<PAGE>

   

<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS                          1997*          1996*               OUR BUSINESS
----------------------------------------  -------------  -------------  -----------------------------
                                          (as restated)  (as restated)
<S>                                       <C>            <C>            <C>
Net Sales...............................  $  28,062,000  $  28,694,000  Starmet Corporation
Net Income (loss).......................  $     482,000  $  (2,387,000) develops & manufactures
Earnings (loss) per share...............  $        0.10  $       (0.50) a variety of advanced
Weighted Average Number of Shares of                                    metal products serving a
  Common Stock Outstanding..............      4,783,000      4,779,000  diverse customer base.
Number of Employees at Year-end.........            235            190
Total Assets............................  $  34,354,000  $  35,768,000
Working Capital.........................  $   4,542,000  $   4,048,000
Stockholders' Equity....................  $  25,746,000  $  25,020,000
</TABLE>

    

CONTENTS
------------------------------------------------------------------
President's Letter................................................   1
Market Profile....................................................   4
Selected Financial Data...........................................  16
Management's Discussion and Analysis of Operations................  18
Consolidated Balance Sheets.......................................  27
Consolidated Statements of Operations.............................  28
Consolidated Statements of Stockholders' Equity...................  29
Consolidated Statements of Cash Flows.............................  30
Notes to Consolidated Financial Statements........................  31
Report of Independent Public Accountants..........................  52
Corporate Directory

   
* See Note 1 of Notes to Consolidated Financial Statements
    

<PAGE>

PRESIDENT'S LETTER

Dear Stockholder:


   
    Fiscal 1997 was a good year for Starmet Corporation (formerly Nuclear 
Metals, Inc.). While sales revenues were essentially level with Fiscal 1996, 
net income of $0.5 Million in Fiscal 1997 compared favorably with a $2.4 
million loss in the prior year. In November 1997 Starmet CMI, our wholly 
owned subsidiary, announced new orders and options valued at $5.5 million for 
work to be performed in Fiscal 1998 with revenues beginning in the second 
quarter. This unique facility for uranium conversion had been without a major 
customer since the fourth quarter of Fiscal 1996, resulting in negative cash 
flow during this period. The new orders to restart our uranium conversion 
process and further expand our Department of Energy licensed DUCRETE-TM- 
stabilization technology should result in Starmet CMI returning to revenue 
growth.
    

FINANCIAL HIGHLIGHTS
   
    Revenues in Fiscal 1997 of $28.1 million compared to $28.7 million in 
Fiscal 1996. Net income of $0.5 million compared favorably to a loss of $2.4 
million the prior year. Year-end backlog increased to $27.7 million from 
$23.3 million the prior year. Capital expenditures of $1.8 million compared 
to $1.4 million the prior year. Research and development spending of $1.3 
million compared to $0.9 million the prior year.
    
   
    The Fiscal 1997 year-end balance sheet showed an increase in the current 
ratio (current assets / current liabilities) to 1.6 : 1 from 1.4 : 1 in the 
prior year. Our Quick ratio (current assets less inventory / current 
liabilities) increased to 0.9 : 1 from 0.7 : 1 the prior year. Year-end cash 
and cash equivalents decreased to $0.27 million from $1.30 million the prior 
year. Long term debt increased to $3.4 million from $1.9 million in the prior 
year. State Street Bank & Trust Company, our commercial bank, increased the 
Company's line of credit to $6.0 million in December 1997.
    

NAME CHANGE AND NEW SUBSIDIARIES

    In late September 1997 shareholders voted to change the name of the 
company to Starmet Corporation and to create several wholly owned 
subsidiaries. This name change and new organizational structure should help 
us grow our business more rapidly by providing greater flexibility to create 
strategic alliances and otherwise finance the growth of our diverse 
technologies and markets.

                                      1
<PAGE>


STARMET CMI & NMI

    The company's uranium processing technology, used primarily for shielding 
applications and feed rod for advanced laser enrichment, is the foundation of 
the new Starmet CMI and NMI subsidiaries. Restart of our uranium hexafluoride 
(UF(6)) conversion process beginning in the second quarter of Fiscal 1998 
will dramatically improve plant utilization and is expected to provide the 
basis for profitability for Starmet CMI. Growing customer acceptance of 
DUCRETE-TM- as a commercially viable stabilization technology with beneficial 
reuse of the depleted uranium as a shielding material for high level wastes 
should result over the longer term in significant new business from the 
Department of Energy and commercial power companies.

STARMET POWDERS

    The PREP-TM- powder technology for producing spherical powder of a 
uniform size which is free of ceramic contamination is the cornerstone of 
this subsidiary. There are several niche markets for high-quality spherical 
powders, particularly in the medical products area, such as porous coatings 
for implants. Additionally, the company is developing new innovative 
technology to produce finer size spherical powders that can be consolidated 
into fully dense parts. We are targeting commercial parts made from our 
titanium powders due to the growing commercial interest in this aerospace 
metal.

STARMET AEROCAST & COMCAST

    Over the past six years, ongoing development efforts on our patented 
Beralcast-Registered Trademark- technology for producing lightweight, 
precision castings for aerospace applications have resulted in a significant 
cost reduction using present equipment; and installation of automated 
production equipment will result in further cost reductions that are expected 
to be significant. This has significantly improved this exciting material's 
economic viability in numerous applications. Our Beralcast-Registered 
Trademark- hardware is now in demonstration and prototype manufacture on its 
way to production for several new aerospace programs. Having our patented 
alloys selected and proven as a reliable "bill of material" on specific 
military programs is of the utmost importance and a good indicator of future 
performance.

    Commercial applications for Beralcast-Registered Trademark- components 
have a much faster but shorter product life cycle. Commercial applications 
require materials that are cost effective and are reliably manufactured. New 
computer disc drive armatures designed in Beralcast-Registered Trademark- now 
are being evaluated by four leading disc drive manufacturers. In commercial 
applications, the ramp from demonstration quantities to production quantities 
is generally only 18 months vs. 10 years for most military application. Now 
that substantial manufacturing cost savings have been demonstrated by 
aerospace applications we are rapidly 

                                       2

<PAGE>

approaching sizable production opportunities for several commercial 
applications.

COMMITMENT TO QUALITY

    During Fiscal 1997 the company became the first small business in the 
United States to qualify for the U. S. Army's highest Quality Certification. 
This ISO 9002 based quality system which the Army has called its Contractor 
Performance Certification Program required a two and a half year total 
company effort. Broad-based employee teams have worked together to improve 
and document processes and procedures and then to develop charts and graphs 
to monitor ongoing performance. Extensive employee participation in the 
measurement and review process has been essential to our success. This 
never-ending process has a single goal of continuously increasing customer 
satisfaction. In addition to receiving Army certification, the company has 
been recommended for ISO 9002 Certification by an international registrar. We 
expect to receive the formal ISO 9002 certification in early Calendar 1998.

THE FUTURE

    The name change, creation of several new subsidiaries, the Army funding 
to remove a holding basin on our Concord, Massachusetts property, the 
increasing Beralcast-Registered Trademark- requirements including a growing 
number of commercial applications and the return to meaningful production 
volumes at Starmet CMI beginning in the second quarter of Fiscal 1998, all 
position the Company well to continue growth and diversification. We have 
outstanding employees who very much join in the excitement of meeting our 
customers' needs today and tomorrow.

    We are committed to following a growth strategy and taking demonstrative 
actions that will enhance shareholder value.

    Thank you for your continued support and confidence. 

   /s/ Robert E. Quinn                             /s/ George J. Matthews
   --------------------------                      -----------------------
   Robert E. Quinn                                 George J. Matthews
   President                                       Chairman of the Board


                                       3

<PAGE>

STARMET

    The ability of a Company to adapt to a changing marketplace while 
maintaining strong customer relationships defines success. Starmet 
Corporation's dedication to solving customers' material related issues is the 
foundation of our ability to adapt and innovate. Our company has been 
transformed over the past three years from principally a manufacturer of 
depleted uranium for Government defense applications to a manufacturer 
offering a broad range of metal products and services. Our capabilities offer 
product solutions to complex issues in the aerospace, energy, medical, 
defense, sporting goods, and computer industries. These products range from 
Beralcast-Registered Trademark- computer disc drive armatures, enabling 
significantly improved data storage and retrieval, to uranium feed material 
for the Atomic Vapor Laser Isotope Separation process, the most advanced 
uranium isotope separation process currently being deployed for nuclear fuel 
production. Starmet Corporation's primary mission is to support its newly 
formed business units with research and development, customer and financial 
support, and operational capabilities consistent with the needs of our 
customers. The Company's business units include Starmet NMI, Starmet CMI, 
Starmet Aerocast, Starmet Comcast and Starmet Powders. Starmet Corporate also 
provides advanced material products and services directly to customers in 
aerospace-related industries consistent with Nuclear Metals' legacy of 
advanced metalworking processes.

    STARMET CORPORATION'S DEDICATION TO SOLVING CUSTOMERS' MATERIAL RELATED 
ISSUES IS THE FOUNDATION OF OUR ABILITY TO ADAPT AND INNOVATE. 

SOLUTIONS


                                       4

<PAGE>














                                       5

<PAGE>

STARMET NMI

    "Transition" describes our status in support of the Armed Forces for 
Depleted Uranium (DU) ammunition. Starmet NMI has provided DU ammunition to 
all branches of the United States Armed Forces. We are proud of our role in 
providing our soldiers with the best ammunition in the world. When we were 
visited by two Desert Storm tank commanders this past year we were told 
emphatically that lives are saved when our soldiers are able to rely 
completely on the quality, consistency, and performance of DU ammunition. 
However, events in the former Soviet Union, combined with the effectiveness 
of the ammunition deployed in Desert Storm, led the Army to the conclusion 
that fewer rounds needed to be stockpiled. As we produce 120MM DU rounds for 
the M1A2 Abrams tank at a tenth of previous rates, the need to transition 
from the ordnance marketplace to the commercial marketplace is evident. A 
versatile material, DU is used in commercial applications ranging from 
shielding devices for the medical industry to counterweight materials in wide 
body aircraft. While facilities in Concord, MA previously used for DU 
penetrator manufacture are being cleaned and readied for production expansion 
of our patented Beryllium Aluminum alloy, Beralcast-Registered Trademark-, 
Starmet will continue to support the Army's DU ammunition needs with 
consolidation of facilities and technical expertise to CMI in Barnwell, SC.

                                       6

<PAGE>
















                                       7

<PAGE>


STARMET CMI

    Novel technologies for difficult issues are the trademark of this unique 
business unit of Starmet. CMI is the only fully integrated DU processing 
facility in the United States. Customer needs for uranium and related 
materials are served by utilizing our patented technologies and a team of 
engineering specialists. Whether it involves transforming radioactive scrap 
metals into useable shielding products, refurbishing commercial and military 
aircraft counterweights, or producing feed materials for the Atomic Vapor 
Laser Isotope Separation process, CMI brings value to customers through 
technical excellence and proven technologies. The answer to the question of 
how to manage the growing inventory of uranium hexafluoride may be found in 
DUCRETE-TM- shielding, a patented form of ultra dense concrete using uranium 
oxide briquettes as aggregate in concrete. We have formed a partnership which 
ensures exclusive rights to DUCRETE-TM- shielding containers and barriers for 
use by nuclear utilities for mandated above-ground storage of spent fuel. 
Respect for the environment, innovative technologies, a skilled workforce and 
room to grow on 340 acres in South Carolina position CMI for success in the 
future.

    CMI BRINGS VALUE TO CUSTOMERS THROUGH TECHNICAL EXCELLENCE AND PROVEN 
TECHNOLOGIES


                                       8

<PAGE>
















                                       9
<PAGE>

STARMET AEROCAST

    Imagine the potential of an affordable aerospace material that is 22 
percent lighter than aluminum, 300% stiffer, with strength comparable to A356 
aluminum aerospace castings, and has six to ten times better vibration 
damping characteristics. Optical structures, electronic boxes, stable 
members, battery cases, navigational housings, satellite structures, tubular 
struts, and a seemingly endless number of additional possibilities are 
candidates for use of Starmet's patented Beralcast-Registered Trademark-. 
Investment castings are designed to meet volume demand at a competitive price 
for the customer. Starmet's engineering staff works closely with all of our 
customers to ensure that delivered product meets their needs for long-term 
production of low cost hardware. The value of this new material is in the 
flexibility now afforded the design engineer to increase the performance of 
new and existing hardware for tomorrow's aerospace needs.

    Working closely with customers' engineers as products are designed 
assures future production costs are as low as possible. Teaming with our 
customers also ensures that we not only understand their needs, but share in 
their future.

    INVESTMENT CASTINGS ARE DESIGNED TO MEET VOLUME DEMAND AT A COMPETITIVE 
AFFORDABLE PRICE FOR THE CUSTOMER


                                      10


<PAGE>




















                                      11

<PAGE>

STARMET COMCAST
 
    Cost-effective, light, durable, and flexible are words that can be used 
to describe Beralcast -Registered Trademark-'s advantageous use for aerospace 
components. The commercial marketplace is equally demanding of such qualities 
in engineering materials. Where production of commercial products advance at 
dizzying rates, engineers are increasingly pressured to design with smaller 
and lighter components manufactured by innovative suppliers. Today's premium 
golf club heads are investment cast or forged from Titanium and its alloys. 
Titanium is twice the density of Beralcast -Registered Trademark- and offers 
less flexibility in its manufacture. Some golfers tell us Beralcast 
-Registered Trademark- is the Titanium of the future. In the computer 
hardware market Beralcast -Registered Trademark- offers significantly better 
performance characteristics than conventional materials. For example, 
Beralcast -Registered Trademark- will allow a vast increase in the data 
storage capacity and retrieval of tomorrow's computer disc drives. Prototypes 
using Starmet's Beralcast -Registered Trademark- are currently being 
qualified for this use. Other commercial applications for this material 
include those where a small premium can be paid for significantly enhanced 
performance and design flexibility.
 
    Imagine using Beralcast -Registered Trademark- instead of aluminum to 
enhance high speed assembly and inspection devices where Beralcast 
-Registered Trademark-'s vibration damping qualities can result in a five to 
ten fold performance improvement.

                                   12

<PAGE>






                                   13
<PAGE>

VISION
 
STARMET POWDERS
 
    Metal powders can be used effectively in a variety of applications where 
exacting sizes, shapes, and cleanliness are important. Clean cobalt chrome 
and titanium powders, made by our patented Plasma Rotating Electrode Process 
(PREP -TM-), are used in medical implants to effectively bond prosthetic 
devices to bone and tissue. Uniform steel powders are used not only in 
photocopiers and sophisticated rapid prototyping applications, but in 
magnetic paint for children's books, wallpaper, and toys. Materials that are 
difficult to fabricate from castings or forgings are candidates for a powder 
metallurgy approach. Oftentimes castings are converted to powders, which are 
in turn, reconsolidated into semi-finished components with improved 
mechanical properties. Fine titanium powders consolidated into semi-finished 
components represent tomorrow's challenge for advanced metal powder-making 
technologies at Starmet Powders. Combining a solid reputation for ultra-clean 
powder processing techniques with new and dedicated engineering resources, 
opens a world of possibilities for creating products. We have realized that 
such possibilities exist even more clearly when we combine our resources with 
other innovative companies whose enthusiasm for producing high value powder 
metallurgy products matches our own. We have a vision that includes 
consolidation of fine powders into complex shapes.

         COMBINING A SOLID REPUTATION FOR ULTRA-CLEAN POWDER PROCESSING
                 TECHNIQUES WITH NEW AND DEDICATED ENGINEERING
        RESOURCES, OPENS A WORLD OF POSSIBILITIES FOR CREATING PRODUCTS

                                     14

<PAGE>






                                     15
<PAGE>

                            SELECTED FINANCIAL DATA
               (NOT COVERED BY REPORT OF INDEPENDENT ACCOUNTANTS)
        (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND NUMBER OF EMPLOYEES)
   
<TABLE>
<CAPTION>

OPERATING RESULTS FOR THE YEAR                                   1997**       1996**       1995         1994         1993
-----------------------------------------------------------  -----------  -----------  -----------  -----------  -----------
                                                            (as restated)(as restated)
<S>                                                          <C>          <C>          <C>          <C>          <C>
Net Sales and Contract Revenues............................  $  28,062    $  28,694    $  18,784    $  19,004    $  17,019
Cost and Expenses..........................................     27,251       30,604       20,708       29,958       27,515
Operating Income (Loss)....................................        811       (1,910)      (1,924)     (10,954)     (10,496)
Other Income (Expense), Net................................       (298)        (476)        (118)        (430)        (557)
Income (Loss) Before Taxes.................................        513       (2,386)      (2,042)     (11,384)     (11,053)
Provision (Benefit) for Income Taxes.......................         31            1       (1,967)      (1,188)      (3,746)
Extraordinary Gain.........................................     --           --              585       --           --
Cumulative Change in Accounting Principle..................     --           --           --           --            1,100
Net Income (Loss)..........................................        482       (2,387)         510      (10,196)      (6,207)
Earnings (Loss) per Share*.................................       0.10        (0.50)        0.11        (2.22)       (1.35)
Capital Expenditures, Net..................................      1,788        1,449          777          709        1,265
Research and Development...................................      1,309          876          439          575        1,031

FINANCIAL POSITION AT YEAR-END

Stockholders' Equity.......................................     25,746       25,020       27,245       26,252       36,371
Share Outstanding*.........................................      4,784        4,782        4,776        4,614        4,590
Net Book Value per Common Share Outstanding*...............       5.38         5.23         5.70         5.69         7.92
Dividends Paid.............................................     --           --           --           --              459
Dividend per Share*........................................     --           --           --           --             0.13
Total Assets...............................................     34,354       35,768       40,886       40,542       57,223
Working Capital............................................      4,542        4,048       15,866       17,477       24,532
Long-term Debt net of Unamortized Discount (including
  current installments)....................................      3,363        1,874        4,480        4,859        8,986

OTHER DATA

Weighted Average Number of Shares of Common Stock
  Outstanding*.............................................      4,959        4,779        4,706        4,600      4,590
Backlog (at Year-end)......................................     27,654       23,248       30,709       14,512      8,285
Number of Employees (at Year-end)..........................        235          190          200          189        169
</TABLE>
    
------------------------
   
*   ADJUSTED TO REFLECT TWO FOR ONE STOCK SPLIT IN 1997
**  See Note 1 of Notes to Consolidated Financial Statements
    

                                     16
<PAGE>

<TABLE>
<CAPTION>

                                                                 1992       1991       1990       1989      1988
OPERATING RESULTS FOR THE YEAR                                ---------  ---------  ---------  ---------  ---------
-----------------------------------------------------------   <C>        <C>        <C>        <C>        <C>
<S>                                                        
Net Sales and Contract Revenues............................   $  42,083  $  48,250  $  47,662  $  49,760  $  45,714
Cost and Expenses..........................................      39,791     44,930     44,734     45,350     42,378
Operating Income (Loss)....................................       2,292      3,320      2,928      4,410      3,336
Other Income (Expense), Net................................        (745)    (1,029)    (1,706)    (1,191)    (1,182)
Income (Loss) Before Taxes.................................       1,547      2,291      1,222      3,219      2,154
Provision (Benefit) for Income Taxes.......................         626        871        489        972        506
Extraordinary Gain.........................................           -     --         --         --         --
Cumulative Change in Accounting Principle..................           -     --         --         --         --
Net Income (Loss)..........................................         921      1,420        733      2,247      1,648
Earnings (Loss) per Share*.................................        0.20       0.30       0.15       0.43       0.31
Capital Expenditures, Net..................................       1,015      1,349      2,270      3,306      2,812
Research and Development...................................       1,233      1,357        685      1,007      1,186

FINANCIAL POSITION AT YEAR-END 

Stockholders' Equity.......................................      43,037     42,614     41,756     43,135     41,592
Share Outstanding*.........................................       4,590      4,670      4,768      5,192      5,264
Net Book Value per Common Share Outstanding*...............        9.38       9.13       8.76       8.31       7.90
Dividends Paid.............................................         276        238        251        263     --
Dividend per Share*........................................        0.06       0.05       0.05       0.05     --
Total Assets...............................................      66,391     70,810     73,603     76,520     75,461
Working Capital............................................      32,571     33,034     32,772     35,578     36,231
Long-term Debt net of Unamortized Discount (including 
  current installments)....................................      11,372     13,759     16,040     18,405     19,756

OTHER DATA

Weighted Average Number of Shares of Common Stock
  Outstanding*.............................................       4,604      4,738      4,894      5,244      5,354
Backlog (at Year-end)......................................      10,729     10,398     14,758     19,352     16,016
Number of Employees (at Year-end)..........................         231        456        455        574        585
</TABLE>


                               17
 
<PAGE>

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
GENERAL
 
    The following discussion and analysis of the Company's financial condition
and results of operations is based on the three business segments in which the
Company currently reports its results, namely Specialty Metal Products, Depleted
Uranium Penetrators and Uranium Services and Recycle. The Specialty Metal
Products segment consists of the manufacture of the Company's Beralcast alloys,
specialty metal powders, billets for tank armor, and industrial and medical
shielding products. The Depleted Uranium Penetrators segment consists of the
manufacture of DU penetrators for military munitions applications. The Uranium
Services and Recycle segment consists of the manufacture of DU and NU metal for
use as uranium feedstock supplied to USEC's AVLIS program, conversion of UF(6)
to UF(4), recycling of various low-level radioactive metals, DUCRETE shielding
capabilities and repair of counterweights for commercial and military aircraft.
   
    In the late 1980s and the 1990s, the decline in U.S. defense spending
resulted in sharply reduced revenues from the sale of the Company's
defense-related depleted uranium products, including DU penetrators and billets
for conversion into tank armor. The Company expects that no revenue will be
derived from sales of DU penetrators after the second quarter of fiscal 1999 and
that only limited revenue will be derived from sales of billets for conversion
into tank armor thereafter. As revenues from defense-related DU products decline
overall and as a percentage of revenues, the Company may provide information on
two business segments in future periods. See "--Segment Information."
    
 
    A central aspect of the Company's strategy is to concentrate its efforts and
resources on commercial applications for its technology. In particular, the
Company intends to focus on the commercialization of its family of Beralcast
alloys. To date, the Company's Beralcast business has received most of its
orders and funding from military aerospace applications. In particular, the
Company has received contracts from Lockheed Martin for Beralcast components to
be used in its Electro Optic Sensor System ("EOSS"), the night vision and target
acquisition system on the Comanche helicopter, which is scheduled for full-scale
production commencing in 2003. The Company is applying its Beralcast technology
to develop, among other things, disk drive arm sets for high-end disk drives as
well as satellite components, premium golf products and other products. These
products currently are in the development and, for certain customers, the
pre-production stages. The Company believes that as a result of the general
practice of manufacturers in the disk drive industry and other targeted
commercial industries of placing only short-term orders, the Company could
experience substantial fluctuations in revenues and earnings from quarter to
quarter. The Company is also developing additional commercial applications for
its Beralcast alloys.
 
    In the third quarter of fiscal 1996, the Company reduced its workforce at
its South Carolina facility due to the completion of a contract for a foreign
customer and lack of anticipated new orders. During most of fiscal 1996, the
Company operated this facility at approximately 40% of capacity on a one-shift
basis. In the fourth quarter of fiscal 1996, the Company took a $2,100,000
reserve for estimated fiscal 1997 losses associated with then current production
contracts, which reserve was fully utilized during fiscal 1997.
 
                                       18
<PAGE>
   
Losses at the facility continued through the first quarter of fiscal 1998 due to
underutilization. At the same time, the Company increased its workforce in
preparation for the receipt of an AVLIS production contract. USEC recently
exercised production options under its existing AVLIS contract with the Company,
and the Company anticipates receiving additional contractual work from USEC in
the summer of 1998. The Company's operations in South Carolina are currently
substantially dependent on orders from USEC and are expected to remain so.
Failure of the Company to be awarded such contracts could have a material
adverse effect on the Company's business, results of operations and financial
condition.
    
   
    Due primarily to the sharp decline in sales of DU penetrators and lack of
orders in its uranium services and recycle business, the Company incurred losses
in three of its last four previous fiscal years and in the first nine months of
fiscal 1998. The Company's accountants, in their report to the Board of
Directors and stockholders of the Company on the Company's financial statements
for fiscal 1995, stated that there was substantial doubt at that time about the
Company's ability to continue as a going concern. Although the Company was
profitable in fiscal 1997, reserve reductions and other non-recurring income
items accounted for the profitability. Excluding these items, the Company would
have reported a net loss in fiscal 1997. As a result, the Company has 
experienced significant financial difficulties and liquidity problems in 
recent years and has had to seek financing from stockholders, waivers of 
non-compliance with, and amendments of, certain covenants and other 
provisions in its debt instruments (including waivers and amendments under 
the Existing Credit Facility in February, May, June and August of 1998), 
additional borrowings and extensions of maturities under the Existing Credit 
Facility, and additional equipment financing from another bank for capital 
expenditures required at its South Carolina facility. See "--Liquidity and 
Capital Resources."
    
   
    In connection with additional borrowings under the Existing Credit Facility
in December 1997, the Company issued the Second Warrant (as defined herein) to
its principal bank lender, which has been recorded as a discount to the related
debt at fair value. The fair value attributable to the Second Warrant, $327,000,
will be amortized as interest expense for the period January 1, 1998 through
October 1, 1998. On April 1, 1998, the Company and the lender entered into the
Facility Restructuring Agreement under which the Company received an option to
pay a fee of $235,313 to eliminate certain anti-dilution provisions of the
lender's warrants upon the closing of an offering of the Company's stock as 
defined.

    In August 1998, the Company restated its September 30, 1996 and September 
30, 1997 consolidated financial statements. The restatement related to the 
Company's accounting for inventory reserves. During the year ended September 
30, 1996, the Company had provided approximately $3.3 million of reserves for 
DU inventory of which approximately $1.0 million of such reserves were reversed
into income during the year ended September 30, 1997, based upon management's 
estimate of the future recoverability of DU inventory. After further review, 
management of the Company has determined, based on consideration of the 
applicable accounting literature and all of the relevant information available
at the time of the release of the Company's September 30, 1996 financial 
statements, that the reserves provided in 1996 should have been lower by 
approximately $650,000 ($0.14 per diluted share) and the reversal of 
approximately $1.0 million ($0.20 per diluted share) of such reserves in 1997
should not have been recorded. In the future, inventory reserves will not be
reversed until the related inventory is sold or disposed of. The
    
                                       19
<PAGE>

following table summarizes the effects of the restatement on net income (loss)
and the related income (loss) per share amounts in fiscal year 1996 and 1997.
 
<TABLE>
<CAPTION>
                                                                                      
                                           1996                        1997           
                               ----------------------------  -------------------------
                                AS REPORTED    AS RESTATED   AS REPORTED   AS RESTATED
                               -------------  -------------  ------------  -----------
<S>                            <C>            <C>            <C>           <C>        
Net income (loss)............  $  (3,037,000) $  (2,387,000) $  1,482,000   $ 482,000 
Income (loss) per share:
  Basic......................          (0.64)         (0.50)         0.31        0.10 
  Diluted....................          (0.64)         (0.50)         0.30        0.10 
</TABLE>
 
    The Company had established inventory reserves totaling approximately $1.6
million at the end of fiscal 1995. During fiscal 1996, the Company established
additional inventory reserves of approximately $2.7 million related to its DU
inventory, which consisted of DU metal and UF(4). These additional reserves were
established based on management's evaluation of the risks associated with the DU
inventory, including risks associated with excess and obsolete inventory, and
had the effect of writing down approximately 20% of the Company's DU metal
inventory to zero and writing down approximately 50% of the Company's UF(4)
inventory to zero. In conducting this evaluation, management considered the type
and quantity of inventory on hand, historical sales volumes and expectations
concerning the timing and amounts of then anticipated sales of current and
proposed products (based upon longer than expected sales cycles for certain
products). At September 30, 1996, the Company's utilization of DU inventory was
uncertain. In particular, the Company considered future use of DU inventory for
munitions contracts with the U.S. Army as unlikely. At that time, the Company
was also discussing with USEC the possibility, timing and volume of AVLIS
feedstock production, and was evaluating the potential use of DU inventory in
other proposed products and the timing of inventory usage with respect to such
products. Although the Company believed the long-term possibilities for DU
inventory usage were numerous, the uncertainties related to the usage of the DU
inventory were significant. Based on these uncertainties, management's judgment
and discussions between the Company and its independent public accountants,
inventory reserves were increased by such $2.7 million amount, bringing the
total inventory reserves at September 30, 1996 to approximately $4.2 million. Of
this amount, approximately $3.2 million was allocated to DU inventory, with the
balance allocated to various other inventories. As of September 30, 1996, gross
DU inventory was approximately $11.9 million and consisted of approximately $7.2
million of DU metal and $4.7 million of UF(4). As of September 30, 1996, DU
inventory, net of reserves, was approximately $8.7 million and consisted of
approximately $6.4 million of DU metal and approximately $2.3 million of UF(4).
   
    During fiscal 1997, the Company used approximately $2.9 million of DU 
metal inventory principally in connection with a munitions contract with a 
foreign customer and to a lesser extent in connection with an AVLIS feedstock 
production contract. Revenues related to a munitions contract with a foreign 
customer and an AVLIS feedstock production contract for fiscal 1997 were $5.4 
million and $3.9 million, respectively, as compared to $3.1 million and $1.3 
million, respectively, for fiscal 1996. Revenues by quarter under these two 
contracts were approximately $3.7 million, $1.0 million, $2.1 million and 
$2.5 million for the fiscal quarters ended December 31, 1996, March 31, 1997, 
June 30, 1997 and September 30, 1997, respectively. At September 30, 1997, 
the Company had approximately $9.0 million of gross DU inventory or 
approximately $5.8 million, net of reserves and consisted of approximately 
$3.5 million of DU metal inventory, net and approximately $2.3 million of 
UF(4) inventory, net. Based on current discussions with customers, the 
Company presently expects to sell approximately $400,000 of DU inventory 
during fiscal 1998 and approximately $1.9 million of DU inventory during 
fiscal 1999. Subject to the uncertainties described above, the Company 
expects to sell the balance of DU inventory, including DU inventory written 
down to zero, thereafter. In the event that the Company sells DU inventory in 
the future which has been written down to zero, the Company will generate 
revenues with higher gross margins than if such inventory had not been 
written down to zero. In the event that the actual usage of any DU inventory, 
or the timing of such usage, differs materially from the Company's current 
expectations, any such differences could have a material adverse effect on 
results of operations of the Company's South Carolina facility and 
accordingly, on the Company's overall liquidity. In such event, the Company's 
liquidity, cash flows and results of operations would be dependent upon the 
Company's other business segments, particularly its Specialty Metal Products 
business segment. See Notes 2 and 5 to Consolidated Financial Statements.
    
             (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTS)

                                       20
<PAGE>
RESULTS OF OPERATIONS
 
   
    The following table sets forth certain items in the consolidated statements
of income as a percentage of net sales and contract revenues for the fiscal
years 1997, 1996 and 1995.
    

   
<TABLE>
<CAPTION>
                                                              YEAR ENDED               
                                                             SEPTEMBER 30,             
                                                ---------------------------------------
                                                    1997           1996         1995    
                                                -------------  -------------  --------- 
                                                (AS RESTATED)  (AS RESTATED)            
                                                                                        
<S>                                             <C>            <C>            <C>       
                                                                                        
Net sales and contract revenues...............          100%           100%         100%
Costs and expenses:                                                                     
  Cost of sales...............................           72             85           82 
  Selling, general and administrative                                                   
    expenses..................................           19             19           26 
  Research and development expenses...........            5              3            2 
  Loss on write-off of fixed asset............            1             --           -- 
Operating income (loss).......................            3             (7)         (10)
Interest and other income (expense), net......           --             --            1 
Interest expense..............................            1              1            2 
Income (loss) before income taxes and                                                   
  extraordinary item..........................            2             (8)         (11)
Provision (benefit) for income taxes..........           --             --          (10)
Income (loss) before extraordinary item.......            2             (8)          -- 
Net income (loss).............................            2             (8)           3 
</TABLE>
    

FISCAL 1997 COMPARED WITH FISCAL 1996
 
    Net sales decreased by $632,000 or 2% to $28,062,000 in fiscal 1997 compared
to $28,694,000 in fiscal 1996. Sales in the Uranium Services and Recycle segment
decreased by $1,224,000 or 20%. Sales in the Specialty Metal Products segment
decreased by $560,000 or 4%. Sales in the Depleted Uranium Penetrator segment
increased by $1,152,000 or 13%.
 
    The sales decrease in the Uranium Services and Recycle segment was primarily
due to lack of volume in depleted uranium products due to completion of a
production contract for a foreign customer in fiscal 1996. This decrease was
partially offset by increases in AVLIS feedstock production for USEC. The sales
decrease in the Specialty Metal Products industry segment was a result of
decreased volumes of beryllium products due to a delay in expected orders,
partially offset by an increase in commercial depleted uranium products. The
sales increase in the Depleted Uranium Penetrator segment was the result of
higher production volume of penetrators for a foreign customer as a result of an
order which was expected to receive government funding in fiscal 1996 but which
was not funded until fiscal 1997 and the revenue recognized pursuant to the
Company's contract with the United States Army to remediate the holding basin at
the Company's Concord facility.
 
    Gross profit increased by $3,635,000 to $7,926,000 or 28% of sales in fiscal
1997 compared to $4,291,000 or 15% of sales in fiscal 1996. This increase in
gross profit was primarily due to reduction of certain accruals in fiscal 1997
for waste burial costs of $1,750,000. The revised contract price for waste
burial costs was approximately $1,750,000 lower than what was previously
estimated and accrued. In addition, gross profit for fiscal 1996 was reduced by
an accrual of a $2,100,000 reserve for anticipated fiscal 1997 operating losses
associated with production contracts in the Uranium Services and Recycle
segment. As of September 30, 1997, the accrual had been fully utilized.
 
    Selling, general and administrative expenses increased by $123,000 or 2% to
$5,448,000 in fiscal 1997 compared to fiscal 1996. This increase was primarily
due to additional employees required to support the
 
                                       21
<PAGE>
forecasted growth in business. As a percentage of sales, these expenses remained
at 19% in fiscal 1997 compared to fiscal 1996.
 
    Company-sponsored research and development expenses increased by 49% or
$433,000 to $1,309,000 for fiscal 1997. As a percentage of sales, these expenses
were 5% compared to 3% in fiscal 1996.
 
    Interest and other income decreased to ($2,000) in fiscal 1997 as compared
to ($89,000) in fiscal 1996. This decrease was mainly due to the absence in
fiscal 1997 of a restructuring fee associated with amendments to the Company's
credit facility during the third quarter of fiscal 1996.
 
    Interest expense decreased by $91,000 to $296,000 in fiscal 1997 as compared
to fiscal 1996. This decrease was primarily the result of higher interest rates
and fees associated with outstanding debt during fiscal 1996.
 
    Income taxes provided during 1997 and 1996 were at effective rates of 2% and
0%, respectively. The 1997 effective rate of 2% differs from the statutory rate
of 34% due to a reduction in the valuation allowance associated with to the
benefit of net operating loss carryforwards.
 
FISCAL 1996 COMPARED WITH FISCAL 1995
 
    Net sales increased by $9,910,000 or 53% to $28,694,000 in fiscal 1996
compared to $18,784,000 in fiscal 1995. Sales in the Uranium Services and
Recycle segment increased by $1,220,000 or 25%. Sales in the Specialty Metal
Products segment increased by $1,628,000 or 13%. Sales in the Depleted Uranium
Penetrator segment increased by $7,062,000 or 412%.
 
    The sales increase in the Uranium Services and Recycle segment was primarily
due to increases in AVLIS feedstock production for USEC. The sales increase in
the Specialty Metal Products segment was a result of higher sales of beryllium
products and commercial depleted uranium. The sales increase in the Depleted
Uranium Penetrator segment was the result of higher sales of large caliber
penetrators.
 
    During the third quarter of fiscal 1996, the Company reduced its workforce
from 55 to 24 employees at its South Carolina facility due to the completion of
a multi-year contract for the manufacture of depleted uranium for a foreign
customer and the lack of anticipated new orders. The Company had expected to
obtain orders from USEC and the DoE in the second half of fiscal 1996. These
orders did not materialize and as a result this facility operated at
approximately 40% capacity on a one-shift basis through most of fiscal 1996. In
the fourth quarter of fiscal 1996, the Company established a $2,100,000 reserve
for estimated fiscal 1997 losses associated with then current production
contracts.
 
    Gross profit increased by $959,000 to $4,291,000 or 15% of sales in fiscal
1996 compared to $3,332,000 or 18% of sales in fiscal 1995. This increase in
gross profit was primarily due to increased sales volume during fiscal 1996. As
a percentage of sales, the decrease in gross profit was primarily due to the
establishment of a $2,100,000 reserve for estimated losses associated with CMI's
production contracts.
 
    Selling, general and administrative expenses increased by $508,000 to
$5,325,000 in fiscal 1996 compared to fiscal 1995. This increase was primarily
due to additional employees required to support the growth in business. As a
percentage of sales, these expenses decreased to 19% in fiscal 1996 compared to
26% in fiscal 1995, as a result of sales increasing at a higher rate than
expenses.
   
    Company-sponsored research and development expenses increased by 100% or
$437,000 to $876,000 in fiscal 1996 compared to fiscal 1995 due to increased
research and development costs related to the use of the Company's Beralcast
technology in certain military aerospace applications. As a percentage of sales,
these expenses were 3% in fiscal 1996 compared to 2% in fiscal 1995.
    
    Interest and other income decreased to $89,000 of expense in fiscal 1996
compared to $232,000 of income for fiscal 1995. This decrease was mainly from a
$150,000 restructuring fee associated with amendments to the Company's credit
facility during the third quarter of fiscal 1996 and a gain of $175,000
recognized during the second quarter of fiscal 1995 on the sale of an office
building.
 
                                       22
<PAGE>
    Interest expense increased by $37,000 to $387,000 in fiscal 1996 compared to
fiscal 1995. This increase was primarily the result of higher interest rates and
fees associated with outstanding debt during fiscal 1996.
 
    During fiscal 1995, the Company realized a $585,000 extraordinary gain net
of taxes of $10,000 on the early extinguishment of debt.
 
    Income taxes provided during 1996 were at an effective rate of 0%. The 1996
effective rate of 0% differed from the statutory rate of 34% due to a reduction
in the valuation allowance associated with to the benefit of net operating loss
carryforwards.
 
LIQUIDITY AND CAPITAL RESOURCES
   
    In recent fiscal years, the Company's primary sources of liquidity have been
borrowings under the Existing Credit Facility, borrowings from shareholders and,
to a limited extent, cash from operations. The Company has experienced
significant financial difficulties and liquidity problems in recent years due
primarily to the sharp decline in sales of DU penetrators and a lack of orders
for certain other DU products. As a result, the Company has had to seek
financing from stockholders, waivers of non-compliance with, and amendments of,
certain covenants and other provisions in its debt instruments (including
waivers and amendments under the Existing Credit Facility in February, May, 
June and August of 1998), additional borrowings and extensions of maturities 
under the Existing Credit Facility, and additional equipment financing from 
another bank for capital expenditures required at its South Carolina 
facility. Bank borrowings and borrowings from stockholders were effected to 
fund working capital requirements, capital expenditures and a number of 
expenses which were incurred in expectation of future business and revenues 
from the Company's Beralcast business and its South Carolina facility.
    
   
    The Company's future liquidity needs are expected to arise primarily from
its capital expenditure program, which is designed primarily to increase
manufacturing capacity to support its Beralcast business. In order to obtain and
satisfy orders for large scale commercial production of its Beralcast products,
the Company plans to significantly increase capital expenditures to expand its
commercial Beralcast manufacturing capabilities through fixed asset additions
including furnaces, automated production equipment and facility upgrades. The
Company anticipates spending up to approximately $90 million over the next four
years, subject to various factors, to increase the capacity at the Company's
facilities. Of this amount, the Company expects to spend approximately $60
million on the expansion of its Beralcast business. The Company expects to fund
such capital expenditures with the proceeds of an offering of its common 
stock and cash expected to be generated from operations. However, there can 
be no assurance that such an offering will take place or that such capital 
expenditures will be made.
    
    Net cash provided (used) by operating activities in fiscal years 1997, 1996
and 1995 was ($921,000), $3,776,000 and ($278,000), respectively. Differences in
cash flows from operating activities over this three-year period were primarily
related to significant year-to-year changes in accounts receivable, inventories
and accounts payable. The Company used net cash of $1,788,000, $1,107,000 and
provided $36,000 in fiscal years 1997, 1996 and 1995, respectively, primarily to
fund investing activities largely related to capital expenditures made in
anticipation of future commercial business. Net cash flows from financing
activities for fiscal years 1997, 1996 and 1995 were $1,676,000, ($2,444,000)
and $105,000, respectively. Net cash provided for financing activities in fiscal
1997 was primarily the result of an increase in bank borrowings of approximately
$1,700,000 and $500,000 in borrowings from shareholders. Fiscal 1996 net cash
used by financing activities was primarily the result of reduction of bank debt
in accordance with credit terms. As a result of the foregoing, net cash
increased (decreased) in fiscal years 1997, 1996 and 1995 by ($1,033,000),
$225,000 and ($137,000), respectively.
 
                                      23

<PAGE>
   
    On October 1, 1997, the Company and its principal bank lender, State Street
Bank & Trust Company, entered into an Amended and Restated Credit Agreement
providing for a credit facility (as amended, the "Existing Credit Facility") of
$6.6 million, including $3.6 million in letters of credit. Borrowings under the
Existing Credit Facility bear interest, payable monthly in arrears, at a rate
equal to the lender's prime rate plus one-half of one percent and the Company
pays a fee of one-half of one percent of the unused portion of the facility.
Borrowings are secured by a security interest in all of the Company's accounts,
inventory and general intangibles. The Company and its lender entered into the
First Amendment to Credit Agreement dated December 9, 1997 which provided for an
increase in the Existing Credit Facility to $8.0 million. On December 29, 1997,
the Company entered into the Second Amendment to Credit Agreement which provided
for the following: (i) an increase in the total amount of credit available to
the Company from $8.0 million to $9.6 million consisting of a $6.0 million line
of credit and $3.6 million letters of credit; (ii) a revised amortization
schedule whereby the maximum aggregate liability (including letters of credit)
of the Company under the Existing Credit Facility shall not exceed $8.1 million
from July 1, 1998 through September 30, 1998, and $6.6 million from October 1,
1998 through February 28, 1999, which is when the balance is due; and (iii)
waiver of non-compliance by the Company with certain covenants in the Existing
Credit Facility and amendment of certain financial covenants. As a result of the
loss in the first quarter of fiscal 1998, the Company sought and obtained a
waiver of non-compliance with certain covenants in the Existing Credit Facility.
The Company and its lender entered into the Third Amendment to Credit Agreement
dated June 11, 1998 which provided for (i) a revised amortization schedule
whereby the maximum aggregate liability (including letters of credit) of the
Company under the Existing Credit Facility shall not exceed $9.6 million through
September 30, 1998, $8.1 million from October 1, 1998 through December 31, 1998,
and $6.6 million from January 1, 1999 through February 28, 1999, which is when
the balance is due, and (ii) a reduction of the net income covenant for the
third quarter of fiscal 1998.

    As of March 31, 1998, the Company was out of compliance with the capital
expenditure financial covenant under its credit agreement which prohibits the
Company from making capital expenditures above $2,000,000 annually. On May 15,
1998, the Company received a waiver for this event of non-compliance and of
non-compliance with the capital expenditure financial covenant for the remainder
of fiscal 1998. The Company also received a waiver of non-compliance in February
1998 with respect to its failure to meet a net income covenant in the first
quarter of fiscal 1998.

    As of June 30, 1998, the Company was out of compliance with the financial 
covenant under its credit agreement that limits the net loss reported for the 
fiscal quarter ended June 30, 1998. On August 7, 1998, the Company received a 
waiver for this event of non-compliance and any events of non-compliance as a 
result of the restatement of the Company's financial statements for the years 
ended September 30, 1997 and 1996. In addition, the credit agreement was 
modified such that the availability was increased to $11,050,000, through 
September 30, 1998; $8,050,000 from October 1, 1998 through December 31, 
1998, and $6,550,000 on January 1, 1999 and thereafter until it's maturity on 
February 28, 1999. Also, the tangible capital base required by the agreement 
shall not be less than $22,500,000 as of September 30, 1998 plus an increase 
equal to the aggregate of 75% of the Company's net income for each fiscal 
quarter after September 30, 1998. Net income (loss) shall be not less than 
($500,000) for the quarter ending September 30, 1998 and $750,000 for the 
quarter ending December 31, 1998 and each quarter thereafter. 
    
 
    In September 1995, in connection with an increase of the Company's borrowing
capacity under the Existing Credit Facility as then in effect, the Company
issued to the lender a warrant (the "First Warrant")
 
                                       24

<PAGE>

to purchase 55,790 shares of Common Stock (as adjusted for a 
two-for-one stock dividend paid on April 7, 1997 and certain subsequent 
anti-dilution adjustments) at an exercise price of $5.95, based on the market 
price of the Common Stock at that time. The First Warrant has a ten-year 
exercise period. In consideration of the Second Amendment to the Credit 
Agreement, the Company issued to the lender a warrant (the "Second Warrant" 
and, together with the First Warrant, the "Warrants") to purchase 25,000 
shares of Common Stock at an exercise price of $23.58, based on the market 
price of the Common Stock at that time. The Second Warrant has a seven-year 
exercise period. The Second Warrant has been valued at approximately 
$327,000, which amount will be amortized as interest expense over the period 
ending October 1, 1998. Under the original terms of each of the Warrants, the 
holder of the Warrants would be entitled to receive, without further 
consideration, a number of shares of Common Stock which would permit the 
holder to maintain its percentage ownership in the Company, on a 
fully-diluted basis, upon any future issuances of Common Stock by the 
Company. 
   

    On April 1, 1998, the Company entered into an agreement (the 
"Facility Restructuring Agreement") with its principal bank lender pursuant 
to which, contingent upon the closing of the offering, the Company received 
an option to make a payment of $235,313 to the lender whereupon no further 
adjustments for issuances of Common Stock by the Company will be made under 
the First Warrant (other than an adjustment related to the closing of the 
offering) and no adjustments for issuances of Common Stock by the Company 
will be made under the Second Warrant.

    The Company and its subsidiaries have entered into an agreement with the 
Company's principal bank lender that, effective upon the closing of an 
offering of the Company's common stock, with net proceeds of at least $40 
million, the lender shall make available to the Company a $10,000,000 
unsecured revolving credit facility, maturing on February 28, 2000 (the "New 
Credit Facility"). Borrowings under the New Credit Facility will bear 
interest, at the Company's option, at either a variable rate equal to the 
lender's prime rate (with interest payable monthly in arrears) or at a rate 
equal to the London Inter-Bank Offered Rate plus a sliding-scale fixed rate 
spread based upon the Company's net income for the previous quarter (with 
interest payable at the end of a one, two or three month period, at the 
option of the Company). Borrowings under the New Credit Facility will be used 
for working capital and stand-by letters of credit, and will be subject to 
the satisfaction of certain financial covenants. The New Credit Facility 
terms provide that the Company and its subsidiaries will not further pledge 
their respective assets to any third party.

    

    The Company has outstanding in the aggregate $2,250,500 in principal amount
under debt instruments issued to certain of its principal stockholders,
consisting of the following: $500,500 in principal amount of its 10% Convertible
Subordinated Debentures due December 10, 1998, which are convertible at any time
into Common Stock at $5.945 per share; $350,000 in principal amount of its 10%
Subordinated
 
                                       25
<PAGE>
Debentures due December 10, 1998, with three-year warrants to purchase 42,000
shares of Common Stock at an exercise price of $7.50 per share; $500,000 in
principal amount of its 10% Subordinated Debentures due December 10, 2000, with
three-year warrants to purchase 60,000 shares of Common Stock at an exercise
price of $17.875 per share; and $900,000 in principal amount of its 10%
Convertible Subordinated Debentures due December 31, 1999, the principal amount
of which is convertible at any time into Common Stock at $21.50 per share. The
Company intends to use a portion of the proceeds of the offering to repay all of
the 10% Subordinated Debentures. The Company intends to offer to repay all of
the 10% Convertible Subordinated Debentures but expects that the holders thereof
will convert such debt into Common Stock instead of accepting repayment.
 
    The Company believes, based on assumptions concerning backlog fulfillment
and the expected timing of new orders, that the proceeds of the offering, cash
from operations, and borrowings which will become available under the New Credit
Facility will be sufficient to sustain operations for more than 12 months and to
fund anticipated capital expenditures.
 
    The Company anticipates that, for the foreseeable future, all earnings will
be retained to support operations and finance expansion. The Company has not
paid cash dividends in recent years, and does not intend to pay cash dividends
on the Common Stock for the foreseeable future. The Company's ability to pay
cash dividends is limited by its dependence upon the receipt of cash from its
subsidiaries to make such dividend payments. The Company's Existing Credit
Facility contains financial covenants and other restrictions that prohibit or
restrict the payment of dividends and intercompany loans among Starmet and its
subsidiaries and by the Company to its stockholders. The New Credit Facility
will not prohibit or restrict payment of dividends in the absence of a default.
 
    The Company has not invested in derivative securities or any other financial
instrument that involves a high level of complexity or risk. Management expects
that, in the future, cash in excess of current requirements will be invested in
investment-grade, interest-bearing securities.

   
SUBSEQUENT EVENT

    In addition to the matters described above, the Company is subject to 
certain environmental matters and legal proceedings which could have a 
material adverse effect on the Company's business, results of operations and 
financial condition. For a discussion of these matters as updated from the 
Company's Form 10-K filed with the Securities and Exchange Commission on 
January 28, 1998, see Part I, Item 1 "Business--Update Relative to Concord 
Site Remediation Status" and Part I, Item 3 "Update Relative to Legal 
Proceedings."
    

IMPACT OF YEAR 2000 ISSUE
 
    The Year 2000 issue is the result of computer programs being written 
using two digits rather than four to define the applicable year. Any of the 
Company's computer programs that have data-sensitive software may recognize a 
date using "00" as the year 1900 rather than the year 2000. This could result 
in a system failure or miscalculations causing disruptions of operations, 
including, among other things, a temporary inability to process transactions, 
send invoices, or engage in simular normal business activities.

    The Company is in the process of installing a new accounting software 
system. Management believes that subject to successful installation of the 
new accounting system, the year 2000 issue will not have a material adverse 
impact to the Company's operations or financial position.

INFLATION
 
    Inflation has not had a material impact on the Company's cost of doing 
business. Management attempts to protect the Company by adjusting prices 
where market conditions permit and by reviewing and improving production 
processes where possible. Price escalation clauses also are negotiated into 
long-term contracts when possible.

             (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTS)

                                        26

<PAGE>

                           CONSOLIDATED BALANCE SHEET
   
<TABLE>
<CAPTION>
ASSETS                                                                  1997          1996
                                                                     ----------    ----------
                                                                    (as restated) (as restated)
<S>                                                                  <C>         <C>
  CURRENT ASSETS:
    Cash and cash equivalents...................................... $   195,000    $ 1,051,000
    Restricted cash................................................      73,000        250,000
    Accounts receivable, net of allowances for doubtful accounts 
      of $421,000 in 1997 and $821,000 in 1996.....................   5,546,000      4,931,000
    Inventories....................................................   5,239,000      6,824,000
    Other current assets...........................................     619,000        376,000
                                                                    -----------    -----------
      Total Current Assets.........................................  11,672,000     13,432,000
                                                                    -----------    -----------
  PROPERTY, PLANT AND EQUIPMENT:
    Land...........................................................   2,124,000      2,178,000
    Buildings......................................................  17,656,000     18,040,000
    Machinery, equipment, and fixtures.............................  18,472,000     26,179,000
    Construction-in-progress.......................................     831,000        583,000
                                                                    -----------    -----------
      Total Property, Plant and Equipment..........................  39,083,000     46,980,000
    Less: Accumulated depreciation.................................  24,036,000     31,834,000
                                                                    -----------    -----------
    Net property, plant, and equipment.............................  15,047,000     15,146,000
  NON-CURRENT INVENTORY............................................   5,851,000      5,851,000
  OTHER ASSETS.....................................................   1,784,000      1,339,000
                                                                    -----------    -----------
                                                                    $34,354,000    $35,768,000
                                                                    -----------    -----------
                                                                    -----------    -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
  CURRENT LIABILITIES:
    Current portion of long-term obligations....................... $ 1,885,000    $   510,000
    Accounts payable...............................................   3,123,000      2,143,000
    Accrued payroll and related costs..............................   1,215,000      1,170,000
    Other accrued expenses.........................................     907,000      5,561,000
                                                                    -----------    -----------
      Total Current Liabilities....................................   7,130,000      9,384,000
                                                                    -----------    -----------
  LONG-TERM OBLIGATIONS............................................     430,000        644,000
                                                                    -----------    -----------
  NOTES PAYABLE TO SHAREHOLDERS....................................   1,048,000        720,000
                                                                    -----------    -----------
  STOCKHOLDERS' EQUITY:............................................
    Common stock, par value $.10; authorized--15,000,000 shares;
      issued and outstanding for 1997 and 1996; 4,784,244 shares
      and 4,781,928 shares, respectively...........................     478,000        478,000
    Additional paid-in capital.....................................  14,033,000     14,019,000
    Warrants Issued................................................     360,000        130,000
    Retained earnings..............................................  10,875,000     10,393,000
                                                                    -----------    -----------
      Total Stockholders' Equity...................................  25,746,000     25,020,000
                                                                    -----------    -----------
                                                                    $34,354,000    $35,768,000
                                                                    -----------    -----------
                                                                    -----------    -----------
</TABLE>
    
                  THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                         CONSOLIDATED FINANCIAL STATEMENTS.

                                     27

<PAGE>

                      CONSOLIDATED STATEMENT OF OPERATIONS

   
<TABLE>
<CAPTION>
                                                                        1997          1996          1995
                                                                   ------------  ------------  ------------
                                                                   (as restated) (as restated)
<S>                                                                <C>           <C>           <C>
NET SALES AND CONTRACT REVENUES............................        $ 28,062,000  $ 28,694,000  $ 18,784,000
                                                                   ------------  ------------  ------------
COST AND EXPENSES:
  Cost of sales............................................          20,136,000    24,403,000    15,452,000
  Selling, general, and administrative expenses............           5,448,000     5,325,000     4,817,000
  Research and development expenses........................           1,309,000       876,000       439,000
  Loss on write-off of fixed asset.........................             358,000            --            --
                                                                   ------------  ------------  ------------
 
                                                                     27,251,000    30,604,000    20,708,000
                                                                   ------------  ------------  ------------
 
OPERATING INCOME (LOSS)....................................             811,000    (1,910,000)   (1,924,000)
INTEREST AND OTHER INCOME (EXPENSE), NET...................              (2,000)      (89,000)      232,000
INTEREST EXPENSE...........................................            (296,000)     (387,000)     (350,000)
                                                                   ------------  ------------  ------------
 
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM...             513,000    (2,386,000)   (2,042,000)
PROVISION (BENEFIT) FOR INCOME TAXES.......................              31,000         1,000    (1,967,000)
                                                                   ------------  ------------  ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM....................             482,000    (2,387,000)      (75,000)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT NET OF TAXES 
OF $10,000.................................................                  --            --       585,000
                                                                   ------------  ------------  ------------
NET INCOME (LOSS)..........................................        $    482,000  $ (2,387,000) $    510,000
                                                                   ------------  ------------  ------------
                                                                   ------------  ------------  ------------
 
Per Share Information*
----------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM....................                0.10         (0.50)          (0.02)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT NET OF TAXES 
OF $10,000.................................................                  --            --            0.12
                                                                   ------------  ------------  --------------
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE...        $       0.10  $      (0.50) $         0.11
                                                                   ------------  ------------  --------------
                                                                   ------------  ------------  --------------
 
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT 
SHARES OUTSTANDING..........................................          4,958,870      4,778,928       4,705,512
                                                                   ------------  -------------  --------------
                                                                   ------------  -------------  --------------
 
DIVIDENDS PER SHARE.........................................      $         --  $          --  $           --
                                                                   ------------  -------------  --------------
                                                                   ------------  -------------  --------------
</TABLE>
    
   
*Adjusted to reflect 2 for 1 stock split issued on April 7, 1997.
    


             THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE 
                      CONSOLIDATED FINANCIAL STATEMENTS.


                                        28

<PAGE>


                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
   
<TABLE>
<CAPTION>
                                             Common Stock
                                        ---------------------      Additional
                                          Number           Par       Paid-in                        Retained 
                                        of Shares         Value      Capital         Warrants       Earnings             Total
                                        ----------     ----------  -----------       --------     -----------        ------------
                                        <S>            <C>         <C>               <C>           <C>               <C>
Balance at September 30, 1994.........  4,614,928     $  460,000  $13,522,000        $  --        $12,270,000       $ 26,252,000
                                        ----------     ----------  -----------       --------     ------------       ------------
Stock Options Exercised...............    161,000         18,000      465,000           --             --                483,000
Net Income for Year...................       --             --          --              --            510,000            510,000
                                        ----------     ----------  -----------       --------     ------------       ------------
Balance at September 30, 1995.........   4,775,928     $  478,000  $13,987,000       $   --       $ 12,780,000       $ 27,245,000
                                        ----------     ----------  -----------       --------     ------------       ------------

Warrants issued.......................       --             --          --            130,000           --                130,000
Stock Options Exercised...............       6,000          --          32,000           --             --                 32,000
Net Loss for Year (as restated).......       --             --          --               --         (2,387,000)        (2,387,000)
                                        ----------     ----------  -----------       --------     ------------       ------------
Balance at September 30, 1996
  (as restated).......................   4,781,928     $  478,000  $14,019,000       $130,000      $10,393,000       $ 25,020,000
                                        ----------     ----------  -----------       --------     ------------       ------------


Warrants issued.......................       --             --          --            230,000           --                230,000
Stock Options Exercised...............       2,316          --          14,000           --             --                 14,000
Net Income for Year (as restated).....       --             --          --               --            482,000            482,000
                                        ----------     ----------  -----------       --------     ------------       ------------

Balance at September 30, 1997
 (as restated)........................   4,784,244     $  478,000  $14,033,000       $360,000     $ 10,875,000       $ 25,746,000
                                        ----------     ----------  -----------       --------     ------------       ------------
                                        ----------     ----------  -----------       --------     ------------       ------------

</TABLE>
    
           THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE 
                    CONSOLIDATED FINANCIAL STATEMENTS.

                                      29

<PAGE>

                     CONSOLIDATED STATEMENT OF CASH FLOWS
   
<TABLE>
<CAPTION>
                                                                    1997          1996            1995
                                                                -----------   ------------   ------------
                                                               (as restated)  (as restated)
<S>                                                             <C>           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)..........................................   $   482,000   $(2,387,000)   $   510,000
  Adjustments to reconcile net income to net cash
   provided (used) by operating activities
     Depreciation and amortization...........................     1,588,000     1,493,000      1,339,000
     Loss on write-off of fixed assets.......................       358,000            --             --
     Changes in assets and liabilities, net-
       Decrease (increase) in accounts receivable............      (616,000)     (201,000)       725,000
       Decrease (increase) in inventories....................     1,585,000     1,449,000     (2,982,000)
       (Decrease) increase in accounts payable and
        accrued expenses.....................................    (3,629,000)    3,358,000      1,387,000
     Gain on sale of building................................            --       (75,000)      (175,000)
     Changes in accrued and deferred taxes...................            --            --         (1,000)
     Changes in other long-term liabilities..................            --      (301,000)      (981,000)
     Other...................................................      (689,000)      440,000       (100,000)
                                                                -----------   -----------    -----------
       Net cash provided (used) by operating activities......      (921,000)    3,776,000       (278,000)
                                                                -----------   -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures, net..................................    (1,788,000)   (1,449,000)      (777,000)
  Sales of marketable securities, net........................            --       170,000        326,000
  Proceeds from sale of Property, Plant & Equipment..........            --       172,000        487,000
                                                                -----------   -----------    -----------
       Net cash (used) provided by investing activities......    (1,788,000)   (1,107,000)        36,000
                                                                -----------   -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments under long-term obligations.............      (545,000)           --             --
  Payments on bank debt......................................    (9,801,000)   (4,856,000)    (4,103,000)
  Proceeds from bank debt....................................    11,508,000     1,530,000      3,725,000
  Proceeds from Notes Payable to Shareholders and Warrants...       500,000       850,000             --
  Proceeds from Stock issuance...............................        14,000        32,000        483,000
                                                                -----------   -----------    -----------
       Net cash (used) provided by financing activities......     1,676,000    (2,444,000)       105,000
                                                                -----------   -----------    -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
  Cash and cash equivalents at beginning of year.............    (1,033,000)      225,000       (137,000)
  Cash and cash equivalents at end of year...................     1,301,000     1,076,000      1,213,000
                                                                -----------   -----------    -----------
                                                                $   268,000   $ 1,301,000    $ 1,076,000
                                                                -----------   -----------    -----------
                                                                -----------   -----------    -----------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid (received) during the year for:
       Interest, net of amounts capitalized..................   $   266,000   $   345,000    $   280,000
       Income tax refunds received...........................   $    14,000   $    11,000    $   978,000

NON-CASH INVESTING & FINANCING ACTIVITIES:
  Capital lease obligations..................................   $        --   $    75,000    $        --
  Loss on write-off of non-current inventories...............   $        --   $ 2,650,000    $        --
</TABLE>
    

       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                CONSOLIDATED FINANCIAL STATEMENTS.


                                      30
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. OPERATIONS

    Starmet Corporation (The Company) is a manufacturer of specialized metal 
products which are fabricated by a variety of metalworking processes. 
Effective October 1, 1997 the company changed its name from Nuclear Metals, 
Inc. to Starmet Corporation. Export sales to foreign unaffiliated customers 
are 25% of total net sales and contract revenues in fiscal 1997, 28% in 
fiscal 1996, and 33% in fiscal 1995. A significant portion of the Company's 
sales revenue has been derived from major customers as follows:

                                         1997      1996      1995
                                         ----      ----      ----
Royal Ordnance.........................   19%       11%        -%
United States Enrichment Corp..........   14         5         --
Primex Technologies....................   12        20         8
Lockheed Martin........................    7        16        18
Lockheed Idaho Falls...................    5         4         9

   

    In August 1998, the Company restated its September 30, 1996 and September 
30, 1997 consolidated financial statements. The restatement related to the 
Company's accounting for inventory reserves. During the year ended 
September 30, 1996, the Company had provided approximately $3.3 million of 
reserves for DU inventory, of which approximately $1.0 million of such reserves
were reversed into income during the year ended September 30, 1997, based upon 
management's estimate of the future recoverability of DU inventory. After 
further review, management of the Company has determined, based on 
consideration of the applicable accounting literature and all of the relevant 
information available at the time of the release of the Company's September 30,
1996 financial statements, that the reserves provided in 1996 should have 
been lower by approximately $650,000 ($0.14 per diluted share) and the 
reversal of approximately $1.0 million ($0.20 per diluted share) of such 
reserves in 1997 should not have been recorded. In the future, inventory 
reserves will not be reversed until the related inventory is sold or disposed 
of. The following table summarizes the effects of the restatement on net 
income and the related income per share amounts in 1996 and 1997.

<TABLE>
<CAPTION>
                                                  1996                          1997
                                       --------------------------    --------------------------
                                       AS REPORTED    AS RESTATED    AS REPORTED    AS RESTATED
                                       -----------    -----------    -----------    -----------
<S>                                    <C>            <C>            <C>            <C>
Net Income:........................... $(3,037,000)   $(2,387,000)   $1,482,000      $482,000
Income per share:
  Basic............................... $     (0.64)   $     (0.50)   $     0.31      $   0.10
  Diluted............................. $     (0.64)   $     (0.50)   $     0.30      $   0.10
</TABLE>
    

2. SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

    The accompanying consolidated financial statements include the accounts 
of Starmet Corporation and its wholly owned subsidiaries: Starmet Powders, 
LLC, Starmet Aerocast, LLC Starmet Comcast, LLC, Starmet NMI Corporation, 
Starmet CMI Corporation, Starmet Holdings Corporation and NMI Foreign Sales 
Corporation. All material intercompany transactions and balances have been 
eliminated in consolidation.

FISCAL YEARS

    References in these financial statements to 1997, 1996, and 1995 are for 
the fiscal years ended September 30, 1997, September 30, 1996, and September 
30, 1995, respectively. The accompanying financial statements and all share 
and per share information have been restated to reflect a 2 for 1 stock split 
effective in April 1997.

REVENUE RECOGNITION

    Revenues are recorded when products are shipped, except for revenues on 
long- term contracts, which are recorded on the percentage-of-completion 
method. The percentage-of-completion method is used for research and 
development contracts and for production contracts, which require significant 
amounts of initial engineering and development costs. The 
percentage-of-completion is determined by relating the actual number of 
contract units completed to date to the total units to be completed under the 
respective contract or by relating total costs incurred to total estimated 
cost at completion. When 

                                       31

<PAGE>

   
the estimated total costs on a contract indicates a loss, the Company's 
policy is to record the entire loss currently. Performance incentives and 
penalties incorporated in certain government contracts are recognized when 
incentives are earned or awarded or when penalties are incurred or assessed. 
Contract revenues include fees resulting from facilitization contracts with 
the U. S. Army (contracts to establish production capacity through the 
purchase and installation of equipment to be owned by the U.S. Army). Costs 
associated with these contracts, exclusive of the costs to purchase the 
equipment ($0 in 1997, 1996 and in 1995) are included in cost of sales. The 
consolidated balance sheets do not include the cost of this U.S. Army-owned 
equipment.

    In the fourth quarter of fiscal 1996, the Company established a 
$2,100,000 reserve for estimated losses associated with Starmet CMI's 
production contracts. The Company was obligated to complete these contracts, 
which were fixed price. The contracts have been completed and the reserve is 
$0 as of September 30, 1997.

    

CASH AND CASH EQUIVALENTS

   
    Cash and cash equivalents are recorded at cost, which approximates 
market value. Cash equivalents include certificates of deposit with a 
maturity of three months or less.
    
   
INVENTORIES

    Inventories are stated at the lower of cost (first-in, first-out) or 
market and include materials, labor, and manufacturing and engineering 
overhead. The Company provides for inventory reserves by charges to cost of 
sales when it is determined that such reserves are necessary for matters such 
as excess and obsolete inventories. Increases in estimated reserve 
requirements, based on relevant information, management's experience, and the 
timing of expected inventory usage, are charged to cost of sales in the 
period in which the increase is determined. Inventory reserves are not 
reversed until the related inventory is sold or disposed of.     

PROPERTY, PLANT, AND EQUIPMENT

    Property, plant, and equipment are recorded at the lower of cost or net 
realizable value. For financial reporting purposes, the Company provides 
depreciation on the straight-line method over the estimated useful lives of 
the assets, which are as follows:

Buildings..................................................  20--30 years
Machinery, equipment, and fixtures.........................  3--10 years

    Maintenance and repairs are charged to operations as incurred; renewals 
and betterments are capitalized. When property, plant, and equipment are 
sold, retired or disposed of, the asset cost and accumulated depreciation are 
removed from the accounts, and the resulting gain or loss is included in 
operations.

   
    During fiscal 1997 the Company completed a review of its property, plant 
and equipment and identified assets with a net book value of $358,000 that 
were no longer being utilized. The Company recorded a charge to write off 
these assets. 

    In Fiscal 1997, the Company adopted the Financial Accounting Standards 
Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 
121, "Accounting for the Impairment of Long-Lived Assets and of Long-Lived 
Assets to be Disposed of." This statement requires a review of impairment for 
long-lived assets and certain identifiable intangibles to be held and used by 
an entity whether events or changes in circumstances indicate that the 
carrying amount of the assets may not be recoverable. An impairment loss is 
recognized if the sum of the expected future cash flows to result from the 
use and eventual disposition of the asset is less than the carrying amount 
    

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                       32

<PAGE>

of the asset. The amount by which the carrying amount of the asset exceeds 
the fair value less costs to sell, is an impairment loss. The effect of 
adopting this statement was not material to the Company's financial position 
or results of operation.

   
    

INCOME TAXES

    The Company accounts for income taxes in accordance with SFAS No. 109, 
"Accounting for Income Taxes." Accordingly, the Company recognizes deferred 
income taxes based on the expected future tax consequences of differences 
between the financial statement basis and the tax basis of assets and 
liabilities, calculated using enacted tax rates in effect for the year in 
which the differences are expected to be reflected in the tax return. The 
Company records a valuation allowance against any net deferred tax assets 
whose realizability is uncertain.

    The deferred federal and state income taxes result primarily from using 
accelerated depreciation on property, plant, and equipment for income tax 
reporting purposes and from establishing reserves which are not currently 
deductible for income tax purposes, respectively.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred. Research and 
development incurred under customer contracts are expensed through cost of 
sales in the period incurred. 

   
Customer funded research and development:
    

   
<TABLE>
<CAPTION>
                                             Years Ended September 30,
                                       -----------------------------------
                                          1995         1996         1997   
                                       ----------   ----------  ----------
<S>                                      <C>        <C>           <C>
Revenue..............................    $557,000   $1,812,000    $793,000
Cost of sales........................     459,000    1,273,000     675,000
</TABLE>
    

INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARES

    The Company currently calculates earnings per common share under 
Accounting Principles Board Opinion (APB) No. 15, "Earnings Per Share." 
Income/(loss) per share was computed by dividing the net income by the 
weighted average number of shares of common stock outstanding during each 
year. Common stock equivalents (stock options and stock warrants) were 
considered in the computation of earnings per common and common equivalent 
share for 1997. Stock options and stock warrants were not considered in 
computing the loss and income per share in 1996 and 1995, as the effect would 
have been antidilutive.

RECLASSIFICATIONS

    Certain amounts previously reported in the consolidated financial 
statements have been reclassified to conform to the 1997 presentation.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                       33

<PAGE>

NEW ACCOUNTING STANDARDS

    In March 1997, the Financial Accounting Standards Board issued SFAS No. 
128 "Earnings Per Share," which establishes standards for computing and 
presenting earnings per share for entities with publicly held common stock or 
potential common stock. SFAS No. 128 is effective for periods ending after 
December 15, 1997 and early adoption is not permitted. SFAS No. 128 replaces 
primary earnings per share with "basic earnings per common share." Basic 
earnings per common share is computed by dividing net income by the weighted 
average number of shares of common stock outstanding during the year. No 
dilution for any potentially dilutive securities is included. In addition, 
SFAS No. 128 replaces fully diluted earnings per common share with "diluted 
earnings per common share." Dilution for options and warrants under SFAS No. 
128 is computed using the average share price of the Company's common stock 
for the period, rather than the more dilutive greater than average share 
price or end-of-period share price required by APB No. 15. For fiscal years 
1997, 1996, and 1995 there would be no material change from primary and fully 
diluted earnings per common share to basic and diluted earnings per share 
under SFAS No. 128.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

    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 and 
disclosure of contingent assets and liabilities at the date of the financial 
statements and the reported amounts of revenues and expenses during the 
reporting period. Actual results could differ from those estimates.

DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

    The Company's financial instruments consist mainly of cash and cash 
equivalents, restricted cash, accounts receivable, notes receivable from 
officers, accounts payable and notes payable. The carrying amounts of the 
Company's cash and equivalents, restricted cash accounts receivable, notes 
receivable from officers and accounts payable approximate their fair value 
due to the short-term nature of these instruments. The carrying value of the 
notes payable also approximates the fair value, based on rates available to 
the Company for debt with similar terms and remaining maturities.
   
LEGAL COSTS FOR LOSS CONTINGENCIES

     Legal costs are recorded in the period in which the legal services are 
provided.
    
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                       34

<PAGE>

3. OTHER ACCRUED EXPENSES

    Accrued expenses consist of the following
    at September 30, 1997 and 1996
                                                      1997             1996
                                                    --------        ----------
    Waste burial cost............................   $404,000        $2,884,000
    Estimated loss on contracts..................      --            2,100,000
    Other........................................    503,000           577,000
                                                    --------        ----------
                                                    $907,000        $5,561,000
                                                    --------        ----------
                                                    --------        ----------

    During 1997, the Company reduced certain accruals by $1,750,000 for site 
remediation and waste burial costs which were deemed no longer necessary.

4. ACCOUNTS RECEIVABLE

    The following is an analysis of accounts receivable
    (net of allowances for doubtful accounts):
                                                       1997           1996
                                                    ----------      ----------
    Accounts receivable..........................   $5,460,000      $3,479,000
    Unbilled Receivables and Retainages due
     upon completion of contracts................       86,000       1,452,000
                                                    ----------      ----------
                                                    $5,546,000      $4,931,000
                                                    ----------      ----------

5. INVENTORIES

    Inventories (net of reserves) at September 30, 1997,
    and September 30, 1996, were as follows:
   
                                                       1997           1996
                                                    -----------    -----------
                                                   (as restated)  (as restated)

    Work-in-process..............................   $ 2,511,000    $   805,000
    Raw materials................................     7,921,000     11,162,000
    Spare parts..................................       658,000        708,000
                                                    -----------    -----------
    Total inventory..............................   $11,090,000    $12,675,000
                                                    -----------    -----------
    Less current inventory.......................     5,239,000      6,824,000
                                                    -----------    -----------
                                                    -----------    -----------
    Non-current inventory........................     5,851,000      5,851,000
                                                    -----------    -----------
                                                    -----------    -----------
    
   
    As of September 30, 1997, approximately $5.8 million of the Company's 
inventory net of $3.2 million reserve, consists of Depleted Uranium (DU) in 
various stages of production. This amount consists of both value-added costs 
to government owned material, ($3.8 million), which is used for U.S. Military 
contracts and for material which the Company has acquired from other sources, 
($2.0 million). During fiscal 1995 the U.S. Army notified the Company that 
the Army would provide the DU for production for the most recent penetrator 
contract. Management strongly believes that the Army is responsible to 
compensate the Company for the value-added costs of this material and that 
at a minimum the Army would allow the Company to use this material for non 
U.S. military contracts at no additional cost to the Company. Management is 
pursuing several Department of Energy programs that would require more DU 
over the next several years than the Company currently has on hand. 
Management believes that the carrying cost of the inventory on hand will be 
fully realizable through these possible programs or from its ongoing usage 
for U.S. and foreign military procurements; however it is uncertain how much 
of the inventory balance will be utilized in fiscal 1998. However, the 
Company expects to sell approximately $400,000 during fiscal 1998, 
approximately $1,900,000 during fiscal 1999 and the balance thereafter.
    
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                       35

<PAGE>

6. LONG-TERM OBLIGATIONS AND NOTES PAYABLE
 
    Long-term obligations and notes payable of the Company are as follows:
 
<TABLE>
<CAPTION>
                                                                            AT SEPTEMBER 30,     
                                                                       --------------------------
                                                                           1996          1997    
                                                                       ------------  ------------
<S>                                                                    <C>           <C>         
                                                                                                 
Term credit, interest rate of prime plus 0.5% due in monthly
  principal payments through 1996....................................  $    133,000  $         --
Line of credit, interest rate of prime plus 0.5% (9.0% at September
  30, 1997)..........................................................            --     1,706,000
Industrial development revenue notes, variable interest rates
  (5.6524% at September 30, 1997) due in quarterly principal payments
  through 2000.......................................................       492,000       180,000
Notes payable to stockholders interest only payments of 10% until
  maturity...........................................................       850,000     1,350,000
Note payable, monthly interest and principal payments through
  November 2000, interest rate of 10.25%.............................       457,000       370,000
Capital leases.......................................................        72,000        59,000
                                                                       ------------  ------------
                                                                       $  2,004,000  $  3,665,000
Less unamortized discount on stockholder debentures and line of
  credit.............................................................       130,000       302,000
Less current portion of long-term obligations........................       510,000     1,885,000
                                                                       ------------  ------------
Total long-term obligations and stockholder debentures...............  $  1,364,000  $  1,478,000
                                                                       ------------  ------------
                                                                       ------------  ------------
</TABLE>
 
CREDIT FACILITY
 
    On August 7, 1997, the Company and its principal bank lender, State 
Street Bank & Trust Company, signed the Third Amendment to the credit 
agreement dated March 31, 1995 (as amended, the "Credit Agreement"). The 
Third Amendment increased the Company's credit facilities from $4.25 million 
to $6.55 million, with a maturity date of February 28, 1998. The $6.55 
million consists of $3.55 million of letters of credit and $3.0 million 
credit line for working capital. Borrowings under the Credit Agreement bear 
interest at the prime rate plus 1/2 of 1%. The Company also pays a fee of 1/2 
of 1% on the unused portion of the credit facilities.
 
    As of September 30, 1997, the Company was not in compliance with certain
financial covenants contained in the Credit Agreement including minimum working
capital and maximum capital expenditures incurred for the year ended September
30, 1997, as defined.

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


                                  36

<PAGE>

    On October 1, 1997, the Company amended and restated the Credit Agreement
(the "Amended Credit Agreement") which amended and restated the Credit Agreement
dated March 31, 1995. The total amount of the credit available to the Company
remained at $6.55 million, and the Company and all its subsidiaries became
borrowers under the Amended Credit Agreement. The Amended Credit Agreement is
secured by an Amended and Restated Joint Security Agreement, whereby the Company
and its subsidiaries granted to the lender a first priority security interest in
all accounts, inventory and general intangibles. The Company is subject to
certain operating and financial covenants, including minimum tangible capital,
as defined and net income requirements in connection with the credit facility.
Also, the minimum working capital requirement in the Credit Agreement was
deleted.
 
    The Company has entered into a First Amendment to the Amended Credit
Agreement with its lender dated December 9, 1997, which provided for an increase
in the credit facility to $8.05 million.
 
    On December 29, 1997, the Company entered into a Second Amendment to the
Amended Credit Agreement which provides for the following: (i) the total amount
of credit available to the Company increased from $8.05 million to $9.55
million; (ii) the terms of repayment for the line of credit have been revised as
follows, the maximum aggregate liability (including letters of credit) of the
Company under the Existing Credit Facility shall not exceed $8.1 million from
July 1, 1998 through September 30, 1998, and $6.6 million from October 1, 1998
through February 28, 1999, which is when the balance is due; and (iii) the
non-compliance with the maximum capital expenditures for the year ended
September 30, 1997 was waived and certain financial covenants have been amended.
As of September 30, 1997 all amounts due under the Amended Credit Agreement were
classified in the accompanying balance sheet in accordance with the stated
maturity dates of the Amended Credit Agreement as Amended on December 29, 1997.
 
    In consideration of the Second Amendment to the Amended Credit Agreement the
Company has issued to the lender a warrant to purchase 25,000 shares of common
stock at the ten day average of fair market value as of December 29, 1997. The
Company also paid its lender $15,000 upon execution of the Second Amendment.
   
    As of September 30, 1997, 1.7 million was outstanding under the Amended 
Credit Agreement. The Company had $3.55 million letters of credit outstanding 
at December 31, 1997.
    
    For the three months ended December 31, 1997, the Company recorded a loss
before interest and taxes in excess of the amount permitted under the Amended
Credit Agreement. On February 23, 1998, the Company received a waiver from the
lender for this event of non-compliance for the three months ended December 31,
1997.
 
    As of March 31, 1998 the Company was out of compliance with one of its
financial covenants, pursuant to the Amended Credit Agreement, that limits the
amount of capital expenditures the Company may make during the year ending
September 30, 1998. On May 15, 1998, the Company received a waiver from the bank
for this event of non-compliance and of non-compliance with the capital
expenditure financial covenant for the remainder of fiscal 1998. As of March 31,
1998 all amounts due under the Amended Credit Agreement have been classified as
current in the accompanying balance sheet in accordance with the stated maturity
dates of the Agreement.
 
   
    
   
    As of June 30, 1998, the Company was out of compliance with the 
financial covenant under its credit agreement that limits the net loss 
reported for the fiscal quarter ended June 30, 1998. On August 7, 1998, the 
Company received a waiver for this event of non-compliance and any events of 
non-compliance as a result of the restatement of the Company's financial 
statements for the years ended September 30, 1997 and 1996. In addition, the 
credit agreement was modified such that the availability was increased to 
$11,050,000, through September 30, 1998; $8,050,000 from October 1, 1998 
through December 31, 1998, and $6,550,000 on January 1, 1999 and thereafter 
until it's maturity on February 28, 1999. Also, the tangible capital base 
required by the agreement should not be less than $22,500,000 as of September 
30, 1998 plus an increase equal to the $22,500,000 as of September 30, 1998 
plus an increase equal to the aggregate of 75% of the Company's net income 
for each fiscal quarter after September 30, 1998. Net income (loss) shall be 
not less than ($500,000) for the quarter ending September 30, 1998 and $750,000 
for the quarter ending December 31, 1998 and each quarter thereafter. 
    

    On June 11, 1998, the Company and its lender entered into the Third
Amendment to Credit Agreement dated June 11, 1998 which provided for (i) a
revised amortization schedule whereby the maximum aggregate liability (including
letters of credit) of the Company under the Existing Credit Facility shall not
exceed $9.6 million through September 30, 1998, $8.1 million from October 1,
1998 through

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


                                   37
<PAGE>

December 31, 1998, and $6.6 million from January 1, 1999 through February 28,
1999, which is when the balance is due and (ii) a reduction of the net income
covenant for the third quarter of fiscal 1998.
 
NOTES PAYABLE TO STOCKHOLDERS
 
    On January 10, 1996, the Company issued $500,500 in principal amount of its
10% Convertible Subordinated Debentures, the principal amount of which is
convertible at the option of the holder into shares of the Company's Common
Stock at the rate of $5.945 per share. The original maturity date of these
Debentures, June 10, 1997, has been extended by the holders pursuant to certain
letter agreements until December 10, 1998. These Debentures were issued to
persons who are significant stockholders of the Company or related to such
persons.
 
    On September 16, 1996 the Company issued an additional $350,000 in principal
amount pursuant to its 10% Subordinated Debentures due December 10, 1998 which
were issued to certain significant stockholders of the Company. In consideration
for the Debentures, the holders were issued three-year warrants to purchase an
aggregate of 42,000 shares of common stock at an exercise price of $7.50 per
share, subject to antidilution adjustments.
 
    On September 22, 1997 the Company issued an additional $500,000 in principal
amount pursuant to its 10% Subordinated Debentures due December 10, 2000 which
were issued to a stockholder of the Company. In consideration for the
Debentures, the holder was issued three-year warrants to purchase an aggregate
of 60,000 shares of common stock at an exercise price of $17.875 per share,
subject to antidilution adjustments.
 
    On December 23, 1997 the Company issued $850,000 in principal amount of its
10% Convertible Subordinated Notes due December 31, 1999 which were issued to
certain significant stockholders of the Company. The principal amount of the
notes are convertible at the option of the holder into shares of the Company's
Common Stock at the rate of $21.50 per share. Subsequent to December 31, 1997,
the Company issued an additional $50,000 in principal amount of these
Convertible Subordinated Notes on the same terms.
 
INDUSTRIAL REVENUE BONDS
 
    The Industrial Revenue Bonds (the "IRBs") outstanding consists of one note
issue. The interest rate on this note is 66.5% of the lenders bank's prime
interest rate. This note is secured by property, plant and equipment.
 
    The IRBs contain restrictive covenants including, among others, a
requirement to maintain minimum working capital, consolidated net worth and a
minimum current ratio. As of September 30, 1997, the Company was not in
compliance with certain of these financial covenants. The Company has received a
waiver from the trustee for these events of non-compliance.
 
    Maturities of long-term obligations subsequent to September 30, 1997 are:
1998--$1,885,000, 1999-- $1,052,000; 2000--$655,000; thereafter $73,000.
 
7. INCOME TAXES
 
    The provision (benefit) for income taxes differs from the amount computed 
by applying the statutory federal income tax rate due to the following:

<TABLE>
<CAPTION>

                                                                      1997        1996      1995
                                                                     ------      -----     ------
<S>                                                                  <C>         <C>
Statutory rate. . . . . . . . . . . . . . . . . . . . . . . . . .     34.0%      (34.0)%   (34.0)%
Increase (reduction) in taxes resulting from:
  State taxes, net of federal effect. . . . . . . . . . . . . . .      6.0        (6.0)     (6.0)
  Valuation allowance . . . . . . . . . . . . . . . . . . . . . .    (38.0)       40.0      (2.0)
  Tax reserves no longer required . . . . . . . . . . . . . . . .      --          --      (48.0)
  Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      --          --       (6.0)
                                                                     -----       -----     -----
                                                                       2.0%        -- %    (96.0)%
                                                                     -----       -----     -----
                                                                     -----       -----     -----
</TABLE>


           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                  38
<PAGE>

    As of September 1997, the Company has a federal net operating loss 
carryforward of approximately $11.1 million of which $3.2 million expires in 
2009 and $1.8 million expires in 2010, $3.0 million expires in 2011, and $3.1 
million in 2012. State net operating loss carry forwards of approximately 
$20.2 million, will expire between 1999 through 2009. These net operating 
loss carryforwards are fully reserved by valuation allowances due to 
uncertainty regarding their realizability.
 
    The components of the provision (benefit) for income taxes are as follows:

<TABLE>
<CAPTION>
                                                                             1997          1996          1995
                                                                         -------------  -----------  -------------
<S>                                                                      <C>            <C>          <C>
Current (Benefit) Provision:
  Federal..............................................................  $    (961,000) $  (363,000) $    (766,000)
  State................................................................       (299,000)    (112,000)      (135,000)
  Valuation allowance..................................................      1,260,000      475,000        901,000
                                                                         -------------  -----------  -------------
    Total current (Benefit) Provision..................................  $          --  $        --  $          --
                                                                         -------------  -----------  -------------
                                                                         -------------  -----------  -------------
Deferred (Benefit) Provision:
  Federal..............................................................  $  (1,310,000) $  (592,000) $  (1,819,000)
  State................................................................       (451,000)    (183,000)      (148,000)
  Valuation Allowance..................................................      1,792,000      776,000             --
                                                                         -------------  -----------  -------------
     Total deferred (Benefit) Provision:...............................         31,000        1,000     (1,967,000)
                                                                         -------------  -----------  -------------
     Total (Benefit) Provision:........................................  $      31,000        1,000     (1,967,000)
                                                                         -------------  -----------  -------------
                                                                         -------------  -----------  -------------
</TABLE>


    During 1995 the Company received $978,000 of Federal income tax refunds. As
of September 30, 1994, the Company had established a full valuation allowance
for this amount. Accordingly, the Company reduced its valuation allowance by
$978,000 upon receipt of this amount.
 
    The Company has provided a full valuation allowance on the net deferred tax
assets as of September 30, 1997, and 1996. The Company's alternative minimum tax
credit has an unlimited life. The tax effects of significant items making up the
deferred tax liabilities and deferred tax assets, as of the end of the 1997 and
1996 fiscal years are as follows:
 
 
<TABLE>
<CAPTION>
                                                                                          1997           1996
                                                                                      -------------  -------------
<S>                                                                                   <C>            <C>
Assets:
  Reserves not currently deductable for tax purpose.................................  $   1,665,000  $   2,475,000
  Accrued employee health benefits..................................................         36,000         38,000
  Federal operating loss carryforward...............................................      3,344,000      1,850,000
  State operating loss carryforwards and other assets...............................      1,903,000      1,438,000
  Other.............................................................................        460,000      1,867,000
  Valuation allowance...............................................................     (4,082,000)    (4,653,000)
                                                                                      -------------  -------------
    Total deferred tax assets.......................................................      3,326,000      3,015,000
    Alternative minimum tax credit..................................................        407,000        407,000
                                                                                      -------------  -------------
                                                                                      $   3,733,000  $   3,422,000
                                                                                      -------------  -------------
                                                                                      -------------  -------------
Liabilities:
  Fixed asset basis difference......................................................  $   2,422,000  $   2,549,000
  Employee benefits.................................................................        813,000        715,000
  Other                                                                                     498,000        158,000
                                                                                      -------------  -------------
                                                                                      $   3,733,000  $   3,422,000
                                                                                      -------------  -------------
                                                                                      -------------  -------------
</TABLE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                  39

<PAGE>

8. STOCK OPTIONS AND WARRANTS AGREEMENTS

STOCK OPTION PLANS
 
    As of September 30, 1997, a total of 342,680 shares of common stock have 
been reserved for issuance upon exercise of options issued or issuable 
pursuant to the Company's stock option plans for employees and directors. The 
exercise price of options issued or issuable under such plans may not be less 
than 100% of the fair market value of the shares purchasable on the date of 
grant of the options. Information concerning options which have been granted 
under the plans and the exercise prices thereof is set forth below. Those 
options with an indicated exercise price of $3.32 expire in 2003, those with 
an exercise price of $6.75, $7.00, or $8.00 expire in 2004, those with an 
exercise price of $6.13 expire in 2005, those with an exercise price of $7.38 
expire in 2006, and those with an exercise price of $15.56 expire in 2007, in 
each case on the anniversary of the date of the grant.
 
<TABLE>
<CAPTION>
   
                                                         1995                   1996                  1997
                                                ----------------------  --------------------   -------------------
                                                                                   WEIGHTED               WEIGHTED
                                                             RANGE OF    NUMBER     AVERAGE     NUMBER    AVERAGE
                                                 NUMBER      EXERCISE      OF      EXERCISE       OF      EXERCISE
                                                OF SHARES     PRICES     SHARES      PRICE      SHARES     PRICE
                                                ---------   ----------  --------   ---------   --------   --------
 <S>                                            <C>         <C>         <C>        <C>         <C>        <C>
 Options outstanding, beginning of year.......    197,800   $3.00-8.00   77,000      $ 6.25    211,000     $ 6.20
   Exercised..................................   (161,000)        3.00       --          --     (2,316)      6.13
   Granted....................................     50,600    6.75-7.00  136,000        6.13    128,000      11.53
   Canceled...................................    (10,400)   3.00-3.25   (2,000)       3.32     (3,334)      6.88
                                                ---------   ----------  --------   ---------   --------   --------
 Options outstanding, end of year.............     77,000    3.32-8.00  211,000        6.20    333,350       8.24
                                                ---------   ----------  --------   ---------   --------   --------
                                                ---------               --------               --------
 Options exercisable..........................     25,719               100,444                205,361
                                                ---------               --------               --------
                                                ---------               --------               --------
 Options available for future grants..........                                                   9,330
                                                                                               --------
                                                                                               --------
 Weighted average fair value per share of
   options granted during the year............              $       --               $ 4.41                $ 8.18
    
</TABLE>


    On February 20, 1998, the Board of Directors adopted the Company's 1998
Stock Plan (the "1998 Stock Plan") and the 1998 Stock Plan was approved by the
Company's stockholders at a meeting on March 18, 1998. The Company has reserved
300,000 shares of Common Stock for issuance under the 1998 Stock Plan to
employees, officers, directors and consultants of the Company.
 
    The 1998 Stock Plan provides for the granting of incentive stock options
which are intended to meet the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), the granting of non-qualified
stock options which do not meet the requirements of Section 422 of the Code,
opportunities to make direct purchases of the Company's Common Stock and the
making of awards of the Company's Common Stock. If any unexercised option
granted pursuant to the 1998 Stock Plan lapses or terminates for any reason, the
shares of Common Stock covered thereby are again available for subsequent option
grants under the 1998 Stock Plan.
 
    The Company has granted options to purchase 200,000 shares of Common Stock
at an exercise price of $23.67 per share, based on the market price of the
Common Stock at that time, under the 1998 Stock Plan, of which 65,000 were
granted to certain Company officers. The remaining options to purchase were
granted to all of the full-time employees of the Company.
 
    On November 20, 1995, the Board of Directors adopted the Company's 1995
Directors Plan (the "1995 Directors Plan") and the 1995 Directors Plan was
approved by the Company's stockholders at a meeting on May 1, 1996. The Company
has reserved 70,000 shares of Common Stock for issuance under the 1995 Directors
Plan to the Company's non-management directors.
 
    Options granted under the 1995 Directors Plan will be non-qualified options
which do not meet the requirements of Section 422 of the Code. If any
unexercised option granted pursuant to the 1995 Directors Plan lapses or
terminates for any reason, the shares of Common Stock covered thereby are again
available for subsequent option grants under the 1995 Directors Plan. The
Company has granted options to purchase 43,500 shares of Common Stock at varying
exercise prices based upon the market price of the Common Stock at the time of
grant.
 
    On December 21, 1981, the Board of Directors adopted the Company's Employee
Stock Plan (the "1981 Stock Plan"), which was approved by the Company's
stockholders at a meeting on February 3, 1982 and subsequently amended and
restated by the Board of Directors on August 1, 1990. The 1981 Stock Plan
provides for the granting of 255,800 shares of Common Stock to the Company's
employees, and such options are intended to be incentive stock options and meet
the requirements of Section 422 of the Code. On February 4, 1988, the Board of
Directors adopted, and amended on August 1, 1990, a Non-Qualified Stock Plan,
under which 190,000 shares of Common Stock were reserved for the granting of
non-qualified options to certain of the Company's key employees. Also, on August
1, 1990, the Company adopted a Directors Plan, under which 70,000 shares of
Common Stock were reserved for the granting of non-qualified options to the
Company's directors. No additional options will be granted under these plans;
however, 351,420 options are outstanding under these plans.
 

                                      40
<PAGE>

WARRANT AGREEMENTS
 
    In consideration of entering into a credit agreement with its principal bank
lender in September 1995, the Company issued the lender a warrant (the "First
Warrant") to purchase 50,000 shares (subject to adjustment pursuant to
anti-dilution provisions contained in the warrant) of the Company's Common Stock
for $5.95 per share, which was the approximate market value of the Company's
Common Stock at the date of the transaction. The First Warrant expires in 2005.
The holder of the First Warrant has the option to exercise a portion of the
warrant in a cashless transaction by surrendering the remaining portion of the
warrant as defined.
 
    In consideration of the purchase of its 10% Subordinated Notes due December
10, 1998, the Company issued the holders of the notes three-year warrants to
purchase 42,000 shares of Common Stock for $7.50 per share, which was the
approximate market value of the Company's Common Stock at the date of the
transactions. The holders of the warrants have the option to exercise a portion
of the warrant in a cashless transaction by surrendering the remaining portion
of the warrants.
 
    In consideration of the purchase of its 10% Subordinated Notes due December
10, 2000, the Company issued the holder of the Notes three-year warrants to
purchase 60,000 shares of Common Stock for $17.875 per share, which was the
approximate market value of the Company's Common Stock at the date of the
transactions.
 
    In consideration of the Second Amendment to the Amended Credit Agreement the
Company issued to the lender a warrant (the "Second Warrant") to purchase 25,000
shares (subject to adjustment pursuant to anti-dilution provisions of the
warrant) of Common Stock of the Company at an exercise price of $23.58 per
share, based on the average fair market value for the ten days ended December
29, 1997.
 
    On April 1, 1998, the Company entered into the Facility Restructuring
Agreement with its principal bank lender pursuant to which, contingent upon the
closing of a public offering, the Company received an option to make a payment
of $235,313 whereupon no further adjustments for issuances of Common Stock by
the Company will be made under the First Warrant following the closing of the
offering and no adjustments for issuances of Common Stock by the Company will be
made under the terms of the Second Warrant.
 
PRO FORMA STOCK-BASED COMPENSATION EXPENSE

    In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based 
Compensation," which sets forth a fair-value based method of recognizing 
stock-based compensation expense. As permitted by SFAS No. 123, the Company 
has elected to continue to apply APB No. 25 to account for its stock-based 
compensation plans. Had compensation cost for awards in 1997 and 1996 under 
the Company's stock-based compensation plans been determined based on fair 
value at the grant dates consistent with the method set forth under SFAS No. 
123, the effect on the Company's net income and earnings per share would have 
been as follows:

In thousands except per share amounts
<TABLE>
   
                                                          1997             1996
                                                        -------------   -------------
                                                        (as restated)   (as restated)
<S>                                                      <C>            <C>
Net Income (Loss).....................................    $ 482          $ (2,387)
  As reported.........................................      373            (2,450)
  Pro forma...........................................                
Primary/fully diluted earnings per share:                             
  As reported.........................................    $0.10          $  (0.50)
  Pro forma...........................................     0.08             (0.51)
    
</TABLE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                       41

<PAGE>

    Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to October 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expensed in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore future pro forma compensation expense may be greater as
additional options are granted.
 
    The fair value of each option granted was estimated on the grant date using
the Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rates of 6.19% to 6.21% and5.38% to 6.50% for
1997 and 1996, respectively, expected life of 10 years, expected volatility of
51% and 54% for 1997 and 1996, respectively.
 
9. PENSION PLAN
 
    The Company has a defined benefit pension plan designed to provide
retirement benefits to all employees. This plan provides pension benefits that
are based on the employee's salary and years of service. The Company's policy is
to fund the plan at a level within the range required by applicable regulations.
 
    The Company's net pension cost for 1997, 1996, and 1995 was $375,000,
$281,000, and $165,000, respectively. During 1997, the Company used the weighted
average discount rate of 8.0%. Net pension cost for the Company's defined
benefit plan included the following components:

<TABLE>
<CAPTION>

                                                                                1997            1996           1995
                                                                              ----------    -----------   -------------
<S>                                                                           <C>           <C>           <C>
Service cost - benefits earned during the period.......................      $   308,000    $   183,000    $   155,000
Interest cost on projected benefit obligation..........................        1,056,000      1,022,000        954,000
Actual return on plan assets...........................................       (1,570,000)      (932,000)      (985,000)
Net amortization and deferral..........................................          581,000          8,000         41,000
                                                                             ------------    ----------     ----------
Net pension cost.......................................................      $   375,000     $  281,000     $  165,000
                                                                             ------------    ----------     ----------
                                                                             ------------    ----------     ----------
  Assumptions used in determining the plan's funded status:  
  Discount rate.......................................................               8.0%           8.0%           8.0%
  Expected rate of increase in compensation levels....................               5.5%           5.5%           5.5%
  Expected long-term rate of return on assets.........................               8.5%           8.5%           8.5%

</TABLE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


                                  42

<PAGE>

    The following table sets forth the plan's funded status as of September 30,
1997, and September 30, 1996:
                                                  1997                 1996
                                           ----------------    ---------------
    Vested benefit obligation............  $   (12,421,000)    $   (11,869,000)
    Accumulated benefit obligation.......      (12,456,000)        (11,884,000)
    Projected benefit obligation.........      (14,164,000)        (13,654,000)
    Plan assets at fair value............       14,418,000          12,517,000
    Funded status........................          254,000          (1,137,000)
    Unrecognized prior service costs.....           89,000              98,000
    Unrecognized net loss................        1,698,000           2,392,000
                                           ----------------    ---------------
    Prepaid pension cost.................   $    2,041,000     $     1,353,000
                                           ----------------    ---------------
                                           ----------------    ---------------

    Plan assets are invested under the provision of a trust agreement with a
bank in common trust funds.
 
10. POST RETIREMENT BENEFITS
 
    Effective the beginning of fiscal 1994 the Company adopted Statement of
Financial Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for
Post retirement Benefits Other Than Pensions". The statement requires companies
to accrue the cost of post retirement health care and life insurance benefits
within the employees' active service periods.
 
    The Company provides employees who retired from the Company prior to January
1, 1993, with at least ten years of service and under the age of 65, with Group
Health Insurance on a cost-sharing basis. Coverage for an employee's spouse or
dependents will also continue under this plan until the employee has reached age
65 at which time, the coverage ceases. In addition, the Company provides the
same employees who are at least 62 years of age with life insurance equal to
their ending annual salary up to a maximum of $50,000.
 
    For employees who retire after January 1, 1993, the post-retirement benefits
do not include health insurance. In addition, the life insurance benefit, up to
a maximum of $50,000, is provided for one year after retirement.
 
    The accumulated benefit obligation of these benefits as of September 30,
1997, is approximately $767,000 ($5,000 for medical insurance and $762,000 for
life insurance). Plan assets of $401,000 in cash reserves are on hand with an
insurance company to partially cover the cost of the life insurance benefits.
The Company adopted the new standard prospectively as of October 1, 1993, and is
amortizing the transition obligation of $456,000, over three years for the
medical insurance benefits and fifteen years for the life insurance benefits.


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                               43

<PAGE>

    Post retirement benefit expense for fiscal 1997,1996 and 1995 as follows:


<TABLE>
<CAPTION>

                                                                                1997            1996           1995
                                                                              ----------    -----------   -------------
<S>                                                                           <C>           <C>           <C>
Service cost of benefits earned........................................      $     1,000    $     1,000    $     1,000
Interest cost on liability.............................................           59,000         58,000         57,000
Return on plan assets..................................................          (12,000)       (12,000)       (10,000)
Amortization of transition obligation..................................           24,000         24,000         48,000
                                                                             ------------    ----------     ----------
Net postretirement benefit cost........................................      $    72,000     $   71,000     $   96,000
                                                                             ------------    ----------     ----------
                                                                             ------------    ----------     ----------
</TABLE>
 
    The following table sets forth the Benefit Plan's funded status as of
September 30, 1997 and September 30 1996:

<TABLE>
<CAPTION>

                                                                                1997            1996
                                                                            -----------     ------------
<S>                                                                        <C>              <C>
Accumulated Post Retirement Benefit obligation..........................    $  (767,000)     $  (758,000)
Plan Asset at Fair Value................................................        401,000          401,000
                                                                            -----------     ------------
Funded Status...........................................................    $  (366,000)     $  (357,000)
Transition obligation...................................................        267,000          266,000
                                                                            -----------     ------------
Accrued Post Retirement Benefit Cost....................................    $   (99,000)     $   (91,000)
                                                                            -----------     ------------
</TABLE>

    The following actuarial assumptions were used:
 
<TABLE>
<CAPTION>

                                                                                1997         1996           1995
                                                                              --------    ----------     ---------
<S>                                                                           <C>           <C>           <C>
Salary increase..........................................................        5.5%          5.5%          5.5%
Discount rate............................................................        8.0%          8.0%          7.0%
Return on Assets.........................................................        3.0%          3.0%          3.0%
Medical Inflation........................................................        4-9%          4-9%         10.0%

</TABLE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                    44

<PAGE>

11. COMMITMENTS AND CONTINGENCIES EXPANSION

EXPANSION
 
    The Company is expanding its facilities by adding new equipment and 
modifying manufacturing floor space to accommodate changing product lines and 
customer demands. The Company anticipates that this will require capital 
expenditures totaling approximately $2,000,000 during fiscal 1998. These 
capital needs will be funded through cash flow from operations, shareholder 
notes and long-term debt. There is no guarantee that the Company will be able 
to obtain adequate financing at acceptable terms to meet these needs.
 
WASTE DISPOSAL
 
    In the process of manufacturing depleted uranium products, the Company 
generates low-level radioactive waste (LLRW) that must be disposed of at 
sites licensed by federal, state, and local governments. At present, there is 
one licensed commercial repository in the United States available for use by 
the Company. For LLRW originating in Concord, no site currently exists and 
provisions have been made to accommodate interim storage. State government 
has the responsibility to implement the provisions of the federal Low-Level 
Waste Policy Amendments Act and provide a state solution for Massachusetts 
companies that generate this type of waste. Management is of the opinion that 
an extended period of storage can be accommodated within existing buildings 
and in an environmentally safe manner acceptable to all regulatory agencies 
until such time as an acceptable site is identified.

   
Concord Site Remediation and Decommissioning Planning Requirements

     For a number of years, ending in 1985, the Company disposed of 
manufacturing-related depleted uranium waste and the associated spent acid 
and other residual materials by neutralizing with lime and discharging the 
neutralized mixture to a holding basin on its premises in Concord, 
Massachusetts. In 1986 the holding basin was covered with hypalon, an 
impervious material used to prevent rain and surface runoff water from 
leaking through the holding basin. (The Company now uses a proprietary 
"closed loop" process that it developed to discontinue such discharges. The 
Company believes that both practices were and are in compliance with all 
applicable regulations.) Substantially all of these waste materials were the 
by-product of work performed for the U.S. Army. On September 13, 1996, the 
Army Contract Adjustment Board ("ACAB") decided, among other things, that the 
costs to clean up the holding basin materials would be funded by the Army and 
that the Army would be obligated to provide transportation and disposal of 
the holding basin material pursuant to a supplement to an existing contract 
with the Company. In a Supplemental Memorandum of Decision dated March 5, 
1997, ACAB decided to pay the Company to transport and dispose of the holding 
basin material. Pursuant to ACAB's decision, the Company contracted with the 
U.S. Army to remove and dispose of the material from the holding basin and 
then subcontracted with Zhagrus Environmental, Inc. ("Zhagrus") to perform 
such work under a contract dated May 8, 1997. Zhagrus arranged for disposal 
of the holding basin materials at a disposal site operated by its parent 
corporation, Envirocare of Utah, Inc. ("Envirocare"). On May 11, 1998, the 
Company was notified by Zhagrus that Zhagrus will incur additional costs in 
connection with the disposal of the material from the holding basin as a 
result of the need for additional work which must be performed by Envirocare 
to treat the holding basin material in order for it to meet the conditions 
for burial imposed by regulations applicable to Envirocare's license issued 
by the State of Utah. Zhagrus has requested that the Company pay it to the 
extent of any additional costs which may be incurred by Envirocare as a 
result of such additional services which may be rendered. The Company has 
requested that Zhagrus provide it with further information in order to 
permit the Company to determine whether it has any liability to Zhagrus under 
the subcontract and to calculate the amount, if any, that the Company may be 
required to pay to Zhagrus under the subcontract. The Company intends to 
request a contract price modification for allowance of any such additional 
costs under its contract with the U.S. Army, although there can be no 
assurance of the timing and amount, if any, of any recovery of such costs 
from the U.S. Army. The Company has notified Zhagrus of its proposed course 
of action without admitting that the Company has any liability to Zhagrus or 
Envirocare for the amount of any such additional costs which may be incurred 
by Zhagrus under the subcontract. The Company has not yet been provided with 
sufficient information concerning the nature and extent of any additional 
work which may be required to allow proper burial by Envirocare. Accordingly, 
the Company is unable to determine whether it is obligated to Zhagrus under 
the terms of its subcontract or the potential amount involved. Accordingly, 
the amount of any additional costs could be material. In the event that the 
Company became liable to Zhagrus for any material amount which is not 
authorized to be paid by the U.S. Army, such liability could have a material 
adverse effect on the Company's business, results of operations and financial 
condition. 

    

    The Company is required to maintain certain licenses issued by the 
Massachusetts Department of Public Health ("DPH") and the South Carolina 
Department of Health and Environmental Control ("DHEC") in order to possess 
and 

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                      45

<PAGE>

process depleted uranium materials at its facilities in Massachusetts and 
South Carolina, respectively. Under applicable licensing regulations 
pertaining to decommissioning and disposal of certain hazardous materials 
("D&D") at licensed sites, the Company submitted to the Nuclear Regulatory 
Commission ("NRC") and the applicable state agencies a Decommissioning 
Funding Plan ("DFP") to provide for possible future decommissioning of its 
facilities. The Concord Facility DFP estimated cost is $11.7 million and the 
Barnwell Facility DFP estimates is $2.9 million. The Company is required to 
provide financial assurance for such decommissioning pursuant to applicable 
regulations. The Company has satisfied these requirements and as a result, 
the site licenses for both locations have been renewed.
 
    Substantially all of the depleted uranium materials to which the DFP 
requirements apply were processed by the Company for the United States 
Government. Based on the terms of certain contracts that the Company entered 
into with the United States Government to process such depleted uranium 
materials, the Company believes that such materials continue to be owned by 
the United States Government and that the United States Government is 
obligated, under applicable law, to pay for its percentage of eventual D&D. 
The Company's DFP reflect its position that it is obligated to provide 
financial assurance only with respect to the portion of the materials which 
are attributable to the Company's commercial production for parties other 
than the United States Government and that this obligation has been satisfied 
by a letter of credit to each geographic locations regulatory agency.
 
    The United States Army, in a memorandum of Decision dated September 13, 
1996, determined pursuant to Public Law 85-804, that it should fund 
remediation of the Concord holding basin site as well as D&D related to the 
Concord facility, based in part on the Army's determination that the 
Company's activities are essential to the national defense. The United States 
Army has issued a fixed price contract, for approximately $6.2 million for 
remediation of the holding basin and the Company entered into a fixed price 
contract with a contractor to perform this remediation. This work is expected 
to continue into the first half of fiscal 1998. The Company's contract with 
the contractor is fixed price based on a specified volume of waste to be 
removed from the basin and delivered to a burial site. If the volume of the 
material removed exceeds the specified level then the Company is 

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                      46

<PAGE>

   
obligated to pay an additional fee per cubic yard of excess material removed. 
The Army has provided written assurances (subject to funding appropriations) 
of its intention to provide funding for D&D costs at the Concord facility in 
addition to the Basin under future contracts or, in the event that no future 
contracts were awarded (which the Army has indicated is unlikely in view of 
its current plans). under an existing contract. D&D costs for the Company's 
CMI facility are adequately covered by the existing letter of credit, which is 
currently in place to assure funding for potential D&D obligations to date. 
The Company has no written assurance that the Army will accept responsibility 
for the share of the estimated cost of D&D at its South Carolina facility 
which directly resulted from production work under U.S. government contracts 
on government supplied materials. However, based on the advice of legal 
counsel, management believes that the Army is responsible for its estimated 
share of D&D.

    The Company is currently remediating the holding basin site at its 
Concord facility and may incur costs in excess of its fixed price contract 
with the United States Army for remediation of the holding basin. (See Note 
15)
    
 
LEGAL PROCEEDINGS
 
    On December 9, 1997, Brush Wellman, Inc. ("Brush Wellman") filed a patent
infringement suit against the Company in the United States District Court for
the District of Massachusetts (the "Massachusetts District Court") alleging that
the Company is infringing on a process patent (the "Brush Wellman
Patent") awarded to Brush Wellman for the investment casting of beryllium
aluminum alloys. Brush Wellman is seeking an injunction against the Company's
alleged patent infringement, monetary damages (including treble damages) and
attorney fees.
 
    On March 28, 1998 the U.S. Patent and Trademark Office (the "PTO") granted
the Company's request (filed January 22, 1998) for re-examination (the
"Request") of the Brush Wellman Patent. In the Request, the Company contended,
among other things, that there was sufficient "prior art" in the field of
investment castings and castings of beryllium aluminum alloys such that the
Brush Wellman Patent should not have been issued. In granting the Request, the
patent examiner agreed that the Company's cited
examples of prior art raised substantial new issues of patentability which were
not decided in the prior examination which led to granting the Brush Wellman
Patent. The PTO will undertake a process of re-examination of the validity of
the Brush Wellman Patent that, the Company anticipates, could last for an
extended period. There can be no assurance that the PTO will find the Brush
Wellman Patent to be invalid. On January 27, 1998, the Company filed in the
Massachusetts District Court a motion to stay the court case pending the outcome
of the re-examination proceeding. If the Massachusetts District Court were to
grant the motion to stay, the court case would not proceed until the conclusion
of the PTO's re-examination of the Brush Wellman Patent. Although the Company
believes that its motion to stay has merit, no assurance can be given that the
Massachusetts District Court will grant the motion.
 
   
    Even though the Company has been advised by patent counsel that Brush
Wellman's claims are without merit because the Brush Wellman Patent is invalid
as a matter of law due to "prior art" and due to the Company's sales of
investment cast beryllium aluminum products more than one year prior to the
Brush Wellman Patent application, no assurance can be given as to the ultimate
outcome of the lawsuit. Even if the lawsuit were not to proceed to trial, the
litigation could result in substantial costs to the Company, and an unfavorable
settlement of the lawsuit could place the Company at a competitive disadvantage.
An adverse judgment or settlement could subject the Company to significant
liabilities and expenses (E.G., reasonable royalties, lost profits, attorneys'
fees and trebling of damages for willfulness). An adverse outcome also could
cause the Company to incur substantial costs in redesigning the investment
casting process for its Beralcast products and components. Moreover, there can
be no assurance that redesign alternatives would be available to the Company,
and if available, that any redesign alternative would not place the Company at a
competitive disadvantage. The Company could be required to license the disputed
patent rights from Brush Wellman or to cease using the patented technology. Any
such license, if required, may not be available on terms acceptable or favorable
to the Company, or at all. Any of these results could have a material adverse
effect on the Company's business, financial condition and results of operations.
Even in the event of a successful outcome, the Company may incur significant
legal expenses in its defense. (See Note 15)
    
 
12. TRANSACTIONS WITH RELATED PARTIES
 
    Under the terms of a management agreement, Matthews Associates Limited is 
entitled to an annual management fee.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                      47

<PAGE>

    George J. Matthews, Chairman of the Board of Directors, and a significant 
shareholder, is sole owner of Matthews Associates Limited. These fees, as 
well as certain expenses of Matthews Associates Limited that were reimbursed 
by the Company, have been included in selling, general, and administrative 
expenses. Management fees were $350,000 in 1997, 1996, and 1995. Mr. Matthews 
does not receive any other salary or fee for services as Chairman of the 
Board of Directors. Also see Note 6 for Notes Payable to Shareholders.
 
13. MAINTENANCE AND REPAIRS
 
    Maintenance and repair expenditures, which are charged to cost and 
expense as incurred, amounted to $1,536,000 in 1997, $1,092,000 in 1996, and 
$854,000 in 1995.
 
14. INDUSTRY SEGMENT INFORMATION
 
    The Company is engaged in the manufacture and sale of various specialty 
metal products. The Company operates in three industry segments: Uranium 
Services and Recycle, Specialty Metal Products, and Depleted Uranium 
Penetrators.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                      48
<PAGE>

    Information relating to the Company's operations for the industry 
segments described above for each of the three years in the period ended 
September 30 is as follows:

   
<TABLE>
<CAPTION>
                                            1997         1996          1995
                                       (as restated) (as restated)
<S>                                     <C>           <C>           <C>
Net Sales and Contract Revenues:        
  Uranium Services & Recycle..........  $ 4,965,000   $ 6,189,000   $ 4,969,000
  Specialty Metal Products............   13,170,000    13,730,000    12,102,000
  Depleted Uranium Penetrators........    9,927,000     8,775,000     1,713,000
                                        -----------   -----------   -----------
    Total.............................  $28,062,000   $28,694,000   $18,784,000
                                        -----------   -----------   -----------
                                        -----------   -----------   -----------

Operating Income (Loss):
  Uranium Services & Recycle.........   $   195,000   $(2,050,000)  $(996,000)
  Specialty Metal Products...........       391,000     1,432,000    (341,000)
  Depleted Uranium Penetrators.......       575,000      (942,000)   (237,000)
                                        -----------   -----------   -----------
    Subtotal.........................     1,161,000    (1,560,000)  (1,574,000)

General Corporate Expenses...........       350,000       350,000      350,000
                                        -----------   -----------   -----------
Net Operating Income(Loss)...........       811,000    (1,910,000)  (1,924,000)
                                        -----------   -----------   -----------
Other Expense, Net...................       298,000       476,000       118,000
                                        -----------   -----------   -----------
Income (Loss) Before Taxes...........   $   513,000   $(2,386,000)  $(2,042,000)
                                        -----------   -----------   -----------
                                        -----------   -----------   -----------

Identifiable Assets:
  Uranium Services & Recycle.........   $14,499,000   $14,399,000   $16,609,000
  Specialty Metal Products...........     6,155,000     6,195,000     5,140,000
  Depleted Uranium Penetrators.......     7,965,000     8,441,000    12,158,000
  Corporate..........................     5,735,000     6,733,000     6,979,000
                                        -----------   -----------   -----------
    Total............................   $34,354,000   $35,768,000   $40,886,000
                                        -----------   -----------   -----------
                                        -----------   -----------   -----------

Depreciation and Amortization Expenses:
  Uranium Services & Recycle.........   $   492,000   $   430,000   $   404,000
  Specialty Metal Products...........       275,000       291,000       251,000
  Depleted Uranium Penetrators.......       498,000       519,000       443,000
  Corporate..........................       323,000       254,000       241,000
                                        -----------   -----------   -----------
    Total............................   $ 1,588,000   $ 1,494,000   $ 1,339,000
                                        -----------   -----------   -----------
                                        -----------   -----------   -----------

Capital Expenditures:
  Uranium Services & Recycle.........   $   627,000   $   379,000   $   325,000
  Specialty Metal Products...........       746,000       436,000        85,000
  Depleted Uranium Penetrators.......         6,000        77,000         6,000
  Corporate..........................       409,000       557,000       361,000
                                        -----------   -----------   -----------
    Total............................   $ 1,788,000   $ 1,449,000   $   777,000
                                        -----------   -----------   -----------
                                        -----------   -----------   -----------
</TABLE>
    

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


                                      49

<PAGE>

    The Uranium Services and Recycle segment includes the manufacture of 
depleted uranium products (non-penetrator) and the recycle of low level 
radioactive metal. The Specialty Metal Products segment includes a large 
assortment of metal products fabricated using foundry, extrusion, and 
machining capabilities including commercial depleted uranium products and 
involves the production and sale of various metal powders manufactured by the 
Company's patented Rotating Electrode Process. Operations in the Depleted 
Uranium Penetrator industry segment include the production of various 
penetrators (a component of armor-piercing ammunition used in certain U.S. 
military gun systems) which are sold to a department of the U.S. Department 
of Defense (DOD), to prime contractors manufacturing such ammunition for the 
DOD or to foreign military operations. Revenues derived from contract 
research and development activities have been included in the above segments 
based on the nature of the product.
 
    Net sales and contract revenues by industry segment include sales to 
unaffiliated customers (intersegment sales are not significant). A 
significant portion of the Company's revenues has been derived from five 
major customers (see Note 1). Sales to United States Enrichment Corporation 
are included in the Uranium Services & Recycle industry segment. Sales to 
Royal Ordnance and Primex Technologies are included in the depleted Uranium 
Penetrators industry segment. Sales to Lockheed Martin and Lockheed Idaho 
Falls are included in the Speciality Metal Products industry segment.
 
    Due to the utilization among segments of common production facilities and 
equipment and the involvement of a single management organization in all 
phases of the Company's operations, necessary allocations have been made 
based on estimates which management believes to be reasonable.
 
    Operating income includes net sales and contract revenues less operating 
expenses allocated to the individual segments. General corporate expenses 
represent expenses which are not of an operating nature and, therefore, are 
not allocable to industry segments.
 
    Identifiable assets shown include accounts receivable, inventory, and 
plant and equipment that have been allocated to each of the Company's 
industry segments. Corporate assets consist primarily of cash and other 
assets.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                      50
<PAGE>

15. QUARTERLY RESULTS (UNAUDITED)
 
    Financial results by quarter for 1997, 1996 and 1995 are summarized below
   
<TABLE>
<CAPTION>
                                     First            Second           Third           Fourth
                                    Quarter           Quarter         Quarter          Quarter
                                    --------          -------         --------         -------
                                 (as restated)     (as restated)                    (as restated)
<S>                                 <C>               <C>             <C>              <C>
1997                         
Net Sales.......................     $ 7,271          $ 5,342          $ 7,013         $ 8,436
Operating Income (Loss).........         476             (477)             399             413
Net Income (Loss)...............         419             (541)             293             311
Net Income (Loss) per share.....        0.09            (0.11)            0.06            0.06

1996
Net Sales.......................     $ 6,671          $10,021          $ 6,434           5,568
Operating Income (Loss).........         198              287              523          (2,918)
Net Income (Loss)...............         109              238              249          (2,983)
Net Income (Loss) per share.....        0.02             0.05             0.05           (0.62)

1995
Net Sales.......................     $ 5,626          $ 4,213          $ 3,753         $ 5,191
Operating Income (Loss).........         220           (1,355)              45            (834)
Income (Loss) before
  extraordinary item............         121             (300)              39              65
Extraordinary gain on 
  extinguishment of debt........          --              585               --              --
Net Income......................         121              285               39              65
Per share amounts:
Income (Loss) before
  extraordinary item............        0.03            (0.06)            0.01            0.01
Extraordinary gain on 
  extinguishment of debt........          --             0.12               --              --
Net Income per share............        0.03             0.06             0.01            0.01
</TABLE>
    
   
    During 1997 the Company reduced certain accruals by $1,750,000 for site 
remediation and waste burial costs, $670,000 in the second quarter and 
$1,080,000 in the fourth quarter.
    
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

   
    

   
Estimated Third Quarter and Nine Months Results of Operations
    
   
     For the quarter ended June 30, 1998, the Company expects to report 
revenues of between $7.4 million and $7.7 million and to report a net loss of 
between $2.5 million ($0.52 per diluted share) and $2.8 million ($0.58 per 
diluted share). For the nine months ended June 30, 1998, the Company expects 
to report revenues of between $26.2 million and $26.5 million and to report a 
net loss of between $3.8 million ($0.79 per diluted share) and $4.1 million 
($0.85 per diluted share).  Included in the results of operations for the 
third quarter and nine months will be a provision of between $1.0 million 
($0.21 per diluted share) and $1.3 million ($0.27 per diluted share) related 
to the amount by which the estimated cost of remediating the holding basin at 
the Company's Concord, Massachusetts facility is expected to exceed the 
amounts covered by the Company's fixed price contract with the U.S. Army (the 
"Army Contract") pursuant to which the holding basin clean-up is being done. 
The exact amount of the excess costs presently is unknown, but the Company 
believes the potential range of such costs is between $1.0 million and $3.4 
million. The Company believes that such costs, subject to confirmation, are 
recoverable as allowable overheads on future government contracts which the 
Company expects to be awarded. Alternatively, the Company believes that all or 
a certain portion of such excess costs may also be recoverable pursuant to a 
contract modification request or pursuant to an additional application for 
relief under Public Law 85-804, pursuant to which the Army Contract was 
granted. Revenue for the third quarter and nine months does not include 
approximately $1.0 million billed in July to a customer reflecting an 
adjustment of overhead rates attributable to work done through the end of the 
third quarter. Such overhead rates are subject to government audit, however, 
the Company believes that such audit would not result in a material change in 
the amount which it expects to receive.
    
   
    
   
     As of June 30, 1998, the Company was not in compliance with certain 
financial covenants contained in its bank credit facility. The Company and 
its principal bank lender have agreed upon modifications to the bank credit 
facility pursuant to which the Company is in compliance with such financial 
covenants and prior non-compliance has been waived (see Note 6).
    
   
     On July 8, 1998, the Company submitted a reply to Brush Wellman's 
response to the U.S. Patent and Trademark Office's ("PTO") order granting 
the reexamination. Also, on July 30, 1998, in response to a motion to stay 
the court case pending the outcome of the reexamination proceeding which was 
filed by the Company on January 27, 1998, the United States District Court 
for the District of Massachusetts dismissed the suit without prejudice to 
either party's moving to restore it to the docket upon the decision of the 
PTO relative to the reexamination.
    


                                 51

<PAGE>

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF STARMET CORPORATION:
 
    We have audited the accompanying consolidated balance sheets of Starmet 
Corporation (formerly known as Nuclear Metals, Inc.) (a Massachusetts 
corporation) and subsidiaries as of September 30, 1997 and 1996 and the 
related consolidated statements of operations, stockholders' equity and cash 
flows for each of the three years in the period ended September 30, 1997. 
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 financial statements referred to above present 
fairly, in all material respects, the financial position of Starmet 
Corporation and subsidiaries as of September 30, 1997 and 1996, and the 
results of their operations and their cash flows for each of the three years 
in the period ended September 30, 1997 in conformity with generally accepted 
accounting principles.
   
    The consolidated financial statements as of September 30, 1996 and 1997, 
and for the years ended, have been restated (see Note 1).
    

ARTHUR ANDERSEN LLP

Boston, Massachusetts 
   
August 7, 1998
    

                                  52

<PAGE>

                            COMMON STOCK INFORMATION
 
    The Company's common stock is traded on the NASDAQ Market under the 
symbol STMT. As reported by a principal market maker for the stock, the high 
and low bid prices for the three years ended September 30 are reflected in 
the following table. This information reflects inter-dealer prices, without 
retail mark-up, mark-down or commissions and may not represent actual 
transactions.
 
    As of September 30, 1997, there were approximately 300 holders of record 
of the Company's Common Stock. The Company believes the actual number of 
beneficial owners of the Company's Common Stock is greater because a large 
number of shares are held in custodial or nominee accounts.
 
    The Company did not declare any cash dividends during its last two fiscal 
years. Given the Company's current cash flow situation, the Company does not 
expect to pay cash dividends in the next year. Future cash dividends, if any, 
would be paid on an annual basis, the amount of which is subject to the 
determination and approval of the Company's Board of Directors. The Company's 
loan agreement with a bank prohibits the declaration of dividends without the 
bank's consent.
 
HEADQUARTERS
2229 Main Street, Concord, Massachusetts 01742
 
STARMET CMI
Highway 80, Barnwell, South Carolina 29812
 
TRANSFER AGENT AND REGISTRAR
State Street Bank & Trust Company
225 Franklin Street, Boston, Massachusetts 02110
 
AUDITORS 
Arthur Andersen LLP
225 Franklin Street, Boston, Massachusetts 02110
 
ANNUAL MEETING

   The annual meeting of stockholders will be held on March 
18, 1998 at 10:00 A.M. at the offices of State Street Bank & Trust Company, 
225 Franklin Street, Boston, Massachusetts 02110.
 
FORM 10-K 

    The Company's Annual Report on Form 10-K as filed with the Securities and 
Exchange Commission will be provided without charge to shareholders on 
written request. Request should be directed to the Vice President, Finance 
and Administration, Starmet Corporation, 2229 Main Street, Concord, 
Massachusetts 01742.
 
<TABLE>
<CAPTION>
    1997*        HIGH        LOW
-------------  ---------  ---------
<S>            <C>        <C>
  1st Quarter     10 3/4      7 1/4
  2nd Quarter     17 5/8      9
  3rd Quarter     18 1/2     14
  4th Quarter     19         14 1/2
</TABLE>
 
<TABLE>
<CAPTION>
    1996*        HIGH        LOW
-------------  ---------  ---------
<S>            <C>        <C>
  1st Quarter      7          5 1/4
  2nd Quarter     10 1/2      5 1/2
  3rd Quarter      9 1/4      6 3/4
  4th Quarter      9 3/8          6
</TABLE>
 
<TABLE>
<CAPTION>
    1995*        HIGH        LOW
-------------  ---------  ---------
<S>            <C>        <C>
  1st Quarter      9          6 5/8
  2nd Quarter      8 3/8      5 3/4
  3rd Quarter      7 1/4      5 3/4
  4th Quarter      7 1/8      5 1/2
</TABLE>
 
------------------------
 
*Adjusted to reflect 2 for 1 stock split in the third quarter of fiscal 1997.
 
   
(CORPORATE)DIRECTORY 
BOARD OF DIRECTORS 
George J. Matthews, CHAIRMAN 
Wilson B. Tuffin, VICE CHAIRMAN 
Robert E. Quinn, PRESIDENT 
Frank H. Brenton, CHAIRMAN MARSHALL'S INCORPORATED, RETIRED 
Kenneth A. Smith, PROFESSOR OF CHEMICAL ENGINEERING 
MASSACHUSETTS INSTITUTE OF TECHNOLOGY 

EXECUTIVE OFFICERS AND CORPORATE STAFF 
George J. Matthews, CHAIRMAN OF THE BOARD OF DIRECTORS, 
CEO AND TREASURER 
Wilson B. Tuffin, VICE CHAIRMAN OF THE BOARD OF DIRECTORS
Robert E. Quinn, PRESIDENT 
Kevin R. Raftery, PRESIDENT STARMET COMCAST & AEROCAST
Douglas F. Grotheer, PRESIDENT STARMET CMI
William T. Nachtrab, VICE PRESIDENT, TECHNOLOGY & ENGINEERING
James M. Spiezio, VICE PRESIDENT, FINANCE AND ADMINISTRATION
Bruce E. Zukauskas, VICE PRESIDENT, OPERATIONS
James H. Scarboro, VICE PRESIDENT, MARKETING
Frank J. Vumbaco, VICE PRESIDENT, HEALTH/SAFETY AND CORPORATE COMMUNICATIONS
Thomas A. Wooters, CLERK
Theodore J. Crowell, CONTROLLER