<PAGE>
 
               UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549
                                   FORM 10-K

           [ X ] Annual Report Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

          [ ] Transition Report Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934

                          Commission File No. 1-7170

                              IMCO Recycling Inc.
            (Exact name of registrant as specified in its charter)

                                   Delaware
        (State or other jurisdiction of incorporation or organization)

                                  75-2008280
                     (I.R.S. Employer Identification No.)

                     5215 North O'Connor Blvd., Suite 940
                       Central Tower at Williams Square
                              Irving, Texas 75039
                   (Address of principal executive offices)

                                (972) 401-7200
             (Registrant's telephone number, including area code)


SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class                                Exchange on Which Registered
-------------------                                ----------------------------
Common Stock, $0.10 Par Value                      New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:   NONE

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                                               Yes X     No___
                                                  ---

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

As of March 1, 1999, the aggregate market value of voting and non-voting common
equity held by nonaffiliates of the Registrant was $177,512,688.

Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of March 1, 1999.
            
                   Common Stock, $0.10 par value, 16,519,991
                   -----------------------------------------

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement relating to its 1999
Annual Meeting of Stockholders are incorporated by reference into Part III
hereof.
<PAGE>
 
ITEM                                                                        PAGE
----                                                                        ----

PART I
------
Item 1.    Business                                                            3
                                                                              
Item 2.    Properties                                                         19
                                                                              
Item 3.    Legal Proceedings                                                  21
                                                                              
Item 4.    Submission of Matters to a Vote of Security Holders                22
                                                                              
Item 4A.   Executive Officers of the Registrant                               22
                                                                              
                                                                              
PART II                                                                       
-------
Item 5.    Market for Registrant's Common Equity and Related                  
           Stockholder Matters                                                23
                                                                                
Item 6.    Selected Financial Data                                            24
           
Item 7.    Management's Discussion and Analysis of Financial
           Condition and Results of Operations                                24
           
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk         37
           
Item 8.    Financial Statements and Supplementary Data                        40
           
Item 9.    Changes in and Disagreements With Accountants on
           Accounting and Financial Disclosure                                68
           
           
PART III   
--------
Item 10.   Directors and Executive Officers of the Registrant                 68
           
Item 11.   Executive Compensation                                             68
           
Item 12.   Security Ownership of Certain Beneficial Owners and
           Management                                                         68
           
Item 13.   Certain Relationships and Related Transactions                     68
           
           
PART IV    
-------
Item 14.   Exhibits, Financial Statement Schedules and Reports on
           Form 8-K                                                           69

Signatures                                                                    73
<PAGE>
 
PART I

This Annual Report on Form 10-K contains forward-looking statements as defined
by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements should be read in conjunction with the cautionary statements and
other important factors included in this Form 10-K. See Item 7. "MANAGEMENT'S
                                                        ------
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS."
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements which are other than statements of historical facts. These
forward-looking statements may be identified by the use of the words
"anticipates," "estimates," "expects," "intends," "plans," "predicts,"
"projects," and similar expressions. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including management's examination of historical operating
trends, data contained in the Company's records and other data available from
third parties, but there can be no assurance that management's expectations,
beliefs or projections will result or be achieved or accomplished.

ITEM 1.       BUSINESS

GENERAL

IMCO Recycling Inc. (the "Company") is the largest aluminum recycler in the
United States and believes that it is the largest aluminum recycler in the
world. The Company's principal business is the processing of aluminum, which
includes used aluminum beverage cans ("UBCs"), scrap, and dross (a by-product of
aluminum production). The Company converts UBCs, scrap and dross into molten
metal in furnaces at facilities owned and/or operated by the Company. While the
aluminum is in molten form, the Company may blend in other metals to prepare a
precise aluminum alloy mixture. The Company then delivers the processed aluminum
to customers in molten form or ingots. The Company recovers magnesium in a
similar process.

With the acquisition of U.S. Zinc Corporation ("U.S. Zinc") in July 1998 (see
"GROWTH OF BUSINESS" below), the Company believes that it is now the largest
recycler of zinc secondaries in the United States. U.S. Zinc uses company-owned
furnaces to convert zinc scrap and dross into various value-added zinc products
such as zinc oxides, dust, and metal.

Most of the Company's processing capacity is utilized to recycle customer-owned
materials, for which the Company charges a fee (a service called "tolling").
During 1998, approximately 68% of the Company's total pounds of metal melted
involved tolling. The balance of the Company's business involves the purchase of
scrap and dross for processing and recycling by the Company for subsequent
resale ("buy/sell" business). Except where the context otherwise requires, the
term "Company" as used herein refers to IMCO Recycling Inc. and its
subsidiaries.

The Company's business has benefited from the trend to include recycled
materials in finished products, the growth in the production and recycling of
UBCs and the increasing utilization of aluminum in automotive components.
According to industry statistics, over the past 25 years, U.S. production of
recycled aluminum has more than tripled to 3.7 million tonnes from 1.0 million
tonnes. In addition, recycled aluminum in the U.S. currently represents
approximately 

                                       3
<PAGE>
 
37% of the total domestic aluminum supply, compared to 19% in 1972. The U.S. is 
the world's leading consumer of zinc, currently consuming about one-sixth of the
world's production, but is only the fifth largest producer. Consequently, the
U.S. is also the largest importer of refined zinc. During the period 1984-1996
world secondary zinc refining activity grew at three times the rate of primary
zinc metal production. Secondary zinc now provides approximately 36% of the
world's refined zinc output and in the U.S., secondary zinc refining is
equivalent to 38% of domestic consumption.

The Company's aluminum customers include some of the world's major aluminum
producers and aluminum fabricators, diecasters, extruders, automotive companies
and other processors. Most of the aluminum metal processed by the Company is
used to produce products for the transportation, packaging and construction
industries, which constitute the three largest aluminum markets. Much of the
Company's recent growth has been directed toward serving the transportation
sector, which has been the largest and fastest-growing aluminum market in recent
years due to the increasing use of aluminum in automotive components. The
Company's principal aluminum customers include Aluminum Company of America
("Alcoa"), Commonwealth Aluminum Corporation ("Commonwealth"), Kaiser Aluminum
Corporation ("Kaiser"), Ford Motor Company ("Ford"), Century Aluminum Company,
General Motors Corporation ("GM"), Toyota Tsusho America, Inc., Nelson Metals,
and Wise Metals Company ("Wise Metals").

The Company's zinc customers include some of the world's major tire and rubber
producers and galvanizers, steel companies and other processors, including
Goodyear Tire & Rubber Co., Michelin Tire, Bethlehem Steel and Dow
Agrosciences.

STRATEGY

The Company's strategy is to participate in sectors of the nonferrous metals
recycling industry in which it believes it can provide customers with a
technology-based, value-added service and in which it can develop significant
market share. The Company believes that it has been successful in
differentiating its aluminum recycling services from those of its competitors
through: 

     .    operational and design technologies that are designed to produce
          higher metal recovery yields

     .    the strategic location of facilities in close proximity to customers,
          providing for both stronger ties to its customers and greater
          convenience and accessibility for its customers

     .    the ability to deliver recycled aluminum in molten form for just-in-
          time delivery, thereby saving customers the expense of remelting
          aluminum ingots

     .    its environmental technologies and practices, including dedicated
          disposal facilities and a proprietary process developed by the Company
          used to recover aluminum from by-products of the recycling process

The Company believes that it has been successful in differentiating its zinc
value-added products from those of its competitors through: 

     .    operational and design technologies that are designed to produce lower
          cost, higher quality products to be sold at competitive prices

     .    the strategic location of facilities in close proximity to customers,
          providing for both stronger ties to its customers and greater
          convenience and accessibility for its customers

     .    customized packaging that meets customers' specifications, including
          customer specific weights and labels

To achieve its objectives, the Company focuses on internal expansion as well as
growth through strategic acquisitions, vertical integration of its operations
and services, and operational efficiencies through technological innovation.

                                       4
<PAGE>
 
Expansion. Since 1993, the Company has increased its number of facilities and
---------
capacity through acquisitions of existing facilities, construction of new
facilities and expansion of existing facilities. As of March 31, 1993, the
Company owned and operated five recycling plants, which had an aggregate annual
processing capacity of 735 million pounds of aluminum and 50 million pounds of
other metals. As of December 31, 1998, the Company owned and operated 22
recycling and processing plants, which have an aggregate annual melting
capacity of approximately 2.6 billion pounds of aluminum and 240 million pounds
of zinc, for a total annual processing capacity of 2.8 billion pounds. In
February 1999, the Company acquired substantially all the assets of an aluminum
alloying facility in Shelbyville, Tennessee, which has an annual capacity of 120
million pounds, and a zinc oxide facility in Clarksville, Tennessee, which has
an annual capacity of approximately 40 million pounds. Additionally, in March
1999, the Company announced plans to construct an aluminum alloying facility in
Saginaw, Michigan to supply molten aluminum to GM under a new long-term supply
agreement. The Company anticipates that its annual capacity for 1999 will be 3.0
billion pounds. In addition, the Company owns a 50% interest in an aluminum
recycling joint venture in Germany, which has an annual melting capacity of 340
million pounds, and has begun operations at its new aluminum recycling facility
in Swansea, Wales, which has an annual melting capacity of 100 million pounds.
The Company expects that currently planned expansions will add approximately 220
million pounds of annual processing capacity during 1999 and 2000. See "GROWTH
OF BUSINESS" below. Expansion of the Company's network of facilities in the U.S.
has enabled the Company to allocate processing work among its facilities,
thereby maximizing utilization of capacity and absorbing excess demand. The
Company intends to continue to expand its business by targeting growing markets,
such as the automotive market, constructing additional recycling facilities,
expanding and improving its existing facilities and acquiring or partnering with
similar recycling businesses or other metals processors. In addition, the
Company plans to continue seeking foreign sites for its recycling facilities
where market conditions warrant.

Vertical Integration. The Company also seeks business opportunities that combine
--------------------
its traditional recycling services with downstream processing operations that
more directly serve manufacturers and other end-users. With the Company's
acquisition of Alchem Aluminum, Inc. ("Alchem") in November 1997, the Company
began manufacturing and selling specification aluminum alloy products for
automotive equipment manufacturers. The Shelbyville, Tennessee acquisition in 
early 1999 will expand the Company's capacity to serve this market.  Further 
expansion will occur with the announced plans to construct an aluminum alloying 
facility in Saginaw, Michigan.

Technological Innovation. The Company's facilities and equipment have been
------------------------
continually improved and updated through plant modernization programs, including
technological advancements designed to improve operational efficiencies. Between
January 1, 1992 and December 31, 1998, the Company made capital expenditures and
joint venture investments totaling $138 million in new plant and equipment
(excluding acquisitions of existing companies or facilities). These investments
have increased the Company's productivity, market share and total processing
capacity.

Customer Service.  The Company is dedicated to maintaining customer satisfaction
----------------
and seeks to develop new methods and processes to better serve its customers.
The Company emphasizes a strong commitment to customer service by offering:

     .    higher metal recovery rates
     .    higher quality of metal recovered
     .    more precise specifications for alloyed metals
     .    advanced environmental technology and practices
     .    facilities conveniently located near its customers

                                       5
<PAGE>
 
     .    customized packaging.

Through long-term relationships with primary producers and other customers, the
Company maximizes its production capabilities while providing customers with a
reliable source for their product requirements.

Environmental Efficiencies. The Company has committed resources towards
--------------------------
developing a "closed loop" production system in which virtually all materials
used in the aluminum recycling process are reclaimed or consumed, thus greatly
reducing the need for and expense of landfilling. Management believes that
considerable progress has been made in this area through the operation of the
Company's Kentucky salt cake processing plant and its patented wet-milling
process employed to recycle salt cake at both its Arizona facility and its Solar
Aluminum Technology Services ("SALTS") joint venture in Utah. While no
assurances can be given that an economically efficient closed loop recycling
system will ever be developed for all of the Company's facilities and processes,
management believes that continued progress toward this goal is desirable for
the Company's customers due to the opportunities for cost savings and further
assurances of environmental safety. In addition, customers benefit from the
enhanced environmental facilities employed by the Company, such as the lined
landfill at its Morgantown, Kentucky aluminum facility, which was built to
hazardous waste standards. See "THE RECYCLING PROCESS."

In the zinc manufacturing process by-products which are generated are oxides
and zinc fines. These are either sold to third parties or melted in another 
process in the zinc manufacturing cycle. Thus, there is no significant disposal
issue in the zinc process.

GROWTH OF BUSINESS

Since its inception, the Company has increased its number of facilities and
capacity through acquisitions, construction of new facilities and expansion of
existing facilities. See ITEM 2. "PROPERTIES." Beginning in 1995, this growth
strategy was accelerated.

In December 1995, the Company formed a joint venture, VAW-IMCO Gu(beta) und
Recycling GmbH ("VAW-IMCO"), with VAW aluminium AG, the largest aluminum company
in Germany. The Company has a 50% interest in this German venture, which owns
and operates two recycling and foundry alloy facilities. The plants principally
serve the European automotive markets.

In January 1996, the Company completed the construction of its salt cake
processing facility, located adjacent to the Company's Morgantown, Kentucky
plant. This facility processes salt cake, a by-product generated from the
Company's aluminum recycling plants, through use of materials separation
technology, and recovers additional amounts of aluminum for resale that would
otherwise be landfilled. See "ENVIRONMENTAL MATTERS."

In 1996, the Company began construction of an aluminum recycling facility in
Coldwater, Michigan for a joint venture with Alchem. The Coldwater plant reached
full capacity in the fourth quarter of 1997.

In 1997, the Company commenced construction of an aluminum recycling facility in
Swansea, Wales, U.K., through its IMCO Recycling (UK) Ltd. subsidiary, which
reached full capacity in mid-1998. The plant site is adjacent to a plant owned
by a subsidiary of Alcoa, which is the Swansea facility's principal customer
under a long-term tolling agreement.

                                       6
<PAGE>
 
In January 1997, the Company acquired IMSAMET, Inc. ("IMSAMET") and Rock Creek
Aluminum, Inc. ("Rock Creek"). IMSAMET owns or has a majority interest in three
aluminum recycling plants located in the western U.S. (i.e., Idaho, Arizona and
Utah), and owns a 50% interest in SALTS, which is a Utah facility that uses a
proprietary process to reclaim materials from salt cake. Rock Creek operates two
facilities in Ohio that utilize milling, shredding, blending, testing and
packaging equipment to process various types of raw materials, including
aluminum dross and scrap, into aluminum products used as metallurgical additions
in the steel making process for steel producers.

In November 1997, the Company acquired Alchem, a producer of specification
aluminum alloys for automotive manufacturers and their suppliers. Through its
acquisition of Alchem, the Company increased its participation in the automotive
industry, broadened its customer base and expanded its product range to include
specification alloys.

In 1997 and 1998, the Company completed expansion programs at certain of its
U.S. facilities and at the VAW-IMCO facilities in Germany. The Sapulpa, Oklahoma
expansion increased the facility's processing capacity by 40 million pounds per
year. In 1997, VAW-IMCO signed a long-term agreement to process dross for a
major rolling mill in Germany and installed a new furnace. During 1998, the
Company constructed a 40-million pound facility at the Company's Loudon,
Tennessee site to supply molten metal to an automobile brake component
manufacturer under a long-term scrap management, tolling and supply agreement.
Additionally during 1998, the Company expanded its Morgantown, Kentucky facility
by adding a reverberatory furnace with an annual capacity of 100 million pounds.

In July 1998, the Company acquired U.S. Zinc which, along with its subsidiaries,
operate five production facilities located in Illinois, Texas and Tennessee.
With the acquisition of U.S. Zinc, the Company has expanded its zinc business,
broadened its customer base and expanded its product range to include various
value-added zinc products.

In February 1999, the Company acquired substantially all of the assets of an
aluminum alloying facility in Shelbyville, Tennessee from Alcan Aluminum
Corporation and acquired substantially all of the assets of a zinc oxide
production facility from North American Oxide, LLC in Clarksville, Tennessee.

In March 1999, the Company announced plans to construct a new aluminum alloying
plant in Saginaw, Michigan, which is expected to begin operations in 2000. This
facility's principal customer will be a GM metal casting plant in Saginaw,
Michigan. This facility will supply molten and ingot aluminum to GM under a new
supply agreement, which expires in 2011. See NOTE O--"SUBSEQUENT EVENTS" of
Notes to Consolidated Financial Statements.

                                       7
<PAGE>
 
CERTAIN FACTORS

For descriptions of certain factors affecting the Company, including commitments
and contingencies, which subject the Company to certain continuing risks, see
(i) "ENVIRONMENTAL MATTERS" below, (ii) ITEM 3. "LEGAL PROCEEDINGS," (iii) ITEM
                                        -------                            ----
7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
--
OPERATIONS--CAUTIONARY STATEMENTS FOR PURPOSES OF FORWARD-LOOKING STATEMENTS"
and (iv) NOTE L--"OPERATIONS" of Notes to Consolidated Financial Statements,
respectively.

SEGMENT REPORTING

With the acquisition of U.S. Zinc in July 1998, the Company has two business
segments that meet the reporting requirements of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." See NOTE M--SEGMENT INFORMATION" of Notes to Consolidated
Financial Statements. The ALUMINUM segment represents all of the Company's
aluminum melting, processing, alloying, brokering and salt cake activities. In
addition, this segment includes the Company's magnesium melting activities,
which represent less than 1% of consolidated revenues and production. The
company's ZINC segment represents all of the Company's zinc melting, processing
and brokering activities.

PRODUCTS AND SERVICES

ALUMINUM. The Company recycles aluminum and delivers the recycled metal to
--------
customers as molten aluminum or ingots. The Company's customers include most of
the major United States aluminum producers and aluminum diecasters, extruders,
automotive companies and other processors of aluminum products. A principal
element of the Company's strategic plan calls for expanding the Company's
activities in the rapidly growing aluminum automotive components market.

The Company's metal alloying plant in Coldwater, Michigan manufactures
specification aluminum alloy products for automotive equipment manufacturers and
their suppliers. The recent acquisition of the Shelbyville, Tennessee facility
will strengthen the Company's ability to serve this market.

The Company's Rock Creek and Elyria, Ohio facilities manufacture a variety of
aluminum products that are ultimately used as metallurgical additions in the
steel making process, such as slag conditioners, deoxidizers, steel
desulfurizers and hot topping compounds. These facilities utilize milling,
shredding, blending, testing and packaging equipment to process various types of
raw materials, including aluminum dross and scrap, into aluminum products for
the steel industry. In addition, these facilities manufacture a wide range of
proprietary briquetted products and offers toll briquetting services.

                                       8
<PAGE>
 
The Company's aluminum business has benefited from the trend to include recycled
materials in finished products, and in particular during its early years, from
the growth in the use and recycling of aluminum beverage conatiners. The
recycling of UBCs in the United States has increased because of numerous
economic, legislative and environmental factors. According to industry
estimates, the number of aluminum beverage cans produced has increased from 34.7
billion in 1979 to an annual average of approximately 100 billion for each of
1996, 1997 and 1998. The number of UBCs recycled increased from 8.5 billion in
1979 to approximately 66.8 billion in 1997.

The major force behind increased demand for recycled aluminum in recent years
has been its greater use in auto and truck components, including body
structures. This trend has made the transportation sector the largest and
fastest-growing aluminum market. The total aluminum shipped to the North
American auto market each year has more than doubled since 1988 to about 3.8
billion pounds.

The average amount of aluminum used per vehicle produced in North America, is
expected to increase to 248 pounds in 1999, some 36 percent above the 138 pound
average in 1991. Major auto makers estimate that this average will double by
2005. Some 65 percent of the aluminum contained in cars and trucks is recycled
metal, but this percentage is expected to move higher in future years as more
usable scrap becomes available.

The Company also recycles magnesium dross for primary magnesium producers. In
addition, it produces a line of magnesium anodes that are recycled from
post-consumer scrap and sold to end-users and independent distributors for
corrosion protection of steel structures.

ZINC.  Zinc is used in diecastings, in brass-making as an alloying metal with
----
copper and in chemical compounds to produce rubber, ceramics, paints and
fertilizer. However, its most unique quality is its natural ability to
metallurgically bond with iron and steel and protect these metals from
corrosion. With its recent acquisition of U.S. Zinc, the Company manufactures
three main value-added zinc products: oxides, dust and metal. 

Zinc oxide is used predominantly in the tire and rubber industries and by the
----------
specialty chemical, motor oil and ceramics industries. The Company produces two
types of zinc dust: extra low lead dust, which is used in the industrial paint
         ---------
industry, and regular dust, which is used in paints, specialty chemical and
mining applications. Zinc metal recovered by the Company is used to galvanize
                     ----------
steel, and by-products generated in the zinc metal recycling process, called
fines, serve the zinc sulfate industry as fertilizer additives.

The Company's zinc business has benefited from the growth of secondary zinc
refining, which has increased at three times the rate of primary zinc
production. According to published industry reports, it is estimated that
secondary zinc now accounts for more than 36% of the world's refined zinc
output, and it is estimated that the consumption of recycled zinc will account
for more than 40% of total worldwide zinc consumption by 2005. 

FOREIGN OPPORTUNITIES. The Company continues to evaluate expansion opportunities
---------------------
in foreign sites, such as Europe and South America, where market conditions
warrant. General political and economic conditions in foreign countries could
affect the overall financial prospects of the Company. Foreign operations are
generally subject to several risks, including foreign currency exchange rate
fluctuations, distinct environmental regulations, changes in the methods and
amounts of taxation, foreign exchange controls and government restrictions on
the repatriation of hard currency.

SALES AND LONG-TERM CONTRACTS

ALUMINUM-GENERAL. The Company's principal aluminum customers (see "GENERAL"
----------------
above) use recycled aluminum to produce can sheet, building, automotive and
other products. The Company provides products and services to a number of
primary and fabricating facilities of Alcoa. During 1998, 1997 and 1996, Alcoa
accounted for approximately 7%, 9% and 13%, respectively, of the Company's
consolidated revenues, and Ford and its affiliates accounted for approximately
10% and 2% of the Company's consolidated revenues in 1998 and 1997,
respectively. The loss of Alcoa or Ford as customers would have a material
adverse effect upon the business of the Company and its future operating
results.

Customarily, agreements with customers in the aluminum recycling industry have
been short-term. These usually result from a bidding process where aluminum
producers and metal traders 

                                       9
<PAGE>
 
offer to sell materials or to have materials tolled. Consequently, the Company
historically has maintained no significant backlog of orders.

ALUMINUM-LONG-TERM CONTRACTS. The Company has secured long term commitments for
----------------------------
its recycling services with Alcoa, Commonwealth, Aluminium Norf GmbH
("AluNorf"), Kaiser, Wise Metals, PBR Automotive USA LLC, Century Aluminum and
GM. For the year ended December 31, 1998 the Company melted 1,077 million pounds
of aluminum pursuant to multi-year contracts with its customers, which
represented approximately 45% of the Company's total 1998 annual aluminum
melting volume.

In 1992, the Company entered into a 10-year supply contract with Commonwealth's
Uhrichsville plant to process all of that facility's scrap aluminum, UBCs and
dross at the Company's adjacent plant. See ITEM 2. "PROPERTIES--RECYCLING AND
                                           ------
PROCESSING FACILITIES." In 1994, the Company entered into a three-year
processing agreement with Alcoa under which the Company's Rockwood plant
provides secondary metal for Alcoa's Alcoa, Tennessee facility. This agreement
was modified in 1995 and 1998 to include certain additional Company facilities
and to modify certain pricing and volume provisions. This agreement will extend
for additional one-year terms at the end of each contract year unless terminated
by either party. When so terminated, the agreement will continue in effect until
the second anniversary date of the last day of the contract year during which
the termination notice was given.

The Company has also entered into a similar supply agreement with an English
subsidiary of Alcoa pursuant to which the Company's Swansea, Wales facility will
provide Alcoa's adjacent facility with secondary tolled aluminum. The agreement
has a five-year primary term, expiring in 2002, with provisions for automatic
three-year extensions. In September 1997, the VAW-IMCO joint venture entered
into a five-year agreement with AluNorf to process 22,000 metric tons of dross
per year.

In 1997, the Company entered into a five and one-half year agreement with Wise
Metals to deliver ten million pounds of aluminum per month to supply a Kentucky
rolling mill.

The Company's Post Falls, Idaho facility has a processing contract to supply, on
a tolling basis, molten and ingot aluminum to Kaiser's nearby Trentwood,
Washington aluminum fabrication mill. The term of this agreement expires in
September 2000.

In February 1999, the Company entered into a supply agreement with GM to provide
alloyed molten and ingot aluminum to GM's metal casting facility in Saginaw,
Michigan. The agreement expires in 2011 and calls for escalating volumes
beginning in 1999. The Company's planned Saginaw facility, which is expected to
begin production in 2000, will supply GM's Saginaw plant.

Many of these agreements contain cross-indemnity provisions, including
provisions obligating the Company to indemnify the customer for certain
environmental liabilities that the customer may incur in connection with the
transactions contemplated by the agreements.

These agreements also typically contain escalation provisions that are intended
to cover changes in certain of the Company's processing costs. The Company may
seek similar dedicated long-term arrangements with customers in the future.
Increased emphasis on dedicated facilities and dedicated contracts with
customers carries the inherent risk of increased dependence on a single 

                                       10
<PAGE>
 
or few customers with respect to a particular Company facility. In such cases,
the loss of such a customer could have a material adverse effect on the
Company's financial condition and results of operation, and any timely
replacement of volumes attributable to such a customer could prove difficult.

ZINC. The Company's principal zinc customers use zinc to make tires and other
----
rubber products, industrial paints, fertilizers, specialty chemicals, motor oil
and ceramics. Zinc products are also used in the mining and steel galvanizing
industries. Major zinc customers include Goodyear, Michelin, Bethlehem Steel and
Dow Agrosciences. Most of the Company's zinc products are sold directly to end
users. No single zinc customer accounted for more than 10% of the Company's
consolidated revenues in 1998.

Most of the Company's contracts with zinc customers are for a term of one year
or less. The Company historically has maintained no significant backlog of
orders for zinc products.

GENERAL. The primary metals industry and the metals recycling industry are
-------
subject to cyclical fluctuations, depending upon the availability and price of
unprocessed scrap metal and the level of demand in the metal consuming
industries. Temporary reductions in can stock production by one of the Company's
aluminum customers have previously affected the Company's results of operations,
and no assurances can be given that such conditions will not recur. See ITEM 7.
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."

The Company sells to both domestic and international customers. Sales to
customers in foreign locations accounted for approximately 13% of consolidated
revenues in 1998, and aluminum shipments to customers located in Canada
accounted for approximately 9% of consolidated revenues for 1998. Foreign sales
in 1997 and 1996 were immaterial (less than 3%). See "Note M-Segment 
Information" of Notes to Consolidated Financial Statements.

THE RECYCLING/MANUFACTURING PROCESS

ALUMINUM. The Company uses two types of furnace technology, rotary and
--------
reverberatory. Rotary or barrel-like furnaces are able to pour a batch of melted
aluminum from dross and then immediately switch to other types of scrap; they
provide high recovery and excellent product quality. Reverberatory furnaces are
stationary and use both radiation and convection heating to melt the material
being processed. Reverberatory furnaces provide better recovery from shredded
material than a rotary furnace and can take advantage of the heat energy
contained in delacquered shreds.

After the aluminum is melted, the recovered metal is poured directly into an
ingot mold or hot metal crucible for delivery to customers. Magnesium is
recycled by the same method in a rotary furnace at the Sapulpa, Oklahoma plant.
Some of the Company's plants deliver molten aluminum in crucibles directly to
their customers' manufacturing facilities. As of December 1998, the Company had
the capacity to provide approximately 76% of its processed aluminum in molten
form. The molten aluminum is poured directly into the customer's furnace, saving
the customer the time and expense of remelting aluminum ingots. The Company
normally charges an additional fee for transportation and handling of molten
aluminum. The Oklahoma, Arizona, Utah, Illinois and Missouri facilities are
restricted, due to the geographical locations of their customers, to delivering
aluminum in ingot form. See ITEM 2. "PROPERTIES."
                            ------

                                       11
<PAGE>
 
At the Company's metal alloying facilities in Coldwater, Michigan, and
Shelbyville, Tennessee, additional materials are blended with molten aluminum to
produce a metal alloy. The alloyed aluminum is shipped in either molten or ingot
form to its customers. The Coldwater alloying facility generates dross, which is
recycled at the Company's adjacent aluminum recycling plant.

The aluminum recycling process from the Company's rotary furnaces produces a by-
product called "salt cake," which is formed from the contaminants and coatings
on aluminum scrap and dross and the salts added during the aluminum recycling
process. Salt cake is composed of salts, metallic aluminum, aluminum oxide and
small amounts of other materials. The by-product of processing materials through
the reverberatory furnaces is dross.

The Company disposes of its salt cake and certain airborne contaminants
("baghouse dust") in landfills that are used exclusively by the Company or that
are permitted specifically to handle the types of materials generated by the
Company. Salt cake is not currently listed as a "hazardous waste" under the
Resource Conservation and Recovery Act of 1976 ("RCRA") or as a "hazardous
substance" under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"). The Company has built and operates a lined
landfill at its Morgantown, Kentucky facility, the design of which exceeds
current requirements for disposal of salt cake and meets RCRA Subchapter "C"
hazardous waste standards.

In 1996, the Company completed the construction of a facility adjacent to its
Morgantown plant to further process the salt cake through the use of materials
separation technology and extract additional aluminum that is left after the
melting process. This salt cake processing facility is a critical step needed
for "closed loop recycling," which would involve no or minimal waste disposal.
The facility's process involves crushing the salt cake and separating the
aluminum out of the salt cake. The residual product is then landfilled in the
Company's Morgantown landfill. See "ENVIRONMENTAL MATTERS."

Certain of the Company's facilities also recycle salt cake and other by-products
from the aluminum recycling process. The Goodyear, Arizona facility processes
aluminum scrap and turnings and recycles concentrates from purchased dross and
salt cake. These concentrates are first treated in the facility's patented wet
milling process, which reduces the volume of material handled, thus allowing for
more efficient utilization of capacity. Aluminum oxide, a by-product of the wet
milling process, is further treated and sold for use in the production of
cement.

Located near the Bonneville Salt Flats, the Company's Wendover, Utah facility
processes aluminum concentrates from the adjacent 50%-owned SALTS joint venture
and produces aluminum ingots. The SALTS facility recycles salt cake from the
Company's Idaho and Utah plants into aluminum concentrates, aluminum oxide and
salt brine. The clear brine is delivered to the venture's partner, where its
chemical content is recycled for multiple uses, including reuse as a flux.

ZINC. Zinc oxide is produced by melting top dross, a low-iron content zinc by-
----  ----------
product of continuous galvanizing, and re-melt die cast, a high zinc-content
alloy, in a sweat or premelt furnace. The sweat furnace separates the zinc from
other metals contained in the raw material. The molten zinc is then transferred
to a muffle furnace which uses radiant heat to transform the molten zinc into a
vapor. The vaporized zinc is sent to a vapor chamber where, upon contact with
air, it condenses to zinc oxide. The final manufacturing step is to send the
completed

                                       12
<PAGE>
 
product through a vertical cooler to a bag collector where the zinc oxide is
collected and custom packaged for shipment.

The Company manufactures two types of zinc dust: extra low lead and regular.
Zinc dust with extra low lead content, which is preferred by the domestic
industrial paint industry, is produced by converting primary zinc into a molten
form using an Electro Thermal Furnace. The Company manufactures regular zinc
dust by melting bottom dross, an iron-bearing zinc residue, created during the
galvanizing process, and re-melt die cast in a pot or ladle. Next, the molten
zinc is fed into a zinc dust retort furnace where the molten metal is vaporized
and condensed into raw zinc dust. Finally, the raw zinc dust is processed in a
dust mill, where it is screened, sent through a ball mill and then packaged into
custom-sized containers.

Zinc metal at the Houston facility is produced by placing pieces of oxidized
zinc-bearing metals (skimmings) into a ball mill, where the Company separates
the oxidic zinc (zinc fines), which are sold as fertilizer additives. After the
ball mill process, the metallic zinc-bearing material is melted in an electric
induction furnace, which is then transferred to a holding furnace for additional
refining. Finally, the molten zinc is poured into molds and shipped to
galvanizers.

In the Company's Coldwater, Michigan zinc recycling process, continuous
galvanizers' top dross is first melted in an electric induction furnace and then
transferred to a reactor which removes the impurities (iron and zinc oxide,
which are sold as by-products). The remaining molten zinc is poured into a
reverberatory holding furnace from which it is blended and cast into ingots,
which are returned to the customer.

OPERATIONS

ALUMINUM. In its aluminum tolling operations, the Company accepts UBCs, dross
and scrap owned by its customers and processes this material for a tolling
charge per pound of incoming weight. In order to retain control of their metal
supplies, customers have typically desired to toll, rather than sell, their
scrap materials. Tolling requires no metal inventory to be purchased or held by
the Company. In addition, tolling limits the Company's exposure to the risk of
fluctuating metal prices since the Company does not own the material being
processed. For the year ended December 31, 1998, approximately 71% of the
Company's total pounds of aluminum processed involved tolling. The acquisitions
of the Chicago Heights and Sikeston plants, the Coldwater metal alloying plant
and the operation of the Morgantown salt cake processing facility have changed
the Company's historical ratio of tolling to buy/sell business (formerly,
aluminum tolling represented more than 90% of the Company's total annual melting
volumes). See ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              ------
CONDITION AND RESULTS OF OPERATIONS."

ZINC. The Company's zinc operations primarily consist of buy/sell transactions.
----
On an annualized basis, the Company's buy/sell zinc business represents
approximately 91% of its total zinc production. Unlike tolling transactions,
buy/sell transactions increase the Company's exposure to the risk of fluctuating
metal prices and increased working capital requirements. See ITEM 7.
                                                             ------
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." and ITEM 7A. "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                 -------
RISK."

                                       13
<PAGE>
 
GENERAL. The Company's production network of plants have generally achieved high
-------
overall operating rates due to strong demand for the Company's services and
products and due to the strategic location of many of the Company's plants near
major customers' production facilities. Expansion of the Company's network of
facilities in the U.S. has enabled the Company to allocate processing work among
its facilities, thereby maximizing utilization of available capacity and taking
advantage of excess demand.

The Company believes that its advanced scrap preparation equipment and recycling
technologies have also increased the demand for its services by producing higher
recovery rates and better quality recycled aluminum and zinc products than many
of its competitors.

The Company constantly seeks improvements in operational efficiencies at its
existing plants and at its acquired facilities through technological
advancements, automation of its operational procedures, and modifications in
processing and material throughput methods.

In addition to its increased emphasis on the buy/sell business, the Company has
also entered into an increasing number of metal brokerage transactions pursuant
to which the Company buys metal from primary and other producers, and then sells
the metal to end users. These transactions involve buying and selling metal
without processing it. Additionally, in order to facilitate the acquisition of
metal for its production process, the Company occasionally enters into metal
"swap" transactions whereby the Company agrees to exchange its recycled finished
goods for scrap raw materials.

When purchasing metals in the open market for its buy/sell business, the Company
attempts to reduce the risk of fluctuating metal prices by hedging anticipated
sales of aluminum and zinc and by avoiding large inventories, except to the
extent necessary to allow its plants to operate without interruption. See ITEM
                                                                          ----
7A. "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK."
--

COMPETITION

GENERAL. The aluminum and zinc recycling industries are fragmented and highly
-------
competitive. The Company believes that its position as the largest U.S. recycler
of secondary aluminum and zinc is a positive competitive factor.

ALUMINUM. The principal factors of competition in the aluminum segment are
--------
price, recovery rates, environmental and safety regulatory compliance, and
services (e.g., the ability to deliver molten aluminum). Freight costs also
limit the geographic areas in which the Company can compete effectively.

The major aluminum producers, some of which are the Company's largest customers,
have generally discontinued processing dross, instead focusing their resources
on other aspects of aluminum production. UBCs and other scrap are processed by
both the secondary recycling industry and the major producers. The Company
competes both with other secondary recyclers and their customers when purchasing
and processing scrap for the buy/sell business.

The amount of the Company's aluminum tolling business can vary depending upon
the extent that the major aluminum producers' used metal materials are
internally recycled. The aluminum producers generally vary their rate of
internal recycling depending upon furnace availability,

                                       14
<PAGE>
 
inventory levels, the price of aluminum and their own internal demand for metal.
The major aluminum producers are larger and have greater financial resources
than the Company. A decision by these producers to expand their recycling
operations could reduce demand for certain of the Company's products and
services.

ZINC. The principal factors of competition in the zinc segment are price,
----
customer service, and delivery schedules. Competition is generally regionally
focused due to high freight costs.

For zinc oxide, the Company's major competitors are Zinc Corporation of America,
a subsidiary of Horsehead Industries, Inc. and Zochem, a subsidiary of Hudson
Bay Mining & Smelting, Ltd. The Company believes its strong customer
relationships, low cost production capabilities and geographic coverage allow it
to compete effectively in the zinc oxide market.

For zinc dust, the Company's major competitors are Purity Zinc Metals Company,
Ltd. and Meadowbrook Company, a subsidiary of T.L. Diamond Company, Inc. The
Company's Houston, Texas facility is believed to be the largest zinc dust
facility in the world, based on volume.

For zinc metal, the Company considers both primary and secondary zinc producers
to be competitors. However, the Company believes that only a minimal threat
exists from galvanizers recycling their own by-products, since relatively large
capital expenditures, technology costs and internally generated raw material
volume represent real barriers to entry into this market.

SOURCE AND AVAILABILITY OF RAW MATERIALS AND ENERGY

ALUMINUM. The Company has historically not had, and does not anticipate having,
--------
difficulties in obtaining raw materials for its aluminum operations. In the case
of buy/sell business, the primary sources of aluminum and magnesium for
recycling and alloying are dross and scrap, which are purchased from both the
major aluminum producers and metal traders. Many of the Company's aluminum
suppliers are also customers of the Company.

ZINC. As the largest worldwide purchaser of zinc-bearing secondaries, the 
----
Company provides its customers an outlet to sell the by-products of their
manufacturing processes. A significant portion of the Company's zinc products
are produced from secondary materials provided by the galvanizing and scrap
metals industries. Secondary zinc-bearing materials consist of top dross
generated by continuous galvanizers, bottom dross and skimmings generated by
"hot dip" galvanizers, and die cast scrap generated by scrap dealers or
remelters. The Company purchases approximately 100,000 tons of these materials
each year. The Company also purchases primary zinc to produce high-grade zinc
oxide in its Hillsboro, Illinois facility and for metals brokerage purposes.

The Company purchases zinc raw materials from numerous suppliers. Many of the
"hot dip" galvanizers, which supply approximately 40% of the aggregate zinc raw
materials, are also customers of the Company. This supplier-customer
relationship is beneficial since the Company competes with other zinc recyclers
for raw materials. The Company believes that its long-term supply contract with
one secondary zinc supplier for re-melt die cast provides the Company with a
stable and cost-efficient supply of raw materials for its Millington, Tennessee
zinc oxide facility. The Company's zinc brokerage unit also procures raw
materials for use in its zinc manufacturing operations. The availability of zinc
dross is dependent upon the demand for galvanized steel,

                                       15
<PAGE>
 
which has historically paralleled fluctuations in customer demand in the
automotive, appliance and construction industries.

GENERAL. The Company's operations are fueled by natural gas, which represents
-------
the second largest component of operating costs. In an effort to acquire the
most favorable natural gas costs, the Company has secured at fixed prices
commitments for its natural gas requirements. Occasionally, when deemed
necessary, the Company purchases its natural gas on a spot-market basis. Most of
the Company's long-term supply contracts with its customers contain provisions
to reflect fluctuations in natural gas prices. See ITEM 7A. "QUANTITATIVE AND
                                                   -------   
QUALITATIVE DISCLOSURES ABOUT MARKET RISK." The Company understands that most of
its competitors' operations are also fueled by natural gas; therefore, it
believes that increases in the prices for natural gas do not adversely affect
the Company's competitive position. The Company believes it will continue to
have access to adequate energy supplies to meet its needs for the foreseeable
future.

SEASONALITY

ALUMINUM. UBC collections have historically been highest in the summer months
--------
and lowest in the winter months. Therefore, the Company has, at times,
experienced lower volumes at certain facilities during the winter. In recent
years, however, the Company's total processing volumes have fluctuated mostly
due to the startup of additional capacity rather than the seasonality of UBC
collections.

A portion of the Company's business that serves the automotive industry has
historically experienced a decline in molten metal deliveries during periods
when its automotive customers stop production to perform new model changeovers
and during the holidays in December.

ZINC. Historically, demand for the Company's zinc products used in the painting
----
industry is somewhat lower in the winter months, while demand for zinc products
used in fertilizers is lower in the summer months.

TRANSPORTATION

ALUMINUM AND ZINC. The Company receives incoming metal by both rail and truck.
-----------------
Most of the Company's plants own their own rail siding or have access to rail
lines nearby. The Company owns and leases various trucks and trailers to support
its business. Customarily, the transportation costs of scrap materials to be
tolled are paid by the Company's customers, while the transportation costs of
metal purchased and sold by the Company may be paid by either customers or the
Company. The Company contracts with third-party transportation firms for hauling
some of its solid waste for disposal.

                                       16
<PAGE>
 
EMPLOYEES

As of January 31, 1999, the Company had 1867 employees, consisting of 428
employees engaged in administrative and supervisory activities and 1439
employees engaged in production and maintenance. Labor relations with employees
have been satisfactory. The production and maintenance employees at the
following Company facilities are represented by the collective bargaining groups
set forth below:

<TABLE> 
<CAPTION> 

                                                                                          CONTRACT
      FACILITY                            REPRESENTATIVE                                  EXPIRES
---------------------  -----------------------------------------------------         ------------------
<S>                    <C>                                                           <C>    
Uhrichsville, OH       United Mine Workers of America                                November 1998*
Chicago, IL            United Auto Workers                                           June 1999
Bedford, IN            International Brotherhood of Electrical Workers               April 2000
Rockwood, TN           United Steelworkers of America                                August 2000
Hillsboro, TN          Laborer's International Union of North America                August 2000
Sikeston, MO           United Steelworkers of America                                March 2001
</TABLE> 
                     

*    This facility is currently operating without a union agreement, and the
     Company is currently negotiating a new collective bargaining agreement.


ENVIRONMENTAL MATTERS

GENERAL. The Company's operations, like those of other basic industries, are
-------
subject to federal, state, local and foreign laws, regulations and ordinances
that (1) govern activities or operations that may have adverse environmental
effects, such as discharges to air and water, as well as handling and disposal
practices for solid and hazardous wastes and (2) impose liability for costs of
cleaning up and certain damages resulting from past spills, disposals or other
releases of hazardous substances. It can be anticipated that more rigorous
environmental laws will be enacted that could require the Company to make
substantial expenditures in addition to those referred to herein, including
future regulations, which are expected to impose stricter emission requirements
on the aluminum industry. While the Company believes that current pollution
control measures at most of the emission sources at its facilities will meet
these anticipated future requirements, additional measures at some of the
Company's facilities may be required.

The Company's operations may generate certain discharges and emissions,
including in some cases off-site dust and odors, which are subject to the
Federal Clean Air Act and other environmental laws. From time to time,
operations of the Company have resulted or may result in certain noncompliance
with applicable requirements under environmental laws. The Company may also
incur liabilities for off-site disposals of salt cake and other materials. In
addition, historical or current operations at, or in the vicinity of, the
Company's facilities, may have resulted in soil or groundwater contamination.
However, based on environmental investigations conducted by the Company and its
consultants and certain indemnities associated with the Company's acquisitions,
the Company believes that any such noncompliance or liability under current
environmental laws would not have a material adverse effect on the Company's
financial position. See ITEM 3. "LEGAL PROCEEDINGS."
                        ------

Due to relatively high costs and limited coverage, the Company does not carry
environmental impairment liability insurance. The Company made capital
expenditures for environmental

                                       17
<PAGE>
 
control facilities of approximately $8,600,000 in 1998, most of which was for
air pollution control equipment and landfill capacity additions. Environmental
expenditures for 1999 and 2000, which primarily relate to the Company's
landfills and air pollution control equipment, are currently estimated to be
approximately $7,200,000 and $5,000,000, respectively.

ALUMINUM. The processing of UBCs, dross and scrap generates solid waste in the
--------
form of salt cake and baghouse dust. Currently, such material is either disposed
of at off-site landfills or at the Company's permitted Sapulpa and Morgantown
disposal sites. For example, the Rockwood, Loudon, Bedford and Sikeston plants
currently dispose of the majority of their solid waste by transporting it to the
Morgantown plant, where the Company operates a salt cake processing facility
which prepares salt cake for landfilling. See ITEM 2. "PROPERTIES--SOLID WASTE
                                              ------ 
DISPOSAL." At the Uhrichsville plant, under the Company's supply agreement with
Commonwealth, the disposal of all salt cake generated by the Company as a result
of its processing for Commonwealth is the responsibility of Commonwealth. Salt
cake from all other material processed at the Uhrichsville plant is either
shipped to the Morgantown plant for disposal or landfilled with a local solid
waste management firm. The IMSAMET Goodyear facility recycles its own salt cake
and sells the by-products to third parties, and the Sapulpa, Wendover and Post
Falls facilities ship most of their salt cake to the 50%-owned SALTS joint
venture for further processing. See "THE RECYCLING/MANUFACTURING PROCESS."

If salt cake were ever classified as a hazardous waste or substance under RCRA
or CERCLA, the Company's handling and disposal of salt cake would be required to
be modified. To dispose of its salt cake, the Company may then be required to
take other actions including obtaining a RCRA Subchapter "C" permit for its
Morgantown landfill, obtaining other permits (including transportation permits),
and landfilling additional amounts of salt cake with third parties not under the
Company's direct control. Based on current annual processing volumes and
remaining landfill capacity, the estimated remaining life of the landfill at the
Sapulpa plant is two years. The Company has constructed a second landfill cell
at its Morgantown plant, which was expanded in 1998, and estimates its remaining
useful life, based on current utilization, to be approximately nine years. A
planned second expansion is expected to provide an additional seven years of
useful life. Landfill closure costs for the Company-owned landfills are
currently estimated to be approximately $8,000,000. The Company is currently
providing for this expenditure by accruing, on a current basis, these estimated
costs as the landfills are used. See ITEM 2. "PROPERTIES."
                                     ------

ZINC. Several of the zinc manufacturing processes create various by-products
----
which are either sold to downstream processors or re-used internally. Because
there are virtually no remaining by-products requiring disposal, the zinc
manufacturing process is essentially a "closed loop' process.

                                       18
<PAGE>
 
ITEM 2.   PROPERTIES

RECYCLING AND PROCESSING FACILITIES

During 1998, the Company owned and/or operated the following facilities as
detailed below:
<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------------------------------------------
                                                ESTIMATED       ESTIMATED
                                  NUMBER         MELTING       PROCESSING                                         MOLTEN
                  OWNED            OF           CAPACITY        CAPACITY        YEAR      YEAR     MATERIALS      DELIVERY
PLANT            ACREAGE        FURNACES     ( MILLION LBS)   (MILLION LBS)    BUILT    ACQUIRED   PROCESSED     CAPABILITY
--------------------------------------------------------------------------------------------------------------------------------
<S>              <C>            <C>           <C>             <C>              <C>      <C>        <C>            <C> 
ALUMINUM SEGMENT:
--------------------------------------------------------------------------------------------------------------------------------
Sapulpa, OK              64          7            210              --           1962       --     Alum/Mag             No
--------------------------------------------------------------------------------------------------------------------------------
Rockwood, TN            238          6            220              --           1985       --      Alum               Yes
--------------------------------------------------------------------------------------------------------------------------------
Morgantown, KY          552(a)       7            320              --           1989       --      Alum               Yes
--------------------------------------------------------------------------------------------------------------------------------
Uhrichsville, OH         42         10            360              --           1992       --      Alum               Yes
--------------------------------------------------------------------------------------------------------------------------------
Loudon, TN              173          4            220              --            --       1994     Alum               Yes
--------------------------------------------------------------------------------------------------------------------------------
Bedford,IN               19          4            210              --            --       1995     Alum               Yes
--------------------------------------------------------------------------------------------------------------------------------
Chicago HTS., IL          9          2            100              --            --       1995     Alum                No
--------------------------------------------------------------------------------------------------------------------------------
Sikeston, MO             31          2             60              --            --       1995     Alum                No
--------------------------------------------------------------------------------------------------------------------------------
Morgantown, KY           (a)        (b)           (b)              400          1996       --   Salt Cake              (b)
--------------------------------------------------------------------------------------------------------------------------------
Post Falls, ID           49          4            280              --            --       1997     Alum               Yes
--------------------------------------------------------------------------------------------------------------------------------
Goodyear, AZ (c)         40(c)       4             70(d)           168           --       1997   Al/Salt Cake          No
--------------------------------------------------------------------------------------------------------------------------------
Wendover, UT            160(c)       2             70              --            --       1997     Alum                No   
--------------------------------------------------------------------------------------------------------------------------------
Elyria, OH               12          (e)          (e)              50            --       1997     Alum                (e)
--------------------------------------------------------------------------------------------------------------------------------
Rock Creek, OH           11          (e)          (e)             100            --       1997     Alum                (e)
--------------------------------------------------------------------------------------------------------------------------------
Coldwater, MI            75          3            150              --           1997       --      Alum               Yes
--------------------------------------------------------------------------------------------------------------------------------
Swansea, Wales           5(c)        2            100              --           1997       --      Alum               Yes
-------------------------------------------------------------------------------------------------------------------------------
Coldwater, MI (alloys)   47          3            200              --            --       1997     Alum               Yes
-------------------------------------------------------------------------------------------------------------------------------
TOTAL ALUM.                                     2,570             718
-------------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------------
ZINC SEGMENT:
-------------------------------------------------------------------------------------------------------------------------------
Coldwater, MI            27          2             40              --            --       1992   Zinc Metal            No
-------------------------------------------------------------------------------------------------------------------------------
Houston, TX               4         22             50              --            --       1998   Zinc Dust             No
-------------------------------------------------------------------------------------------------------------------------------
Houston, TX               7          1             20              --            --       1998   Zinc Metal            No
-------------------------------------------------------------------------------------------------------------------------------
Chicago, IL               2          6             40              --            --       1998   Zinc Oxide            No
-------------------------------------------------------------------------------------------------------------------------------
Hillsboro, IL             5          3             50              --            --       1998   Zinc Oxide            No
-------------------------------------------------------------------------------------------------------------------------------
Millington, TN           17          3             40              --            --       1998   Zinc Oxide            No
-------------------------------------------------------------------------------------------------------------------------------
TOTAL ZINC                                        240              --
-------------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED CAPACITY                           2,810             718
-------------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------------
50% OWNED FACILITIES (ALUMINUM):
-------------------------------------------------------------------------------------------------------------------------------
  VAW-IMCO, Germany      29         13            340(f)           --            --       1996   Alum                  Yes
-------------------------------------------------------------------------------------------------------------------------------
  SALTS, Wendover, UT    40         (b)            (b)            168            --       1997   Salt Cake             (b)
-------------------------------------------------------------------------------------------------------------------------------
 TOTAL CAPACITY                                 3,150             886
------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       19
<PAGE>
 
NOTES:
-----

(a)  The acreage in Morgantown, Kentucky includes both the aluminum and salt
     cake processing facilities as well as landfill cells.

(b)  These facilities process salt cake only.

(c)  This acreage is leased.

(d)  Represents 100% of the capacity of this facility--the facility is 70% owned
     by the Company.

(e)  These facilities process aluminum products for use in the steel industry.

(f)  Represents 100% of the capacity of the two VAW-IMCO facilities located in  
     Grevenbroich and Toging, Germany.

The average operating rates for all of the Company's facilities for 1998, 1997
and 1996 were 97%, 95% and 92%, respectively, of stated capacity. The operating
rate for 1996 was negatively impacted due to the effect of the closure of the
Company's Corona, California facility during the third quarter of 1996. See ITEM
                                                                            ----
7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
-
OPERATIONS."

Commonwealth has a currently exercisable option to acquire up to a 49% equity
interest in the Uhrichsville plant at a price equal to the equity percentage
amount to be specified by Commonwealth, multiplied by the depreciated book value
of the plant, or the subsidiary owning the plant, plus a premium to compensate
the Company for its recycling technology. The option price may be above or below
the fair value of the Uhrichsville plant. Should Commonwealth exercise its
option, there can be no assurance that the production or earnings attributable
to the purchased interest could be replaced, and the Company's net earnings and
cash flow could be adversely affected. See NOTE D--PROPERTY AND EQUIPMENT of
Notes to Consolidated Financial Statements.

In 1996, the Company began its 50% participation in its VAW-IMCO joint venture
in Germany. The joint venture owns and operates two recycling and foundry alloy
facilities located at Grevenbroich and Toging, Germany. Aggregate annual melting
capacity for these two plants is approximately 340 million pounds.

The Company also has four zinc brokerage offices located in California,
Pennsylvania, Canada and Germany.

SOLID WASTE DISPOSAL

The Company completed a new landfill cell adjacent to its plant in Morgantown,
Kentucky in 1996. All of the waste generated from the salt cake processing
facility at the Morgantown site is deposited in this landfill. Management
anticipates that this new landfill cell, which was expanded during 1998 and is
designed to be expanded again, will serve the Company's landfilling needs for
the majority of the salt cake generated by facilities currently owned by the
Company in the Eastern United States for the next 16 years, based on current
utilization. The Company also owns a landfill at its Sapulpa, Oklahoma plant
which is estimated to have two years' useful life remaining. The Goodyear
facility recycles its

                                       20
<PAGE>
 
own salt cake and sells the by-products to third parties, and the Sapulpa,
Wendover and Post Falls facilities ship their salt cake to the 50%-owned SALTS
joint venture for further processing. See ITEM 1. "BUSINESS--ENVIRONMENTAL
                                          ------
MATTERS."

ADMINISTRATIVE

In Irving, Texas, the Company leases approximately 28,200 square feet of office
space for certain of its executive, financial and management functions. This
lease expires in January 2000. In Houston, Texas, the Company owns approximately
30,000 square feet of office space for certain of its financial and management
functions for its zinc operations.

The Company believes that its plants and equipment are maintained in good
operating condition. Properties and improvements at the Company's Sapulpa,
Rockwood, Morgantown, Loudon, Bedford, Chicago Heights and Post Falls plants are
mortgaged to secure senior indebtedness. See ITEM 7. "MANAGEMENT'S DISCUSSION
                                             ------
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND
CAPITAL RESOURCES" and NOTE H--"LONG TERM DEBT AND EXTRAORDINARY LOSS ON EARLY
DEBT RETIREMENT" of Notes to Consolidated Financial Statements.


ITEM 3.   LEGAL PROCEEDINGS
------
In 1996, the Company entered into a settlement agreement with the Missouri
Department of Natural Resources ("MDNR") pertaining to certain air violations at
its Sikeston facility. Since entering into the settlement agreement, the Company
received additional notices of violation from the MDNR, which related to
fugitive dust emissions from its truck loading and unloading operations and
certain other air compliance matters. In addition, the Company responded to a
request for information from the United States Environmental Protection Agency
regarding air issues at the Sikeston facility. Since purchasing the Sikeston
facility in 1995, the Company has made significant upgrades to the air pollution
control equipment and has constructed a new truck loading facility which is
intended to capture fugitive emissions located at the facility. The Company
currently believes that it has fulfilled all of its obligations related to the
settlement agreement and that the Sikeston facility is now operating in full
compliance with MDNR standards. There can be no assurance, however, that future
violations will not occur or that the violations identified by the MDNR will not
result in penalties against the Company.

In 1997, the Illinois Environmental Protection Agency ("IEPA") notified IZI that
it is a potentially responsible party ("PRP") pursuant to the Illinois
Environmental Protection Act for the cleanup of contamination at a site in
Marion County, Illinois to which IZI, among others, in the past sent zinc oxide
for processing and resale. IZI has joined a group of PRPs that is planning to
negotiate with the IEPA regarding the cleanup of the site. Although the site has
not been fully investigated and final cleanup costs not yet determined, based on
current cost estimates and information regarding the amount and type of
materials sent to the site by IZI, the Company does not believe, although there
can be no assurance, that its liability at this site will have a material
adverse effect on its financial position or its results of operations. A
subsidiary of U.S. Zinc, which the Company acquired in July 1998, was also
named as a PRP at this site.

The Company is also a party from time to time to what it believes are routine
litigation and proceedings considered part of the ordinary course of its
business; however, the Company believes that the outcome of such proceedings
would not have a material adverse effect on the Company's financial position or
results of operations.

                                       21
<PAGE>
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------
No matters were submitted to a vote of security holders of the Company during
the quarter ended December 31, 1998.


ITEM 4A.  EXECUTIVE OFFICERS OF THE REGISTRANT
-------
The executive officers of the Company are listed below, together with brief
accounts of their experience and certain other information. Executive officers
are appointed by the Board of Directors.

Name                       Age          Position
----                       ---          --------

Don V. Ingram               63          Chairman of the Board and Chief
                                        Executive Officer

Richard L. Kerr             56          President and Chief Operating Officer

Paul V. Dufour              59          Executive Vice President--Finance and
                                        Administration, Chief Financial Officer
                                        and Secretary

Thomas W. Rogers            52          Senior Vice President, Marketing and
                                        Sales

Denis W. Ray                50          Senior Vice President, Operations

C. Lee Newton               55          Senior Vice President, Engineering,
                                        Technology and Environmental

Robert R. Holian            46          Vice President and Controller

James B. Walburg            45          Vice President and Treasurer

Don V. Ingram has served as a director of the Company since 1988 and as Chairman
of the Board since 1994. He was elected Chief Executive Officer of the Company
in February 1997. Mr. Ingram played the major role in the formation of the
Company in 1986. 

Richard L. Kerr was elected President of the Company in February 1997.
Previously, he served as Executive Vice President and has been Chief Operating
Officer since 1991. In 1994, he became President of the Company's Metals
Division. Mr. Kerr joined International Metal Co., a predecessor of the Company,
in April 1984, and became Executive Vice President of International Metal Co. in
April 1987.

Paul V. Dufour has served as Vice President, Chief Financial Officer and
Secretary of the Company since March 1987. He was promoted to Senior Vice
President in May 1988 and to Executive Vice President in October 1994. 

Thomas W. Rogers has served as Senior Vice President of Marketing and Sales of
the Company since July 1988. Mr. Rogers was employed as Plant Manager of the
Sapulpa, Oklahoma plant in October 1986.

Denis W. Ray has served as Senior Vice President of the Company since March
1998. Previously, Mr. Ray served as President of Reynolds Architectural Products
at Reynolds Metals Company from 1997 to 1998, President of Reynolds (Europe)
Ltd. in Switzerland from 1995 to 1997 and Vice President, Operations of Reynolds
(Europe) Ltd. from 1994 to 1995. Prior to his employment with Reynolds Metals
Company and its affiliates, Mr. Ray was employed by Alcoa in various capacities
for 25 years.

C. Lee Newton became Senior Vice President of the Company in 1993. Mr. Newton
was named Vice President in 1990 and was the General Manager of the Morgantown,
Kentucky plant from 1989 to 1993. He was originally employed by the Company as
Plant Manager of its Rockwood, Tennessee plant in 1987.

Robert R. Holian has served as Vice President and Controller since 1994. He 
joined the Company in 1990 and was named Controller in 1992.

James B. Walburg has served as Vice President and Treasurer of the Company since
September 1994. Prior to this, Mr. Walburg was employed by NTS, Inc., a
transportation service company, as Vice President, Client Services and
Operations.

                                       22
<PAGE>
 
PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
------
The Company's Common Stock trades on The New York Stock Exchange (trading
symbol: IMR). The following table sets forth, for the fiscal quarters indicated,
the high and low sales prices for the Company's Common Stock, as reported on The
New York Stock Exchange composite tape from January 1, 1997 through December 31,
1998, and the dividends declared per share during the periods indicated.

        
      CALENDAR                     PRICE RANGE              DIVIDENDS
                            ------------------------
        YEAR                  HIGH             LOW          DECLARED
-------------------------   --------         -------       ---------- 
1997
----
  FIRST QUARTER            $      17        $ 13 5/8       $     0.05
  SECOND QUARTER              18 7/8          13 3/4             0.05
  THIRD QUARTER              20 1/16          17 3/8             0.05
  FOURTH QUARTER                  21          15 1/4             0.05
                                                                   
1998                                                            
----                                                            
  FIRST QUARTER               18 1/2          14 1/4       $     0.05
  SECOND QUARTER                  20          15 1/2             0.05
  THIRD QUARTER               18 5/8          10 1/4             0.05
  FOURTH QUARTER            15 13/16         12 3/16             0.06 

Dividends as may be determined by the Board of Directors may be declared and
paid on the Common Stock from time to time out of any funds legally available
therefor. The Company's Amended and Restated Credit Agreement contains
limitations on the Company's ability to declare and pay dividends in cash or
property; however, if there is no default under the agreement, then the Company
is permitted to make cash dividend payments in an aggregate amount of up to
$6,000,000 in 1999, $6,000,000 in 2000, and $8,000,000 in each year thereafter.
See ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
    ------
RESULTS OF OPERATIONS."

No assurances can be given as to future levels of dividends, if any, which may
be declared and paid. The Company intends to continue paying dividends on its
Common Stock, although future dividend declarations are at the discretion of the
Company's Board of Directors and will be based upon the Company's level of
earnings, cash flow, financial requirements, and economic and business
conditions then prevailing, as well as other relevant factors, including the
restrictions contained in the Company's long-term debt instruments.

On March 1, 1999, the outstanding shares of Common Stock were held of record by
473 stockholders.

                                       23
<PAGE>
 
During the fourth quarter of 1998, the Company made no unregistered sales of its
equity securities.


ITEM 6.       SELECTED FINANCIAL DATA
------

(In thousands, except per share data)

-------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                                      FOR THE YEAR ENDED DECEMBER 31,
                                                          ---------------------------------------------------------
                                                               1998       1997        1996       1995       1994
                                                          ---------------------------------------------------------
<S>                                                       <C>           <C>         <C>        <C>        <C> 
Revenues                                                     $568,514   $339,381    $210,871   $141,167   $101,116
Earnings before extraordinary item                             19,590     14,127      6,720      12,470      8,471
Earnings per common share before 
  extraordinary item: 
      Basic (a)                                                  1.18       1.08        0.57       1.08       0.75
      Diluted (a)                                                1.17       1.06        0.55       1.05       0.74
Total assets                                                  456,558    332,536     164,707    139,877     96,791
Long-term debt (excluding current maturities                  168,700    109,194      48,202     29,754     11,860
Dividends declared per common share                          $  0.210   $  0.200    $  0.200   $  0.105   $  0.100
</TABLE> 
-------------------------------------------------------------------------------

NOTE:
-----
(a)  The earnings per share amounts prior to 1997 have been restated, as
     required, to comply with Statement of Financial Accounting Standards No.
     128, Earnings per Share.

The Company's results of operations and financial position have been affected by
acquisitions of existing facilities and companies during the periods presented.
See NOTE B--" ACQUISITIONS AND INVESTMENTS" of Notes to Consolidated Financial
Statements. See also ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                     ------
CONDITION AND RESULTS OF OPERATIONS."


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------
          RESULTS OF OPERATIONS

 GENERAL

Most of the Company's processing consists of aluminum tolled for its customers.
To a lesser (but increasing) extent, the Company's processing also consists of
zinc and aluminum buy/sell business, which involves purchasing scrap metal and
dross for further processing and resale. The Company's zinc processing and
aluminum alloying operations consist primarily of buy/sell transactions. The
Company's buy/sell business revenues include the cost of the metal, the
processing cost and the Company's profit margin. Tolling revenues reflect only
the processing cost and the Company's profit margin. Accordingly, tolling
business produces lower revenues and costs of sales than does the buy/sell
business. Variations in the mix of these two businesses can cause revenues to
change significantly from period to period while not significantly affecting
gross profit, since both types of business generally produce approximately the
same gross profit per pound of metal processed. As a result, the Company
considers processing volume to be a more important determinant of performance
than revenues.

                                       24
<PAGE>
 
The Company's Coldwater, Michigan aluminum alloying facility (acquired in
November 1997) is primarily engaged in buy/sell business, as opposed to tolling,
and with the recent acquisition of U.S. Zinc (see "ACQUISITION" below), the
level of overall buy/sell business, relative to tolling, for the Company
increased during 1998. The higher levels of buy/sell business increase the
Company's working capital requirements and subject the Company to greater risks
associated with price fluctuations in the metals markets.

During the 1990's, aluminum inventories on the worldwide commodity exchanges
fluctuated from severe excesses to relatively balanced positions. In times of
excess, aluminum prices declined, negatively impacting the profitability of the
major aluminum producers who are some of the Company's largest customers.
Environments of low profitability for the Company's customers have inhibited,
during those times, the Company's ability to pass cost increases through to its
customers. During 1997, the U.S. domestic aluminum industry benefited from
increases in aluminum prices and an increase in demand. However, during the
fourth quarter of 1997 and throughout 1998, aluminum prices declined, which
negatively impacted the Company's selling prices of aluminum, especially at its
salt cake processing facility in Kentucky. Also during 1998, zinc prices
declined sharply from their relatively high levels in the third quarter of 1997.
It is not possible to predict the future price of aluminum or zinc, or the level
of worldwide inventories of these metals and whether, or to what extent, such
factors will affect the Company's future business.

The following table sets forth, for the periods indicated, the total pounds of
material processed (aluminum and zinc); the percentage of total pounds processed
represented by pounds tolled and purchased; total revenues; total gross profits
and gross profits as a percentage of revenues (in thousands, except
percentages):

                                            FOR THE YEAR ENDED DECEMBER 31,
                                      ------------------------------------------
                                           1998            1997          1996
                                      ------------------------------------------
Total Pounds Processed                   2,516,752       1,988,796     1,451,408

Percent of Total Pounds Processed:
   Tolled                                      68%             82%           83%
   Purchased                                   32%             18%           17%
                                      ------------------------------------------
                                              100%            100%          100%
                                      ==========================================

Revenues                                $  568,514      $  339,381    $  210,871
Gross Profits                           $   61,520      $   47,854    $   25,538
Gross Profit % *                             10.8%           14.1%         12.1%

*      See NOTE L--"OPERATIONS" of Notes to Consolidated Financial Statements
       and RESULTS OF OPERATIONS--Fiscal Year 1998 vs. Fiscal Year 1997 below.
                                  -------------------------------------

In addition to its increased emphasis on the buy/sell business, the Company has
also entered into an increasing number of metal brokerage transactions each year
pursuant to which the Company buys metal from primary and other producers, and
then sells the metal to end users. These transactions involve buying and selling
metal without processing it. Additionally, in order

                                       25
<PAGE>
 
to facilitate acquiring metal for its production process, the Company
occasionally enters into metal "swap" transactions whereby the Company agrees to
exchange its recycled finished goods for scrap raw materials. As with the
buy/sell business, the brokerage business also increases the Company's working
capital requirements and subjects the Company to greater price risk associated
with fluctuations in the metal commodity markets. See ITEM 7A. "QUANTITATIVE AND
                                                      -------
QUALITATIVE DISCLOSURES ABOUT MARKET RISK."

The following table sets forth, for the periods indicated, aluminum and zinc
segment information for percentage of total pounds processed, revenues, income
and assets.

<TABLE> 
<CAPTION> 
                                                             FOR THE YEAR ENDED DECEMBER 31,
                                                   -------------------------------------------------
                                                         1998             1997             1996
                                                   ----------------  --------------   --------------    
<S>                                                 <C>              <C>              <C> 
PERCENT OF TOTAL POUNDS PROCESSED:
   Tolled Aluminum                                           67%              81%             82%
   Purchased Aluminum                                        27%              17%             15%
                                                    ---------------  --------------   --------------    
Total Aluminum                                               94%              98%             97%
                                                    ---------------  --------------   --------------    
   Tolled Zinc                                                1%               1%              1%
   Purchased Zinc                                             5%               1%              2%
                                                    ---------------  --------------   --------------    
Total Zinc                                                    6%               2%              3%
                                                    ---------------  --------------   --------------    
                                                            100%             100%            100%
                                                    ===============  ==============   ==============    

REVENUES:                                                            
   Aluminum revenues from external customers           $ 465,122        $ 326,522       $ 198,769 
   Zinc revenues from external customers                 103,392           12,859          12,102 
                                                    ---------------  --------------   --------------    
Consolidated revenues                                  $ 568,514        $ 339,381       $ 210,871 
                                                    ===============  ==============   ==============    

INCOME:                                                              
   Aluminum income                                     $  54,704        $  45,728       $  23,830 
   Zinc income                                             6,429            1,127           1,278   
   Unallocated general and administrative expenses        21,568           16,431          11,458  
   Unallocated interest expense                            9,197            7,331           3,421   
   Unallocated interest and other income                     775              413             623      
Net earnings before provision for income taxes,                      
                                                    ---------------  --------------   --------------    
   minority interests and extraordinary item           $  31,143        $  23,506       $  10,852 
                                                    ===============  ==============   ==============   

ASSETS:
   Aluminum                                            $ 328,891        $ 314,377       $ 149,822 
   Zinc                                                  109,398            9,235           5,135 
   Other unallocated assets                               18,269            8,924           9,750 
                                                    ---------------  --------------   --------------   
Consolidated assets                                    $ 456,558        $ 332,536       $ 164,707 
                                                    ===============  ==============   ============== 
</TABLE> 

                                       26
<PAGE>
 
The accounting policies of the reportable segments are the same as those
described in NOTE A--"SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES" of Notes to
Consolidated Financial Statements. The Company evaluates performance based on
gross profit or loss from operations, net of selling expenses. Provision for
income taxes, interest, corporate general and administrative costs, including
depreciation of corporate assets and amortization of capitalized debt costs, are
not allocated to the reportable segments. Intersegment sales and transfers are
recorded at market value; net profits on intersegment sales and transfers were
immaterial for the periods presented. Consolidated cash, net capitalized debt
costs, net current deferred tax assets and assets located at the Company's
headquarters office in Irving, Texas are not allocated to the reportable
segments. Also, see NOTE M--"SEGMENT INFORMATION" of Notes to Consolidated
Financial Statements for additional segment disclosures.

RESULTS OF OPERATIONS

FISCAL YEAR 1998 VS. FISCAL YEAR 1997
-------------------------------------

Production. During 1998, the pounds of metal processed by the Company increased
----------     
27% to 2,517 million pounds, compared to 1,989 million pounds processed in 1997.
Aluminum processing at the Company's newest plants in Coldwater, Michigan (which
began production in the first quarter of 1997) and Swansea, Wales (which began
production in the fourth quarter of 1997) and the acquisitions of the Alchem
Aluminum, Inc. ("Alchem") aluminum alloying facility (which was acquired in
November 1997) and U.S. Zinc facilities (which were acquired in July 1998)
accounted for 74% of the increase in production for 1998. The increase in
production was partially offset by lower production at the Bedford facility due
to a reconfiguration of the furnaces and a work force reorganization at that
facility. In addition, the Company's June and July 1998 production was
negatively impacted by a strike at several of the facilities of GM, a customer
of the Company.

Production by segment is as follows:

                                             FOR THE YEAR ENDED DECEMBER 31,
                                          -----------------------------------
                                            1998          1997         1996
                                          --------     -------      ---------
     Pounds Processed (in millions):

        Aluminum                             2,375        1,952           1,411
        Zinc                                   142           37              40
                                         ---------     --------     -----------
                                             2,517        1,989           1,451
                                         =========     ========     ===========

Aluminum processing at the Company's newest plants in Coldwater, Michigan;
Swansea, Wales; and the Alchem facility accounted for 68% of the increase in
production for the aluminum segment. Zinc processing at the Company's recently
acquired U.S. Zinc facilities accounted for 96% of the increase in production
for the zinc segment.

Revenues. During 1998, revenues increased 68% to $568,514,000, compared to
--------
revenues of $339,381,000 in 1997. The acquisitions of Alchem and U.S. Zinc and
operations at the new Coldwater, Michigan and Swansea, Wales plants principally
accounted for this increase; however, this increase was partially offset by
lower aluminum selling prices prevailing during 1998. The percentage increase in
revenues was greater than the relative increase in volumes processed due to
higher levels of buy/sell business during 1998 as compared to 1997. The

                                       27
<PAGE>
 
buy/sell business increased to 32% of total processing for 1998 compared to 18%
for 1997. As discussed above, an increase in buy/sell business generally results
in a much higher increase in revenue than would be generated by a similar
increase in tolling business. The increased levels of buy/sell business were
principally attributable to the acquisitions of Alchem and U.S. Zinc. Prior to
November 1997, materials processed for Alchem at the Company's Coldwater,
Michigan facility were classified as tolling business, but because the Company
acquired Alchem in November 1997, these pounds are now classified as buy/sell
business. The increase in buy/sell activity in 1998 also resulted in higher
inventory, accounts receivable and accounts payable levels.

Sales at the Company's newest plants in Coldwater, Michigan; Swansea, Wales; and
the Alchem facility accounted for 114% of the increase in revenues for the
aluminum segment, which was partially offset by a decrease in aluminum selling
prices. Sales from the Company's recently acquired U.S. Zinc facilities
accounted for virtually all of the increase in revenues for the zinc segment.

Gross Profits. During 1998, gross profits increased 29% to $61,520,000, compared
-------------
to gross profits of $47,854,000 in 1997. The acquisitions of Alchem and U.S.
Zinc and operations at the new Coldwater plant accounted for virtually all of
the increase in total gross profits and virtually all the increase in profits by
each segment. However, falling aluminum and zinc selling prices reduced the
gross margin per pound of metal sold.

SG&A Expenses. During 1998, selling, general and administrative costs increased
-------------
35% to $23,705,000, compared to $17,612,000 in 1997. This increase was due
principally to higher employee, selling and goodwill amortization expenses,
principally associated with the acquisitions of Alchem and U.S. Zinc.

Interest. During 1998, interest expense increased 25% to $9,197,000, compared to
--------
interest expense of $7,331,000 in 1997. The increase in interest expense was
primarily related to higher levels of borrowings outstanding to fund the cash
portion of the U.S. Zinc acquisition ($46,500,000) and to repay $16,000,000 of
U.S. Zinc's outstanding indebtedness (see "LIQUIDITY AND CAPITAL RESOURCES"
below).

Extraordinary Item: In connection with the Company's acquisition in January 
------------------
1997, the Company borrowed funds under a new long-term credit facility. A
portion of the funds borrowed under this credit facility was used to retire
substantially all of the Company's then-outstanding indebtedness prior to its
stated maturity. This early debt retirement generated an extraordinary loss of
$1,318,000 (net of income tax benefit of $878,000) for the first quarter of
1997. There was no extraordinary item in 1998.

Net Earnings. During 1998, the Company's earnings before provision for income
------------
taxes, minority interests and extraordinary item increased 32% to $31,143,000,
compared to $23,506,000 in 1997. The increase was primarily the result of higher
gross profits, due mainly to the Alchem and U.S. Zinc acquisitions, which were
in turn partially offset by the increases in selling, general and administrative
expenses and interest expense (also attributable to these and other recent
acquisitions). The Company's higher earnings before income taxes caused the tax
provision to increase to $11,275,000 in 1998, compared to $9,086,000 in 1997.
The effective tax rate was approximately 36% in 1998 compared to 39% in 1997
primarily due to lower state taxes provided during 1998. During 1998, net
earnings increased 53% to $19,590,000, compared to $12,809,000 in 1997.

                                       28
<PAGE>
 
FISCAL YEAR 1997 VS. FISCAL YEAR 1996
-------------------------------------

Production. During 1997, the pounds of metal processed by the Company increased
----------
37% to 1,989 million pounds, compared to 1,451 million pounds processed in 1996.
Increases in aluminum processing from the Idaho, Utah and Arizona facilities
(which were acquired in January 1997), the Coldwater, Michigan aluminum facility
(which began production during the first quarter of 1997) and the Coldwater
alloying facility (which was acquired in November 1997) were the primary reasons
for the increased production.

Revenues. During 1997, revenues increased 61% to $339,381,000, compared to
--------
revenues of $210,871,000 in 1996. The acquisitions of the Idaho, Utah and
Arizona plants, the Rock Creek and Elyria, Ohio plants and the Coldwater,
Michigan alloying facility, and the operations at the new Coldwater aluminum
plant, accounted for virtually all of the increase in revenues. During 1997,
higher revenues from the combination of higher aluminum selling prices (relative
to 1996 prices), higher levels of buy/sell business at the Company's remaining
aluminum plants and additional metal for sale from its Kentucky salt cake
processing facility were partially offset by the elimination of revenues at the
Company's Corona, California plant (which was closed in the third quarter of
1996). The percentage increase in revenues was greater than the relative
increase in volumes processed due to higher levels of buy/sell business during
1997 as compared to 1996. The increased level of buy/sell business was
principally attributable to the Coldwater alloying facility acquired in 1997.
Tolling activity for aluminum represented 81% of the Company's total pounds
melted during 1997, as compared to 82% in 1996. The increase in buy/sell
activity in 1997 also resulted in higher inventory levels. Additionally,
revenues increased due to the January 1997 acquisitions of the Rock Creek and
Elyria, Ohio plants.

Gross Profits. During 1997, gross profits increased 87% to $47,854,000, compared
-------------
to gross profits of $25,538,000 in 1996. Approximately 60% of the increase in
gross profits was due to (1) the January 1997 acquisitions of the Idaho, Utah
and Arizona plants, and the Rock Creek and Elyria, Ohio facilities, (2) the
operations at the new Coldwater, Michigan plant and (3) the November 1997
acquisition of the Coldwater, Michigan alloying facility. In addition, 1997's
gross profits were higher due to (a) the elimination of the losses at the
Company's Corona, California plant (which was closed in the third quarter of
1996), (b) higher aluminum prices, which increased margins from the Company's
buy/sell business and (c) strengthened plant operating efficiencies.

SG&A Expenses. During 1997, selling, general and administrative costs increased
-------------
50% to $17,612,000, compared to $11,774,000 in 1996. This increase was due
principally to higher employee, professional, consulting and goodwill
amortization expenses associated with the January and November 1997 plant
acquisitions.

Interest. During 1997, interest expense increased 114% to $7,331,000, compared
--------
to interest expense of $3,421,000 in 1996. The increase in interest expense was
primarily attributable to the additional debt outstanding during 1997 to fund
the January and November 1997 plant acquisitions. See "LIQUIDITY AND CAPITAL
RESOURCES" below.

Extraordinary Item. In connection with the plant acquisitions in January 1997,
------------------
the Company borrowed funds under a new Credit Agreement. See "LIQUIDITY AND
CAPITAL RESOURCES" below. A portion of the sums borrowed under the Credit
Agreement was used to

                                       29
<PAGE>
 
retire substantially all of the Company's then-outstanding indebtedness prior to
its stated maturity. This early debt retirement generated an extraordinary loss
of $1,318,000 (net of income tax benefit of $878,000) for the first quarter of
1997. There was no extraordinary item in 1996.

Net Earnings. During 1997, the Company's earnings before provision for income
------------
taxes, minority interests and extraordinary item increased 117% to $23,506,000,
compared to $10,852,000 in 1996. This increase in earnings was primarily the
result of higher gross profits, which were in turn partially offset by the
increases in selling, general and administrative expenses and interest expense.
The Company's higher earnings before income taxes caused the tax provision to
increase to $9,086,000 in 1997, compared to $4,132,000 in 1996. The effective
tax rate was approximately 39% in 1997 compared to 38% in 1996. During 1997, net
earnings increased 91% to $12,809,000, compared to $6,720,000 in 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically financed its operations and capital expenditures
from internally generated cash and its working capital credit facilities and has
financed its acquisitions and capacity expansions from a combination of funds
from long-term borrowings and public stock offerings.

Cash Flows from Operations. During 1998, operations provided cash of
--------------------------
$53,198,000, compared to $30,368,000 in 1997. Changes in the components of
operating assets and liabilities accounted for 62% of the increase in cash
provided from operations; in 1998, changes in the components of operating assets
and liabilities provided $11,386,000 in cash, compared to using $2,832,000 in
cash during 1997'. In addition, net earnings before extraordinary item increased
39% or $5,463,000, and depreciation and amortization increased 38% or
$6,317,000, compared to 1997's corresponding amounts. The increase in these
items was primarily due to the Company's plant acquisitions during 1998. As of
December 31, 1998, the relationship of current assets to current liabilities, or
current ratio, decreased to 1.93, compared to 2.71 as of December 31, 1997.

For the reasons discussed above, working capital fluctuates as the mix of
buy/sell business, tolling business and metals brokerage activities changes. The
Company anticipates its working capital requirements to further increase in 1999
as a result of higher levels of buy/sell business and metals brokerage
activities and increased processing volumes primarily due to its recent
acquisitions.

Cash Flows from Investing Activities. During 1998, net cash used by investing
------------------------------------
activities decreased 25% to $93,873,000, compared to $124,461,000 in 1997. In
July 1998, the Company spent $59,497,000 (net of cash acquired) to purchase U.S.
Zinc. In 1997, the Company spent $59,882,000 (net of cash acquired) to purchase
IMSAMET, Inc. and $25,430,000 (net of cash acquired) to purchase Alchem. In
addition, the Company's total payments for property, plant and equipment
(excluding acquisitions) in 1998 decreased to $35,199,000, compared to
$37,159,000 spent in 1997. During 1998, major projects included the completion
of construction of the Company's new aluminum recycling facility in Swansea,
Wales, installation of a reverberatory furnace and delacquering equipment at the
Morgantown, Kentucky facility, the purchase of environmental equipment, the
expansion of an existing Company-owned landfill and upgrades to various
furnaces.

                                       30
<PAGE>
 
Capital expenditures for property, plant and equipment in 1999 are expected to
total approximately $35,000,000. Major projects include the installation of an
Enterprise Resource Planning (ERP) software system, construction of a new
aluminum alloying plant in Saginaw, Michigan and the installation of a new
furnace at the Millington, Tennessee facility.

Cash Flows from Financing Activities. During 1998, net cash provided from
------------------------------------
financing activities decreased 48% to $46,326,000, compared to $89,434,000 in
1997. In July 1998, the Company borrowed approximately $62,000,000 under its
senior credit facility, to fund the cash portion of the acquisition of U.S. Zinc
and to repay a portion of U.S. Zinc's outstanding long-term indebtedness under
its working capital line of credit (approximately $16,000,000). In connection
with its January 1997 acquisitions, the Company entered into a new long-term
credit agreement with certain lenders, borrowing $110,000,000 at the closing and
using approximately $61,000,000 for the IMSAMET, Inc. acquisition and
$49,000,000 to retire substantially all of the Company's then-outstanding debt.
Financing activities also included cash payments of $3,503,000 in dividends
during 1998 compared to $2,702,000 in 1997.

Equity Purchases and Sales. In September 1998, the Company's Board of Directors
--------------------------
authorized the repurchase in open market or privately-negotiated transactions of
up to 1,000,000 shares of its common stock. As of December 31, 1998, the Company
had spent $6,377,000 to repurchase 488,900 shares. As of February 28, 1999, the
Company had purchased a total of 543,900 shares for an aggregate cumulative
purchase price of $7,026,000. The shares repurchased are being held as treasury
shares to be used to satisfy obligations of the Company under its stock option
and other equity plans, and for general corporate purposes.

In November 1997, the Company issued and sold 2,645,000 (inclusive of 345,000
shares from the exercise of the underwriters' over-allotment option) shares of
its Common Stock through an underwritten public offering at a price to public of
$18.00 per share. The Company received net proceeds of approximately
$44,734,000, after deducting underwriting discounts and commissions and offering
expenses. The Company used the net proceeds to reduce outstanding indebtedness
under its credit agreement. See NOTE H--"LONG-TERM DEBT AND EXTRAORDINARY LOSS
ON EARLY DEBT RETIREMENT" of Notes to Consolidated Financial Statements.

Credit Facilities. The Company's Amended and Restated Credit Agreement provides
-----------------
for a reducing revolving credit facility of up to $200,000,000, and provides
that the maximum amount of commitments under the facility will be reduced on an
annual basis beginning in December 1999 (e.g. to $180,000,000 on December 31,
1999), so that by December 31, 2002, the maximum amount of aggregate commitments
may not exceed $100,000,000. As of December 31, 1998, the Company had
$152,000,000 in indebtedness outstanding under the Amended and Restated Credit
Agreement and had $46,479,000 available for borrowings. The Amended and Restated
Credit Agreement bears interest, at the Company's option, at fluctuating
interest rates based upon an alternate base rate (which may be the prime rate),
or a rate based upon the applicable LIBOR rate plus a credit margin (6.2% at
December 31, 1998) which is based upon the Company's ratio of total debt to
total capitalization (47% at December 31, 1998). In addition, the Company pays a
commitment fee for unborrowed amounts available under the reducing revolving
facility based upon the Company's ratio of debt to total capitalization.

At December 31, 1998, the Company had standby letters of credit outstanding in
the aggregate amount of $3,442,000. The Company has also entered into an
interest rate cap transaction

                                       31
<PAGE>
 
agreement with Chase Bank of Texas, N.A.. See ITEM 7A. "QUANTITATIVE AND
                                              -------
QUALITATIVE DISCLOSURES ABOUT MARKET RISK."

The Amended and Restated Credit Agreement is secured by a first lien mortgage
and security interest on seven plant facilities owned by the Company, as well as
security interests in equipment, accounts receivable, inventories and certain
intellectual property and general intangibles. The facilities are additionally
secured by a pledge of the capital stock and equity interests of substantially
all of the Company's wholly-owned subsidiaries and certain joint ventures in
which the Company is directly or indirectly a joint venturer. Additionally,
substantially all of the Company's wholly-owned subsidiaries have guaranteed the
Company's obligations under the credit facilities. The Amended and Restated
Credit Agreement provides that if (i) the Company's senior unsecured long-term
indebtedness for borrowed money is rated at least BBB- or Baaa3 by Standard &
Poor's and Moody's, or (ii) during four consecutive fiscal quarters the
Company's leverage ratio and debt to capitalization ratio meet certain
requirements, then the lenders' liens in the collateral may be released upon the
request and at the expense of the Company. See NOTE H--"LONG-TERM DEBT AND
EXTRAORDINARY LOSS ON EARLY DEBT RETIREMENT" of Notes to Consolidated Financial
Statements.

The Amended and Restated Credit Agreement contains certain covenants,
representations and warranties by the Company and its subsidiary guarantors,
including (i) limitations on the ability to dispose of assets of the Company and
its subsidiaries or equity interests of subsidiaries, (ii) limitations on
acquisitions of unaffiliated businesses other than certain scheduled specified
transactions, and additional unscheduled acquisitions and investments not to
exceed $125,000,000 in the aggregate, (iii) restrictions on liens and
indebtedness permitted to be incurred or assumed by the Company and its
subsidiaries, other than as otherwise scheduled or permitted under the Amended
and Restated Credit Agreement, and (iv) restrictions on investments by the
Company and its subsidiaries.

The Amended and Restated Credit Agreement also contains limitations on the
Company's ability to declare and pay dividends in cash or property; however, if
there is no default under the agreement, then the Company is permitted to make
cash dividend payments in an aggregate amount of up to $6,000,000 in 1999,
$6,000,000 in 2000, and $8,000,000 in each year thereafter (see ITEM 5. "MARKET
                                                                ------         
FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS"). The Amended
and Restated Credit Agreement further contains provisions restricting the amount
of capital expenditures that the Company and its subsidiaries may make in any
fiscal year ($35,000,000 for fiscal 1999 and for each fiscal year thereafter,
plus certain allowed carryovers, not including capital expenditures for certain
permitted acquisitions). Finally, the agreement requires the Company to maintain
and comply with certain financial covenants and ratios, including a maximum debt
to capitalization ratio, a minimum interest coverage ratio and a covenant
requiring that certain minimum net worth amounts be maintained.

In May 1996, the Company borrowed $5,740,000 from the issuance of Solid Waste
Disposal Facilities Revenue Bonds (Series 1996) by the City of Morgantown,
Kentucky. These bonds were issued in connection with the Company's construction
of its salt cake processing plant in Morgantown, which was completed in January
1996. The 1996 bonds bear interest at the rate of 7.65% per annum and mature on
May 1, 2016. In April 1997, the Company borrowed an additional $4,600,000 from
the issuance of Solid Waste Disposal Facilities Revenue Bonds (Series 1997) by
the City of Morgantown, Kentucky. These bonds were also issued in connection
with the Company's expansion of its second landfill cell and to fund additional

                                       32
<PAGE>
 
construction costs of its salt cake processing facility in Morgantown. The 1997
bonds bear interest at the rate of 7.45% per annum and mature on May 1, 2022. In
June 1998, the Company borrowed an additional $4,100,000 from the issuance of
Solid Waste Disposal Facilities Revenue Bonds (Series 1998) by the City of
Morgantown, Kentucky. These bonds were issued in connection with the Company's
expansion of its second landfill cell at Morgantown. The 1998 bonds bear
interest at the rate of 6% per annum and mature May 1, 2023. The net proceeds
from the 1998 bonds were deposited into an escrow fund, which will be borrowed
by the Company as it incurs costs to expand its landfill. As of December 31,
1998, the Company has drawn against and received $3,421,000 in cash proceeds
from the escrow fund.

Contingencies. On May 8, 1997, Harvard Industries, Inc. ("Harvard") announced
-------------
that it and its wholly-owned subsidiary, Doehler-Jarvis, Inc. ("Doehler-
Jarvis"), had filed for protection under Chapter 11 of the U.S. Bankruptcy Code.
Doehler-Jarvis had been an aluminum customer of the company. At December 31,
1998, the Company had $2,292,000 of outstanding unsecured receivables from
Doehler-Jarvis, net of related reserves. The Company's revenues from Doehler-
Jarvis totaled $12,350,000 and $17,490,000 for the years ended December 31, 1997
and 1996, respectively.

On October 15, 1998, the United States Bankruptcy Court for the District of
Delaware confirmed Harvard's First Amended and Modified Consolidated Plan under
Chapter 11 of the Bankruptcy Code (the "Plan"). According to the terms of the
Plan, it is currently expected that holders of general unsecured claims
(including the Company) will receive, to the extent their general unsecured
claims are allowed, their pro rata share of 100% of the new common stock of
reorganized, Harvard (subject to dilution pursuant to provisions of the Plan,
including an emergence bonus plan, incentive plan and new warrants). Harvard, as
reorganized, has commenced execution of the Plan. The Company anticipates that
upon allowance of its claims, it will receive its pro rata share of common stock
of reorganized Harvard as provided in the Plan. While the Company currently
believes that Harvard's bankruptcy will not have a material adverse effect on
the Company's financial position or results of operations, no assurance can be
given as to the amount in which the Company's claims will be allowed and/or the
timing and value of the Company's ultimate recovery, if any, on its claims.

The Company believes that its cash on hand, the resources available under the
terms of its Amended and Restated Credit Agreement and anticipated 1999 cash
provided by operations should provide the financial resources necessary to fund
its capital requirements and to meet its obligations for 1999 and the
foreseeable future.

ENVIRONMENTAL

The Company's operations, like those of other basic industries, are subject to
federal, state, local and foreign laws, regulations and ordinances that (1)
govern activities or operations that may have adverse environmental effects,
such as discharges to air and water, as well as handling and disposal practices
for solid and hazardous wastes and (2) impose liability for costs of cleaning
up, and certain damages resulting from past spills, disposals, or other releases
of hazardous substances. It is possible that more rigorous environmental laws
and regulations will be adopted that could require the Company to make
substantial expenditures in addition to those referred to in this Form 10-K and
in other filings made by the Company.

                                       33
<PAGE>
 
From time to time, operations of the Company have resulted or may result in
certain noncompliance with applicable requirements under environmental laws.
However, the Company believes that any such non-compliance under such
environmental laws would not have a material adverse effect on the Company's
financial position or results of operations.

The Illinois Environmental Protection Agency ("IEPA") recently notified the
Company that a subsidiary, Interamerican Zinc, Inc., ("IZI") is a potentially
responsible party ("PRP") pursuant to the Illinois Environmental Protection Act
for the cleanup of contamination at a site in Marion County, Illinois to which
IZI, among others, in the past sent zinc oxide for processing and resale. IZI
has joined a group of PRPs that is planning to negotiate with the IEPA regarding
the cleanup of the site. Although the site has not been fully investigated and
final cleanup costs not yet determined, based on current cost estimates and
information regarding the amount and type of materials sent to the site by IZI,
the Company does not believe, while there can be no assurance, that its
liability at this site will have a material adverse effect on its financial
position or results of operations.

YEAR 2000 COMPLIANCE

The Company relies on software and hardware technology for its information and
data processing and to deliver its services, and has established a comprehensive
plan to address potential Year 2000 compliance problems resulting from the
computer programs written utilizing two digits, instead of four, to represent
the year. The Company's embedded systems (or non-information technology systems)
include office equipment such as phone and voicemail systems, fax machines,
copiers, and postage machines, as well as environmental and manufacturing
control systems at its plants. These environmental and manufacturing systems at
the Company's plant locations consist of items such as scales, process
controllers, programmable logic controllers, adjustable frequency drives, and
radiation detection systems.

The Company has completed a physical inventory of its information technology
computer hardware and software, and its embedded systems at each facility. The
Company's assessment phase, currently in progress, entails obtaining
manufacturer and developer Year 2000 compliance information about embedded
systems and software. This process is ongoing and is currently expected to be
completed in April 1999.

All personal computer hardware compliance testing and remediation is also
anticipated to be completed by April 1999. Testing of embedded systems and
desktop application software is ongoing and expected to be completed by July
1999.

The Company believes that its primary information technology operations and
accounting software are Year 2000 compliant. Because of the Company's recent
rapid growth and the need to integrate its financial and operating systems, the
Company is in the process of implementing an enterprise-wide information
technology system, which has been tested to be Year 2000 compliant. When
complete, this will enable the Company to gather more uniform operating and
financial information, and do so in less time than is currently required.

The Company has identified potential Year 2000 compliance issues with certain
subsidiaries and a joint venture partner, and is currently converting and
modifying those systems in order to achieve Year 2000 compliance.

The cumulative Year 2000 project expenditures have been immaterial to date, and
based upon results of current testing, the estimated remaining Year 2000 costs
are not expected to be material to the Company's results of operations and
financial position. The Company currently believes that it will be able to
manage its total Year 2000 transition without any material adverse effect on its
business, financial position or results of operations.

                                       34
<PAGE>
 
The Company cannot presently determine the impact on its customers and suppliers
in the event that any of them may be Year 2000 non-compliant, and in such event,
whether such non-compliance may have a material adverse effect on the Company's
results of operations or financial position. The Company has contacted its
customers and suppliers (via written questionnaires and verbal inquiries) to
determine the status of their respective Year 2000 compliance programs and is
currently reviewing the responses and taking additional actions, such as further
inquiries and personal follow up interviews, on an as needed basis.

An unexpected or widespread Year 2000 problem involving the Company and/or its
suppliers and customers could result in a significant interruption to the
Company's normal business operations or activities, which could have a material
adverse effect on the Company's results of operations and financial position.
The Company is preparing for this uncertainty through its remediation efforts
and its ongoing investigation of its suppliers and customers referred to above.
The Company has not yet developed a contingency plan, but based upon completion
of its assessments and investigations discussed above, plans to develop such a
plan. Currently, the development of such a contingency plan is anticipated to be
completed in the third quarter of 1999.

CONVERSION TO THE EURO CURRENCY

On January 1, 1999, certain members of the European Union established fixed
conversion rates between their existing currencies and the European Union's
common currency (the euro). The Company conducts business through a joint
venture in one member country. The transition period for the introduction of the
euro is between January 1, 1999 and June 30, 2002. The Company is addressing the
issues involved with the introduction of the euro. The more important issues
facing the Company include: converting information technology systems;
reassessing currency risk; and processing tax and accounting records.

Based on progress to date, the Company believes that use of the euro will not
have a significant impact on the manner in which it conducts its business
affairs and processes its business and accounting records. Accordingly,
conversion to the euro is not expected to have a material effect on the
Company's financial condition or results of operations.

CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS

Certain information contained in this ITEM 7. "MANAGEMENT'S DISCUSSION AND
                                      ------
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" (as well as certain
oral statements made by or on behalf of the Company) may be deemed to be
forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995 and are subject to the "Safe Harbor" provisions in
that enacted legislation. This information includes, without limitation,
statements concerning future capacity, volumes, revenues, earnings, costs,
margins and expenses; the expected effects of strikes or work stoppages at
Company customer facilities; future acquisitions or corporate combinations;
expected effects of the recent U.S. Zinc acquisition; future prices for metals;
plans for domestic or international expansion, facility construction schedules
and projected completion dates (including that of its recently-announced
Saginaw, Michigan plant), and anticipated technological advances; future
capabilities of the Company to achieve "closed loop recycling" on a commercially
efficient basis; prospects for the Company's joint venture partners to purchase
a portion of the Company's interests; future (or extensions of existing) long-
term supply contracts

                                       35
<PAGE>
 
with its customers; the outcome of and any liabilities resulting from any
claims, investigations or proceedings against the Company or its subsidiaries;
future levels of dividends (if any); the future mix of business; future asset
recoveries; future operations, future demand, future industry conditions, future
capital expenditures and future financial condition; effects of the euro
conversion on the Company's operations and results of operations; and the extent
of the Company's "Year 2000" compliance, its timetable for becoming "Year 2000"
compliant, and impact of the "Year 2000" transition on the operations, results
of operations and financial condition of the Company, its customers and
suppliers. These statements are based on current expectations and involve a
number of risks and uncertainties. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to be correct.

When used in or incorporated by reference into this Annual Report on Form 10-K,
the words "anticipate," "estimate," "expect," "may," "project" and similar
expressions are intended to be among the statements that identify forward-
looking statements. Important factors that could affect the Company's actual
results and cause actual results to differ materially from those results that
might be projected, forecasted, estimated or budgeted by the Company in these
forward-looking statements include, but are not limited to, the following:
fluctuations in operating levels at the Company's facilities, the mix of
buy/sell business as opposed to tolling business, retention and financial
condition of major customers, effects of future costs, collectibility of
receivables, the inherent unpredictability of adversarial or administrative
proceedings, effects of environmental and other governmental regulations,
currency exchange rate fluctuations, trends in the Company's key markets, the
price of and supply and demand for aluminum and zinc (and their derivatives) on
world markets, business conditions and growth in the aluminum and zinc
industries and aluminum and zinc recycling industries, the extent of "Year 2000"
compliance by the Company's suppliers and customers and the Company's
information technology and embedded systems' technology, and future levels and
timing of capital expenditures.

These statements are further qualified by the following:

   * Estimates of future operating rates at the Company's plants are based on
     current expectations by management of the Company of future levels of
     volumes and prices for the Company's services or metal, and are subject to
     fluctuations in customer demand for the Company's services and prevailing
     conditions in the metal markets, as well as certain components of the
     Company's cost of operations, including energy and labor costs. Many of the
     factors affecting revenues and costs are outside of the control of the
     Company, including weather conditions, general economic and financial
     market conditions, and governmental regulation and factors involved in
     administrative and other proceedings. The future mix of buy/sell vs.
     tolling business is dependent on customers' needs and overall demand, world
     and U.S. market conditions then prevailing in the respective metal markets,
     and the operating levels at the Company's various facilities at the
     relevant time.

   * The price of primary aluminum, zinc and other metals is subject to
     worldwide market forces of supply and demand and other influences. Prices
     can be volatile, which could affect the Company's buy/sell metals business.
     The Company's use of contractual arrangements including long-term
     agreements and forward contracts, may reduce the Company's exposure to this
     volatility but does not eliminate it.

                                       36
<PAGE>
 
   * The markets for most aluminum and zinc products are highly competitive. The
     major primary aluminum producers are larger than the Company in terms of
     total assets and operations and have greater financial resources. In
     addition, aluminum competes with other materials such as steel, vinyl,
     plastics and glass, among others, for various applications in the Company's
     key markets. Unanticipated actions or developments by or affecting the
     Company's competitors and/or willingness of customers to accept
     substitutions for aluminum products could affect the Company's financial
     position and results of operations.

   * Fluctuations in the costs of fuels, raw materials and labor can affect the
     Company's financial position and results of operations. Weather delays and
     labor and materials shortages can adversely affect the construction
     schedules of the Company's new facilities.

   * The Company's key transportation market is cyclical, and sales within that
     market in particular can be influenced by economic conditions. Strikes and
     work stoppages by automotive customers of the Company may have a material
     adverse effect on the Company's financial condition and results of
     operations.

   * A strike at a customer facility or a significant downturn in the business
     of a key customer supplied by the Company could affect the Company's
     financial position and results of operations.

   * The Company spends substantial capital and operating amounts relating to
     ongoing compliance with environmental laws. In addition, the Company is
     involved in certain investigations and actions in connection with
     environmental compliance and past disposals of solid waste. Estimating
     future environmental compliance and remediation costs is imprecise due to
     the continuing evolution of environmental laws and regulatory requirements
     and uncertainties about their application to the Company's operations, the
     availability and applicability of technology and the allocation of costs
     among principally responsible parties. Unanticipated material legal
     proceedings or investigations could affect the Company's financial position
     and results of operations.

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------

In the ordinary course of business, the Company is exposed to potential losses
arising from changes in the price of aluminum, zinc and natural gas, and the
level of interest rates. The Company uses derivative instruments, such as
futures, options, swaps and interest rate caps to manage the effect of such
changes. See NOTE A--"SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES" of Notes to
Consolidated Financial Statements.

RISK MANAGEMENT. All derivative contracts are held for purposes other than
---------------
trading, and are used primarily to mitigate uncertainty and volatility, and
cover underlying exposures. The Company's commodity and derivative activities
are subject to the management, direction and control of the Company's Risk
Management Committee, which is composed of the chief executive officer, the
chief financial officer, the treasurer and other officers and employees that the
chief executive officer designates. The Risk Management Committee reports to the
Company's Board of Directors, which has supervisory authority over all of its
activities.

                                       37
<PAGE>
 
COUNTER-PARTIES. The Company is exposed to losses in the event of 
---------------
non-performance by the counter-parties to the derivative contracts discussed
below; however, while no assurances can be made, the Company currently does not
anticipate any non-performance by the counter-parties. Counter-parties are
evaluated for creditworthiness and risk assessment prior to the Company
initiating trading activities. The counter-parties' creditworthiness is
monitored on an ongoing basis, and credit levels are reviewed to ensure that
there is not an inappropriate concentration of credit outstanding to any
particular counter-party.

METAL COMMODITY PRICE RISK. Aluminum and zinc ingots are internationally
--------------------------
produced, priced, and traded commodities, with their principal trading market
being the London Metal Exchange ("LME"). In order to preserve margins, the
Company enters into futures and options contracts.

ALUMINUM. The Company enters into futures sale contracts with metal brokers
--------
to fix the margin on a portion of the aluminum generated by the Company's salt 
cake processing facility in Kentucky and aluminum generated from the processing 
of other scrap items having minimal or no cost associated in obtaining them. 
These futures sale contracts are settled in the month of shipment. Estimated
1999 total production covered under these futures sale contracts as of December
31, 1998 was 16,100 metric tonnes (mt). The impact of a 10% change in the
December 31, 1998 price of aluminum ingot per the LME would be immaterial on the
Company's gross profit for the year ended December 31, 1999.

ZINC. In the normal course of business, the Company enters into fixed-price
----
forward sales contracts with a number of its zinc customers. At December 31,
1998 such contracts had metal deliveries committed during 1999 of 5,674 mt. The
Company may enter into similar arrangements in the future. In order to hedge the
risk of higher metal prices the Company enters into long positions, principally
using future purchase contracts. These contracts are settled in the month of the
corresponding shipment. At December 31, 1998 the contracts hedging 1999
deliveries totaled 5,674 mt. The impact of a 10% change in the December 31, 1998
price of zinc ingot per the LME would be immaterial on the Company's gross
profit for the year ended December 31, 1999.

NATURAL GAS. The Company's earnings are affected by changes in the price and
-----------
availability of natural gas, which is the Company's second largest cost
component. In an attempt to acquire the most favorable natural gas costs, the
Company is utilizing natural gas swap contracts. Under the terms of the swap
contracts, the Company has fixed the price for approximately 55% of its expected
1999 natural gas requirements. The Company makes or receives payments based on
the difference between the month-end closing price on the New York Mercantile
Exchange ("NYMEX") and the fixed price agreed to in the swap contracts. The
impact of a hypothetical 10% change in the December 31, 1998 NYMEX closing price
would result in no material impact to the Company's gross profits for the year
ended December 31, 1999.

INTEREST. Approximately 90% of the Company's outstanding long-term debt as of
--------
December 31, 1998 is at floating rates related to LIBOR plus a margin. In order
to limit the risk associated with a potentially significant increase in the
LIBOR rates, the Company entered into an interest rate cap transaction which
expires on March 30, 2001. Under the terms of this cap transaction, the
Company's interest rate will not exceed 8% per annum for $35,600,000 (the
notional amount as of December 31, 1998) of the Company's outstanding floating-
rate debt. Beginning in 1999 the notional amount covered under the cap
transaction reduces quarterly until the amount of the cap reaches $22,800,000
upon its expiration. The counter-party to the cap transaction is a major
commercial bank, and management believes that potential losses related to the
credit risk are remote.

The Company's earnings are affected by changes in interest rates due to the
impact those changes have on its interest expense from variable-rate debt
instruments. If interest rates increased 10% from the floating rates as of
December 31, 1998, interest expense for the year ended December 31, 1999 would
increase by approximately $1,030,000. These amounts are determined by
considering the impact of hypothetical interest rates on the Company's
variable-rate long-term debt, as of December 31, 1998, adjusted for known cash
commitments during 1999.

                                       38
<PAGE>
 
Market risk for fixed-rate long-term debt is estimated as the potential increase
in fair value resulting from a hypothetical decrease in market interest rates.
With respect to the Company's fixed-rate long-term debt outstanding at December
31, 1998, a 10% decline in market interest rates would result in an increase to
the fair value of the Company's fixed-rate long-term debt of approximately
$1,160,000. The fair values of the Company's long-term debt were estimated using
discounted future cash flows based on the Company's incremental borrowing rates
for similar types of borrowing arrangements.

                                       39
<PAGE>
 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------

INDEX OF FINANCIAL STATEMENTS OF IMCO RECYCLING INC. AND SUBSIDIARIES


                                                                        PAGE
                                                                        ----

Report of Ernst & Young LLP, Independent Auditors                         41

Consolidated Balance Sheets at December 31, 1998 and 1997                 42

Consolidated Statements of Earnings for the three years ended
  December 31, 1998                                                       43

Consolidated Statements of Cash Flows for the three years ended
  December 31, 1998                                                       44

Consolidated Statements of Changes in Stockholders' Equity for the
  three years ended December 31, 1998                                     45

Notes to Consolidated Financial Statements                                46



All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.

                                       40
<PAGE>
 
               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


Stockholders and
Board of Directors
IMCO Recycling Inc.


We have audited the accompanying consolidated balance sheets of IMCO Recycling
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, stockholders' 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 Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of IMCO
Recycling Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.



                                             /s/ ERNST & YOUNG LLP


Dallas, Texas
February 1, 1999

                                       41
<PAGE>
 
                     IMCO RECYCLING INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS 
                       (in thousands, except share data)

<TABLE> 
<CAPTION> 
                                                                                           December 31,
                                                                             -----------------------------------------
                                                                                   1998                    1997
                                                                             -----------------       -----------------
<S>                                                                          <C>                     <C> 
ASSETS
Current Assets
     Cash and cash equivalents                                               $           6,075       $             405
     Accounts receivable (net of allowance of $1,616 and $1,345
       at December 31, 1998 and 1997, respectively)                                     84,446                  52,163
     Inventories                                                                        50,921                  34,556
     Deferred income taxes                                                               4,093                   2,782
     Other current assets                                                                6,302                   1,746
                                                                             -----------------       -----------------
        Total Current Assets                                                           151,837                  91,652
Property and equipment, net                                                            168,505                 142,100
Excess of acquisition cost over the fair value of net assets             
     acquired, net of accumulated amortization of $7,156 and             
     $4,053 at December 31, 1998 and 1997, respectively                                112,559                  74,658
Investments in joint ventures                                                           14,502                  14,271
Other assets, net                                                                        9,155                   9,855
                                                                             -----------------       -----------------
                                                                             $         456,558       $         332,536
                                                                             =================       =================
                                                                         
LIABILITIES AND STOCKHOLDERS' EQUITY                                     
Current Liabilities                                                      
     Accounts payable                                                        $          67,089       $          25,902
     Accrued liabilities                                                                10,365                   7,254
     Current maturities of long-term debt                                                1,415                     648
                                                                             -----------------       -----------------
        Total Current Liabilities                                                       78,869                  33,804
Long-term debt                                                                         168,700                 109,194
Deferred income taxes                                                                   12,820                  11,278
Other long-term liabilities                                                              8,861                   9,336
STOCKHOLDERS' EQUITY                                                     

Preferred stock; par value $.10; 8,000,000 shares                        
     authorized; none issued                                                                 -                       -
Common stock; par value $.10; 40,000,000 shares authorized              
     at December 31, 1998; 20,000,000 authorized at December
     31,1997; 17,048,585 issued at December 31, 1998; 16,515,750                  
     issued at December 31, 1997                                                         1,705                   1,652
Additional paid-in capital                                                             106,046                  96,519
Retained earnings                                                                       87,214                  71,128
Accumulated other comprehensive loss from foreign currency               
     translation adjustments                                                              (902)                    (32)
Treasury stock, at cost; 530,539 shares at December 31, 1998;            
     39,354 shares at December 31, 1997                                                 (6,755)                   (343)
                                                                             -----------------       -----------------
        Total Stockholders' Equity                                                     187,308                 168,924
                                                                             -----------------       -----------------
                                                                             $         456,558       $         332,536
                                                                             =================       =================
</TABLE> 
  
See Notes to Consolidated Financial Statements.

                                       42
<PAGE>
 
                     IMCO RECYCLING INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF EARNINGS
                     (in thousands, except per share data)


<TABLE> 
<CAPTION> 
                                                                      For the Year Ended December 31,
                                                                -------------------------------------------
                                                                   1998           1997            1996
                                                                ------------   ------------    ------------
<S>                                                             <C>            <C>             <C> 
Revenues                                                         $  568,514     $  339,381      $  210,871
Cost of sales                                                       506,994        291,527         185,333
                                                                ------------   ------------    ------------
Gross profits                                                        61,520         47,854          25,538
Selling, general and administrative expense                          23,705         17,612          11,774
Interest expense                                                      9,197          7,331           3,421
Interest and other income                                              (775)          (413)           (623)         
Equity in (earnings) loss of affiliates                              (1,750)          (182)            114          
                                                                -------------  --------------  ------------
Earnings before provision for income taxes, minority                            
    interests and extraordinary item                                 31,143         23,506          10,852
Provision for income taxes                                           11,275          9,086           4,132
                                                                ------------   ------------    ------------
Earnings before minority interests and extraordinary item            19,868         14,420           6,720
Minority interests, net of provision for income taxes                   278            293               -
                                                                ------------   ------------    ------------
Earnings before extraordinary item                                   19,590         14,127           6,720
Extraordinary item, net                                                   -         (1,318)              -                       
                                                                ------------   --------------  ------------
Net earnings                                                     $   19,590     $   12,809      $    6,720
                                                                ============   ============    ============


Net earnings per common share:
    Basic:
    -----
      Earnings before extraordinary item                         $     1.18     $     1.08      $     0.57 
      Extraordinary item                                                  -          (0.10)              - 
                                                                ============   ============    ============ 
      Net earnings                                               $     1.18     $     0.98      $     0.57 
                                                                ============   ============    ============

    Diluted:
    -------
      Earnings before extraordinary item                         $     1.17     $     1.06      $     0.55
      Extraordinary item                                                  -          (0.10)              - 
                                                                ============   ============    ============ 
      Net earnings                                               $     1.17     $     0.96      $     0.55
                                                                ============   ============    ============

Weighted average shares outstanding:
    Basic                                                            16,670         13,066          11,852 
    Diluted                                                          16,802         13,293          12,130 
                                                                                                           
Dividends declared per common share                              $     0.21     $     0.20      $     0.20
</TABLE> 

See Notes to Consolidated Financial Statements.

                                       43
<PAGE>
 
                     IMCO RECYCLING INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)

<TABLE> 
<CAPTION> 
                                                                        FOR THE YEAR ENDED DECEMBER 31,
                                                                     -------------------------------------
                                                                        1998         1997         1996
                                                                     -----------  -----------  -----------
<S>                                                                  <C>          <C>          <C> 
OPERATING ACTIVITIES
Earnings before extraordinary item                                   $    19,590  $    14,127  $     6,720
Depreciation and amortization                                             22,828       16,511       11,316
Provision for (benefit of) deferred income taxes                            (674)       1,516          176
Equity in (earnings) loss of affiliates                                   (1,750)        (182)         114
Other noncash charges                                                      1,818        1,228          132
Provision for plant closure                                                    -            -        3,577
Changes in operating assets and liabilities:                           
    Accounts receivable                                                   (9,504)      12,256       (6,282)
    Inventories                                                           (6,505)       2,594       (3,728)
    Other current assets                                                    (531)         379           72
    Accounts payable and accrued liabilities                              27,926      (18,061)      (5,353)
                                                                     -----------  -----------  -----------
NET CASH FROM OPERATING ACTIVITIES                                        53,198       30,368        6,744
                                                                       
INVESTING ACTIVITIES                                                   
Payments for property and equipment                                      (35,199)     (37,159)     (16,711)
Acquisition of U.S. Zinc Corporation, net of cash acquired               (59,497)           -            - 
Acquisition of IMSAMET, Inc., net of cash acquired                             -      (59,882)           -
Acquisition of Alchem Aluminum, Inc., net of cash acquired                     -      (25,430)           -
Acquisitions of other businesses and investments in joint ventures          (700)         163      (13,681)
Other                                                                      1,523       (2,153)          47
                                                                     -----------  -----------  -----------
NET CASH USED BY INVESTING ACTIVITIES                                    (93,873)    (124,461)     (30,345)
                                                                       
FINANCING ACTIVITIES                                                   
Net proceeds from long-term revolving credit facility                     55,775       96,225            - 
Net proceeds from (repayments of) short-term borrowings                        -       (8,351)       2,000 
Net proceeds from issuance (repayments) of long-term debt                    705      (41,072)      18,355
Net proceeds (costs) from public stock offering                              (65)      44,799            -
Debt issuance costs                                                         (158)      (3,180)           - 
Dividends paid                                                            (3,503)      (2,702)      (2,371)
Purchases of treasury stock                                               (6,377)           -            - 
Other                                                                        (51)       3,715        2,009
                                                                     -----------  -----------  -----------
Net cash from financing activities                                        46,326       89,434       19,993

Effect of exchange rate differences on cash and cash equivalents              19           (6)           -
                                                                     -----------  -----------  -----------

Net increase (decrease) in cash and cash equivalents                       5,670       (4,665)      (3,608)
Cash and cash equivalents at January 1                                       405        5,070        8,678
                                                                     -----------  -----------  -----------
Cash and cash equivalents at December 31                             $     6,075  $       405  $     5,070 
                                                                     ===========  ===========  ===========

SUPPLEMENTARY INFORMATION
Cash payments for interest                                           $     9,098  $     9,087  $     3,083 
Cash payments for income taxes                                       $    10,152  $     5,940  $     7,440 
Fair value of the shares and warrants  issued in the acquisition     
    of U.S. Zinc Corporation                                         $     8,470            -            - 
Fair value of the shares issued in the acquisition of Alchem         
    Aluminum, Inc.                                                             -  $    17,250            -
Fair value of the shares issued in the acquisition of Rock           
    Creek Aluminum, Inc.                                                       -  $     7,125            - 
</TABLE> 

See Notes to Consolidated Financial Statements.

                                       44
<PAGE>
 
                     IMCO RECYCLING INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                     (in thousands, except share amounts)

<TABLE> 
<CAPTION> 
                                                                                       ADDITIONAL      
                                                            COMMON STOCK                 PAID-IN            RETAINED
                                                    -----------------------------                                                   

                                                       SHARES          AMOUNT            CAPITAL            EARNINGS  
                                                    ------------    -------------    ---------------     ------------        
<S>                                                 <C>             <C>              <C>                 <C> 
BALANCE AT DECEMBER 31, 1995                          11,964,911    $       1,196    $        27,282     $    56,672         
                                                                                                                                  
Net earnings and comprehensive income                          -                -                  -           6,720              
Cash dividend                                                  -                -                  -          (2,371)             
Issuance of common stock for services                      3,003                1                 51               -              
Exercise of stock options                                      -                -               (586)              -              
Tax benefit from the exercise of non-                                                                                               
    qualified stock options                                    -                -                806               -                
Exercise of warrants                                      50,000                5                  -               -                

                                                    ------------    -------------    ---------------     -----------               
BALANCE AT DECEMBER 31, 1996                          12,017,914            1,202             27,553          61,021                

Comprehensive income:                                                                                                            
    Net earnings                                               -                -                  -          12,809              
    Other comprehensive loss, net of tax:                                                                                         
      Foreign currency translation adjustments                 -                -                  -             (32)              
Net comprehensive income                                                                                                          
Cash dividend                                                  -                -                  -          (2,702)              
Net proceeds from public stock offering                2,645,000              264             44,535               -               
Purchase of Rock Creek Aluminum                          618,137               62              7,063               -               
Purchase of Alchem Aluminum                            1,208,339              121             17,129               -               
Issuance of common stock for services                      7,493                1                127               -               
Exercise of stock options                                 18,867                2               (212)              -               
Tax benefit from the exercise of non-                                                                                              
    qualified stock options                                    -                -                324               -               
                                                    ------------    -------------    ---------------     -----------             
BALANCE AT DECEMBER 31, 1997                          16,515,750            1,652             96,519          71,096              
Comprehensive income:                                                                                                            
    Net earnings                                               -                -                  -          19,590              
    Other comprehensive loss, net of tax:                                                                                        
      Foreign currency translation adjustments                 -                -                  -            (871)              
Net comprehensive income                                                                                                          
Cash dividend                                                  -                -                  -          (3,503)              
Public stock offering costs                                    -                -                (65)              -               
Purchase of U.S. Zinc Corporation                        298,010               30              8,470               -         
Issuance of common stock for services                      7,625                1                123               -         
Exercise of stock options                                227,200               22              1,554               -         
Executive option exercise loan program                         -                -             (1,360)              -
Tax benefit from the exercise of non-                                                                                        
    qualified stock options                                    -                -                994               -         
Common stock repurchased                                       -                -                  -               -         
Other                                                          -                -               (189)              -         
                                                    ============    =============     ==============      ==========        
BALANCE AT DECEMBER 31, 1998                          17,048,585    $       1,705     $      106,046      $   86,312        
                                                    ============    =============     ==============      ==========        

<CAPTION> 
                                                             TREASURY STOCK                TOTAL
                                                    ------------------------------
                                                        SHARES           AMOUNT           DOLLARS
                                                    -------------     ------------     -------------
<S>                                                 <C>               <C>              <C> 
BALANCE AT DECEMBER 31, 1995                             (207,972)    $     (1,874)    $      83,276 
                                                                                             
Net earnings and comprehensive income                           -                -             6,720
Cash dividend                                                   -                -            (2,371)
Issuance of common stock for services                           -                -                52
Exercise of stock options                                  89,421              433              (153)
Tax benefit from the exercise of non-                                                   
    qualified stock options                                     -                -               806
Exercise of warrants                                            -                -                 5 
                                                    -------------     ------------     -------------
BALANCE AT DECEMBER 31, 1996                             (118,551)          (1,441)           88,335 
                                                                                                    
Comprehensive income:                        
    Net earnings                                                -                -            12,809 
    Other comprehensive loss, net of tax:                                    
      Foreign currency translation adjustments                  -                -               (32)
                                                                                       -------------
Net comprehensive income                                                                      12,777 
                                                                                       -------------
Cash dividend                                                   -                -            (2,702) 
Net proceeds from public stock offering                         -                -            44,799 
Purchase of Rock Creek Aluminum                                 -                -             7,125 
Purchase of Alchem Aluminum                                     -                -            17,250 
Issuance of common stock for services                           -                -               128 
Exercise of stock options                                  79,197            1,098               888 
Tax benefit from the exercise of non-                                                         
    qualified stock options                                     -                -               324 
                                                    -------------     ------------     -------------
BALANCE AT DECEMBER 31, 1997                              (39,354)            (343)          168,924 
Comprehensive income:                                                    
    Net earnings                                                -                -            19,590 
    Other comprehensive loss, net of tax:                                
      Foreign currency translation adjustments                  -                -              (871)
                                                                                       ------------- 
Net comprehensive income                                                                      18,719 
                                                                                       ------------- 
Cash dividend                                                   -                -            (3,503)                      
Public stock offering costs                                     -                -               (65)                      
Purchase of U.S. Zinc Corporation                               -                -             8,500                      
Issuance of common stock for services                           -                -               124                      
Exercise of stock options                                  (2,285)             (35)            1,541          
Executive option exercise loan program                          -                -            (1,360)     
Tax benefit from the exercise of non-                                    
    qualified stock options                                     -                -               994                       
Common stock repurchased                                 (488,900)          (6,377)           (6,377) 
Other                                                           -                -              (189)
                                                    =============     ============     =============
BALANCE AT DECEMBER 31, 1998                             (530,539)    $     (6,755)    $     187,308
                                                    =============     ============     =============
</TABLE> 

See Notes to Consolidated Financial Statements.

                                       45
<PAGE>
 
                     IMCO RECYCLING INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1998
          (DOLLARS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION:
----------------------

The accompanying consolidated financial statements include the accounts of IMCO
Recycling Inc. and all of its majority owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated upon
consolidation. Investments in affiliated companies, owned 50% or less, are
accounted for using the equity method.

The Company's principal business involves the ownership and operation of
aluminum recycling and alloying facilities and zinc manufacturing facilities.
Aluminum scrap material is recycled for a fee and then the material is returned
to its customers, some of whom are the world's largest aluminum and automotive
companies. Aluminum and zinc scrap is also purchased on the open market,
recycled and sold.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the 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.

CASH EQUIVALENTS:
----------------

All highly liquid investments with a maturity of three months or less when
purchased are considered cash equivalents. The carrying amount approximates fair
value because of the short maturity of those instruments.

INVENTORIES:
-----------

Inventories are stated at the lower of cost or market. Cost is determined using
the specific identification method and includes an allocation of average
manufacturing labor and overhead costs to finished goods.

CREDIT RISK:
-----------

The majority of the Company's accounts receivable are due from companies in the
aluminum, zinc and automotive industries. Credit is extended based on evaluation
of the customers' financial condition and, generally, collateral is not
required. Accounts receivable are net of a valuation reserve that represents an 
estimate of amounts considered uncollectible. Expense for such uncollectible 
amounts was $1,325,000, $670,000 and $35,000 in 1998, 1997 and 1996, 
respectively.

                                       46
<PAGE>
 
PROPERTY AND EQUIPMENT:
----------------------

Property and equipment are stated at cost. Major renewals and improvements are
capitalized, while maintenance and repairs are expensed when incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets.

Landfill closure costs are currently estimated to be approximately $8,000,000
and are being accrued as space in the landfills are used. Landfill costs are
depreciated as space in the landfill is used.

The Company reviews its property and equipment for impairment when changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment is measured as the amount by which the carrying amount
of the asset exceeds the estimated fair value of the asset less disposal costs.

Interest is capitalized in connection with the construction of major facilities.
Capitalized interest costs for 1998, 1997 and 1996 were $339,000, $1,386,000 and
$237,000, respectively.

AMORTIZATION OF INTANGIBLES:
---------------------------

The excess of original acquisition cost over the fair value of net assets
acquired (goodwill) is amortized on a straight-line basis over the expected
life, currently from 15-40 years. Management regularly reviews the remaining
goodwill with consideration toward recovery through future operating results.
Goodwill is evaluated for recovery on an undiscounted basis. Deferred debt
issuance costs, included in other assets, are being amortized over the term of
the long-term debt. Organizational costs are being amortized on a straight-line
basis from 5-15 years. Patents are amortized over their remaining legal lives.

REVENUE RECOGNITION:
-------------------

Revenues are recognized when products are shipped or when services are performed
for customers.

STOCK-BASED COMPENSATION:
------------------------

The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) and related interpretations in accounting
for its employee stock options. Under APB 25, if the exercise price of employee
stock options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recorded.

MARKET RISK MANAGEMENT USING FINANCIAL INSTRUMENTS:
--------------------------------------------------

In order to reduce the floating interest rate risk on its long-term debt, the
Company entered into an interest rate cap transaction in 1997 (see NOTE H). The
cost of the rate cap is included in other long-term assets and is being
amortized as interest expense over the life of the Credit Agreement.

In order to manage its price exposure for natural gas purchases, the Company
has fixed the future price of a portion of its natural gas requirements by
entering into
                                       47
<PAGE>
 
financial hedge agreements. Under these agreements, payments are made or
received based on the differential between the monthly closing price on the New
York Mercantile Exchange, ("NYMEX") and the actual hedge price. These contracts
are accounted for as hedges, with all gains and losses recognized in cost of
sales when the gas is consumed. In addition, the Company has cost escalators
included in some of its long-term supply contracts with its customers, which
limit the Company's exposure to natural gas price risk. At December 31, 1998,
the Company had outstanding swap agreements to hedge its anticipated domestic
natural gas requirements on approximately 3,350,000 mmbtu's of natural gas,
which represents approximately 55% of its expected 1999 fuel needs and
approximately 8% of its expected 2000 fuel needs. The fair value of the
Company's financial hedging agreements at December 31, 1998, representing the
amount the Company would pay to terminate the agreements, totaled $817,000.

The Company has entered into futures contracts and a series of put and call
option contracts with metal brokers to cover the future selling prices on a
portion of the aluminum generated by the Company's salt cake processing facility
in Kentucky. In addition, the Company has entered into futures contracts with
metal brokers to cover the future selling prices of zinc recycled for certain
zinc customers under fixed-price contracts. These contracts are settled in the
month of the corresponding production and/or shipment, with all gains or losses
recognized in revenues.

The Company is exposed to losses in the event of non-performance by the counter-
parties to the financial hedge agreements and futures contracts discussed above;
however, the Company does not anticipate non-performance by the counter-parties.
The counter-parties are evaluated for creditworthiness and risk assessment prior
to initiating trading activities with the brokers.  However, the Company does 
not require collateral to support broker transactions.

FOREIGN CURRENCY TRANSLATION:
----------------------------

The Company's foreign subsidiaries in the U.K., Germany, Canada, Netherlands,
and its equity investee in Germany use the local currency as their functional
currency. Adjustments resulting from the translation into U.S. dollars are
reflected as a separate component of stockholders' equity, and foreign currency
transaction gains and losses are reflected in the Statement of Earnings. The
gains and losses on foreign currency exchange rate fluctuations and the
translation adjustments for 1998 were immaterial. As of December 31, 1998, the
Company's accumulated foreign currency translation adjustment totaled $902,000
and is included in other comprehensive income in the Statement of Changes in
Stockholders' Equity.

NEW ACCOUNTING STANDARDS:
------------------------

In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal quarters beginning after June 15, 1999. Statement No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company is currently assessing the impact
of Statement 133 on its financial position and results of operations.

PRIOR YEAR RECLASSIFICATIONS:
----------------------------

Certain reclassifications have been made to prior year statements to conform to
the current year presentation.

                                       48
<PAGE>
 
NOTE B--ACQUISITIONS AND INVESTMENTS

On July 21, 1998, the Company acquired all of the capital stock of U.S. Zinc
Corporation ("U.S. Zinc") for a total purchase price of approximately
$72,000,000, consisting of (i) $46,500,000 in cash, (ii) the assumption of
approximately $17,000,000 in long-term debt, (iii) the issuance of 298,010
shares of the Company's common stock, and (iv) the issuance of four-year
warrants to purchase up to 1,500,000 shares of the Company's common stock at an
exercise price of $19.04 per share. The former U.S. Zinc shareholders have
certain registration rights with respect to the shares of common stock, and the
warrants that were issued to the former U.S. Zinc shareholders are contractually
restricted from exercise for periods of up to four years. In addition, the
transaction provides for future contingent payments (which will be expensed as
earned) to certain former U.S. Zinc shareholders, dependent upon the future
earnings performance of U.S. Zinc and the Company's other zinc-related
operations through June 30, 2002. The acquisition was accounted for using the
purchase method of accounting. The preliminary estimated excess of the purchase
price over the fair value of net assets acquired is approximately $39,180,000
and is being amortized over thirty years on a straight-line basis.

U.S. Zinc, headquartered in Houston, Texas, and its subsidiaries, operate five
production facilities located in Illinois, Texas and Tennessee which convert
zinc scrap into various value-added zinc products such as zinc dust, oxides,
ingots and other zinc by-products. These facilities have an aggregate annual
processing capacity of approximately 200 million pounds of zinc bearing
materials.

The preliminary allocation of the purchase price of U.S. Zinc is as follows:

     Working capital                                    $    20,105
     Property and equipment                                  14,335
     Goodwill                                                39,180
     Other noncurrent assets                                    540
     Noncurrent liabilities                                 (19,291)
                                                        -----------
     Total                                              $    54,869
                                                        =========== 

In November 1997, the Company acquired all of the capital stock of Alchem
Aluminum, Inc. ("Alchem") in exchange for approximately $26,000,000 cash and the
assumption of debt and 1,208,339 shares of the Company's common stock. The
shares of common stock that were issued to the former Alchem shareholders are
contractually restricted from resale for periods of up to three years, and the
former Alchem shareholders have certain registration rights with respect to such
shares of common stock. The acquisition was accounted for using the purchase
method of accounting. The excess of the purchase price over the fair value of
net assets acquired of approximately $17,000,000 is being amortized over forty
years on a straight-line basis. Alchem is a producer of specification aluminum
alloys for automotive manufacturers and their suppliers and has been operating
its facility located in Coldwater, Michigan since 1972. Alchem and the Company
had been operating under a joint venture agreement entered into in October 1995
to construct and operate an aluminum recycling plant adjacent to Alchem's
processing facility in Coldwater.

                                       49
<PAGE>
 
The allocation of the purchase price of Alchem is as follows:

     Working capital                               $ 14,938
     Property and equipment                          10,959
     Goodwill                                        16,852
     Other noncurrent assets                          4,228
     Noncurrent liabilities                         (18,819)
                                                   --------
     Total                                         $ 28,158
                                                   ======== 

During 1997, the Company and Alchem completed the construction of a $17,000,000
aluminum recycling facility in Coldwater, Michigan. This facility, which
delivers molten metal to the Company's Alchem subsidiary, commenced operations
in the first quarter of 1997 and reached full capacity in the fourth quarter of
1997.

In January 1997, the Company acquired all of the capital stock of IMSAMET, Inc.
("IMSAMET"), a wholly owned subsidiary of EnviroSource, Inc., for approximately
$58,000,000 in cash, not including acquisition costs. IMSAMET operates and owns
or has a majority interest in three aluminum recycling plants located in Post
Falls, Idaho; Wendover, Utah and Goodyear, Arizona. In addition, IMSAMET owns a
50% interest in a joint venture facility adjacent to the Utah plant, which uses
a proprietary process to reclaim materials from salt cake. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price was allocated to the net assets acquired based on their fair values. The
excess of the purchase price over the fair value of net assets acquired of
approximately $42,000,000 is being amortized over forty years on a straight-line
basis.

The allocation of the purchase price of IMSAMET is as follows:

     Working capital                                $    4,674
     Property and equipment                             19,852
     Goodwill                                           41,976
     Other noncurrent assets                               914
     Noncurrent liabilities                             (7,176)
                                                   -----------
     Total                                          $   60,240
                                                   ===========

Also in January 1997, the Company acquired, in a privately-negotiated
transaction, all of the capital stock of Rock Creek Aluminum, Inc. ("Rock
Creek") in exchange for 618,137 shares of the Company's Common Stock. The
acquisition was accounted for using the purchase method of accounting. The
excess of the purchase price over the fair value of net assets acquired of
$6,000,000 is being amortized over forty years on a straight-line basis. Rock
Creek owns and operates two Ohio facilities located in Elyria and Rock Creek.
These facilities utilize milling, blending, testing and packaging equipment to
process various types of raw materials, including aluminum dross and scrap,
various minerals and slags.

The Company's results of operations include the results of IMSAMET and Rock
Creek from January 1, 1997, the results of Alchem from November 1, 1997 and the
results of U.S. Zinc from July 1, 1998.

                                       50
<PAGE>
 
The following table sets forth unaudited pro forma results of operations of the
Company and U.S. Zinc for the year ended December 31, 1998 and the Company,
Alchem and U.S. Zinc for the year ended December 31, 1997, assuming the
acquisitions had been consummated on January 1 of each respective year. The pro
forma combined information is presented for comparative purposes only and does
not purport to represent the actual results which would have occurred had the
acquisitions been consummated on such dates or of future results of the combined
companies under the ownership and management of the Company:

<TABLE> 
<CAPTION> 
                                                                 1998            1997
                                                             -------------  --------------
                                                              (UNAUDITED)     (UNAUDITED)
<S>                                                          <C>            <C>   
Revenues                                                      $  650,561      $  626,079
Gross profit                                                      67,576          72,071
Earnings before extraordinary item                                20,248          17,804
Net earnings                                                      20,248          16,486
Earnings per common share before extraordinary item:
    Basic                                                     $     1.20      $     1.23
    Diluted                                                   $     1.19      $     1.21
Net earnings per common share:
    Basic                                                     $     1.20      $     1.14
    Diluted                                                   $     1.19      $     1.12
</TABLE> 

The table above reflects certain pro forma adjustments including additional
depreciation expense as a result of the increased basis of the fixed assets
acquired, additional amortization expense related to the goodwill recorded, a
reduction in general and administrative expenses for the elimination of
duplicate management costs, additional interest expense related to debt incurred
on the acquisitions (see NOTE H) and adjustments for related income taxes and
minority interests.


NOTE C--INVENTORIES

The components of inventories are:

                                                   DECEMBER 31,
                                        ---------------------------------
                                            1998               1997
                                        --------------    ---------------
Finished goods                            $  26,668          $  16,771
Raw materials                                23,012             17,313
Supplies                                      1,241                472
                                         --------------    ---------------
                                          $  50,921          $  34,556
                                         ==============    ===============

                                       51
<PAGE>
 
NOTE D--PROPERTY AND EQUIPMENT

The components of property and equipment are:

                                                      DECEMBER 31,
                                             ---------------------------------
                                                  1998               1997
                                             ---------------    --------------
Land, buildings and improvements                $ 113,709          $  100,587
Production equipment and machinery                117,861              89,804
Office furniture, equipment and other               8,876               6,704
                                             ---------------    --------------
                                                  240,446             197,095
Accumulated depreciation                          (71,941)            (54,995)
                                             ---------------    --------------
                                                $ 168,505          $  142,100
                                             ===============    ==============

Depreciation expense for 1998, 1997 and 1996 was $19,074,000, $14,007,000 and
$10,249,000, respectively.

Estimated useful lives for buildings and improvements range from 15 to 39 years,
machinery and equipment range from 3 to 20 years and office furniture and
equipment range from 3 to 10 years.

In March 1992, the Company entered into an agreement with Commonwealth
Industries, Inc. ("Commonwealth"), formerly Barmet Aluminum Corporation, to
construct, own and operate the Uhrichsville plant adjacent to Commonwealth's
rolling mill in Uhrichsville, Ohio and to supply Commonwealth with all of its
recycled aluminum needs. The Uhrichsville plant, including costs for capitalized
interest and for the 1994 expansion, cost approximately $20,750,000.
Commonwealth has an option to acquire up to a 49% equity interest in the
Company's subsidiary that owns the Uhrichsville plant at a price based on a
predetermined formula; such formula should result in a gain if Commonwealth
exercised its option.


NOTE E--LONG-TERM RECEIVABLE

On May 8, 1997, Harvard Industries, Inc. ("Harvard") announced that it and its
wholly-owned subsidiary, Doehler-Jarvis, Inc. ("Doehler-Jarvis") had filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. The Company had
previously sold aluminum to Doehler-Jarvis. At December 31, 1998, the Company
had $2,292,000 of outstanding unsecured receivables from Doehler-Jarvis, net of
related reserves. The Company's revenues from Doehler-Jarvis totaled $12,350,000
and $17,490,000 for the years ended December 31, 1997 and 1996, respectively.

On October 15, 1998, the United States Bankruptcy Court for the District of
Delaware confirmed Harvard's First Amended and Modified Consolidated Plan under
Chapter 11 of the Bankruptcy Code (the "Plan"). According to the terms of the
Plan, holders of general unsecured claims (including the Company) will receive,
to the extent their general unsecured claims are allowed, their pro rata share
of 100% of the new common stock of reorganized Harvard (subject to dilution
pursuant to provisions of the Plan, including an emergence bonus plan, incentive
plan and new warrants). Reorganized Harvard has commenced execution of the Plan.
The Company

                                       52
<PAGE>
 
anticipates that upon allowance of its claims, it will receive its pro rata
share of common stock of reorganized Harvard as provided in the Plan. While the
Company currently believes that Harvard's bankruptcy will not have a material
adverse effect on the Company's financial position or results of operations, no
assurance can be given as to the amount in which the Company's claims will be
allowed and/or the timing and value of the Company's ultimate recovery, if any,
on its claims.


NOTE F - COMMON STOCK

OFFERING:
--------

In November 1997, the Company issued and sold 2,645,000 (inclusive of 345,000
shares from the exercise of the underwriters' over-allotment option) shares of
its Common Stock through an underwritten public offering at a price to public of
$18.00 per share. The Company received net proceeds of approximately
$44,734,000, after deducting underwriting discounts and commissions and offering
expenses. The Company used the net proceeds to reduce outstanding indebtedness
originally incurred under its credit agreement in January 1997 (see NOTE H).

CHANGE IN AUTHORIZED SHARES:
---------------------------

In May 1998, the Company's stockholders approved an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 20,000,000 shares to 40,000,000 shares.

REPURCHASE:
-----------

In September 1998, the Company's Board of Directors authorized and the Company
announced the repurchase in open market or privately-negotiated transactions of
up to 1,000,000 shares of its common stock. As of December 31, 1998, the Company
had spent $6,377,000 to repurchase 488,900 shares. The shares repurchased are
being held as treasury shares to be used to satisfy obligations of the Company
under its stock option and other equity plans, and for general corporate
purposes.

                                       53
<PAGE>
 
NOTE G--INCOME TAXES

The provision for income taxes was as follows:


<TABLE> 
<CAPTION>      
                                      FOR THE YEAR ENDED DECEMBER 31,         
                                  -----------------------------------------   
                                     1998           1997          1996        
                                  ------------  -------------  ------------   
<S>                               <C>           <C>            <C> 
CURRENT:                                                                      
    Federal                        $   11,498    $     6,035    $    3,587    
    State                                 451          1,535           369    
                                  ------------  -------------  ------------   
                                       11,949          7,570         3,956    
                                                                              
DEFERRED:                                                                     
    Federal                               (45)         2,028             7    
    State                                (211)          (512)          169    
    Foreign                              (418)             -             -     
                                  ------------  -------------  ------------   
                                         (674)         1,516           176    
                                                                              
                                  ------------  -------------  ------------   
                                   $   11,275    $     9,086    $    4,132    
                                  ============  =============  ============   
</TABLE> 

The income tax expense, computed by applying the federal statutory tax rate to
earnings before income taxes, differed from the provision for income taxes as
follows:

<TABLE> 
<CAPTION> 
                                                            FOR THE YEAR ENDED DECEMBER 31,
                                                      -----------------------------------------
                                                          1998           1997         1996
                                                      ------------   ------------  ------------
<S>                                                   <C>            <C>           <C>             
Income taxes at the federal statutory rate            $  11,854         $  8,227      $   3,690 
Foreign taxes at the statutory rate                        (845)               -              -     
Goodwill amortization, nondeductible                        453              196            168     
State income taxes, net                                     150              651            355     
Foreign loss                                               (593)               -              -     
Other, net                                                  256               12            (81)    
                                                      ---------         --------      ---------     
Provision for income taxes                            $  11,275         $  9,086      $   4,132     
                                                      =========         ========      =========     
</TABLE> 

                                       54
<PAGE>
 
Deferred 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. Significant components of
the Company's deferred tax liabilities and assets are as follows:

<TABLE> 
<CAPTION> 
                                                        DECEMBER 31,       
                                                    -------------------    
                                                      1998        1997     
                                                    --------   --------    
<S>                                                 <C>        <C>         
Deferred tax liabilities:                                                  
------------------------                                                   
  Accelerated depreciation and amortization          $15,250    $13,635    
  Federal effect of state income taxes                   969        804    
  Other                                                1,016        171    
                                                     -------    -------    
Total Deferred Tax Liabilities                        17,235     14,610    
                                                                           
Deferred tax assets:                                                       
--------------------                                                       
  Net operating loss carryforwards                     1,591        859    
  Tax credit carryforwards                             2,074      1,900    
  Expenses not currently deductible                    5,288      3,434    
  Federal effect of state income taxes                   896        805    
  Other                                                    -         44    
                                                     -------    -------    
Total deferred tax assets                              9,849      7,042    
Valuation allowance                                   (1,341)      (928)   
                                                     -------    -------    
Net deferred tax assets                                8,508      6,114    
                                                                           
                                                     -------    -------    
Net deferred tax liability                                                 
                                                     $ 8,727    $ 8,496    
                                                     =======    =======     
</TABLE> 

At December 31, 1998, the Company had a $1,341,000 valuation allowance to reduce
certain deferred tax assets to amounts that are more than likely to be realized.
The majority of the valuation allowance relates to the Company's potential
inability to utilize, foreign tax loss carryforwards available in the United
Kingdom and state recycling credits available in Kentucky.

At December 31, 1998, the Company had approximately $2,546,000 of unused net
operating loss carryforwards for foreign tax purposes, which do not expire, and
had approximately $13,009,000 for state purposes which expire in 2008 to 2012.
The majority of the net operating loss carryforwards were generated by the
Loudon, Bedford and Houston facilities.

At December 31, 1998, the Company had $2,074,000 of unused federal and state tax
credit carryforwards, $147,000 of which expire in 2007 to 2012, and $1,927,000
of which do not expire.

Undistributed earnings of the Company's non-United States investment in a joint 
venture amounted to approximately $720,000 at December 31, 1998. These earnings
are considered permanently reinvested and, accordingly, no additional United
States income taxes or non-U.S. withholding taxes have been provided.
Determination of the amount of additional taxes that would be payable if such
earnings were not considered indefinitely reinvested is not practical.

                                       55
<PAGE>
 
NOTE H--LONG-TERM DEBT AND EXTRAORDINARY LOSS ON EARLY DEBT RETIREMENT

Long-term debt is summarized as follows:

<TABLE> 
<CAPTION> 
                                                          1998         1997  
                                                        ---------    --------
<S>                                                     <C>          <C>     
Revolving Credit Loans                                  $ 152,000    $ 96,225 
7.65% Morgantown, Kentucky Solid Waste                                        
     Disposal Facilities Revenue Bonds-1996 Series          5,690       5,688 
7.45% Morgantown, Kentucky Solid Waste                                        
     Disposal Facilities Revenue Bonds-1997 Series          4,600       4,600 
6.00% Morgantown, Kentucky Solid Waste                                          
     Disposal Facilities Revenue Bonds-1998 Series          3,421           - 
                                                                              
Other                                                       4,404       3,329 
                                                        ---------    --------
Subtotal                                                  170,115     109,842 
Less current maturities                                     1,415         648 
                                                        ---------    --------
Total                                                   $ 168,700    $109,194
                                                        =========    ======== 
</TABLE> 
                                                                           
                                                              
In connection with the January 1997 acquisitions (see NOTE B), the Company
entered into a $125,000,000 syndicated credit agreement (the "Credit Agreement")
with certain lenders, including Merrill Lynch & Co. as syndication agent and
Chase Bank of Texas, N.A. as administrative agent ("Chase"). The Company
received $110,000,000 at the closing and used approximately $61,000,000 for the
IMSAMET acquisition. The remaining $49,000,000 of the proceeds was used to
retire substantially all of the Company's outstanding debt as of December 31,
1996. The early debt retirement generated an extraordinary loss of $1,318,000 in
the first quarter of 1997, which consisted of early payment penalties of
$1,953,000, write-off of old debt costs of $243,000 and an income tax benefit of
$878,000.

The Credit Agreement provided for $125,000,000 of senior secured credit
facilities consisting of a $105,000,000 term loan, with a final maturity of
seven years, and a $20,000,000 revolving credit facility, with a final maturity
of five years. Of the $20,000,000 revolving credit facility, $4,000,000 was to
be used, as needed, by the Company for standby letters of credit.

In November 1997, the Company amended and restated the terms of the Credit
Agreement with its lenders (the "Amended and Restated Credit Agreement"). The
Amended and Restated Credit Agreement provides for a reducing revolving credit
facility of up to $200,000,000, which allowed the Company to consolidate the
unpaid amount of its then-outstanding indebtedness of $96,755,000 and
$15,100,000 under the original Credit Agreement's term loan and revolving credit
facilities, respectively, and permitted the company to acquire Alchem (see NOTE
B). The Company funded the cash portion of the Alchem acquisition and repaid a
portion of Alchem's outstanding indebtedness from borrowings under the Amended
and Restated Credit Agreement. In addition, up to $12,000,000 available under
the Amended and Restated Credit Agreement may be used, as needed, by the Company
for letters of credit. Indebtedness under the Amended and Restated Credit
Agreement will mature in December 2003. The Amended and Restated Credit
Agreement provides that the maximum amount of commitments under the facility
will be

                                       56
<PAGE>
 
reduced on an annual basis beginning in December 1999, so that by December 31,
2002, the maximum amount of aggregate commitments may not exceed $100,000,000.
Indebtedness under the Amended and Restated Credit Agreement bears interest, at
the Company's option, at fluctuating interest rates based upon an alternate base
rate (which may be the prime rate), or a rate based upon the applicable LIBOR
rate plus a credit margin which is based upon the Company's ratio of total debt
to total capitalization. At December 31, 1998, the interest rate under the
Company's Amended and Restated Credit Agreement was approximately 6.2%. In
addition, the Company pays a commitment fee for unborrowed amounts available
under the reducing revolving facility at a rate based upon the Company's ratio
of debt to total capitalization.

In July 1998, the Company borrowed, under its long-term revolving credit
facility, approximately $62,000,000 to fund the cash portion of the acquisition
of U.S. Zinc and to repay a portion of U.S. Zinc's outstanding long-term
indebtedness under its working capital line of credit facility (approximately
$16,000,000).

In order to reduce the fluctuating interest rate exposure on the term loan, the
Company entered into an interest rate cap transaction ("Rate Cap Transaction")
agreement with Chase in April 1997. The cost associated with this Rate Cap
Transaction is being amortized as interest expense over the four-year term of
the agreement. As of December 31, 1998, the floating interest rate was capped at
8% per annum for 23% of the total borrowings under the Amended and Restated
Credit Agreement.

The Amended and Restated Credit Agreement imposes certain restrictions,
including: (i) a prohibition of certain additional indebtedness (ii) maintenance
of certain financial ratios, and (iii) limitations on investments, dividends,
capital expenditures, acquisitions of businesses (limitation increased to
$125,000,000 in 1998) and dispositions of assets. The annual limitations on cash
dividends are as follows: $4,000,000 for 1997, $5,000,000 for 1998, $6,000,000
per year for 1999 and 2000, and $8,000,000 for each year after 2000. The
indebtedness under the Amended and Restated Credit Agreement is secured by
assets at seven of the Company's plants, as well as a pledge of the capital
stock of certain of the Company's subsidiaries.

At December 31, 1998, the Company had standby letters of credit outstanding in
the aggregate amount of $3,442,000.

The 6% Morgantown, Kentucky Solid Waste Disposal Facilities Revenue Bonds
(Series 1998) are due on May 1, 2023. The bonds were issued in 1998 in
conjunction with the Company's expansion of its landfill in Morgantown,
Kentucky. The net proceeds from the bonds were deposited into an escrow fund,
which will be disbursed to the Company as it incurs costs to expand its
landfill. As of December 31, 1998, the Company has drawn against and received
$3,421,000 in cash proceeds from the escrow fund.

The 7.45% Morgantown, Kentucky Solid Waste Disposal Facilities Revenue Bonds
(Series 1997) are due on May 1, 2022. The bonds were issued in 1997 in
conjunction with the Company's expansion of its landfill in Morgantown, Kentucky
and additional construction costs of its salt cake processing plant in
Morgantown.

The 7.65% Morgantown, Kentucky Solid Waste Disposal Facilities Revenue Bonds
(Series 1996) are due on May 1, 2016. The bonds were issued in 1996 in
conjunction with the 

                                       57
<PAGE>
 
Company's construction of its salt cake processing plant in Morgantown,
Kentucky. The bonds were issued at a 1% discount which is being amortized over
the life of the bonds.

The fair value of the Company's Amended and Restated Credit Agreement
approximates its carrying value due to its recent issuance, floating rate and
relatively short maturity. The fair value of the Company's fixed rate Revenue
Bonds based on discounted cash flows and incremental borrowing rates totals
approximately $15.6 million.

Scheduled maturities of long-term debt subsequent to December 31, 1998 are as
follows:

<TABLE> 
<S>                                                       <C> 
1999                                                      $    1,415     
2000                                                           1,020     
2001                                                          18,020     
2002                                                          35,569     
2003                                                         100,380     
After 2003                                                    13,711     
                                                          ----------     
Total                                                     $  170,115     
                                                          ==========     
</TABLE> 


NOTE I--NET EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share:

<TABLE> 
<CAPTION> 
                                                                           1998             1997                1996              
                                                                      --------------    ------------         -----------          
<S>                                                                   <C>               <C>                  <C>                  
Numerators for basic and diluted earnings per share:                                                                              
   Net earnings before extraordinary item                             $      19,590     $     14,127         $     6,720          
   Extraordinary item                                                             -           (1,318)                  -          
                                                                      -------------     ------------         -----------          
   Net earnings                                                       $      19,590     $     12,809         $     6,720          
                                                                      =============     ============         ============         
                                                                                                                                  
Denominator:                                                                                                                      
   Denominator for basic earnings per share--                                                                                     
      weighted-average shares outstanding                                16,669,768       13,066,006          11,852,066          
   Dilutive potential common shares--stock options                          132,300          226,698             277,773          
                                                                      -------------     ------------         -----------          
   Denominator for diluted earnings per share                            16,802,068       13,292,704          12,129,839          
                                                                      =============     ============         ===========          
                                                                                                                                  
Basic net earnings per share:                                                                                                     
   Earnings before extraordinary item                                 $        1.18             1.08                0.57          
   Extraordinary item                                                             -            (0.10)                  -          
                                                                      -------------     ------------         -----------          
   Net earnings                                                       $        1.18     $       0.98         $      0.57           
                                                                      =============     ============         ============         
                                                                                                                                  
Diluted net earnings per share:                                                                                                   
   Earnings before extraordinary item                                 $        1.17     $       1.06         $      0.55          
   Extraordinary item                                                             -            (0.10)                  -          
                                                                      -------------     ------------         -----------          
   Net earnings                                                       $        1.17     $       0.96         $      0.55          
                                                                      =============    =============         ===========          
</TABLE> 

                                       58
<PAGE>
 
The following stock options were excluded from the computation of diluted
earnings per share because the effect would have been anti-dilutive, as the
options' exercise price was greater than the average market price of the common
stock:

<TABLE> 
<CAPTION> 
                                                              1998            1997             1996
                                                          -------------   -------------    ------------
<S>                                                       <C>             <C>              <C> 
Anti-dilutive stock options as of December 31                 1,098,856         225,829         612,353 
</TABLE> 
                                                              


NOTE J--EMPLOYEE BENEFIT PLANS

With the exception of the employees at the Company's recently acquired U.S. Zinc
facilities, the Company's profit-sharing retirement plan covers most of its
employees who meet defined service requirements. Contributions are determined
annually by the Board of Directors and may be as much as 15% of covered
salaries. Contributions for 1998, 1997 and 1996 were $1,994,000, $1,524,000 and
$1,366,000, respectively. The Company paid the 1998 and 1997 contributions in
January 1999 and 1998, respectively.

In July 1996, the Company amended and restated the profit-sharing retirement
plan to allow elective contributions as described in Internal Revenue Code
Section 401(k). Subject to certain dollar limits, employees may contribute a
percentage of their salaries to this plan, and the Company matches a portion of
the employees' contributions. The Company's match of employee contributions
totaled $707,000, $582,000 and $189,000 for 1998, 1997 and 1996, respectively.

NOTE K--STOCK OPTION PLANS

In 1990, the Company adopted an Amended and Restated Stock Option Plan. This
plan expired in 1997, and no further grants of options may be made under the
plan. This plan provided for the granting of nonqualified and incentive stock
options. The number of shares of common stock authorized for issuance under the
plan was 1,200,000 shares. Options granted under the plan had various vesting
periods and are exercisable for a period of 10 years from the date of grant,
although options may expire earlier because of termination of employment.

In 1992, the Company adopted the 1992 Stock Option Plan, which provides for the
granting of nonqualified and incentive stock options to employees, officers,
consultants and nonemployee members of the Board of Directors. Options granted
to employees under this plan have various vesting periods. Annually, nonemployee
directors will be granted nonqualified stock options exercisable after six
months from the date of grant, equal to the number of shares determined by
dividing the annual director fee amount by the fair market value of a share of
common stock as of the date of grant. All options granted under this plan, once
vested, are exercisable for a period of up to 10 years from the date of grant,
although options may expire earlier because of termination of employment or
service.

In 1996, the Company adopted the Annual Incentive Program, which provides
certain of the Company's key employees with annual incentive compensation tied
to the achievement of pre-established and objective performance goals. This plan
provides for the granting of stock options to key management employees, both on
a discretionary basis and based upon a plan formula, in the event that the
Company's return on total assets (as defined in the plan) for any bonus year
exceeds 15%. Nonqualified and incentive stock options may be granted, and the

                                       59
<PAGE>
 
terms of the plan concerning the stock options are substantially the same as the
corresponding terms of the 1992 Stock Option Plan.

The 1992 Stock Option Plan and the 1996 Annual Incentive Program allow for the
payment of all or a portion of the exercise price and tax withholding
obligations in shares of the Company's common stock delivered and/or withheld.
Such payment or withholding will be valued at fair market value as of the date
of exercise. Participants making use of this feature will automatically be
granted a reload stock option to purchase a number of shares equal to the number
of shares delivered and/or withheld. When a reload stock option is granted, a
portion of the shares issued to the participant will be designated as restricted
stock for a period of five years, although the restriction may be removed
earlier under certain circumstances. Reload stock options have an exercise price
equal to the fair market value as of the date of exercise of the original
options and will expire on the same date as the original options.

In March 1998, the Company adopted the Executive Option Exercise Loan Program in
order to encourage option exercises and share retention by management employees
holding certain options under the Company's Amended and Restated Option Plan and
to provide such management employees with a long-term capital accumulation
opportunity. This program provides loans to permit the exercise of certain
Company stock options under the Amended and Restated Option Plan and to pay
federal and state taxes realized upon such exercises. During 1998, options to
purchase 196,800 shares were exercised under this loan program, and as of
December 31, 1998, the Company had extended $2,074,000 in executive loans to
these individuals ($1,360,000 of which represented a reduction to additional
paid in capital and $714,000 of which was included in other long-term assets)
and recorded $28,000 in interest income.

In 1998, 1997 and 1996 the Company acquired from employees and placed in the
treasury, 2,285, 19,703 and 48,806 shares, respectively, pursuant to provisions
of the Company's stock option plan. Such shares were tendered or withheld in
satisfaction of those employees' federal and state withholding taxes on
compensation resulting from the exercise of nonqualified stock options and for
the aggregate exercise cost of certain of the options.

Transactions under the option plans are as follows:

<TABLE> 
<CAPTION> 
                                                        1998                        1997                        1996
                                             ---------------------------  --------------------------  ------------------------ 
                                                              WEIGHTED                   WEIGHTED                   WEIGHTED
                                                              AVERAGE                     AVERAGE                   AVERAGE
                                                              EXERCISE                   EXERCISE                   EXERCISE
                                                OPTIONS        PRICE         OPTIONS       PRICE         OPTIONS      PRICE
                                             --------------------------   -------------------------   ------------------------
<S>                                          <C>              <C>         <C>            <C>          <C>           <C> 
Options outstanding Jan. 1                       1,868,433    $   14.25     1,541,959     $   13.65     1,291,364    $   12.05
Options granted                                    627,696    $   13.36       584,714     $   15.84       395,422    $   16.25
Options exercised                                 (227,200)   $    6.94      (117,767)    $   10.63      (138,227)   $    6.00
Options forfeited                                  (28,566)   $   16.79      (140,473)    $   17.30        (6,600)   $   17.64
                                             -------------                -----------                 ----------- 
Options outstanding Dec. 31                      2,240,363    $   14.71     1,868,433     $   14.25     1,541,959    $   13.65
                                             =============                ===========                 =========== 
Options exercisable Dec. 31                      1,131,961    $   15.11       958,285     $   12.62       776,732    $   11.17
                                             =============                ===========                 =========== 
Options available for grant Dec. 31                273,328                     80,331                     499,821 
                                             =============                ===========                 =========== 
</TABLE> 

                                       60
<PAGE>
 
Information related to options outstanding at December 31, 1998, is summarized
below:

  
<TABLE> 
<CAPTION> 
                                    OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
                        --------------------------------------------    -------------------------
                                           WEIGHTED
                                           AVERAGE        WEIGHTED                     WEIGHTED
                                          REMAINING        AVERAGE                      AVERAGE
       RANGE OF                          CONTRACTUAL      EXERCISE                     EXERCISE
    EXERCISE PRICES        OPTIONS           LIFE           PRICE         OPTIONS        PRICE
-------------------------------------   -------------    -----------    -----------   -----------
<S>                     <C>             <C>              <C>            <C>           <C> 
$ 4.890 - $ 7.550             110,200     2.0 Years         $   7.16       110,200       $   7.16
$12.325 - $13.750           1,031,307     7.7 Years         $  13.18       441,911       $  13.37
$15.000 - $19.000             939,441     6.7 Years         $  15.91       420,435       $  16.12
$22.750 - $23.375             159,415     6.7 Years         $  22.75       159,415       $  22.75
                        -------------                                   ----------
                            2,240,363                                    1,131,961
                        =============                                   ==========
</TABLE> 

Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" requires disclosure of pro forma net earnings and net
earnings per common share information computed as if the Company had accounted
for its employee stock options granted subsequent to December 31, 1995 under the
fair value method set forth in SFAS No. 123. The fair value of the Company's
outstanding stock options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:

<TABLE> 
<CAPTION> 
                                           1998       1997        1996
                                         ---------  ---------   ---------
     <S>                                 <C>        <C>         <C> 
     Expected option life in years           4.0          3.4         3.9
     Risk-free interest rate                 4.58%        6.13%       6.11%
     Volatility factor                      0.312        0.293       0.305
     Dividend yield                          1.80%        1.28%       1.22%
</TABLE> 

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the option's vesting period. In addition, because SFAS No. 123 is
applicable only to options granted subsequent to December 31, 1994, the pro
forma information does not reflect the pro forma effect of all previous stock
option grants of the Company. Therefore, the pro forma information is not
necessarily indicative of future amounts unless SFAS No. 123 is applied to all
outstanding stock options.

                                       61
<PAGE>
 
The Company's pro forma information is as follows:

<TABLE> 
<CAPTION> 
                                                                                                     December 31,
                                                                                     -----------------------------------------
                                                                                        1998          1997           1996
                                                                                     ------------  -----------   -------------
<S>                                                                                  <C>           <C>           <C>    
Net earnings before extraordinary item:
    As reported                                                                        $  19,590     $ 14,127         $ 6,720
    Pro forma                                                                          $  18,528     $ 13,446         $ 6,406

Net earnings per common share before extraordinary item:
    As reported--basic                                                                 $    1.18     $   1.08         $  0.57
    As reported--diluted                                                               $    1.17     $   1.06         $  0.55

    Pro forma--basic                                                                   $    1.11     $   1.03         $  0.54
    Pro forma--diluted                                                                 $    1.10     $   1.01         $  0.53

Weighted-average fair value of options granted during the year                         $    3.56     $   4.15         $  4.83
</TABLE> 

NOTE L--OPERATIONS

During the third quarter of 1996, the Company recorded a charge to cost of sales
of $3,577,000 resulting from management's decision to close the Company's
Corona, California aluminum recycling plant.

The Company's operations, like those of other basic industries, are subject to
federal, state, local and foreign laws, regulations and ordinances that (1)
govern activities or operations that may have adverse environmental effects,
such as discharges to air and water, as well as handling and disposal practices
for solid and hazardous wastes and (2) impose liability for costs of cleaning
up, and certain damages resulting from, past spills, disposals, or other
releases of hazardous substances (together, "Environmental Laws"). It is
possible that more rigorous Environmental Laws will be enacted that could
require the Company to make substantial expenditures in addition to those
referred to herein.

From time to time, operations of the Company have resulted or may result in
certain non-compliance with applicable requirements under Environmental Laws.
However, the Company believes that any such non-compliance under such
Environmental Laws would not have a material adverse effect on the Company's
financial position or results of operations.

The Illinois Environmental Protection Agency ("IEPA") recently notified the
Company that a subsidiary, Interamerican Zinc, Inc., ("IZI") is a potentially
responsible party ("PRP") pursuant to the Illinois Environmental Protection Act
for the cleanup of contamination at a site in Marion County, Illinois to which
IZI, among others, in the past sent zinc oxide for processing and resale. IZI
has joined a group of PRPs that is planning to negotiate with the IEPA regarding
the cleanup of the site. Although the site has not been fully investigated and
final cleanup costs not yet determined, based on current cost estimates and
information regarding the amount and type of materials sent to the site by IZI,
the Company does not believe, although there can be no 

                                       62
<PAGE>
 
assurance, that its liability at this site will have a material adverse effect
on its financial position or results of operations. A subsidiary of U.S. Zinc, 
which the Company acquired in July 1998, was also named as a PRP at this site.

The Company is also a party from time to time, to what it believes are routine
litigation and proceedings considered part of the ordinary course of its
business.


NOTE M--SEGMENT INFORMATION

In 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which is
effective for periods beginning after December 15, 1997. Statement 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company adopted Statement 131 in 1998, and its recent acquisition of U.S.
Zinc increased the number of operating segments the Company is required to
report.

DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH REPORTABLE
----------------------------------------------------------------------------
SEGMENT DERIVES ITS REVENUES: 
----------------------------
The Company has two reportable segments: aluminum and zinc. The ALUMINUM segment
represents all of the Company's aluminum melting, processing, alloying,
brokering and salt cake activities including investments in joint ventures. The
Company delivers aluminum in molten and ingot form to aluminum producers,
diecasters, extruders, steel and automotive companies and other aluminum
customers in the packaging, construction and transportation industries. In
addition, this segment includes magnesium melting activities, which represent
less than 1% of consolidated revenues and production. The company's ZINC segment
represents all of the Company's zinc melting, processing and brokering
activities. The Company sells zinc dust, oxides and metal to customers in the
tire and rubber, industrial paint, specialty chemical, mining and steel
galvanizing industries.

MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS:
--------------------------------------------------------
The accounting policies of the reportable segments are the same as those
described in NOTE A. The Company evaluates performance based on gross profit or
loss from operations, net of selling expenses. Provision for income taxes,
interest, corporate general and administrative costs, including depreciation of
corporate assets and amortization of capitalized debt costs, are not allocated
to the reportable segments. Intersegment sales and transfers are recorded at
market value; net profits on intersegment sales and transfers were immaterial
for the periods presented. Consolidated cash, net capitalized debt costs, net
current deferred tax assets and assets located at the Company's headquarters
office in Irving, Texas are not allocated to the reportable segments.

FACTORS MANAGEMENT USED TO IDENTIFY THE COMPANY'S REPORTABLE SEGMENTS:
---------------------------------------------------------------------
The Company's reportable segments are business units that offer different types
of metal products and services. The reportable segments are each managed
separately, because they sell distinct products and services and sell to
different types of customers.

                                       63
<PAGE>
 
REPORTABLE SEGMENT INFORMATION:
------------------------------
Selected reportable segment disclosures for the three years ended December 31,
1998 are as follows:

<TABLE> 
<CAPTION> 
                                                 ALUMINUM           ZINC            TOTALS
                                              ---------------   --------------  ---------------
<S>                                           <C>               <C>             <C>  
1998
----                                                            
Revenues from external customers               $     465,122      $   103,392     $    568,514
Intrasegment revenues                                 27,332            9,791           37,123
Intersegment revenues                                     89               10               99
Segment income                                        54,704            6,429           61,133
Depreciation and amortization expense                 19,155            2,402           21,557
Equity in earnings of affiliates                       1,750                -            1,750
Segment assets                                       328,891          109,398          438,289
Equity investments in joint ventures                  14,502                -           14,502
Payments for plant and equipment                      30,507            1,518           32,025

1997
----
Revenues from external customers               $     326,522      $    12,859     $    339,381
Intrasegment revenues                                 11,782                -           11,782
Segment income                                        45,728            1,127           46,855
Depreciation and amortization expense                 15,162              304           15,466
Equity in earnings of affiliates                         182                -              182
Segment assets                                       314,377            9,235          323,612
Equity investments in joint ventures                  14,271                -           14,271
Payments for plant and equipment                      32,623            3,532           36,155

1996
----
Revenues from external customers               $     198,769      $    12,102     $    210,871
Intrasegment revenues                                 11,571                -           11,571                           
Segment income                                        23,830            1,278           25,108                           
Depreciation and amortization expense                 10,376              275           10,651                           
Equity in loss of affiliates                            (114)               -             (114)                            
Segment assets                                       149,822            5,135          154,957                           
Equity investments in joint ventures                  14,187                -           14,187                           
Payments for plant and equipment                      15,500              267           15,767                            
</TABLE> 

                                       64
<PAGE>
 
Reconciliations of total reportable segment disclosures to the Company's
consolidated financial statements are as follows:

<TABLE> 
<CAPTION> 
                                                                               1998            1997            1996
                                                                          ----------------  ------------   ------------
<S>                                                                       <C>               <C>            <C> 
REVENUES                                                                  
--------                                                                  
Total revenues from external customers for reportable segments                 $  568,514    $  339,381     $  210,871
Intrasegment revenues for reportable segments                                      37,123        11,782         11,571 
Intersegment revenues for reportable segments                                          99             -              - 
Elimination of intrasegment and intersegment revenues                            (37,222)       (11,782)       (11,571) 
                                                                          ================  ============   ============
Total consolidated revenues                                                    $  568,514    $  339,381     $  210,871
                                                                          ================  ============   ============
                                                                          
PROFITS                                                                   
-------
Total profits for reportable segments                                          $   61,133    $   46,855     $   25,108
Unallocated amounts:                                                      
    General and administrative expense                                             21,568        16,431         11,458 
    Interest expense                                                                9,197         7,331          3,421 
    Interest and other income                                                         775           413            623 
Income before provision for income taxes, minority interests              
                                                                          ================  ============   ============
    and extraordinary item                                                     $   31,143    $   23,506     $   10,852
                                                                          ================  ============   ============
                                                                          
DEPRECIATION AND AMORTIZATION EXPENSE                                     
-------------------------------------
Total depreciation and amortization expense for reportable                                   
    segments                                                                   $   21,557    $   15,466     $   10,651 
Other depreciation and amortization expense                                         1,271         1,045            665 
                                                                          ================  ============   ============
Total consolidated depreciation and amortization expense                       $   22,828    $   16,511     $   11,316 
                                                                          ================  ============   ============
                                                                          
ASSETS                                                                    
------
Total assets for reportable segments                                           $  438,289    $  323,612     $  154,957
Other assets                                                                       18,269         8,924          9,750 
                                                                          ================  ============   ============
Total consolidated assets                                                      $  456,558    $  332,536     $  164,707
                                                                          ================  ============   ============
                                                                          
PAYMENTS FOR PLANT AND EQUIPMENT                                          
--------------------------------
Total payments for plant and equipment for reportable segments                 $   32,025    $   36,155     $   15,767
Other payments for plant and equipment                                              3,174         1,004            944 
                                                                          ================  ============   ============
Total consolidated payments for plant and equipment                            $   35,199    $   37,159     $   16,711
                                                                          ================  ============   ============
</TABLE> 

                                       65
<PAGE>
 
GEOGRAPHIC INFORMATION:
----------------------
The following table sets forth the geographic breakout of revenues (based on
customer location) and property and equipment (net of accumulated depreciation):

<TABLE> 
<CAPTION> 
                                           1998            1997            1996
                                       -------------   --------------  --------------
<S>                                    <C>             <C>             <C>  
REVENUES                               
--------                               
Domestic                                  $ 494,674        $ 329,937     $    210,871
Foreign                                      73,840            9,444                -                           
                                       -------------   --------------  --------------
Consolidated Total                        $ 568,514        $ 339,381     $    210,871
                                       =============   ==============  ==============
                                       
PROPERTY AND EQUIPMENT                 
----------------------
Domestic                                  $ 157,844        $ 135,716     $     86,308
Foreign                                      10,661            6,384                -                           
                                       -------------   --------------  --------------
Consolidated Total                        $ 168,505        $ 142,100     $     86,308
                                       =============   ==============  ==============
</TABLE> 

Aluminum shipments to customers located in Canada accounted for approximately 9%
of consolidated revenues for 1998. Substantially all the Company's foreign
property and equipment are located at the Company's aluminum facility in
Swansea, Wales.

MAJOR CUSTOMERS:
---------------
During 1998, aluminum sales to Ford Motor Company ("Ford") accounted for 10% of
consolidated revenues. During 1997, no single customer accounted for more than
10% of consolidated revenues. During 1996, aluminum sales to Aluminum Company of
America ("Alcoa") accounted for 13% of consolidated revenues. The loss of Alcoa
and Ford would have a material adverse effect upon the business of the Company
and its future operating results. However, a significant portion of the
processing for Alcoa is performed pursuant to long-term supply agreements.

                                       66
<PAGE>
 
NOTE N--QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE> 
<CAPTION> 
                                                     First        Second        Third         Fourth        Total
                                                    Quarter       Quarter      Quarter       Quarter         Year
                                                 ------------  ------------  ------------  ------------  ------------ 
<S>                                              <C>           <C>           <C>           <C>           <C> 
1998:
----
Revenues                                            $ 127,232     $ 124,489     $ 153,651     $ 163,142     $ 568,514               
Gross profits                                          13,626        14,174        16,692        17,028        61,520              
Net earnings                                            4,611         5,011         4,968         5,000        19,590               
Net earnings per common share:                                                                                                      
   Basic                                                 0.28          0.30          0.29          0.30          1.18
   Diluted                                               0.28          0.30          0.29          0.30          1.17
                                                                                                                                    

1997:                                                                                                                               
----                                                                                                                                

Revenues                                               82,528        76,600        77,461       102,792       339,381
Gross profits                                          10,152        12,140        12,843        12,719        47,854  
Earnings before extraordinary item                      2,280         3,567         4,131         4,149        14,127 
Extraordinary item                                     (1,318)            -             -             -        (1,318)
Net earnings                                              962         3,567         4,131         4,149        12,809 
Basic net earnings per common share: *                                                                                              
   Earnings before extraordinary item                    0.18          0.28          0.33          0.28          1.08
   Extraordinary item                                   (0.10)            -             -             -         (0.10)
                                                 ============  ============  ============  ============  ============
   Net earnings                                          0.08          0.28          0.33          0.28          0.98       
                                                 ============  ============  ============  ============  ============
Diluted net earnings per common share: *
   Earnings before extraordinary item                    0.18          0.28          0.32          0.28          1.06        
   Extraordinary item                                   (0.10)            -             -             -         (0.10)           
                                                 ============  ============  ============  ============  ============ 
   Net earnings                                     $    0.08     $    0.28     $    0.32     $    0.28     $    0.96         
                                                 ============  ============  ============  ============  ============ 
</TABLE> 



*    The earnings per share amounts have been restated, as required, to comply
     with the Statement of Financial Accounting Standards No. 128, Earnings per
     Share.


NOTE O--SUBSEQUENT EVENTS (UNAUDITED)

In February 1999, the Company acquired substantially all of the assets of an
aluminum alloying facility located in Shelbyville, Tennessee from Alcan Aluminum
Corporation for approximately $11,000,000 in cash, not including acquisition
costs. Also in February 1999, the Company acquired substantially all of the
assets of a zinc oxide production facility located in Clarksville, Tennessee
from North American Oxide, LLC for approximately $11,000,000 in cash, not
including acquisition costs. Both acquisitions will be accounted for using the
purchase method of accounting.

In February 1999, the Company entered into a supply agreement with General
Motors Corporation ("GM") to provide alloyed molten and ingot aluminum to GM's
metal casting facility in Saginaw, Michigan. The agreement expires in 2011 and
calls for escalating volumes beginning in 1999. The Company plans to construct a
new aluminum alloying plant in Saginaw, which is expected to begin production in
2000 to supply GM's Saginaw facility.

                                       67
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------
FINANCIAL DISCLOSURE

None.


PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------- 

The information required by this item with respect to directors and nominees for
director of the Company appears under the captions "Election of Directors" and
"Remuneration of Directors and Officers - Compliance with Section 16(a)" in the
definitive Proxy Statement (herein so called) of the Company relating to the
Company's 1999 Annual Meeting of Stockholders, to be filed with the Securities
and Exchange Commission (the "Commission") pursuant to Regulation 14A of the
Securities Exchange Act of 1934, which information is incorporated herein by
reference. It is currently anticipated that the Proxy Statement will be publicly
available and mailed to stockholders in mid-April 1999. Certain information as
to executive officers is included herein under PART I, ITEM 4A. "EXECUTIVE
                                                            --
OFFICERS OF THE REGISTRANT."


ITEM 11.  EXECUTIVE COMPENSATION
-------
The information required by this item appears under the caption "Remuneration of
Directors and Officers" in the definitive Proxy Statement, which information is
incorporated herein by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------
The information required by this item appears under the caption "Voting and
Principal Stockholders" in the definitive Proxy Statement, which information is
incorporated herein by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------
The information required by this item appears under the captions "Remuneration
of Directors and Officer--Directors' Compensation" and "Compensation Committee
Report to Stockholders-Compensation Committee Interlocks and Insider
Participation" in the definitive Proxy Statement, which information is
incorporated herein by reference.

                                       68
<PAGE>
 
PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------

 (a)      The following documents are filed as part of this Annual Report on
Form 10-K:

     1.   Consolidated Financial Statements: See index to Consolidated Financial
          Statements and Financial Statement Schedules on Page 40 hereof.

     2.   Consolidated Financial Statement Schedules: See index to Consolidated
          Financial Statements and Financial Statement Schedules on Page 40
          hereof.

     3.   Exhibits:
          --------

    3.1        Certificate of Incorporation of IMCO Recycling Inc., as amended
               May 13, 1998, filed as Exhibit 3.1 to the Company's Quarterly
               Report on Form 10-Q for the quarterly period ended June 30, 1998,
               and incorporated herein by reference.

    3.2        By-laws of IMCO Recycling Inc., as amended, effective as of
               February 25, 1997, filed as Exhibit 3.2 to the Company's Annual
               Report on Form 10-K for the year ended December 31, 1997, and 
               incorporated herein by reference.

    4.1        Specimen Stock Certificate of the Common Stock, $0.10 par value,
               of IMCO Recycling Inc., filed as Exhibit 4.1 to the Company's
               Registration Statement on Form S-2 (No. 33-48571) and
               incorporated herein by reference.

    10.4       IMCO Recycling Inc. Amended and Restated Stock Option Plan, filed
               as Exhibit 10.4 to the Company's annual Report on Form 10-K for
               the year ended December 31, 1997, and incorporated herein by 
               reference.

    *10.7      Specimen Split-Dollar Life Insurance Agreement. This agreement is
               virtually identical to agreements between the Company and Richard
               L. Kerr, Paul V. Dufour, Denis W. Ray, Thomas W. Rogers, C. Lee
               Newton, Robert R. Holian and James B. Walburg.

    10.8       Supply Agreement between Barmet Aluminum Corporation (now
               Commonwealth Aluminum Corporation) and the Company, dated March
               2, 1992, filed as Exhibit 10.9 to the Company's Annual Report on
               Form 10-K for the year ended December 31, 1997, and incorporated
               herein by reference..

    10.9       Right of First Refusal Agreement between Barmet Aluminum
               Corporation (now Commonwealth Aluminum Corporation) and the
               Company, dated March 2, 1992, relating to Commonwealth's Indiana
               recycling plant, filed as Exhibit 10.23 to the Company's Annual
               report on 1994 Form 10-K for the year ended December 31, 1994 and
               incorporated herein by reference.

                                       69
<PAGE>
 
    10.10      Agreement, effective as of December 1, 1995, between IMCO
               Recycling of Ohio Inc.1and2 the United Mine Workers of America,
               and filed as Exhibit 10.24 to the Company's Annual Report on Form
               10-K for the year ended December 31, 1995 and incorporated herein
               by reference.

    *10.11     Agreement, effective as of January 1, 1994, between IMCO
               Recycling Inc. and Aluminum Company of America.

    10.12      First Amendment to processing agreement by and among the Rigid
               Packaging division of Aluminum Company of America, the Company
               and Metal Resources Inc., filed as Exhibit 10.2 to the Company's
               Quarterly Report on Form 10-Q for the quarterly period ended June
               30, 1995, and incorporated herein by reference.

    10.14      Stock Purchase Agreement by and among IMCO Recycling Inc.,
               EnviroSource, Inc. and IMSAMET, Inc. dated November 26, 1996.
               (In accordance with Item 601 of Regulation S-K, the copy of the
               IMSAMET Agreement filed with the Securities and Exchange
               Commission (the "Commission") does not include the Schedules or
               exhibits thereto. The Company agrees to furnish such information
               supplementally to the Commission upon request). This agreement
               was filed as Exhibit 2.1 to the Company's Current Report on Form
               8-K, dated January 21, 1997, and is incorporated herein by
               reference.

    10.15      Amendment No. 1 to Stock Purchase Agreement by and among IMCO
               Recycling Inc., EnviroSource, Inc. and IMSAMET, Inc. dated
               January 21, 1997. Filed as Exhibit 2.2 to the Company's Current
               Report on Form 8-K, dated January 21, 1997, and incorporated
               herein by reference.

    10.16      Registration Rights Agreement dated as of January 21, 1997 among
               IMCO Recycling Inc. and the former shareholders of Rock Creek
               Aluminum, Inc., filed as Exhibit 10.1 to the Company's Quarterly
               Report on Form 10-Q for the quarterly period ended March 31,
               1997, and incorporated herein by reference.
     
    10.17      IMCO Recycling Inc. 1992 Stock Option Plan, as amended December
               15, 1994, February 28, 1996, February 25, 1997, May 13, 1997 and
               May 13, 1998, filed as Exhibit 10.2 to the Company's Quarterly
               Report on Form 10-Q for the quarterly period ended June 30, 1998,
               and incorporated herein by reference.

    10.18      IMCO Recycling Inc. Annual Incentive Program, as amended February
               25, 1997, April 1, 1997, May 13, 1997 and May 13, 1998, filed as
               Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
               the quarterly period ended June 30, 1998, and incorporated herein
               by reference.

    10.19      Agreement and Plan of Merger by and among IMCO Recycling Inc.,
               IMCO Recycling of Coldwater Inc., Alchem Aluminum, Inc. and the
               Shareholders of Alchem Aluminum, Inc. dated November 14, 1997,
               filed as Exhibit 10.3 to the

                                       70
<PAGE>
 
               Company's Current Report on Form 8-K/A-2 dated September 18,
               1997, and incorporated herein by reference.

    10.20      Registration Rights Agreement dated as of November 14, 1997 among
               IMCO Recycling Inc. and the former shareholders of Alchem
               Aluminum, Inc., filed as Exhibit 10.4 to the Company's Current
               Report on Form 8-K/A-2 dated September 18, 1997, and incorporated
               herein by reference.

    10.21      Amended and Restated Credit Agreement by and among the Company,
               the Subsidiary Guarantors named therein, the Lenders thereunder,
               Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
               Incorporated and Texas Commerce Bank National Association dated
               November 5, 1997, filed as Exhibit 10.1 of the Company's
               Quarterly Report on Form 10-Q for the quarterly period ended
               September 30, 1997, and incorporated herein by reference.

    *10.22     Amendment No. 1 dated June 25, 1998, to the Amended and Restated
               Credit Agreement by and among the Company, the Subsidiary
               Guarantors named therein, the Lenders thereunder, Merrill Lynch &
               Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Texas
               Commerce Bank National Association dated November 5, 1997.

    *10.23     Amendment No. 2 dated January 15, 1999, to the Amended and
               Restated Credit Agreement by and among the Company, the
               Subsidiary Guarantors named therein, the Lenders thereunder,
               Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
               Incorporated and Texas Commerce Bank National Association dated
               November 5, 1997.

    10.24      Executive Option Exercise Loan Program, dated March 10, 1998,
               filed as Exhibit 10.1 to the Company's Quarterly Report for the
               quarterly period ended March 31, 1998, and incorporated herein by
               reference.

    10.25      Memorandum of Purchase and Sale Agreement by and among IMCO
               Recycling Inc., The Minette and Jerome Robinson Community
               Property Trust, The Minette and Jerome Robinson Foundation, The
               Minette and Jerome Robinson Charitable Remainder Trust, M. Russ
               Robinson, Howard Robinson and Mindy Robinson Brown, dated July
               21, 1998, filed as Exhibit 2.1 to the Company's Current report on
               Form 8-K, dated August 4, 1998, and incorporated herein by
               reference.

    10.26      Form of Common Stock Purchase Warrant, dated July 21, 1998, filed
               as Exhibit 2.2 to the Company's Current report on Form 8-K, dated
               August 4, 1998, and incorporated herein by reference.

    *21        Subsidiaries of IMCO Recycling Inc. as of March 8, 1999.

    *23        Consent of Ernst & Young LLP.

    *27        Financial Data Schedule.

                                       71
<PAGE>
 
------------------
*  Filed herewith.

  (b) Reports on Form 8-K filed in fourth quarter 1998: None.

  (c) See sub-item (a) above.

  (d) See sub-item (a) above.

                                       72
<PAGE>
 
SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

Dated: March 12, 1999                   IMCO Recycling Inc.


                                        By:   /s/ Robert R. Holian 
                                            -----------------------------------
                                        Robert R. Holian, Vice President and
                                        Controller, Principal Accounting Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:

<TABLE> 
<CAPTION>  
         Signature                                  Title                                        Date
------------------------------       --------------------------------------               ---------------------
<S>                                  <C>                                                  <C> 
                                      Director, Chairman of the
/s/ Don V. Ingram                     Board, Chief Executive Officer                           March 12, 1999       
------------------------------                                                                                
Don V. Ingram                                                                                                 
                                                                                                              
/s/ Jack M. Brundrett                 Director                                                 March 12, 1999 
------------------------------                                                                                
Jack M. Brundrett                                                                                             
                                                                                                              
/s/ Ralph L. Cheek                    Director                                                 March 12, 1999 
------------------------------                                                                                
Ralph L. Cheek                                                                                                
                                                                                                              
/s/ John J. Fleming                   Director                                                 March 12, 1999 
------------------------------                                                                                
John J. Fleming                                                                                               
                                                                                                              
/s/ Don Navarro                       Director                                                 March 12, 1999 
------------------------------                                                                                
Don Navarro                                                                                                   
                                                                                                              
/s/ Jack C. Page                      Director                                                 March 12, 1999 
------------------------------                                                                                
Jack C. Page                                                                                                  
                                                                                                              
/s/ Steve Bartlett                    Director                                                 March 12, 1999 
------------------------------                                                                                
Steve Bartlett                                                                                                
                                                                                                              
/s/ Jeb Hensarling                    Director                                                 March 12, 1999 
------------------------------                                                                                
Jeb Hensarling                                                                                                
                                                                                                              
                                      Executive Vice President Finance and                                    
/s/ Paul V. Dufour                    Administration (Principal Financial Officer)             March 12, 1999  
------------------------------
Paul V. Dufour

                                      Vice President and Controller (Principal                 March 12, 1999
/s/ Robert R. Holian                  Accounting Officer)                                              
------------------------------
Robert R. Holian
</TABLE> 

                                       73