s assets.

We use various actuarial assumptions including the discount rate and the expected trend in health care costs to estimate the costs and benefit obligations for our retiree health care plans.

We use a September 30 measurement date. The discount rate, which is used to discount plan liabilities, reflects the current rate at which the retiree health care liabilities could be effectively settled at the measurement date. In estimating this rate, we look to the Moody’s Average Aa-Rated Corporate Bonds index. At  September 30, 2002, we determined this rate to be 6.75%, a reduction of 0.75% compared to the prior year.

The health care cost trend is used to project plan liabilities. While the ultimate health care cost trend reflects long-term expectations as to a sustainable growth rate for underlying health care costs, the initial health care cost trends reflect short-term expectations influenced by recent experience. At September 30, 2002, we determined the health care cost trend for 2003 to be 10%. The health care cost trend is then expected to decrease by 1% per year until an ultimate health care cost trend of 5% is reached in 2008. Under the prior year’s assumptions, the health care cost trend for 2003 was to be 8.25%, with an ultimate health care cost trend of 5.25% being reached in 2006.

Liabilities Subject to Compromise

SOP 90-7 requires that prepetition liabilities, including claims that become known after a petition is filed, be reported on the basis of the expected amount of the claim allowed rather than the amounts for which those claims might be settled. We have continued to prepare our financial statements as a going concern in accordance with accounting principles generally accepted in the United States on the basis that, until other information is available, recorded liability amounts represent our best estimate for potential allowed claims. It is reasonably possible that the amount of claims ultimately allowed by the Court could exceed the amounts presently recorded by amounts that are material to our financial position and results of operations. Also, the PBGC has filed a preliminary proof of claim with the court that is substantially larger than the pension liability recorded on our balance sheet. The PBGC uses different discount rates and mortality assumptions to determine the actuarial liability and, therefore, the funded status of our plan. The amount of the claim that the Court could allow could be materially in excess of those actuarially determined amounts disclosed in Note 6 to the Consolidated Financial Statements. Also a transaction involving the sale of a material amount of our operating facilities or a Court confirmed Chapter 11 plan will likely result in a material reduction in the carrying value of our long-lived assets.

Under provisions of SOP 90-7 interest is not accrued on secured claims if the value of the collateral is less than the principal amount of the secured claim. In addition, interest on unsecured claims does not accrue during bankruptcy proceedings. Interest at the stated contractual amount not charged to earnings in 2002 was approximately $41.5 million and primarily related to the First Mortgage Bonds and other debt obligations. The amount of claim the Court could allow could be materially different.

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Allowance for Doubtful Accounts—Methodology

We evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us (e.g., bankruptcy filings, substantial down-grading of credit scores), we record a specific reserve for bad debts against outstanding amounts to reduce the net recognized receivable to the amount we reasonably believe will be collected. For customers that are highly leveraged (those customers whose value of debt exceeds equity by a predetermined ratio) and exceed a minimal risk threshold, we record a reserve representing our best estimate of potential losses from these customers in the aggregate. For all other customers, we recognize reserves for bad debts based on the general status of the economy and, specifically, the steel industry and past collections experience. The bankruptcy filing of some customers and current economic conditions within the United States, especially within the steel industry, have caused us to record a provision for doubtful accounts receivable of $7.9 million during 2002. At December 31, 2002 and 2001, the allowance for doubtful accounts represented 15% and 14% of outstanding trade accounts receivable, respectively. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations to us), our estimates of the recoverability of amounts due us could be reduced by a material amount.

Postemployment Benefits

We provide workers’ compensation, disability, and other medical benefits for certain salaried and represented employees. We account for these costs in accordance with SFAS No. 112, Employers’ Accounting for Postemployment Benefits (“SFAS 112”). With respect to those costs for which we have sufficient information to reasonably estimate our future expenditures, we have accrued $73.0 million at December 31, 2002 which represents our best estimates of the probable cost for these benefits. This estimate has been developed based upon past history of actual payments for these benefits and in consultation with third parties that assist us in managing and settling the workers’ compensation costs. To the extent additional information arises, it is possible our best estimate of our probable liability for these costs may change. Such changes could have a material adverse effect on our earnings and financial position.

Environmental Liabilities and Other Contingencies

Our operations are subject to numerous laws and regulations relating to the protection of human health and the environment. We have expended, and can be expected to expend in the future, substantial amounts for ongoing compliance with these laws and regulations, including the Clean Air Act and the Resource Conservation and Recovery Act of 1976. Additionally, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state superfund statutes have imposed joint and several liability on us as one of many potentially responsible parties at a number of sites requiring remediation.

With respect to those claims for which we have sufficient information to reasonably estimate our future expenditures, we have accrued $14.2 million at December 31, 2002 which represents our best estimate of the probable cost for the resolution of these claims. This estimate has been developed in consultation with outside counsel that is handling our defense in these matters and is based upon a combination of litigation and settlement strategies. To the extent additional information arises or our strategies change, it is possible that our best estimate of our probable liability in these matters may change. Since environmental laws are becoming increasingly more stringent, our expenditures and costs for environmental compliance may increase in the future.

Since we have been conducting steel manufacturing and related operations at numerous locations for over sixty years, we potentially may be required to remediate or reclaim any contamination that may be present at these sites. We do not have sufficient information to estimate our potential liability in connection with any potential future remediation at such sites. Accordingly, we have not accrued for such potential liabilities.

One of our subsidiaries, The Hanna Furnace Corporation, is jointly liable with LTV Steel Company, Inc. for environmental clean-up and certain retiree benefit costs related to the closed Donner Hanna Coke plant. On

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December 31, 2000, LTV filed for Chapter 11 protection under U.S. bankruptcy laws. During the fourth quarter of 2001, LTV announced their intentions to initiate an orderly liquidation in accordance with bankruptcy laws. As a result, in the fourth quarter in 2001, we recorded 100% of the obligation for the retiree benefit costs and recorded a charge of $3.6 million.

We have a 50% interest in a joint venture coating facility with Bethlehem and a 13% interest in a joint venture family health care facility with Bethlehem and another steel company. On March 13, 2003, Bethlehem Steel Corporation announced that it had signed an asset purchase agreement to sell substantially all of its assets including its interest in joint ventures. We are uncertain what effect, if any, this will have on our future earnings and financial position.

We are also involved in various non-environmental legal proceedings, most of which occur in the normal course of our business. We do not believe that these proceedings will have a material adverse effect, either individually or in the aggregate, on our financial position. However, with respect to certain of the proceedings, if reserves prove to be inadequate and we incur a charge to earnings, such charges could have a material adverse effect on our earnings and liquidity for the applicable period.

Other Operational and Financial Disclosure Matters

Impact of Recently Issued Accounting Standards

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”). SFAS 143 applies to legal obligations associated with the retirement of certain long-lived assets. It requires companies to record the fair value of the liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the company capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the company either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. We plan to adopt SFAS 143, as required, in our fiscal year beginning on January 1, 2003. The transition adjustment of less than $3 million, net of tax, resulting from the adoption of SFAS 143 will be reported as a cumulative effect of a change in accounting principle in the first quarter of 2003.

In April 2002, the FASB issued SFAS No. 145, Recession of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”), which will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operation rather than as extraordinary items as previously required under SFAS 4. SFAS 145 also amends SFAS 13 to require certain modifications to capital leases be treated as a sales-leaseback. We adopted SFAS 145 effective January 1, 2003 and it did not have a material impact on our earnings or financial position. Adoption will require the extraordinary gain in 2001 to be reclassified.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), which changes financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized as incurred rather than at the date a company commits to an exit plan as currently required. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. Adoption of SFAS 146 did not have an effect on the Company’s earnings or financial position.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (“SFAS 148”) an amendment of SFAS No. 123 Accounting for Stock-Based Compensation (“SFAS 123”), which provides alternative transition methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also amended the disclosure

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provisions, which now require the method of accounting for stock-based employee compensation to be provided and the effect of the method used on reported results. As permitted by SFAS 123, the Company has chosen to continue accounting for stock options at their intrinsic value at the date of grant consistent with the provision of APB 25. The adoption of this statement in December 2002 did not have an impact on the Company’s earnings or financial position, and the disclosure requirements have been met.

Asset Purchase Agreement

On January 9, 2003, we entered into an Asset Purchase Agreement with US Steel for the sale of substantially all of our principal steel making and finishing assets. This transaction was valued at approximately $950 million, consisting primarily of cash, but including up to $100 million of US Steel common stock and the assumption of certain liabilities approximating $200 million. This transaction was subject to a number of conditions, including approval of the Bankruptcy Court, and the execution and ratification of a new collective bargaining agreement by the United Steelworkers of America satisfactory to US Steel for the National Steel employees who would become employees of US Steel. A motion to approve procedures related to this transaction was scheduled to be held in the Bankruptcy Court on January 30, 2003. Prior to that hearing, we received a competing bid from AK Steel. Following further negotiations among the parties, on January 30, 2003, we entered into an Asset Purchase Agreement with AK Steel for the sale of substantially all of our principal steelmaking and finishing assets, as well as National Steel Pellet Company, our iron ore pellet operations in Keewatin, Minnesota. This transaction is valued at approximately $1.125 billion, consisting of $925 million of cash and the assumption of certain liabilities approximating $200 million. The transaction is subject to a number of conditions, including approval of the Bankruptcy Court, and the execution and ratification of a new collective bargaining agreement by the United Steelworkers of America satisfactory to AK Steel for the National Steel employees who will become employees of AK Steel. The Asset Purchase Agreement is also subject to higher and better offers submitted in accordance with the bidding procedures approved by the Bankruptcy Court under Sections 363 and 365 of the Bankruptcy Code on February 6, 2003, as modified by the Bankruptcy Court on March 25, 2003. Under these bidding procedures, bids must be submitted no later than April 10, 2003, and if one or more bids are determined to be Qualified bids under the bidding procedures, an auction is expected to be conducted on April 16, 2003. On February 26, 2003, the Company was notified that the Justice Department was terminating the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act for the AK Steel transaction.

Job Creation and Worker Assistance Act of 2002

On March 9, 2002, President Bush signed the Job Creation and Worker Assistance Act of 2002 (the “Act”). This new Act, among other provisions, provides for an expansion of the carryback of net operating losses (“NOLs”) from two years to five years for NOLs arising in 2001 and 2002. We were able to carryback our loss recorded during 2001 to the 1996 through 1998 tax years when we paid an alternative minimum tax. This carryback allowed us to recover the entire amount of alternative minimum taxes paid during those prior taxable years. On March 27, 2002, we received a refund of $53.2 million. The impact of this change in the tax law was reflected in the financial results in the first quarter of 2002.

Discussion of Liquidity and Sources of Capital

Overview

Our liquidity needs arise primarily from working capital requirements, capital investments, principal and interest payments on our indebtedness, and pension and retiree health care funding requirements. We have satisfied these liquidity needs with funds provided by borrowings, the sale of non-core assets and cash provided by operations. Additionally, during 2002 we received $53.2 million in federal income tax refunds. As a result of our Chapter 11 filing, we have not made principal or interest payments on substantially all secured and unsecured indebtedness incurred prior to March 6, 2002.

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In conjunction with our Chapter 11 filing, we obtained Court approval of a $450 million Secured Super Priority Debtor in Possession Credit Agreement (the “DIP Facility”) with our existing senior secured bank group. As part of the DIP Facility, all cash received by us or any of our subsidiaries is applied to outstanding obligations under the DIP Facility.

Total liquidity, which includes cash balances plus available borrowing capacity under the DIP Facility was $221 million at December 31, 2002 as compared to $107 million under the Credit Facility at December 31, 2001.

Availability under the DIP Facility will be subject to a borrowing base calculated by applying advance rates to eligible accounts receivable and eligible inventory. Availability under the DIP Facility is also subject to: (i) certain eligibility reserves and availability reserves, (ii) a reserve for certain professional and bankruptcy court expenses related to our Chapter 11 cases and (iii) a liquidity reserve of $35 million.

Proceeds of loans under the DIP Facility will be used solely to pay certain pre-petition claims approved by the Court, for post-petition operating expenses incurred in the ordinary course of business and certain other costs and expenses of administration of the cases as will be specified and as approved by the Court. Except for certain specified circumstances, all cash received by us or any of our subsidiaries shall be applied to outstanding claims under the Credit Facility and after all such claims have been paid, to outstanding obligations under the DIP Facility.

All amounts owing by us under the DIP Facility at all times will constitute allowed super-priority administrative expense claims in our Chapter 11 cases, generally having priority over all our administrative expenses. In addition, all amounts owing by us under the DIP will be secured by valid and perfected security interests in, and liens on, substantially all of our assets.

Liabilities Subject to Compromise

The principal categories of claims classified as liabilities subject to compromise under reorganization proceedings are identified below. All amounts below may be subject to future adjustment depending on Court action, further developments with respect to disputed claims, or other events. Additional claims may arise resulting from rejection of additional executory contracts or unexpired leases by the Company. Under an approved final plan of reorganization, these claims may be settled at amounts substantially less than their allowed amounts.

Recorded liabilities subject to compromise under the Chapter 11 proceedings consisted of the following at December 31, 2002:

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Cash Flows from Operating Activities

During 2002, we generated $248.5 million of cash in operating activities compared to using cash of $241.3 million in 2001. This change is primarily the result of decreased losses during the year, improved operating performance, non-payment of various liabilities in conjunction with our Chapter 11 filing, and receipt of a federal income tax refund.

During 2001, we used $241.3 million of cash in operating activities compared to a cash inflow of $110.1 million in 2000. This change is primarily the result of increased losses during the year and the repurchase of previously sold accounts receivable under our Receivables Purchase Agreement partially offset by a reduction in inventories of $134.1 million during the year.

Capital Investments

Capital investments including those under capital leases for the years ended December 31, 2002, 2001 and 2000 amounted to $38.5 million, $51.9 million and $225.2 million, respectively. Spending in 2002 included upgrades to the “A” blast furnace at Great Lakes, replacement of gas lines at the Great Lakes hot strip mill, and various other small projects necessary to maintain our facilities at current operating levels. Spending in 2001 included the replacement of a BOF steam drum at Great Lakes, new computer systems, and various other small projects necessary to maintain our facilities at their current operating levels. A large part of our spending in 2000 was attributable to the B blast furnace reline at Great Lakes, the new hot dip galvanizing facility at Great Lakes, the initial addition of roll bending capabilities to the hot strip mill at Granite City and a new order fulfillment system.

Capital investments in 2003 are expected to increase to $64.8 million, of which approximately $8.1 million was committed at December 31, 2002. Planned capital expenditures include upgrades to the “B” Blast Furnace at Granite City, the “A” blast furnace at Great Lakes, and replacement of certain heavy equipment at our Pellet operations.

Cash Proceeds from the Sale of Non-Core Assets

During 2002, we sold undeveloped land in Texas related to non-core businesses and received net proceeds of $7.1 million and recorded a gain of $3.3 million.

During the second quarter of 2001, we sold certain assets related to our Granite City Division building products line and certain trademarks used in that business for $1.5 million and recognized a net gain for the full amount of the proceeds. During the third quarter of 2001, we sold property and certain assets related to a discontinued pickling operation for $0.4 million and recognized a net gain of $0.9 million as a result of the reversal of certain liabilities and cash in excess of the net book value. During the fourth quarter of 2001, we received a final payment of $0.6 million related to the sale of our equity interest in Presque Isle Corporation (“Presque Isle”) and recognized a gain for the full amount.

During the second quarter of 2000, we sold our 30% equity interest in Presque Isle and received proceeds of $16.9 million (net of expenses) and recognized a net gain of $15.1 million.

All proceeds from the aforementioned non-core asset sales were used for general corporate purposes.

Cash Flows from Financing Activities

During 2002, net cash used in financing activities amounted to $204.5 million. This resulted from a net reduction in borrowings under our revolving credit agreements of $185.1 million, scheduled payments on long-term debt prior to our bankruptcy filing, scheduled payments on long-term debt after our bankruptcy filing in accordance with Court orders, and debt issuance costs related to our new DIP facility. As a result of our

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Chapter 11 filing, we have not made principal and interest payments on substantially all secured or unsecured indebtness incurred prior to March 6, 2002. Contractual principal and interest payments not made in 2002 were $165.8 million.

During 2001, net cash provided by financing activities amounted to $287.4 million. Financing activities included additional short-term borrowings of $13.5 million and long-term borrowings of $313.6 million partially offset by scheduled debt repayments of $28.9 million. In addition, we paid fees of $10.8 million during 2001 related to the closing on our new $465 million Credit Agreement.

During 2000, net cash provided by financing activities amounted to $33.5 million. This resulted from cash borrowings under the Inventory Facility offset by scheduled payments on other outstanding debt and dividend payments on our common stock during the first three quarters of the year.

Contractual Obligations

Aggregated information on future cash obligations based on contractual liabilities (excluding liabilities subject to compromise) (in millions) at December 31, 2002 follows:

Aggregated information on future cash obligations based upon commercial commitments at December 31, 2002 follows:

Under the Bankruptcy Code we may assume or reject executory contracts, including lease obligations. Therefore, the amounts shown above may not reflect actual cash outlays in the future periods.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, our operations are exposed to continuing fluctuations in commodity prices and interest rates that can affect the cost of operating, investing and financing. Accordingly, we address a portion of these risks, primarily commodity price risk, through a controlled program of risk management that includes the use of derivative financial instruments. Our objective is to reduce earnings volatility associated with these fluctuations to allow management to focus on core business issues. Our derivative activities, all of which are for purposes other than trading, are initiated within the guidelines of a documented corporate risk-management policy. We do not enter into any derivative transactions for speculative purposes.

Interest Rate Risk

We are exposed to interest rate risk from having certain variable rate financing arrangements. The interest on our DIP Facility is based on an indexed rate. We do not have any interest rate swaps or other financial

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instruments in place that would fix a portion of the interest rates on these financings. Therefore, a hypothetical increase or decrease in interest rates by 1% would increase or decrease interest expense on the $128.5 million of variable secured debt by $1.3 million per year, with a corresponding change in cash flows. The effect of changing interest rates on pension and OPEB obligations and expense is discussed under the caption “Critical Accounting Policies” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Commodity Price Risk

In the normal course of business we are exposed to market risk or price fluctuations of raw materials and energy used to manufacture our products. For example, we are exposed to changes in prices for coal, coke, natural gas, steel scrap, iron ore and pellets, zinc, tin and other metals. In the past, we have used derivative financial instruments (principally swap contracts with global financial institutions) to manage the price risk for a portion of our annual requirements for zinc. At December 31, 2002, we did not have any such instruments. Therefore, the requirement to disclose the impact of a hypothetical change in prices or rates on financial instruments is not applicable.

Item 8.    Consolidated Financial Statements

The following consolidated financial statements of National Steel Corporation and subsidiaries are submitted pursuant to the requirements of Item 8:

National Steel Corporation and Subsidiaries

Debtor-In-Possession As of March 6, 2002

Index to Consolidated Financial Statements

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MANAGEMENT’S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS

Management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements and related notes. The consolidated financial statements, presented on pages 46 to 76, have been prepared in conformity with accounting principles generally accepted in the United States and include amounts based upon our estimates and judgments, as required. Management also prepared the other information included in the Form 10-K and is responsible for its accuracy and consistency with the consolidated financial statements. The consolidated financial statements have been audited in accordance with auditing standards generally accepted in the United States and reported upon by our independent auditors, Ernst & Young LLP, who were given free access to all financial records and related data, including minutes of the meetings of the Board of Directors and committees of the Board. We believe the representations made to the independent auditors during the audit were valid and appropriate. Ernst & Young LLP’s audit report is presented on page 45.

National Steel Corporation maintains a system of internal accounting control designed to provide reasonable assurance for the safeguarding of assets and reliability of financial records. The system is subject to review through its internal audit function, which monitors and reports on the adequacy of and compliance with the internal control system and appropriate action is taken to address control deficiencies and other opportunities for improving the system as they are identified. Although no cost effective internal control system will preclude all errors and irregularities, management believes that through the careful selection, training and development of employees, the division of responsibilities and the application of formal policies and procedures, National Steel Corporation has an effective and responsive system of internal accounting controls.

The Audit Committee of the Board of Directors, which is composed solely of non-employee directors, provides oversight to the financial reporting process through periodic meetings. The Audit Committee is responsible for recommending to the Board of Directors, subject to approval by the Board, the independent auditors to perform audit and related work for the Company, for reviewing with the independent auditors the scope of their audit of the Company’s financial statements, for reviewing with the Company’s internal auditors the scope of the plan of audit, for meeting with the independent auditors and the Company’s internal auditors to review the results of their audits and the Company’s internal accounting controls and for reviewing other professional services being performed for the Company by the independent auditors. Both the independent auditors and the Company’s internal auditors have free access to the Audit Committee.

Management believes the system of internal accounting controls provides reasonable assurance that business activities are conducted in a manner consistent with the Company’s high standards of business conduct, and the Company’s financial accounting system contains the integrity and objectivity necessary to maintain accountability for assets and to prepare National Steel Corporation’s consolidated financial statements in accordance with accounting principles generally accepted in the United States.

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REPORT OF ERNST & YOUNG LLP

INDEPENDENT AUDITORS

Board of Directors

National Steel Corporation

We have audited the accompanying consolidated balance sheets of National Steel Corporation and subsidiaries (the “Debtor-in-Possession” or the “Company”) as of December 31, 2002 and 2001, and the related consolidated statements of operations, cash flows, and changes in stockholders’ equity (deficit) for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company (Debtor-in-Possession) at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 9 to the consolidated financial statements, in 2001 the Company changed its method for reporting realized and unrealized gains and losses on plan assets in the determination of pension expense.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, on March 6, 2002, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”). The Company is currently operating its business under the jurisdiction of Chapter 11 and the United States Bankruptcy Court in Chicago, Illinois (the “Bankruptcy Court”), and continuation of the Company as a going concern is dependent upon, among other things, the ability to formulate a plan of reorganization which will be approved by the requisite parties under the United States Bankruptcy Code and be confirmed by the Bankruptcy Court, comply with its debtor-in-possession financing facility, obtain adequate financing sources, and generate sufficient cash flows from operations to meet its future obligations. In addition, the Company has experienced operating losses in 2002, 2001 and 2000. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of these uncertainties.

ERNST & YOUNG LLP

Indianapolis, Indiana

February 5, 2003 except for

Notes 1 and 10, as to which the

date is March 25, 2003

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NATIONAL STEEL CORPORATION AND SUBSIDIARIES

DEBTOR-IN-POSSESSION AS OF MARCH 6, 2002

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Millions, Except Per Share Amounts)