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                                                                    EXHIBIT 10.4



                               QUANEX CORPORATION

                           DEFERRED COMPENSATION PLAN





                              AMENDED AND RESTATED

                                  JUNE 1, 1999


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                               QUANEX CORPORATION
                           DEFERRED COMPENSATION PLAN

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                             Section

<S>                                                                                                          <C>
ARTICLE I - DEFINITIONS

         Account................................................................................................1.1
         Beneficiary............................................................................................1.2
         Board    ..............................................................................................1.3
         Change of Control......................................................................................1.4
         Change of Control Value................................................................................1.5
         Code...................................................................................................1.6
         Committee..............................................................................................1.7
         Common Stock...........................................................................................1.8
         Company................................................................................................1.9
         Company Match.........................................................................................1.10
         Deferred Compensation Ledger..........................................................................1.11
         Director..............................................................................................1.12
         Director Fees.........................................................................................1.13
         Disability............................................................................................1.14
         Incentive Bonus.......................................................................................1.15
         Normal Retirement Date................................................................................1.16
         NYSE     .............................................................................................1.17
         Participant...........................................................................................1.18
         Plan     .............................................................................................1.19
         Plan Year.............................................................................................1.20
         Quanex................................................................................................1.21
         Rabbi Trust...........................................................................................1.22
         Retirement............................................................................................1.23
         Retirement Plan.......................................................................................1.24
         Securities Act........................................................................................1.25
         Subsidiary............................................................................................1.26
         Term of Deferral......................................................................................1.27
         Voting Securities.....................................................................................1.28

ARTICLE II - ELIGIBILITY

ARTICLE III - DEFERRALS AND COMPANY CONTRIBUTIONS

         Deferral Election......................................................................................3.1
         Company Match..........................................................................................3.2
         Mandatory Deferral.....................................................................................3.3
</TABLE>

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<TABLE>
<S>                                                                                                           <C>
ARTICLE IV - ACCOUNT

         Establishing a Participant's Account...................................................................4.1
         Credit of the Participant's Deferral and
            the Company's Match.................................................................................4.2
         Crediting of Dividends, Distributions and Interest.....................................................4.3
         Interest Rate..........................................................................................4.4
         Common Stock Conversion Election.......................................................................4.5
         Conversion and Cash-Out Upon a Change of Control.......................................................4.6

ARTICLE V - VESTING

         Vesting..............................................................................................  5.1
         Forfeiture of Company Match Because
            of Early Distribution...............................................................................5.2
         Forfeiture For Cause...................................................................................5.3
         Forfeiture For Competition.............................................................................5.4
         Full Vesting in the Event of a Change of Control.......................................................5.5

ARTICLE VI - DISTRIBUTIONS

         Form of Distributions or Withdrawals...................................................................6.1
         Death..................................................................................................6.2
         Disability.............................................................................................6.3
         Expiration of Term of Deferral.........................................................................6.4
         Hardship Withdrawals...................................................................................6.5
         Payment Restrictions on any Portion of a Benefit
            Determined Not to be Deductible.....................................................................6.6
         Responsibility for Distributions and
            Withholding of Taxes................................................................................6.7

ARTICLE VII - ADMINISTRATION

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

</TABLE>

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

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

ARTICLE IX - AMENDMENT AND/OR TERMINATION

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

ARTICLE X - FUNDING

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

ARTICLE XI - MISCELLANEOUS

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




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                               QUANEX CORPORATION

                           DEFERRED COMPENSATION PLAN


     WHEREAS, Quanex Corporation originally established the Quanex Deferred
Compensation Plan (the "Plan") effective October 1, 1981, which provides a
mechanism by which certain highly compensated management personnel may defer
their compensation under the Quanex Corporation Executive Incentive Compensation
Plan prior to such compensation being earned and directors may defer their
director's fees prior to their being earned;

     WHEREAS, Quanex Corporation amended and restated the Plan effective October
12, 1995;

     WHEREAS, Quanex Corporation desires to amend and restate the Plan effective
June 1, 1999;

     NOW, THEREFORE, Quanex Corporation amends and restates the Plan as follows:



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                                    ARTICLE I

                                   DEFINITIONS


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

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

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

                  1.4 "CHANGE OF CONTROL" means the occurrence of one or more of
the following events after June 1, 1999:

         (a) the acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Covered
Person") of beneficial ownership (within the meaning of rule 13d-3 promulgated
under the Exchange Act) of 20 percent or more of either (i) the then outstanding
shares of the common stock of Quanex (the "Outstanding Quanex Common Stock"), or
(ii) the combined voting power of the then outstanding voting securities of
Quanex entitled to vote generally in the election of directors (the "Outstanding
Quanex Voting Securities"); provided, however, that for purposes of this
subsection (a) of this Section, the following acquisitions shall not constitute
a Change of Control of Quanex: (i) any acquisition directly from Quanex, (ii)
any acquisition by Quanex, (iii) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by Quanex or any entity controlled by
Quanex, or (iv) any acquisition by any corporation pursuant to a transaction
which complies with clauses (i), (ii) and (iii) of subsection (c) of this
Section; or

         (b) individuals who, as of June 1, 1999, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
June 1, 1999 whose election, or nomination for election by Quanex's
stockholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Covered Person other than the Board; or

                                       I-1

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         (c) the consummation of (xx) a reorganization, merger or consolidation
or sale of Quanex or (yy) a disposition of all or substantially all of the
assets of the Company (a "Business Combination"), in each case, unless,
following such Business Combination, (i) all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of the
Outstanding Quanex Common Stock and Outstanding Quanex Voting Securities
immediately prior to such Business Combination beneficially own, direct or
indirectly, more than 80 percent of, respectively, the then outstanding shares
of common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction owns
Quanex or all or substantially all of Quanex's assets either directly or through
one or more subsidiaries) in substantially the same proportions as their
ownership immediately prior to such Business Combination of the Outstanding
Quanex Common Stock and Outstanding Quanex Voting Securities, as the case may
be, (ii) no Covered Person (excluding any employee benefit plan (or related
trust) of Quanex or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20 percent or more of, respectively,
the then outstanding shares of common stock of the corporation resulting from
such Business Combination or the combined voting power of the then outstanding
voting securities of such corporation, except to the extent that such ownership
existed prior to the Business Combination, and (iii) at least a majority of the
members of the board of directors of the corporation resulting from such
Business Combination, were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board of Directors,
providing for such Business Combination; or

         (d) the approval by the stockholders of Quanex of a complete
liquidation or dissolution of Quanex.

                  1.5 "CHANGE OF CONTROL VALUE" means the amount determined in
clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the per
share price offered to stockholders of Quanex in the merger, consolidation,
reorganization, sale of assets or dissolution transaction that constitutes a
Change of Control, (ii) the price per share offered to stockholders of Quanex in
any tender offer or exchange offer that constitutes a Change of Control, or
(iii) if a Change of Control occurs other than a Change of Control specified in
clause (i) or (ii), the fair market value per share of the Common Stock on the
date of the Change of Control, based on the closing quotation as described in
Section 4.2, on that day. If the consideration offered to stockholders of the
Company in any transaction described above consists of anything other than cash,
the Committee shall determine the cash equivalent of the fair market value of
the portion of the consideration offered that is other than cash.

                                       I-2

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

                  1.7 "COMMITTEE" means the persons who are from time to time
serving as members of the committee administering the Plan.

                  1.8 "COMMON STOCK" means Quanex's common stock, $.50 par value
(or such other par value as may be designated by the vote of Quanex stockholders
or such other equity securities of Quanex into which such common stock may be
converted, reclassified or exchanged).

                  1.9 "COMPANY" means Quanex and any Subsidiary adopting the
Plan.

                  1.10 "COMPANY MATCH" means the 20 percent match which the
Company makes to the amount deferred in Common Stock during a Plan Year by a
Participant under the Plan for three or more Plan Years.

                  1.11 "DEFERRED COMPENSATION LEDGER" means the ledger
maintained by the Committee for each Participant which reflects the amount of
compensation deferred for the Participant under the Plan, the Company match, and
the amount of income credited on each of these amounts.

                  1.12 "DIRECTOR" means any person serving as a member of the
Board of Directors.

                  1.13 "DIRECTOR FEES" means any amount paid to a Director for
services in such capacity.

                  1.14 "DISABILITY" means a mental or physical disability that
in the opinion of a physician selected by the Committee, shall prevent the
Participant from engaging in any substantial gainful activity, can be expected
to result in death or has lasted or can be expected to last for a


                                       I-3

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continuous period of not less than twelve months, and which: (a) was not
contracted, suffered or incurred while the Participant was engaged in or did not
result from having engaged in, a felonious criminal enterprise; (b) did not
result from alcoholism or addiction to narcotics; and (c) did not result from an
injury incurred while a member of the Armed Forces of the United States for
which the Participant received a military pension.

                  1.15 "INCENTIVE BONUS" means a bonus awarded or to be awarded
to the Participant under the Quanex Corporation Executive Incentive Compensation
Plan.

                  1.16 "NORMAL RETIREMENT DATE" means the first day of the month
that coincides with or next follows the date on which the Participant or former
Participant attains age 65.

                  1.17 "NYSE" means the New York Stock Exchange.

                  1.18 "PARTICIPANT" means an employee or director of a Company
who is participating in the Plan.

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

                  1.20 "PLAN YEAR" means a one-year period that coincides with
the fiscal year of Quanex, which begins on the first day of November of each
calendar year and ends on October 31 of the next ensuing calendar year.

                  1.21 "QUANEX" means the Quanex Corporation, a Delaware
corporation, the sponsor of the Plan.

                  1.22 "RABBI TRUST" means the Quanex Corporation Deferred
Compensation Trust, which agreement was entered into between NBD Bank and
Quanex.

                  1.23 "RETIREMENT" means the retirement of a Participant from
any Company covered by the Plan under the terms of the Retirement Plan.



                                       I-4

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                  1.24 "RETIREMENT PLAN" means the Quanex Corporation Salaried
Employees' Pension Plan, or if the Company does not maintain that plan, the
defined contribution plan maintained by the Company that is intended to satisfy
the requirements of section 401(a) of the Code.

                  1.25 "SECURITIES ACT" means the Securities Exchange Act of
1934, as amended from time to time.

                  1.26 "SUBSIDIARY" means any wholly owned subsidiary of Quanex.

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

                  1.28 "VOTING SECURITIES" means any security which ordinarily
possesses the power to vote in the election of the Board without the happening
of any precondition or contingency.


                                       I-5

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                                   ARTICLE II

                                   ELIGIBILITY


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


                                      II-1

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                                   ARTICLE III

                       DEFERRALS AND COMPANY CONTRIBUTIONS


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

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

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

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

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

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

                  If a Participant elects a deferral period to Retirement, he
shall also specify whether the deferral period shall end at the date of his
termination of employment with the Company or at his Normal Retirement Date, in
the event of termination other than as a result of death, Disability

                                     III-1

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or Retirement. If a Participant elects a deferral period of a number of years or
to a date certain, the deferral period shall end upon the Participant's
Retirement, if earlier.

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

                  Once an election has been made it becomes irrevocable for that
Plan Year, except that the Participant may change his election of the form of
payment he previously elected under Section 3.1(5) during a 30-day period ending
one year prior to the end of the deferral period. In the event a Participant
originally elected a deferral period of a number of years or until a date
certain and, as a result of the Participant's election to take Retirement, the
Participant will retire before the end of the elected deferral period, the
Participant may elect to change the form of payment during a 30- day period
ending one year prior to the Retirement date chosen by the Participant by
written notice to the Company. In the event a Participant changes his election,
if the deferral period terminates early for any reason, which is beyond the
control of the Participant, such as involuntary termination of employment, death
or Disability, then the distribution or the first installment, whichever is
applicable, shall not be made until one year after the election was changed;
however, if the deferral period terminates early for any reason which is within
the control of the Participant,
                                      III-2

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such as Retirement or voluntary termination of employment, then the
change of election will be ineffective. If for any reason the deferral period
does not end one year after the end of such 30-day period because of a
postponement of Retirement or otherwise, the change of election shall remain in
effect and no further changes of election shall be permitted.

                  The election to participate in the Plan for a given Plan Year
will be effective only upon receipt by the Committee of the Participant's
election on such form as will be determined by the Committee from time to time.
If the Participant does not exercise his right to defer, subject to Section 3.3
below, the Participant will be deemed to have elected not to defer any part of
his Incentive Bonus or Director Fees for that Plan Year and all of his Incentive
Bonuses and Director Fees will be paid in cash. If the percentage of the
Incentive Bonus and Director Fees elected to be deferred in Common Stock results
in a fractional share, it shall be reduced to the next lowest full share and the
fractional share shall be paid or deferred, as the case may be, in cash.

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

                  3.3 MANDATORY DEFERRAL. If a Participant becomes entitled to a
cash payment of part or all of an Incentive Bonus because the Participant did
not elect to defer all of the Incentive Bonus but the Company determines that
section 162(m) of the Code may not allow the Company to take a deduction for
part or all of the Incentive Bonus, then, unless a Change of Control has
occurred after June 1, 1999, the payment of the Incentive Bonus will be delayed
until December 1st following the end of the Plan Year in which it occurred. Then
on December 1st, if the Company's



                                      III-3

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deduction is determined by the Company not to be affected, the Incentive Bonus
in total will be paid immediately. However, if the Company determines that some
portion of the Incentive Bonus is affected, then only that portion of the
Incentive Bonus which is deductible by the Company shall be paid on December 1st
and the remaining portion of the Incentive Bonus will be delayed to the first
day of the first complete month of the second Plan Year, at which time it will
be paid. The Committee may waive the mandatory deferral required by this Section
3.3 with respect to a Participant who is not a member of the Committee but such
waiver shall only be made on an individual basis and at the time the Incentive
Bonus is determined and awarded.



                                      III-4

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                                   ARTICLE IV

                                     ACCOUNT


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

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

                  4.3 CREDITING OF DIVIDENDS, DISTRIBUTIONS AND INTEREST. When
dividends are declared and paid, or other distributions, whether stock,
property, cash, rights or other, are made with



                                      IV-1

<PAGE>   17

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

                  4.4 INTEREST RATE. Interest will be accrued on the last day of
each calendar month on each portion of a Participant's Account held in the form
of cash (whether resulting from a cash deferral, cash dividends or other cash
distributions on Common Stock or the conversion of a Common Stock credit in his
Account to cash) from the later of (a) the time it is credited to his Account or
(b) the last previous calendar month end at a rate equal to (x) the rate of
interest announced by Chase Manhattan Bank, N.A., or its successor, if
applicable as its prime rate of interest on the last business day of the
calendar quarter preceding the calendar quarter in which the month falls divided
by (y) four. Interest so accrued on the last day of each calendar month shall be
credited as cash to the Participant's Account and shall thereafter accrue
interest. Interest will continue to be credited on the cash balance in the
Participant's Account until the entire cash balance has been distributed.

                  4.5 COMMON STOCK CONVERSION ELECTION. At any time during a
period of three years prior to the earliest time a Participant could retire
under the Retirement Plan and ending on the Participant's Normal Retirement
Date, the Participant may elect a Retirement date under the


                                      IV-2

<PAGE>   18


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

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

                  4.6 CONVERSION AND CASH-OUT UPON A CHANGE OF CONTROL.
Notwithstanding any other provision of the Plan, immediately upon the occurrence
of a Change of Control, all shares of Common Stock credited to a current or
former Participant's Account shall be converted to cash based on the Change of
Control Value of such shares of Common Stock. Within five days after the date on
which the Change of Control occurs, all current and former Participants shall be
paid in cash lump sum payments the balances credited to their Accounts.



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                                    ARTICLE V

                      VESTING AND EVENTS CAUSING FORFEITURE


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

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

                  5.3 FORFEITURE FOR CAUSE. If the Committee finds, after full
consideration of the facts presented on behalf of both the Company and a former
Participant, that the Participant was discharged by the Company for fraud,
embezzlement, theft, commission of a felony, proven dishonesty in the course of
his employment by the Company which damaged the Company, or for disclosing trade
secrets of the Company, the entire amount credited to his Account, exclusive of
an

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amount equal to the sum of the total deferrals of the Participant, will be
forfeited. The decision of the Committee as to the cause of a former
Participant's discharge and the damage done to the Company will be final. No
decision of the Committee will affect the finality of the discharge of the
Participant by the Company in any manner.

                  5.4 FORFEITURE FOR COMPETITION. If at the time a distribution
is being made or is to be made to a Participant or former Participant, the
Committee finds after full consideration of the facts presented on behalf of the
Company and the Participant or former Participant, that the Participant or
former Participant at any time within two years from his termination of
employment from the Company, and without written consent of the Company,
directly or indirectly owns, operates, manages, controls or participates in the
ownership, management, operation or control of or is employed by, or is paid as
a consultant or other independent contractor by a business which competes or at
any time did compete with the Company by which he was formerly employed in a
trade area served by the Company at the time distributions are being made or to
be made and in which the Participant or former Participant had represented the
Company while employed by it; and, if the Participant or former Participant
continues to be so engaged 60 days after written notice has been given to him,
the Committee will forfeit all amounts otherwise due the Participant or former
Participant, exclusive of an amount equal to the sum of the total deferrals of
the Participant or former Participant.

                  5.5 FULL VESTING IN THE EVENT OF A CHANGE OF CONTROL. The
forfeitures created by sections 5.2, 5.3 or 5.4 shall not apply with respect to
any amounts credited to the Accounts of current or former Participants after the
occurrence of a Change of Control.



                                       V-2

<PAGE>   21


                                   ARTICLE VI

                                  DISTRIBUTIONS


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

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



                                      VI-1

<PAGE>   22

                  Each Participant, upon making his initial deferral election,
will file with the Committee a designation of one or more Beneficiaries to whom
distributions otherwise due the Participant will be made in the event of his
death prior to the complete distribution of the amount credited to his Account
in the Deferred Compensation Ledger. The designation will be effective upon
receipt by the Committee of a properly executed form which the Committee has
approved for that purpose. The Participant may from time to time revoke or
change any designation of Beneficiary by filing another approved Beneficiary
designation form with the Committee. If there is no valid designation of
Beneficiary on file with the Committee at the time of the Participant's death,
or if all of the Beneficiaries designated in the last Beneficiary designation
have predeceased the Participant or otherwise ceased to exist, the Beneficiary
will be the Participant's spouse, if the spouse survives the Participant, or
otherwise the Participant's estate. A Beneficiary must survive the Participant
by 60 days in order to be considered to be living on the date of the
Participant's death. If any Beneficiary survives the Participant but dies or
otherwise ceases to exist before receiving all amounts due the Beneficiary from
the Participant's Account, the balance of the amount which would have been paid
to that Beneficiary will, unless the Participant's designation provides
otherwise, be distributed to the individual deceased Beneficiary's estate or to
the Participant's estate in the case of a Beneficiary which is not an
individual. Any Beneficiary designation which designates any person or entity
other than the Participant's spouse must be consented to in writing in a form
acceptable to the Committee in order to be effective.

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


                                      VI-2

<PAGE>   23

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

                  6.5 HARDSHIP WITHDRAWALS. Any Participant who is in the employ
of a Company and is not entitled to a distribution from the Plan may request a
hardship withdrawal. No hardship withdrawal can exceed the lesser of the amount
credited to the Participant's Account or the amount reasonably needed to satisfy
the emergency need. Whether a hardship exists and the amount reasonably needed
to satisfy the emergency need will be determined by the Committee based upon the
evidence presented by the Participant and the rules established in this Section.
If a hardship withdrawal is approved by the Committee it will be made in Common
Stock or cash as required in Section 6.1 within ten days of the Committee's
determination. A hardship for this purpose is a severe financial hardship to the
Participant resulting from a sudden and unexpected illness or accident of the
Participant or of a dependent (as defined in section 152(a) of the Code) of the
Participant, loss of the Participant's property due to casualty, or any similar
extraordinary and unforeseeable circumstance arising as a result of events
beyond the control of the Participant. The circumstances that will constitute a
hardship will depend upon the facts of each case, but, in any case, payment may
not be made to the extent that the hardship is or may be relieved: (a) through
reimbursement or compensation by insurance or otherwise, (b) by liquidation of
the Participant's assets, to the extent the liquidation of such assets will not
itself cause severe financial hardship, or (c) by cessation of deferrals under
the Plan. Such foreseeable needs for funds as the need to send a Participant's
child to college or the desire to purchase a home will not be considered to be a
hardship.


                                      VI-3

<PAGE>   24


                  6.6 PAYMENT RESTRICTIONS ON ANY PORTION OF A BENEFIT
DETERMINED NOT TO BE DEDUCTIBLE. Except for hardship withdrawals under Section
6.5, if a Participant has a benefit that is due during a Plan Year and the
Committee determines that section 162(m) of the Code could affect the Company's
deduction on the amount paid, the distribution of his benefit will be delayed
until December 1 following the end of the Plan Year. Then on December 1 if the
Company's deduction is determined by the Committee not to be affected, the
benefit in total will be distributed immediately; however, if the Committee
determines that some portion of the benefit is affected, then only that portion
of the benefit which is deductible by the Company shall be distributed on
December 1st and the distribution of the remaining portion of the benefit will
be delayed to the first day of the first complete month of the Plan Year or
Years on which a portion or all of the remaining distribution can be made and
deducted by the Company on its federal income tax return. The Committee may
waive the mandatory deferral required by this Section 6.6 with respect to a
Participant who is not a member of the Committee, but such waiver shall only be
made on an individual basis and at the time the distribution is to be made.

                  6.7 RESPONSIBILITY FOR DISTRIBUTIONS AND WITHHOLDING OF TAXES.
The Committee will furnish information to the Company last employing the
Participant, concerning the amount and form of distribution to any Participant
entitled to a distribution so that the Company may make or cause the Rabbi Trust
to make the distribution required. It will also calculate the deductions from
the amount of the benefit paid under the Plan for any taxes required to be
withheld by federal, state or local government and will cause them to be
withheld. If a Participant has deferred compensation under the Plan while in the
service of more than one Company, each Company for which the Participant was
working will reimburse the disbursing agent for the amount attributable to
compensation deferred while the Participant was in the service of that Company
if it has not already provided that funding to the disbursing agent.


                                      VI-4

<PAGE>   25

                                   ARTICLE VII

                                 ADMINISTRATION

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

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

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

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

                                      VII-1

<PAGE>   26

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

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

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

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

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

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

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

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

                                      VII-2

<PAGE>   27

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

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


                                      VII-3

<PAGE>   28

                                  ARTICLE VIII

                            ADOPTION BY SUBSIDIARIES


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

                  8.2 TERMINATION OF PARTICIPATION BY ADOPTING SUBSIDIARY. Any
Subsidiary adopting the Plan may, by appropriate action of its board of
directors, terminate its participation in the Plan. The Committee may, in its
discretion, also terminate a Subsidiary's participation in the Plan at any time.
The termination of the participation in the Plan by a Subsidiary will not,
however, affect the rights of any Participant who is working or has worked for
the Subsidiary as to amounts or shares of Common Stock previously standing to
his credit in his Account or reduce the income accrued on amounts deferred by
him or matched by the Company and credited to his Account whether in cash or in
shares of Common Stock, prior to the distribution of the benefit to the
Participant without his consent.


                                     VIII-1

<PAGE>   29

                                   ARTICLE IX

                          AMENDMENT AND/OR TERMINATION


                  9.1 AMENDMENT OR TERMINATION OF THE PLAN. The Board may amend
or terminate the Plan at any time by an instrument in writing without the
consent of any adopting Company.

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

                  9.3 EFFECT OF TERMINATION. If the Plan is terminated, all
amounts, whether in cash or in shares of Common Stock, deferred by Participants
and matched by the Company will continue to be held under the terms of the Plan
until all amounts have been distributed according to the elections made by the
Participants or the directives made by the Committee prior to the deferrals. The
forfeiture provisions of Sections 5.2, 5.3 and 5.4 and the restriction set out
in Section 6.6 would continue to apply throughout the period after the
termination of the Plan but prior to the completed distribution of all benefits.



                                      IX-1

<PAGE>   30

                                    ARTICLE X

                                     FUNDING


                  10.1 PAYMENTS UNDER THIS AGREEMENT ARE THE OBLIGATION OF THE
COMPANY. The Company will distribute the benefits due the Participants under the
Plan; however, should it fail to do so when a benefit is due and the funding
trust contemplated by Section 10.2 exists, the benefit will be distributed by
the trustee of that funding trust. In any event, if the trust fails to
distribute a benefit for any reason, the Company still remains liable for all
benefits provided by the Plan.

                  10.2 AGREEMENT MAY BE FUNDED THROUGH RABBI TRUST. It is
specifically recognized by both the Company and the Participants that the
Company may, but is not required to transfer any funds, shares or Common Stock
or other assets that it finds desirable to a trust established to accumulate
assets sufficient to fund the obligations of all of the Companies signatory to
the Plan. However, under all circumstances, the Participants will have no rights
to any of those assets; and likewise, under all circumstances, the rights of the
Participants to the assets held in the trust will be no greater than the rights
expressed in this agreement. Nothing contained in the trust agreement which
creates the funding trust will constitute a guarantee by any Company that assets
of the Company transferred to the trust will be sufficient to fund all benefits
under the Plan or would place the Participant in a secured position ahead of
general creditors should the Company become insolvent or bankrupt. Any trust
agreement prepared to fund the Company's obligations under this agreement must
specifically set out these principles so it is clear in that trust agreement
that the Participants in the Plan are only unsecured general creditors of the
Company in relation to their benefits under the Plan.

                                       X-1

<PAGE>   31

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

                  10.4 PARTICIPANTS MUST RELY ONLY ON GENERAL CREDIT OF THE
COMPANY. It is also specifically recognized by both the Company and the
Participants that the Plan is only a general corporate commitment and that each
Participant must rely upon the general credit of the Company for the fulfillment
of its obligations under the Plan. Under all circumstances the rights of
Participants to any asset held by the Company will be no greater than the rights
expressed in this agreement. Nothing contained in this agreement will constitute
a guarantee by the Company that the assets of the Company will be sufficient to
distribute any benefits under the Plan or would place the Participant in a
secured position ahead of general creditors of the Company. Though the


                                       X-2

<PAGE>   32

Company may establish or become a signatory to a Rabbi Trust, as indicated in
Section 10.1, to accumulate assets to fulfill its obligations, the Plan and any
such trust will not create any lien, claim, encumbrance, right, title or other
interest of any kind in any Participant in any asset held by the Company,
contributed to any such trust or otherwise designated to be used in fulfillment
of any of its obligations created in this agreement. No specific assets of the
Company have been or will be set aside, or will in any way be transferred to the
trust or will be pledged in any way for the performance of the Company's
obligations under the Plan which would remove such assets from being subject to
the general creditors of the Company.


                                       X-3

<PAGE>   33

                                   ARTICLE XI

                                  MISCELLANEOUS


               11.1 LIMITATION OF RIGHTS. Nothing in the Plan will be construed:

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

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

               (c) to limit in any way the right of the Company to terminate a
          Participant's employment with the Company at any time;

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

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

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

               11.3 NONALIENATION OF BENEFITS. No right or benefit provided in
the Plan will be transferable by the Participant except, upon his death, to a
named Beneficiary as provided in the Plan. No right or benefit under the Plan
will be subject to anticipation, alienation, sale, assignment, pledge,
encumbrance or charge, and any attempt to anticipate, alienate, sell, assign,
pledge, encumber, or charge the same will be void. No right or benefit under the
Plan will in any manner

                                      XI-1

<PAGE>   34

be liable for or subject to any debts, contracts, liabilities or torts of the
person entitled to such benefits. If any Participant or any Beneficiary becomes
bankrupt or attempts to anticipate, alienate, sell, assign, pledge, encumber or
charge any right or benefit under the Plan, that right or benefit will, in the
discretion of the Committee, cease. In that event, the Committee may have the
Company hold or apply the right or benefit or any part of it to the benefit of
the Participant or Beneficiary, his or her spouse, children or other dependents
or any of them in any manner and in any proportion the Committee believes to be
proper in its sole and absolute discretion, but is not required to do so.

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

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

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

                                      XI-2

<PAGE>   35


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

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

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


                                      XI-3

<PAGE>   36

                  IN WITNESS WHEREOF, the Company has executed this document on
this 29th day of September, 1999.

                                     QUANEX CORPORATION



                                     By /s/ PAUL GIDDENS
                                        --------------------------------------