The effect of internal solute oxidation during annealing in H2‐N2‐H2O atmospheres on the magnetic properties of nonoriented Si‐steel electrical sheet has been investigated, using standard magnetic tests, electron and x‐ray re‐emission Mossbauer spectroscopy, metallography, and scanning electron microscopy. A significant correlation was found between the extent of internal oxide penetration into the steel and the degradation of magnetic properties. Permeability was observed to decrease linearly with increasing fayalite content, as determined by Mossbauer spectroscopy.