<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K
(mark one)
 [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2001

                                       or

 [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934

For the transition period from                       to
                               ---------------------    -----------------------

                          Commission file No. 000-22029

                           SPECIAL METALS CORPORATION
                           --------------------------
             (Exact name of registrant as specified in its charter)

           Delaware                                              25-1445468
-------------------------------                              -------------------
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

                           4317 Middle Settlement Road
                             New Hartford, NY 13413
              -----------------------------------------------------
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (315) 798-2900
              -----------------------------------------------------
              (Registrant's telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common stock, $0.01
par value per share

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]

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

At March 1, 2002, the aggregate market value of the publicly traded voting stock
held by non-affiliates of the Registrant was $5,081,417 based upon the closing
price of the Registrant's common stock on that date as reported by the Nasdaq
National Market. At March 1, 2002, the Registrant had 15,479,000 shares of
common stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the proxy statement or other informational filing for the 2002
Annual Meeting of Stockholders are incorporated by reference into Part III of
this report.
<PAGE>
                           Special Metals Corporation
                           Annual Report on Form 10-K
                        For Year Ended December 31, 2001
                                Table Of Contents


<TABLE>
<CAPTION>
Item                                                                                                            Page
<S>    <C>                                                                                                      <C>
                                     Part I
1      Business                                                                                                   1
2      Properties                                                                                                16
3      Legal Proceedings                                                                                         17
4      Submission of Matters to a Vote of Security Holders                                                       22

                                     Part II

5      Market for the Registrant's Common Equity and Related Stockholder Matters                                 22
6      Selected Financial Data                                                                                   24
7      Management's Discussion and Analysis of Financial Condition and Results of Operations                     25
7A     Quantitative and Qualitative Disclosures About Market Risk                                                37
8      Financial Statements and Supplementary Data                                                               41
9      Changes In and Disagreements with Accountants on Accounting and Financial Disclosure                      76

                                    Part III

10     Directors and Executive Officers of the Registrant                                                        77
11     Executive Compensation                                                                                    77
12     Security Ownership of Certain Beneficial Owners and Management                                            77
13     Certain Relationships and Related Transactions                                                            77

                                     Part IV

14     Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                          78
       Signatures                                                                                                83
</TABLE>
<PAGE>
                                     PART I

ITEM 1.    BUSINESS

BANKRUPTCY FILING

         Although the Company incurred operating losses for the years 1999
through 2001, many of the industries served by the Company improved during 2001.
This coupled with working capital reductions and cost improvement and reduction
programs enabled the Company to increase its sales volume during 2001, reduce
operating losses and increase cash flow from operating activities. However, the
events of September 11th, as well as the acceleration of an economic downturn,
have subsequently adversely affected the industries served by the Company and
have impacted its near term sales volume. As a result of these events and
trends, the Company anticipates reductions in sales volume and increases in its
operating loss during 2002.

          As a result of changes in the Company's financial prospects, the
Company's Senior Lenders prohibited the Company from additional borrowing under
its revolving credit facility. Without access to the revolving credit facility
there was insufficient liquidity available to make the required quarterly
principal repayment of approximately $9 million due on the term loans at the end
of March 2002. As a result, on March 27, 2002, the Company and its operating
subsidiaries in the United States filed voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy
Court for the Eastern District of Kentucky in Lexington. The Company is now
operating its business as a Debtor-in-Possession under the jurisdiction of the
Bankruptcy Court, and continuation of the Company as a going concern is
contingent upon, among other things, the confirmation of a Plan of
Reorganization, the Company's ability to negotiate debtor-in-possession
financing agreements, and the Company's ability to generate sufficient cash from
operations and obtain financing sources to meet its future obligations. Should
no reorganization plan be approved, it is possible that the Company's assets may
be liquidated. As noted above, the Company does not currently have the ability
to borrow under the Credit Agreement, but is working with its bank group to
obtain debtor in possession financing. Although the Company believes that it
will be able to obtain such financing, it is still uncertain at this stage. In
the interim, the Company expects that cash and cash equivalents on hand and cash
flow from operations will be adequate to meet its anticipated operating
requirements.

         On March 28, 2002, the Company received notice from The Nasdaq Stock
Market ("Nasdaq") advising that the Company's common stock will be delisted from
Nasdaq at the opening of business on April 5, 2002 unless the Company requests a
hearing in accordance with Nasdaq's rules. Nasdaq indicated that its
determination is based on the Company's bankruptcy filing and associated public
interest; concerns regarding the residual equity interest of the existing
security holders; and concerns about the Company's ability to sustain compliance
with all requirements for continued listing on Nasdaq. The Company has not
determined whether or not it will request a hearing with Nasdaq.


CORPORATE PROFILE

         Special Metals Corporation (herein referred to as the "Company" or
"Special Metals") is a corporation that was incorporated under the laws of the
State of Delaware in 1983. The Special Metals family of companies, which
includes Special Metals and its direct and indirect subsidiaries, is the world's
largest and most diversified producer of high-performance nickel-based alloys,
superalloys and special alloys. These highly engineered materials are produced
to exacting customer specifications for technically demanding applications and
are designed to withstand environmental extremes of heat, stress, and corrosion.
Special Metals offers a number of alloy materials in a broad range of product
forms, including sheet, strip, foil, plate, tubing, ingot, billet, bar, rod,
extruded shapes, rod-in-coil, wire and welding consumables. The Company serves a
diverse group of worldwide end-user markets, including aerospace, land-based gas
turbine power generation, environmental control, marine


                                      -1-
<PAGE>
engineering, fossil-fuel power generation, thermal processing, electronics,
chemical and petrochemical processing, petroleum refining and exploration,
automotive and consumer products.

         The Company is committed to offering products with the highest
standards of quality, technological excellence and customer service.
Substantially all of the Company's facilities have attained certification under
the ISO international quality standards and other domestic and international
quality accreditations.

BUSINESS AND INDUSTRY OVERVIEW

         The high-performance nickel-based alloy, superalloy and special alloy
industry emerged out of the requirement for materials with unique
characteristics and physical properties such as high temperature strength,
corrosion-resistance in very caustic environments, electrical properties,
controlled thermal expansion or a combination of these characteristics. In the
1970's and 1980's, many established U.S. and European based specialty stainless
metals companies were attracted by the opportunities available in the
high-performance nickel-based alloy industry.

         Evolutionary advances in processing procedures and metallurgy expanded
the range of high-performance nickel-based alloys in terms of their obtainable
characteristics, physical properties and the range of product forms and sizes
available. Current industry participants offer several products to the
marketplace for a variety of applications. The relationship between the
end-markets and the alloy manufacturer is significant as new alloys are often
developed in close collaboration between the manufacturer and the end-customer.

         Since high-performance nickel-based alloy production utilizes many of
the same processes as stainless steel manufacturing, several large industry
participants are principally diversified stainless steel enterprises. The
balance of the industry is comprised of a number of smaller manufacturers which
specialize in specific alloy types and/or product forms. Special Metals is
unique in that it is the only company that specializes in both the production of
high-performance nickel-based alloys, and superalloys and downstream value-added
products. Special Metals offers a comprehensive range of products, properties,
forms and sizes to most end-market industries from consumer products to
aerospace.

PERFORMANCE STRATEGY

         The Company's principal long-term objective is to strengthen its
position in the nickel-based alloy, superalloy and special alloy industry,
enhance its ability to anticipate and adapt to customer needs and market
opportunities, thereby providing shareholders with superior investment returns
through such strategies which maximize long-term profitability and net asset
values. In the short-term, the Company's objective is to stabilize its liquidity
situation (as more fully discussed above and in Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations below).

         The Company intends to achieve future growth and earnings development
through the following initiatives:

         Emphasize market-driven, higher value-added businesses. The largest
end-market served by the Company is the aerospace market. The Company intends to
strengthen its existing position and establish new leading competitive positions
in the aerospace market and diversify into new worldwide growth markets by
leveraging its manufacturing capabilities and expertise in high-performance
materials. In carrying out this objective, the Company seeks to enhance its
customer relationships by providing higher value-added products, technical
support and product planning which meets the high quality specifications of its
customers.

         Invest in long-term capital improvement initiatives. The Company
invests in capital improvement initiatives directed towards market-driven
requirements, customer service, productivity improvements, cost-reduction
programs, new information technology, replacement projects, and environmental
compliance. These


                                      -2-
<PAGE>
investments build long-term value by increasing production capacity and
operating efficiency and positioning the Company to maintain its technological
leadership. Liquidity constraints anticipated for 2002 may require that the
Company defer capital expenditures to future years.

         Develop New Products and Exploit New Worldwide Growth Markets. The
Company believes that its expertise in the manufacture of high-performance
nickel-based alloys, superalloys and special alloys affords it the ability to
develop new innovative products and manufacturing methods and to exploit new
worldwide growth markets. The Company actively pursues internal development
programs which build on existing core competencies and which may be applied to
new market segments. Approximately 85% of the Company's current nickel-based
alloy, superalloy and special alloy production is comprised of alloys developed
by the Company. The Company engages in research and development activities
directed towards capitalizing on and strengthening core capabilities in products
and processes.

         Continue Performance Improvements and Cost Reductions. The Company has
realized significant productivity improvements in recent years and is committed
to continued improvements in its operations and internal cost structure. Various
initiatives have been undertaken by the Company to reduce production and
operating costs, shorten manufacturing cycle times, improve delivery
performance, improve product quality and realize economies of scale.
Organizational teams employ statistical measurement tools to increase
utilization rates, optimize existing processes and reduce inventory
requirements, process variability, and operating expenses. The Company's
strategy is to integrate its manufacturing plants, both vertically and, where
appropriate horizontally, to develop competitive advantage. Intermediate
products produced in one Company facility are frequently distributed to other
plants for downstream production. This integration provides the Company with
cost efficient and flexible manufacturing operations that permit the Company to
allocate capital more efficiently. The Company also exploits commercial
synergies between operations, such as the purchase of raw materials used in
production. There can be no assurance that the Company will be able to realize
or perform, within a particular time frame, the cost reductions, cash flow
increases or other synergies expected to result from acquisitions or other
transactions. In addition, the Company may not be able to generate additional
revenue to offset any unanticipated inability to realize such expected
synergies. See "- Forward Looking Statements."

         Increase Product and Geographic Diversification. The Company is a
global enterprise with three principal manufacturing facilities in
geographically diverse locations from which the Company produces and markets
high-performance nickel-based alloys, superalloys and special alloys to a broad
range of end-customers. The Company's facilities include downstream operations,
such as tube manufacturing, powder manufacturing and wire drawing, which
increase its sales of value-added products. The Company seeks to continue to
expand its customer base and its product mix, and believes that such market and
product diversification allows it to mitigate the impact of cyclical downturns
in both geographical markets and markets for particular products.


OPERATING SEGMENTS

         The Company's strategic business units have been aggregated into three
reportable operating segments. These segments are: (i) the Premium Alloys
Division; (ii) the Huntington Alloys Division; and (iii) the Wiggin Alloys
Division. In 2001, the Premium Alloys Division, the Huntington Alloys Division,
and the Wiggin Alloys Division accounted for 24.3%, 52.6%, and 23.1%,
respectively, of the Company's net sales of $729.3 million. Certain business
segment information, including revenues for external customers, operating income
or loss, and total assets, for each of the three years in the period ended
December 31, 2001, is set forth in Note 15 to the Consolidated Financial
Statements contained elsewhere in this report. Such Note 15 also sets forth the
amount of revenues attributed to external customers, and the amount of
long-lived assets, located in the United States and foreign countries for each
of the last three fiscal years.



                                      -3-

<PAGE>
         PREMIUM ALLOYS DIVISION

         The Premium Alloys Division is primarily engaged in the manufacture,
fabrication and distribution of wrought superalloy, superalloy powder, special
alloys, and shape memory alloy products. The principal manufacturing facilities
of the Premium Alloys Division are located in New Hartford, New York and
Princeton, Kentucky.

         New Hartford, New York. This facility produces a broad range of premium
grade, nickel-based and cobalt-based wrought superalloy and special alloy long
products in ingot, billet and bar forms. These products are engineered to meet
the high performance requirements and stress applications of aircraft engine
critical rotating components and land-based steam and gas turbine generators.
Principal manufacturing operations conducted at this facility include melting,
remelting, forging, bar rolling, and billet and bar cold finishing. Production
in New Hartford is supported by open-die forging in Dunkirk, New York.

         This facility also produces a class of nickel/titanium shape memory
alloys (known as Nitinol) which exhibit unique memory and flexibility
properties. Nitinol's principal uses include medical applications such as
orthodontic wire, stents, catheter guide wires and eye glass frames. Industrial
applications for Nitinol include cellular telephone antennas, temperature
control and clamping devices.

         Princeton, Kentucky. The Company's powder metal facility in Princeton,
Kentucky has the capability to atomize and process alloy metal powders for use
in aerospace applications. Powder metallurgy superalloy products are used in
military jet engines and the latest generation of large commercial jet engines.
The Company pioneered the powder metallurgical processing of superalloys in the
1960s and remains the world's largest independent manufacturer of superalloy
powder products.


         HUNTINGTON ALLOYS DIVISION

         The Huntington Alloys Division is primarily engaged in the manufacture,
fabrication and distribution of nickel-based alloys in a range of product forms,
including, ingot, billet, bar, rod, sheet, strip, plate, tubulars and
rod-in-coil. The division also manufactures and distributes nickel-based welding
consumables and high-performance nickel-based alloy and stainless steel wire.
The primary manufacturing facilities of the Huntington Alloys Division are
located in Huntington, West Virginia; Burnaugh, Kentucky; and Elkhart, Indiana.
The division also operates three specialty businesses.

          The Huntington, West Virginia facility is the largest of its type in
the world devoted exclusively to the development, production, marketing and
sales of nickel-based alloys. Operations of the Huntington, West Virginia
integrated production facility include the melting, remelting, forging, hot
rolling and finishing of rod, bar, sheet/strip, plate, and tubular products. The
Huntington facility serves as the principal production, management and marketing
headquarters for the Huntington Alloys Division's activities. Production in
Huntington is supported by melting, remelting, extrusion, large diameter tube
reduction, and powder manufacture in Burnaugh, Kentucky and by cold strip
finishing in Elkhart, Indiana.

         In addition, the Division's operations include the following ancillary
businesses and operations, which specialize in unique product lines
complementing the core business:

         Welding Products Company, Newton, North Carolina. This operation
manufactures nickel-based welding consumables for joining high-nickel alloys,
high-performance steels, and other materials. The Newton operation supplies
products to the North American marketplace via direct sales and through
inventory-holding distributors. Specialized production processes include wire
drawing, annealing, straightening, cutting, and the production of
flux-containing electrodes and wires.


                                      -4-


<PAGE>
         A-1 Wire Tech, Inc., Rockford, Illinois. This operation converts,
markets, and distributes specialty high-performance nickel alloy and stainless
steel wire, bar and shaped products for use in a broad range of industrial and
commercial applications.

         Mechanically Alloyed Products, Huntington, West Virginia. This
operation supplies oxide dispersion strengthened alloys produced by the
Mechanical Alloying powder metallurgy process for high temperature aerospace and
industrial applications. Similar equipment and capabilities are possessed by the
Wiggin Alloy Division's production facility in Hereford, England.

         WIGGIN ALLOYS DIVISION

         The Wiggin Alloys Division is primarily engaged in the manufacture and
distribution of nickel-based alloys including billet, bar, rod, extruded
section, narrow strip, rod-in-coil, wire, foil, sheet and tubular product forms.
In addition, wide sheet and plate products distributed in Europe are sourced
from the Huntington Alloys Division. The primary manufacturing facility of the
Wiggin Alloys Division is located in Hereford, England. A separate facility
located in Epone, France produces electrical resistance alloy wire and ribbon
products.

         Operations of the Company's Hereford, England integrated production
facility include the melting, remelting, forging, extrusion, hot rolling and
finishing of billet, bar, rod, extruded section, narrow strip, rod-in-coil,
wire, foil, sheet and tubular products. In addition to these manufacturing
operations, the Hereford site is the management center for marketing and sales
to Europe, the Middle East, Africa, and India. This organization also supports a
network of distribution facilities in strategic locations throughout Europe.

The Wiggin Alloys Division also includes the following:

         Rescal, S.A., Epone, France. Rescal is a major international supplier
of electrical resistance alloy wire and ribbon products for use primarily in
domestic appliances and heating furnaces. Rescal also specializes in the design
and production of high temperature electric annealing furnaces and industrial
furnace components.

         Welding Products Company, Stratford-on-Avon, United Kingdom. The
facility performs service center operations for the sale and distribution of
welding consumables in the United Kingdom, continental western Europe, Africa,
India and the Middle East. Distribution efforts are coordinated by the Welding
Products Company of the Huntington Alloys Division.

         Special Metals Services. The Division operates service/distribution
centers in Chassieu (Lyon), France and Milan, Italy, which support the marketing
and distribution of nickel-based alloy, welding, electrical resistance alloy,
titanium, and cobalt-based hard facing alloy products throughout Europe.


                                      -5-
<PAGE>
PRODUCTS

         Special Metals produces a comprehensive range of high-quality alloy
products which enables it to be a significant supplier to most end-market
industries from consumer products to aerospace. A substantial portion of the
Company's products are used where corrosion-resistance and/or strength at high
temperatures is required. Others are specified for physical properties such as
electrical resistance, controlled thermal expansion or magnetic characteristics.

         Unique alloys, form combinations and innovative processing techniques
have been developed by the Company over the years to serve increasingly
demanding customer applications and specifications.

         The Company's fully-integrated manufacturing facilities and broad range
of metallurgical skills allow it to effectively serve its customers and lead the
development of new metal technologies. The Company's alloys are classified into
distinct families recognized worldwide by the trademarked designations listed
below:

<TABLE>
<CAPTION>
         FAMILY                     ALLOY TYPE (PRIMARY ELEMENTS)
         ------                     ----------------------------
<S>                                 <C>
         INCONEL                    Nickel-Chromium
         INCOLOY                    Nickel-Iron-Chromium
         NIMONIC                    Nickel-Chromium & Nickel-Chromium-Cobalt
         UDIMET                     Nickel-Chromium-Cobalt
         MONEL                      Nickel-Copper
         BRIGHTRAY                  Nickel-Chromium & Nickel-Iron-Chromium
         NILO                       Nickel-Iron
</TABLE>

The principal nickel and superalloy product forms produced by the Company
include:

-        Long Products (Ingot, Billet, Bar, and Cold Drawn Bar)

-        Flat Products (Plate, Sheet, and Strip)

-        Pipe, Tubulars, and Extruded Shapes

-        Wire and Wire Rod

-        Welding Products

-        Niche and Other Products

         The Company's product strategy includes maintaining a strong portfolio
of proprietary products. These products include highly specialized formulations,
newly developed or improved from existing materials resulting from the joint
efforts of the Company's research and development, technical services, and
applications engineering groups.

         Long Products

         The Company is one of the world's leading producers of superalloy and
special alloy long products. This product group is comprised of various alloy
and form combinations which include ingot, billet, bar, and cold


                                      -6-
<PAGE>
drawn bar. Long products are produced utilizing ingots manufactured in the
Company's New Hartford, Huntington, and Hereford facilities and by forging them
to a smaller size. The forging process consists of heating an ingot to a
precisely controlled temperature and reducing its diameter through pressing or
extrusion, thereby producing a billet. The Company's billet-products include
rounds or squares ranging from 5 to 18 inches in diameter, in lengths up to 30
feet. End-market applications of billet products include forged turbine aircraft
engine disks, ring components, spacers, shafts and casings. The billet may be
processed further into a bar by rolling it to a smaller cross section. The
rolling process entails heating the billet to a precisely controlled temperature
and reducing its diameter by passing it between shaped rolls. The Company
produces bar products in rounds, squares and rectangles ranging from 0.375 to 5
inches in diameter, in common lengths from 20 to 30 feet. Bar products are sold
primarily to machine shops, forgers and distributors. Cold drawn bar products
are available in diameters less than 4 inches and include cold drawing in the
final fabrication process.

         Flat Products

         The Company manufactures an extended range of flat products which
provide high-strength, consistent formability, weldability and
corrosion-resistance. Flat products are produced from slabs melted in the
Huntington and Burnaugh facilities and hot-rolled on a primary hot sheet/strip
facility in Huntington. The Hereford facility also produces flat products
utilizing both extrusion billet and via conventional forging and hot or cold
rolling procedures. The Company produces plate products in gauges ranging from
0.187 to 4 inches. Sheet and strip products are produced from slabs which are
rolled on a hot reversing mill to form hot bands and subsequently cold-worked
into the final product. Sheet products are produced in gauges ranging from 0.020
to 0.250 inches and with maximum width of 48 inches. Strip products are produced
in gauges ranging from 0.008 to 0.250 inches and with maximum width of 36
inches. Customers use these materials to fabricate a variety of products
including reaction vessels, heat exchangers and transfer piping for industrial
applications.

         Pipe, Tubulars, and Extruded Shapes

         The Company produces a full range of extruded and cold-worked seamless
pipe and tubular products used in corrosive and high temperature service
environments. The Company's products are utilized worldwide in the critical
piping systems of fossil fuel and commercial power facilities, equipment for
petroleum and sour-gas exploration/development, heat-exchanger tubing and
thermocouple sheathing. The Company hot extrudes and subsequently cold-works
pipe to sizes ranging from 0.5 to 10 inches in diameter. Wall thicknesses are
contingent upon product or application requirements and may range from 0.03 to 2
inches. Pipe and tubular products are produced in lengths up to 40 feet.
Extruded shapes may include a broad range of sectional shapes and dimensions and
are commonly produced in lengths up to 20 feet.

         Wire and Wire Rod

         Special Metals manufactures specialty wire products at its A-1 Wire
Tech operations in Rockford, Illinois, at its Rescal operations in Epone, France
and at its wire mill in Hereford, England. Each of these operations draws wire
from high-performance nickel-based alloys supplied by other Company facilities
in the United States and England, purchased stainless steel and other specialty
alloy wire rod. Both Rescal and A-1 Wire Tech market and distribute these
products globally. In addition to consuming output of the Company's primary
operations, these wire products allow Special Metals to proceed downstream to
higher value-added products.

         Both A-1 Wire Tech and the Hereford, England wire mills manufacture
products for cold heading, spring wire, weaving wire and other industrial
applications. The products are produced as coil, shaped wire or as straightened
and cut bar. Finishes include cold drawn, electropolish quality or centerless
ground. Rescal produces fine wire and ribbon from electrical resistance alloys
for markets in Europe, Asia and the Pacific Rim. In addition, Rescal also
produces electric annealing furnaces and components for industrial furnaces.


                                       -7-

<PAGE>
         The Company also manufactures wire rod products in the Huntington and
Hereford facilities. Wire rod products are supplied to customers for further
fabrication or for further cold working to smaller diameters.

         Welding Products

         The Company produces approximately 50 distinct welding electrodes, bare
filler wires and flux products. The Company's aggregation of welding products
complements the sale of primary mill products, which require welding, and
markets high-value added welding products. The Company manufactures numerous
types of filler metals, flux-coated electrodes, flux-cored wires, and fluxes,
which may be used to join the high-performance nickel-based alloys it produces.
Additional welding product applications include: (i) welding or repair-welding
cast irons, (ii) welding dissimilar metal combinations, (iii) welding
copper-nickel alloys, and (iv) overlaying corrosion-resisting layers on steels
using welding techniques. Flux coated electrodes (for shielded-metal-arc
welding), flux-cored wires (for flux-cored arc welding) and fluxes are produced
in the Company's Newton, North Carolina facility. Bare filler wires (for
gas-tungsten-arc, gas-metal-arc and submerged arc welding) are manufactured in
both the Company's Newton, North Carolina and Hereford, England facilities.
Other product offerings include thermal spray wire, flux-core wire and weld
strip which are produced in a variety of alloy and chemical compositions.

         Niche and Other Products

         Powder Metallurgy. In the most technologically advanced jet engines,
the requirements for strength, high temperature corrosion-resistance and
toughness exceed the capabilities of conventional cast or wrought mill forms.
Powder metallurgy alloys are manufactured using inert gas atomization to break
up a molten metal stream into droplets, which rapidly solidify into metal powder
particles. Superalloys produced in the Company's Princeton, Kentucky facility
are supplied as powder, hot isostatically pressed consolidated shapes or
extruded billet and bar.

         Shape Memory Alloys (Nitinol). Nitinol is a family of specialty
nickel/titanium alloys which exhibit unique shape memory and super-elastic
characteristics. This class of materials may be formed into a product, bent or
twisted into a different shape, and then easily returned to their original
shape. Principal applications include a variety of medical grade devices,
orthodontic wire, eyeglass frames, temperature control devices, clamping devices
and cellular telephone antennas.

         Mechanically Alloyed Products. Special Metals produces Oxide Dispersion
Strengthened (ODS) materials in diverse alloys and forms by applying a
Mechanical Alloying (MA) powder metallurgy process. The properties of
Mechanically Alloyed materials are not obtainable from conventionally melted
alloys, or from alloys produced by alternative powder processes. The
manufacturing activities in support of this business are fully integrated into
the operations of the Company. Mechanically Alloyed powders produced in Company
facilities are consolidated using conventional extrusion or hot isostatic
pressing processes, and the resulting consolidated materials are processed into
finished product using standard hot and cold working processes and equipment.
Extensive product and market development efforts are being undertaken to expand
the use of Mechanically Alloyed products to a broad range of high temperature
and stress-rupture industrial applications which require performance beyond
conventional materials. Current applications for Mechanically Alloyed products
include molten glass processing, marine and diesel engines, and other high
temperature thermal processing operations, such as furnace parts, skid rails and
hearth rollers.


                                      -8-
<PAGE>
MARKETS

         The Company markets and distributes its products to various defined
industrial end-markets which include the following:

         Aerospace                               Marine
         Chemical                                Thermal Processing
         Power / Pollution Control               Automotive
         Oil / Petrochemical                     Electrical / Heating Elements
         Electronics                             Welding

The key product requirements of each industrial market are as follows:

         Aerospace - The aerospace market utilizes high-performance nickel-based
superalloys for use in both the static and rotating components of turbine
aircraft engines. Jet engines may produce in excess of 100,000 pounds of thrust
and may subject parts to temperatures reaching 2,100(degree) Fahrenheit. Demand
for the Company's products, which includes ingot, billet, rod, bar, plate,
extruded shapes, sheet and wire products, is driven by the production of new
commercial and military aircraft, new and replacement aircraft engines, and the
maintenance requirements of commercial and military aircraft operators.
Aerospace applications include turbine disks, casings, blades, vanes, ring
components, ducting, thermal protection and fasteners. The aerospace market is
the single largest market for the Company's products, aggregating approximately
35% of the Company's total net revenues in 2001.

         Chemical - The Chemical processing industry requires high temperature
strength and corrosion resistant nickel-based alloys for process containment and
the material transfer of corrosive gas and fluids. Demand for the Company's
tubular, plate, sheet and welding products is based on the level of maintenance,
repair and expansion of existing chemical processing facilities as well as the
construction of new facilities.

         Power/Pollution Control - Demand for the Company's ingot, plate, sheet
and welding products is driven by the construction and maintenance of land-based
gas turbine cogeneration facilities, industrial and municipal hazardous waste
management systems and by government legislated and self-imposed programs aimed
at significantly reducing the level of sulfur dioxide emissions from fossil-fuel
powered electric generating facilities.

         Oil/Petrochemical - The oil and petrochemical industry utilizes
nickel-based billet, bar, plate and tubular products for applications such as
downhole tubulars and tools for oil and gas extraction/refining, transfer piping
and process furnaces used in hydrocarbon cracking, and sour-gas exploration/
development. Demand for the


                                      -9-

<PAGE>
Company's products is driven by the global demand and price of natural gas,
development of sour-gas fields and petrochemical processing.

         Electronics - The Company's wire and wire rod products are utilized
primarily in industrial and commercial lighting applications.

         Marine - Nickel-based alloys possess reliable aqueous corrosion
resistance in seawater environments. Marine applications include critical
components aboard nuclear-powered submarines and shipboard systems required to
resist seawater corrosion.

         Thermal Processing - The high temperature strength and
corrosion-resistance of the Company's portfolio of alloys is well-suited for
service in industrial processing furnaces used for diverse applications from
heat treatment to glassmaking. Rod, bar, wire rod, wire, sheet and plate are
common thermal processing forms supplied by the Company.

         Automotive - The requirement for cleaner burning, extended warranty,
fuel efficient engines has created global opportunities for nickel-based alloys
in automobile exhaust valves, exhaust system bellows, oxygen sensors, catalytic
converters, and high-temperature fasteners. The primary product forms supplied
to the automotive end-market include rod and strip.

         Electrical/Heating Elements - Nickel-based alloys are used in this
industry for a wide variety of applications in connectors, leads, resistors,
magnetostrictive devices, battery cases, semiconductor packaging, and sheathing
for heating elements. The predominant product forms supplied to this industry
include thin strip and small diameter wire. Wire products are also used in
electrical applications as resistance elements and thermocouples.

         Welding - Nickel-based welding materials are a requisite for the
manufacture of fabrications of nickel alloys and other materials. The primary
applications include: joining similar or dissimilar nickel-based materials,
welding or repair-welding of cast irons, and overlaying nickel-based alloys on
dissimilar base materials.


MARKETING AND DISTRIBUTION

         The Company serves a diversified global marketplace through a number of
strategic distribution channels. These routes to market are structured to be the
most effective and efficient for both Special Metals and the customer, and
promote the products of the mills in Huntington, New Hartford and Hereford. The
Company's other businesses control their individual routes-to-market using a
similar mix of channels as appropriate.

         The Company's global sales and marketing organization identifies
potential markets and growth opportunities for its products and determines
effective strategies to service those markets and to establish and sustain a
position as a preferred supplier. The critical elements of this strategy
include:

         -        Maintaining an appropriate presence in emerging market
                  countries;

         -        Participating in appropriate route-to-market development; and

         -        Developing partnerships with leading industry customers and
                  suppliers.

         The Company continually evaluates and modifies its routes-to-market,
thereby increasing customer awareness of Special Metals' products and providing
end-market visibility for the sales and marketing groups.


                                      -10-
<PAGE>
         The Company's marketing representatives build collaborative
relationships with end-market customers in order to manufacture and sell
products which meet their specific technical requirements and applications. The
Company's marketing efforts also provide the highest level of quality customer
technical/engineering support and product planning.

         The Company maintains a global presence in all major geographic regions
through the following types of outlets:

         -        Direct Sales Representatives;

         -        Wholly or jointly owned sales and distribution operations such
                  as Special Metals Services in Europe, Special Metals Services
                  (Pacific) Pte. Ltd. in the Pacific Rim and Daido-Special
                  Metals, Ltd. in Japan;

         -        Distributors and Agents; and

         -        Value-added business units of the Company such as A-1 Wire
                  Tech, Rescal, and the Welding Products Company.


         The Company distributes alloy products principally through its own
direct sales organization to markets in North America, Europe, portions of
Central and South America, and the Middle East.

         The Company maintains a strong global presence through a consolidated
and integrated marketing and sales organization. Its presence in the continental
United States is represented by field sales personnel located in two geographic
regions, each of which is administered by a regional sales manager. Regional
focus has allowed the Company to achieve operating efficiencies between its
manufacturing, distribution, and marketing operations. Field sales personnel
utilize computerized information systems which enable them to coordinate efforts
with the manufacturing facilities and order entry personnel.

         The Company's direct sales efforts in Europe are coordinated through
its principal marketing and sales offices headquartered in Hereford, England and
field sales offices located in Dusseldorf, Germany; Chassieu (Lyon), France;
Rotterdam, Netherlands; and Milan, Italy. The coverage of this organization also
includes emerging Eastern European nations and the Commonwealth of Independent
States.

         The Company operates a sales office in Bangalore, India which services
the Indian sub-continent with wrought nickel-based alloy products manufactured
by Company facilities in the United States and United Kingdom.

         In addition to these direct sales organizations, the Company operates a
Singapore-based trading company, Special Metals Services (Pacific) Pte. Ltd.,
which also has an office in Hong Kong. This organization serves the Pacific Rim
with products of the Company and trades in other complementary metal products.

         The Company and Daido Steel Co., Ltd. of Japan participate in a
joint-venture marketing and sales organization referred to as Daido-Special
Metals, Ltd. This organization, in cooperation with Special Metals Services
(Pacific) Pte. Ltd., markets an extensive range of superalloys and
high-performance alloys produced by Special Metals and Daido Steel Co., Ltd. in
Japan. This affiliation has led to a strong relationship between the two
companies and has promoted joint efforts in product and process development.
Marketing efforts of the joint venture are conducted through sales offices in
Tokyo, Osaka, and Fukuoka and a service/distribution center and sales office in
Nagoya.

         The sale of Special Metals products through independent distributors
complements the direct sales efforts of the Company. The Company's distribution
network has evolved over a period of years and is being


                                      -11-

<PAGE>
continuously revised to ensure the most efficient structure for timely response
to customer requirements. The Company continually seeks to refine its
distribution base by: (i) offering effective market and product support to
existing distributors; (ii) selectively expanding wholly-owned Company
distribution center locations; and (iii) increasing the number of customer
supply partnerships with distributors in the United States and Europe.

         The Company's other businesses, which include the Welding Products
Company, A-1 Wire Tech, Rescal, powder products and shape memory alloy products
have developed their own distribution channels to suit their specific business
requirements.

PRICING

         Pricing of nickel-based alloys can be volatile and is influenced by key
raw materials, such as nickel and cobalt. Sales of the Company's products are
made under conventional purchase orders, one-year supply contracts and long-term
firm price or indexed price contracts. Firm price contracts will continue to be
a significant part of the superalloy industry because the end-users of
superalloy products, primarily jet engine manufacturers, require the ability to
quote firm prices on products deliverable in the future. The Company will
continue to attempt to minimize raw material price risks in connection with firm
price contracts by hedging prices of certain raw materials, purchasing raw
materials under fixed price arrangements and entering into scrap purchase
arrangements with customers.

SUPPLY AND COST OF RAW MATERIALS

         Raw material costs constitute a substantial portion of the Company's
cash cost of production. The major raw materials utilized in the manufacture of
superalloys and special alloys include scrap and various virgin materials such
as nickel, chromium, cobalt, columbium, molybdenum, titanium and aluminum. Over
half of the raw materials used in superalloy production is scrap, either
internal scrap reclamation from the Company's own production process, or scrap
purchased on the open market or from customers. The Company has entered into a
long-term supply arrangement with Inco Limited ("Inco"), whereby Inco will
supply all of the virgin nickel requirements of the Huntington Alloys and Wiggin
Alloys Divisions. Although there can be no assurances, the Company believes that
a number of suppliers can produce sufficient quantities of either scrap or
virgin raw materials and that it is not dependent on any one supplier for any of
the raw materials used to manufacture its products.

         Commercial deposits of certain raw materials used by the Company are
found in only a few parts of the world. The availability and prices of these
materials may be influenced by cartels, changes in world politics, unstable
governments in exporting nations and inflation. Although the Company believes
that raw materials are available in adequate quantities at market prices, and
that it has not experienced any interruption in the supply of such raw
materials, the availability and prices of raw materials may be subject to
curtailment or to change due to, among other things, interruptions in production
by suppliers, worldwide price levels and allocations to other purchasers.

         Any protracted interruption in the supply of raw materials, substantial
increases in their costs, or changes in payment terms extended to the Company by
its suppliers, could have a material adverse effect on the business, financial
condition, results of operations or prospects of the Company.

CYCLICALITY OF AEROSPACE INDUSTRY

         The aerospace industry is the largest end-user market of the Company's
products and has historically been characterized by severe cyclicality which has
had a significant impact on the sales and profitability of superalloy producers,
including Special Metals. The worldwide market for commercial aircraft is
predominantly


                                      -12-
<PAGE>
driven by long-term trends in airline passenger traffic. The principal factors
underlying long-term traffic growth include sustained economic growth, both in
developed and emerging countries, and political stability. In individual global
market forecasts for the period between 2000 and 2019 prepared by the Boeing
Company ("Boeing") and Airbus Industrie S.A. ("Airbus"), both companies project
an average worldwide airline passenger growth rate of approximately 4.8% per
annum during the forecast period. Both studies also projected that worldwide
airline passenger traffic will double in 15 years and nearly triple in 20 years.
In addition, worldwide cargo traffic and regional airline traffic is projected
to grow at average annual rates of 6.4% and 8.0% respectively during the
forecast period (Reference is made to the Current Market Outlook published by
the Boeing Company, dated September 2000 and Global Market Forecast published by
Airbus Industrie dated July 2000).

         In addition to worldwide airline passenger traffic, demand for
commercial aircraft is further influenced by airline profitability, world trade
policies, bilateral government relations, environmental constraints imposed upon
aircraft operators and changes in technology.

         Following several years of economic expansion, the major economies of
the United States and Europe began to slow in 2001. Air travel growth slowed in
parallel. World air travel grew at more than 7% for the year ending December
2000. By August of 2001, air travel growth had declined 3% over the previous 12
months. A downturn in the commercial aircraft industry directly associated with
the terrorist activities of September 11, 2001 was immediate, significant and
widespread. Based upon industry data, air travel in September 2001 was
drastically curtailed by approximately 20% in the U.S. and by approximately 12%
in both Europe and Asia. As a result, airlines reduced their routes and
frequencies to manage the decline in passenger traffic. The major U.S. airlines
also reported significant financial losses in the fourth quarter of 2001 as did
European and Asian airlines. Recent trends appear to indicate that, absent an
event similar to that occurring on September 11, 2001, air travel growth and
airline revenue will gradually return to pre-September 11 levels. As this
occurs, airlines are expected to slowly expand their routes and frequencies.

         The following table sets forth historical and projected 2002-03
deliveries and orders for Boeing and Airbus.

<TABLE>
<CAPTION>
                      Boeing                                     Airbus
                      ------                                     ------
       Year         Deliveries          Orders       Deliveries          Orders
       ----         ----------          ------       ----------          ------
<S>                 <C>                 <C>          <C>                 <C>
       1995             252              437            124                106
       1996             272              727            126                326
       1997             374              550            182                460
       1998             564              630            229                556
       1999             620              370            294                476
       2000             489              608            312                520
       2001             527              329            325                274
       2002             380                -            300                  -
       2003             300                -            300                  -
</TABLE>

         As a result, it is anticipated that future demand for our products from
the commercial aerospace end-market, driven by an anticipated reduction in
commercial aircraft production rates and the effect of excess


                                      -13-
<PAGE>
inventory in the supply chain, is expected to decline during 2002. This decline
started to occur in the fourth quarter of 2001.

         Substantially all of the revenues of the Company are derived from the
sale of high-performance nickel-based alloy, superalloy, special alloy and
related products. Accordingly, any significant decrease in demand or decline in
prices for such products could have a material adverse effect on the business,
financial condition, results of operations or prospects of the Company.


COMPETITION

         Several of the Company's production capabilities are possessed in
varying degrees by other large, technically-competent firms with substantial
assets, including both domestic and foreign manufacturers. The global industry
is highly competitive and dominated by a few major producers. The Company's
largest competitors include Allegheny Technologies, Inc. (formerly Allegheny
Teledyne, Inc.), Carpenter Corporation, Haynes International, Inc., Krupp VDM
GmbH, and Sumitomo (Japan).

         In the future, the Company may face increased competition from
companies which currently have the required manufacturing equipment, but lack
sufficient technological or financial resources. Demanding end-user
specifications, a multi-stage manufacturing process and the technical, marketing
and manufacturing expertise required to develop new innovative products combine
to create significant barriers to entry. Factors which affect the Company's
competitive posture include the quality of its products, marketing strategies,
service and delivery capabilities, pricing, and engineering/production
expertise. Although the Company believes that it exhibits strength in these
areas and is well positioned to compete in the markets in which it operates, the
competitive nature of the industry has had, and in the future may have, a
material adverse effect on the business, financial condition, results of
operations or prospects of the Company.


RESEARCH & DEVELOPMENT

         Special Metals is an industry leader in research and technology
development. The Company's research and development efforts are closely aligned
with its key business objectives, namely reducing the cost of producing its core
business products, developing and improving proprietary alloys and metallurgical
processes, and applying its technology to the manufacture of specialty alloys
and materials for new market sectors. The Company's applied research, technical,
development and metallurgical production efforts are staffed by approximately 75
individuals with engineering and science degrees. The Company conducts research
and development activities at its New Hartford, Princeton and Huntington
facilities. In addition to complete metal analysis and testing capabilities to
support the Company's production and testing of nickel alloys, the New Hartford
and Huntington facilities have dedicated research laboratories for physical and
mechanical metallurgical analyses and process laboratories for pilot scale
processing of new alloys. The research and development staffs are in close
collaboration with the Company's production staffs and sales and marketing
forces to facilitate the identification and development of new products as well
as to improve existing products and processes.

         The Company is presently an active participant in several industrial
consortia, including the U.S. Department of Energy sponsored Specialty Metals
Processing Consortium ("SMPC"). The SMPC includes other U.S. superalloy
producers and the EU THERMIE program, which includes members from the European
metal alloy producers and power industry equipment designer, fabricator, and
utility companies. The SMPC's purpose is to pursue melting and solidification
technology and to better understand the very complex nature of alloy melting and
solidification. SMPC's research is conducted at the Sandia National Laboratory
and also includes industrial experiments conducted at the member companies.
Funding for the consortium is generated through membership fees, matching
support from the U.S. Department of Energy and other sources. The THERMIE
program involves the development and qualification of critical component
materials, including nickel alloys,


                                      -14-
<PAGE>
which can withstand the high operating temperatures of combustion and steam
handling applications and designing an advanced 700(degree)C steam, pulverized
fuel (PF) power plant with at least 10% higher operating efficiency than present
coal fired power plant systems. The THERMIE program is funded by members of the
European Union.

         The Company is a world leader in the development, invention, and
production of high-performance nickel-based alloys. Research programs undertaken
in laboratories in the New Hartford and Huntington facilities are aimed at
creating new proprietary, value-added products, evaluating alloy performance in
simulated process environments, improving the technology of Company-owned
manufacturing facilities, and supporting the daily quality assurance systems and
procedures which are an integral part of all production activities.
Approximately 85% of all alloys sold by the Company were invented in its
laboratories.

         Non-aerospace special alloys under development include products in the
Company's shape memory alloys product line. These products, as with Nitinol,
utilize precise chemistries and thermomechanical processing and are being
designed for use in medical, industrial and consumer product applications.

         The Company spent approximately $4.4 million, $4.0 million and $2.9
million during 1999, 2000, and 2001, respectively, for research and development
activities. The Company has also developed research and development initiatives
with a number of customers in several industries and with several major
universities in North America, Europe and Asia.

         The Company owns significant intellectual property, including 57 issued
United States patents (with approximately 156 foreign equivalent patents) which
protect its proprietary technology and processes, many of which are also filed
under the patent laws of other nations. Although these patents, as well as the
Company's numerous trademarks, technical information license agreements, and
other intellectual property, have been and are expected to be of value,
management believes that the loss or termination of any single such item or
technically related group would not materially affect the Company's overall
business.


CUSTOMER CONCENTRATION

         There are a small number of large consumers of high-performance
nickel-based alloys in the world, and Special Metals believes it enjoys good
relations with them. A substantial portion of the Company's business is
conducted with a relatively small number of large customers. No single customer,
in any year, represented over 10% of the Company's net sales. The Company's top
ten customers accounted for approximately 31%, 35% and 38% of the Company's net
sales in 1999, 2000 and 2001, respectively.


EMPLOYEES

         As of December 31, 2001, the Company had approximately 3,188 employees,
approximately 61% of whom are represented by various national and international
labor unions. The Company has entered into collective bargaining agreements with
these union employees as follows:


                                      -15-
<PAGE>

<TABLE>
<CAPTION>
                                            Number of
                                        Employees Covered
                                          By Bargaining
Location                                   Agreements       Effective Date                Expiration Date
<S>                                     <C>                 <C>                           <C>
New Hartford, New York:
     Production                                 348         September 1997                August 2003
     Support Technicians                         21         April 1999                    March 2002
Princeton, Kentucky                              67         August 2000                   August 2003
Dunkirk, New York                                50         August 1999                   August 2002
Huntington, West Virginia                       688         February 2002                 February 2005
Burnaugh, Kentucky                              149         April 1999                    March 2002
Hereford, England:
     Production                                 438         November 2001                 November 2002
     Craft                                      111         November 2001                 November 2002
     Clerical and Professional Staff             70         December 2001                 December 2002
</TABLE>

         The Company is expected to negotiate six union contracts or collective
bargaining agreements affecting 26% of the workforce during 2002. Approximately
438 production and maintenance workers in Hereford, England are covered under an
annual collective bargaining agreement between the Company and the General
Municipal Boilermakers and Allied Trades Union (the "GMBATU") effective through
November 2002; approximately 111 craft and 70 clerical/professional staff in
Hereford, England are covered under an annual collective bargaining agreement
between the Company and Amicus effective through November 2002 and December
2002, respectively; approximately 149 production and maintenance workers in
Burnaugh, Kentucky and 50 production and maintenance workers in Dunkirk, New
York are covered by collective bargaining agreements between the Company and
United Steelworkers of America (the "USWA") effective through March 2002 and
August 2002, respectively; and approximately 21 support technicians in New
Hartford, New York are covered under a collective bargaining agreement between
the Company and the International Association of Machinists and Aerospace
Workers through March 2002.

         The Company's remaining 1,103 union employees are represented by
national unions under contracts with expiration dates extending through February
2005. In February 2002, the Company entered into a new, three-year collective
bargaining agreement with the USWA representing approximately 688 production and
maintenance workers at its Huntington, West Virginia facility.

         The Company believes it has good relations with its employees, but
there can be no assurances that the Company will not experience a strike or
other work stoppage or that acceptable collective bargaining agreements can be
negotiated when the existing collective bargaining agreements expire.


ITEM 2.  PROPERTIES

         The following table sets forth certain information with respect to the
Company's principal operating facilities. The Company believes that its
operating facilities are generally well maintained, are suitable to support the
Company's business and are adequate for the Company's present and anticipated
needs.

<TABLE>
<CAPTION>
Facility                    Approximate            Nature of
Location                Size (Square Feet)         Occupancy           Product/Function
<S>                     <C>                        <C>                 <C>
Huntington, WV               1,755,000               Owned             Melting & Finishing Plant
                                                                       Research & Development
Hereford, UK                 1,102,000               Owned             Melting & Finishing Plant
Burnaugh, KY                   400,000               Owned             Melting & Finishing Plant
New Hartford, NY               358,000               Leased            Melting & Finishing Plant
                                                                       Research & Development
                                                                       Corporate Headquarters
</TABLE>


                                      -16-
<PAGE>
<TABLE>
<S>                            <C>                   <C>               <C>
Elkhart, IN                    160,000               Owned             Cold Strip Finishing and Conversion
Epone, FR                      150,000               Leased            Wire Products
Rockford, IL                   115,000               Leased            Wire Products
Newton, NC                     100,000               Owned             Welding Products
Dunkirk, NY                     98,000               Owned             Forging Plant
Princeton, KY                   70,000               Leased            Powder Products
                                                                       Research & Development
</TABLE>

         The facilities in New Hartford, NY and Princeton, KY are leased from
government agencies under arrangements in which the Company pays rent in lieu of
taxes and has options to purchase such facilities at a nominal purchase price.
These arrangements for the New Hartford, NY and Princeton, KY facilities expire
in 2007 and 2005, respectively. The Princeton, KY facility lease is subject to
extensions by the Company for an additional 10 years beyond the current term
which expires on August 31, 2005. The Dunkirk, NY facility was leased under a
similar arrangement, which expired in 2001. The transfer of title back to the
Company is currently in process.



ITEM 3.  LEGAL PROCEEDINGS

CHAPTER 11 BANKRUPTCY FILING

See "Item 1. Business -- Bankruptcy Filing."

ENVIRONMENTAL MATTERS

         The Company's facilities are engaged in activities regulated by
extensive federal, state, local and foreign environmental and worker safety and
health laws and regulations, including those relating to air emissions,
wastewater discharges, the handling and disposal of solid and hazardous wastes
and the release of hazardous substances (collectively, "Environmental Laws"). In
the United States, for example, such laws include the Federal Clean Air Act,
Clean Water Act, Resource Conservation and Recovery Act ("RCRA"), Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), and analogous
state laws. The Company uses substantial quantities of substances that are
considered hazardous or toxic under Environmental Laws. The Company's operations
pose a continuing risk of accidental releases of, and worker exposure to,
hazardous or toxic substances. There is also a risk that Environmental Laws, or
the enforcement thereof, may become more stringent in the future and that the
Company may be subject to legal proceedings brought by private parties or
government agencies with respect to environmental matters. Although the Company
believes that it is in substantial compliance with applicable requirements of
Environmental Laws, there can be no assurance that some, or all, of the risks
discussed under this heading will not result in liabilities that are material to
the Company's business, results of operations, financial condition or cash
flows.

         The Company's facilities have been used for industrial purposes for a
substantial period and, over such time, these facilities have used substances or
generated and disposed of wastes which are hazardous. The Company currently
faces potential material environmental remediation liabilities in connection
with certain sites at which the Company's wastes have been allegedly released or
otherwise come to be located. At December 31, 2001, the Company had total
reserves of approximately $9.1 million to cover future costs arising from known
environmental liabilities for investigation, remediation and operation and
maintenance of remediation systems, including costs relating to its own
properties and to certain sites at which the Company's wastes have allegedly


                                     -17-

<PAGE>
been identified. However, the Company's actual future expenditures for
remediation of environmental conditions existing at its properties and at
offsite waste-disposal locations cannot be conclusively determined at this time.
Furthermore, additional locations at which wastes generated by the Company may
have been released or disposed, and of which the Company is currently unaware,
may in the future become the subject of remediation for which the Company may be
liable, in whole or in part. Accordingly, it is possible that the Company could
become subject to environmental liabilities in the future that could result in a
material adverse effect on the Company's business, results of operations,
financial condition or cash flows.

         The Company's policy is to continually strive to improve environmental
performance. From time to time, the Company may be subject to regulatory
enforcement under various Environmental Laws, resolution of which typically
involves the establishment of compliance programs and may involve the payment of
penalties. The Company's 2002 capital budget provides $1.9 million for
environmental protection and compliance matters. The Company incurred annual
capital expenditures for environmental matters of $3.5 million during 1999, $1.5
million during 2000 and $0.6 million during 2001. The Company does not expect
future costs of compliance with currently enacted and proposed Environmental
Laws in respect of known remediation to have a material impact on its liquidity
and capital resources. However, changes in Environmental Laws which result in
the imposition of stricter standards or requirements or more rigorous
enforcement of existing Environmental Laws could result in expenditures in
excess of amounts estimated to be required for such matters.

         The following is a summary of the more significant environmental
matters or proceedings in which the Company is currently involved:

         Asbestos Exposure Actions. Huntington Alloys, a domestic subsidiary of
the Company ("Huntington"), is a co-defendant in various consolidated and
unconsolidated actions by plaintiffs, including former employees of Huntington
and former employees of contractors to Huntington, alleging exposure to asbestos
at Huntington's West Virginia facility. Plaintiffs' counsel have also informed
Huntington that they intend to add similar claims by additional plaintiffs.
Insurance coverage is available for some of these proceedings. To date, no
asbestos claims against Huntington have gone to trial.

         Jurisdiction over all asbestos cases pending in the State of West
Virginia has been transferred to the Mass Litigation Panel, a panel set up by
the West Virginia Supreme Court of Appeals to streamline the processes and
procedures for resolving asbestos cases.

         In July of 2001, the West Virginia Supreme Court of Appeals issued a
mandate to the presiding judge of the Mass Litigation Panel to commence all
trials necessary to dispose of all asbestos litigation in the State of West
Virginia by July 1, 2002. To attempt to comply with this mandate, the presiding
judge of the Mass Litigation Panel has set a date of September 23, 2002 to
commence a mass a trial for the thousands of asbestos cases that were pending in
West Virginia as of September 6, 2001. As contemplated by the court's order,
Huntington would be one of numerous defendants in the mass trial.

         Because the court has so far permitted Huntington to engage in only
limited discovery with respect to the merits of the claims asserted against it,
the Company is not able to reasonably estimate what the ultimate loss, if any,
will be with respect to these matters. However, the damages sought by plaintiffs
in these actions, if Huntington were required to pay them, could have a material
adverse effect on the business, financial condition, results of operations or
cash flows of the Company.

         Manganese Exposure Actions. Huntington is a defendant in ten cases
seeking damages for alleged health problems resulting from exposure to manganese
in welding products. The cases are at various stages of pleading and discovery.
One of the cases involves numerous plaintiffs. The Company does not believe that
these proceedings are likely to have a material adverse effect on the business,
financial condition, results of operations or cash flows of the Company, but
there can be no assurance that this will be the case.


                                      -18-

<PAGE>
         Toxic Tort Exposure Actions. Huntington is a defendant in six toxic
tort exposure cases involving numerous plaintiffs. Discovery has not yet been
conducted with respect to these claims. The Company does not believe that these
proceedings are likely to have a material adverse effect on the business,
financial condition, results of operations or cash flows of the Company, but
there can be no assurance that this will be the case.

         Ludlow Landfill. The Company has been identified as a potentially
responsible party ("PRP") under CERCLA at the Ludlow Landfill in Clayville, New
York, due to the Company's alleged generation of certain industrial wastes,
including wastes contaminated by polychlorinated biphenyls ("PCBs"), which were
disposed at the landfill (the "Ludlow Site"). CERCLA imposes strict, joint and
several liability upon, inter alia, generators of wastes disposed at a
contaminated site, for investigation and remedial costs.

         The Company assumed responsibility for remediation of the Ludlow Site
and has completed remediation except for that of an adjoining property known as
the "North Gravel Pit." The discovery of PCB contamination in the North Gravel
Pit has required further investigation and remediation. The Company's engineers
have submitted to the New York State Department of Environmental Conservation
(the "DEC") a report detailing their investigation pursuant to the work plan and
recommending a remedial alternative. The Company has established a reserve based
on the recommended remedial alternative. The Company has received comments from
the DEC objecting to the recommended remedial alternative. In light of such
comments, the Company has proposed a second recommended remedial alternative.
The cost of the second remedial alternative is essentially the same as that for
which the reserve was established.

         The Company is also responsible for post-closure operations and
maintenance at the remainder of the Ludlow Site, including groundwater
monitoring, through 2027. These operations and maintenance costs are estimated
at approximately $90,000 per year. In addition, the Company may be required to
conduct certain post-closure activities.

         The Company and the DEC disagree concerning the DEC's outstanding
natural resources damage claim. The DEC has requested additional annual biota
sampling for a period in excess of the post-closure operations and maintenance
period, to be incorporated in a revised post-closure operations and maintenance
plan. The Company has disputed this request. In July of 1999, the DEC decided
not to pursue further at that time its request for the Company to undertake
biota sampling. The DEC retains the right to sample biota. The DEC may renew its
request for the inclusion of biota sampling in the post-closure operations and
maintenance plan.

         Though the Company does not believe it likely that liabilities at the
Ludlow Site will have a material adverse effect on the Company's business,
results of operations, financial condition or cash flows, this possibility
cannot be excluded.

         Universal Waste Site. The owners and operators of the Universal Waste
Site, Utica, New York, conducted a preliminary site assessment pursuant to a
consent order with the DEC, which also conducted a separate preliminary site
assessment. The Company believes that at least four other PRPs have been
identified with respect to the contamination at the site. The DEC is dividing
the site into two separate sites, the Utica Alloys site (1.5 acre occupied by
the industrial concern known as Utica Alloys, Inc.) and the Universal Waste site
(the remainder of the original site). The Company has not been obligated to
become involved in the investigation. Based upon the limited information
available to it, the Company has established a reserve of $575,000. However,
because of the preliminary nature of the investigation, it is not possible at
this time to provide a reasonable estimate of the ultimate cost of any
investigative or remedial work which will be required, or the Company's share,
if any, of such costs. Therefore, it is possible that liabilities could arise in
respect of this site that could have a material adverse effect on the business,
results of operations, financial condition or cash flows of the Company.


                                      -19-

<PAGE>
         Huntington and Burnaugh RCRA Facility Assessments. The Huntington, West
Virginia, and Burnaugh, Kentucky facilities of Huntington have been subject to
site inspections pursuant to RCRA. Draft reports issued by the respective
inspecting agencies recommended environmental investigation at Huntington and
Burnaugh.

         The Huntington report was never issued in final form. No action has
been taken by the inspecting agency since January 1996 in the case of
Huntington. Burnaugh has been listed as one of over 1,700 high priority
facilities. The Kentucky Division of Waste Management has revised the RCRA
Facility Assessment report for Burnaugh and considers it to be a finalized
document. A Voluntary Investigation Workplan submitted by the Company has been
approved by the Division. The investigation is now underway. A revised Voluntary
Investigation Workplan for three of the Solid Waste Management Units has been
proposed to and approved by the Division. A Voluntary Investigation report has
been submitted to the Division. If an investigation is ultimately required in
Huntington, and when such is completed in Burnaugh, the Company could also be
required to undertake significant remediation, the cost of which could have a
material adverse effect on the business, financial condition, results of
operations or cash flows of the Company.

         Pennsauken Landfill / Puchack Well Field. Huntington is a third-party
defendant in a lawsuit filed in New Jersey Superior Court (the "Pennsauken
Action"). The plaintiffs in the Pennsauken Action, the Township of Pennsauken
and the Pennsauken Solid Waste Management Authority filed the Pennsauken Action
in 1991 against various defendants seeking to hold the defendants liable for the
costs of remediation of the Pennsauken Landfill, the Puchack Well Field and/or
surrounding areas. In September of 1999, two defendants in the Pennsauken Action
filed a third-party complaint against numerous third-party defendants, one of
which is Huntington. Several of the named third-party defendants, including
Huntington, had previously been PRP's at the nearby Superfund site known as the
Swope Oil Field. Huntington was a de minimis participant in the Swope Oil Field
site and has, to date, paid less than $70,000 for its share of the remediation.

         The third-party complaint in the Pennsauken Action alleges that
contamination at the Swope Oil Field migrated via groundwater to the Pennsauken
Landfill, the Puchack Well Field and/or surrounding areas. The third-party
plaintiffs assert that if they are found to be liable for remediation of those
sites, Huntington and the other third-party defendants which were PRP's at the
Swope Oil Field are in turn liable to the third-party plaintiffs. The claims
against Huntington and the other Swope third-party defendants have been severed
and stayed, pending the resolution of the underlying action. It is not possible
at this time to provide a reasonable estimate of the cost of any investigative
or remedial work which may be required, or Huntington's share of such cost, if
any.

         Wiggin Tube Degreaser. Special Metals Wiggin Ltd., a United Kingdom
subsidiary of the Company ("Wiggin"), may be required to make an expenditure of
approximately $1.5 million to upgrade its degreasing operations at its facility
in Hereford, England in order to reduce emissions of volatile organic compounds.
This expenditure is unlikely to be incurred before 2003.

         Wiggin Electrical Switchgear. The Company expects that the Hereford,
England facility of Wiggin will need to institute a phased program over ten
years to replace its electrical switchgear, including oil-filled manual direct
switchgear, air breakers and all other oil-filled switchgear. A program to
replace the oil-filled manual direct switches began in 2000 ($0.6 million has
been incurred through December 31, 2001) and will be completed by 2002, at a
remaining estimated cost of $0.2 million. The cost of a program to replace the
remainder of the electrical switchgear is estimated to be approximately $4.6
million, to be incurred during the period from 2002 through 2009.

         Wiggin Water Drainage Arrangements. The U.K. Environment Agency has
informed Wiggin that they are considering improvements for the water drainage
arrangements at the Hereford, England facility of Wiggin. They may request that
Wiggin separate their process and storm water drainage systems.


                                      -20-

<PAGE>
         Wiggin Dust Emission. A dust extractor for Wiggin's aerofall shot blast
unit at its facility in Hereford, England was improperly fitted by an outside
contractor resulting in emissions in violation of Wiggin's authorization under
the Environmental Protection Act of 1990. An Enforcement Notice has,
accordingly, been issued by the Environmental Agency. The Notice requires Wiggin
to take action aimed at avoiding another violation of its authorization. It is
not known whether the Agency will take further administrative action.

         Tremont City Landfill Site. The United States Environmental Protection
Agency (the "EPA") has identified Huntington as one of several PRPs under CERCLA
at the Tremont City Landfill Site in Clark County, Ohio. The EPA has asked the
PRPs to enter into an Administrative Order on Consent to perform or finance a
Remedial Investigation and Feasibility Study (RI/FS) focusing on the barrelfill
portion of the site. Huntington does not possess any records or information
indicating that any of its wastes were ever transported to the site.
Huntington's potential liability is premised on a reference in a facility
customer list located by the EPA, although the EPA has attributed no waste
volume to Huntington at this time. Huntington has declined the EPA's request to
perform or finance an RI/FS and has requested the EPA to consider an appropriate
de micromis or de minimis settlement. The EPA has not yet responded to
Huntington's request. At this time, it is not possible to provide a reasonable
estimate of the ultimate cost of any work which may be required at the Tremont
City Landfill Site, or Huntington's share, if any, of such costs. Though the
Company does not believe it likely that its liabilities, if any, at the Tremont
City Landfill Site will have a material adverse effect on the Company's
business, results of operations, financial condition or cash flow, this
possibility cannot be excluded.

         Wiggin Acid Spill. Wiggin received an Enforcement Notice issued by the
U.K. Environmental Agency when dilute chromic acid was accidentally released to
a local stream. An action plan of improvements aimed at preventing a
reoccurrence has been submitted to the Agency and accepted subject to Wiggin
providing quarterly updates. It is not known whether the Agency will take
further administrative action.



INCO

         The Company has filed a lawsuit against Inco Limited ("Inco") and
certain of its subsidiaries, (together with Inco, the "Sellers"). The Company
has claims pending against the Sellers alleging that the Sellers made fraudulent
misrepresentations in connection with the Company's October 1998 acquisition of
the capital stock of the companies which comprised the Inco Alloys International
high performance nickel alloys business unit of Inco (the "IAI Acquisition"),
and that the Sellers breached the terms of the related Stock Purchase Agreement.
The Sellers have filed a counterclaim against the Company seeking in excess of
$13 million, which the Sellers claim is owed by the Company under the terms of
the Stock Purchase Agreement. The Company intends to vigorously defend against
the counterclaim. The lawsuit is still in the discovery stage. At this point in
the proceeding, it is not possible to know if the Company will recover
significant damages from the Sellers, or may ultimately be required to pay any
or all of the amount sought by the Sellers.

OTHER MATTERS

         From time to time, the Company is involved in legal proceedings
relating to claims arising out of its operations in the normal course of
business. Except as discussed above, the Company does not believe that it is
presently a party to any proceedings that are likely to have a material adverse
effect on the Company's business, financial condition, results of operations or
cash flows.


                                      -21-

<PAGE>
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the year ended December 31, 2001.



                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

         The Company's common stock is quoted on the Nasdaq National Market
under the symbol "SMCX." The Company has been advised by The Nasdaq Stock Market
that its common stock will be delisted at the opening of business on April 5,
2002, unless the Company requests a hearing. See "Item 1. Business -- Bankruptcy
Filing." As of March 1, 2002, there were approximately 73 shareholders of record
(including holders who are nominees for an undetermined number of beneficial
owners) of the Company's common stock. The quarterly high and low sales prices
of the Company's common stock for the previous two fiscal years are indicated
below:

<TABLE>
<CAPTION>
                                   2000                               2001
Quarter Ended             High               Low             High               Low
------------------------------------------------------------------------------------
<S>                      <C>                <C>             <C>               <C>
March 31                 $ 4.00             $2.75           $ 3.50            $ 2.25
June 30                    3.09              2.03             3.50              2.38
September 30               4.34              2.38             2.87              2.18
December 31                3.97              2.38             2.58              1.50
</TABLE>

         Stock prices above are over-the-counter market quotations reflecting
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.


                                      -22-

<PAGE>
         The Company did not pay dividends on its common stock during 2000 or
2001 and does not currently intend to pay dividends on its common stock in the
foreseeable future. Future decisions as to the payment of dividends will be at
the discretion of the Company's Board of Directors, subject to applicable law.
The Company's ability to pay dividends on its common stock is also subject to
the covenants contained in its credit agreements, which effectively preclude the
Company from paying dividends on its common stock for the foreseeable future.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."


                                      -23-

<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA

         The following table sets forth selected historical financial data of
the Company as of, and for the years ended December 31, 1997, 1998, 1999, 2000,
and 2001. The financial data set forth below should be read in conjunction with
the information under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Item 7 of this Form 10-K and
the Financial Statements of the Company and the notes thereto included in Item 8
of this Form 10-K.

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31
                                                      -----------------------------------------------------------------------------
                                                         1997             1998             1999             2000             2001
                                                      ---------        ---------        ---------        ---------        ---------
                                                                         (in thousands, except per share data)
<S>                                                   <C>              <C>              <C>              <C>              <C>
STATEMENT OF OPERATIONS DATA:
Net sales                                             $ 186,071        $ 253,361        $ 603,220        $ 697,321        $ 729,348
Cost of goods sold                                      142,029          219,555          597,509          698,974          677,882
                                                      ---------        ---------        ---------        ---------        ---------

Gross profit (loss)                                      44,042           33,806            5,711           (1,653)          51,466
Selling, general and administrative expenses              6,958           15,753           25,468           26,254           29,946
                                                      ---------        ---------        ---------        ---------        ---------
Operating income (loss)                                  37,084           18,053          (19,757)         (27,907)          21,520
Interest expense                                            670            4,109           24,944           30,724           26,050
Other income                                               (107)            (914)          (3,259)          (6,999)            (989)
                                                      ---------        ---------        ---------        ---------        ---------
Income (loss) before income taxes                        36,521           14,858          (41,442)         (51,632)          (3,541)
Income tax expense (benefit)(1)                          13,519            5,018          (16,132)         (19,757)          52,081
                                                      ---------        ---------        ---------        ---------        ---------
Net income (loss)                                     $  23,002        $   9,840        $ (25,310)       $ (31,875)       $ (55,622)
                                                      =========        =========        =========        =========        =========

Net income (loss) attributable to
  common shareholders                                 $  23,002        $   8,769        $ (31,733)       $ (39,091)       $ (62,646)
                                                      =========        =========        =========        =========        =========

Net income (loss) per share - (Basic and Diluted)     $    1.53        $     .57        $   (2.05)       $   (2.53)       $   (4.05)
Weighted average shares outstanding                      15,004           15,479           15,479           15,479           15,479
  (Basic and Diluted)

BALANCE SHEET DATA (AT PERIOD END):

Working capital(2)                                    $  68,825        $ 323,764        $ 283,722        $ 292,438        $   2,602
Total assets                                            141,750          840,154          811,287          820,325          700,579
Current portion of long-term debt and
  capital lease obligations(2)                              316           13,155           21,356           30,168          233,465
Long-term debt and capital lease obligations
  (excluding current maturities)(2)                         174          282,792          259,035          250,678              936
Subordinated notes payable to affiliate                      --               --            5,000           58,116           66,352
Shareholders' equity (deficit)                          103,971          111,359           76,277           30,313          (87,739)
</TABLE>

(1) During the fourth quarter of 2001 the Company recorded a valuation allowance
to offset the net deferred tax asset recorded in the United States. This
resulted in a charge to tax expense of $53.7 million.


                                      -24-

<PAGE>
(2) The Company believed it likely would not be able to meet certain financial
covenants under the Credit Agreement as of the quarter ending June 30, 2002. As
of December 31, 2001, substantially all of the Company's long-term debt was
reclassified to current debt in the consolidated balance sheet.

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

FORWARD LOOKING STATEMENTS

Statements included in this Management Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this document that do not
relate to present or historical conditions are "forward looking statements"
within the meaning of that term in Section 21E of the Securities Exchange Act of
1934, as amended. Additional oral or written statements may be made from time to
time, and such statements may be included in documents filed with the Securities
and Exchange Commission. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors, which may cause the actual
results, performance or achievements of the Company to be materially different
from those expressed or implied by such forward-looking statements. Such factors
include the Company's possible inability to obtain debtor in possession
financing or effect a plan of reorganization; the general effect of the
Company's bankruptcy filing on its vendors, customers and other aspects of
its business operations; economic slowdowns and recessions (especially in the
aerospace industry, in which a significant portion of the Company's customers
are concentrated); the demand for the Company's products; the availability and
pricing of raw materials used in the manufacture of the Company's products; the
pricing of natural gas and electricity; changes in payment terms extended to the
Company by its suppliers; the reliable operation of the Company's manufacturing
facilities and equipment; the Company's ability to evaluate, finance and
integrate acquired businesses, products and companies into the Company's
existing business and operations; the Company's ability to effectively compete
in the industries in which it does business; the Company's ability
to successfully negotiate new labor agreements and otherwise maintain favorable
relations with its employees, a majority of whom are unionized; and the
Company's ability to comply with existing and future environmental laws and
regulations, the accuracy of its current estimates of existing environmental
liabilities and the possibility that currently unknown environmental liabilities
may be discovered; and other factors detailed from time to time in the Company's
filings with the Securities and Exchange Commission.

OVERVIEW

                  Although the Company incurred operating losses for the years
1999 through 2001, many of the industries served by the Company improved during
2001. This coupled with working capital reductions and cost improvement and
reduction programs enabled the Company to increase its sales volume during 2001,
reduce operating losses and increase cash flow from operating activities.
However, the events of September 11th, as well as the acceleration of an
economic downturn, have subsequently adversely affected the industries served by
the Company and have impacted its near term sales volume. As a result of these
events and trends, the Company anticipates reductions in sales volume and
increases in its operating loss during 2002.

         As a result of the changes in the Company's financial prospects, the
Company's Senior Lenders prohibited the Company from additional borrowing under
its revolving credit facility. Without access to the revolving credit facility
there was insufficient liquidity available to make the required quarterly
principal repayment of approximately $9 million due on the term loans at the end
of March 2002. As a result, on March 27, 2002, the Company and its operating
subsidiaries in the United States filed voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy
Court for the Eastern District of Kentucky in Lexington. As noted above, the
Company does not currently have the ability to borrow under the Credit
Agreement, but is working with its bank group to obtain debtor in possession
financing. Although the Company feels confident it should obtain such financing,
it is still uncertain at this stage. In the interim, the Company expects that
cash and cash equivalents on hand and cash flow from operations will be adequate
to meet its anticipated operating requirements.


                                      -25-

<PAGE>
         In response to this situation and in order to ensure the Company's
ability to continue as a going concern, management's plans include the
following:

         In addition to working with the bank group to arrange for debtor in
         possession financing the Company is also having discussions with its
         principal common and preferred stockholders, concerning the
         restructuring of its balance sheet. These discussions are ongoing and
         the ultimate outcome is uncertain at this time.

         The Company is in the process of implementing a corporate restructuring
         program and reducing salaried employment levels as part of its current
         effort to reduce costs. During 2002 the Company has eliminated 75
         salaried positions with a projected annual savings of $5.0 million. The
         Company recorded a charge for severance of $1.1 million related to this
         restructuring program in the first quarter of 2002.

         Capital expenditures which are not deemed critical to ongoing
         operations will be deferred and strategies implemented to improve
         working capital management, particularly related to inventory.

         Many of the foregoing factors, over which the Company does not have
complete control, may materially affect the performance, financial condition and
liquidity of the Company.

         General

         The Company manufactures high-performance nickel-based alloys,
superalloys and special alloys which are highly engineered metal alloys designed
to withstand extremes of heat, stress, and corrosion. The Company conducts its
business through three principal operating segments. The Premium Alloys Division
manufactures a comprehensive range of premium grade, nickel-based and
cobalt-based wrought superalloy and special alloy long products in ingot, billet
and bar forms, which are used primarily in jet engines. This division also
produces shape memory alloys, known as Nitinol, which is used primarily in
medical and dental applications; and powder metallurgy superalloy products used
principally in military and the latest generation of large commercial jet
engines. The Huntington Alloys Division manufactures nickel-based alloys in a
broad range of product forms, including ingot, billet, bar, rod, sheet, strip,
plate, tubulars, and rod-in-coil. The division also manufactures and sells
nickel-based welding consumables and high-performance nickel-based alloy and
stainless steel wire products. The Wiggin Alloys Division manufactures
nickel-based alloys in billet, bar, rod, extruded section, narrow strip, wire,
foil, sheet, rod-in-coil and tubular product forms. The organization also
includes a network of distribution facilities and service centers throughout
Europe.

         Net Sales. For the twelve months ended December 31, 2001, the Premium
Alloys Division, the Huntington Alloys Division, and the Wiggin Alloys Division
accounted for 24.3%, 52.6%, and 23.1%, respectively, of the Company's net sales
of $729.3 million. Net sales include sales of the Company's high-performance
nickel-based alloy, superalloy, and special alloy products, as well as revenue
earned from toll conversion. Sales of the Company's products are made under
conventional purchase orders, one-year supply contracts, long-term firm price
contracts and indexed price contracts. Long-term firm price and indexed price
contracts have become more prevalent in the superalloy industry because jet
engine manufacturers are required to provide firm price quotations to airlines
for jet engines to be delivered several years into the future. To the extent
that it has entered into long-term agreements, the Company has sought pricing
terms which are either indexed or otherwise accommodate changes in product and
raw material markets.

         Export sales represent a significant portion of the Company's business.
In 1999, 2000 and 2001, sales by domestic businesses of the Company to
purchasers outside of the United States totaled 15%, 18% and 17% of the
Company's total net sales, respectively.


                                      -26-

<PAGE>
         Cost of Goods Sold. The high-performance nickel-based alloy, superalloy
and special alloy industry is characterized by high capital investment and high
fixed costs, and therefore profitability is significantly affected by changes in
volume. Variable costs such as raw materials, labor, supplies and energy
(primarily electricity and natural gas) generally account for more than 70% of
the Company's cost of goods sold. Fixed costs, which include indirect overhead
and depreciation, constitute the remainder of the Company's cost of goods sold.
The Company has undertaken in previous years and continues to focus on
initiatives to maintain and improve its efficiency and cost position.

         The Company consumes large amounts of electricity and natural gas in
the manufacture of its products. The prices for electricity, natural gas, and
other energy resources are subject to market conditions and may be volatile. As
a result, any increase in the cost of such resources may have a material adverse
effect on the Company's business, financial condition, results of operations or
cash flows. See "- Forward Looking Statements." The financial performance of
the Company's U.S. domestic operations were adversely impacted by rising natural
gas costs during 2000 and 2001.

         The Company's superalloy and special alloy products are comprised of
varying amounts of nickel and nickel-bearing scrap (often representing 50% or
greater). Therefore, product costs are impacted more by the supply and price of
nickel and nickel-bearing scrap than by other materials. The price the Company
pays for nickel is usually based upon quoted prices on the London Metals
Exchange (the "LME") plus a premium due to quality, location, and volume
purchased. Certain of the Company's long-term sales agreements, referred to as
indexed price sales contracts, provide for certain price adjustments to reflect
changes in the price of raw materials, principally nickel. Most of the Company's
product sales are made, and are expected to be made in the future, under firm
price contracts which do not provide for raw material price adjustments. In an
attempt to mitigate the risks associated with raw material price fluctuations
and to match raw material purchases with firm price product contracts, the
Company often enters into forward contracts to manage its exposure to changes in
nickel prices and also enters into contracts for the purchase of scrap with
customers. As a result, in the short term, changes in the prices of raw
materials do not necessarily impact the current period revenue and cost of
sales. A substantial majority of the nickel forward contracts result in the
Company taking possession of the inventory; however, certain of these contracts
are settled in cash. For the nickel forward contracts settled in cash, the
Company makes or receives payment equal to the net change in value of the
contract at its maturity. Substantially all contracts are designated as hedges
of the Company's firm sales commitments, are timed to correspond to the
commitment period, and are effective in hedging the Company's exposure to
changes in nickel prices during that cycle. At December 31, 2001, the Company
had open purchase contracts with a notional principal value of approximately
$37.3 million. The fair value of the material covered by these contracts based
on the December 31, 2001 price quoted on the LME, was approximately $36.8
million. Unrealized gains and losses on the contracts, which have been
designated as effective hedges on firm sales commitments have been deferred.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses represent costs associated with sales and marketing,
research and development, legal expenses, and general corporate administration.

         Certain freight and handling costs have been reclassed among net sales,
cost of goods sold and selling, general and administrative expenses for the
twelve month period ended December 31, 2000 and preceding periods. This
reclassification was recorded in the quarter ended September 30, 2001 in order
to be consistent with the terms of EITF 00-10 regarding the classification of
freight and handling costs. As a result of EITF 00-10, net sales increased $1.5
million, cost of goods sold increased $2.8 million and selling, general and
administrative expenses decreased $1.3 million for the twelve month period ended
December 31, 2000 (Net sales increased $1.0 million, cost of goods sold
increased $2.3 million and selling, general and administrative expenses
decreased $1.3 million for the twelve month period ended December 31, 1999).


                                      -27-

<PAGE>
RESULTS OF OPERATIONS

         The following table sets forth, for the periods indicated, statement of
operations data as a percentage of net sales.

<TABLE>
<CAPTION>
                                        1999             2000             2001
                                        -----            -----            -----
<S>                                     <C>              <C>              <C>
Net sales                               100.0%           100.0%           100.0%
Costs of goods sold                      99.1            100.2             92.9
                                        -----            -----            -----
Gross profit (loss)                       0.9             (0.2)             7.1
Selling, general and
   administrative expenses                4.2              3.8              4.1
                                        -----            -----            -----
Operating income (loss)                  (3.3)            (4.0)             3.0
Interest expense                          4.1              4.4              3.6
Other income                             (0.5)            (1.0)            (0.1)
                                        -----            -----            -----
                                          3.6              3.4              3.5
                                        -----            -----            -----
Loss before income taxes                 (6.9)            (7.4)            (0.5)
Income tax expense (benefit)             (2.7)            (2.8)             7.1
                                        -----            -----            -----
Net loss                                 (4.2)            (4.6)            (7.6)
                                        =====            =====            =====
</TABLE>

YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000

NET SALES.

         Premium Alloys. Net sales increased $8.7 million, or 5.2%, from $168.5
million in 2000 to $177.2 million in 2001. An increase in sales volume accounted
for $5.9 million of the above increase and an increase in average realized
selling prices accounted for $2.8 million. This increase in sales is primarily
attributable to increased sales volume and average realized selling prices for
the Company's billet and rolled nickel-based superalloy and special alloy
products supplied to growing markets for land-based gas turbines used in
electrical power generation and improved conditions in the commercial aerospace
end-market.

         Huntington Alloys. Net sales increased $8.7 million, or 2.3%, from
$374.7 million in 2000 to $383.4 million in 2001. An increase in average
realized selling prices accounted for $35.7 million of the above increase,
offset by a decrease in sales volume which accounted for $(27.0) million. The
increase in average realized selling prices was driven by a product mix shift to
higher priced nickel-based superalloy and special alloy billet and ingot
products supplied to growing markets for land-based gas turbines used in
electrical power generation and in the commercial aerospace and oil/gas
end-markets. However, this increase was offset by reduced sales volume and
average realized selling prices for the Company's products used in consumer
related goods (most notably, in the automotive and appliance industries) and
continued weakness in the chemical processing industry.

         Wiggin Alloys. Net sales increased $14.6 million, or 9.5%, from $154.1
million in 2000 to $168.7 million in 2001. An increase in sales volume accounted
for $21.8 million of the above increase, offset by a decrease in average
realized selling prices which accounted for $(7.2) million. The Company realized
increased


                                      -28-

<PAGE>
sales volume for its nickel-based superalloy and special alloy billet and plate
products supplied to the oil/gas and commercial aerospace end-markets.



COST OF GOODS SOLD.

         Premium Alloys. Cost of goods sold decreased $6.5 million, or 4.3%,
from $152.1 million in 2000 to $145.6 million in 2001. As a percentage of net
sales, cost of goods sold decreased from 90.3% in 2000 to 82.2% in 2001,
primarily as a result of fixed costs being absorbed over a higher volume of
sales, and lower raw material costs, principally nickel.

         Huntington Alloys. Cost of goods sold decreased $31.2 million, or 7.8%,
from $399.5 million in 2000 to $368.3 million in 2001. Raw material costs
accounted for $(41.1) million of the above decrease, offset by an increase in
manufacturing costs which accounted for $9.9 million. As a percentage of net
sales, cost of goods sold decreased from 106.6% in 2000 to 96.1% in 2001,
primarily as a result of increased selling prices as mentioned above and lower
raw material costs, principally nickel.

         Wiggin Alloys. Cost of goods sold increased $16.2 million, or 11.4%,
from $141.7 million in 2000 to $157.9 million in 2001. An increase in raw
material costs accounted for $11.4 million of the above increase and an increase
in manufacturing costs accounted for $4.8 million. As a percentage of net sales,
cost of goods sold increased from 91.9% in 2000 to 93.6% in 2001.

         Corporate. Cost of goods sold not allocated to an operating segment
increased $0.4 million, or 7.1%, from $5.6 million in 2000 to $6.0 million in
2001. Cost of goods sold included in this category consists principally of the
amortization of deferred financing costs and amortization of the covenant not to
compete and certain other costs associated with the IAI Acquisition.

GROSS PROFIT (LOSS).

         Premium Alloys. Gross profit increased $15.2 million, or 92.7%, from
$16.4 million in 2000 to $31.6 million in 2001.

         Huntington Alloys. Gross profit (loss) increased $39.9 million, from
$(24.8) million in 2000 to $15.1 million in 2001.

         Wiggin Alloys. Gross profit decreased $1.6 million, or 13.2%, from
$12.4 million in 2000 to $10.8 million in 2001.

SELLING, GENERAL AND ADMINISTRATIVE.

         Premium Alloys. Selling, general and administrative expenses decreased
$2.7 million, or 33.6%, from $8.0 million in 2000 to $5.3 million in 2001 as a
result of reduced sales, marketing, administrative and research expenditures as
well as an absorption of costs by other segments. Selling, general and
administrative expenses as a percentage of net sales decreased from 4.8% in 2000
to 3.0% in 2001.

         Huntington Alloys. Selling, general and administrative expenses
decreased $0.4 million, or 2.4%, from $14.8 million in 2000 to $14.4 million in
2001 as a result of reduced sales, marketing and research expenditures, offset
by increased administrative expenditures, including an absorption of costs from
other segments. Selling, general and administrative expenses as a percentage of
net sales decreased from 3.9% in 2000 to 3.7% in 2001.


                                     -29-

<PAGE>
         Wiggin Alloys. Selling, general and administrative expenses increased
$0.1 million, or 5.5%, from $2.4 million in 2000 to $2.5 million in 2001 as a
result of increased research expenditures. Selling, general and administrative
expenses as a percentage of net sales were 1.5% in both 2000 and 2001.

         Corporate. Selling, general and administrative expenses not allocated
to an operating segment increased $6.7 million from $1.1 million in 2000 to $7.8
million in 2001. This increase is primarily attributable to increased legal
expenditures associated with the Company's lawsuit against Inco and certain
other administrative expenses.

OPERATING INCOME (LOSS).

         Premium Alloys. Operating income increased $17.9 million, or 216.5%,
from $8.4 million in 2000 to $26.3 million in 2001. Operating income as a
percentage of net sales increased from 4.9% in 2000 to 14.9% in 2001.

         Huntington Alloys. Operating income (loss) increased $40.3 million, or
101.8%, from $(39.6) million in 2000 to $0.7 million in 2001. Operating income
(loss) as a percentage of net sales improved from (10.6)% in 2000 to 0.2% in
2001.

         Subsequent to the acquisition of the Huntington Alloys segment in
October, 1998, the segment was impacted by several negative events. These
included a work stoppage at the Huntington facility which lasted eleven weeks,
turnover of senior management, distractions and inefficiencies related to the
implementation of a new information system and unanticipated increases in the
cost of raw material. These events resulted in delays in accomplishing
post-merger integration programs and created distractions for the Company in
responding to strategic changes in the marketplace. As the unusual events have
been resolved, the Company has been able to focus on improving the profitability
of the segment in late 2000 and throughout 2001.

         Wiggin Alloys. Operating income decreased $1.7 million, or 17.7%, from
$10.0 million in 2000 to $8.3 million in 2001. Operating income as a percentage
of net sales decreased from 6.5% in 2000 to 4.9% in 2001.

INTEREST EXPENSE.

         Interest expense decreased $4.7 million, or 15.2%, from $30.7 million
in 2000 to $26.0 million in 2001, primarily due to a decrease in indebtedness
and lower interest rates.

OTHER EXPENSE (INCOME).

         Other expense (income) decreased $6.0 million from $(7.0) million in
2000 to $(1.0) million in 2001. This decrease is primarily attributable to $0.8
million in foreign currency gains in 2000 as compared to $0.7 million in foreign
currency losses in 2001 and the Company's adoption of SFAS No. 133 during 2001
which resulted in a $2.2 million charge.

INCOME TAX EXPENSE (BENEFIT).

         Income tax expense increased $71.9 million, from a benefit of $19.8
million in 2000 to an expense of $52.1 million in 2001, primarily due to the
decrease in loss before income taxes and the Company recording a $53.7 million
deferred tax valuation allowance during the fourth quarter of 2001.

NET LOSS.

         Net loss increased $23.7 million, or 74.5%, from $(31.9) million in
2000 to $(55.6) million in 2001 for the reasons stated above. Net loss as a
percentage of net sales increased from (4.6)% in 2000 to (7.6)% in 2001.



                                      -30-

<PAGE>


YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999

NET SALES.

         Premium Alloys. Net sales increased $41.7 million, or 32.9%, from
$126.8 million in 1999 to $168.5 million in 2000. An increase in sales volume
accounted for $20.5 million of the above increase and an increase in average
realized selling prices accounted for $21.2 million. This increase in sales is
primarily attributable to increased sales volume for nickel-based superalloys
and special alloys from growing markets for land-based gas turbines used in
electrical power generation and improved conditions in the commercial aerospace
end-market.

         Huntington Alloys. Net sales increased $54.2 million, or 16.9%, from
$320.5 million in 1999 to $374.7 million in 2000. An increase in sales volume
accounted for $35.6 million of the above increase and an increase in average
realized selling prices accounted for $18.6 million. The Company realized
increased sales volume and average realized selling prices for nickel-based
superalloys and special alloys from growing markets for land-based gas turbines
used in electrical power generation and improved conditions in the commercial
aerospace and oil/gas end-markets. However, this increase was offset by a
decline in sales and operating profit resulting primarily from decreased sales
volume and average realized selling prices for the Company's flat rolled
products to the chemical and petrochemical processing end-markets.

         Wiggin Alloys. Net sales decreased $1.8 million, or 1.1%, from $155.9
million in 1999 to $154.1 million in 2000. A decrease in average realized
selling price accounted for $(10.7) million of the above decrease, offset by an
increase in sales volume which accounted for $8.9 million. The Company realized
increased sales volume for nickel-based superalloys and special alloys due to
improved conditions in the commercial aerospace end-market. However, this
increase was offset by the continued weakening of European currencies as
compared to the U.S. dollar and the British pound sterling.

COST OF GOODS SOLD.

         Premium Alloys. Cost of goods sold increased $44.9 million, or 41.9%,
from $107.2 million in 1999 to $152.1 million in 2000. As a percentage of net
sales, cost of goods sold increased from 84.5% in 1999 to 90.3% in 2000,
primarily as a result of higher raw material costs, principally nickel, and the
rising cost of natural gas.

         Huntington Alloys. Cost of goods sold increased $57.8 million, or
16.9%, from $341.7 million in 1999 to $399.5 million in 2000, primarily as a
result of higher raw material costs, principally nickel, and the rising cost of
natural gas in the fourth quarter of 2000. As a percentage of net sales, cost of
goods sold was 106.6% in 1999 and 2000.

         Wiggin Alloys. Cost of goods sold decreased $0.8 million, or 0.5%, from
$142.5 million in 1999 to $141.7 million in 2000, as a result of reduced sales
volumes and improved manufacturing efficiencies, offset in part, by higher raw
material costs, principally nickel. As a percentage of net sales, cost of goods
sold increased from 91.4% in 1999 to 91.9% in 2000.


                                      -31-

<PAGE>
         Corporate. Cost of goods sold not allocated to an operating segment
decreased $0.5 million from $6.1 million in 1999 to $5.6 million in 2000. Cost
of goods sold included in this category consists principally of the amortization
of deferred financing costs and amortization of the covenant not to compete and
certain other costs associated with the IAI Acquisition.

GROSS PROFIT (LOSS).

         Premium Alloys. Gross profit decreased $3.2 million, or 16.6%, from
$19.6 million in 1999 to $16.4 million in 2000.

         Huntington Alloys. Gross profit (loss) increased $(3.6) million, or
16.9%, from $(21.2) million in 1999 to $(24.8) million in 2000.

         Wiggin Alloys. Gross profit decreased $1.0 million, or 7.4%, from $13.4
million in 1999 to $12.4 million in 2000.

SELLING, GENERAL AND ADMINISTRATIVE.

         Premium Alloys. Selling, general and administrative expenses decreased
$0.2 million, or 2.5%, from $8.2 million in 1999 to $8.0 million in 2000. This
decrease is principally the consequence of reduced sales and marketing
expenditures, offset in part by a non-recurring charge associated with the
retirement of the Company's former President and Chief Executive Officer.
Selling, general and administrative expenses as a percentage of net sales
decreased from 6.5% in 1999 to 4.8% in 2000.

         Huntington Alloys. Selling, general and administrative expenses
increased $0.5 million, or 3.7%, from $14.3 million in 1999 to $14.8 million in
2000. This increase is principally the consequence of increased sales and
marketing expenditures, offset in part by reduced research and development
expenditures. Selling, general and administrative expenses as a percentage of
net sales decreased from 4.4% in 1999 to 3.9% in 2000.

         Wiggin Alloys. Selling, general and administrative expenses decreased
$0.6 million, or 20.4%, from $3.0 million in 1999 to $2.4 million in 2000. This
decrease is principally the consequence of reduced sales and marketing
expenditures. Selling, general and administrative expenses as a percentage of
net sales decreased from 1.9% in 1999 to 1.5% in 2000.

         Corporate. Selling, general and administrative expenses not allocated
to an operating segment increased $1.1 million from zero in 1999 to $1.1 million
in 2000. This increase is primarily attributable to increased legal expenditures
associated with the Company's lawsuit against Inco and certain other consulting
expenses.

OPERATING INCOME (LOSS).

         Premium Alloys. Operating income decreased $3.0 million, or 26.9%, from
$11.4 million in 1999 to $8.4 million in 2000. Operating income as a percentage
of net sales decreased from 9.0% in 1999 to 4.9% in 2000.

         Huntington Alloys. Operating income (loss) increased $(4.1) million, or
11.6%, from $(35.5) million in 1999 to $(39.6) million in 2000. Operating income
(loss) as a percentage of net sales decreased from (11.1)% in 1999 to (10.6)% in
2000.

         Wiggin Alloys. Operating income decreased $0.4 million, or 3.7%, from
$10.4 million in 1999 to $10.0 million in 2000. Operating income as a percentage
of net sales decreased from 6.7% in 1999 to 6.5% in 2000.


                                      -32-

<PAGE>
INTEREST EXPENSE.

         Interest expense increased $5.8 million, or 23.2%, from $24.9 million
in 1999 to $30.7 million in 2000, primarily due to the increase in indebtedness
and interest rates.

INCOME TAX EXPENSE (BENEFIT).

         Income tax benefit increased $(3.7) million, or 22.5%, from $(16.1)
million in 1999 to $(19.8) million in 2000, primarily due to the increased
pre-tax loss. The effective tax rate decreased from 38.9% in 1999 to 38.3% in
2000, primarily due to the effect of foreign income and decreased benefits from
the Company's foreign sales corporation.

NET LOSS.

         Net loss increased $6.6 million, or 25.9%, from $(25.3) million in 1999
to $(31.9) million in 2000 for the reasons stated above. Net loss as a
percentage of net sales increased from (4.2)% in 1999 to (4.6)% in 2000.

LIQUIDITY AND CAPITAL RESOURCES

         The Company's liquidity needs arise primarily from capital
expenditures, working capital requirements, and principal and interest payments
on indebtedness. The Company has historically met these liquidity requirements
with funds generated from operations and from short-term and long-term debt
financing (including borrowings from its principal stockholders). The Company's
business is capital intensive and requires substantial expenditures for, among
other things, the purchase and maintenance of equipment used in the
manufacturing process and compliance with environmental laws.

         Net cash provided by (used in) operating activities was $8.4 million,
$(32.2) million and $ 58.7 million for 1999, 2000 and 2001, respectively. Net
cash provided by operating activities for 2001 amounted to $ 58.7 million,
consisting primarily of a net loss of $ (55.6) million offset by depreciation
and amortization expense of $40.7 million, provision for deferred income taxes
of $ 51.3 million, subordinated debt interest of $3.4 million, charges for
derivative and hedging activities of $2.2 million, $0.6 million of other
adjustments and decrease in working capital of $ 16.1 million, which includes
decreases in accounts receivable and inventory. Net cash used in operating
activities for 2000 amounted to $ (32.2) million, consisting primarily of a net
loss of $(31.9) million offset by depreciation and amortization expense of $40.5
million, subordinated debt interest of $3.3 million, increases in working
capital of $23.3 million, which includes increases in accounts receivable and
inventory and an increase in the provision for deferred income taxes of $20.9
million.

         Capital expenditures were $12.0 million, $8.1 million and $9.5 million
for 1999, 2000 and 2001, respectively.

         The Company's principal sources of funds have been (i) funds generated
from operations; (ii) borrowings under the Company's Senior Secured Credit
Agreement with Credit Lyonnais, as agent, and other financial institutions (as
amended, the "Credit Agreement"). and (iii) borrowings under the Subordinated
Loan Agreement.

         As discussed above, because the Company's Senior Lenders prohibited the
Company from additional borrowing under the Revolving Credit Facility, the
Company was unable to pay the scheduled principal repayments of approximately $9
million due on the term loans at the end of March 2002. As a result, on March
27, 2002, the Company and its operating subsidiaries in the United States filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code in the U.S. Bankruptcy Court for the Eastern District of
Kentucky in Lexington. The Company does not currently have the ability to borrow
under the Credit Agreement but is working with its bank group to obtain debtor
in possession financing. Although the Company expects that it will be able to
obtain such financing, it is still uncertain at this stage. In the interim, the
Company expects that cash and cash equivalents on hand and cash flow from
operations will be adequate to meet its anticipated operating requirements.

         The Credit Agreement provides for two term loans (the "Tranche A Term
Loan" and the "Tranche B Term Loan," collectively, the "Term Loans") and a $100
million revolving credit and letter of credit facility (the "Revolving Credit
Facility").

                                      -33-

<PAGE>
         The Tranche A Term loan is scheduled to be repaid in quarterly
installments through 2003 and the Tranche B Term loan is scheduled to be repaid
in quarterly installments through 2005. Required payments under the Credit
Facility are as follows, assuming prepayment of the debt obligations is not
required (in thousands):

<TABLE>
<CAPTION>
                    Tranche A         Tranche B
         Year       Term Loan         Term Loan        Revolver            Total
         ----       ---------         ---------        --------            -----
<S>                 <C>               <C>              <C>               <C>
         2002           36,250            1,000                 -         37,250
         2003           28,442           12,625            71,500        112,567
         2004                -           47,500                 -         47,500
         2005                -           34,125                 -         34,125
</TABLE>

The Company had made all scheduled repayments as they came due until the March
29, 2002 repayment date, when the Company was unable to make the scheduled
repayments due to the liquidity constraints discussed above.

         The Company's obligations under the Credit Agreement are secured by all
of the assets of the Company and its domestic subsidiaries and by a pledge of
the capital stock of certain subsidiaries. The Credit Agreement also contains
covenants restricting the ability of the Company to, among other things, make
certain restricted payments, permit liens on its assets, guarantee indebtedness
or enter into certain transactions with affiliates. The Credit Agreement also
requires the Company to satisfy certain financial tests relating to, among other
things, the Company's minimum consolidated earnings before interest, taxes,
depreciation and amortization ("EBITDA"); consolidated leverage ratio; interest
coverage ratio and fixed charge coverage ratio.

         At September 30, 1999, the Company was in violation of the revised
minimum EBITDA and leverage ratio financial tests included in the Credit
Agreement. The lenders under the Credit Agreement (the "Senior Lenders") agreed
to amend the terms of the Credit Agreement and waive the defaults provided the
Company agree to pursue additional capital in the form of subordinated loans.

         Effective December 17, 1999, the Company entered into the Subordinated
Loan Agreement with Societe Industrielle de Materiaux Avances ("SIMA"), which
is the owner of 38.5% of the Company's outstanding common stock. The
Subordinated Loan Agreement provides for a total of $50 million, $20 million in
term loans (the "Subordinated Term Loans") and a $30 million revolving credit
facility (the "Subordinated Revolving Credit Facility"). Proceeds from the
Subordinated Term Loans were used for working capital purposes and to make
required repayments to the Senior Lenders under the Credit Agreement. The
Subordinated Term Loans and outstanding Subordinated Revolving Loans mature on
July 28, 2006 (the "Maturity Date"). Amounts outstanding under the Subordinated
Loan Agreement bear interest at a rate per year equal to the three-month London
Interbank Offered Rate plus 1%. Accrued interest on both the Subordinated Term
Loans and Subordinated Revolving Loans is to be paid in kind by addition to the
principal of the Subordinated Term Loans on the last day of each calendar
quarter.
       The Company's obligations under the Subordinated Loan Agreement are
unsecured and expressly subordinated to its obligations under the Credit
Agreement. Pursuant to a Debt Subordination Agreement entered into by SIMA and
the Company for the benefit of the Senior Lenders, the Company may not repay the
Subordinated Term Loans until all amounts due to the Senior Lenders have been
paid. Additionally, the Company may not repay Subordinated Revolving Loans if an
event of default exists under the Credit Agreement or would occur as a result of
the payment or if the aggregate amount outstanding under the Revolving Credit
Facility exceeds $76 million.

                                      -34-

<PAGE>
         Effective December 29, 1999, the Company entered into the Third
Amendment to Credit Agreement and Limited Waiver (the "Third Amendment"). Among
other things, the Third Amendment; waived the events of default which resulted
from the Company not complying with the minimum EBITDA and leverage ratio
financial tests at September 30, 1999; reduced the maximum amount available to
the Company under the Revolving Credit Facility from $150 million to $100
million; revised the minimum EBITDA financial tests through the period ending
March 31, 2001, and suspended all other financial tests until the quarter ended
June 30, 2001, at which time all financial tests were to again be effective. The
Third Amendment also prohibited payments of dividends on the Series A
Convertible Preferred Stock unless such payments were funded by the issuance and
sale of stock of the Company to SIMA or from additional advances by SIMA of
Subordinated Term Loans.

         Pursuant to an amendment to the Credit Agreement dated as of March 28,
2001 (the "Fourth Amendment"), amounts outstanding on the Tranche A Term Loan
and amounts outstanding under the Revolving Credit Facility bear interest at the
Company's option at (i) a base rate, which is the higher of the bank's
short-term commercial reference rate or the Federal Funds rate plus .50%, plus a
margin of 2.00% or (ii) the Eurodollar rate, which is the reserve adjusted New
York interbank offered rate, plus a margin of 3.25%. The applicable margins
under the Fourth Amendment for amounts outstanding on the Tranche B Term Loan
are (i) for base rate loans, 2.50% and (ii) for Eurodollar rate loans, 3.75%.
Prior to the Fourth Amendment, pursuant to an amendment to the Credit Agreement
dated as of March 31, 1999 (the "First Amendment"), the applicable margins for
amounts outstanding on the Tranche A Term Loan and amounts outstanding under the
Revolving Credit Facility were (i) for base rate loans, 1.50% and (ii) for
Eurodollar rate loans, 2.75%. The applicable margins under the First Amendment
for amounts outstanding on the Tranche B Term Loan were (i) for base rate loans,
2.00% and (ii) for Eurodollar rate loans, 3.25%. A commitment fee of .375% to
..50% per annum, depending on the Company's leverage ratio, on the unused portion
of the Revolving Credit Facility is due quarterly.

         In addition to modifying the interest rates for amounts outstanding
under the Credit Agreement, the Fourth Amendment, among other things, revised
the minimum EBITDA financial tests through the period ending March 31, 2002, and
suspended all other financial tests until the quarter ended June 30, 2002, at
which time all financial tests were to again be effective. The Fourth Amendment
also limited capital expenditures to a maximum of $23 million in 2001 and $7.5
million during the first three months of 2002, unless capital expenditures in
excess of those amounts are funded by the issuance and sale of stock of the
Company to SIMA or from additional advances by SIMA of Subordinated Term Loans.

         At December 31, 2001, the aggregate amount outstanding under the
Revolving Credit Facility was $71.5 million. However, as a result of outstanding
letters of credit issued under the Revolving Credit Facility, for purposes of
determining borrowing availability, the balance outstanding under the Revolving
Credit Facility is deemed to be $74.8 million. The amount outstanding under the
Subordinated Revolving Credit Facility was $2.4 million at December 31, 2001.
The aggregate amount outstanding under the Subordinated Term Loan was $63.9
million at December 31, 2001, due to the addition of accrued interest on the
SIMA loans to the principal amount of the Subordinated Term Loan, the conversion
of $27.6 million of Subordinated Revolving Loans to


                                      -35-

<PAGE>
Subordinated Term Loans and additional advances from SIMA to pay dividends on
the Company's Senior Preferred Stock (as defined below).

         As of December 31, 2001, the Company believed it likely would not be
able to meet certain financial covenants under the Credit Agreement as of the
quarter ending June 30, 2002. Consequently, in accordance with generally
accepted accounting principles, as of December 31, 2001, substantially all of
the Company's long-term debt was reclassified to current debt in the
consolidated balance sheet. As of December 31, 2001, the Company's total
outstanding debt under the credit facility was $231.4 million.

         As discussed above because the Company's Senior Lenders prohibited the
Company from additional borrowing under the Revolving Credit Facility, the
Company was unable to pay the scheduled principal repayments of approximately $9
million due on the term loans at the end of March 2002. As a result, on March
27, 2002, the Company and its operating subsidiaries in the United States filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code in the U.S. Bankruptcy Court for the Eastern District of
Kentucky in Lexington. As noted above, the Company does not currently have the
ability to borrow under the Credit Agreement, but is working with its bank group
to obtain debtor in possession financing. Although the Company feels confident
it should obtain such financing, it is still uncertain at this stage. In the
interim, the Company expects that cash and cash equivalents on hand and cash
flow from operations will be adequate to meet its anticipated operating
requirements.

         The Company's Series A Convertible Preferred Stock ("Senior Preferred
Stock") accrues cumulative dividends at the rate of 6.625% per annum, payable
quarterly each January 28, April 28, July 28 and October 28, (each, a "Dividend
Payment Date"). For each of the Dividend Payment Dates from April 28, 2000
through July 28, 2001, the Company borrowed $1,606,563 from SIMA and declared
and paid a dividend to the holders of Senior Preferred Stock with the proceeds
of each loan. The Company has the right to defer payment of accumulated
dividends. The Company exercised the right to defer payment on each Dividend
Payment Date from the issuance of the Senior Preferred Stock (October 28, 1998)
through the January 28, 2000 Dividend Payment Date and on the October 28, 2001
and January 28, 2002 Dividend Payment Dates. The terms of the Credit Agreement
prohibited the Company from paying dividends as of those Dividend Payment Dates.
As of December 31, 2001, the total amount of dividends accrued and unpaid was
$12.1 million. Because the Company deferred payment of dividends for six
quarterly dividend periods, the number of directors constituting the Company's
Board of Directors has been increased, and the holders of Senior Preferred Stock
have elected three individuals to fill the newly created directorships.

         The Company does not expect the future costs of compliance with
currently enacted environmental laws and adopted or proposed regulations to have
a material impact on its liquidity and capital resources. However, the
imposition of more strict standards or requirements under environmental laws and
the possibility of increased enforcement could result in expenditures in excess
of amounts estimated to be required for such matters. See " - Forward Looking
Statements."

         As noted above, the Company does not currently have the ability to
borrow under the Credit Agreement, but is working with its bank group to obtain
debtor in possession financing. Although the Company expects that it will be
able to obtain such financing, it is still uncertain at this stage. In the
interim, the Company expects that cash and cash equivalents on hand and cash
flow from operations will be adequate to meet its anticipated operating
requirements. See "- Forward Looking Statements."

BACKLOG

         As of December 31, 2001, the Company's backlog orders aggregated
approximately $294.2 million, compared to $310.2 million at December 31, 2000.
The Company defines backlog as firm orders, which are generally subject to
cancellation by the customer. Substantially all orders in the backlog at
December 31, 2001


                                      -36-

<PAGE>
are expected to be shipped within the 12 months beginning January 1, 2002. Due
to the cyclical nature of order entry experienced by the Company and its
dependence on the aerospace industry, there can be no assurance that order entry
will continue at current levels or that current firm price orders will not be
canceled or delayed. The cyclical nature of the Company's business and the
events associated with the terrorist activities of September 11 has impacted the
order entry in early 2002 and as a result the Company's backlog orders
aggregated approximately $242.0 million at March 22, 2002.

INFLATION

         Although the Company's sales and results of operations are affected by
the prices of raw materials used to make its products and the cyclicality of the
aerospace industry, the Company does not believe that general economic inflation
has had a material effect on its results of operations for the periods
presented.

LEGAL PROCEEDINGS

         Reference is made to the information included in Item 3 "Legal
Proceedings" of this Form 10-K, which is hereby incorporated by reference.

IMPACT OF NEW ACCOUNTING STANDARDS

         In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). This statement changes the accounting for
goodwill and intangible assets. Under SFAS 142, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed annually, or more
frequently if impairment indicators arise, for impairment. Separable intangible
assets which have finite lives will continue to be amortized over their useful
lives, with no maximum life. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, companies are required to adopt SFAS 142 in
their fiscal year beginning after December 15, 2001. The Company anticipates
adopting SFAS 142 in fiscal 2002 and has not yet determined the impact on the
overall financial condition of the Company, if any, which may result.
Amortization of existing goodwill is $0.1 million annually.

         The Company has also considered SFAS No. 141 ("Business Combinations")
and SFAS No. 143 ("Accounting for Asset Retirement Obligations") and has
determined that each is not applicable to the Company's current operations. The
Company has also considered SFAS No. 144 ("Accounting for the Impairment or
Disposal of Long-Lived Assets") and is currently assessing if there will be any
impact on the Company's financial position.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Market risk is the potential loss arising from adverse changes in
market rates and prices, such as commodity prices, foreign currency exchange and
interest rates. The Company is exposed to various market risks, including
changes in commodity prices, foreign currency exchange rates and interest rates.
The Company has entered into financial instrument transactions which attempt to
manage and reduce the impact of changes in commodity prices, foreign currency
exchange rates, and interest rates. The Company does not enter into derivatives
or other financial instruments for trading or speculative purposes.

         The Company is exposed to risk from changes in the price of commodities
used in production between the date of a firm sales commitment and the date of
delivery. The Company purchases forward commodity contracts to manage its
exposure to changes in commodity prices, primarily nickel. A substantial portion
of the forward commodity contracts result in the Company actually taking
possession of the material; however, certain of the forward contracts result in
the Company making or receiving payments equal to the net change in the value of
the contract, which fluctuates with the price of the commodity. A 10%
fluctuation in the price of the underlying commodities would change the fair
value of the contracts settled in cash by approximately $239,000. However, since
these contracts hedge the Company's firm sales commitments, any change in the
fair value of the contracts would be offset by changes in the underlying value
of the transaction being hedged.

         A portion of the Company's operations consists of manufacturing and
sales activities in foreign jurisdictions, principally in Europe. As a result,
the Company's financial results could be significantly affected by factors such
as changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company distributes its products. The Company
enters into forward currency and currency option contracts to mitigate the
effect of currency transaction exposures. An overall 10% fluctuation in exchange
rates would change the fair value of these contracts by approximately
$1,000,000. However, since these contracts hedge foreign currency denominated
transactions, any change in the fair value of the contracts would be offset by
changes in the underlying value of the transaction being hedged.

                                      -37-

<PAGE>
         At December 31, 2001, the Company has approximately $297.8 million of
variable rate long-term debt. As required by the terms of the Credit Agreement,
the Company has entered into two interest rate swap agreements. The first
agreement has a notional amount of $53,250,000 through September 15, 2003 based
on LIBOR at 5.95%. The second agreement has a notional amount of $53,250,000
through September 15,2003 based on LIBOR at 5.76%. Net payments or receipts
under the swap agreements are recorded as adjustments to interest expense. Under
these agreements, the Company makes or receives payments equal to the difference
between fixed and variable interest rate payments on the notional amount. A 1%
fluctuation in interest rates would change future interest expense on the $191.3
million of debt that is not covered by the swap agreements by approximately $1.9
million.

CRITICAL ACCOUNTING POLICIES

         The "Management's Discussion and Analysis of Financial Condition and
Results of Operations", as well as disclosures included elsewhere in this Form
10-K, are based upon the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingencies. On
an on-going basis, the Company evaluates its estimates, including those related
to allowances for uncollectible accounts, inventory reserves, restructuring
accruals, pension and other post-retirement benefit obligations and the
underlying actuarial assumptions related thereto, the recoverability of other
long-lived assets and accruals for environmental remediation, litigation, income
tax and other contingencies. The Company bases its estimates on historical
experience, current conditions and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources as well as identifying and
assessing the accounting treatment with respect to commitments and
contingencies. Actual results may differ from previously estimated amounts under
different assumptions or conditions. A critical accounting policy is one that
requires management's most difficult, subjective or complex estimates and
assessments, often as a result of the need to make estimates about the effect of
matters which are inherently uncertain. The Company believes that the following
discussion addresses the Company's most critical accounting policies, which are
those most important in the portrayal of the Company's financial condition and
results of operations.


                                      -38-

<PAGE>
         This discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and related notes contained
elsewhere in this report.

Environmental and Contingencies

         The Company is subject to various federal, state, local and foreign
environmental legal and worker safety and health laws and regulations, related
to its worldwide operations. As a result of those obligations the Company is
involved in specific environmental litigation and claims, the clean-up of
disposal sites alleged to contain hazardous and/or toxic wastes and efforts to
meet or correct compliance related matters. The Company records an accrual for
environmental, legal, and other contingencies when estimated future expenditures
associated with such contingencies become probable, and the amounts may be
reasonably estimated. The Company continually assesses the likely outcome of
these matters and the adequacy of amounts, if any, provided for these matters.
There can be no assurance that the ultimate outcome of those matters will not
differ materially from the Company's assessment of them.



Pension and Other Post-Retirement Benefit Obligations

         The Company accounts for its defined benefit pension plans in
accordance with SFAS No. 87, "Employers' Accounting for Pensions", which
requires that amounts recognized in the financial statements be determined on an
actuarial basis. The most significant elements in determining the Company's
pension income (expense) include pension liability discount rates, the expected
return on plan assets and rate of future compensation increases as determined by
the Company, within certain guidelines. In addition, the Company's actuarial
consultants utilize subjective factors such as withdrawal and mortality rates to
determine these factors. The actuarial assumptions used by the Company may
differ materially from actual results due to changing market and economic
conditions, higher or lower withdrawal rates or longer or shorter life spans of
participants. Such differences may result in a significant impact to the amount
of pension expense recorded by the Company.

         The Company accounts for its other post-retirement benefit obligations
in accordance with SFAS No. 106, "Employers' Accounting for Post-Retirement
Benefits Other Than Pensions". Costs and obligations are dependent upon
management's assumptions related to future events which are used by actuaries in
calculating such amounts. These assumptions include health care cost trend
rates, mortality rates and other factors. Health care cost trend assumptions are
developed based upon historical cost data, the near term outlook and an
assessment of long term trends. Significant differences in actual experience or
significant changes in assumptions could affect other post-retirement benefit
costs and obligations.

Deferred Income Taxes

         The Company records a valuation allowance to reduce its deferred tax
assets to the amount which is believed to be realizable under the more likely
than not recognition criteria. While the Company has considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for a valuation allowance, it is possible that in the future the Company
may change its estimate of the amount of deferred income tax assets that would
more likely than not be realized, resulting in an adjustment to the deferred
income tax valuation allowance that would either increase or decrease, as
applicable, reported net income in the period such determination was made.
During 2001, a deferred tax valuation allowance of $77.6 million was established
for net deferred assets related to the Company's U.S. operations.


                                      -39-

<PAGE>
Long-Term Contractual Obligations and Commercial Commitments

         The following table summarizes the Company's various long-term
contractual obligations for the next five years and thereafter, assuming
prepayment of the debt obligations is not required (in thousands):

<TABLE>
<CAPTION>
                                                Payments due
                      -------------------------------------------------------------------------------
                        2002          2003          2004          2005          2006       Thereafter
                      --------      --------      --------      --------      --------      --------
<S>                   <C>           <C>           <C>           <C>           <C>           <C>
Long-term debt        $ 37,434      $112,752      $ 47,661      $ 34,249      $    129      $  1,153
Capital leases             200           218           238           218           101            48
Operating leases         2,389         1,173           886           741           671            --
                      --------      --------      --------      --------      --------      --------
Contractual cash      $ 40,023      $114,143      $ 48,785      $ 35,208      $    901      $  1,201
</TABLE>

Off-Balance Sheet Arrangements

The Company's investment in joint venture represents its 50% investment in
Daido-Special Metals, Ltd. ("DSML"). DSML is a Japanese marketer of an extensive
range of superalloys and high-performance alloys produced by the Company and
Daido Steel Co., Ltd. in Japan. The Company accounts for its investment using
the equity method. The Company's share of earnings in the joint venture was
$888,000 and $686,000 in 2000 and 2001, respectively. The net investment in
joint venture was $7,991,000 and $7,294,000 at December 31, 2000 and 2001,
respectively, and is recorded in other assets.

The summary balance sheet of the joint venture at December 31, 2000 and 2001 is
as follows (in thousands):

<TABLE>
<CAPTION>
                                     2000                     2001
                                    -------                 -------
<S>                                 <C>                     <C>
Current Assets                      $96,227                 $63,915
Total Assets                        $97,817                 $65,286

Current Liabilities                 $80,020                 $49,415
Total Liabilities                   $81,835                 $50,698

Shareholders' Equity                $15,982                 $14,588
</TABLE>

The Company does not guarantee any amounts of debt in the joint venture
Daido-Special Metals, Ltd.

Other Transactions

The Company has entered into various transactions with related parties,
including a principal shareholder of the Company. The Company and an affiliate
share common insurance coverage for product liability, contingent and excess
liabilities, and business interruption. The Company was charged $1.1 million,
$1.1 million and $0.9 million for its share of the premium due for the years
ended December 31, 1999, 2000 and 2001, respectively. The Company also purchases
products used in the manufacturing process from affiliates, principally raw
materials. Such purchases totaled $7.1 million, $17.7 million and $21.4 million
during the years ended December 31, 1999, 2000 and 2001, respectively. During
1999, 2000 and 2001, the Company sold superalloy and special alloy products to
affiliates. The net revenues realized from such sales were $50.6 million, $78.5
million and $89.1 million for the years ended December 31, 1999, 2000 and 2001,
respectively. The Company has also entered into a Managerial Assistance
Agreement, Technical Assistance Agreement and warehouse agreement with
affiliated parties. Management believes that the terms of such transactions are
no less favorable than the terms which it would have obtained in transactions
with unaffiliated third parties.


                                      -40-

<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   Index to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                             Page in
                                                                            Form 10-K
                                                                            ---------
<S>                                                                         <C>
Report of Independent Auditors                                                42

Consolidated Balance Sheets as of December 31, 2000 and 2001.                 43

Consolidated Statements of Operations for the Years Ended December 31,
   1999, 2000 and 2001.                                                       44

Consolidated Statements of Shareholders' Equity (Deficit) for the
   Years Ended December 31, 1999, 2000 and 2001.                              45

Consolidated Statements of Cash Flows for the Years Ended December 31,
   1999, 2000 and 2001.                                                       46

Notes to Consolidated Financial Statements                                    47
</TABLE>


                                      -41-
<PAGE>
                         Report of Independent Auditors


Board of Directors
Special Metals Corporation


We have audited the accompanying consolidated balance sheets of Special Metals
Corporation as of December 31, 2000 and 2001, and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 consolidated financial position of Special Metals
Corporation at December 31, 2000 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates continuity
of the Company's operations and realization of its assets and payments of its
liabilities in the ordinary course of business. As more fully described in Note
1 to the consolidated financial statements, on March 27, 2002, the Company and
its operating subsidiaries in the United States filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code. The
Company has incurred continuing losses before taxes since 1999 totaling
approximately $96.6 million and has projected additional losses in the near
term. The uncertainties inherent in the bankruptcy process and the Company's
recurring losses from operations raise substantial doubt about the Company's
ability to continue as a going concern. Effective March 27, 2002, the Company is
operating its business as a Debtor-in-Possession under the jurisdiction of the
Bankruptcy Court, and continuation of the Company as a going concern is
contingent upon, among other things, the confirmation of a Plan of
Reorganization, the Company's ability to negotiate debtor-in-possession
financing agreements, and the Company's ability to generate sufficient cash from
operations and obtain financing sources to meet its future obligations. If no
reorganization plan is approved, it is possible that the Company's assets may be
liquidated. The consolidated financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the outcome of these uncertainties.


                                             /s/ Ernst & Young LLP


Buffalo, New York
February 8, 2002,
except for the last paragraph of this report and Notes 1 and 5, as to which the
date is March 27, 2002


                                      -42-

<PAGE>
                           SPECIAL METALS CORPORATION
                           CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                              DECEMBER 31
                                                                     -----------------------------
                                                                        2000               2001
                                                                     ---------           ---------
<S>                                                                  <C>                 <C>
ASSETS
Current assets:
   Cash and cash equivalents                                         $   8,574           $  10,834
   Accounts receivable - trade, less allowance for doubtful
     accounts of $4,569 and $3,555, respectively                       143,460             131,281
   Accounts receivable - affiliates                                     16,345              15,555
   Inventories                                                         259,533             250,582
   Prepaid expenses and other current assets                            10,260               6,011
                                                                     ---------           ---------
Total current assets                                                   438,172             414,263
Property, plant and equipment, net                                     254,105             231,668
Non-competition agreement, net of accumulated
   amortization of $8,017 and $11,717, respectively                     28,983              25,283
Non-current deferred taxes                                              55,665                  --
Other assets                                                            43,400              29,365
                                                                     ---------           ---------
Total assets                                                         $ 820,325           $ 700,579
                                                                     =========           =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Accounts payable - trade                                          $  62,194           $  51,488
   Accounts payable - affiliates                                         2,673               5,084
   Accrued liabilities                                                  43,572              46,733
   Notes payable                                                         7,127               8,539
   Subordinated notes payable to affiliate                                  --              66,352
   Current portion of long-term debt and capital lease
     obligations                                                        30,168             233,465
                                                                     ---------           ---------
Total current liabilities                                              145,734             411,661
Long-term debt and capital lease obligations                           250,678                 936
Subordinated notes payable to affiliate                                 58,116                  --
Postretirement benefits obligation                                     198,760             202,479
Pension benefit obligations                                                 --              38,760
Other long-term liabilities                                             29,834              25,388
Commitments and contingencies

Redeemable, convertible preferred stock, Series A,
   nonvoting, $0.01 par value,  10,000,000 shares
  authorized, 1,940,000 shares issued and outstanding                  106,890             109,094

Shareholders' equity (deficit):
   Common stock, $0.01 par value, 35,000,000 shares
     authorized, 15,479,000 shares issued and outstanding                  155                 155
   Paid-in surplus                                                      75,712              75,712
   Accumulated other comprehensive loss                                (12,133)            (67,539)
   Accumulated deficit                                                 (33,421)            (96,067)
                                                                     ---------           ---------
Total shareholders' equity (deficit)                                    30,313             (87,739)
                                                                     ---------           ---------
Total liabilities and shareholders' equity (deficit)                 $ 820,325           $ 700,579
                                                                     =========           =========
</TABLE>

See accompanying notes.


                                      -43-

<PAGE>
                           SPECIAL METALS CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31
                                                      -------------------------------------------------
                                                         1999                2000                2001
                                                      ---------           ---------           ---------
<S>                                                   <C>                 <C>                 <C>
Net sales to non-affiliates                           $ 552,599           $ 618,849           $ 640,209
Net sales to affiliates                                  50,621              78,472              89,139
                                                      ---------           ---------           ---------
                                                        603,220             697,321             729,348
Cost of goods sold                                      597,509             698,974             677,882
                                                      ---------           ---------           ---------
Gross profit (loss)                                       5,711              (1,653)             51,466
Selling, general and administrative expenses             25,468              26,254              29,946
                                                      ---------           ---------           ---------

Operating income (loss)                                 (19,757)            (27,907)             21,520
Other expense (income):
   Interest expense                                      24,944              30,724              26,050
   Other                                                 (3,259)             (6,999)               (989)
                                                      ---------           ---------           ---------
                                                         21,685              23,725              25,061
                                                      ---------           ---------           ---------
Loss before income taxes                                (41,442)            (51,632)             (3,541)
Income tax expense (benefit)                            (16,132)            (19,757)             52,081
                                                      ---------           ---------           ---------
Net loss                                                (25,310)            (31,875)            (55,622)
Preferred stock dividends                                 6,423               7,216               7,024
                                                      ---------           ---------           ---------

Net loss attributable to common shareholders          $ (31,733)          $ (39,091)          $ (62,646)
                                                      =========           =========           =========
Net loss per share
   (Basic and Diluted)                                $   (2.05)          $   (2.53)          $   (4.05)
                                                      =========           =========           =========
</TABLE>


See accompanying notes.


                                      -44-

<PAGE>
                           SPECIAL METALS CORPORATION
            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                    ACCUMULATED       RETAINED
                                                                                      OTHER            EARNINGS
                                                                      PAID-IN       COMPREHENSIVE    (ACCUMULATED
                                           SHARES          PAR        SURPLUS       INCOME (LOSS)      DEFICIT)       TOTAL
                                          --------      ---------    -----------    -------------   -------------   -----------
<S>                                        <C>          <C>            <C>             <C>            <C>            <C>
Balance - December 31, 1998                15,479       $    155       $  75,712       $ (1,911)      $ 37,403       $ 111,359

Comprehensive loss:
   Net loss                                    --             --              --             --        (25,310)        (25,310)
   Minimum pension liability
     adjustment, net of tax of $957            --             --              --          1,560             --           1,560
   Foreign currency translation
     adjustment                                --             --              --         (4,909)            --          (4,909)
                                                                                       --------       --------       ---------
   Comprehensive loss                                                                    (3,349)       (25,310)        (28,659)
   Preferred stock dividends                   --             --              --             --         (6,423)         (6,423)
                                          -------       --------       ---------       --------       --------       ---------
Balance - December 31, 1999                15,479            155          75,712         (5,260)         5,670          76,277

Comprehensive loss:
   Net loss                                    --             --              --             --        (31,875)        (31,875)
   Minimum pension liability
     adjustment, net of tax of ($69)           --             --              --           (104)            --            (104)
   Foreign currency translation
     adjustment                                --             --              --         (6,769)            --          (6,769)
                                                                                       --------       --------       ---------
   Comprehensive loss                                                                    (6,873)       (31,875)        (38,748)
   Preferred stock dividends                   --             --              --             --         (7,216)         (7,216)
                                          -------       --------       ---------       --------       --------       ---------
Balance - December 31, 2000                15,479            155          75,712        (12,133)       (33,421)         30,313

Comprehensive loss:
   Net loss                                    --             --              --             --        (55,622)        (55,622)
   Minimum pension liability
     adjustment                                --             --              --        (51,520)            --         (51,520)
   Cumulative effect of
     adoption of SFAS No. 133,
     net of tax of ($92)                       --             --              --           (318)            --            (318)
   Change in fair value of
     derivative instruments,
     net of tax of $92                         --             --              --         (1,351)            --          (1,351)
   Foreign currency translation
     adjustment                                --             --              --         (2,217)            --          (2,217)
                                                                                       --------       --------       ---------
   Comprehensive loss                                                                   (55,406)       (55,622)       (111,028)
   Preferred stock dividends                   --             --              --             --         (7,024)         (7,024)
                                          -------       --------       ---------       --------       --------       ---------
Balance - December 31, 2001                15,479       $    155       $  75,712       $(67,539)      $(96,067)      $ (87,739)
                                          =======       ========       =========       ========       ========       =========
</TABLE>

See accompanying notes.



                                      -45-
<PAGE>
                           SPECIAL METALS CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31
                                                                  1999               2000                2001
                                                                --------           --------           --------
<S>                                                             <C>                <C>                <C>
OPERATING ACTIVITIES
Net loss                                                        $(25,310)          $(31,875)          $(55,622)
Adjustments to reconcile net loss to
   net cash provided by (used in)
   operating activities:
   Depreciation and amortization                                  37,260             40,529             40,667
   Provision for deferred income taxes                               124            (20,948)            51,280
   Interest financed with subordinated debt                           --              3,289              3,416
   Provision for change in fair value
     of derivatives                                                   --                 --              2,169
   Other adjustments                                                (145)               140                672
   Change in working capital and other:
     Accounts receivable                                           1,111            (26,435)            12,387
     Inventories                                                   7,128             (2,399)             6,197
     Prepaid expenses and other current assets                      (694)              (333)               415
     Income taxes                                                (15,858)             4,586              3,514
     Accounts payable - trade                                     28,867                184             (7,371)
     Accrued liabilities                                         (30,259)             1,361                436
     Postretirement benefits obligation                            5,652                (93)               492
     Other long-term liabilities                                     501               (214)                48
                                                                --------           --------           --------
Net cash provided by (used in) operating activities                8,377            (32,208)            58,700

INVESTING ACTIVITIES
Capital expenditures                                             (12,004)            (8,088)            (9,510)
Capitalized software                                             (14,999)            (1,899)              (957)
Net change in restricted deposits                                    352                 --                 --
                                                                --------           --------           --------
Net cash used in investing activities                            (26,651)            (9,987)           (10,467)

FINANCING ACTIVITIES
Proceeds from term loans and other long-term debt                  2,000                 --                 --
Borrowings under revolving credit facilities                      24,000             21,500             12,500
Repayment of revolving credit facilities                         (28,000)                --            (28,500)
Repayment of term loans and other long-term debt                 (12,897)           (19,897)           (29,035)
Proceeds from subordinated notes payable to affiliates             5,000             46,537              4,820
Dividends paid                                                        --             (4,820)            (4,820)
Financing costs                                                   (1,979)               (24)            (1,228)
                                                                --------           --------           --------
Net cash provided by (used in) financing activities              (11,876)            43,296            (46,263)
Net effect of exchange rate changes on cash                         (408)            (1,591)               290
                                                                --------           --------           --------
Net increase (decrease) in cash                                  (30,558)              (490)             2,260
Cash and cash equivalents at beginning of year                    39,622              9,064              8,574
                                                                --------           --------           --------
Cash and cash equivalents at end of year                        $  9,064           $  8,574           $ 10,834
                                                                --------           --------           --------
</TABLE>


See accompanying notes.


                                      -46-
<PAGE>
                           SPECIAL METALS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 2000 AND 2001


1.     ACCOUNTING POLICIES

A summary of the significant accounting policies used in the preparation of the
accompanying financial statements follows:

DESCRIPTION OF BUSINESS

Special Metals Corporation is a manufacturer of high-performance, nickel-based
alloys, superalloys and special alloys. The Company sells its products worldwide
to customers in several industries, the most significant of which include the
aerospace, power generation/pollution control, and chemical processing
industries. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. An allowance for
doubtful accounts is maintained at a level which management believes is
sufficient to cover potential credit losses.

BASIS OF PRESENTATION AND GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates continuity
of the Company's operations and realization of its assets and payments of its
liabilities in the ordinary course of business.

The Company has incurred continuing losses before income taxes since 1999
totaling approximately $96.6 million. In addition, the events of September 11th,
as well as the acceleration of an economic downturn have subsequently adversely
affected the industries served by the Company and have impacted its near term
sales volume. As a result of these events and trends, the Company anticipates
reductions in sales volume and increases in its operating loss during 2002.

As a result of the changes in the Company's financial prospects, the Company's
Senior Lenders prohibited the Company from additional borrowing under its
revolving credit facility. Without access to the revolving credit facility there
was insufficient liquidity available to make the required quarterly principal
repayment of approximately $9 million due on the term loans at the end of March
2002. As a result, on March 27, 2002, the Company and its operating subsidiaries
in the United States filed voluntary petitions for reorganization under Chapter
11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the
Eastern District of Kentucky in Lexington.

         In response to this situation and in order to ensure the Company's
ability to continue as a going concern, management's plans include the
following:

         In addition to working with the bank group to arrange for debtor in
         possession financing the Company is also having discussions with its
         principal common and preferred stockholders, concerning the
         restructuring of its balance sheet. These discussions are ongoing and
         the ultimate outcome is uncertain at this time.

         The Company is in the process of implementing a corporate restructuring
         program and reducing salaried employment levels as part of its current
         effort to reduce costs. During 2002 the Company has eliminated 75
         salaried positions with a projected annual savings of $5.0 million.



                                      -47-
<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.       ACCOUNTING POLICIES (CONTINUED)

         Capital expenditures which are not deemed critical to ongoing
         operations will be deferred and strategies implemented to improve
         working capital management, particularly related to inventory.

Many of the foregoing factors, over which the Company does not have complete
control, may materially affect the performance, financial condition and
liquidity of the Company.

The ability of the Company to continue as a going concern depends on the
successful implementation of management's plans described above. All these
matters raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its domestic and foreign subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

FOREIGN CURRENCY

The financial statements of the Company's foreign subsidiaries are translated
into U.S. dollars assuming the functional currency of the foreign subsidiaries
is the applicable local currency. Accordingly, all items of income and expense
are translated at average exchange rates for the year and all assets and
liabilities are translated at the year-end exchange rate. Gains or losses on
translations are accumulated in other comprehensive loss in the shareholders'
equity (deficit) section of the balance sheet. Gains (losses) on transactions
denominated outside of the functional currency are included in other income and
totaled ($565,000), 775,000, and $(670,000) for the years ended December 31,
1999, 2000 and 2001, respectively.

REVENUE RECOGNITION

Revenue is recognized when title has been transferred to the buyer, which is
generally at the time of shipment. In certain cases where goods are shipped "FOB
Destination", revenue is recognized when the goods are received by the customer.
Sales of the Company's products are made under conventional purchase orders,
one-year supply contracts, long-term firm price and index-priced contracts. The
Company's price to the buyer under firm price contractual arrangements is fixed
and determinable at the time of a written sales agreement, which precedes
shipment of the product. The Company's price to the buyer under index-priced
contractual arrangements is fixed and determinable at the time of the final
written sales agreement, which also precedes shipment of the product. The
Company also performs certain conversion services for which a tolling fee is
received. Revenue from conversion services is recognized when the services are
performed.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.


                                      -48-
<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


1.       ACCOUNTING POLICIES (CONTINUED)

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost or market. The cost of approximately
56% of 2000 and 2001 inventories were valued using the LIFO (last-in, first-out)
method. All remaining inventories are accounted for under the FIFO (first-in,
first-out) or average cost method of accounting.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost and depreciated on the
straight-line method over the estimated useful lives of the assets, principally
10-40 years for buildings and improvements, 5-20 years for machinery and
equipment, 3 years for data processing equipment, and 5-20 years for furniture
and fixtures. The cost of property, plant and equipment held under capital
leases is equal to the lower of the net present value of the minimum lease
payments, using interest rates appropriate at the inception of the lease, or the
fair value of the leased property, plant and equipment at the inception of the
lease. Depreciation expense includes the amortization of property, plant and
equipment recorded under capital leases.

NON-COMPETITION AGREEMENT

The non-competition agreement is being amortized on the straight line basis over
its contractual life of ten years.

INVESTMENT IN JOINT VENTURE

The Company's investment in joint venture represents its 50% investment in
Daido-Special Metals, Ltd. ("DSML"). DSML is a Japanese marketer of an extensive
range of superalloys and high-performance alloys produced by the Company and
Daido Steel Co., Ltd. in Japan. The Company accounts for its investment using
the equity method. The Company's share of earnings in the joint venture was
$888,000 and $686,000 in 2000 and 2001, respectively. The net investment in
joint venture was $7,991,000 and $7,294,000 at December 31, 2000 and 2001,
respectively, and is recorded in other assets.

COMPUTER SOFTWARE COSTS

The Company capitalized certain internal labor costs totaling $1,359,000, $0 and
$70,000 in 1999, 2000 and 2001 respectively. Internal use software development
costs are amortized on the straight-line method over the estimated useful lives
of the software, not to exceed five years. Unamortized internal use software
development costs have been included in other assets in the accompanying
consolidated balance sheets and totaled $15,350,000 and $12,055,000, net of
accumulated amortization of $5,259,000 and $9,079,000 at December 31, 2000 and
2001, respectively. Amortization of capitalized internal use software
development costs totaled $3,901,000 and $3,820,000 during 2000 and 2001,
respectively.


                                      -49-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


1.     ACCOUNTING POLICIES (CONTINUED)

IMPAIRMENT OF LONG-LIVED ASSETS

The Company periodically evaluates the carrying value of long-lived assets to be
held and used and long-lived assets to be disposed of, whenever events or
circumstances indicate that such carrying amounts may not be recoverable. If the
carrying value of a long-lived asset is considered impaired, the carrying amount
of the asset is reduced, by a charge to income, to its current fair value.

ENVIRONMENTAL LIABILITIES

Environmental expenditures that relate to current or future revenues are
expensed or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations and that are not allocable to current or
future earnings are expensed. Liabilities for environmental costs are recognized
when environmental assessments or clean-ups are probable and the associated
costs can be reasonably estimated.

INCOME TAXES

Deferred income taxes are recognized for the tax consequences of temporary
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities by applying enacted statutory rates
applicable to future years to the differences. The effect of a change in tax
rates is recognized in the period that includes the enactment date. The Company
has not recognized a deferred tax liability for the undistributed earnings of
its foreign subsidiaries and affiliated joint venture, totaling approximately
$55 million at December 31, 2001, as the Company does not currently expect those
unremitted earnings to reverse and become taxable in the foreseeable future. A
deferred tax liability will be recognized when the Company expects that it will
recover those undistributed earnings in a taxable manner. The Company believes
that available foreign tax credits would largely eliminate any U.S. tax and
offset any foreign withholding tax that might otherwise be due.

STOCK-BASED COMPENSATION

The Company accounts for stock options granted under its stock-based
compensation plan in accordance with the intrinsic value based method of
accounting as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), as allowed under
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No.123"). Accordingly, compensation expense for stock
options is measured as the excess, if any, of the fair market value of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock.

RESEARCH AND DEVELOPMENT COSTS

Product research and development costs are charged to expense as incurred.
Research and development expense for the years ended December 31, 1999, 2000 and
2001 was $4,418,000, $3,959,000 and $2,893,000, respectively.


                                      -50-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


1.     ACCOUNTING POLICIES (CONTINUED)

FINANCIAL INSTRUMENTS

Effective January 1, 2001, the Company adopted the Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities ("SFAS No. 133")." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
intended use of the derivative and its designation as either a fair value hedge
or cash flow hedge determines when the gains or losses on the derivatives are to
be reported in earnings and when they are to be reported as a component of other
comprehensive income. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. Amounts in other comprehensive
income will be reclassified into earnings over the remaining lives of the
derivatives. The fair value of derivatives are recorded in accrued liabilities.

In the normal course of business, the Company periodically purchases forward
contracts to manage its exposure to changes in commodity prices, primarily
nickel. A substantial portion of the forward commodity contracts result in the
Company actually taking possession of the material, however, certain of the
forward contracts result in the Company making or receiving payments equal to
the net change in the value of the contract, which fluctuates with the price of
the commodity. All contracts settled in cash are designated as cash flow hedges
of the Company's firm sales commitments, are short-term in nature to correspond
to the commitment period, and are effective in hedging the Company's exposure to
changes in nickel prices during that cycle.

In the normal course of business, the Company enters into forward currency and
currency option contracts to mitigate the effect of currency transaction
exposures on its operations. Forward contracts are marked to market with
unrealized gains and losses recognized in other expense (income).

To manage its exposure to interest rate fluctuations on its variable rate debt,
the Company has entered into two interest rate swap agreements. Net payments or
receipts under the swap agreements are recorded as adjustments to interest
expense.

The adoption of SFAS No. 133 resulted in the Company recording a charge to
accumulated other comprehensive income for the cumulative effect of a change of
$318,000, net of tax.


SHIPPING AND HANDLING COSTS

The Company records shipping and handling costs as a component of cost of goods
sold.


                                      -51-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


1.       ACCOUNTING POLICIES (CONTINUED)

RECLASSIFICATIONS

Certain reclassifications have been made within the 2000 and 1999 financial
statements to conform with the 2001 presentation.

USE OF ESTIMATES

The preparation of the Company's consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and judgments which affect the reported amounts of
assets, liabilities, related disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amount of revenues and
expenses during the reporting period. Estimates are used in accounting for,
among other things, allowances for uncollectible accounts, inventory allowances,
restructuring accruals, pensions and other post-retirement benefits, intangible
assets, contingencies and environmental accruals. The Company bases its
estimates on historical experience and on various other assumptions which are
believed to be reasonable under the circumstances. Due to the inherent
uncertainty involved in making estimates, actual results reported in future
periods may differ from those estimates. Estimates and assumptions are reviewed
periodically, and the effect of revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary.


2.     INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
                                             DECEMBER 31
                                       2000                 2001
                                    ---------           ---------
                                            (In thousands)
<S>                                 <C>                 <C>
Raw materials and supplies          $  73,733           $  70,501
Work-in-process                       144,891             124,676
Finished goods                         66,914              72,631
                                    ---------           ---------
                                      285,538             267,808
Adjustment to LIFO cost               (26,005)            (17,226)
                                    ---------           ---------
                                    $ 259,533           $ 250,582
                                    =========           =========
</TABLE>

                                      -52-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


3.     PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
                                              DECEMBER 31
                                         2000              2001
                                       --------          --------
                                              (In thousands)
<S>                                    <C>               <C>
Land                                   $  7,348          $  7,150
Buildings and improvements               91,473            91,254
Machinery and equipment                 251,803           257,858
Furniture and fixtures                    2,854             3,003
Construction-in-progress                  2,635             2,569
                                       --------          --------
                                        356,113           361,834
Less accumulated depreciation           102,008           130,166
                                       --------          --------
                                       $254,105          $231,668
                                       ========          ========
</TABLE>

Depreciation expense for the years ended December 31, 1999, 2000 and 2001 was
$28,473,000, $29,863,000, and $29,887,000, respectively.


4.     ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                    DECEMBER 31
                                                2000             2001
                                               -------          -------
                                                  (In thousands)
<S>                                            <C>              <C>
Accrued payroll and employee benefits          $24,753          $26,486
Amounts due to former affiliates                 1,961            2,079
Fair value of derivative instruments                --            3,839
Other                                           16,858           14,329
                                               -------          -------
                                               $43,572          $46,733
                                               =======          =======
</TABLE>


                                      -53-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5.     LONG-TERM DEBT AND CAPITAL LEASES

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                              DECEMBER 31
                                        2000              2001
                                      --------          --------
                                           (In thousands)
<S>                                   <C>               <C>
Credit Agreement:
   Term Loans
     Tranche A                        $ 92,706          $ 64,692
     Tranche B                          96,794            95,250
   Revolving Credit Facility            87,500            71,500
Capital leases                           1,273             1,023
Other                                    2,573             1,936
                                      --------          --------
                                       280,846           234,401
Current portion                         30,168           233,465
                                      --------          --------
                                      $250,678          $    936
                                      ========          ========
</TABLE>

The Company has entered into a Senior Secured Credit Agreement with Credit
Lyonnais, as agent, and other financial institutions (the "Credit Agreement")
that provides for two term loans (the "Tranche A Term Loan" and the "Tranche B
Term Loan," collectively, the "Term Loans") and a revolving credit and letter of
credit facility (the "Revolving Credit Facility").

Under the Revolving Credit Facility, the Company can borrow, repay and re-borrow
from time to time up to $100 million in the aggregate, subject to the
restrictions described below. The Revolving Credit Facility terminates on
October 28, 2003. The amount the Company may borrow under the Revolving Credit
Facility is reduced by the aggregate amount of any letters of credit issued for
the account of the Company. Amounts outstanding under the Credit Agreement bear
interest at either a base rate, as defined, or a Eurodollar rate, which is the
reserve-adjusted New York interbank offered rate, at the Company's option, plus
a margin, as defined in the Credit Agreement, dependent upon the Company's
leverage ratio. The weighted-average interest rate at December 31, 2001 was
5.53% (9.64% at December 31, 2000). A commitment fee of .375% to .50% per annum,
depending on the Company's leverage ratio, on the unused portion of the
Revolving Credit Facility is due quarterly.

The Tranche A Term loan is scheduled to be repaid in quarterly installments
through 2003 and the Tranche B Term loan is scheduled to be repaid in quarterly
installments through 2005. The Company is required to prepay amounts outstanding
under the Credit Agreement out of any excess cash flow of the Company.
Prepayments will be applied first to the Term Loans, pro rata, then to amounts
outstanding under the Revolving Credit Facility and finally as cash collateral
against outstanding letters of credit. So long as any amounts remain outstanding
under the Tranche A Term Loan, lenders under the Tranche B Term Loan may elect
not to have their portion of the Tranche B Term Loan prepaid until the Tranche A
Term Loan is paid in full.

As more fully described in Note 1, as a result of the changes in the Company's
financial prospects, the Company's Senior Lenders prohibited the Company from
additional borrowing under its revolving credit facility. Without access to the
revolving credit facility there was insufficient liquidity available to make the
required quarterly principal repayment of approximately $9 million due on the
term loans at the end of March 2002. As a result, on March 27, 2002, the Company
and its operating subsidiaries in the United States filed voluntary petitions
for reorganization under Chapter 11 of the United States Bankruptcy Code in the
U.S. Bankruptcy Court for the Eastern District of Kentucky in Lexington.


                                      -54-
<PAGE>

                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5.     LONG-TERM DEBT AND CAPITAL LEASES (CONTINUED)

During 1999, the Company entered into amendments to the Credit Agreement and, in
connection with these amendments, a shareholder of the Company agreed to provide
up to $50 million of subordinated loans (see Note 8). The amendments, among
other things, reduced the availability of the Revolving Credit Facility from
$150 million to a maximum of $100 million and waived the events of default which
resulted from the Company not complying with certain financial covenants. As
disclosed in Note 8, during 2000, the shareholder has advanced the full amount
of the subordinated loans

Pursuant to an amendment to the Credit Agreement dated as of March 28, 2001 (the
"Fourth Amendment"), amounts outstanding on the Tranche A Term Loan and amounts
outstanding under the Revolving Credit Facility bear interest at the Company's
option at (i) a base rate, which is the higher of the bank's short-term
commercial reference rate or the Federal Funds rate plus .50%, plus a margin of
2.00% or (ii) the Eurodollar rate, which is the reserve adjusted New York
interbank offered rate, plus a margin of 3.25%. The applicable margins under the
Fourth Amendment for amounts outstanding on the Tranche B Term Loan are (i) for
base rate loans, 2.50% and (ii) for Eurodollar rate loans, 3.75%. Prior to the
Fourth Amendment, pursuant to an amendment to the Credit Agreement dated as of
March 31, 1999 (the "First Amendment"), the applicable margins for amounts
outstanding on the Tranche A Term Loan and amounts outstanding under the
Revolving Credit Facility were (i) for base rate loans, 1.50% and (ii) for
Eurodollar rate loans, 2.75%. The applicable margins under the First Amendment
for amounts outstanding on the Tranche B Term Loan were (i) for base rate loans,
2.00% and (ii) for Eurodollar rate loans, 3.25%. A commitment fee of .375% to
..50% per annum, depending on the Company's leverage ratio, on the unused portion
of the Revolving Credit Facility is due quarterly.

In addition to modifying the interest rates for amounts outstanding under the
Credit Agreement, the Fourth Amendment, among other things, revised the minimum
EBITDA financial tests through the period ending March 31, 2002, and suspended
all other financial tests until the quarter ended June 30, 2002, at which time
all financial tests as set forth in the First Amendment will again be effective;
and limited capital expenditures to a maximum of $23 million in 2001 and $7.5
million during the first three months of 2002, unless capital expenditures in
excess of those amounts are funded by the issuance and sale of stock of the
Company to SIMA or from additional advances by SIMA of Subordinated Term Loans.
Also in accordance with the terms of the Fourth Amendment, the Company has
engaged an investment banking firm to act as financial advisor with respect to
its strategic options.

The Company's obligations under the Credit Agreement are secured by all of the
assets of the Company and its domestic subsidiaries and by a pledge of the
capital stock of certain subsidiaries. The Credit Agreement also contains
covenants restricting the ability of the Company to, among other things, make
certain restricted payments, including dividends, create liens, guarantee
indebtedness or enter into transactions with affiliates. The Company is also
subject to certain financial tests relating to, among other things, its minimum
EBITDA; consolidated leverage ratio; interest coverage ratio and fixed charge
coverage ratio. As a result of the amendments to the Credit Agreement described
above, the financial covenants, other than the EBITDA covenant, have been
suspended until the quarter ending June 30, 2002.

                                      -55-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.     LONG-TERM DEBT AND CAPITAL LEASES (CONTINUED)

As of the quarter ending June 30, 2002, the Company believes it likely will not
be able to meet certain financial covenants set forth in the First Amendment.
Consequently, in accordance with generally accepted accounting principles and
the Financial Accounting Standards Board Emerging Issues Task Force ("EITF")
pronouncement EITF 86-30 ("Classification of Obligations When A Violation Is
Waived By The Creditor"), as of December 31, 2001, substantially all of the
Company's long-term debt is reclassified to current debt in the consolidated
balance sheet.

Scheduled principal repayments on long-term debt for the next five years and
thereafter are as follows, assuming prepayment of the debt obligations is not
required. (in thousands):

<TABLE>
<S>                                    <C>
           2002                         $   37,634
           2003                            112,970
           2004                             47,899
           2005                             34,467
           2006                                230
           Thereafter                        1,201
                                        ----------
                                        $  234,401
                                        ==========
</TABLE>


6.     OPERATING LEASES

The Company leases certain equipment under operating leases which contain
renewal options and escalation clauses in some cases. Rental expense under these
leases amounted to approximately $5,860,000, $4,918,000 and $4,207,000 for the
years ended December 31, 1999, 2000, 2001, respectively. The following amounts
represent future minimum payments under operating leases with initial or
remaining noncancelable terms extending beyond one year (in thousands):

<TABLE>
<S>                                           <C>
           2002                                $2,389
           2003                                 1,173
           2004                                   886
           2005                                   741
           2006                                   671
</TABLE>


                                      -56-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


7.     RETIREMENT PLANS

The Company provides defined benefit pension and other postretirement benefit
plans to employees. The following provides a reconciliation of benefit
obligations, plan assets, and funded status of the plans:

<TABLE>
<CAPTION>
                                                                                                     OTHER
                                                        PENSION BENEFITS                     POSTRETIREMENT BENEFITS
                                                     2000               2001                2000                2001
                                                  ---------           ---------           ---------           ---------
                                                                               (In thousands)
<S>                                               <C>                 <C>                 <C>                 <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning
   of year                                        $ 312,241           $ 332,303           $ 166,074           $ 174,692
Service cost                                          7,939               7,220               2,500               2,242
Interest cost                                        22,748              23,349              12,320              13,774
Effect of amendments                                  1,206              (1,773)                (59)             (3,146)
Actuarial (gain) loss                                22,813              14,147               3,712              32,187
Benefits paid                                       (27,457)            (27,924)             (9,855)            (11,950)
Currency translation impact                          (7,287)             (2,761)                 --                  --
                                                  ---------           ---------           ---------           ---------
Benefit obligation at end of year                   332,203             344,461             174,692             207,799

CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning
   of year                                          370,835             342,334                  --                  --
Actual return on plan assets                          3,819             (24,946)                 --                  --
Employer contribution                                 5,314               4,934                  --                  --
Benefits paid                                       (27,457)            (27,924)                 --                  --
Currency translation impact                         (10,177)             (3,293)                 --                  --
                                                  ---------           ---------           ---------           ---------
Fair value of plan assets at end of year            342,334             291,105                  --                  --
                                                  ---------           ---------           ---------           ---------

Funded status                                        10,131             (53,356)           (174,692)           (207,799)
Unrecognized transition obligation                       --                  --               2,120               1,657
Unrecognized actuarial gain                          (3,717)             64,393             (32,680)               (198)
Unrecognized prior service cost                       2,498                 790                (508)             (3,139)
                                                  ---------           ---------           ---------           ---------
Net amount recognized                             $   8,912           $  11,827           $(205,760)          $(209,479)
                                                  =========           =========           =========           =========
</TABLE>


                                      -57-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


7.     RETIREMENT PLANS (CONTINUED)

<TABLE>
<CAPTION>
                                                                                                 OTHER
                                                      PENSION BENEFITS                    POSTRETIREMENT BENEFITS
                                                  2000                2001               2000                 2001
                                                --------           ---------           ---------           ---------
                                                                          (In thousands)
<S>                                             <C>                <C>                 <C>                 <C>
AMOUNTS RECOGNIZED IN THE STATEMENT OF
   FINANCIAL POSITION CONSIST OF:
Accrued benefit liability:
   Other assets                                 $ 11,286           $      --           $      --           $      --
   Accrued liabilities                            (3,000)             (3,000)             (7,000)             (7,000)
   Pension benefit obligations                        --             (38,760)                 --                  --
   Postretirement benefits obligation                 --                  --            (198,760)           (202,479)
                                                --------           ---------           ---------           ---------
                                                   8,286             (41,760)           (205,760)           (209,479)

Intangible asset                                     436               1,952                  --                  --
Accumulated other comprehensive income               115              51,635                  --                  --
Deferred tax effect of equity charge                  75                  --                  --                  --
                                                --------           ---------           ---------           ---------
Net amount recognized                           $  8,912           $  11,827           $(205,760)          $(209,479)
                                                ========           =========           =========           =========
</TABLE>

The Company recorded an additional minimum pension liability of $51,520,000
during 2001, primarily due to the market performance of the plan's investment
assets.

<TABLE>
<S>                                               <C>                <C>                <C>        <C>
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
   DECEMBER 31
Discount rate                                     6.5% - 7.75%       6.0% - 7.125%        7.5%       7.125%
Expected return on plan assets                    7.5% -  9.0%       6.5% - 9.0%          n/a          n/a
Rate of compensation increase                     3.5% -  5.0%       3.0% - 4.0%          n/a          n/a
</TABLE>


The various plans sponsored by the Company use different measurement dates for
determining the projected benefit obligation and fair value of plan assets.
Plans using a measurement date of September 30 had an aggregate projected
benefit obligation of $149,935,000 and aggregate fair value of plan assets of
$116,504,000 for 2001. All other plans' use a December 31 measurement date.

The aggregate accumulated benefit obligation and aggregate fair value of plan
assets for the pension plans with accumulated benefit obligations in excess of
plan assets were $234,283,000 and $182,505,000, respectively, as of December 31,
2001 and $32,072,000 and $21,203,000, respectively, as of December 31, 2000.

The aggregate projected benefit obligation and aggregate fair value of plan
assets for the pension plans with projected benefit obligations in excess of
plan assets were $239,265,000 and $182,505,000, respectively, as of December 31,
2001 and $128,473,000 and $115,831,000, respectively, as of December 31, 2000.

The unrecognized transition obligation is being amortized on a straight-line
basis over 20 years. Unrecognized gains and losses are amortized on a
straight-line basis over the average remaining service period of active
participants.


                                      -58-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


7.     RETIREMENT PLANS (CONTINUED)

Net periodic benefit cost included the following:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31
                                                            1999              2000               2001
                                                         --------           --------           --------
                                                                       (In thousands)
<S>                                                      <C>                <C>                <C>
PENSION BENEFITS:
Service cost - benefits earned
   during the period                                     $  9,450           $  7,939           $  7,220
Interest cost on projected benefit obligation              21,459             22,748             23,349
Curtailment                                                 2,993                 --                 --
Expected return on plan assets                            (30,773)           (30,325)           (28,451)
Amortization of unrecognized prior service cost               (14)               (12)              (137)
Recognized actuarial loss (gain)                              173             (1,502)              (274)
                                                         --------           --------           --------
Net periodic pension benefit cost (gain)                 $  3,288           $ (1,152)          $  1,707
                                                         ========           ========           ========
OTHER POSTRETIREMENT BENEFITS:
Service cost - benefits earned
   during the period                                     $  3,310           $  2,500           $  2,242
Interest cost on projected benefit obligation              11,420             12,320             13,774
Amortization of unrecognized portion of net
   obligation at transition                                   183                177                151
Amortization of unrecognized prior service cost                (9)                (9)              (203)
Recognized actuarial gain                                      (3)            (1,042)              (150)
                                                         --------           --------           --------
Net periodic postretirement benefit cost                 $ 14,901           $ 13,946           $ 15,814
                                                         ========           ========           ========
</TABLE>


For measuring the postretirement benefit obligation, an annual rate of increase
in the net medical claims cost of 10.0% was assumed. The rate was assumed to
decrease gradually to 5.0% in 2006 and remain at that level thereafter. Assumed
medical claims cost trend rates have a significant effect on the amounts
reported for the health care plans. A one percentage point change in assumed
health care cost trend rates would have the following effect:

<TABLE>
<CAPTION>
                                      ONE PERCENTAGE     ONE PERCENTAGE
                                      POINT INCREASE     POINT DECREASE
                                      --------------     --------------
                                              (In thousands)
<S>                                   <C>                <C>
Effect on total of service and
     interest cost components           $ 2,241          $ (1,956)
Effect on postretirement
     benefit obligation                  26,762           (23,825)
</TABLE>


                                      -59-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


7.     RETIREMENT PLANS (CONTINUED)

The Company also sponsors a number of defined contribution plans covering
substantially all employees. Participants may elect to contribute basic
contributions. The Company may make discretionary matching contributions, as
well as additional discretionary contributions. The Company recorded a charge
for such contributions of approximately $2,100,000 , $2,120,000 and $2,100,000
in 1999, 2000, and 2001, respectively.

8.     RELATED PARTY TRANSACTIONS

The Company and its principal common and preferred shareholders as well as
Daido-Special Metals, Ltd. from time to time enter into various business
transactions and agreements and may continue to do so in the future.

The Company and an affiliate share common insurance coverage for product
liability, contingent and excess liabilities, and business interruption. The
Company is charged a pro rata premium based on the net sales of the covered
parties. The Company was charged $1,123,000, $1,090,000 and $944,000 for the
years ended December 31, 1999, 2000, and 2001, respectively.

The Company sold superalloy and special alloy products to affiliates totaling
$50,621,000, $78,472,000 and $89,139,000 during the years ended December 31,
1999, 2000 and 2001, respectively. The Company also made purchases of products
used in the manufacturing process from affiliates totaling $7,138,000,
$17,737,000 and $21,435,000 during the years ended December 31, 1999, 2000 and
2001, respectively.

During 1997, the Company and one of its shareholders entered into a Managerial
Assistance Agreement, whereby the shareholder provides the Company with
information and advice regarding the management of its existing business and the
expansion of the Company's business into new products and markets. Under the
agreement, which is cancelable upon 30 days written notice, the Company is
required to pay the shareholder a pre-established monthly fee and to reimburse
the shareholder for expenses. The Company was charged $360,000 per annum in
connection with this agreement during 1999, 2000 and 2001.

In connection with the amendments to the Credit Agreement during 1999, the
Company entered into a Subordinated Loan Agreement with a shareholder, whereby
the shareholder agreed to provide up to $50 million of subordinated loans,
including $20 million of Subordinated Term Loans and up to an additional $30
million of Subordinated Revolving Loans. Amounts outstanding under the
Subordinated Loan Agreement accrue interest at a rate per annum equal to LIBOR
plus 1.0%. Accrued interest is paid in kind by addition to the principal of the
Subordinated Term Loan on a quarterly basis. Further, the Third Amendment to the
Credit Agreement prohibits dividend payments on the Company's Series A
Convertible Preferred Stock unless funded by proceeds of Subordinated Term
Loans.

This debt is evidenced by notes and is subordinate to the Company's obligations
under the Credit Agreement. In addition, the Company's Senior Lenders have
placed restrictions on the repayment of these amounts. As a result of these
restrictions, amounts owing to the shareholder under the subordinated agreement
had been classified as long-term as of December 31, 2000. As a result of the
reclassification of the Company's debt under the Senior Secured Credit Agreement
to a current liability (See Note 5), the borrowings under the Subordinated Loan
Agreement have been reclassified as a current liability as of December 31, 2001
due to a cross default provision. The weighted average interest rate at December
31, 2001 was 3.59% (7.40% at December 31, 2000).


                                      -60-
<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9.     INCOME TAXES

The components of income (loss) before income taxes are as follows:

<TABLE>
<CAPTION>
                              YEAR ENDED DECEMBER 31
                    1999               2000                2001
                  --------           --------           -------
                                 (In thousands)
<S>               <C>                <C>                <C>
Domestic          $(43,347)          $(56,779)          $(4,250)
Foreign              1,905              5,147               709
                  --------           --------           -------
                  $(41,442)          $(51,632)          $(3,541)
                  ========           ========           =======
</TABLE>

Income tax expense (benefit) consists of the following:

<TABLE>
<CAPTION>
                                YEAR ENDED DECEMBER 31
                        1999              2000              2001
                     --------           --------           -------
                                    (In thousands)
<S>                  <C>                <C>                <C>
Current:
   Federal           $(13,681)          $     --           $    --
   State               (1,180)                --                --
   Foreign             (1,395)             1,191               801
                     --------           --------           -------
                      (16,256)             1,191               801
Deferred:
   Domestic            (1,622)           (21,657)           51,188
   Foreign              1,746                709                92
                     --------           --------           -------
                          124            (20,948)           51,280
                     --------           --------           -------
                     $(16,132)          $(19,757)          $52,081
                     ========           ========           =======
</TABLE>

The 2000 domestic deferred tax amount includes approximately $19.0 million of
benefit from net operating loss carryforwards. The 2001 domestic deferred tax
amount includes approximately $53.7 million of expense related to the addition
of a deferred tax valuation allowance.

The provision for income taxes differs from the amount computed by applying the
statutory income tax rate as follows:

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31
                                                       1999              2000              2001
                                                     --------           --------           --------
                                                                    (In thousands)
<S>                                                 <C>                <C>                <C>
Income before income taxes at 35%                    $(14,505)          $(18,071)          $ (1,240)
Permanent income tax disallowances                        339                190                264
State taxes, net of federal effect                     (1,180)            (2,383)              (642)
Benefit from foreign sales corporation                   (442)                --                 --
Taxes on foreign income versus Federal rate              (681)              (160)               (47)
Foreign losses with no tax benefit                        623                108                560
Change in deferred tax valuation allowance                 --                 --             53,729
Other                                                    (286)               559               (543)
                                                     --------           --------           --------
                                                     $(16,132)          $(19,757)          $ 52,081
                                                     ========           ========           ========
</TABLE>


                                      -61-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9.     INCOME TAXES (CONTINUED)

Deferred tax liabilities and assets recorded in the Company's balance sheets
consist of the following:

<TABLE>
<CAPTION>
                                                       DECEMBER 31
                                                2000                 2001
                                             ---------           ---------
                                                     (In thousands)
<S>                                          <C>                 <C>
Deferred tax liabilities:
   Property, plant and equipment             $ (55,171)          $ (52,227)
   Inventory                                    (8,349)             (5,900)
   Other                                        (3,298)             (2,925)
                                             ---------           ---------
Gross deferred tax liabilities                 (66,818)            (61,052)
Deferred tax assets:
   Employee retirement plans                    78,210             100,321
   Accrued liabilities                          11,233              12,253
   Net operating loss carryforwards             19,048              15,043
   Tax credit carryforwards                      2,468               2,468
   Other                                         2,634               3,912
                                             ---------           ---------
Gross deferred tax assets                      113,593             133,997
Deferred tax valuation allowance                    --             (77,658)
                                             ---------           ---------
Net deferred taxes                           $  46,775           $  (4,713)
                                             =========           =========
</TABLE>


Deferred tax liabilities and assets are recorded in the Company's balance sheets
as follows:

<TABLE>
<CAPTION>
                                                            DECEMBER 31
                                                     2000              2001
                                                   --------           -------
                                                         (In thousands)
<S>                                                <C>                <C>
Prepaid expenses and other current assets          $  2,839           $ 2,656
Non-current deferred taxes                           55,665                --
Accrued liabilities                                    (192)               --
Other long-term liabilities                         (11,537)           (7,369)
                                                   --------           -------
Net deferred taxes                                 $ 46,775           $(4,713)
                                                   ========           =======
</TABLE>


During 2001, a deferred tax valuation allowance of $77.6 million was established
for net deferred assets related to the Company's U.S. operations. The Company
has continued to incur operating losses before taxes through 2001. In addition,
the industries served by the Company have been negatively impacted by the events
of September 11th, resulting in additional projected losses in the near term.
Considering these factors, the Company does not believe that it is more likely
than not that it will generate a sufficient level of taxable income to realize
the value of the U.S. deferred tax assets in the near future.

At December 31, 2001, the Company has approximately $37.6 million of federal net
operating loss carryforwards, plus various state net operating loss
carryforwards, that are available to be used to offset future taxable income.
Substantially all of these losses expire in 2019 and 2020.


                                      -62-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10.    FAIR VALUE OF FINANCIAL INSTRUMENTS

FORWARD PURCHASE CONTRACTS

As part of its risk management strategy, the Company enters into forward
purchase contracts to manage its exposure to changes in commodity prices,
primarily nickel. The contracts mature principally in 2002 and result in the
Company taking possession of the contracted material. At December 31, 2001, the
Company had open purchase contracts with a notional principal value of
approximately $37.3 million. The fair value of the material covered by these
contracts, based on the December 31, 2001 price quoted on the London Metal
Exchange, was approximately $36.8 million.

In addition, the Company also enters into forward commodity contracts that
result in the Company making or receiving payments equal to the net change in
the value of the contract, which fluctuates with the price of the commodity. At
December 31, 2001 all of the forward contracts settled in cash were designated
and were effective as cash flow hedges for firm price sales agreements the
Company had entered into. The fair value of these commodity contracts is a net
asset of $415,000 at December 31, 2001.


FORWARD CURRENCY AND CURRENCY OPTION CONTRACTS

Certain of the Company's purchases and sales are denominated in foreign
currencies. As part of its risk management strategy, the Company periodically
enters into forward currency and currency option contracts to manage its
exposure to changes in exchange rates. At December 31, 2001, the Company had the
following outstanding forward contracts to buy or sell currencies at the
following rates:

         -        Buy JPY 18,050,000 at an average rate to GBP of JPY 168.74

         -        Buy $1,750,000 at an average rate to EUR of $0.900

         -        Buy $3,412,000 at an average rate to GBP of $1.43

         -        Sell EUR 3,417,000 at an average rate to USD of EUR 1.10

         -        Sell EUR 10,596,000 at an average rate to GBP of EUR 1.62

The fair value of forward currency and currency option contracts is a net asset
of approximately $156,000 at December 31, 2001. The fair value of any individual
currency contract is not significant. During 2001, the Company recorded other
income of $925,000 related to the change in fair value of currency contracts.


INTEREST RATE SWAP AGREEMENTS

To manage its exposure to interest rate fluctuations, the Company has entered
into two interest rate swap agreements. The first agreement has a notional
amount of $53,250,000 through September 15, 2003 based on LIBOR at 5.95%. The
second agreement has a notional amount of $53,250,000 through September 15, 2003
based on LIBOR at 5.76% and was cancelable at the bank's option on September 15,
2001. The bank did not exercise its option in September 2001. The fair value of
the swap agreements, based on December 31, 2001 rates, is a net liability of
approximately $4.4 million. During 2001, the Company recorded other expense of
$2,326,000 related to the change in fair value of swap agreements not designated
as effective hedges.


                                      -63-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10.    FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

ACCUMULATED OTHER COMPREHENSIVE LOSS

The cumulative effect of the adoption of SFAS No. 133 and the change in fair
value of derivatives designated as effective hedges are recorded in accumulated
other comprehensive loss (AOCL). In addition, amounts recorded in AOCL are
reclassified into earnings as derivative instruments are settled. Activity in
AOCL related to derivatives held by the Company during 2001 is summarized as
follows:

<TABLE>
<CAPTION>
                                                     BEFORE TAX          INCOME           AFTER TAX
                                                       AMOUNT              TAX             AMOUNT
                                                     ----------         --------          ---------
                                                                     (In thousands)
<S>                                                  <C>               <C>               <C>
Cumulative effect of adopting SFAS No. 133            $  (410)          $    92           $  (318)
Net change in fair value of derivatives                (3,770)            1,392            (2,378)
Net reclassification from AOCL into earnings            2,511              (871)            1,640
Deferred tax valuation allowance                           --              (613)             (613)
                                                      -------           -------           -------
                                                      $(1,669)          $    --           $(1,669)
                                                      =======           =======           =======
</TABLE>

Of the $1,669,000 accumulated loss on derivatives reported in AOCL at December
31, 2001, $1,321,000 of net losses are expected to be reclassified to earnings
in the next twelve months. Amounts are expected to be reclassified from AOCL
into earnings as settlements occur.


FAIR VALUE DISCLOSURE

The carrying amounts reported in the Company's balance sheets for cash and cash
equivalents approximate fair value. The carrying amounts reported in the
Company's balance sheets for long-term debt, including current portion,
approximate fair value, as the underlying long-term debt does not have a long
maturity and the interest rate margins were renegotiated during 2001.


                                      -64-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


11.    COMMITMENTS AND CONTINGENCIES

ENVIRONMENTAL

The Company is subject to loss contingencies pursuant to various federal, state
and local environmental laws, and is currently involved in several actions
regarding the clean-up of disposal sites alleged to contain hazardous and/or
toxic wastes generated over a number of years including the following:

The Company, with contribution from other parties, performed remedial actions at
a site in Clayville, New York (the "Ludlow Landfill"). Except for investigation
and remediation at an adjoining property known as the "North Gravel Pit," the
New York State Department of Environmental Conservation ("DEC") has advised the
Company that all work performed to date is acceptable. The Company is
responsible for operation and maintenance costs through 2027. The costs for
these are estimated to be approximately $90,000 per year. The total estimated
costs of approximately $2.3 million have been discounted at an annual rate of 5
percent in the accompanying financial statements. The DEC may also seek
post-excavation biota monitoring, a procedure to assess the toxicity of water
contamination. This claim is not expected to be material. The Company may also
be required to conduct certain post-closure activities. It is not possible to
determine which, if any, of the contingent activities the Company will need to
perform. Contamination has also been discovered at the North Gravel Pit site. A
study was completed in 1997 to determine the extent of the contamination and to
select an appropriate remedial alternative. Based on this study, the Company has
developed a remediation plan for the site and is currently negotiating the plan
with the DEC. The Company anticipates that it will be responsible for operation
and maintenance costs for an extended period following the remediation. Based
upon information available, the Company estimates the total cost of remediation
to be approximately $2.1 million. The total remediation costs include ongoing
operation and maintenance costs of approximately $23,000 per year. The Company
has reserved a total of approximately $2.9 million with respect to the Ludlow
Landfill and North Gravel Pit.

The Company has also been identified as potentially responsible for
investigation and remediation of the Universal Waste Site, an allegedly
contaminated site in Utica, New York. The owners and operators of the Universal
Waste Site conducted a preliminary site assessment pursuant to a consent order
with the DEC, which also conducted a separate preliminary site assessment. The
Company believes that at least four other potentially responsible parties have
been identified with respect to the contamination at the site. The Company has
not been obligated to become involved in the investigation. Based upon the
limited information available to it, the Company has established a reserve of
$575,000. However, because of the preliminary nature of the investigation, it is
not possible, at this time, to provide a reasonable estimate as to the ultimate
cost of any investigative or remedial work which will be required, or the
Company's share, if any, of such costs.

Huntington Alloys, a domestic subsidiary of the Company ("Huntington"), is a
co-defendant in various consolidated and unconsolidated actions by plaintiffs,
including former employees of Huntington and former employees of contractors to
Huntington, alleging exposure to asbestos at Huntington's, West Virginia
facility. Plaintiffs' counsel have also informed Huntington that they intend to
add similar claims by additional plaintiffs. Insurance coverage is available for
some of these proceedings. To date, no asbestos claims against Huntington have
gone to trial.

Jurisdiction over all asbestos cases pending in the State of West Virginia has
been transferred to the Mass Litigation Panel, a panel set up by the West
Virginia Supreme Court of Appeals to streamline the processes and procedures for
resolving asbestos cases.

                                      -65-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


11.    COMMITMENTS AND CONTINGENCIES (CONTINUED)

In July of 2001, the West Virginia Supreme Court of Appeals issued a mandate to
the presiding judge of the Mass Litigation Panel to commence all trials
necessary to dispose of all asbestos litigation in the State of West Virginia by
July 1, 2002. The presiding judge of the Mass Litigation Panel has set a date of
September 23, 2002 to commence a mass a trial for the thousands of asbestos
cases that were pending in West Virginia as of September 6, 2001. As
contemplated by the court's order, Huntington would be one of numerous
defendants in the mass trial.

Because the court has so far permitted Huntington to engage in only limited
discovery with respect to the merits of the claims asserted against it, the
Company is not able to reasonably estimate what the ultimate loss, if any, will
be with respect to these matters. However, the damages sought by plaintiffs in
these actions, if Huntington were required to pay them, could have a material
adverse effect on the business, financial condition, results of operations or
cash flows of the Company.

Huntington is a defendant in ten cases seeking damages for alleged health
problems resulting from exposure to manganese in welding products. The cases are
at various stages of pleading and discovery. One of the cases involves numerous
plaintiffs. The Company does not believe that these proceedings are likely to
have a material adverse effect on the business, financial condition, results of
operations or cash flows of the Company, but there can be no assurance that this
will be the case.

The Company is on notice of, and involved in, certain other environmental
matters which have been settled or are at various stages of discussion,
negotiation or settlement which the Company does not believe to be material.

Although the Company believes that it is in substantial compliance with
applicable requirements of environmental laws, there can be no assurance that
some, or all, of the risks noted previously will not result in liabilities that
are material to the Company's business, results of operations, financial
position, or cash flows.

OTHER

From time to time, the Company is involved in legal proceedings relating to
claims arising out of its operations in the normal course of business. The
Company does not believe that it is a party to any proceedings at the present
time that could have a material adverse effect on the business, financial
condition, results of operations or cash flows of the Company.

The Company has filed a lawsuit against Inco Limited ("Inco") and certain of its
subsidiaries, (together with Inco, the "Sellers"). The Company has claims
pending against the Sellers alleging that the Sellers made fraudulent
misrepresentations in connection with the Company's October 1998 acquisition of
the capital stock of the companies which comprised the Inco Alloys International
high-performance nickel alloys business unit of Inco (the "IAI Acquisition"),
and that the Sellers breached the terms of the related Stock Purchase Agreement.
The Sellers have filed a counterclaim against the Company seeking in excess of
$13 million, which the Sellers claim is owed by the Company under the terms of
the Stock Purchase Agreement. The Company intends to vigorously defend against
the counterclaim. The lawsuit is still in the discovery stage. At this point in
the proceeding, it is not possible to know if the Company will recover
significant damages from the Sellers, or may ultimately be required to pay any
or all of the amount sought by the Sellers.


                                      -66-
<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


12.    PREFERRED STOCK

In connection with the IAI Acquisition, the Company issued non-voting Series A
Convertible Preferred Stock with an aggregate fair value of $97 million
(1,940,000 shares). The Company received cash proceeds of $80 million, which
were used to finance a portion of the Acquisition, and the remaining $17 million
fair value was issued as partial consideration for the non-competition
agreement. The Series A Preferred Stock has a par value of $0.01 per share and a
liquidation preference of $50 per share. The preferred stock accrues cumulative
dividends at the rate of 6.625% per annum, payable quarterly, and is convertible
into common stock at a conversion price of $16.50 per share. A total of
5,878,788 shares of common stock have been reserved for future issuance upon
conversion of the Series A Convertible Preferred Stock. The preferred stock is
mandatorily redeemable after seven and one-half years and is subject to optional
redemption by the Company commencing October 28, 2001 at a redemption price of
103.975% of the liquidation amount plus accumulated and unpaid dividends. The
redemption price declines incrementally on each subsequent October 28 until
October 28, 2006 after which the redemption price is 100% of the liquidation
amount plus accumulated and unpaid dividends.

Cumulative dividends in arrears on the Series A Preferred Stock totaled
$10,922,000 at December 31, 2001 ($8,723,000 at December 31, 2000).


                                      -67-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


13.    STOCK OPTIONS AND RESTRICTED STOCK

The Company has granted restricted stock and options to purchase common stock to
certain employees and directors under the Special Metals Corporation 1997
Long-Term Stock Incentive Plan (the "Stock Incentive Plan"). In connection with
the Stock Incentive Plan, 800,000 shares of the Company's common stock were
reserved for the grant of stock options, stock appreciation rights, restricted
stock, performance awards, and other stock-based awards to certain key employees
and certain directors. During 2000, the number of shares reserved under the Plan
was increased to 2,050,000. Stock options are granted at an exercise price equal
to the market value on the respective grant date. The options granted in 1997
become exercisable at a rate of 50% on the second anniversary of the date of
grant, 25% on the third anniversary of the date of grant, and 25% on the fourth
anniversary of the date of grant. The options granted subsequent to 1997
generally become exercisable ratably over a 3 year period. The options generally
expire 10 years from the date of grant or upon certain specified events. No
awards shall be granted under the Stock Incentive Plan after December 31, 2007.

A summary of stock option activity and related information for the years ended
December 31, 1999, 2000 and 2001 follows:

<TABLE>
<CAPTION>
                                                 1999                             2000                               2001
                                        -----------------------          -------------------------        ------------------------
                                                      Weighted-                          Weighted-                       Weighted-
                                                       Average                           Average                          Average
                                                      Exercise                           Exercise                         Exercise
                                         Options        Price            Options          Price           Options           Price
                                        --------      --------           -------          ------          -------          ------
<S>                                     <C>           <C>                <C>              <C>             <C>              <C>
Outstanding - beginning of year         413,000         $16.28           757,100          $11.12          697,100          $10.75
Granted                                 344,100           4.93            12,000            3.25               --              --
Forfeited                                    --             --           (37,000)          11.37               --              --
Expired                                      --             --           (35,000)          15.63           (5,000)           5.59
                                        -------                          -------                          -------
Outstanding - end of year               757,100         $11.12           697,100          $10.75          692,100          $10.78
                                        =======                          =======                          =======
Exercisable at end of year              186,917          16.34           370,367           12.95          577,900          $11.97
                                        =======                          =======                          =======
Weighted-average fair value of
   options granted during the year      $  3.91                          $  2.01                          $   --
                                        =======                          =======                          =======
</TABLE>

                                      -68-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


13.    STOCK OPTIONS AND RESTRICTED STOCK (CONTINUED)

The following table summarizes information for stock options outstanding and
exercisable at December 31, 2001:

<TABLE>
<CAPTION>

                                      Options Outstanding                           Options Exercisable
                        -------------------------------------------------       ------------------------------
                                           Weighted-
                                            Average           Weighted-                             Weighted-
Range of                                   Remaining           Average                               Average
Prices                  Options              Life          Exercise Price        Options         Exercise Price
-----------------       -------         ------------       --------------        -------         --------------
<S>                     <C>             <C>                <C>                   <C>             <C>
$3.00 - 6.00            330,600          7.59 years            $ 4.82            216,400               $ 4.85
$8.25                    14,000          6.96 years            $ 8.25             14,000               $ 8.25
$16.00 - 17.00          347,500          5.42 years           $ 16.56            347,500              $ 16.56
</TABLE>

The Company has chosen to continue to account for stock-based compensation using
the intrinsic value based method of accounting as prescribed by APB 25. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the grant date, no
compensation cost is recognized. SFAS 123 requires companies that do not account
for stock-based compensation using the fair value based method to disclose pro
forma net income and earnings per share under the fair value based method. The
fair value of each option on the date of grant was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:

<TABLE>
<CAPTION>
                                                                     1999             2000
                                                                   ----------       ---------
<S>                                                                <C>              <C>
Risk free interest rate                                                 7%               7%
Dividend yield                                                          0%               0%
Volatility factor of the expected market price of the Company's
   common stock                                                     0.931            0.584
Weighted-average expected life of the option (in years)                 6                6
</TABLE>


If the fair value based method accounting provisions of SFAS 123 had been
adopted, net income (loss) and earnings per share (both basic and diluted) would
have been as follows. The effects of applying SFAS 123 for providing pro forma
disclosures are not likely to be representative of the effects on reported net
income (loss) for future years.

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31
                                                    1999                 2000                  2001
                                                ------------         -----------          -----------
                                                         (In thousands, except per share amounts)
<S>                                             <C>                  <C>                  <C>
Net loss                                        $  (25,972)          $  (32,579)          $  (56,109)
Net loss per share (basic and diluted)               (2.09)               (2.57)               (4.08)
</TABLE>


                                      -69-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


13.    STOCK OPTIONS AND RESTRICTED STOCK (CONTINUED)

During 1999, the Company awarded 20,465 shares of restricted stock to an
executive officer under the Stock Incentive Plan. Fifty percent of the
restricted stock will vest over a three year period. The remaining restricted
stock will vest based upon achievement of certain performance objectives. Shares
are not issuable until two years after the vesting date.


14.     ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss are as follows:

<TABLE>
<CAPTION>
                                                      DECEMBER 31
                                                 2000               2001
                                              ---------          ---------
                                                     (In thousands)
<S>                                           <C>                <C>
Fair value of derivative instruments          $     --           $ (1,669)
Minimum pension liability adjustment              (115)           (51,635)
Currency translation adjustment                (12,018)           (14,235)
                                              --------           --------
                                              $(12,133)          $(67,539)
                                              ========           ========
</TABLE>


15.    BUSINESS SEGMENT INFORMATION

The Company's strategic business units have been aggregated into three
reportable business segments. The Premium Alloys segment manufactures and
distributes superalloy and other high-performance nickel-based alloy products,
principally to the aerospace industry. The Huntington Alloys and Wiggin Alloys
segments manufacture and distribute high-performance nickel-based alloy products
to a wide range of industries.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All intersegment sales prices are
market based. The Company evaluates performance based on operating earnings of
the respective business units.


                                      -70-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


15.    BUSINESS SEGMENT INFORMATION (CONTINUED)

Segment information as of and for the years ended December 31, 1999, 2000 and
2001 is as follows.

<TABLE>
<CAPTION>
                                       PREMIUM          HUNTINGTON            WIGGIN
                                        ALLOYS            ALLOYS              ALLOYS          CORPORATE            TOTAL
                                       --------          ---------           --------          --------           ---------
                                                                   (In thousands)
<S>                                    <C>              <C>                 <C>               <C>                <C>
1999
Sales to external customers            $126,826          $ 320,462           $155,932          $     --           $ 603,220
Intersegment sales                       19,183             24,034             15,278                --              58,495
Operating income (loss)                  11,395            (35,462)            10,409            (6,099)            (19,757)
Depreciation and amortization             5,258             20,668              5,235             6,099              37,260
Total assets                            122,942            501,169            141,462            45,714             811,287
Capital expenditures                      3,565              5,990              2,449                --              12,004

2000
Sales to external customers            $168,490          $ 374,688           $154,143          $     --           $ 697,321
Intersegment sales                       12,026             38,102             20,812                --              70,940
Operating income (loss)                   8,332            (39,576)            10,028            (6,691)            (27,907)
Depreciation and amortization             5,918             24,318              4,687             5,606              40,529
Total assets                            121,035            507,206            149,565            42,519             820,325
Capital expenditures                      1,601              3,683              2,804                --               8,088

2001
Sales to external customers            $177,206          $ 383,423           $168,719          $     --           $ 729,348
Intersegment sales                       23,738             39,666             14,233                --              77,637
Operating income (loss)                  26,365                699              8,252           (13,796)             21,520
Depreciation and amortization             5,776             24,533              4,351             6,007              40,667
Total assets                             95,365            433,745            129,560            41,909             700,579
Capital expenditures                      2,104              4,328              3,078                --               9,510
</TABLE>



Financial information relating to the Company's operations by geographic area is
as follows:


<TABLE>
<CAPTION>
                                     YEAR ENDED DECEMBER 31
                             1999              2000              2001
                           --------          --------          --------
                                          (In thousands)
<S>                        <C>               <C>               <C>
NET SALES
United States              $326,031          $398,531          $416,910
United Kingdom               67,641            66,272            74,571
France                       57,928            86,834            99,388
Other                       151,620           145,684           138,479
                           --------          --------          --------
                           $603,220          $697,321          $729,348
                           ========          ========          ========
LONG-LIVED ASSETS
United States              $245,609          $225,093          $204,949
United Kingdom               32,533            28,458            26,332
Other                           361               554               387
                           --------          --------          --------
                           $278,503          $254,105          $231,668
                           ========          ========          ========
</TABLE>

                                      -71-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16.    EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                         1999               2000                2001
                                                       --------           --------           --------
                                                          (In thousands, except per share amounts)
<S>                                                    <C>                <C>                <C>
Numerator:
   Net loss                                            $(25,310)          $(31,875)          $(55,622)
   Preferred stock dividends                              6,423              7,216              7,024
                                                       --------           --------           --------
   Numerator for basic earnings per share -
     loss available to common shareholders              (31,733)           (39,091)           (62,646)

   Numerator for diluted earnings per share -
     loss available to common shareholders             $(31,733)          $(39,091)          $(62,646)
                                                       ========           ========           ========
Denominator:
   Denominator for basic earnings per share -
     weighted-average shares outstanding                 15,479             15,479             15,479

     Denominator for diluted earnings per
     share - adjusted weighted-average shares            15,479             15,479             15,479
                                                       ========           ========           ========
Basic and Diluted earnings per share                   $  (2.05)          $  (2.53)          $  (4.05)
                                                       ========           ========           ========
</TABLE>

Potential common shares resulting from stock options and convertible preferred
stock at December 31, 1999, 2000 and 2001 were excluded from the calculation of
diluted earnings per share because their inclusion would have had an
antidilutive effect on earnings per share.



                                      -72-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


17.    STATEMENT OF CASH FLOW - SUPPLEMENTAL DISCLOSURES

Selected cash payments and non-cash activities were as follows:

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31
                                                     1999               2000               2001
                                                   --------           --------           --------
                                                                  (In thousands)
<S>                                                <C>                <C>                <C>
Cash paid (received) during the year for:
   Interest                                        $ 25,243           $ 26,871           $ 24,737
   Income taxes                                       1,870             (1,873)            (3,294)

Non-cash activities:
   Intangible pension asset                        $    (21)          $    313           $  1,516
   Accumulated pension adjustment                    (1,560)               104             51,520
   Deferred taxes                                      (957)                69                (75)
                                                   --------           --------           --------
     Net accrued pension liability                 $ (2,538)          $    486           $ 52,961
                                                   ========           ========           ========
</TABLE>


During 2000, approximately $27.4 million of net operating losses were carried
back to the 1998 federal return of a former affiliate. The tax benefit of this
carryback was approximately $9.6 million and was used to offset amounts due to
the former affiliate.


18.    CONCENTRATIONS

No customers, in any year, represented greater than 10% of the Company's total
sales. No one customer accounted for greater than 10% of the Company's total
accounts receivable at December 31, 1999, 2000 or 2001.

Approximately 61% of the Company's employees are represented by eight separate
domestic and international collective bargaining agreements which terminate at
various times between March 2002 and February 2005. Approximately 26% of the
labor force is covered by collective bargaining agreements which will expire
within one year. The Company believes it has good relations with its employees,
but there can be no assurances that the Company will not experience a strike or
other work stoppage or that satisfactory new collective bargaining agreements
will be negotiated when the existing collective bargaining agreements expire or
that future work stoppages would not materially and adversely effect the
Company's business, financial condition, results of operations or cash flows.


19.    EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). This statement changes the accounting for goodwill and
intangible assets.


                                      -73-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


19.      EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)

Under SFAS 142, goodwill and indefinite lived intangible assets are no longer
amortized but are reviewed annually, or more frequently if impairment indicators
arise, for impairment. Separable intangible assets which have finite lives will
continue to be amortized over their useful lives, with no maximum life. With
respect to goodwill and intangible assets acquired prior to July 1, 2001,
companies are required to adopt SFAS 142 in their fiscal year beginning after
December 15, 2001.

The Company anticipates adopting SFAS 142 in fiscal 2002 and has not yet
determined the impact on the overall financial condition of the Company, if any,
which may result. Amortization of existing goodwill is $0.1 million annually.

The Company has also considered SFAS No. 141 ("Business Combinations")and SFAS
No. 143 ("Accounting for Asset Retirement Obligations") and has determined that
each is not applicable to the Company's current operations. The Company has also
considered SFAS No. 144 ("Accounting for the Impairment or Disposal of
Long-Lived Assets") and is currently assessing if there will be any impact on
the Company's financial position.


20.      QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the quarterly results of operations for the years
ended December 31, 2000 and 2001:

<TABLE>
<CAPTION>
                                                                    FISCAL QUARTER
                                            ----------------------------------------------------------------
                                             FIRST             SECOND              THIRD             FOURTH
                                            -------            -------            -------            -------
                                                             (In thousands, except per share amounts)
<S>                                         <C>                <C>                <C>                <C>
YEAR ENDED DECEMBER 31, 2000:

Net sales                                   175,539            177,240            162,579            181,963
Gross profit (loss)                            (300)            (1,229)            (5,300)             5,176
Net loss                                     (7,795)            (7,728)           (11,340)            (5,012)
Net loss attributable to common
   shareholders                              (9,767)            (9,474)           (13,088)            (6,762)
Net loss per share
   (Basic and Diluted)                        (0.63)             (0.61)             (0.85)             (0.44)

YEAR ENDED DECEMBER 31, 2001:

Net sales                                   195,150            182,690            181,198            170,310
Gross profit                                 10,499             11,415             14,809             14,743
Net income (loss)                            (3,861)            (2,665)             1,760            (50,856)
Net income (loss) attributable to
   common shareholders                       (5,612)            (4,418)                 1            (52,617)
Net income (loss) per share
   (Basic and Diluted)                        (0.36)             (0.29)              0.00              (3.40)
</TABLE>



                                      -74-

<PAGE>
                           SPECIAL METALS CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


20.      QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)

During the fourth quarter of 2001 the Company recorded a valuation allowance to
offset the net deferred tax asset recorded in the United States. This resulted
in a fourth quarter charge to tax expense of $53,729.

Certain amounts for quarters prior to the third quarter of 2001 were
reclassified to conform to the current presentation of shipping and handling
costs.


                                      -75-

<PAGE>
Schedule II - Valuation and Qualifying Accounts
For the fiscal years 2001, 2000, and 1999
Dollars in Thousands


<TABLE>
<CAPTION>
                                                                            ADDITIONS
                                          --------------------------------------------------------------------------------
                                          BALANCE AT                        CHARGED TO                             BALANCE
                                          BEGINNING      CHARGED TO           OTHER                               AT END OF
DESCRIPTION                               OF PERIOD       EXPENSE            ACCOUNTS           DEDUCTIONS          PERIOD
-----------                               ---------       -------            --------           ----------        --------
<S>                                       <C>            <C>                <C>                 <C>               <C>
Year ended December 31, 2001:
  Deducted from asset accounts:
     Allowance for doubtful accounts        $ 4,569        $   548           $ (33)(a)           $ 1,529(b)         $ 3,555
     Allowance for obsolescence               5,593          1,369             (60)(a)             1,060(c)           5,842
                                            -------        -------           -----               -------            -------
   Total                                    $10,162        $ 1,917           $ (93)              $ 2,589            $ 9,397
                                            =======        =======           =====               =======            =======
Year ended December 31, 2000:
  Deducted from asset accounts:
     Allowance for doubtful accounts        $ 2,894        $ 2,316          $ (104)(a)           $   537(b)         $ 4,569
     Allowance for obsolescence               8,914           (538)           (216)(a)             2,567(c)           5,593
                                            -------        -------           -----               -------            -------
   Total                                    $11,808        $ 1,778          $ (320)              $ 3,104            $10,162
                                            =======        =======           =====               =======            =======
Year ended December 31, 1999:
  Deducted from asset accounts:
     Allowance for doubtful accounts        $ 3,179        $  (167)          $ (43)(a)           $    75(b)         $ 2,894
     Allowance for obsolescence               7,526          1,497            (109)(a)                --              8,914
                                            -------        -------           -----               -------            -------
   Total                                    $10,705        $ 1,330           $(152)              $    75            $11,808
                                            =======        =======           =====               =======            =======
</TABLE>


(a)      Impact of foreign currency translation adjustments.

(b)      Uncollectible accounts written off, net of recoveries.

(c)      Obsolete inventory disposals, physical inventory adjustments, and
         adjustments for material reclaimed or ultimately sold.



ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         Not Applicable.


                                      -76-

<PAGE>
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required by this item is herein incorporated by
reference to the Company's definitive Proxy Statement or other informational
filing to be filed with the Securities and Exchange Commission on or prior to
April 30, 2002.

ITEM 11.  EXECUTIVE COMPENSATION

         The information required by this item is herein incorporated by
reference to the Company's definitive Proxy Statement or other informational
filing to be filed with the Securities and Exchange Commission on or prior to
April 30, 2002.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this item is herein incorporated by
reference to the Company's definitive Proxy Statement or other informational
filing to be filed with the Securities and Exchange Commission on or prior to
April 30, 2002.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this item is herein incorporated by
reference to in the Company's definitive Proxy Statement or other informational
filing to be filed with the Securities and Exchange Commission on or prior to
April 30, 2002.


                                      -77-

<PAGE>
                                     PART IV


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

<TABLE>
<CAPTION>
                                                                                            Page in
                                                                                           Form 10-K
                                                                                           ---------
<S>                                                                                        <C>
(a)      The following are filed as part of this report:

(1)      Audited financial statements of the Company as of December 31, 2000 and
         2001, and for the three years in the period ended December 31, 2001.                 41

(2)      Financial statement schedule

         II - Valuation and Qualifying Accounts                                               76

         All other schedules have been omitted as the required information is
         not applicable or the information is presented in the financial
         statements or the notes thereto.

(3)      Exhibits
</TABLE>

Exhibit No.                                 Description
-----------                                 -----------
2.1               Stock Purchase Agreement, dated as of July 8, 1998, between
                  Special Metals Corporation and Inco Limited, Inco United
                  States, Inc., Inco Europe Limited and Inco S.A. (Incorporated
                  by reference to the Company's current report on Form 8-K filed
                  with the Securities and Exchange Commission on July 10, 1998).

2.2               Letter Agreement, dated October 28, 1998, between Special
                  Metals Corporation, Special Metals S.A.R.L., IAII Acquisition
                  Co., IACL Acquisition Inc. and IAL Holdings Limited and Inco,
                  Inco United States, Inc., Inco Europe Limited, Inco S.A. and
                  Inco Alloys International, Inc. (Incorporated by reference to
                  the Company's current report on Form 8-K filed with the
                  Securities and Exchange Commission on November 12, 1998).

3.1.1             Amended and Restated Certificate of Incorporation
                  (Incorporated by reference to the Company's Registration
                  Statement on Form S-1 (File No. 333-18499)).

3.1.2             Certificate of Designations for Series A Preferred Stock,
                  filed on October 28, 1998, with the Secretary of State of
                  Delaware (Incorporated by reference to the Company's current
                  report on Form 8-K filed with the Securities and Exchange
                  Commission on November 12, 1998).

3.2               Amended and Restated By-Laws (Incorporated by reference to the
                  Company's Registration Statement on Form S-1 (File No.
                  333-18499)).

4.1               Investment Agreement, dated as of July 8, 1998, among Special
                  Metals Corporation, TIMET and TMC (Incorporated by reference
                  to the Company's current report on Form 8-K filed with the
                  Securities and Exchange Commission on July 10, 1998).

4.2               Amendment to Investment Agreement, dated October 28, 1998,
                  among Special Metals Corporation, TIMET and TMC (Incorporated
                  by reference to the Company's current report on Form 8-K filed
                  with the Securities and Exchange Commission on November 12,
                  1998).


                                      -78-

<PAGE>
4.3               Investment Agreement, dated October 28, 1998, between Special
                  Metals Corporation and Inco (Incorporated by reference to the
                  Company's current report on Form 8-K filed with the Securities
                  and Exchange Commission on November 12, 1998).

4.4               Voting Agreement, dated October 28, 1998, among TIMET, TMC,
                  Societe Industrielle de Materiaux Avances, LWH Holding S.A.
                  and Advanced Materials Investments Holding S.A. (Incorporated
                  by reference to the Company's current report on Form 8-K filed
                  with the Securities and Exchange Commission on November 12,
                  1998).

10.1              Form of Registration Rights Agreement among Special Metals
                  Corporation, SIMA, LWH and AMI (Incorporated by reference to
                  the Company's Registration Statement on Form S-1 (File No.
                  333-18499)).

10.2              Registration Rights Agreement, dated October 28, 1998, between
                  TIMET and Special Metals Corporation (Incorporated by
                  reference to the Company's current report on Form 8-K filed
                  with the Securities and Exchange Commission on November 12,
                  1998).

10.3              Registration Rights Agreement, dated October 28, 1998, between
                  Inco and Special Metals Corporation (Incorporated by reference
                  to the Company's current report on Form 8-K filed with the
                  Securities and Exchange Commission on November 12, 1998).

10.4              Amended and Restated Stockholders Agreement among the Company,
                  SIMA, LWH and AMI (Incorporated by reference to the Company's
                  Registration Statement on Form S-1 (File No. 333-18499)).

10.5              Amendment No. 1 to Stockholders Agreement dated as of March 1,
                  1998. (Incorporated by reference to the Company's Quarterly
                  Report on Form 10-Q for the quarter ended June 30, 1998).

10.6              Technical Exchange Agreement between the Company and SIMA.
                  (Incorporated by reference to the Company's Registration
                  Statement on Form S-1 (File No. 333-18499)).

10.7              Managerial Assistance Agreement between the Company and SIMA
                  (Incorporated by reference to the Company's Registration
                  Statement on Form S-1 (File No. 333-18499)).

10.8              Lease Agreement, dated as of February 1, 1994 between the
                  Oneida County Development Agency and the Company (Incorporated
                  by reference to the Company's Registration Statement on Form
                  S-1 (File No. 333-18499)).

10.9              Lease Extension and Modification Agreement, dated as of
                  February 28, 1997, by and between the Oneida County Industrial
                  Development Agency and the Company (Incorporated by reference
                  to the Company's Quarterly Report on Form 10-Q for the quarter
                  ended June 30, 1997).

10.10             Amended and Restated Payment in Lieu of Taxes Agreement, dated
                  February 28, 1997, by and between the Oneida County Industrial
                  Development Agency and the Company (Incorporated by reference
                  to the Company's Quarterly Report on Form 10-Q for the quarter
                  ended June 30, 1997).

10.11             First Amendment to Amended and Restated Payment in Lieu of
                  Taxes Agreement, dated January 22, 1998, by and between the
                  Oneida County Industrial Development Agency and the Company
                  (Incorporated by reference to the Company's Quarterly Report
                  on Form 10-Q for the quarter ended September 30, 1998).


                                      -79-

<PAGE>
10.12             Lease, dated as of November 1, 1990 between the County of
                  Chautauqua Industrial Development Agency and the Company
                  (Incorporated by reference to the Company's Registration
                  Statement on Form S-1 (File No. 333-18499)).

10.13             Payment in Lieu of Taxes Agreement, dated as of November 1,
                  1990 between the Company and the County of Chautauqua
                  Industrial Development Agency (Incorporated by reference to
                  the Company's Registration Statement on Form S-1 (File No.
                  333-18499)).

10.14             Amended and Restated Lease Agreement, dated as of September 1,
                  1990 between the City of Princeton, Kentucky and the Company
                  (Incorporated by reference to the Company's Registration
                  Statement on Form S-1 (File 333-18499)).

10.15+            Special Metals Corporation Equity Appreciation Rights Plan
                  (Incorporated by reference to the Company's Registration
                  Statement on Form S-1 (File No. 333-18499)).

10.16+            Special Metals Corporation Supplemental Retirement Income Plan
                  (Incorporated by reference to the Company's Registration
                  Statement on Form S-1 (File 333-18499)).

10.17+            Special Metals Corporation 1997 Long-Term Stock Incentive
                  Plan, together with Form of Stock Option Award Agreement
                  (Incorporated by reference to the Company's Registration
                  Statement on Form S-1 (File No. 333-18499)).

10.18+            Amended and Restated Employment Agreement, dated December 30,
                  1994, between the Company and Donald R. Muzyka (Incorporated
                  by reference to the Company's Registration Statement on Form
                  S-1 (File No. 333-18499)).

10.19+            Amended and Restated Employment Agreement, dated December 30,
                  1994, between the Company and Robert F. Dropkin (Incorporated
                  by reference to the Company's Registration Statement on Form
                  S-1 (File No. 333-18499)).

10.20.1+          Restricted Stock Award Agreement between the Company and T.
                  Grant John. (Incorporated by reference to the Company's Annual
                  Report on Form 10-K for the year ended December 31, 2000).

10.20.2+          Nonqualified Stock Option Agreement between the Company and T.
                  Grant John. (Incorporated by reference to the Company's Annual
                  Report on Form 10-K for the year ended December 31, 2000).

10.21+            Employment Agreement, dated December 30, 1994, between the
                  Company and Donald C. Darling (Incorporated by reference to
                  the Company's Registration Statement on Form S-1 (File No.
                  333-18499)).

10.22             Noncompetition Agreement, dated as of October 28, 1998,
                  between Inco and Special Metals Corporation (Incorporated by
                  reference to the Company's current report on Form 8-K filed
                  with the Securities and Exchange Commission on November 12,
                  1998).

10.23             Agreement in Principle, dated July 8, 1998 between Special
                  Metals Corporation and TMC (Incorporated by reference to the
                  Company's current report on Form 8-K filed with the Securities
                  and Exchange Commission on July 10, 1998).


                                      -80-

<PAGE>
10.24             Agreement, dated October 28, 1998, among Special Metals
                  Corporation, the Lenders and Credit Lyonnais New York Branch
                  as Issuing Bank and Agent (Incorporated by reference to the
                  Company's current report on Form 8-K filed with the Securities
                  and Exchange Commission on November 12, 1998).

10.25             First Amendment to the Credit Agreement and Limited Waiver
                  dated as of April 1, 1999 by and among the Company, Credit
                  Lyonnais New York Branch and the other financial institutions
                  party thereto (Incorporated by reference to the Company's
                  Quarterly Report on Form 10-Q for the quarter ended March 31,
                  1999).

10.26             Second Amendment to the Credit Agreement dated as of June 8,
                  1999 by and among the Company, Credit Lyonnais New York Branch
                  and the other financial institutions party thereto.
                  (Incorporated by reference to the Company's Annual Report on
                  Form 10-K for the year ended December 31, 2000).

10.27             Third Amendment to the Credit Agreement and Limited Waiver
                  dated as of December 29, 1999 by and among the Company, Credit
                  Lyonnais New York Branch and the other financial institutions
                  party thereto. (Incorporated by reference to the Company's
                  Annual Report on Form 10-K for the year ended December 31,
                  2000).

10.28             Subordinated Loan Agreement dated as of December 17, 1999
                  between the Company and SIMA. (Incorporated by reference to
                  the Company's Annual Report on Form 10-K for the year ended
                  December 31, 2000).

10.29             Debt Subordination Agreement dated as of December 29, 1999 by
                  and among the Company, SIMA and Credit Lyonnais New York
                  Branch. (Incorporated by reference to the Company's Annual
                  Report on Form 10-K for the year ended December 31, 2000).

10.30             Technical Exchange Agreement, dated April 6, 2000, between the
                  Company and Eramet (Incorporated by reference to the Company's
                  Quarterly Report on Form 10-Q for the quarter ended June 30,
                  2000).

10.31             Warehouse Agreement, dated April 1, 2000, between Huntington
                  Alloys and Aubert & Duval (Incorporated by reference to the
                  Company's Quarterly Report on Form 10-Q for the quarter ended
                  June 30, 2000).

10.32             Fourth Amendment to the Credit Agreement dated as of March 28,
                  2001 by and among the Company, Credit Lyonnais New York Branch
                  and other financial institutions party thereto. (Incorporated
                  by reference to the Company's Annual Report on Form 10-K for
                  the year ended December 31, 2000).

10.33+            Employment Agreement, dated March 6, 2000, between the Company
                  and Paul A. Totaro. (Incorporated by reference to the
                  Company's Annual Report on Form 10-K for the year ended
                  December 31, 2000).

10.34+            Amended and Restated Employment Agreement, dated April 4,
                  2000, between the Company and Dr. Gernant E. Maurer.
                  (Incorporated by reference to the Company's Annual Report on
                  Form 10-K for the year ended December 31, 2000).


                                      -81-

<PAGE>
10.35+            Employment Agreement, dated March 30, 2000, between Special
                  Metals Wiggin Ltd. and George B. Nairn. (Incorporated by
                  reference to the Company's Annual Report on Form 10-K for the
                  year ended December 31, 2000).

10.36+            Employment Agreement, dated October 1, 1999, between Inco
                  Alloys International, Inc. and James M. Hensler. (Incorporated
                  by reference to the Company's Annual Report on Form 10-K for
                  the year ended December 31, 2000).

10.37+            Employment Agreement, dated December 31, 1999, between the
                  Company and Teresa A. Daniel. (Incorporated by reference to
                  the Company's Annual Report on Form 10-K for the year ended
                  December 31, 2000).

10.38+            Employment Agreement, dated March 6, 2000, between the Company
                  and Thomas E. MacDonald. (Incorporated by reference to the
                  Company's Annual Report on Form 10-K for the year ended
                  December 31, 2000).

10.39+            Amended and Restated Employment Agreement, dated June 18,
                  2001, between the Company and T. Grant John. (Incorporated by
                  reference to the Company's Quarterly Report on Form 10-Q for
                  the quarter ended June 30, 2001).

10.40+            Amended and Restated Agreement for Executive Services, dated
                  July 12, 2001, between the Company and Philippe Choppin de
                  Janvry. (Incorporated by reference to the Company's Quarterly
                  Report on Form 10-Q for the quarter ended June 30, 2001).

10.41             Reimbursement Agreement, dated July 12, 2001, between the
                  Company and Special Metals SARL. (Incorporated by reference to
                  the Company's Quarterly Report on Form 10-Q for the quarter
                  ended June 30, 2001).

10.42+            Employment Agreement, dated June 30, 2001, between the Company
                  and Dennis L. Wanlass. (Incorporated by reference to the
                  Company's Quarterly Report on Form 10-Q for the quarter ended
                  June 30, 2001).

10.43             Consignment Agreement, dated January 1, 2001, between the
                  Company and ERAMET MARIETTA, INC. (Incorporated by reference
                  to the Company's Quarterly Report on Form 10-Q for the quarter
                  ended June 30, 2001).

21.1*             Subsidiaries of the Company.

23.1*             Consent of Ernst & Young LLP.

------------------


*        Filed herewith.

+        Management contract or compensatory plan or arrangement.


(b)      Reports on Form 8-K

         The Company did not file any Reports on Form 8-K during the fiscal
         quarter ended December 31, 2001.

(c)      Exhibits

         All exhibits required by Item 601 of Regulation S-K are included in
         Item 14(a)(3).

                                      -82-


<PAGE>
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on April 1, 2002.

                                               By  /s/ T. Grant John
                                                   ----------------------------
                                                   T. Grant John
                                                   President
                                                   (Principal Executive Officer)


                                      -83-

<PAGE>
         BE IT KNOWN TO ALL BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Dennis L. Wanlass and T. Grant John such
person's true and lawful attorney-in-fact and agents, with full power of
substitution and revocation, for such person and in such person's name, place
and stead, in any and all capacities to sign any and all amendments to this
report filed pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1934, as amended, and to file the same with all exhibits
thereto, and the other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as such persons might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.


<TABLE>
<S>                                         <C>                                                             <C>
/s/ Leo G. Thompson                                                                                          April 1, 2002
------------------------------------
Leo G. Thompson                             Chairman of the Board


/s/ T. Grant John                                                                                            April 1, 2002
------------------------------------
T. Grant John                               President and Director
                                            (Principal Executive Officer)

/s/ Dennis L. Wanlass                                                                                        April 1, 2002
------------------------------------
Dennis L. Wanlass                           Vice President and Chief Financial Officer
                                            (Principal Financial and Accounting Officer)



------------------------------------
Susan E. Alderton                           Director



------------------------------------
Francis P. Avanzi                           Director


/s/ Philippe Choppin de Janvry                                                                               March 29, 2002
------------------------------------
Philippe Choppin de Janvry                  Director


/s/ Raymond F. Decker                                                                                        April 1, 2002
------------------------------------
Raymond F. Decker                           Director


/s/ Edouard Duval                                                                                            March 29, 2002
------------------------------------
Edouard Duval                               Director


/s/ Michel Hemonnot                                                                                          March 29, 2002
------------------------------------
Michel Hemonnot                             Director
</TABLE>



                                      -84-

<PAGE>
<TABLE>
<S>                                         <C>                                                             <C>
/s/ Alain A. Honnart                                                                                         March 29, 2002
------------------------------------
Alain A. Honnart                            Director


/s/ Edward C. Hutcheson, Jr.                                                                                 April 1, 2002
------------------------------------
Edward C. Hutcheson, Jr.                    Director



------------------------------------
Carlos Luis Landin                          Director


/s/ J. Landis Martin                                                                                         April 1, 2002
------------------------------------
J. Landis Martin                            Director



------------------------------------
Patrick Rothey                              Director



------------------------------------
Antoine G. Treuille                         Director
</TABLE>

                                      -85-