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                                   EXHIBIT 13

                              FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>

                                                                        1998             1997             1996
                                                                ------------    -------------      -----------
<S>                                                             <C>             <C>                <C>
summary of operations
Net Sales                                                       $103,894,000    $  97,226,000      $86,420,000
Operating Income                                                  10,192,000        8,371,000        3,066,000
Other, net (expense) income                                         (822,000)       1,635,000          455,000
Net Income                                                         5,365,000        5,793,000        2,612,000
Capital Expenditures                                              20,728,000       16,584,000       16,426,000

financial position
Working Capital                                                 $ 14,810,000    $  18,975,000      $18,688,000
Shareholders' Equity                                              81,898,000       76,535,000       70,997,000

per common share
Net Income                                                      $       0.65    $        0.70      $      0.32
Shareholders' Equity                                                    9.41             9.04             8.59

common shares
Weighted Average Common Shares Outstanding                         8,286,178        8,267,630        8,272,904
Common Shares Issued And Outstanding At Year End                   8,707,796        8,463,491        8,269,099
</TABLE>

Note: all dollar amounts shown herein are in U.S. dollars



                               TABLE OF CONTENTS

     To Our Shareholders  . . . . . . . . . . . . . . . . . . . . . . . .2

     Industrial Minerals  . . . . . . . . . . . . . . . . . . . . . . . .5

     Metal Powders  . . . . . . . . . . . . . . . . . . . . . . . . . . 11

     Alumitech  . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

     Management's Discussion and Analysis  . . . . . . . . . . . . . . .23

     Independent Auditors' Report  . . . . . . . . . . . . . . . . . . .32

     Management's Report  . . . . . . . . . . . . . . . . . . . . . . . 33

     Audit Committee Report  . . . . . . . . . . . . . . . . . . . . .  33

     Consolidated Financial Statements  . . . . . . . . . . . . . . . . 34

     Notes to Consolidated Financial Statements  . . . . . . . . . . .  38

     Financial Data (Unaudited)  . . . . . . . . . . . . . . . . . . . .61

     Selected Financial Data  . . . . . . . . . . . . . . . . . . . . . 62


                              Zemex Corporation 1
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                               TO OUR SHAREHOLDERS





Despite the turmoil that affected world markets in 1998, Zemex reported a 22%
increase in operating earnings on a 7% increase in sales. Each of our divisions
executed its business strategy well in 1998, focusing on quality and service as
well as cost reduction and production optimization. We also significantly
increased margins, acquired and digested two acquisitions and developed several
new value-added products during the year. These efforts should help make our
customers more competitive and give Zemex a sustainable competitive advantage in
the marketplace, enhancing our position and profitability going forward.

We have experienced and knowledgeable teams in place at the divisional level and
have developed leading positions in niche markets, earning a reputation among
our customers and suppliers as a well-run, highly-competitive company. Our
strength is found in both our sales and marketing teams and our eighteen
operating facilities; they have positioned us as a major supplier of industrial
minerals, metal powders, and specialty products. A hidden strength is our
pre-eminent industrial mineral resource position, one of the strongest of any
competitive North American supplier.

In recent months, Zemex has had somewhat of a re-birth with its reincorporation
in Canada. In view of this, we would like to answer some questions our
shareholders have posed with respect to the past year and our strategy going
forward, and address what we believe are currently the salient issues for
shareholders.

Reincorporation

The change in domicile of the Corporation from Delaware to Canada resulted from
our desire to foster greater access to Canadian capital markets and especially
Canadian investors who appear to have a significant interest in industrial
minerals and metal processing companies. This change in domicile did not result
in any change to the business of Zemex or to the equity or voting interests of
our shareholders. However, it did result in our common shares being listed on
both the Toronto Stock Exchange and the New York Stock Exchange, which should
result in greater exposure in the marketplace and ultimately benefit our
shareholders.

The basis for this change is straightforward. Zemex is a successful and
profitable company, as witnessed by our growth over the past six years, yet this
has not been reflected in our share price or in our trading volumes. One reason
for this is that Zemex is considered to be a small company by U.S. standards
and, as a result, is often overlooked by U.S. analysts and investors. In the
Canadian marketplace, Zemex is considered a solid, mid-size company and as such
should attract greater interest from the investment community.

Acquisitions

Zemex plans to grow its three divisions, both internally and through synergistic
acquisitions. In 1998, we were fortunate enough to be able to acquire a mica
operation, which will strengthen and augment our industrial mineral group, and
an aluminum dross recycling facility, which will support our growth strategy in
Alumitech. Although we


                               Zemex Corporation  2



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realized some benefit from these acquisitions in 1998, the retrofitting of these
two acquisitions carried out during 1998 and early 1999 should make a
significant contribution to earnings in 1999.

One of the major frustrations of 1998 was our thwarted takeover of Inmet Mining
Corporation, a major Canadian base and precious metals mining company. We began
to look at Inmet a couple of years ago. Last spring we reviewed its assets and
decided that they could be of greater value than the marketplace perceived.
Originally, our interest in Inmet stemmed from their Austrian tungsten mine,
concentrator and processing plant, a facility which would have been synergistic
to the technology and target markets of our metal powder operations.
Unfortunately, we were prevented from acquiring Inmet by that company's
defensive measures.

Day-To-Day Business Strategy

Our focus is to substantially increase the inherent value of the Corporation on
an ongoing basis by:

o  continuing to deliver superior quality and service to our customers in order
   to achieve leading market share positions;

o  continuing our focus on developing new value-added products and supporting
   them with aggressive marketing and sales programs;

o  continuing to pursue compelling, strategically important acquisitions which
   meet our demanding criteria and which will closely complement our existing
   activities;

o  continuing to utilize and improve our technology as an integral tool to
   increasing operating efficiency and maintaining our low-cost producer status;
   and

o  continuing to build a lean, effective, aggressive organization with the
   responsiveness necessary to seize emerging opportunities.

In the future, we will continue to turn technology and markets to our advantage,
invest for growth and seek new customers and niche markets. We enter the last
year of this century proud of our accomplishments and confident in the future of
the Corporation.

Today's Zemex Corporation is a strong, growing company. Our strength comes from
the energy, ingenuity and dedication of our employees and our supportive,
knowledgeable board of directors. Their combined commitment to our success is a
competitive advantage few companies can match.


/s/ Richard L. Lister                              /s/ Peter O. Lawson-Johnston
Richard L. Lister                                      Peter O. Lawson-Johnston
President and Chief Executive Officer                     Chairman of the Board




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                                   [ PICTURE ]



                               Zemex Corporation  4



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                                                             INDUSTRIAL MINERALS









                                   [PICTURE]









Zemex's industrial minerals group ("ZIM") mines, processes and supplies
industrial mineral products primarily for the ceramics, plastics and coatings
industries. These materials include feldspar, kaolin, mica, talc, barytes and
sand for use in a multitude of consumer and industrial products and
applications. With eleven operating facilities and eight mines located in North
America, ZIM provides strong, growing cash generation and made a solid
contribution to the Corporation's financial results in 1998. ZIM's strategy is
twofold: first, to be the largest or one of the largest suppliers to niche
industries and, second, to ensure that it has the strongest resource base among
its competitors.

ZIM is a major supplier of sodium feldspar to the ceramics industry, where it is
used in the production of ceramic plumbing fixtures and in floor and wall tiles,
and potassium feldspar, which is used in frits, glazes and technical glass
applications such as television picture tubes. ZIM produces appproximately
330,000 tons of sodium and potassium feldspar annually and demand remains
strong.







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                                   [ PICTURE ]





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                                                                     BILL ROGERS






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                                   [ PICTURE ]



The company also produces a full range of mica products for use in the
manufacture of paints, plastics, and fillers and supplies almost all of the
high-end, domestic phlogopite mica market. ZIM also has about 30% of the
muscovite mica market, supplying the needs of the paint, plastics and wallboard
industries.

In 1998, the performance of several product categories stood out: sodium and
potassium feldspar sales volumes increased 11.2%, primarily as a result of
continued strong demand from the company's traditional customer base in the
ceramic tile, plumbing fixture, and glassware industries and inroads the company
has made in other new market sectors. ZIM also recorded significant volume
increases in industrial sand products as well as increased market penetration of
its muscovite mica products.

During the year, continued strides were made in margin improvements and
operating efficiencies. At ZIM's feldspar facility in Spruce Pine, North
Carolina, efforts were focused on refining the process and maximizing ore
recovery. The result: a 10% increase in feldspar recovery. Similarly, the
redesign of certain screening circuits has allowed the company to increase
capacity by 30% at ZIM's phlogopite mica processing facility in Boucherville,
Quebec.

Internationally, ZIM continued to implement its talc strategy, forming a joint
venture with Industria Mineraria Italiana Fabi S.r.l ("Fabi"), a highly regarded
technological leader and a major talc supplier to the plastics industry in
Europe. In early 1998, Fabi became a partner in ZIM's Benwood, West Virginia
grinding facility through the acquisition of a 40% interest in a new entity,
Zemex Fabi-Benwood, LLC. This joint venture gives ZIM exclusive access to Fabi's
application technology and has enabled the company to develop and introduce
Zemex Fabi-Benwood world talc products: high-quality talc products targeted to
the more sophisticated North American plastics industry. Additionally, as part
of the joint venture, ZIM has access to Fabi's Mount Seabrook talc deposit in
Australia. This relationship with Fabi will allow ZIM to accelerate its
penetration of the upper end of the finely ground talc business.

The past year also saw the company introduce a variety of muscovite mica
products to the marketplace following ZIM's acquisition of a muscovite mica
operation in the Spruce Pine area of North Carolina. After completion of its
retrofitting in early 1999, this acquisition will allow ZIM to process mined ore
as well as up-grade the by-product




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                                   [ PICTURE ]



mica produced at its nearby feldspar operation and convert that mica into
high-quality value-added material. As a result of this strategic acquisition,
ZIM will expand its offerings to the paint and plastics industries, markets it
already serves with its phlogopite mica, talc and barytes products. The addition
of muscovite mica to its already expansive product line will allow ZIM to
penetrate the mid-range mica market and become a significant full-line supplier
of mica products.

ZIM is committed to continual improvement in its health and safety record. In
1998, ZIM employees worked 555,000 hours and recorded only one lost time
accident, an improvement of 600% from the previous year. We consider this to be
a very important milestone.

ZIM's substantial growth in the industrial minerals market is being driven by a
concentrated focus on establishing the industry standard for reliable, quality
products with strong customer relationships. In the years ahead, industrial
minerals will increase their importance as a vital part of everyday life,
finding increased use in consumer products ranging from glassware and plumbing
fixtures, to ceramic floor and wall tiles, to paints and plastics. ZIM will be
instrumental in meeting the strong and growing demand for industrial minerals as
a highly efficient producer offering a broad range of quality products backed by
exceptional service and technology.

















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                                                                   METAL POWDERS









                                   [PICTURE]











Pyron, Zemex's metal powders group, is a leading supplier of ferrous and
non-ferrous metal powders. In recent years, Pyron has redefined its business
strategy to be a producer of specialty value-added products for the rapidly
growing powder metallurgy (P/M) markets serving the automotive and appliance
industries. It produces hydrogen reduced sponge iron powders primarily directed
to the friction industry, both automotive and non-automotive, and it also
produces copper and copper alloy powders for the small appliance, friction and
automotive markets. Pyron has also made significant inroads into developing
powder products for soft magnetics, oxygen removal, projectile components, and
welding rods and wires, as well as a vast array of consumer related products
that require the unique performance characteristics of Pyron's metal powders.

Highly developed complex P/M parts are made by compacting powders into a mold
and sintering the resultant shapes in a controlled-atmosphere. There is
virtually no wastage of material using this process and often little or no need
for secondary machining. Industry sources believe that future demand for P/M
parts should continue to accelerate as metal powders are utilized in larger and
more sophisticated applications.



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                                                                   WELKER FAMILY



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The reason for this growth is twofold. First, powder producers, such as Pyron,
are now producing higher-quality, more consistent materials. Second, advances in
die and furnace design and in the press equipment used to form powder parts have
made it possible to produce larger and more intricate components. These
compelling advantages are expected to foster future exponential growth for P/M
parts at the expense of forged, machined, and cast components.

Pyron had a successful year in 1998 despite the strike at General Motors, which
resulted in overall industry shipments falling short of forecast. Fortunately,
the disruption had limited effect on Pyron primarily because of concerted
efforts to diversify its customer and market base. In fact, even in light of the
strike, the company established records in sales volumes and made significant
progress in product quality, consistency and service while successfully reducing
manufacturing costs at each of its locations. Sales were up by approximately 5%,
and, due to its focus on value-added products, maximizing production
efficiencies and reducing costs, operating income was up by over 90% compared to
1997. Internally, the development of programs to provide safer working
conditions and improve manufacturing efficiencies have met with outstanding
results and the formation of an across-the-board team spirit. The improvements
made in 1998, combined with those planned for 1999, should firmly establish
Pyron as a high-quality, cost-competitive, niche producer of specialty metal
powders.

The metal powders industry is exacting in its demands for precision blends and
quality products. Today's international standard is ISO-9002 certification, and
in the fourth quarter of 1998 both Pyron's Niagara Falls and St. Marys
facilities earned that certification. It is anticipated that the Tennessee
facilities will receive ISO-9002 certification in 1999.

During 1998, Pyron continued to establish itself as a top line producer of metal
powders through product line extensions, new product development, and the
introduction of valued-added services. Each component is a critical element of
this group's business strategy and has contributed to strong sales growth. Some
of Pyron's recent new product introductions include:





                              Zemex Corporation  14



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o  Manganese Sulfide Plus ("MnS+"(TM)). Industry acceptance of Pyron's patented
   MnS+, a powder additive designed to improve the machining of P/M parts, grew
   nearly 63% in 1998 over the previous year. Additionally, a derivative of MnS+
   is currently being evaluated by Pyron as a more environmentally friendly
   substitute for lead and antimony sulfide in the production of friction
   products.

o  Pyron Molybdenum Alloys ("PMAs"). The company recently introduced its line of
   PMAs, powders which produce harder parts with higher strength and ductility.
   Typical PMA applications, which include gears and sprockets, displace
   expensive machined parts thereby reducing costs. Customer product evaluations
   are underway and it is expected that these iron-based alloy powders may
   displace competing processes and products and be utilized in a number of new
   applications.

o  Ferro-Phosphorous ("Fe3P"). The introduction of Fe3P, an additive used to
   enhance the magnetic characteristics of P/M parts, also added to Pyron's line
   of new products in 1998. The 1998 market demand for Pyron Fe3P-based blends
   exceeded expectations and we see this usage accelerating in 1999.

o  Cu Alloy ("MV-0"). Efforts to energize the non-ferrous product line also
   proved successful. Market demand for Pyron non-ferrous products, such as
   unique air-atomized and lower priced water-atomized powders, necessitated
   bringing back on-line the Maryville, Tennessee production facility. The
   additional capacity of the Maryville facility will be used to meet the
   anticipated demand for our recently introduced diluted bronze product line
   utilizing MV-0. This material is particularly well suited for use in the
   production of bushings and bearings.

Pyron is firmly positioned as a market-driven provider of specialty metal
powders and technology-based services. As Pyron moves forward, the plan is to
acquire additional business units and continue to channel assets and resources
toward providing an ever-increasing value-added component for its products and
services, a strategy that should allow Pyron to meet even higher levels of
performance in 1999 and beyond.







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                                  [ PICTURE ]






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                                                               A L U M I T E C H

                                   [PICTURE]

Alumitech, Zemex's aluminum dross processor, has the potential to be a major
contributor to the future of the Corporation. Zemex initiated its interest in
Alumitech in 1994 and by mid-1995 assumed 100% ownership, believing at that
time, and believing even more so today, that Alumitech's proprietary technology
for recycling aluminum dross represents the way of the future.

Unlike conventional aluminum dross processors, who simply recover aluminum metal
values and send the remaining materials to landfill, Alumitech has a patented
process that enables it to not only recover aluminum metal present in secondary
dross and saltcake (both of which are waste by-products produced in the aluminum
recycling process) but to convert the balance traditionally landfilled into
profitable industrial products. Using its technology, Alumitech has become the
industry leader in developing alternative uses for this residual waste,
otherwise known as non-metallic product ("NMP"), by converting it into products
used in refractory, steel and other metallurgical industries.




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Until Alumitech developed its unique "closed-loop" technology, much of the
aluminum dross and saltcake materials generated from secondary aluminum
processing were simply landfilled. The U.S. Department of Energy estimates that
up to two billion pounds of aluminum dross and saltcake are landfilled annually
in the United States, with volumes well in excess of that amount disposed of
elsewhere in the world. This material has been banned from landfills in some
areas of the world.

The past year was one of both ups and downs for Alumitech. On the upside,
Alumitech focused on the construction of its new NMP facility, growth through
acquisition, the consolidation of current operations and the development of new
markets and applications for its products. On the downside, aluminum prices,
which continued to decline from an average of $0.65 per pound in 1997 to an
average of $0.56 per pound in 1998, had a significant negative impact on
Alumitech's financial results. However, the partial year earnings realized from
the acquisition of S&R Enterprises, Inc., partially offset the negative impact
of the reduction in aluminum prices.

During the year, Alumitech completed the construction of the full-scale
commercial NMP regeneration operation at its Cleveland facility, Alumitech of
Cleveland, Inc. Although late, the new processing facility was brought on stream
at the end of the third quarter, but mechanical problems in the start-up phase
have slowed full-scale continuous commercial production. It has been a daunting
process, accompanied by a series of setbacks from an engineering and
construction point of view; however, Alumitech knows where the problems are, and
the solutions, including the necessary retrofitting of some of the equipment,
are being implemented. Despite the dislocation that occurred as a result of the
construction of the NMP facility, the Cleveland operation managed to approximate
the level of throughput achieved in 1997.

In 1998, Alumitech also continued to refine the quality and consistency of its
NMP product offerings: calcium aluminate and feedstock for the production of
refractory ceramic fibre. Calcium aluminate is used to treat molten steel in the
ladle during the final stages of steel refinement just prior to casting.
Although produced only in small non-continuous batches, the calcium aluminate
product has been of good consistant quality.

In June, Alumitech acquired S&R Enterprises, Inc. (since renamed Alumitech of
Wabash, Inc.), an aluminum dross processor located in Wabash, Indiana. This
acquisition improves Alumitech's ability to serve the aluminum industry


                              Zemex Corporation 20


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                                   [PICTURE]






with broader geographic coverage and expanded processing capabilities. This
acquisition is an integral part of Alumitech's business plan -- to grow and
expand the business to better serve the aluminum industry and to optimize the
use of its proprietary technology. Alumitech began a significant expansion
project at this facility to increase this plant's processing capacity. This
first phase of expansion is expected to be completed on schedule by the end of
the first quarter of 1999, with start-up to commence immediately thereafter.

Once Alumitech's newly constructed regeneration facility in Cleveland is up and
running, we should see a positive impact on the company's profitability going
forward. This will, in turn, allow us to shift our sights to the recently
acquired aluminum dross processing facility in Indiana and consider other
locations to build additional processing plants in North American and other
parts of the world. Each of these will use our proprietary technology to turn
aluminum waste into saleable industrial products.

Alumitech's third wholly-owned subsidiary, ETS Schaefer Corporation,
manufactures patented engineered heat-containment systems, refractory ceramic
materials and fire protection materials for commercial structures for use in the
steel making, aluminum, and other high temperature-related industries, as well
as the commercial building industry. In 1998, ETS had record sales and profits
as a result of improved production efficiencies and strong market growth. During
the year it also built a new fabrication plant in Macedonia, Ohio. The on-time
completion of this new production facility at year end has enabled the
consolidation of four existing facilities into one as of the first quarter of
1999 and should foster further improved operating efficiencies in 1999.

Aluminum continues to gain ground as the material of choice in everything from
packaging to automobiles to electrical components. Much of the metal for this
growth is, and will continue to be, produced by the secondary aluminum industry,
Alumitech's customer base. With a greater emphasis on economically competitive,
environmentally sound alternatives to landfilling, the outlook for Alumitech is
extremely positive.


                              Zemex Corporation 21
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                                FINANCIAL REVIEW






                                 C O N T E N T S


Management's Discussion and Analysis ........................................ 23
Independent Auditors' Report ................................................ 32
Management's Report ......................................................... 33
Audit Committee Report ...................................................... 33
Consolidated Statements of Income ........................................... 34
Consolidated Balance Sheets ................................................. 35
Consolidated Statements of Shareholders' Equity ............................. 36
Consolidated Statements of Cash Flows ....................................... 37
Notes to the Consolidated Financial Statements .............................. 38
  1.  Summary of Significant Accounting Policies ............................ 38
  2.  Acquisitions and Dispositions ......................................... 41
  3.  Inventories ........................................................... 42
  4.  Property, Plant and Equipment ......................................... 43
  5.  Other Assets .......................................................... 43
  6.  Income Taxes .......................................................... 44
  7.  Pension Plans and Other Postretirement Benefits ....................... 46
  8.  Long Term Debt ........................................................ 46
  9.  Common Shares and Stock Options ....................................... 48
  10. Reorganization Charges and Unusual Item ............................... 50
  11. Operating Leases and Other Commitments ................................ 51
  12. Financial Instruments ................................................. 51
  13. Changes in Non-Cash Working Capital  .................................. 52
  14. Related Party Transactions ............................................ 52
  15. Segment Information ................................................... 53
  16. Contingencies ......................................................... 56
  17. Differences from United States Accounting Principles .................. 56
Financial Data (Unaudited) .................................................. 61
Selected Financial Data ..................................................... 62



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                      MANAGEMENT'S DISCUSSION AND ANALYSIS






The following is a discussion and analysis of the results of operations and
financial condition of the Corporation for the years ended December 31, 1998,
1997 and 1996, along with certain factors that may affect the Corporation's
prospective financial condition and results of operations. The following should
be read in conjunction with the consolidated financial statements and related
notes thereto.


overview

The Corporation is a diversified producer of specialty materials and products
for use in a variety of industrial applications. The Corporation operates in
three principal business segments: (i) industrial minerals, which includes The
Feldspar Corporation, Suzorite Mica Products Inc., Suzorite Mineral Products,
Inc., Zemex Fabi-Benwood, LLC, Zemex Industrial Minerals, Inc. and Zemex Mica
Corporation; (ii) metal powders, which includes Pyron Corporation and Pyron
Metal Powders, Inc.; and (iii) aluminum recycling, which includes Alumitech,
Inc., Alumitech of Cleveland, Inc., Alumitech of Wabash, Inc. and ETS Schaefer
Corporation.

The operating performance of the Corporation was significantly better in 1998
than in 1997. Net sales were up 6.9% but, more importantly, gross margin
improved from 27.2% in 1997 to 29.1% in 1998 and income from operations
increased by 21.8%. This was partially as a result of the focus on operation
efficiency and cost control.

In January 1998, the Corporation, through its wholly-owned subsidiary Zemex
Industrial Minerals, Inc., acquired a muscovite mica producer for approximately
$2.0 million. The facilities acquired in the purchase are located in the Spruce
Pine, North Carolina area and now operate under the name Zemex Mica Corporation.
This acquisition enhances the Corporation's position as a major mica supplier.

On February 24, 1998, Industria Mineraria Italiana Fabi S.r.l ("Fabi") became an
investor in the Corporation's talc facility located in Benwood, West Virginia by
acquiring a 40% interest in a new limited liability company, Zemex Fabi-Benwood,
LLC. As part of the transaction, Fabi paid $3.1 million and is providing access
to its technology. Suzorite Mineral Products, Inc., a wholly-owned subsidiary of
the Corporation, will manage the new entity pursuant to an operatiing agreement.
There was no gain or loss recognized by the Corporation on the transaction.

Effective June 1, 1998, Alumitech, Inc. ("Alumitech"), a wholly-owned subsidiary
of the Corporation, acquired all of the issued and outstanding shares of S&R
Enterprises, Inc. ("S&R") for approximately $5.6 million. S&R is an aluminum
dross processor located in Wabash, Indiana. The acquisition of S&R enhances the
Corporation's position in the dross processing industry and provides a
foundation for future expansion.









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During the second quarter of 1998, the Corporation proposed a business
combination with Inmet Mining Corporation ("Inmet"). Approximately 4.1 million
shares of Inmet were acquired and financed by the Corporation's credit
facilities, as amended (see Liquidity and Capital Resources). Subsequently, the
transaction was abandoned and the Corporation sold approximately 2.6 million
common shares of Inmet for proceeds of Cdn$14.9 million. The Corporation
recorded a foreign exchange loss of $0.7 million in other income (expense) as a
result of a decline in the value of its Canadian dollar investment in Inmet. The
Corporation remains a significant shareholder of Inmet with approximately 5% of
the issued and outstanding shares.

In August 1997, the Corporation entered into an agreement with respect to
Alumitech's fibre manufacturing operation located in Streetsboro, Ohio. Under
the agreement, the fibre line was sold to a new corporation in which Alumitech
retained a nominal non-voting equity participation. Alumitech and the purchaser
entered into a joint research and development agreement in conjunction with the
purchase and sale agreement. The one-time gain, when netted against certain
other non-recurring items, resulted in other income of $1.8 million.

During the first quarter of 1996, the Corporation recognized reorganization
costs of $1.2 million in connection with the reorganization of its industrial
minerals division and the recognition of a provision for anticipated costs. A
write-down to market of inventory held in Brazil in the amount of $0.5 million
was recorded as a charge against cost of goods sold. The Brazilian enterprise
was unsuccessful primarily due to rapidly deteriorating market prices, which
made market penetration extremely difficult.

The Corporation's strategy going forward is to enhance its position as a leading
supplier of specialty materials through investments in its core businesses, the
introduction of new products, strategic acquisitions and investments in new
technologies.


results of operations

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997


Net Sales

<TABLE>
<CAPTION>
                                 1998              1997            Change       % Change
                         ------------      ------------      ------------       --------

<S>                      <C>               <C>               <C>                 <C> 
Industrial minerals      $ 44,835,000      $ 43,396,000      $  1,439,000          3.3%
Metal powders              35,556,000        33,930,000         1,626,000          4.8%
Aluminum recycling         23,503,000        19,900,000         3,603,000         18.1%
                         ------------      ------------      ------------       ------ 
                         $103,894,000      $ 97,226,000      $  6,668,000          6.9%
                         ============      ============      ============       ====== 
</TABLE>

The Corporation's net sales for 1998 were $103.9 million, an increase of $6.7
million, or 6.9%, from 1997.





                              Zemex Corporation  24



<PAGE>   25


The industrial minerals segment recorded a 3.3% increase in sales from $43.4
million in 1997 to $44.8 million in 1998. The increase was primarily due to a
$0.7 million increase from the feldspar group generated by a favourable product
mix and a $0.7 million increase due to increased volume of talc sales. Talc
sales are expected to rise in 1999 as market share continues to increase.
Feldspar sales to the plumbing fixtures industry should increase; however,
uncertainty exists in the tile industry due to the devaluation of the Malaysian
currency.

Net sales of the metal powders division increased 4.8%, or $1.6 million, from
$33.9 million in 1997 to $35.6 million in 1998. The increase was due to
increased market penetration of new value-added products, improved product mix,
and increased volume of ferrous and non-ferrous atomized powders. The ferrous
business is expected to remain strong during 1999 as powdered metal parts become
more widely used by the automotive sector.

The aluminum recycling group recorded an increase of 18.1% in sales, or $3.6
million, from $19.9 million in 1997 to $23.5 million in 1998. This increase was
due to the acquisition of S&R in June 1998. If the effect of the acquisition is
removed, aluminum recycling revenues were static year over year. In the face of
a 13.5% decline in aluminum prices realized, the constant revenue was achieved
by an offsetting increase in volume.

Cost of Goods Sold

Cost of goods sold were $70.8 million in 1997 compared to $73.7 million in 1998.
The corresponding gross margins were 27.2% for 1997 and 29.1% for 1998. The main
increase came from the metal powders group as a result of production
efficiencies and a 9.1% increase in volume sold.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses increased 10.7% from $12.2
million in 1997 to $13.5 million in 1998. As a percentage of sales, SG&A expense
was 13.0% in 1998 as compared to 12.5% in 1997. The increase was primarily due
to the incremental SG&A associated with acquisitions made in 1998, expenses
associated with investigating potential acquisitions, and increased staffing in
the metal powders group.

Depreciation, Depletion and Amortization

Depreciation, depletion and amortization increased by $0.7 million, or 11.8%,
from $5.9 million in 1997 to $6.6 million in 1998. This increase was driven by
capital expenditures made by the Corporation over the past several years.
Prospectively, depreciation will continue to increase as current capital
programs are placed into service.

Operating Income

Operating income increased from $8.4 million for fiscal 1997 to $10.2 million in
fiscal 1998, representing a 21.8% increase.








                              Zemex Corporation  25



<PAGE>   26


Interest Income

Interest income for the year ended December 31, 1998 was $0.3 million, a slight
increase of $0.1 million over the same period in 1997.

Interest Expense

Interest expense for the year ended December 31, 1998 was $2.6 million, an
increase of $0.5 million over 1997. Total indebtedness increased from $25.5
million at December 31, 1997 to $51.5 million at December 31, 1998. Interest
expense is expected to increase significantly in 1999.

Other Income (Expense)

Other income (expense) changed from income of $1.6 million in 1997 to an expense
of $0.8 million in 1998. The net change year over year was $2.4 million. In
1997, the Corporation recognized other income of $1.6 million. The largest
component of this revenue was generated by a one-time gain on the sale of
Alumitech's fibre line.

In 1998, the Corporation recognized a foreign exchange loss of approximately
$0.7 million. This loss arose from a decline in the value of the Canadian dollar
during the time that the Corporation had a significant investment in Inmet.

Provision for Income Taxes

The provision for income taxes for the fiscal year 1998 was $1.7 million as
compared to $2.3 million in 1997. In 1999, the Corporation will use an effective
tax rate of approximately 28% to calculate its income taxes, reflecting the
permanent difference in the United States arising from the application of
percent depletion to income derived from extractive industries.

Non-Controlling Interest in Loss of Subsidiary

As a result of its sale of a 40% interest in its talc facility located in
Benwood, West Virginia, the Corporation recorded a loss of $41,000 as its
proportionate share of the loss in the new limited liability company.

Net Income and Earnings Per Share

As a result of the factors discussed above, net income for the year ended
December 31, 1998 was $5.4 million, a decrease of $0.4 million from 1997.

<TABLE>
<CAPTION>
                                         1998               1997
                                -------------      -------------
<S>                             <C>                <C> 
Net income                      $   5,365,000      $   5,793,000
Earnings per share - basic      $        0.65      $        0.70
- fully diluted                 $        0.60      $        0.65
                                =============      =============
</TABLE>



                              Zemex Corporation  26



<PAGE>   27


Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Net Sales

<TABLE>
<CAPTION>
                                1997             1996           Change       % Change
                         -----------      -----------      -----------       -------- 

<S>                      <C>              <C>              <C>                  <C> 
Industrial minerals      $43,396,000      $40,469,000      $ 2,927,000          7.2%
Metal powders             33,930,000       31,725,000        2,205,000          7.0%
Aluminum recycling        19,900,000       14,226,000        5,674,000         39.9%
                         -----------      -----------      -----------         ---- 
                         $97,226,000      $86,420,000      $10,806,000         12.5%
                         ===========      ===========      ===========         ==== 
</TABLE>

The Corporation's net sales for 1997 were $97.2 million, an increase of $10.8
million, or 12.5%, from 1996. Sales in the industrial minerals segment, the
metal powders group, and the aluminum recycling division increased $2.9 million,
$2.2 million and $5.7 million, respectively.

The industrial minerals segment recorded a 7.2% increase in sales from $40.5
million in 1996 to $43.4 million in 1997. The increase was primarily due to a
$1.7 million increase from the feldspar group generated by a favourable product
mix, resulting in slightly higher margins, and a $1.4 million increase due to
increased volume of talc sales.

Net sales in the metal powders group increased 7.0%, or $2.2 million, from $31.7
million in 1996 to $33.9 million in 1997. Of the increase, $1.7 million was due
to increased sales of ferrous metal powders.

The aluminum recycling group generated increased sales of $5.7 million for a
total of $19.9 million in 1997. Of the increase, $1.3 million resulted from a
positive movement in the price of aluminum, $1.6 million resulted from higher
volumes and $2.6 million was due to increased sales of ceramic fibre products.

Cost of Goods Sold

Cost of goods sold were $70.8 million in 1997 compared to $67.0 million in 1996.
The corresponding gross margins were 27.2% for 1997 and 22.5% for 1996. The main
increase in 1997 came from the industrial minerals group as a result of
production efficiencies, a favourable product mix and the 1996 write-down of
inventory held in Brazil.

Selling, General and Administrative Expenses

SG&A expenses increased 15.9% from $10.5 million in 1996 to $12.2 million in
1997. As a percentage of sales, SG&A expense was 12.5% in 1997 as compared to
12.1% in 1996. The increase was due to increased staffing in the industrial
minerals group, expenses associated with reviewing potential acquisitions, and
bonuses paid pursuant to the Corporation's management incentive program. No
management bonuses were paid in respect of the 1996 year.








                              Zemex Corporation  27



<PAGE>   28


Depreciation, Depletion and Amortization

Depreciation, depletion and amortization increased by $1.2 million, or 25.1%,
from $4.7 million in 1996 to $5.9 million in 1997. This increase was driven by
capital expenditures made by the Corporation over the past several years.

Operating Income Before Reorganization Charges

Operating income before reorganization charges was $8.4 million in 1997 compared
to $4.3 million in 1996. A $1.2 million reorganization charge was recognized in
the first quarter of 1996 in connection with the reorganization of the
Corporation's industrial minerals division.

Operating Income

Operating income increased from $3.1 million for fiscal 1996 to $8.4 million in
fiscal 1997, representing a 173.1% increase.

Interest Income

Interest income for the year ended December 31, 1997 was $0.2 million compared
to $0.1 million in 1996.

Interest Expense

Interest expense for the year ended December 31, 1997 was $2.1 million, an
increase of $1.1 million over 1996. During 1996, interest expense relating to
the expansion of the Spruce Pine facility was capitalized. During 1997, the
project was completed and, accordingly, the related interest was expensed. Total
indebtedness declined to $25.5 million in 1997 from $26.6 million in 1996.

Other Income (Expense)

In 1997, the Corporation recognized other income of $1.6 million. The largest
component of this revenue was generated by a one-time gain from the sale of
Alumitech's fibre line.

Provision for (Recovery of) Income Taxes

The provision for income taxes for the fiscal year 1997 was $2.3 million as
compared to a tax recovery of $0.9 million in 1996. The 1996 tax recovery
reflected the recognition of the benefit of net operating losses available to
the Corporation.













                              Zemex Corporation  28


<PAGE>   29



Net Income and Earnings Per Share

As a result of the factors discussed above, net income for the year ended
December 31, 1997 was $5.8 million, an increase of $3.2 million from 1996.

<TABLE>
<CAPTION>
                                         1997              1996
                                -------------      -------------

<S>                             <C>                <C>          
Net income                      $   5,793,000      $   2,612,000
Earnings per share - basic      $        0.70      $        0.32
- fully diluted                 $        0.65      $        0.30
                                =============      =============
</TABLE>

liquidity and capital resources

The Corporation has historically funded its activities through cash flow from
operations, bank debt and sales of capital stock and warrants. During the most
recent three-year period ended December 31, 1998, the Corporation funded all
capital expenditures, acquisitions and debt reduction from a combination of
additional debt, cash flow from operations, and proceeds from the sale of
assets.

Cash Flow from Operations

The Corporation had $14.8 million of working capital at December 31, 1998
compared to $19.0 million at December 31, 1997. During 1998, the Corporation
generated cash flow from operations of $4.6 million as compared to $13.5 million
for 1997. The decrease of $8.9 million was primarily due to a large swing in
non-cash working capital items and in particular a movement in accounts payable
and accrued liabilities in the aggregate amount of $7.1 million. In 1998,
non-cash working capital items consumed $5.5 million in cash as compared to
generating $3.7 million in 1997.

Financing Agreements

In March 1997, the Corporation amended its credit facility to increase the total
availability to $50,224,000. In 1998 the operating line was increased, on a
temporary basis, to $15,000,000. As at December 31, 1998, the operating line was
reduced to $10,000,000 with a further reduction to $5,000,000 to occur on
February 28, 1999. The amended credit facility is further subdivided into four
facilities: (i) a $30,000,000 revolving credit facility; (ii) a $10,000,000
multiple advance term loan facility; (iii) a $5,224,000 standby letter of
credit; and (iv) a $5,000,000 operating line. These facilities are secured by
specific assets and a floating charge over the Corporation's assets. The
facilities bear interest at rates varying from bank prime to bank prime plus
0.25% and from LIBOR plus 1.25% to LIBOR plus 2.25%, depending upon the
financial position of the Corporation. As at December 31, 1998, there was
$10,000,000 outstanding under the operating line, $6,945,000 outstanding under
the multiple advance term loan facility, $30,000,000 outstanding under the
revolving credit facility, and the standby letter of credit was issued to secure
the Corporation's industrial development revenue bond. The operating line
matures June 30, 1999 and is





                              Zemex Corporation  29



<PAGE>   30


reviewed annually for purposes of renewal. The multiple advance term loan
facility requires quarterly payments of $278,000 with the balance outstanding,
if any, due January 1, 2000. The revolving credit facility expires and must be
repaid on January 1, 2000.

Capital Expenditures

The Corporation's primary capital activities in the past involved the
acquisition of mineral and metal processing businesses, and capital investments
to expand its facilities, increase operating efficiencies, and meet
environmental, health and safety standards at its existing operations. During
1998, capital expenditures were $20.7 million compared to $16.6 million and
$16.4 million for the years ended December 31, 1997 and 1996, respectively.
During 1998, the Corporation spent approximately $7.6 million in cash and
assumed approximately $2.3 million in long term debt to acquire S&R and Aspect
Minerals, Inc. (Zemex Mica Corporation). The capital expenditures and
acquisitions were funded by cash flow from operations and bank indebtedness.

The Corporation is currently completing several major capital programs. These
include retrofitting the aluminum dross plant in Cleveland, expanding capacity
at S&R and retrofitting the mica facility in Spruce Pine, North Carolina. In
aggregate, 1999 capital expenditures are anticipated to be approximately $15.5
million. The Corporation plans on funding these expenditures from a combination
of cash flow from operations and credit facilities.

Although the Corporation's capital budgets provide for certain reclamation and
environmental compliance activities, management does not believe that the cost
of the Corporation's environmental compliance will have a material adverse
effect on the Corporation's results of operations or financial condition in
1999.

seasonality and inflation

Although the Corporation's results from extraction and processing operations are
cyclical due to fluctuations in industrial minerals and metal powders demands,
sales of the Corporation's products are generally not seasonal. Inflation in
recent years has not adversely affected the Corporation's results of operations
and is not expected to adversely affect the Corporation in the future unless it
increases substantially.

year 2000

The Corporation operates in basic industries that do not rely heavily on
computerized systems. The major systems operated by the Corporation are those
for financial reporting all of which are year 2000 compliant. It is the opinion
of management that any year 2000 issues that may arise will not be significant
and will not have a material adverse impact on the financial performance of the
Corporation.

The Corporation is reviewing its key suppliers to determine their exposure to
problems arising from year 2000. The review is being conducted by management
personnel and additional resources are not required.






                              Zemex Corporation  30



<PAGE>   31


market risk

Market risk represents the risk of loss that may impact the consolidated
financial statements of the Corporation due to adverse changes in financial
market prices and rates. The Corporation's market risk is primarily the result
of fluctuations in interest rates and aluminum prices. Management monitors the
movements in interest rates and performs sensitivity analysis on aluminum prices
and, on that basis, decides on the appropriate measures to take. Prices and
interest rates are such that no measures need be taken at this time.

The Corporation does not hold or issue financial instruments for trading
purposes. A discussion of the Corporation's financial instruments is included in
the financial instruments note to the consolidated financial statements.


capital stock

Zemex Corporation's common shares are traded on the New York Stock Exchange and,
as of February 1, 1999, on the Toronto Stock Exchange under the symbol ZMX. The
price range in which the shares have traded for the past two years is shown
below:

Common Shares

<TABLE>
<CAPTION>
1998             Q1          Q2         Q3          Q4        Year
--------   --------   ---------   --------   ---------   ---------

<S>        <C>        <C>         <C>        <C>         <C>      
High       $   9.75   $   10.44   $   9.19   $    6.94   $   10.44
Low            7.81        8.75       6.00        6.00        6.00
Close          9.50        8.75       6.50        6.25        6.25
</TABLE>



<TABLE>
<CAPTION>
1997             Q1          Q2         Q3          Q4        Year
--------   --------   ---------   --------   ---------   ---------

<S>        <C>        <C>         <C>        <C>         <C>      
High       $   7.75   $    8.00   $   9.50   $   10.94   $   10.94
Low            6.75        6.75       7.88        7.94        6.75
Close          6.75        7.75       9.50        8.75        8.75
</TABLE>

In the fourth quarter of each of 1998, 1997 and 1996, the Corporation declared a
2% stock dividend.

As of December 31, 1998, there were approximately 1,669 holders of record of the
Corporation's common shares. This number includes shares held in nominee name
and, thus, does not reflect the number of holders of a beneficial interest in
the shares.


                              Zemex Corporation  31

<PAGE>   32


                          INDEPENDENT AUDITORS' REPORT





To the Shareholders and
Board of Directors of Zemex Corporation

We have audited the consolidated balance sheets of Zemex Corporation as of
December 31, 1998 and 1997 and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Corporation'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 Canada. Those standards require that we plan and perform the audit to obtain
reasonable assurance 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.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of Zemex Corporation as of December
31, 1998 and 1997 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in accordance with
accounting principles generally accepted in Canada.


/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
Chartered Accountants

Toronto, Ontario
February 5, 1999















                              Zemex Corporation  32



<PAGE>   33


                               MANAGEMENT'S REPORT



The management of Zemex Corporation and its subsidiaries has the responsibility
for preparing the consolidated financial statements presented in this annual
report and for their accuracy and integrity. The statements have been prepared
in conformity with accounting principles generally accepted in Canada, and
include informed judgments and estimates as required. Other financial
information in this annual report is consistent with the financial statements.

Zemex Corporation's system of internal controls is designed to provide
reasonable assurance, at a justifiable cost, as to the reliability of financial
records and reporting and the protection of assets. This system includes
organizational arrangements with clearly defined lines of responsibility.

Deloitte & Touche LLP, independent auditors, have audited the consolidated
financial statements of Zemex Corporation and their opinion is included on the
preceding page.

Zemex Corporation has formal standards of corporate conduct and policies
regarding high standards of ethics and financial integrity. These policies have
been disseminated to appropriate employees and internal control procedures
provide reasonable assurance that violations of these policies, if any, are
detected.


/s/ Allen J. Palmiere                                /s/ Richard L. Lister

Allen J. Palmiere                                        Richard L. Lister
Vice President and                                       President and
Chief Financial Officer                                  Chief Executive Officer


                             AUDIT COMMITTEE REPORT



The Audit Committee of the Board of Directors is currently composed of two
independent directors, John M. Donovan and Garth A.C. MacRae. The Committee held
three meetings during 1998.

The Audit Committee oversees the financial reporting process of the Corporation
on behalf of the Board of Directors. In fulfilling its responsibility, the
Committee recommended to the Board of Directors, subject to shareholder
approval, the selection of the Corporation's independent auditors. The Audit
Committee met with management and representatives of the auditors, Deloitte &
Touche LLP, to review accounting, auditing and financial reporting matters. The
Committee met with Deloitte & Touche LLP representatives without management
present.


/s/ John M. Donovan

John M. Donovan
Chairman, Audit Committee




                              Zemex Corporation  33



<PAGE>   34


                        CONSOLIDATED STATEMENTS OF INCOME
                        (All amounts are in U.S. dollars)

<TABLE>
<CAPTION>
Years ended December 31                                               1998                1997                1996
-----------------------                                      -------------       -------------       -------------

<S>                                                          <C>                 <C>                 <C>          
Net sales                                                    $ 103,894,000       $  97,226,000       $  86,420,000
                                                             -------------       -------------       -------------
Costs and expenses
Cost of goods sold (note 10)                                    73,678,000          70,826,000          66,952,000
Selling, general and administrative                             13,463,000          12,158,000          10,492,000
Depreciation, depletion and amortization                         6,561,000           5,871,000           4,694,000
                                                             -------------       -------------       -------------
                                                                93,702,000          88,855,000          82,138,000
                                                             -------------       -------------       -------------
Operating income before reorganization charges                  10,192,000           8,371,000           4,282,000
Reorganization charges (note 10)                                      --                  --             1,216,000
                                                             -------------       -------------       -------------
Operating income                                                10,192,000           8,371,000           3,066,000
                                                             -------------       -------------       -------------
Other income (expense)
Interest income                                                    255,000             150,000              93,000
Interest expense                                                (2,588,000)         (2,094,000)         (1,041,000)
Other, net (notes 2 and 10)                                       (822,000)          1,635,000            (455,000)
                                                             -------------       -------------       -------------
                                                                (3,155,000)           (309,000)         (1,403,000)
                                                             -------------       -------------       -------------
Income before income taxes and non-controlling interest          7,037,000           8,062,000           1,663,000
Provision for (recovery of) income taxes (note 6)                1,713,000           2,269,000            (949,000)
Non-controlling interest in loss of subsidiary (note 2)            (41,000)               --                  --
                                                             -------------       -------------       -------------
Net income                                                   $   5,365,000       $   5,793,000       $   2,612,000
                                                             -------------       -------------       -------------
Net income per share - basic                                 $        0.65       $        0.70       $        0.32
                     - fully diluted                         $        0.60       $        0.65       $        0.30
                                                             -------------       -------------       -------------
Weighted average number of common shares outstanding             8,286,178           8,267,630           8,272,904
                                                             -------------       -------------       -------------
</TABLE>

See notes to the consolidated financial statements



                              Zemex Corporation  34



<PAGE>   35


                           CONSOLIDATED BALANCE SHEETS
                        (All amounts are in U.S. dollars)

<TABLE>
<CAPTION>
December 31                                                                         1998                1997
-----------                                                                -------------       -------------
<S>                                                                        <C>                 <C>          
ASSETS

Current assets
Cash and cash equivalents                                                  $   1,062,000       $   2,189,000
Accounts receivable (less allowance for doubtful accounts of $329,000
at December 31, 1998 and $328,000 at December 31, 1997) (note 14)             17,642,000          16,287,000
Inventories (note 3)                                                          18,036,000          17,595,000
Prepaid expenses and other                                                       946,000             786,000
Future tax benefits (note 6)                                                     657,000           1,328,000
                                                                           -------------       -------------
                                                                              38,343,000          38,185,000
Property, plant and equipment (notes 4 and 8)                                 89,058,000          70,812,000
Other assets (note 5)                                                         21,374,000           9,777,000
Future tax benefits (non-current) (note 6)                                        91,000                --
                                                                           -------------       -------------
                                                                           $ 148,866,000       $ 118,774,000
                                                                           -------------       -------------
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Bank indebtedness (note 8)                                                 $  10,000,000       $   3,000,000
Accounts payable                                                               6,324,000           9,805,000
Accrued liabilities                                                            4,433,000           3,151,000
Accrued income taxes                                                             644,000           1,235,000
Current portion of long term debt (note 8)                                     2,132,000           2,019,000
                                                                           -------------       -------------
                                                                              23,533,000          19,210,000
Long term debt (note 8)                                                       39,354,000          20,527,000
Other non-current liabilities                                                  1,006,000           1,014,000
Future tax obligations (note 6)                                                     --             1,488,000
                                                                           -------------       -------------
                                                                              63,893,000          42,239,000
                                                                           -------------       -------------
Non-controlling interest in subsidiary company                                 3,075,000                --
                                                                           -------------       -------------
Shareholders' equity
Common stock (note 9)                                                          8,708,000           9,204,000
Paid-in capital                                                               48,691,000          53,298,000
Retained earnings                                                             28,418,000          24,235,000
Note receivable from shareholder (note 9)                                     (1,749,000)         (1,749,000)
Cumulative translation adjustment                                             (2,170,000)         (1,588,000)
Treasury stock at cost (note 9)                                                     --            (6,865,000)
                                                                           -------------       -------------
                                                                              81,898,000          76,535,000
                                                                           -------------       -------------
                                                                           $ 148,866,000       $ 118,774,000
                                                                           =============       =============
</TABLE>

See notes to the consolidated financial statements



                                     /s/ John M. Donovan   /s/ Garth A.C. MacRae

Approved by the Board of Directors   John M. Donovan       Garth A.C. MacRae
                                     Director              Director




                              Zemex Corporation  35



<PAGE>   36


                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                        (All amounts are in U.S. dollars)

<TABLE>
<CAPTION>

                                                                                   Note
                                                                             Receivable    Cumulative
                                      Common       Paid-In      Retained           From   Translation       Treasury
                                       Stock       Capital      Earnings    Shareholder    Adjustment          Stock          Total
                                 -----------   -----------   -----------   ------------   -----------    -----------    -----------

<S>                              <C>           <C>           <C>           <C>            <C>            <C>            <C>        
Balance at
December 31, 1995                $ 8,695,000   $49,692,000   $18,683,000   $ (1,749,000)  $(1,218,000)   $(3,203,000)   $70,900,000
Stock issued under ESPP(a)(b)         73,000       535,000          --             --            --             --          608,000
Stock dividend(a)                    161,000     1,089,000    (1,255,000)          --            --             --           (5,000)
Stock options exercised(a)            21,000        84,000          --             --            --             --          105,000
Stock purchased for treasury(a)         --            --            --             --            --       (3,170,000)    (3,170,000)
Stock options repurchased               --         (96,000)         --             --            --             --          (96,000)
Net income for the year                 --            --       2,612,000           --            --             --        2,612,000
Translation adjustment                  --            --            --             --          43,000           --           43,000
                                 -----------   -----------   -----------   ------------   -----------    -----------    -----------
Balance at
December 31, 1996                  8,950,000    51,304,000    20,040,000     (1,749,000)   (1,175,000)    (6,373,000)    70,997,000
Stock issued under ESPP(a)(b)         75,000       528,000          --             --            --             --          603,000
Stock dividend(a)                    165,000     1,428,000    (1,598,000)          --            --             --           (5,000)
Stock options exercised(a)            14,000       205,000          --             --            --             --          219,000
Stock purchased for treasury(a)         --            --            --             --            --         (492,000)      (492,000)
Stock options repurchased               --        (167,000)         --             --            --             --         (167,000)
Net income for the year                 --            --       5,793,000           --            --             --        5,793,000
Translation adjustment                  --            --            --             --        (413,000)          --         (413,000)
                                 -----------   -----------   -----------   ------------   -----------    -----------    -----------
Balance at
December 31, 1997                  9,204,000    53,298,000    24,235,000     (1,749,000)   (1,588,000)    (6,865,000)    76,535,000
Stock issued under ESPP(a)(b)        112,000       776,000          --             --            --             --          888,000
Stock dividend(a)                    170,000     1,008,000    (1,182,000)          --            --             --           (4,000)
Stock options exercised(a)            27,000       186,000          --             --            --             --          213,000
Stock purchased for treasury(a)         --            --            --             --            --         (499,000)      (499,000)
Stock options repurchased               --         (18,000)         --             --            --             --          (18,000)
Cancellation of treasury stock      (805,000)   (6,559,000)         --             --            --        7,364,000           --
Net income for the year                 --            --       5,365,000           --            --             --        5,365,000
Translation adjustment                  --            --            --             --        (582,000)          --         (582,000)
                                 -----------   -----------   -----------   ------------   -----------    -----------    -----------
Balance at
December 31, 1998                $ 8,708,000   $48,691,000   $28,418,000   $ (1,749,000)  $(2,170,000)   $      --     $ 81,898,000
                                 ===========   ===========   ===========   ============   ===========    ===========   ============
</TABLE>

See notes to the consolidated financial statements

(a) See note 9 

(b) employee stock purchase plan ("ESPP")








                              Zemex Corporation  36



<PAGE>   37


                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        (All amounts are in U.S. dollars)

<TABLE>
<CAPTION>
Years ended December 31                                         1998             1997             1996
-----------------------                                 ------------     ------------     ------------

<S>                                                     <C>              <C>              <C>         
Cash flows from operating activities
Net income                                              $  5,365,000     $  5,793,000     $  2,612,000
Adjustments to reconcile net income from operations
to net cash flows from operating activities
Depreciation, depletion and amortization                   6,561,000        5,871,000        4,694,000
Amortization of deferred financing costs                     168,000          147,000          101,000
(Decrease) increase in future tax obligations               (909,000)         356,000       (1,761,000)
Non-controlling interest in subsidiary earnings              (41,000)            --               --
Loss (gain) on sale of property, plant and equipment          19,000       (1,831,000)         255,000
(Increase) decrease in other assets                         (795,000)        (957,000)         670,000
(Decrease) increase in non-current liabilities              (191,000)         415,000           (6,000)
Changes in non-cash working capital items(a)              (5,536,000)       3,709,000         (533,000)
                                                        ------------     ------------     ------------
Net cash provided by operating activities                  4,641,000       13,503,000        6,032,000
                                                        ------------     ------------     ------------
Cash flows from investing activities
Additions to property, plant and equipment               (20,728,000)     (16,584,000)     (16,426,000)
Assets acquired in connection with acquisitions,
net of cash acquired(b)                                   (7,468,000)            --               --
Acquisitions of securities(b)                            (14,566,000)            --               --
Proceeds on sales of securities                            9,696,000             --               --
Proceeds from sale of assets(b)                            3,126,000        3,939,000           86,000
                                                        ------------     ------------     ------------
Net cash used in investing activities                    (29,940,000)     (12,645,000)     (16,340,000)
                                                        ------------     ------------     ------------
Cash flows from financing activities
Proceeds (payments) net, on bank indebtedness              7,000,000       (3,590,000)       3,370,000
Proceeds from long term debt                              21,572,000        5,717,000       12,882,000
Repayment of long term debt                               (4,921,000)      (3,169,000)      (2,747,000)
Cash paid in lieu of fractional shares                        (4,000)          (5,000)          (5,000)
Issuance of common stock(c)                                1,101,000          679,000          713,000
Purchase of common stock and options for treasury(c)        (516,000)        (516,000)      (3,266,000)
                                                        ------------     ------------     ------------
Net cash provided by (used in) financing activities       24,232,000         (884,000)      10,947,000
                                                        ------------     ------------     ------------
Effect of exchange rate changes on cash                      (60,000)         (64,000)         (13,000)
                                                        ------------     ------------     ------------
Net (decrease) increase in cash                           (1,127,000)         (90,000)         626,000
                                                        ------------     ------------     ------------
Cash and cash equivalents at beginning of year             2,189,000        2,279,000        1,653,000
                                                        ------------     ------------     ------------
Cash and cash equivalents at end of year                $  1,062,000     $  2,189,000     $  2,279,000
                                                        ------------     ------------     ------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid                                       $  2,658,000     $    821,000     $    393,000
Interest paid                                              2,957,000        2,412,000          937,000
                                                        ------------     ------------     ------------

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Notes received in connection with
sale of assets held for resale(b) (d)                   $        --     $  2,274,000      $        --
                                                        ============     ============     ============
</TABLE>

See notes to the consolidated financial statements

                 (a) See note 13  (b) See note 2 (c) See note 9  (d) See note 10








                              Zemex Corporation  37



<PAGE>   38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Basis of Preparation

On January 21, 1999, a reincorporation merger was completed, the effect of which
was to migrate Zemex Corporation from the United States to Canada. The
predecessor Zemex Corporation became a wholly-owned subsidiary of Zemex Canada
Corporation. Zemex Canada Corporation subsequently changed its name to Zemex
Corporation. As the Canadian parent has as its sole asset the shares of the U.S.
subsidiary, and this change in structure has no effect on the ultimate ownership
of Zemex Corporation, these financial statements have been prepared in
accordance with accounting principles generally accepted in Canada and reflect
the results of operations, financial position and changes in cash flows of the
Corporation as though the new structure had been in place for all periods
presented.


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



The preparation of financial statements in conformity with Canadian generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
significant accounting policies of Zemex Corporation and its subsidiaries (the
"Corporation") are as follows:

A. PRINCIPLES OF CONSOLIDATION


   The consolidated financial statements include the accounts of Zemex
   Corporation and its subsidiaries. All intercompany transactions have been
   eliminated.

B. INVENTORIES

   Inventories are stated at the lower of cost or net realizable value and are
   computed using the average cost method. It is not practical to segregate
   finished products from ore and concentrates. Materials and supplies are
   stated at cost using the first-in, first-out or average cost method.

C. PROPERTY, PLANT AND EQUIPMENT

   Property, plant and equipment are recorded at cost. Repairs and maintenance
   are charged to expense as incurred. Expenditures for major renewals and
   improvements are capitalized. When assets are sold or otherwise retired, the
   cost and accumulated depreciation or depletion are removed from the accounts
   and any gain or loss is included in results of operations. Provisions for
   depreciation are based upon estimated useful lives, using principally the
   straight-line method. Depreciation on newly constructed or purchased assets
   begins when the asset is placed into production. Depletion of mining
   properties and depreciation of other mining assets are computed using the
   unit-of-production method, except in the case of the Corporation's mica
   operation where the estimated reserves exceed the expected production during
   the



                              Zemex Corporation 38


<PAGE>   39

term of the mining lease. The mica mining lease rights and deferred costs,
including all preproduction and set-up costs, are amortized using the
straight-line method over the term of the mining lease.

D. POSTRETIREMENT BENEFITS

   Pension Plans

   Generally, the funding policy of the Corporation is to contribute annually at
   a rate that is intended to provide for the cost of benefits earned during the
   year and which will amortize prior service costs and experience gains and
   losses over the average remaining service lives of the employee group.

   Healthcare and Other Postretirement Benefits Other Than Pensions

   The Corporation accounts for healthcare and other postretirement benefits
   other than pensions by accruing for all such amounts during the years in
   which employees render the necessary services to be entitled to receive such
   benefits. The 1998, 1997 and 1996 amounts include the current year expense
   and the transition liability which is being amortized over a twenty-year
   period which began in 1993.

E. FOREIGN CURRENCY TRANSLATION

   The functional currency for the Corporation's operations is the U.S. dollar.
   The assets and liabilities of the Corporation's self-sustaining foreign
   operation are translated at the exchange rates in effect at the balance sheet
   date. The subsidiary's revenues and expenses are translated at average rates
   for the period. The resulting unrealized gains and losses are accumulated as
   part of the cumulative translation adjustment component of shareholders'
   equity. Foreign currency assets and liabilities are translated using the
   exchange rates in effect at the balance sheet date. Results of operations and
   cash flows are translated using the average exchange rates during the year.
   Gains and losses from foreign currency transactions are included in net
   income for the year.

F. REVENUE RECOGNITION

   Revenue is recognized when goods are shipped to customers. Consignment sales
   are recognized when a customer draws the goods from inventory.

G. RESEARCH AND DEVELOPMENT EXPENSES

   Research and development expenses are charged to earnings in the periods in
   which they are incurred. Research and development expenses were $636,000,
   $961,000 and $622,000 for the years ended December 31, 1998, 1997 and 1996,
   respectively.

H. PROVISION FOR FUTURE RECLAMATION COSTS

   Costs for future reclamation have been provided for based upon estimated
   future reclamation costs allocated over the expected productive lives of the
   Corporation's quarries and mines.



                              Zemex Corporation 39

<PAGE>   40



I. INCOME TAXES

   The Corporation has early adopted CICA Handbook Section 3465, "Income Taxes".
   Section 3465 substantially mirrors the U.S. pronouncement, SFAS No. 109,
   "Accounting for Income Taxes". These pronouncements require income taxes to
   be recognized during the year in which transactions enter into the
   determination of financial statement income, with future taxes being provided
   for temporary differences between amounts of assets and liabilities for
   financial reporting purposes and such amounts as measured by tax laws.

J. EARNINGS PER SHARE

   The Corporation calculates basic earnings per share in accordance with
   Canadian accounting principles which are substantially in accordance with the
   U.S. pronouncement SFAS No. 128, "Earnings Per Share". Under this standard,
   earnings per share are calculated based upon the weighted average number of
   common shares outstanding. For the purpose of calculating earnings per share,
   stock dividends are considered to be issued at the beginning of all periods
   presented.

K. DEFERRED FINANCING COSTS

   Costs associated with the issuance of long term debt are deferred, and are
   being amortized over the term of the debt on a straight-line basis. The
   unamortized balance is included in other assets.

L. OTHER ASSETS

   Other assets includes assets held for sale which are carried at cost, unless
   there has been a decline in their value that is other than temporary in which
   case the value of such asset is written down accordingly. In determining the
   appropriate value, the Corporation deducts from the estimated selling price
   the projected costs to bring the assets into a saleable condition, to dispose
   of the assets or to hold the property to an expected date of sale. Other
   assets also includes patents which are stated at cost and are being amortized
   over their remaining life of 12 years on a straight-line basis. Patents are
   evaluated periodically and, if conditions warrant, an impairment charge is
   provided.

M. CASH EQUIVALENTS

   For purposes of the consolidated statements of cash flows, highly liquid
   investments with original maturities of three months or less when purchased
   are considered as cash equivalents.

N. GOODWILL

   Goodwill represents the excess of the costs of acquisitions over the fair
   values of the net identifiable assets acquired, and is amortized on a
   straight-line basis over its estimated useful life, up to a period of 15
   years. The Corporation assesses the recoverability of goodwill at each
   balance sheet date by determining whether the amortization of the balance
   over its remaining useful life can be recovered through projected
   undiscounted future operating cash flows.



                              Zemex Corporation 40

<PAGE>   41
2. ACQUISITIONS AND DISPOSITIONS

   ACQUISITIONS

   Acquisition of Aspect Minerals, Inc.

   In January 1998, the Corporation, through its wholly-owned subsidiary, Zemex
   Industrial Minerals, Inc., acquired all of the issued and outstanding shares
   of Aspect Minerals, Inc., a muscovite mica processor, for approximately $2.2
   million, which included the assumption of debt. The two facilities acquired
   in the transaction are located in the Spruce Pine, North Carolina area and
   are operating under the name Zemex Mica Corporation ("ZMC"). The acquisition
   was financed through borrowings on the Corporation's credit facility. The
   acquisition of ZMC has been accounted for using the purchase method of
   accounting and, accordingly, the purchase price has been allocated first to
   the assets purchased and liabilities assumed and the excess purchase price
   has been allocated to goodwill. The purchase price was allocated as follows:

<TABLE>
<S>                                                               <C>

   Tangible assets acquired                                      $   614,000
   Liabilities assumed                                            (1,542,000)
   Goodwill                                                        2,934,000
                                                                 -----------
   Cash consideration                                            $ 2,006,000
                                                                 ===========
</TABLE>


   Acquisition of S&R Enterprises, Inc.

   Effective June 1, 1998, Alumitech, Inc., a wholly-owned subsidiary of the
   Corporation, acquired all of the issued and outstanding shares of S&R
   Enterprises, Inc. ("S&R") for approximately $7.7 million, which included the
   assumption of debt. S&R is an aluminum dross processor located in Wabash,
   Indiana. The Corporation used its credit facility to finance the acquisition.
   The acquisition of S&R has been accounted for using the purchase method of
   accounting and, accordingly, the purchase price has been allocated first to
   the assets purchased and liabilities assumed and the excess purchase price
   has been allocated to goodwill. The purchase price was allocated as follows:

<TABLE>
<S>                                                                <C>
   Tangible assets acquired                                        $ 4,845,000
   Liabilities assumed                                              (2,849,000)
   Goodwill                                                          3,561,000
                                                                   -----------
   Cash consideration                                              $ 5,557,000
                                                                   ===========
</TABLE>

                              Zemex Corporation 41


<PAGE>   42

   Investment in Inmet Mining Corporation

   During the second quarter of 1998, the Corporation proposed a business
   combination with Inmet Mining Corporation ("Inmet"). Approximately 4.1
   million shares of Inmet were acquired. The purchase was financed by the
   Corporation's credit facilities, as amended. Subsequently, the transaction
   was abandoned and the Corporation sold, pursuant to an issuer bid,
   approximately 2.6 million common shares of Inmet for proceeds of
   approximately Cdn$14.9 million. No gain or loss was recognized on the
   transaction. The Corporation recorded a foreign exchange loss of $0.7 million
   in other income (expense) as a result of a decline in the value of the
   Canadian dollar. The Corporation's residual 5% interest in Inmet is included
   in other assets.

   DISPOSITIONS

   Sale of Interest in Benwood Facility

   On February 24, 1998, Industria Mineraria Italiana Fabi S.r.1. ("Fabi")
   became an investor in the Corporation's talc facility located in Benwood,
   West Virginia by acquiring a 40% interest in a new limited liability company,
   Zemex Fabi-Benwood, LLC. As part of the transaction, Fabi paid $3.1 million
   and is providing access to its technology. Suzorite Mineral Products, Inc., a
   wholly-owned subsidiary of the Corporation, manages the new entity pursuant
   to an operating agreement. There was no gain or loss on the transaction.

   Asset Sale

   During the third quarter of 1997, the Corporation sold certain assets
   utilized to manufacture refractory ceramic fibre. These assets were vended
   into a joint venture in which the Corporation retained a nominal interest.
   The sale resulted in a pre-tax gain of $1.8 million, which has been included
   in other income (expense). Total proceeds were $4.3 million, which included
   $2.1 million in cash and $2.3 million in notes receivable included in
   accounts receivable.

3. INVENTORIES

<TABLE>
<CAPTION>
                                                                                           1998               1997
                                                                            -------------------      -------------  
<S>                                                                          <C>                     <C> 
   Ore, raw materials, work in process and finished products
   Industrial minerals                                                      $         9,221,000      $   8,312,000
   Metal powders                                                                      3,306,000          3,315,000
   Aluminum recycling                                                                   321,000            686,000
                                                                            -------------------      -------------  
                                                                                     12,848,000         12,313,000
                                                                            ===================      =============
   Materials and supplies
   Industrial minerals                                                                3,703,000          3,955,000
   Metal powders                                                                      1,032,000          1,218,000
   Aluminum recycling                                                                   453,000            109,000
                                                                            -------------------      -------------  
                                                                                      5,188,000          5,282,000
                                                                            -------------------      -------------  
                                                                            $        18,036,000      $  17,595,000
                                                                            ===================      =============
</TABLE>

                              Zemex Corporation 42


<PAGE>   43

4. PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
                                                             Effective Life             1998             1997
                                                             --------------     ------------     ------------ 
<S>                                                           <C>                <C>               <C>
   Land                                                                         $  6,410,000     $  5,344,000
   Mining properties and deferred costs                                            8,261,000        8,125,000
   Buildings                                                  30 - 40 years       21,267,000       18,092,000
   Machinery and equipment                                     3 - 20 years       77,054,000       64,952,000
   Construction in progress                                                       17,077,000        8,308,000
                                                                                ------------     ------------ 
   Total property, plant and equipment, at cost                                  130,069,000      104,821,000
   Less: Accumulated depreciation and amortization                               (41,011,000)     (34,009,000)
                                                                                ------------     ------------ 
   Net property, plant and equipment                                            $ 89,058,000     $ 70,812,000
                                                                                ============     ============
</TABLE>

   As of December 31, 1998, the Corporation estimates that approximately
   $3,015,000 will be expended to complete its construction in progress (at
   December 31, 1997, $3,973,000). During 1998, the Corporation capitalized
   $394,000 in interest relating to capital projects (1997, nil).

5. OTHER ASSETS

<TABLE>
<CAPTION>
                                                                         1998            1997
                                                                  -----------      ----------
<S>                                                               <C>              <C>    
   Prepaid pension cost                                           $ 1,318,000      $1,378,000
   Assets held for resale (note 10)                                   300,000         300,000
   Deferred financing costs                                           445,000         646,000
   Deferred start-up costs                                          1,191,000              --
   Long term note receivable                                          549,000         549,000
   Other                                                              774,000         547,000
   Patents, net                                                     5,688,000       6,357,000
   Goodwill                                                         6,238,000              --
   Investments                                                      4,871,000              --
                                                                  -----------      ----------
                                                                  $21,374,000      $9,777,000
                                                                  ===========      ==========
</TABLE>

                              Zemex Corporation 43

<PAGE>   44

6. INCOME TAXES

   The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>

                                                                1998              1997             1996
                                                       -------------     ------------     -------------
<S>                                                    <C>               <C>              <C>
   Total pre-tax income                                $   7,037,000     $   8,062,000    $   1,663,000
                                                       -------------     ------------     -------------
   Current income tax provision
   Canadian                                            $     557,000     $     350,000    $      76,000
   Federal U.S.                                            1,461,000         1,277,000          478,000
   State and local U.S.                                      352,000           211,000          123,000
                                                       -------------     ------------     -------------
   Total                                                   2,370,000         1,838,000          677,000
                                                       -------------     ------------     -------------
   Future income tax provision
   Canadian                                                       --                --               --
   Federal U.S.                                             (584,000)          279,000       (1,369,000)
   State and local U.S.                                      (73,000)          152,000         (257,000)
                                                       -------------     ------------     -------------
   Total                                                    (657,000)          431,000       (1,626,000)
                                                       -------------     ------------     -------------
   Provision for (recovery of) income taxes            $   1,713,000     $   2,269,000    $    (949,000)
                                                       =============     =============    =============
</TABLE>


   The following tabulation reconciles the Canadian statutory income tax rate to
   the effective income tax rate.

<TABLE>
<CAPTION>
                                                            1998                     1997              1996
                                                            ----                     ----              ----

<S>                                                         <C>                      <C>               <C>
                                                               %                        %                 %
   Statutory rate                                           38.2                     38.2              38.2
   Mining taxes                                              2.4                      0.4               0.6
   Resource allowance                                       (2.5)                    (1.5)               --
   Difference in U.S. tax rates                             (3.4)                    (3.9)             (4.0)
   Benefit of operating loss carryforwards                    --                       --             (43.8)
   U.S. percentage depletion                               (11.2)                    (7.7)            (49.6)
   Other                                                     0.8                      2.6               1.5
                                                            ----                     ----              ----
   Effective income tax rate                                24.3                     28.1             (57.1)
                                                            ====                     ====              ====

</TABLE>

                              Zemex Corporation 44



<PAGE>   45
Future income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. As at December 31, 1998 and
December 31, 1997, the Corporation had unused tax benefits of $8,239,000 and
$6,661,000, respectively, related to U.S. federal and state net operating loss
and tax credit carryforwards. Significant components of the Corporation's future
tax assets and obligations as of December 31 are as follows (dollars in
thousands):

<TABLE>
<CAPTION>
                                                              1998                               1997
                                                Canada        U.S.       Total     Canada        U.S.            Total
                                             ---------     -------     -------   --------    --------         -------- 


<S>                                          <C>           <C>         <C>       <C>         <C>              <C>
Future tax assets
Net operating loss and tax
credit carryforwards                         $      --     $ 8,239     $ 8,239   $     --     $ 6,661         $  6,661
Accrued expenses and reserves                       --         513         513         --         958              958
Bad debt allowances                                 --         109         109         --         110              110
Inventories                                         --         173         173         --         280              280
Other                                               --         173         173         --         167              167
                                             ---------     -------     -------   --------    --------         -------- 
Gross future tax assets                             --       9,207       9,207         --       8,176            8,176
Valuation allowance                                 --      (1,014)     (1,014)        --        (523)            (523)
                                             ---------     -------     -------   --------    --------         -------- 
Net future tax assets                               --       8,193       8,193         --       7,653            7,653
                                             =========     =======     =======   ========    ========         ========
Future tax obligations
Property, plant and equipment                    1,879       3,415       5,294      2,012       3,206            5,218
Patent                                              --       1,456       1,456         --       1,658            1,658
Pension contributions                               --         512         512         --         580              580
Other                                               --         183         183         --         357              357
                                             ---------     -------     -------   --------    --------         -------- 
Total                                            1,879       5,566       7,445      2,012       5,801            7,813
                                             =========     =======     =======   ========    ========         ========
Net future tax (assets) obligations          $   1,879     $(2,627)     $ (748)  $  2,012     $(1,852)        $    160
                                             =========     =======     =======   ========    ========         ========
</TABLE>

At December 31, 1998, the Corporation had approximately $12,300,000 of U.S.
federal net operating loss carryforwards available to reduce future taxable
income, which will expire between 2002 and 2011. Additionally, for U.S. tax
purposes, the Corporation has unused general business tax credits, which expire
between 1999 and 2011, and alternative minimum tax credits. The Corporation also
has U.S. state net operating losses and investment credit carryforwards;
however, a valuation allowance of $1,014,000 has been recognized to offset the
related future tax asset due to the uncertainty of realizing the full benefit of
the tax attribute carryforward.


                              Zemex Corporation 45



<PAGE>   46
7. pension plans and other postretirement benefits

   Pension Plans

   The Corporation has several non-contributory defined benefit pension plans
   covering the majority of all U.S. resident employees. The plans provide
   pension benefits that are based on the length of service and the compensation
   of the employee.

   The following table sets forth the financial position of the pension plans:

<TABLE>
<CAPTION>
   At December 31,                                                                         1998                  1997
                                                                                   ------------          ------------


<S>                                                                                <C>                   <C>         
Plan assets at market value                                                        $ 16,872,000          $ 16,447,000
Actuarial present value of accrued pension benefits                                  14,522,000            13,686,000
                                                                                   ============          ============
</TABLE>
   Other Postretirement Benefits

   The Corporation provides healthcare and life insurance benefits for certain
   retired employees which are accrued as earned (note 1). The cost of such
   benefits was $110,000 in 1998, $66,000 in 1997 and $85,000 in 1996.


8. long term debt

<TABLE>
<CAPTION>
                                                                                              1998                  1997
                                                                                      ------------          ------------

<S>                                                                                   <C>                   <C>         
   Credit facility(a)                                                                 $ 36,945,000          $ 18,056,000
   Other term loan(b)                                                                      128,000                    --
   Industrial development revenue bonds(c)                                               3,060,000             3,570,000
   Promissory notes                                                                             --                70,000
   Capital leases(d)                                                                       857,000               654,000
   Other                                                                                   496,000               196,000
                                                                                      ------------          ------------
   Total debt                                                                           41,486,000            22,546,000
   Less: Current portion                                                                 2,132,000             2,019,000
                                                                                      ------------          ------------
   Long term debt                                                                     $ 39,354,000          $ 20,527,000
                                                                                      ============          ============
</TABLE>

                              Zemex Corporation 46



<PAGE>   47

(a) During 1995, the Corporation entered into a $30,224,000 credit facility
    with a syndicate of two banks. During 1997, the credit facility was amended
    to increase the total availability to $50,224,000. During 1998, the credit
    facility was further amended to provide for a short term increase of the
    operating line to $15,000,000. As at December 31, 1998, the operating line
    was reduced to $10,000,000 with a further reduction to $5,000,000 to occur
    February 28, 1999. The amended credit facility is further subdivided into
    four facilities: (i) a $30,000,000 revolving credit facility; (ii) a
    $10,000,000 multiple advance term loan facility; (iii) a $5,224,000 standby
    letter of credit; and (iv) a $5,000,000 operating line. These facilities are
    secured by specific assets and a floating charge over the Corporation's
    assets. The facilities bear interest at rates varying from bank prime to
    bank prime plus 0.25% and from LIBOR plus 1.25% to LIBOR plus 2.25%,
    depending upon the financial position of the Corporation. As at December 31,
    1998, and December 31, 1997, there was $10,000,000 and $3,000,000,
    respectively, outstanding under the operating line and $6,945,000, and
    $8,056,000, respectively, outstanding under the multiple advance term loan
    facility.

    Advances under the revolving credit facility as at December 31, 1998, and
    1997 were $30,000,000 and $10,000,000, respectively, and the standby letter
    of credit was issued to secure Pyron's Industrial Development Bonds (see (c)
    below). The operating line matures June 30, 1999 and is reviewed annually
    for renewal. The multiple advance term loan facility requires quarterly
    payments of $278,000 which commenced April 1, 1996 with the balance
    outstanding, if any, due January 1, 2000. Advances under the revolving
    credit facility are, if any, due January 1, 2000.

(b) The other term loan bears interest at 6.79%, requires annual payments of
    approximately $40,000 and will be retired in the year 2001.

(c) Pyron Corporation ("Pyron") entered into a lease agreement on November 29,
    1989 with the Niagara County Industrial Development Agency (the "Agency") to
    partially finance the construction of a manufacturing facility, acquire and
    install equipment and machinery, and renovate the existing Pyron facility
    for the purpose of manufacturing atomized steel powders. The agreement
    authorized the Agency to issue and sell industrial development revenue bonds
    in the aggregate principal amount of $7,650,000 to provide the funds for the
    project.

    While the bonds are not the obligation of Pyron, the agreement requires
    Pyron to make quarterly rental payments equal to the debt service under the
    sinking fund requirements and interest on the outstanding principal to the
    Agency. The amount outstanding at December 31, 1998 and 1997 was $3,060,000
    and $3,570,000, respectively. Pyron's annual obligation under the agreement
    is $510,000 until paid.

    The bonds bear interest at a variable rate not to exceed 15% per annum. The
    rate at December 31, 1998 was 4.02% and at December 31, 1997 was 4.15%.
    Pyron has the option to convert the bonds to a fixed interest rate at any
    time during the term. Under the lease agreement, Pyron may purchase the
    facility at any time during the term, which expires November 1, 2004, by
    paying the outstanding principal amount of the bonds plus $1.




                              Zemex Corporation 47

<PAGE>   48

    The bonds are collateralized by a mortgage on the land, the new facility and
    the existing facility, which have an aggregate net book value of
    approximately $10,134,000 at December 31, 1998.

     A bank has provided Pyron with a letter of credit which is available to
     support Pyron's obligations under the lease agreement. If the bondholders
     tender their bonds for repayment, the letter of credit will be utilized to
     pay the bondholders. The letter of credit is collateralized under the
     credit facility in (a) above. The letter of credit expires on October 1,
     1999.

(d) The Corporation has long term capital lease agreements at various rates and
    for various terms with maturities ranging from 1999 to 2002 for equipment
    used in its operations. The carrying value of the leased equipment as of
    December 31, 1998 was $875,000. The current obligation under the long term
    lease agreements is $359,000.

    Principal repayments on long term debt are as follows:
<TABLE>
<S>                                                       <C>

    1999                                                     $        2,132,000
    2000                                                             36,771,000
    2001                                                                855,000
    2002                                                                645,000
    2003                                                                573,000
    Thereafter                                                          510,000
                                                             ------------------
                                                             $       41,486,000
                                                             ==================
</TABLE>

9. COMMON SHARES AND STOCK OPTIONS

    Shares Outstanding

    As at December 31, 1998, the Corporation's authorized capital stock was
    25,000,000 par value one dollar per share, of which 20,000,000 were
    denominated common shares and 5,000,000 were denominated preferred shares.
    Pursuant to the reincorporation merger effective January 21, 1999, the
    authorized capital stock of the Corporation now consists of an unlimited
    number of first preference shares without par value and an unlimited number
    of common shares without par value. There were 8,707,796 common shares
    issued and outstanding as of December 31, 1998 and 8,463,491 common shares
    as of December 31, 1997.

    During 1998, 1997 and 1996, 131,000, 90,000 and 80,000 common shares,
    respectively, were purchased pursuant to the Corporation's employee stock
    purchase plan for an aggregate cost of $1,045,000, $729,000 and $672,000,
    respectively.

    As part of a stock repurchase program in 1998, the Corporation purchased
    60,000 common shares on the open market for an aggregate cost of $499,000,
    60,000 common shares in 1997 for an aggregate cost of $492,000, and 344,000
    common shares in 1996 for an aggregate cost of $3,170,000.




                              Zemex Corporation 48
<PAGE>   49
Dividends

On October 2, 1998, the Corporation declared a 2% stock dividend to shareholders
of record on October 19, 1998, which was paid November 2, 1998. Retained
earnings were charged $1,182,000 as a result of the issuance of 169,988 of the
Corporation's common shares, and cash payments of $4,000 in lieu of fractional
shares.

On November 21, 1997, the Corporation declared a 2% stock dividend to
shareholders of record on December 1, 1997, which was paid December 15, 1997.
Retained earnings were charged $1,598,000 as a result of the issuance of 165,537
of the Corporation's common shares, and cash payments of $5,000 in lieu of
fractional shares.

On October 18, 1996, the Corporation declared a 2% stock dividend to
shareholders of record on November 4, 1996, which was paid November 18, 1996.
Retained earnings were charged $1,255,000 as the result of the issuance of
161,398 of the Corporation's common shares, and cash payments of $5,000 in lieu
of fractional shares.

Stock Options

The Corporation provides stock option incentive plans and has, with shareholder
approval, issued options to certain directors outside of the plans. The plans
are intended to provide long term incentives and reward to executive officers,
directors and other key employees contingent upon an increase in the market
value of the Corporation's common shares. Options for 10% of the Corporation's
outstanding common shares are issuable under the plans.

The following is a summary of option transactions under the Corporation's stock
option plans:

<TABLE>
<CAPTION>
                                                         1998            1997            1996
                                                  -----------      ----------      ----------


<S>                                               <C>              <C>             <C>
Options outstanding at beginning of year              942,750         845,550         852,550
Options granted during year                           357,000         198,000          61,000
Options exercised during the year                     (26,600)        (13,800)        (45,000)
Options cancelled during the year                     (25,500)        (87,000)        (23,000)
                                                  -----------      ----------      ----------
Options outstanding at end of year                  1,247,650         942,750         845,550
Options exercisable at end of year                    746,650         628,250         631,550
                                                  -----------      ----------      ----------
Price range of options granted during the year    $6.50-10.19      $7.00-8.63      $7.75-9.75
                                                  ===========      ==========      ==========
</TABLE>

The options expire from 1999 to 2004.








                              Zemex Corporation  49





<PAGE>   50


      Note Receivable from Shareholder

      The note receivable from shareholder of $1,749,000 represents amounts due
      from the Corporation's President and Chief Executive Officer pursuant to
      the Key Executive Common Stock Purchase Plan. The loan, which was used to
      acquire 357,000 shares of common stock of the Corporation, is non-interest
      bearing and secured by a pledge of most of the shares acquired. The terms
      were amended in 1998 and the loan is now due on the earlier of August 12,
      1999 or 30 days after the termination of employment. Since the loan arose
      from the sale of treasury stock, it is classified as a reduction of
      shareholders' equity.

10.   REORGANIZATION CHARGES AND UNUSUAL ITEM

      Reorganization Charges

      During the first quarter of 1996, the Corporation recognized
      reorganization costs of $1,216,000 in connection with the reorganization
      of its industrial minerals division and the recognition of a provision for
      costs. A write-down to market of inventory held in Brazil in the amount of
      $536,000 was also recorded as a charge against cost of goods sold. The
      Brazilian enterprise was unsuccessful primarily due to rapidly
      deteriorating market prices which made market penetration extremely
      difficult.

      Unusual Item

      In December 1991, the Corporation closed its industrial minerals plant
      located in Connecticut. The assets of this operation were reclassified to
      assets held for resale and written down in 1991 by $430,000 to their
      estimated net realizable value. These assets were written down by a
      further $300,000 in 1993. In 1995, a portion of the property was sold for
      approximately net book value. In 1996, the purchaser defaulted on the
      payment obligations. Accordingly, the Corporation instituted legal action
      to repossess the property. A provision of $723,000 was recorded in 1996 to
      provide for reclamation costs, legal costs and to write-down the property
      to current market value.





















                              Zemex Corporation  50



<PAGE>   51


11.   OPERATING LEASES AND OTHER COMMITMENTS

      Operating Leases

      The Corporation has a number of operating lease agreements primarily
      involving equipment, office space, warehouse facilities and rail sidings.
      The operating lease for equipment provides that the Corporation may, after
      the initial lease term, renew the lease for successive yearly periods or
      may purchase the equipment at the fair market value. An operating lease
      for office facilities contains escalation clauses for increases in
      operating costs and property taxes. The majority of the leases are
      cancellable and are renewable on a yearly basis. Future minimum rental
      payments required by operating leases that have initial or remaining
      non-cancellable lease terms in excess of one year as of December 31, 1998
      are as follows:

<TABLE>
<CAPTION>
      Years                            Minimum Lease Payments
      -----                            ----------------------

<S>   <C>                                         <C>        
      1999                                        $   770,000
      2000                                            709,000
      2001                                            631,000
      2002                                            524,000
      2003                                            432,000
      Thereafter                                    2,704,000
                                                  -----------
      Total minimum lease payments                $ 5,770,000
                                                  ===========
</TABLE>

      Rent expense was $569,000, $492,000 and $668,000 in 1998, 1997 and 1996,
      respectively.


12.   FINANCIAL INSTRUMENTS

      Financial instruments which potentially subject the Corporation to
      concentrations of credit risk consist principally of trade receivables.
      Concentrations of credit risk with respect to trade receivables are
      limited due to the large number of customers comprising the Corporation's
      customer base and their dispersion across a number of different
      industries, principally construction, glass, electrical and automotive.

      Financial instruments comprise cash and cash equivalents, accounts
      receivable, short term bank borrowings, accounts payable, accrued
      liabilities, and long term debt. The fair value of these financial
      instruments approximates their carrying value reflecting: (i) the
      proximity to market rates of the interest obligations on the debt
      instruments; and (ii) the limited durations of all of the other
      instruments.











                              Zemex Corporation  51



<PAGE>   52


13.   CHANGES IN NON-CASH WORKING CAPITAL

      The changes in non-cash working capital items are as follows:

<TABLE>
<CAPTION>
                                                                   1998             1997             1996
                                                            -----------      -----------      ----------- 


<S>                                                         <C>              <C>              <C>         
      (Increase) in accounts receivable                     $  (476,000)     $(1,285,000)     $(1,838,000)
      (Increase) decrease in inventories                       (173,000)         576,000        2,005,000
      (Increase) decrease in prepaid expenses and other        (120,000)         602,000         (547,000)
      (Decrease) increase in accounts payable and
        accrued liabilities                                  (4,177,000)       2,882,000         (185,000)
      (Decrease) increase in accrued income taxes              (590,000)         934,000           32,000
                                                            -----------      -----------      ----------- 
                                                            $(5,536,000)     $ 3,709,000      $  (533,000)
                                                            ===========      ===========      =========== 
</TABLE>

14.   RELATED PARTY TRANSACTIONS

      As at December 31, 1998 and 1997, accounts receivable included amounts due
      from directors and one officer of $100,000 and $115,000, respectively.
      These amounts are non-interest bearing, with no fixed terms of repayment.

      During 1997, the Corporation agreed to guarantee a personal loan in the
      amount of $600,000 drawn down by the President and Chief Executive
      Officer. The proceeds of the loan were used to acquire common shares of
      the Corporation on the open market. The shares acquired are held by the
      Corporation as security for the guarantee.

      During 1998, the Corporation extended a short term loan to the President
      and Chief Executive Officer. The maximum amount outstanding was $200,000
      and it bore interest at the Corporation's cost of borrowing. The loan was
      repaid in full by December 31, 1998.

      During 1998, a director became indebted to the Corporation in the amount
      of $124,000. At December 31, 1998, $116,000 remained outstanding. This
      obligation is collateralized and bears interest at the Corporation's cost
      of borrowing (7.4% at December 31, 1998).

















                              Zemex Corporation  52



<PAGE>   53


15.   SEGMENT INFORMATION

      The Corporation has three principal lines of business and is organized
      into three operating units based on its product lines: (i) industrial
      minerals, (ii) metal powders and (iii) aluminum recycling. Industrial
      mineral products include feldspar, kaolin, mica, talc, baryte, feldspathic
      sand and industrial sand. These products are marketed principally to the
      automotive, housing, and ceramics industries in North America. They are
      produced from mines and processing plants located near Edgar, Florida;
      Monticello, Georgia; Murphy, North Carolina; Spruce Pine, North Carolina;
      Natural Bridge, New York; Van Horn, Texas; Benwood, West Virginia;
      Boucherville, Quebec; and Suzor Township, Quebec. Metal powders are
      processed in Niagara Falls, New York; St. Marys, Pennsylvania; and
      Greenback and Maryville, Tennessee. The Corporation's ferrous and
      non-ferrous metal powders are marketed primarily in North America to
      manufacturers of powder metallurgy parts used in the automotive and
      transportation industries. Aluminum dross is recycled at plants in
      Cleveland, Ohio and Wabash, Indiana and ceramic fibre products are
      fabricated at a plant in Macedonia, Ohio. Corporate assets principally 
      include cash, term deposits and furniture and fixtures.

      The accounting policies of the segments are the same as those described in
      note 1.

      Information pertaining to sales and earnings from operations and assets by
      business segment appears below:

<TABLE>
<CAPTION>
                                                            Industrial              Metal           Aluminum
Year Ended December 31, 1998           Consolidated           Minerals            Powders          Recycling          Corporate
                                      -------------      -------------      -------------      -------------        -----------  


<S>                                   <C>                <C>                <C>                <C>                  <C>        
Net sales                             $ 103,894,000      $  44,835,000      $  35,556,000      $  23,503,000        $        --
Depreciation, depletion and
  amortization                            6,561,000          3,536,000          1,208,000          1,384,000            433,000
Operating income (loss)                  10,192,000          5,840,000          3,990,000          2,881,000         (2,519,000)
Interest income                             255,000               --               53,000             49,000            153,000
Interest (expense)                       (2,588,000)           (60,000)          (204,000)           (34,000)        (2,290,000)
Income (loss) before income taxes
  and non-controlling interest            7,037,000          5,674,000          3,857,000          2,933,000         (5,427,000)
Provision for income taxes                1,713,000            556,000               --                 --            1,157,000
Non-controlling interest in
  loss of subsidiary                        (41,000)           (41,000)              --                 --                 --
Net income (loss)                         5,365,000          5,159,000          3,857,000          2,933,000         (6,584,000)
                                      -------------      -------------      -------------      -------------        -----------  
</TABLE>




                              Zemex Corporation  53



<PAGE>   54



<TABLE>
<CAPTION>
                                                    Industrial             Metal          Aluminum
Year Ended December 31, 1997    Consolidated          Minerals           Powders         Recycling         Corporate
----------------------------    ------------      ------------      ------------      ------------      ------------

<S>                             <C>               <C>               <C>               <C>               <C>       
Net sales                       $ 97,226,000      $ 43,396,000      $ 33,930,000      $ 19,900,000      $       --
Depreciation, depletion and
amortization                       5,871,000         3,228,000         1,107,000         1,134,000           402,000
Operating income (loss)            8,371,000         6,497,000         2,376,000         1,925,000        (2,427,000)
Interest income                      150,000              --              50,000            73,000            27,000
Interest (expense)                (2,094,000)           (9,000)         (245,000)          (84,000)       (1,756,000)
Income before income taxes         8,062,000         6,659,000         2,200,000         3,726,000        (4,523,000)
Provision for income taxes         2,269,000           350,000              --                --           1,919,000
Net income (loss)                  5,793,000         6,309,000         2,200,000         3,726,000        (6,442,000)
                                ------------      ------------      ------------      ------------      ------------
</TABLE>



<TABLE>
<CAPTION>
                                                    Industrial             Metal          Aluminum
Year Ended December 31, 1996    Consolidated          Minerals           Powders         Recycling         Corporate
----------------------------    ------------      ------------      ------------      ------------      ------------  


<S>                             <C>               <C>               <C>               <C>               <C>       
Net sales                       $ 86,420,000      $ 40,469,000      $ 31,725,000      $ 14,226,000      $       --
Depreciation, depletion and
amortization                       4,694,000         2,352,000         1,032,000           915,000           395,000
Operating income (loss)            3,066,000         2,764,000         2,377,000           213,000        (2,288,000)
Interest income                       93,000              --              32,000              --              61,000
Interest (expense)                (1,041,000)          (89,000)         (176,000)         (263,000)         (513,000)
Income before income taxes         1,663,000         1,843,000         2,288,000             6,000        (2,474,000)
(Recovery of) provision for
income taxes                        (949,000)           75,000              --                --          (1,024,000)
Net income (loss)                  2,612,000         1,768,000         2,288,000             6,000        (1,450,000)
                                ------------      ------------      ------------      ------------      ------------
</TABLE>




<TABLE>
<CAPTION>
                                                    Industrial             Metal          Aluminum
December 31, 1998               Consolidated          Minerals           Powders         Recycling         Corporate
-----------------               ------------      ------------      ------------      ------------      ------------

<S>                             <C>               <C>               <C>               <C>               <C>         
Total assets                    $148,866,000      $ 74,104,000      $ 24,969,000      $ 33,464,000      $ 16,329,000
Total current liabilities         23,533,000         5,029,000         3,210,000         3,777,000        11,517,000
Total long term liabilities       40,360,000         1,035,000         2,603,000           678,000        36,044,000
Total shareholders' equity        81,898,000              --                --                --          81,898,000
                                ------------      ------------      ------------      ------------      ------------

</TABLE>



                              Zemex Corporation  54



<PAGE>   55



<TABLE>
<CAPTION>
                                                   Industrial            Metal         Aluminum
December 31, 1997               Consolidated         Minerals          Powders        Recycling        Corporate
-----------------               ------------     ------------     ------------     ------------     ------------


<S>                             <C>              <C>              <C>              <C>              <C>         
Total assets                    $118,774,000     $ 65,750,000     $ 24,547,000     $ 17,853,000     $ 10,624,000
Total current liabilities         19,210,000        5,437,000        4,317,000        4,047,000        5,409,000
Total long term liabilities       23,029,000        3,065,000        3,107,000          279,000       16,578,000
Total shareholders' equity        76,535,000             --               --               --         76,535,000
                                ------------     ------------     ------------     ------------     ------------
</TABLE>




<TABLE>
<CAPTION>
                                                   Industrial            Metal         Aluminum
December 31, 1996               Consolidated         Minerals          Powders        Recycling        Corporate
-----------------               ------------     ------------     ------------     ------------     ------------

<S>                             <C>              <C>              <C>              <C>              <C>         
Total assets                    $109,376,000     $ 60,914,000     $ 24,152,000     $ 12,993,000     $ 11,317,000
Total current liabilities         19,166,000        4,752,000        3,494,000        3,783,000        7,137,000
Total long term liabilities       19,213,000        2,706,000        3,706,000          898,000       11,903,000
Total shareholders' equity        70,997,000             --               --               --         70,997,000
                                ------------     ------------     ------------     ------------     ------------
</TABLE>




<TABLE>
<CAPTION>
                                                  Industrial           Metal           Aluminum
                                Consolidated        Minerals         Powders          Recycling        Corporate
                                ------------     -----------     -----------        -----------     -----------

<S>                             <C>             <C>             <C>             <C>             <C>        
1998

Capital expenditures             $20,728,000     $ 8,283,000     $ 2,113,000       $10,124,000      $   208,000
Goodwill acquired                  6,495,000       2,934,000            --           3,561,000            --
                                  -----------     -----------     -----------      -----------      -----------

1997

Capital expenditures             $16,584,000     $ 9,945,000     $ 1,319,000       $ 5,314,000      $     6,000
Goodwill acquired                       --              --              --                --              --
                                  -----------     -----------     -----------      -----------      -----------
</TABLE>




<TABLE>
<CAPTION>
                                              Canada                                         U.S.
                         -------------------------------------------     -------------------------------------------
                                1998            1997            1996            1998            1997            1996
                         -----------     -----------     -----------     -----------     -----------     -----------

<S>                      <C>             <C>             <C>             <C>             <C>             <C>        
Capital expenditures     $   605,000     $   734,000     $   816,000     $20,123,000     $15,850,000     $15,610,000
Goodwill acquired                 --              --              --       6,495,000              --              --
                         -----------     -----------     -----------     -----------     -----------     -----------

The Corporation determines its geographic allocation based upon the location of
its sales offices which are all domiciled in the United States.
</TABLE>













                              Zemex Corporation  55


<PAGE>   56
16. CONTINGENCIES

    The Corporation is involved in various legal actions in the normal course of
    business. In the opinion of management, the aggregate amount of any
    potential liability, for which provision has not already been made, is not
    expected to have a material adverse effect on the Corporation's financial
    position or its results.

    Uncertainty Due to the Year 2000 Issue

    The year 2000 issue arises because many computerized systems use two digits
    rather than four to identify a year. Date-sensitive systems may recognize
    the year 2000 as 1900 or some other date, resulting in errors when
    information using year 2000 dates is processed. In addition, similar
    problems may arise in some systems which use certain dates in 1999 to
    represent something other than a date. The effects of the year 2000 issue
    may be experienced before, on, or after January 1, 2000, and if not
    addressed, the impact on operations and financial reporting may range from
    minor errors to significant systems failure which could affect an entity's
    ability to conduct normal business operations. It is not possible to be
    certain that all aspects of the year 2000 issue affecting the entity,
    including those related to the efforts of customers, suppliers, or other
    third parties, will be fully resolved.


17. DIFFERENCES FROM UNITED STATES ACCOUNTING PRINCIPLES

    These consolidated financial statements have been prepared in accordance
    with accounting principles generally accepted in Canada. The differences
    between Canadian and U.S. GAAP do not have a material effect on the
    Corporation's reported financial position or net income except as follows:

    a.  Income Statements

    For the purposes of calculating fully diluted earnings per share, U.S. GAAP
    requires the application of the treasury stock method.
<TABLE>
<CAPTION>

    Fully diluted earnings per share            1998         1997         1996
                                             -------      -------      -------  

<S>                                             <C>          <C>          <C>

    Canadian GAAP, as reported               $  0.60      $  0.65      $  0.30
    U.S. GAAP                                   0.63         0.69         0.31
                                             =======      =======      =======
</TABLE>


                              Zemex Corporation 56

<PAGE>   57

b.  Balance Sheets

    The following summarizes the balance sheet amounts in accordance with U.S.
    GAAP where different from the amounts reported under Canadian GAAP.

    For purposes of reporting in accordance with U.S. GAAP, certain equity
    securities that are not held principally for the purpose of sale in the near
    term are classified as available-for-sale securities and are reported at
    fair value, with unrealized gains and losses excluded from earnings and
    reported in a separate component of shareholders' equity. For Canadian GAAP
    purposes, such securities are to be reported at cost, unless there is deemed
    to have been a permanent impairment in their value.

<TABLE>
<CAPTION>
                                                                       1998                          1997
                                                         Canadian GAAP        U.S. GAAP
                                                         -------------      -----------     ------------- 
<S>                                                      <C>                  <C>            <C>             
    Other assets                                           $21,374,000      $20,440,000     No difference
    Unrealized loss on available-for-sale securities                --         (934,000)               --
                                                         -------------      -----------     ------------- 
</TABLE>

c.  Statements of Comprehensive Income

    U.S. GAAP requires a statement of comprehensive income as follows:

<TABLE>
<CAPTION>
                                                                     1998              1997                 1996
                                                             ------------       -----------        -------------


    <S>                                                      <C>                <C>                <C>          
    Net income                                               $  5,365,000       $ 5,793,000        $   2,612,000
    Change in foreign currency translation adjustment,
      net of tax (1998, $217,000; 1997, $154,000;
      1996, ($16,000))                                           (365,000)         (259,000)              27,000
    Change in unrealized holding losses on
      available-for-sale securities                              (934,000)               --                   --
                                                             ------------       -----------        -------------
Comprehensive income                                         $  4,066,000       $ 5,534,000        $   2,639,000
                                                             ============       ===========        =============
</TABLE>


                              Zemex Corporation 57

<PAGE>   58

d.  Pension Plans

    Under U.S. GAAP, the Corporation must adopt SFAS No. 132, "Employers'
    Disclosures about Pensions and Other Postretirement Benefits". The following
    data is based upon reports from independent consulting actuaries as at
    December 31:

<TABLE>
<CAPTION>
    Change in benefit obligation                                                           1998                  1997
                                                                                   ------------          ------------
<S>                                                                                <C>                   <C>         
    Benefit obligation, beginning of year                                          $ 15,126,000          $ 15,925,000
    Service cost                                                                        532,000               466,000
    Interest cost                                                                     1,015,000               978,000
    Plan amendments                                                                     146,000                    --
    Actuarial loss (gain)                                                               778,000            (1,605,000)
    Benefits paid                                                                      (721,000)             (638,000)
                                                                                   ------------          ------------
    Benefit obligation, end of year                                                $ 16,876,000          $ 15,126,000
                                                                                   ============          ============
</TABLE>

<TABLE>
<CAPTION>

    Change in fair value of plan assets                                                    1998                  1997
                                                                                   ------------          ------------
<S>                                                                                <C>                   <C>         
    Fair value, beginning of year                                                  $ 17,177,000          $ 16,432,000
    Actual return on plan assets                                                        916,000             1,383,000
    Employer contribution                                                               219,000                    --
    Benefits paid                                                                      (721,000)             (638,000)
                                                                                   ------------          ------------
    Fair value, end of year                                                        $ 17,591,000          $ 17,177,000
                                                                                   ============          ============
</TABLE>

    Net periodic pension expense (income) included the following components:
<TABLE>
<CAPTION>

                                                                                1998             1997             1996
                                                                        ------------     ------------     ------------
<S>                                                                     <C>              <C>              <C>         
    Current service costs                                               $    532,000     $    466,000     $    528,000
    Interest cost on projected benefit obligations                         1,015,000          978,000        1,028,000
    Expected return on assets                                             (1,175,000)      (1,236,000)      (1,309,000)
    Net amortization                                                         (93,000)         (98,000)        (103,000)
                                                                        ------------     ------------     ------------
    Net pension expense                                                 $    279,000     $    110,000     $    144,000
                                                                        ============     ============     ============
</TABLE>



                              Zemex Corporation 58

<PAGE>   59


     Assumptions:

<TABLE>
<CAPTION>
                                                                             1998              1997             1996
                                                                             ----              ----             ----
                                                                                %                 %                %
<S>                                                                           <C>               <C>              <C>
    Weighted average discount rate                                            6.5               7.0              7.0
    Expected long term rate of return                                        8.75              8.75             8.75
    Increase in level of compensation                                         4.0               4.0              4.0
    Weighted average health care cost trend rate                              8.5               9.0              9.5
    Weighted average ultimate health care cost trend rate                     5.0               5.0              5.0
                                                                             ----              ----             ----
    Year in which ultimate health care cost trend rate
      will be achieved                                                       2005              2005             2005
                                                                             ----              ----             ----
</TABLE>

    The status of the plans and the amounts recognized in the consolidated
    balance sheets of the Corporation for its pension plans as of December 31,
    1998 and 1997 are tabulated below:

<TABLE>
<CAPTION>
                                                                                           1998                  1997
                                                                                  -------------         ------------- 
<S>                                                                               <C>                   <C>
    Projected benefit obligation                                                  $ (16,876,000)        $ (15,126,000)
    Plan assets at fair value                                                        17,591,000            17,147,000
                                                                                  -------------         ------------- 
    Plan assets in excess of projected benefit obligation                               715,000             2,021,000
    Unrecognized net loss (gain)                                                        331,000              (662,000)
    Prior service cost not yet recognized in net periodic pension expense               297,000               196,000
    Unrecognized net assets at year end                                                 (25,000)             (177,000)
                                                                                  -------------         ------------- 
    Prepaid pension cost included in consolidated balance sheets                  $   1,318,000         $   1,378,000
                                                                                  =============         =============
</TABLE>

    Assumed health care cost trend rates have a significant effect on the
    amounts reported for health care plans. A one percentage point change in
    assumed health care cost trend rates would have the following effects:

<TABLE>
<CAPTION>
                                                                             1% Increase              1% Decrease
                                                                             -----------              -----------
<S>                                                                          <C>                      <C>         
Effect on accumulated postretirement benefit obligation                      $    42,271              $   (38,272)
Effect on aggregate of the service and interest
  cost-components of net postretirement benefit cost                               4,176                   (3,699)
                                                                             ===========              ===========
</TABLE>


                              Zemex Corporation 59


<PAGE>   60

 e. Stock Based Compensation

    The Corporation does not recognize compensation expense for its stock-based
    compensation plans. Had compensation expense for the stock option plans been
    determined based upon fair value at the grant date for awards under these
    plans consistent with the methodology prescribed under SFAS No. 123,
    "Accounting for Stock-Based Compensation", the Corporation's net income and
    earnings per share would have been reduced by approximately $1,267,000 or
    $0.15 per share in 1998, $589,000 or $0.07 per share in 1997, $227,000 or
    $0.03 per share in 1996. The fair value of the options granted during 1998,
    1997, and 1996 is estimated to be $1,267,000, $589,000 and $227,000,
    respectively. The fair value of each option grant is estimated on the date
    of grant using the Black-Scholes option-pricing model with the following
    weighted-average assumptions used for grants in 1998, 1997 and 1996:
    dividend yield of 0 percent; expected volatility of 32%, 32% and 38%,
    respectively; risk-free interest rates varying from 4.3% to 6.7%; and an
    expected life of 5 years.

f.  Recent Accounting Pronouncements

    In April 1998, the American Institute of Certified Public Accountants issued
    Statement of Position 98-5, "Reports on the Costs of Start-up Activities",
    which is effective for periods beginning after December 15, 1998. This
    Statement requires costs of start-up activities and organization costs to be
    expensed as incurred. Initial application of this Statement will, for U.S.
    GAAP purposes, be reported as the cumulative effect of a change in
    accounting principle, without retroactive application. In 1999, the
    Corporation will adopt this treatment when reporting under U.S. GAAP and, as
    a result, all of the Corporation's pre-production and set-up costs will be
    removed from property, plant and equipment in effecting this change in
    accounting principle. These costs were $2,303,000 and $1,105,000 at December
    31, 1998 and December 31, 1997, respectively.

    In June 1998, the Financial Accounting Standards Board ("FASB") issued
    Statement of Financial Accounting Standards No. 133, "Accounting for
    Derivative Instruments and Hedging Activities" (SFAS No. 133), which
    established accounting and reporting standards for derivative instruments
    and hedging activities. It requires an entity to measure all derivatives at
    fair value and to recognize them in the balance sheet as an asset or
    liability, depending on the entity's rights or obligations under the
    applicable derivative contract. Management has not yet evaluated the effects
    of this statement on its results of operations. As required, the Corporation
    will adopt SFAS No. 133 in the first quarter of 2000.



                              Zemex Corporation 60


<PAGE>   61


                           FINANCIAL DATA (UNAUDITED)
   The following is a summary of certain unaudited quarterly financial data.
<TABLE>
<CAPTION>

                                                                                                 1998                  1997
                                                                                      ---------------         -------------

<S>                                                                                   <C>                     <C>
Net Sales
  First quarter                                                                       $    26,446,000         $  23,700,000
  Second quarter                                                                           25,933,000            25,199,000
  Third quarter                                                                            25,677,000            24,773,000
  Fourth quarter                                                                           25,838,000            23,554,000
                                                                                      ---------------         -------------
                                                                                      $   103,894,000         $  97,226,000
                                                                                      ===============         =============
Operating Income
  First quarter                                                                       $     2,373,000         $   1,766,000
  Second quarter                                                                            2,418,000             2,255,000
  Third quarter                                                                             3,104,000             2,372,000
  Fourth quarter                                                                            2,297,000             1,978,000
                                                                                      ---------------         -------------
                                                                                      $    10,192,000         $   8,371,000
                                                                                      ===============         =============
Net Income
  First quarter                                                                       $     1,228,000         $     862,000
  Second quarter                                                                            1,274,000             1,064,000
  Third quarter                                                                             1,358,000             2,095,000
  Fourth quarter                                                                            1,505,000             1,772,000
                                                                                      ---------------         -------------
                                                                                       $    5,365,000         $   5,793,000
                                                                                      ===============         =============
Net Income Per Share - Basic
  First quarter                                                                        $         0.15         $        0.10
  Second quarter                                                                                 0.15                  0.13
  Third quarter                                                                                  0.16                  0.25
  Fourth quarter                                                                                 0.18                  0.22
                                                                                      ===============         =============
</TABLE>


                              Zemex Corporation 61

<PAGE>   62


                             SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>

                                                        1998            1997             1996            1995             1994
                                                ------------    ------------     ------------    ------------     ------------
<S>                                             <C>             <C>              <C>             <C>              <C>
SUMMARY OF OPERATIONS

Net sales                                       $103,894,000    $ 97,226,000     $ 86,420,000     $85,056,000     $55,306,000
Reorganization charges                                    --              --        1,216,000              --              --
Operating income                                  10,192,000       8,371,000        3,066,000       8,342,000       5,841,000
Other, net (expense) income                         (822,000)      1,635,000         (455,000)         80,000         163,000
Net income                                         5,365,000       5,793,000        2,612,000       8,418,000       6,250,000
                                                ------------    ------------     ------------     -----------     -----------
FINANCIAL POSITION

Working capital                                 $ 14,810,000    $ 18,975,000     $ 18,688,000     $19,709,000     $26,046,000
Total assets                                     148,866,000     118,774,000      109,376,000      96,681,000      70,864,000
Long term debt (non-current portion)              39,354,000      20,527,000       17,797,000       7,485,000       5,461,000
                                                ------------    ------------     ------------     -----------     -----------
COMMON SHARES

Weighted average common shares
  outstanding                                      8,286,178       8,267,630        8,272,904       8,342,276       5,813,473
Actual common shares issued and
  outstanding at year end                          8,707,796       8,463,491        8,269,099       8,355,722       7,168,153
                                                ------------    ------------     ------------    ------------     -----------
PER COMMON SHARE

Basic earnings per share                        $       0.65      $     0.70      $     0.32        $   1.01        $    1.08
Fully diluted earnings per share                        0.60            0.65            0.30            0.92             0.91
                                                ------------     -----------      -----------     -----------     -----------
COMMON SHARE PRICES

High                                            $      10.44      $    10.94      $    10.00        $  10.88         $  12.25
Low                                                     6.00            6.75            6.88            8.25             6.13
Year end                                                6.25            8.75            7.00           10.00             8.63
                                                ============      ==========     ===========      ==========      ===========
</TABLE>


                              Zemex Corporation 62