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, 1999
                                             -----------------
                                       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, 2000, the aggregate market value of the publicly traded voting stock
held by non-affiliates of the Registrant was $12,525,500 based upon the closing
price of the Registrant's common stock on that date as reported by the Nasdaq
National Market. At March 1, 2000 the Registrant had 15,479,000 shares of common
stock outstanding.

                      Documents Incorporated By Reference:

Portions of the proxy statement for the 2000 annual shareholders meeting are
incorporated by reference into Part III of this report.
<PAGE>

                           Special Metals Corporation
                                    Form 10-K
                                Table Of Contents

<TABLE>
<CAPTION>
Item                                                                               Page
----                                                                               ----
<S>   <C>                                                                          <C>
                                     Part I
1     Business                                                                        1
2     Operating Facilities                                                           15
3     Legal Proceedings                                                              15
4     Submission of Matters to a Vote of Security Holders                            19

                                     Part II

5     Market for the Registrant's Common Equity and Related Stockholder Matters      20
6     Selected Financial Data                                                        21
7     Management's Discussion and Analysis of Financial Condition and Results of
      Operations                                                                     22
7A    Quantitative and Qualitative Disclosures About Market Risk                     31
8     Financial Statements and Supplementary Data                                    32
9     Changes In and Disagreements with Accountants on Accounting and Financial
      Disclosure                                                                     64

                                    Part III

10    Directors and Executive Officers of the Registrant                             65
11    Executive Compensation                                                         65
12    Security Ownership of Certain Beneficial Owners and Management                 65
13    Certain Relationships and Related Transactions                                 65

                                     Part IV

14    Exhibits, Financial Statement Schedules, and Reports on Form 8-K               66
      Signatures                                                                     70
</TABLE>
<PAGE>

                                     Part I

Item 1. Business

General

        Special Metals Corporation (herein referred to as the "Company" or
"Special Metals") is the world's largest and most diversified producer of
high-performance nickel-based alloys and superalloys. These highly engineered
materials are produced to exacting customer specifications for technically
demanding applications and are designed to withstand environmental extremes of
heat and stress, and corrosion-resistance. Special Metals offers a number of
alloy materials in a broad range of product forms, including sheet, strip, foil,
plate, tubing, 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 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.

Industry Overview

        The high-performance nickel-based 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 customer
and the alloy manufacturer is significant as new alloys are often developed in
close collaboration between the manufacturer and the 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 full range of products, properties, forms and
sizes across the entire spectrum of end-user industries.

Business Strategy

        The Company's principal objective is to strengthen its position in the
superalloy and special alloy industry, enhance its ability to anticipate and
adapt to customer needs and market opportunities, and provide shareholders with
superior investment returns through strategies which maximize long-term
profitability and net asset values. The Company intends to achieve future growth
and earnings development through the following initiatives:

                                       -1-
<PAGE>

        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 markets by leveraging its
manufacturing capabilities and expertise in high-performance materials. In
carrying out this objective, the Company's divisions seek closer relationships
with their customers in order to provide higher value-added products and product
offerings which are aligned with customer requirements.

        Continue long-term capital improvement initiatives. The Company
systematically 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 investments build long-term value by increasing
production capacity and operating efficiency and positioning the Company to
maintain its technological leadership. The Company anticipates that total
capital expenditures will approximate $15.0 million during 2000.

        Develop New Products and Enter New Markets. The Company believes that
its expertise in the manufacture of high-performance nickel-based alloys and
superalloys affords it the ability to design new products and applications and
to enter new growth markets. The Company actively pursues internal development
programs which build on existing core competencies and may be applied to new
market segments. Approximately 85% of the Company's current nickel alloy and
superalloy production is comprised of alloys developed by the Company. The
Company engages in research and development activity to continue product
development for the core businesses.

        Continue Performance Improvements and Cost Reductions. The Company has
realized significant productivity increases 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 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 between
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. I 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."

        Pursue Acquisitions or Strategic Alliances. The Company intends to
pursue selective acquisitions and strategic alliances which will enable the
Company to leverage its manufacturing expertise and metallurgical skills.
Potential acquisitions or strategic alliances may include investments in
companies, technologies, products, or related assets which complement the
Company's business or products. The Company continuously evaluates the strategy
and profitability of its existing business portfolio within the scope of its
long-term, value-oriented corporate policy.

        Increase Product and Geographic Diversification. The Company is a global
enterprise with three principal manufacturing facilities in geographically
diverse locations from which the Company markets high-performance nickel-based
alloys and special alloys to a broad range of end customers. The Company's
facilities include downstream operations, such as tube 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.

                                       -2-
<PAGE>

Operating Segments

        The Company's businesses are organized, managed, and internally reported
as three principal operating segments. These segments are: (i) the Premium
Alloys Division; (ii) the Huntington Alloys Division; and (iii) the Wiggin
Alloys Division. In 1999, the Premium Alloys Division, the Huntington Alloys
Division, and the Wiggin Alloys Division accounted for 21.1%, 53.0%, and 25.9%
respectively, of the Company's net sales of $602.2 million.

        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; Princeton,
Kentucky; and Ann Arbor, Michigan.

        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 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 at this facility include melting, remelting, forging,
bar rolling, and billet and bar cold finishing.

        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.

        Ann Arbor, Michigan. This facility designs, manufactures, and markets
silver-based amalgamable dental alloys. Dental products are produced in the form
of very fine powder by melting, alloying and atomizing alloys of silver, copper,
tin, palladium, and other elements. A number of the division's dental products
are protected by patents extending to 2000 and beyond. The Company is the
leading North American producer of amalgamable dental alloys.

                                       -3-
<PAGE>

        Huntington Alloys Division

        The Huntington Alloys Division is primarily engaged in the manufacture
and sale of nickel-based alloys in a range of product forms, including, 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. 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 products subsidiaries.

        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 include melting, remelting, forging, hot rolling
and finishing of rod, 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 Company's 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.

        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 Company's
Hereford, England production facility.

        Wiggin Alloys Division

        The Wiggin Alloys Division is primarily engaged in the manufacture and
sale of nickel-based alloys including billet, bar, rod, extruded section, narrow
strip, rod-in-coil, and tubular product forms. Wide sheet and plate products are
provided for distribution in Europe through the Company's Huntington Alloys
Division. The primary manufacturing facility of the Wiggin Alloys Division is
located in Hereford, England. A European subsidiary affiliated with this
division produces cold-drawn nickel-based alloy wire and 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 rod, strip, foil, wire, 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.

                                       -4-
<PAGE>

The Wiggin Alloys Division also includes the following subsidiaries:

        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 England, continental western Europe, Africa, India and
the Middle East. This distribution effort is coordinated by the Welding Products
Company in North America.

        Special Metals Services. This network of Company-owned service centers
support the marketing and distribution of nickel-based alloy, welding,
electrical resistance alloy, titanium, and cobalt-based hard facing alloy
products throughout Europe. Sales offices and service/distribution centers are
located in St. Priest (Lyon), France; Milan, Italy; and Rotterdam, Netherlands.

Products

        Special Metals produces a comprehensive product range of high-quality
alloys 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:

        FAMILY               ALLOY TYPE (PRIMARY ELEMENTS)
        ------               -----------------------------
        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

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

o       Long Products (Ingot, Billet, Bar, and Cold Drawn Bar)
o       Flat Products (Plate, Sheet, and Strip)
o       Pipe, Tubulars, and Extruded Shapes
o       Wire and Wire Rod
o       Welding Products
o       Niche and Other Products

                                       -5-
<PAGE>

        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 drawn bar. Long
products are produced utilizing ingots manufactured in the Company's New
Hartford, Huntington, and Hereford facilities and 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 thirty 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 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 twenty to thirty 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
Company's Huntington and Burnaugh facilities and hot-rolled on a primary hot
sheet/strip facility in Huntington. The Company's Hereford facility also
produces flat products utilizing extrusion billet. 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 maximum width of 48 inches.
Strip products are produced in gauges ranging from 0.008 to 0.250 inches and
maximum width of 36 inches. Customers use these materials to fabricate a variety
of products such as 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
and seam-welded pipe and tubular products used in corrosive and high temperature
service environments. The Company's products are utilized in the critical piping
systems of domestic and international 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.

                                       -6-
<PAGE>

        Both A-1 Wire Tech and the Hereford, England wire mill 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.

        The Company also manufactures wire rod products in its 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
supports 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) the welding or repair-welding of 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.

        Dental Products. The Company's Ann Arbor, Michigan facility designs,
manufactures and markets silver-based amalgamable alloys used principally for
conventional tooth restoration.

        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 medical devices, orthodontic wire,
eyeglass frames, temperature control devices and clamping devices.

        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

                                       -7-
<PAGE>

molten glass processing, marine and diesel engines, and other high temperature
thermal processing operations, such as furnace parts, skid rails and hearth
rollers.

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 service 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 and sheet is based on the new and replacement market for jet
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 net revenues in 1999.

        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 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 sulphur dioxide emissions from fossil-fuel
powered electric generating facilities.

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

                                       -8-
<PAGE>

        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
represent 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 sustain a position as a
preferred supplier. The critical elements of this strategy include:

o       Maintaining an appropriate presence in emerging market countries
o       Participating in appropriate route-to-market development
o       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.

        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.

                                       -9-
<PAGE>

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

o       Direct Sales Representatives
o       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
o       Distributors and Agents
o       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 presence in the continental United States
through field sales personnel located in three 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 principal sales
efforts of the Company in Canada are managed directly through Huntington Alloys
Canada Ltd. located in Toronto, Ontario.

        The Company's direct sales efforts in Europe are coordinated through its
principal marketing and sales offices headquartered in Hereford, England and
field sales office located in Dusseldorf. 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 appropriate, 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 distribution channels
complements the direct sales efforts of the Company. The Company's distribution
network has evolved over a period of years and is continuously improved 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 exclusive
distributors in the United States and the United Kingdom.

        The Company also has formed long established relationships with agents
and distributors worldwide. These distributors generally sell a comprehensive
range of products offered exclusively by the Huntington and Hereford facilities.
The Company maintains distribution operations in France, Italy and the
Netherlands under the name Special Metals Services. Special Metals Services
sales offices and service/distribution centers are located in St. Priest (Lyon),
France; Milan, Italy; and Rotterdam, Netherlands.

                                      -10-
<PAGE>

        The Company's other businesses, which include the Welding Products
Company, A-1 Wire Tech, Rescal, powder products, shape memory alloy products and
dental 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 or
substantial increases in their costs could have a material adverse effect on the
business, financial condition, results of operations or prospects of the
Company.

                                      -11-
<PAGE>

Cyclicality of Aerospace Industry

        The aerospace industry is one of the largest end-user markets 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 driven by long-term trends in airline passenger
traffic. Principal factors underlying long-term traffic growth include sustained
economic growth, both in developed and emerging countries, and political
stability. According to forecasts prepared by the Boeing Company ("Boeing"), for
the five-year period 1995-1999, the average growth rate for worldwide passenger
traffic was approximately 5.5%. Boeing's 20-year forecast projects an annual
growth rate of approximately 4.7% in worldwide airline passenger traffic.

        In addition, a mandate went into effect January 1, 2000, requiring that
all aircraft operators entering and exiting U.S. airports must comply with
federal Stage 3 noise regulations. This environmental compliance requires
airline operators to replace existing Stage 2 engines or retrofit such engines
with hush kits. Demand for commercial aircraft is further influenced by airline
profitability, world trade policies, bilateral government relations, and
technological changes.

        In 1995, the commercial aircraft industry began recovering from the
recession of the early 1990's. Deliveries of large commercial aircraft have
increased by 47% from 1995 to 1997, 42% from 1997 to 1998 and 12% from 1998 to
1999. Boeing's average production rate decreased to 49 aircraft per month in
1999 with Airbus Industrie, S.A. ("Airbus") increasing to an average of 25
planes per month. Boeing projects that 2000 average production rates will
approximate 41 aircraft per month, with Airbus projecting 26 aircraft per month.

        Substantially all of the revenues of the Company are derived from the
sale of 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 companies in the industry, 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
that 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 applications 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 could have, an adverse effect on the
business, financial condition, results of operations or prospects of the
Company.

                                      -12-
<PAGE>

Research & Development

        Special Metals Corporation is an industry leader in research and
technology development. The Company's research and development efforts are
closely aligned with its key business objectives - to reduce 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, Ann Arbor 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 collaborate with the Company's
production staffs and sales and marketing forces to help identify and develop
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") which includes other U.S. superalloy producers
and the EU THERMIE program which has 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 developing and qualifying critical component materials,
including nickel alloys, that 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.
Additional non-aerospace products under development include dental alloys, such
as a recently patented restoration alloy system which offers a unique
combination of properties and handling characteristics during application. The
Company spent approximately $1.9 million, $2.9 million and $4.4 during 1997,
1998, and 1999, 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 over 95 United States patents (with approximately 380
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 conduct of its overall business.

                                      -13-
<PAGE>

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. Although no one
customer accounted for 10% or more of the Company's net sales in 1999, the
Company's top ten customers accounted for approximately 31% of the Company's
1999 net sales. In 1998, Wyman Gordon Forgings, Inc. accounted for approximately
16% of the Company's net sales. In 1997, the Company's three largest customers
accounted for approximately 21%, 11%, and 10%, respectively, of the Company's
net sales.

Employees

        As of December 31, 1999, the Company had approximately 3,230 employees,
approximately 61% of whom are represented by labor unions. The Company has
entered into collective bargaining agreements with these union employees as
follows:

<TABLE>
<CAPTION>
                                   Number of
                               Employees Covered
                                 By Bargaining
Location                          Agreements              Effective Date             Expiration Date
--------------------------------------------------------------------------------------------------------
<S>                            <C>                        <C>                        <C>
New Hartford, New York:
    Production                         302                September 1997             August 2003
    Support Technicians                 18                April 1999                 April 2002
Princeton, Kentucky                     48                August 1997                August 2000
Dunkirk, New York                       49                August 1999                August 2002
Huntington, West Virginia              754                February 1999              February 2002
Burnaugh, Kentucky                     154                April 1999                 March 2002
Hereford, England:
    Production                         471                November 1999              November 2000
    Craft                              120                November 1999              November 2000
    Staff (Junior)                      17                November 1999              November 2000
    Staff (Senior)                      31                January 2000               January 2001
</TABLE>

        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.

                                      -14-
<PAGE>

Item 2. Operating Facilities

        The following table sets forth certain information with respect to the
Company's principal operating facilities. The Company believes that its
operating facilities are 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
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             Leased        Forging Plant
Princeton, KY            70,000             Leased        Powder Products
                                                          Research & Development
Ann Arbor, MI             9,000             Owned         Dental Products
                                                          Research & Development
</TABLE>

        The facilities in New Hartford, Dunkirk and Princeton 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, Dunkirk and Princeton facilities expire
in 2007, 2001, and 2000 respectively. The Princeton facility lease is subject to
extensions for an additional 15 years beyond the current term.

Item 3. Legal Proceedings

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.

                                      -15-
<PAGE>

        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, 1999, the Company had total
reserves of approximately $10.1 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
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 2000 capital budget provides $2.7 million for
environmental protection and compliance matters. The Company incurred average
annual capital expenditures for environmental matters of $.2 million during
1997, $1.4 million during 1998 and $3.5 million during 1999. The Company does
not expect future costs of compliance with currently enacted and proposed
Environmental Laws 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 the Company's Huntington, 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. 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 sixteen actions
(one not served) by plaintiffs seeking damages for alleged health problems
resulting from exposure to manganese in welding products and one action in which
the plaintiff alleges exposure to manganese originating in wastewater from the
Company's Huntington, West Virginia facility, while an employee of the
Huntington Sanitary Board. The cases are at various stages of pleading and
discovery. 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, 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.

                                      -16-
<PAGE>

        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 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 is currently awaiting DEC approval
of the remedial alternative, which will include removal of PCB-impacted soils.
Furthermore, if the EPA, which also has jurisdiction over the Ludlow Site,
disagrees with the final remedial alternative, it may seek to require
implementation of a different remedial alternative.

        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 $70,000 per year. In addition, the Company may be required to
conduct certain post-closure activities.

        The Company and the DEC also 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 potentially
responsible parties 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.

        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.

        Neither report was ever issued in final form. No action has been taken
by the inspecting agency since January 1996 in the case of Huntington. Burnaugh
has recently been listed as one of over 1,700 high priority facilities. The
Kentucky Division of Waste Management is in the process of revising the RCRA
Facility Assessment report for Burnaugh. If such investigation is ultimately
required in Huntington, and when such is required 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.

        Huntington West Pickle House. The Company expects that the Huntington,
West Virginia facility of Huntington will need to install a wet scrubber exhaust
system to remove ammonia vapor directly from an

                                      -17-
<PAGE>

ammonia/water solution tank within its West Pickle House. The cost is estimated
to be about $500,000 and is expected to be incurred in calendar year 2000.

        Pennsauken Landfill / Puchack Well Field. The Company recently received
notice that Huntington has been named as 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 a 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. Huntington has
not, to date, filed an answer to the third-party complaint. The Company is in
the preliminary stages of investigating the claim against it. 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.

        Wiggin Tube Degreaser. A United Kingdom subsidiary (Special Metals
Wiggin Ltd., "Wiggin") may be required to make an expenditure of approximately
$3.2 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 Switchgears. The Company expects that the Hereford,
England facility of Wiggin will need to institute a phased program over ten
years to replace its electrical switchgears, including oil-filled manual direct
switchgears, air breakers and all other oil-filled switchgears. The cost of a
program to replace the oil-filled manual direct switches is estimated to be
approximately $0.7 million over the next two years. The cost of a program to
replace the remainder of the electrical switchgears is estimated to be
approximately $4.6 million, to be incurred during the period from 2002 through
2009.

        Wiggin Water Drainage Arrangements. The Environment Agency has informed
the Company 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.

        Consent Order - New Hartford. The New York State Department of
Environmental Conservation has alleged that the Company's New Hartford facility
has violated certain regulations pertaining to hazardous waste management
promulgated under the authority of Environmental Conservation Law Article 27,
Title a. The department is seeking a penalty for the cited violation in the
amount of $54,500. The violations pertain to a number of matters including a
fire and a RCRA inspection.

                                      -18-
<PAGE>

Department of Justice Investigation

        In March 1999, the Company received a subpoena from a federal grand jury
investigating possible violations of the federal antitrust laws in the nickel
industry. The Company is responding to the subpoena but cannot at this time
determine what further action may be taken by the grand jury or the United
States Justice Department's Antitrust Division, which is submitting evidence to
the grand jury.

Inco

        The Company has filed a lawsuit against Inco and certain of Inco's
subsidiaries (the "Sellers"), alleging that they made fraudulent and negligent
misrepresentations in connection with the IAI Acquisition and that the Sellers
breached the terms of the Stock Purchase Agreement. The Sellers have moved to
dismiss the lawsuit, and the motion is pending before the court. The Sellers
have advised the Company that in the event the court denies their motion to
dismiss, they intend to file a counterclaim against the Company seeking in
excess of $12 million, which the Seller's claim is owed by the Company under the
terms of the Stock Purchase Agreement. The Company has established a reserve of
$12 million for the Seller's potential counterclaim, although the Company
intends to vigorously defend against such a counterclaim if, in fact, it is
filed. Because of the preliminary nature of the lawsuit, it is not possible at
this time to know if the Company 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.

Item 4.  Submission of Matters to a Vote of Security Holders

None

                                      -19-
<PAGE>

                                     Part II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

        The Company's common stock is traded on the NASDAQ National Market under
the symbol "SMCX." As of March 1, 2000 there were approximately 75 shareholders
of record (including holders who are nominees for an undetermined number of
beneficial owners) of the Company's common stock. The quarterly common stock
ranges for the previous two fiscal years are indicated below:

<TABLE>
<CAPTION>
                                          1999                                1998
Quarter Ended                     High            Low                 High            Low
-------------------------------------------------------------------------------------------
<S>                              <C>            <C>                 <C>            <C>
March 31                         $ 9.31         $ 3.81              $ 18.00        $ 15.50
June 30                            7.00           3.63                18.81          14.00
September 30                       5.59           4.31                16.50          10.00
December 31                        4.19           2.63                10.44           7.00
</TABLE>

        The Company has not paid dividends on its common stock during 1999 or
1998 and does not currently pay dividends on its common stock. 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."

                                      -20-
<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, 1995, 1996, 1997, 1998, and
1999. 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
                                      1995          1996           1997           1998          1999
                                 --------------------------------------------------------------------
                                                 (in thousands, except per share data)
<S>                              <C>           <C>           <C>           <C>            <C>
Statement of Operations Data:
Net Sales                        $   132,245   $   162,300   $   186,071   $    253,226   $   602,249
Cost of goods sold                   114,752       133,828       142,029        219,110       562,486
                                 --------------------------------------------------------------------
Gross profit                          17,493        28,472        44,042         34,116        39,763
Selling, general and
  administrative expenses              5,207         5,408         6,958         16,063        59,520
                                 --------------------------------------------------------------------
Operating income (loss)               12,286        23,064        37,084         18,053       (19,757)
Interest expense                       4,727         4,079           670          4,109        25,711
Other income                               -             -          (107)          (914)       (4,026)
                                 --------------------------------------------------------------------
Income (loss) before income taxes      7,559        18,985        36,521         14,858       (41,442)
Income tax expense (benefit) (1)         354           (96)       13,519          5,018       (16,132)
                                 --------------------------------------------------------------------
Net income (loss)                $     7,205   $    19,081   $    23,002   $      9,840   $   (25,310)
                                 ====================================================================
Net income (loss) attributable
  to common shareholders         $     7,205   $    19,081   $    23,002   $      8,769   $   (31,733)
                                 ====================================================================

Net income (loss) per share -
  Basic and assuming dilution    $       .58   $      1.54   $      1.53   $        .57   $     (2.05)

Weighted average shares
  outstanding                         12,400        12,400        15,004         15,479        15,479

Balance Sheet Data (at
  period end):
Working capital                  $    35,779   $    47,450   $    68,825   $    323,764   $   283,722
Total assets                         106,945       116,492       141,750        840,154       811,287
Current portion of long-term
  debt and capital lease
  obligations                          5,270         4,296           316         13,155        21,356
Long-term debt and capital
  lease obligations (excluding
  current maturities)                 41,587        42,522           174        282,792       259,035
Subordinated notes payable to
  affiliates                           8,500         1,500             -              -         5,000
Stockholders' equity                  15,666        34,775       103,971        111,359        76,277
</TABLE>

--------------------------------
(1) Income tax expense for 1995 and 1996 differs from the amount which is
    derived by applying the combined statutory income tax rates due to the
    utilization of previously unrecognized net operating loss and other tax
    carryforwards in 1995 and 1996 and the recognition of previously
    unrecognized deferred income tax assets in 1996.

                                      -21-
<PAGE>

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 21F 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 economic slowdowns and recessions (especially in the aerospace industry,
in which a significant portion of the Company's customers are concentrated); the
availability and pricing of raw materials used in the manufacture of the
Company's products; 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.

Overview

        IAI Acquisition

        On October 28, 1998, the Company acquired the stock of the companies
which comprised the Inco Alloys International high performance nickel alloys
business unit ("IAI") of Inco Limited ("Inco") and entered into a
non-competition agreement with Inco (the "Acquisition"). The purchase price was
$328 million cash (subject to a purchase price adjustment). The purchase price
of the non-competition agreement was $37 million, consisting of $20 million cash
and $17 million fair value Series A Convertible Preferred Stock (340,000
shares). The Company financed the cash portion of the aggregate purchase price
with funds drawn under a new $375 million bank credit facility and with proceeds
from the issuance of $80 million fair value Series A Senior Convertible
Preferred Stock (1,600,000 shares) to TIMET Finance Management Company
("TIMET"), a wholly-owned subsidiary of Titanium Metals Corporation ("TMC"). In
connection with the Acquisition and related financing, the Company also incurred
fees totaling approximately $11.3 million.

        The acquisition has been accounted for under the purchase method of
accounting, and the results of operations of IAI have been included in the
consolidated statements of operations since October 28, 1998, the date of
acquisition. The initial purchase price of $328 million, subject to a purchase
price adjustment defined in the purchase agreement, was allocated during 1998 to
the assets acquired and liabilities assumed based upon their estimated fair
values. During the fourth quarter of 1999, the purchase price adjustment process
was concluded, resulting in a net decrease to the purchase price of
approximately $2 million. This purchase price adjustment was allocated to the
assets acquired. See Note 2 to the Consolidated Financial Statements included in
Item 8. "Financial Statements and Supplementary Data."

        General

        The Company manufactures high-performance nickel-based alloys and
superalloys, 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

                                      -22-
<PAGE>

products in 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; powder metallurgy superalloy
products used principally in military and the latest generation of large
commercial jet engines; and silver-based amalgamable dental alloys. The
Huntington Alloys Division manufactures nickel-based alloys in a broad range of
product forms, including 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, rod-in-coil, and tubular product
forms. The organization also includes a network of distribution facilities and
service centers throughout Europe. In 1999, the Premium Alloys Division, the
Huntington Alloys Division, and the Wiggin Alloys Division accounted for 21.1%,
53.0%, and 25.9% respectively, of the Company's net sales of $602.2 million.

        Net Sales. 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 1997, 1998 and 1999, sales by domestic businesses of the Company to
purchasers outside of the United States totaled 31%, 24% and 15% of the
Company's net sales, respectively.

        Cost of Goods Sold. The high-performance nickel-based alloy and
superalloy 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) generally account for more than 70 percent of the
Company's cost of goods sold. Fixed costs, such as indirect overhead and
depreciation, constitute the remainder of the Company's cost of goods sold. The
Company has undertaken various initiatives to maintain and improve its
efficiency and cost position over the last few years.

        A substantial portion of the Company's raw material used in production
consists of commodities, such as nickel, which are subject to wide price
fluctuations. 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. Although the Company's long-term agreements
provide for certain price adjustments to reflect changes in the price of raw
materials, once a customer places an order, the price is generally fixed and not
subject to further adjustment. In an attempt to mitigate the risks associated
with raw material price fluctuations and to match raw material purchases with
firm price product orders, 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. 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, 1999,
the Company had open purchase contracts, none of which are expected to be
settled in cash, with a notional principal value of approximately $40.0 million.
The fair value of the material covered by these contracts, based on the December
31, 1999 price quoted on the LME, was approximately $46.2 million. Unrealized
gains and losses on the contracts which have been designated, and are effective,
as hedges for firm sales commitments have been deferred.

                                      -23-
<PAGE>

        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.

Results Of Operations

        The following table sets forth, for the periods indicated, the
percentage of total sales represented by the line items reflected in the
Company's condensed consolidated income statements.

                                             1997           1998          1999
                                        --------------------------------------
Net sales                                   100.0%         100.0%        100.0%
Costs of goods sold                          76.3           86.5          93.4
                                        --------------------------------------
Gross profit                                 23.7           13.5           6.6

Selling, general and
  administrative expenses                     3.7            6.3           9.9
                                        --------------------------------------
Operating income (loss)                      20.0            7.2          (3.3)

Interest expense                               .4            1.6           4.3
Abandoned acquisition costs                    .3            -             -
Other income                                  (.4)           (.3)          (.7)
                                        --------------------------------------
                                              0.3            1.3           3.6
                                        --------------------------------------
Income (loss) before income taxes            19.7            5.9          (6.9)

Income taxes expense (benefit)                7.3            2.0          (2.7)
                                        ---------------------------------------
Net income (loss)                            12.4%           3.9%         (4.2)
                                        =======================================

Year Ended December 31, 1999 Compared With Year Ended December 31, 1998

        Net Sales. Net sales increased $349.0 million, or 137.8%, from $253.2
million in 1998 to $602.2 million in 1999. This increase is the result of the
inclusion of IAI sales for a full year, offset in part by lower average realized
selling prices due to continuing difficult pricing conditions and reduced sales
volumes for high performance metals in the commercial aerospace, chemical and
oil/petrochemical end markets.

        Export sales decreased from 24% of the Company's net sales for 1998 to
15% of the Company's net sales for 1999.

        Cost of Goods Sold. Cost of goods sold increased $343.4 million, or
156.7%, from $219.1 million in 1998 to $562.5 million in 1999. As a percentage
of net sales, cost of goods sold increased from 86.5% in 1998 to 93.4% in 1999,
primarily as a result of lower average selling prices and higher raw material
costs, primarily nickel.

        Gross Profit. Gross profit increased $5.7 million, or 16.6% from $34.1
million in 1998 to $39.8 million in 1999.

        Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $43.4 million from $16.1 million in 1998 to
$59.5 million in 1999. This increase is principally the consequence

                                      -24-
<PAGE>

of including the results of operations of IAI for a full year. Selling, general
and administrative expenses as a percentage of net sales increased from 6.3% in
1998 to 9.9% in 1999.

        Operating Income (Loss). Operating income (loss) decreased $37.9 million
from $18.1 million in 1998 to $(19.8) million in 1999. Operating income as a
percentage of net sales decreased from 7.2% in 1998 to (3.3)% in 1999.

        Interest Expense. Interest expense increased $21.6 million from $4.1
million in 1998 to $25.7 million in 1999, primarily due to the increase in
indebtedness in connection with the Acquisition.

        Income Taxes. Income tax expense decreased $21.1 million from an expense
of $5.0 in 1998 to a benefit of $(16.1) million in 1999, primarily due to the
decrease in operating income and the increase in interest expense. The effective
tax rate increased from 33.8% in 1998 to 38.9% in 1999, primarily due to
decreased benefits from the Company's foreign sales corporations.

        Net Income (Loss). Net income (loss) decreased $35.1 million from $9.8
million in 1998 to $(25.3) million in 1999. Net income as a percentage of net
sales decreased from 3.9% for 1998 to (4.2)% for 1999.

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

        Net Sales. Net sales increased $67.1 million, or 36.1%, from $186.1
million in 1997 to $253.2 million in 1998. This increase is the result of
including two months' sales of IAI, offset in part by reduced sales of the
Premium Alloys Division as a consequence of global economic pressures which
resulted in reduced volumes and increased pressure on prices during 1998, and
customer inventory adjustments in response to earlier order patterns which had
led to overstocking in customer plants.

        Export sales decreased from 31% of the Company's net sales for 1997 to
24% of the Company's net sales for 1998. This decrease is a result of the
Acquisition.

        Cost of Goods Sold. Cost of goods sold increased $77.1 million, or
54.3%, from $142.0 million in 1997 to $219.1 million in 1998. As a percentage of
net sales, cost of goods sold increased from 76.3% in 1997 to 86.5% in 1998.
This increase is the result of including IAI's results of operations for the two
months subsequent to its acquisition. For the Premium Alloys Division, cost of
goods sold, as a percentage of net sales, increased from 76.3% in 1997 to 81.3%
in 1998. This increase is due primarily to the decrease in net sales of the
division.

        Gross Profit. Gross profit decreased $10.0 million, or 22.5% from $44.1
million in 1997 to $34.1 million in 1998, as a consequence of global economic
pressures and customer inventory adjustments in response to earlier order
patterns which led to overstocking in customer plants.

        Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $9.1 million, or 130.9% from $7.0 million in
1997 to $16.1 million in 1998. Selling, general and administrative expenses as a
percentage of net sales increased from 3.7% in 1997 to 6.3% in 1998. The
increase was due to including IAI's results of operations for the two months
subsequent to the Acquisition.

        Operating Income. Operating income decreased $19.0 million, or 51.3%
from $37.1 million in 1997 to $18.1 million in 1998. Operating income as a
percentage of net sales decreased from 20.0% in 1997 to 7.2% in 1998.

        Interest Expense. Interest expense increased $3.4 million from $.7
million in 1997 to $4.1 million in 1998, primarily due to the increase in
indebtedness in connection with the Acquisition.

                                      -25-
<PAGE>

        Income Taxes. Income tax expense decreased $8.5 million from $13.5 in
1997 to $5.0 million in 1998, primarily due to the decrease in operating income
and the increase in interest expense. The effective tax rate was 37.0% in 1997
and 33.8% in 1998.

        Net Income. Net income decreased $13.2 million, or 57.2% from $23.0
million in 1997 to $9.8 million in 1998. Net income as a percentage of net sales
decreased from 12.4% for 1997 to 3.9% for 1998.

Liquidity and Capital Resources

        The Company's liquidity needs arise primarily from capital investments,
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 operating activities was $22.1 million, $21.3
million and $8.4 million for 1997, 1998 and 1999, respectively.

        Capital expenditures were $9.9 million, $20.3 million and $12.0 million
for 1997, 1998 and 1999, respectively.

        The Company's principal sources of funds are (i) funds generated from
operations; (ii) borrowings under the Company's Senior Secured Credit Agreement
with Credit Lyonnais, as agent, and other financial institutions (the "Credit
Agreement"), which the Company entered into in connection with the Acquisition;
and (iii) borrowings under the Company's Subordinated Loan Agreement (the
"Subordinated Loan Agreement") with Societe Industrielle de Materiaux Avances
("SIMA").

        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"). Proceeds from the Term Loans and a portion of the Revolving Credit
Facility were used to finance a portion of the purchase price of the IAI
Acquisition.

        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
certain restrictions described below. The Revolving Credit Facility terminates
on October 28, 2003. The amount the Company may borrow under the Credit
Agreement is reduced by the aggregate amount of any letters of credit issued for
the account of the Company.

        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 zero to 1.50%
depending on the Company's leverage ratio or (ii) the Eurodollar rate, which is
the reserve adjusted New York interbank offered rate, plus a margin of 0.75% to
2.75% depending on the Company's leverage ratio. The applicable margins for
amounts outstanding on the Tranche B Term Loan are (i) for base rate loans,
either 1.50% or 2.00% depending on the Company's leverage ratio and (ii) for
Eurodollar rate loans, 2.75% or 3.25% depending on the Company's leverage ratio.
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 as follows (in thousands):

                                      -26-
<PAGE>

                                         Tranche A     Tranche B
        Year                             Term Loan     Term Loan       Total
        ----                             ---------     ---------       -----
        2000                          $    18,560    $    1,940    $    20,500
        2001                               27,500         1,000         28,500
        2002                               36,250         1,000         37,250
        2003                               28,940        12,625         41,565
        2004                                    -        47,500         47,500
        2005                                    -        34,685         34,685

The Company has made all scheduled repayments that have come due.

        The Company is required to prepay amounts outstanding under the Credit
Agreement out of the excess cash flow of the Company. Excess cash flow is
defined as consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA"), minus the sum of debt service for the year, voluntary
prepayments of the Term Loans, capital expenditures, income tax expense,
restricted payments (as defined), and consideration for permitted acquisitions
(as defined). 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.

        The Stock Purchase Agreement regarding the Acquisition ( the "Stock
Purchase Agreement") sets forth a post-closing procedure for adjusting the
purchase price. The Company is required to prepay amounts outstanding under the
Credit Agreement in an amount equal to any adjustments to the purchase price
received by the Company or credited to the Company, whether payable in cash or
credited or offset against any obligations owed to Inco Limited and certain of
its affiliates (collectively, the "Sellers"), less the expenses reasonably
incurred by the Company in obtaining any adjustment to the purchase price.
During 1999, the Company and the Sellers followed the post-closing procedure
provided in the Stock Purchase Agreement for adjusting the purchase price. As a
result of this process and pursuant to the terms of the Credit Agreement, the
Company is required to prepay $2 million toward the Term Loans.

        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, create liens, guarantee indebtedness or enter into
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 EBITDA; consolidated leverage ratio; interest coverage
ratio and fixed charge coverage ratio.

        Effective March 31, 1999, the Company entered into the First Amendment
to Credit Agreement and Limited Waiver (the "First Amendment") which, among
other things, waived the event of default which resulted from the Company not
complying with the minimum EBITDA financial test at December 31, 1998, revised
the financial tests for 1999 and subsequent periods, adjusted the applicable
margins to those indicated above, and restricted payments of dividends on the
Series A Convertible Preferred Stock.

        At September 30, 1999, the Company was in violation of the revised
minimum EBITDA and leverage ratio financial tests. 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 SIMA, which is the owner of 38.5% of the Company's
outstanding common stock. The Subordinated Loan Agreement provides for $20
million in term loans (the "Subordinated Term Loans") and a $30 million
revolving credit

                                      -27-
<PAGE>

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 Subordinated Revolving
Credit Facility, the Company can borrow ("Subordinated Revolving Loans"), repay
(subject to certain restrictions) and re-borrow from time to time up to $30
million in the aggregate.

        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
Subordinated Term Loans mature on July 28, 2006 (the "Maturity Date"). The
Subordinated Revolving Credit Facility terminates, and any outstanding
Subordinated Revolving Loans mature, on the Maturity Date.

        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; provided that the aggregate amount outstanding under the Revolving
Credit Facility may not exceed $76 million unless Subordinated Revolving Loans
are outstanding in a principal amount of at least $30 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 as set forth in the First Amendment will again be
effective; limited capital expenditures to a maximum of $15 million in 2000 and
$7.5 million during the first six months of 2001, 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;
and prohibited payments of dividends on the Series A Convertible Preferred Stock
unless such payments are funded by the issuance and sale of stock of the Company
to SIMA or from additional advances by SIMA of Subordinated Term Loans.

        The Third Amendment also prescribes a procedure to be followed in the
event that the Company's actual consolidated EBITDA through the period ending
March 31, 2001 is less than the amounts required by the revised minimum EBITDA
financial tests. As of the end of each quarter during such period, if the
Company's actual consolidated EBITDA for the prior twelve months is less than
the minimum EBITDA levels required by the Third Amendment, any outstanding
Subordinated Revolving Loans will be converted to Subordinated Term Loans in an
amount equal to the difference between the Company's actual consolidated EBITDA
and certain amounts set forth in the Third Amendment. If the amount to be
converted exceeds the outstanding balance of Subordinated Revolving Loans, the
Company shall borrow additional Subordinated Revolving Loans to the extent
necessary to fund the amount to be converted, until SIMA's entire $30 million
commitment to make Subordinated Revolving Loans has been funded. SIMA's
obligation to make Subordinated Revolving Loans to the Company is backed by a
$30 million letter of credit. In the event that the required amount is converted
from Subordinated Revolving Loans to Subordinated Term Loans, the Company will
be deemed to have satisfied the minimum EBITDA financial test for the
twelve-month period, and the amount so converted shall be included for purposes
of calculating whether the Company has satisfied the minimum EBITDA financial
test for succeeding periods through the period ending March 31, 2001.

      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.

        At December 31, 1999, the aggregate amount outstanding under the
Revolving Credit Facility was $66 million, and there was no amount outstanding
under the Subordinated Revolving Credit Facility. At February 29,

                                      -28-
<PAGE>

2000, the aggregate amount outstanding under the Revolving Credit Facility was
$76 million, and there was no amount outstanding under the Subordinated
Revolving Credit Facility.

        In connection with the IAI acquisition, the Company issued an aggregate
of $97 million liquidation value Series A Senior Convertible Preferred Stock
(the "Senior Preferred Stock"). See "- Overview - IAI Acquisition" and Footnotes
2 and 13 to the Condensed Financial Statements in Item 8. "Financial Statements
and Supplementary Data." The Senior Preferred Stock has a par value of $0.01 per
share and a liquidation preference of $50 per share. The 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, commencing January 28, 1999
(each a "Dividend Payment Date"). The Company has the right to defer payment of
accumulated dividends, and has exercised this right to defer payment on each
Dividend Payment Date since the issuance of the Senior Preferred Stock. As of
December 31, 1999, the total amount of dividends accrued and unpaid was $7.5
million. In the event that the Company defers payment of dividends for more than
six quarterly dividend periods, the number of directors constituting the
Company's Board of Directors will be increased by at least two members, and the
holders of the Senior Preferred Stock will have the special right, voting
separately as a single class, to elect two 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."

        The Company expects that cash and cash equivalents on hand, cash flow
from operations and borrowing capacity under the Credit Agreement and
Subordinated Loan Agreement will be adequate to meet its anticipated operating
requirements, and planned capital expenditures over the next 12 months. See " -
Forward Looking Statements."

Backlog

        As of December 31, 1999, the Company's backlog orders aggregated
approximately $218.4 million, compared to $298.1 million at December 31, 1998.
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, 1999 are expected to be shipped within the 12 months beginning
January 1, 2000. 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.

                                      -29-
<PAGE>

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 Year 2000

        In prior years, the Company discussed the nature and progress of its
comprehensive enterprise-wide "Year 2000" program to become Year 2000 compliant.
The Company's Year 2000 efforts focused primarily on four areas of potential
impact: internal information technology systems ("IT"); internal process control
systems; products and services provided by the Company; and the readiness of
significant third parties with whom the Company has material business
relationships. As of December 31, 1999, the Company had completed all of its
Year 2000 compliance efforts on critical domestic and international systems in
each of its respective business units. As a result of these remediation and
planning programs, the Company experienced no significant disruptions as a
result of the Year 2000 date change, and the Company is not aware of any
problems resulting from Year 2000 issues, either with its IT systems, internal
process control systems, or products. Likewise, the Company is currently not
aware of any significant Year 2000 or similar problems that have arisen for its
key customers and suppliers. The Company will continue to monitor Year 2000
risks and issues for all business units, customers and suppliers. Problems
encountered will be resolved using resources normally available to the Company.
There can be no assurance that the Company has fully and accurately assessed its
Year 2000 readiness or of the effectiveness of the Company's corrective actions,
nor can there be any assurance that the Company's customers and suppliers have
fully and accurately assessed their Year 2000 readiness or of the effectiveness
of their corrective actions. Such interruptions, if they were to occur, could
have a material adverse affect upon the consolidated results of operations or
financial condition of the Company.

        The costs associated with the Company's internal IT readiness actions
are a combination of incremental external spending and the use of existing
internal resources. As of December 31, 1999, the Company estimates that it had
incurred approximately $28.0 million for its Year 2000 efforts. The Company does
not expect that any future expenditures related to the Year 2000 issue will be
material. The statements set forth herein concerning the Year 2000 issue which
are not historical facts are forward looking statements. There can be no
guarantee that any estimates or other forward looking statements will be
achieved and actual results could differ significantly from those contemplated.

Impact of New Accounting Standards

        The Company adopted SOP 98-1, "Accounting For the Costs of Computer
Software Developed For or Obtained For Internal Use," which requires the
capitalization of certain costs incurred in connection with developing or
obtaining software for internal use, effective January 1, 1999. The adoption of
SOP 98-1 resulted in the Company capitalizing certain costs totaling $1,359,000
which, under the Company's prior policies, would have been expensed as incurred.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company is
required to adopt SFAS No. 133 in 2001. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments

                                      -30-
<PAGE>

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 (1) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or a
firm commitment (a fair value hedge), (2) a hedge of the exposure to variable
cash flows of a forecasted transaction (a cash flow hedge), or (3) a hedge of
the foreign currency exposure of a net investment in a foreign operation (a
foreign currency hedge), will determine 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 impact of SFAS No. 133 on the
Company's consolidated financial statements has not yet been determined.

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. 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 consist 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 $75,000.
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.

        At December 31, 1999, the Company has approximately $276 million of
variable rate long-term debt. The Company has entered into interest swap
agreements to manage a portion of its exposure to interest rate changes. At
December 31, 1999, the Company had outstanding interest rate swap agreements
with a notional value of approximately $130 million, maturing in September 2003,
which effectively fix the interest rates on the underlying debt at a weighted
average 5.86% plus the applicable margins based on the Company's leverage ratio.
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 $146 million of debt that is not covered by the swap agreements by
approximately $1.5 million.

                                      -31-
<PAGE>

Item 8.  Financial Statements and Supplementary Data

                   Index to Consolidated Financial Statements

                                                                Page in
                                                               Form 10-K
                                                               ---------
Report of Independent Auditors                                    33

Consolidated Balance Sheets as of
  December 31, 1998 and 1999                                      34

Consolidated Statements of Operations for the
  Years Ended December 31, 1997, 1998 and 1999.                   35

Consolidated Statements of Shareholders'
  Equity for the Years Ended December 31,
  1997, 1998 and 1999                                             36

Consolidated Statements of Cash Flows for the
  Years Ended December 31, 1997, 1998 and 1999                    37

Notes to Consolidated Financial Statements                        38

                                      -32-
<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, 1998 and 1999, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. 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, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 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.

                                        /s/ Ernst & Young LLP
                                        ---------------------
Buffalo, New York
February 10, 2000

                                      -33-
<PAGE>

                           Special Metals Corporation
                           Consolidated Balance Sheets
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                     December 31
                                                               1998              1999
                                                          --------------------------------
<S>                                                       <C>               <C>
Assets
Current assets:
  Cash and cash equivalents                               $       39,622    $        9,064
  Restricted deposits                                                352                 -
  Accounts receivable - trade, less
    allowance for doubtful accounts of
    $3,179 and $2,894, respectively                              130,696           120,643
  Accounts receivable - affiliates                                 6,938            12,529
  Inventories                                                    271,812           262,474
  Prepaid expenses and other current
    assets                                                        16,991            25,746
                                                          --------------------------------
Total current assets                                             466,411           430,456
Property, plant and equipment                                    309,025           278,503
Non-competition agreement, net of
  accumulated amortization of $617 and
  $4,317, respectively                                            36,383            32,683
Other assets                                                      28,335            69,645
                                                          --------------------------------
Total assets                                              $      840,154     $     811,287
                                                          ================================
Liabilities and Shareholders' Equity
Current liabilities:
  Accounts payable - trade                                $       46,313     $      64,382
  Accounts payable - affiliates                                      530             1,660
  Accrued liabilities                                             79,486            55,611
  Notes payable                                                    3,163             3,725
  Current portion of long-term debt
    and capital lease obligations                                 13,155            21,356
                                                          --------------------------------
Total current liabilities                                        142,647           146,734
Long-term debt and capital lease
    obligations                                                  282,792           259,035
Subordinated notes payable to affiliate                                -             5,000
Postretirement benefits obligation                               188,748           194,524
Other long-term liabilities                                       16,537            25,223
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                         98,071           104,494

Shareholders' equity:
  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                            (1,911)           (5,260)
  Retained earnings                                               37,403             5,670
                                                          --------------------------------
Total shareholders' equity                                       111,359            76,277
                                                          --------------------------------
Total liabilities and shareholders' equity                $      840,154     $     811,287
                                                          ================================
</TABLE>

See accompanying notes.

                                      -34-
<PAGE>

                           Special Metals Corporation
                      Consolidated Statements of Operations
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                          Year ended December 31
                                                   1997            1998            1999
                                              ----------------------------------------------
<S>                                           <C>             <C>             <C>
Net sales to non-affiliates                   $      175,570  $      243,457  $      552,026
Net sales to affiliates                               10,501           9,769          50,223
                                              ----------------------------------------------
                                                     186,071         253,226         602,249

Cost of goods sold                                   142,029         219,110         562,486
                                              ----------------------------------------------
Gross profit                                          44,042          34,116          39,763

Selling, general and
  administrative expenses                              6,958          16,063          59,520
                                              ----------------------------------------------
Operating income (loss)                               37,084          18,053         (19,757)

Other expense (income):
  Interest expense                                       670           4,109          25,711
  Abandoned acquisition
  costs                                                  554               -               -
  Other                                                 (661)           (914)         (4,026)
                                              ----------------------------------------------
                                                         563           3,195          21,685
                                              ----------------------------------------------
Income (loss) before
  income taxes                                        36,521          14,858         (41,442)

Income tax expense
  (benefit)                                           13,519           5,018         (16,132)
                                              ----------------------------------------------
Net income (loss)                                     23,002           9,840         (25,310)

Accumulated preferred
  stock dividends                                          -           1,071           6,423
                                              ----------------------------------------------
Net income (loss) attributable
  to common shareholders                      $       23,002  $        8,769  $      (31,733)
                                              ==============================================
Earnings (loss) per common share,
  basic and assuming dilution                 $         1.53  $         0.57  $        (2.05)
                                              ==============================================
</TABLE>

See accompanying notes.

                                      -35-
<PAGE>

                           Special Metals Corporation
                 Consolidated Statements of Shareholders' Equity
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                   Accumulated
                                                                      Other
                                                        Paid-in   Comprehensive    Retained
                                  Shares       Par      Surplus       Loss         Earnings     Total
                                 ---------------------------------------------------------------------
<S>                               <C>       <C>       <C>           <C>            <C>       <C>
Balance -  December 31, 1996      12,400    $  124    $  29,716     $    (697)     $  5,632  $ 34,775

Sale of common stock               3,075        31       45,926             -             -    45,957
Common stock
  grants                               2         -           36             -             -        36
Comprehensive income:
  Net income                           -         -            -             -        23,002    23,002
  Minimum pension liability
    adjustment, net of
    tax of $161                        -         -            -           201             -       201
                                                                                             ---------
  Comprehensive income                                                                         23,203
                                 ---------------------------------------------------------------------
Balance - December 31, 1997       15,477       155       75,678          (496)       28,634   103,971

Common stock grants                    2         -           34             -             -        34
Comprehensive income:
  Net income                           -         -            -             -         9,840     9,840
  Minimum pension liability
    adjustment, net of
    tax of ($659)                      -         -            -        (1,075)            -    (1,075)
  Foreign currency translation
    adjustment                         -         -            -          (340)            -      (340)
                                                                                             ---------
    Comprehensive income                                                                        8,425

Accumulated preferred stock
  dividends                            -         -            -             -        (1,071)   (1,071)
                                 ---------------------------------------------------------------------
Balance - December 31, 1998       15,479       155       75,712        (1,911)       37,403   111,359

Comprehensive income:
  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                                                                        (28,659)

Accumulated preferred
  stock dividends                      -         -            -             -        (6,423)   (6,423)
                                 ---------------------------------------------------------------------
Balance -  December 31, 1999      15,479    $  155    $  75,712     $  (5,260)     $  5,670  $ 76,277
                                 =====================================================================
</TABLE>

See accompanying notes.

                                      -36-
<PAGE>

                           Special Metals Corporation
                      Consolidated Statements of Cash Flows
                                 (In thousands)

<TABLE>
<CAPTION>
                                                          Year ended December 31
                                                   1997            1998            1999
                                              ----------------------------------------------
<S>                                           <C>             <C>             <C>
Operating Activities
Net income (loss)                             $       23,002  $        9,840  $      (25,310)
Adjustments to reconcile net
  income (loss) to net cash
  provided by operating activities:
  Depreciation and amortization                        3,612           8,222          37,260
  Provision for deferred income
    taxes                                                584             570             124
  Other adjustments                                       38              34            (145)
  Change in assets and liabilities,
    net of effects from businesses
    acquired:
    Accounts receivable                               (1,583)         25,739           1,111
    Inventories                                       (7,841)          9,756           7,128
    Prepaid expenses and other
    current assets                                       166             446            (694)
    Income taxes                                         306          (5,653)        (15,858)
    Accounts payable - trade                           2,832         (11,883)         28,867
    Accrued liabilities                                 (108)        (13,216)        (30,259)
    Postretirement benefits
    obligation                                           567            (418)          5,652
    Other long-term liabilities                          508          (2,105)            501
                                              ----------------------------------------------
Net cash provided by operating
  activities                                          22,083          21,332           8,377

Investing Activities
Payments for businesses acquired,
  net of cash acquired                                     -        (320,010)              -
Payment for covenant not to
  compete                                                  -         (20,000)              -
Capital expenditures                                  (9,935)        (20,264)        (12,004)
Capitalized software                                       -            (681)        (14,999)
Net change in restricted deposits                     (1,161)            809             352
Proceeds from sale of fixed assets                         8               -               -
                                              ----------------------------------------------
Net cash used in investing
  activities                                         (11,088)       (360,146)        (26,651)

Financing Activities
Proceeds from sale of preferred stock                      -          80,000               -
Proceeds from sale of common stock                    45,957               -               -
Proceeds from term loans and
  other long-term debt                                     -         225,000           2,000
Borrowings under revolving credit
  facilities                                               -          70,000          24,000
Repayment of revolving credit
  facilities                                         (26,000)              -         (28,000)
Repayment of term loans and other
  long-term debt                                     (20,319)         (2,910)        (12,897)
Proceeds from (repayment of)
  subordinated notes payable to
  affiliates                                          (1,500)              -           5,000
Financing costs                                         (232)         (5,781)         (1,979)
                                              ----------------------------------------------
Net cash (used in) provided by
  financing activities                                (2,094)        366,309         (11,876)
Net effect of exchange rate
  changes on cash                                          -            (110)           (408)
                                              ----------------------------------------------
Net increase (decrease) in cash                        8,901          27,385         (30,558)
Cash and cash equivalents at
  beginning of year                                    3,336          12,237          39,622
                                              ----------------------------------------------
Cash and cash equivalents at end
  of year                                     $       12,237  $       39,622  $        9,064
                                              ==============================================
</TABLE>

See accompanying notes.

                                      -37-
<PAGE>

                           Special Metals Corporation
                   Notes to Consolidated Financial Statements
                        December 31, 1997, 1998 and 1999

1. Accounting Policies

Description of Business

Special Metals Corporation (the Company) is a manufacturer of high-performance,
nickel-based alloys and superalloys. The Company sells its products world-wide
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.

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 Translations

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 income (loss) in the
shareholders' equity section of the balance sheet.

Revenue Recognition

Revenue from sales of product is recognized at the time of shipment to the
customer. The Company periodically enters into long-term sales contracts, the
terms of which may include firm prices. The Company recognizes revenues on those
sales contracts as the related product is shipped. 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.

Cash and Cash Equivalents

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

Restricted Deposits

The Company is required to maintain on deposit with a broker, a margin account
to cover unrealized losses on its forward purchase contracts in excess of
certain specified amounts. Such amounts were recorded on the Company's balance
sheet as restricted deposits.

                                      -38-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

1. Accounting Policies (continued)

Inventories

Inventories are valued at the lower of cost or market. The cost of approximately
48% and 54% of 1998 and 1999 inventories, respectively, 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 methods 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.

Computer Software Costs

The Company adopted SOP 98-1, "Accounting For the Costs of Computer Software
Developed For or Obtained For Internal Use," which requires the capitalization
of certain costs incurred in connection with developing or obtaining software
for internal use, effective January 1, 1999. The adoption of SOP 98-1 resulted
in the Company capitalizing certain internal labor costs totaling $1,359,000
which, under the Company's prior policies, would have been expensed as incurred.
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
$2,983,000 and $17,328,000, net of accumulated amortization of $65,000 and
$1,358,000 at December 31, 1998 and 1999, respectively. Amortization of
capitalized internal use software development costs totaled $65,000 and
$1,293,000 during 1998 and 1999, respectively.

                                      -39-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

1. Accounting Policies (continued)

Impairment of Long-Lived Assets

The Company reviews asset carrying amounts whenever events or circumstances
indicate that such carrying amounts may not be recoverable. When 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
$65 million at December 31, 1999, 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 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, 1997, 1998 and
1999 was $1,906,000, $2,920,000, and $4,418,000, respectively.

                                      -40-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

1. Accounting Policies (continued)

Financial Instruments

As part of its risk management strategy, the Company periodically purchases
forward contracts to manage its exposure to changes in commodity prices,
primarily nickel. 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 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. The Company does not engage in any foreign currency
activities which have not been specifically designated as hedges.

Forward contracts are marked to market with unrealized gains and losses deferred
and recognized in earnings when realized as an adjustment to cost of goods sold
(the deferral accounting method). Unrealized changes in fair value of contracts
not effective as hedges are recognized in income. Historically, the Company has
not closed any contracts prior to the execution of the underlying sale
transaction, nor have any of the underlying sales transactions failed to occur.

The Company has also entered into interest rate swap agreements to manage its
exposure to interest rate fluctuations. Net payments or receipts under the swap
agreements are recorded as adjustments to interest expense.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company is
required to adopt SFAS No. 133 in 2001. 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,
a cash flow hedge, or a foreign currency hedge, will determine 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 impact of SFAS No.
133 on the Company's consolidated financial statements has not yet been
determined.

Reclassifications

Certain reclassifications have been made within the 1998 financial statements to
conform to the 1999 presentation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

                                      -41-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

2. Inco Alloys Acquisition

On October 28, 1998, the Company acquired the stock of the companies which
comprised the Inco Alloys International high performance nickel alloys business
unit ("IAI") of Inco Limited ("Inco") and entered into a non-competition
agreement with Inco (the "Acquisition"). IAI produces high-performance
nickel-based alloys in various forms, including sheet, strip, foil, plate,
tubulars, billet, bar, rod, extruded shapes, wire rod and welding products.
IAI's products are used in the aerospace, chemical processing, environmental,
off-shore drilling, industrial gas turbine, and automotive markets. The purchase
price was $328 million cash (subject to a purchase price adjustment). The
purchase price of the non-competition agreement was $37 million, consisting of
$20 million cash and $17 million fair value Series A Convertible Preferred Stock
(340,000 shares). The Company financed the cash portion of the aggregate
purchase price with funds drawn under a new $375 million bank credit facility
and with the proceeds from the issuance of $80 million fair value Series A
Convertible Preferred Stock (1,600,000 shares) to TIMET Finance Management
Company, a wholly-owned subsidiary of Titanium Metals Corporation. In connection
with the Acquisition and the related financing, the Company also incurred fees
totaling approximately $11.3 million.

The Acquisition has been accounted for under the purchase method of accounting,
and the results of operations of IAI have been included in the consolidated
statements of operations since the date of acquisition. The initial purchase
price of $328 million, subject to a purchase price adjustment defined in the
purchase agreement, was allocated during 1998 to the assets acquired and
liabilities assumed based upon their estimated fair values. During the fourth
quarter of 1999, the purchase price adjustment process was concluded, resulting
in a net decrease to the purchase price of approximately $2 million. This
purchase price adjustment was allocated to the assets acquired.

The following unaudited pro forma information presents the results of operations
of the Company as if the Acquisition had taken place at the beginning of the
respective periods. These pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the Acquisition occurred on
the date indicated, or which may result in the future.

<TABLE>
<CAPTION>
                                                                      December 31
                                                                 1997              1998
                                                          ---------------------------------
                                                       (In thousands, except per share amounts)
<S>                                                       <C>               <C>
Net sales                                                 $      854,541    $      761,095
Net income                                                        41,349            13,802
Net income attributable to common shareholders                    34,923             7,376
Net income per share:
  Basic                                                             2.33              0.48
  Diluted                                                           1.98              0.48
</TABLE>

                                      -42-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

3. Inventories

Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                      December 31
                                                                 1998              1999
                                                          ---------------------------------
                                                                    (In thousands)
<S>                                                       <C>               <C>
Raw materials and supplies                                $       67,198    $       65,167
Work-in-process                                                  151,136           133,436
Finished goods                                                    57,478            73,955
                                                          --------------------------------
                                                                 275,812           272,558
Adjustment to LIFO cost                                           (4,000)          (10,084)
                                                          --------------------------------
                                                          $      271,812    $      262,474
                                                          ================================
</TABLE>

4. Property, Plant and Equipment

Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                      December 31
                                                                 1998              1999
                                                          ---------------------------------
                                                                    (In thousands)
<S>                                                       <C>               <C>
Land                                                      $        7,379    $        7,370
Buildings and improvements                                        78,665            92,557
Machinery and equipment                                          230,148           239,026
Furniture and fixtures                                             2,798             2,832
Construction-in-progress                                          37,022            10,972
                                                          ---------------------------------
                                                                 356,012           352,757
Less accumulated depreciation                                     46,987            74,254
                                                          ---------------------------------
                                                          $      309,025    $      278,503
                                                          ================================
</TABLE>

Depreciation expense for the years ended December 31, 1997, 1998 and 1999 was
$3,429,000, $6,500,000 and $28,473,000, respectively.

                                      -43-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

5. Accrued Liabilities

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                                      December 31
                                                                 1998              1999
                                                          ---------------------------------
                                                                    (In thousands)
<S>                                                       <C>               <C>
Accrued payroll and employee benefits                     $       34,077    $       26,828
Amounts due to former affiliates                                  15,706            11,145
Other                                                             29,793            17,638
                                                          ---------------------------------
                                                          $       79,576    $       55,611
                                                          =================================
</TABLE>

6. Long-Term Debt and Capital Leases

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                      December 31
                                                                 1998              1999
                                                          ---------------------------------
                                                                    (In thousands)
<S>                                                       <C>               <C>
Credit Agreement:
  Term Loans
    Tranche A                                             $      122,500    $      111,250
    Tranche B                                                     99,750            98,750
  Revolving Credit Facility                                       70,000            66,000
Capital leases                                                     2,188             1,550
Other                                                              1,509             2,841
                                                          ---------------------------------
                                                                 295,947           280,391
Current portion                                                   13,155            21,356
                                                          ---------------------------------
                                                          $      282,792    $      259,035
                                                          =================================
</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").

                                      -44-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

6. 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, including $20 million of term loans and
up to an additional $30 million on a revolving basis (see Note 9). The
amendments, among other things, reduced the availability of the Revolving Credit
Facility from $150 million to a maximum of $100 million; waived the events of
default which resulted from the Company not complying with certain financial
covenants; adjusted the applicable interest rate margins; restricted payments of
dividends on the Series A Convertible Preferred Stock; suspended the existing
financial covenants until the quarter ending June 30, 2001; limit capital
expenditures for the year 2000 and the first six months of 2001 to $15 million
and $7.5 million, respectively; and added a minimum quarterly earnings before
interest, taxes, depreciation and amortization ("EBITDA") requirement of $25
million for the 12 months ending December 31, 1999 increasing in a number of
steps to $55 million for the 12 months ending March 31, 2001. Also, under the
amended terms of the Credit Agreement, no borrowings in excess of $76 million
will be permitted under the Revolving Credit Facility until the additional $30
million in subordinated revolving loans from the shareholder has been advanced.

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 above. The Revolving Credit Facility matures 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, 1999 was
9.17% (7.07% at December 31, 1998). 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 the excess cash flow of the Company. The
Company is also required to prepay amounts equal to any adjustments received by
the Company or credited to the Company as a result of the purchase price
adjustment process in connection with the Acquisition. As a result, the Company
is required to prepay $2 million toward the Term Loans. 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.

                                      -45-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

6. Long-Term Debt and Capital Leases (continued)

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 existing financial covenants have been suspended until the quarter
ending June 30, 2001.

Scheduled principal repayments on long-term debt for the next five years and
thereafter are as follows (in thousands):

         2000                                             $      21,356
         2001                                                    29,130
         2002                                                    37,586
         2003                                                   106,985
         2004                                                    47,887
         Thereafter                                              37,447
                                                          -------------
                                                          $     280,391
                                                          =============

7. 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 $460,000, $1,290,000 and $5,860,000 for the
years ended December 31, 1997, 1998, 1999, respectively. The following amounts
represent future minimum payments under operating leases with initial or
remaining noncancelable terms extending beyond one year (in thousands):

    2000                                                  $       3,136
    2001                                                          1,749
    2002                                                            668
    2003                                                            125
    2004                                                             16

                                      -46-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

8. 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
                                           1998           1999          1998           1999
                                      ---------------------------  ---------------------------
                                                           (In thousands)
<S>                                   <C>           <C>            <C>           <C>
Change in Benefit Obligation
Benefit obligation at beginning
  of year                             $      41,174 $     338,526  $       5,506 $     197,880
Benefit obligations of businesses
  acquired                                  291,026             -        191,825             -
Service cost                                  3,179         9,450            491         3,310
Interest cost                                 6,107        21,459          2,383        11,420
Effect of amendments                            337         2,032           (663)         (604)
Actuarial loss (gain)                         3,238       (33,007)            53       (37,261)
Benefits paid                                (5,901)      (25,800)        (1,715)       (8,671)
Currency translation impact                    (634)       (3,412)             -             -
Curtailment                                       -         2,993              -             -
                                      ---------------------------  ---------------------------
Benefit obligation at end
  of year                                   338,526       312,241        197,880       166,074

Change in Plan Assets
Fair value of plan assets at
  beginning of year                          39,475       355,694              -             -
Assets of businesses acquired               296,453             -              -             -
Actual return on plan assets                 25,432        41,162              -             -
Employer contribution                           918         3,633              -             -
Benefits paid                                (5,901)      (25,800)             -             -
Currency translation impact                    (683)       (3,854)             -             -
                                      ---------------------------  ---------------------------
Fair value of plan assets
  at end of year                            355,694       370,835              -             -
                                      ---------------------------  ---------------------------

Funded status                                17,168        58,594       (197,880)     (166,074)
Unrecognized transition
  obligation                                      -             -          2,554         2,372
Unrecognized actuarial gain                 (13,226)      (56,830)          (484)      (37,289)
Unrecognized prior service
  cost                                         (764)        1,282             62          (533)
                                      ---------------------------  ---------------------------
Net amount recognized                 $       3,178 $       3,046  $    (195,748)$    (201,524)
                                      ===========================  ===========================
</TABLE>

                                      -47-
<PAGE>

                              Special Metals Corporation
                Notes to Consolidated Financial Statements (continued)


8. Retirement Plans (continued)

<TABLE>
<CAPTION>
                                                                              Other
                                             Pension Benefits        Postretirement Benefits
                                           1998           1999          1998           1999
                                      ---------------------------  ---------------------------
                                                           (In thousands)
<S>                                   <C>           <C>            <C>           <C>
Amounts recognized in the statement
  of financial position consist of:
Accrued benefit liability:
  Other assets                        $       5,469 $       8,173  $           - $           -
  Accrued liabilities                        (4,969)       (5,267)        (7,000)       (7,000)
  Postretirement benefits obligation              -             -       (188,748)     (194,524)
                                      ---------------------------  ---------------------------
                                                500         2,906       (195,748)     (201,524)
Intangible asset                                144           123              -             -
Accumulated other comprehensive
  income                                      1,571            11              -             -
Deferred tax effect of equity charge            963             6              -             -
                                      ---------------------------  ---------------------------
Net amount recognized                 $       3,178 $       3,046  $    (195,748)$    (201,524)
                                      ===========================  ===========================
Weighted-average assumptions as of
  December 31
Discount rate                                   6.5%          7.5%           6.5%          7.5%
Expected return on plan assets                  9.0%          9.0%           n/a           n/a
Rate of compensation increase            3.5% - 5.5%     3.5%-5.5%           n/a           n/a
</TABLE>

During 1999, the Company instituted an early retirement incentive program as
part of a workforce reduction plan. This early retirement incentive program
resulted in a curtailment loss of $2,993,000.

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 $31,395,000 and $21,464,000, respectively, as of December 31,
1999 and $52,808,000 and $37,839,000, respectively, as of December 31, 1998.

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 $36,320,000 and $25,601,000, respectively, as of December 31,
1999 and $58,260,000 and $41,564,000, respectively, as of December 31, 1998.

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.

                                      -48-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)


8. Retirement Plans (continued)

Net periodic benefit cost included the following:

<TABLE>
<CAPTION>
                                                          Year ended December 31
                                                   1997            1998            1999
                                             -----------------------------------------------
                                                              (In thousands)
<S>                                          <C>             <C>             <C>
Pension benefits:
Service cost - benefits earned
  during the period                          $         1,459 $         3,179 $         9,450
Interest cost on projected benefit
  obligation                                           2,577           6,107          21,459
Curtailment                                                -               -           2,993
Expected return on plan assets                        (2,749)         (7,947)        (30,773)
Amortization of unrecognized prior
  service cost                                          (181)           (152)            (14)
Recognized actuarial loss                                  -               -             173
                                             -----------------------------------------------
Net periodic pension benefit cost            $         1,106 $         1,187 $         3,288
                                             ===============================================

Other postretirement benefits:
Service cost - benefits earned
  during the period                          $            65 $           491 $         3,310
Interest cost on projected
  benefit obligation                                     365           2,383          11,420
Amortization of unrecognized portion
  of net obligation at transition                        223             183             183
Amortization of unrecognized prior
  service cost                                            20              15              (9)
Recognized actuarial loss                                (25)            (23)             (3)
                                             -----------------------------------------------
Net periodic postretirement benefit cost     $           648 $         3,049 $        14,901
                                             ===============================================
</TABLE>

For measuring the postretirement benefit obligation, an annual rate of increase
in the net medical claims cost of 8.5% - 9.0% was assumed. The rate was assumed
to decrease gradually to 5.5% in 2005 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                             $      2,194           $      (1,878)
Effect on postretirement
  benefit obligation                                         20,878                 (18,477)
</TABLE>

                                      -49-
<PAGE>

                              Special Metals Corporation
                Notes to Consolidated Financial Statements (continued)

8. 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 $290,000, $760,000 and $2,100,000 in
1997, 1998, and 1999, respectively.

9. Related Party Transactions

The Company and an affiliate share common insurance coverage for product
liability related, 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 $200,000, $204,000, and $1,123,000 for the
years ended December 31, 1997, 1998, and 1999 respectively.

The Company made purchases of products used in the manufacturing process from
affiliates totaling $3,960,000 during the year ended December 31, 1999 ($0 for
1997 and 1998).

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 cancellable 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 in connection
with this agreement during 1997, 1998 and 1999.

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 term loans and up to an additional $30 million on a
revolving basis. 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 term loan on a quarterly
basis. 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
notes payable have been classified as long-term. The amount outstanding at
December 31, 1999 under the term loan portion was $5,000,000. No amounts were
outstanding under the revolving loan portion at December 31, 1999. The weighted
average interest rate at December 31, 1999 was 7.13%.

Subsequent to December 31, 1999, the Company borrowed an additional $15,000,000
under the term loan portion of the Subordinated Loan Agreement.

                                      -50-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

10. Income Taxes

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

<TABLE>
<CAPTION>
                                                          Year ended December 31
                                                   1997            1998            1999
                                             -----------------------------------------------
                                                              (In thousands)
<S>                                          <C>            <C>              <C>
Domestic                                     $      36,521  $        13,967  $       (43,347)
Foreign                                                  -              891            1,905
                                             -----------------------------------------------
                                             $      36,521  $        14,858  $       (41,442)
                                             ===============================================
</TABLE>

Income tax (benefit) expense consists of the following:

<TABLE>
<CAPTION>
                                                          Year ended December 31
                                                   1997            1998            1999
                                             -----------------------------------------------
                                                              (In thousands)
<S>                                          <C>            <C>              <C>
Current:
  Federal                                    $      11,665  $         4,856  $       (13,681)
  State                                              1,270              271           (1,180)
  Foreign                                                -              784           (1,395)
                                             -----------------------------------------------
                                                    12,935            5,911          (16,256)
Deferred:
  Domestic                                             584             (845)          (1,622)
  Foreign                                                -              (48)           1,746
                                             -----------------------------------------------
                                                       584             (893)             124
                                             -----------------------------------------------
                                             $      13,519  $         5,018  $       (16,132)
                                             ===============================================
</TABLE>

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
                                                   1997            1998            1999
                                             -----------------------------------------------
                                                              (In thousands)
<S>                                          <C>            <C>              <C>
Income before income taxes at 35%            $      12,782  $         5,200  $       (14,505)
Permanent income tax disallowances                      64              116              339
State taxes, net of federal effect                   1,321              197           (1,180)
Benefit of foreign sales corporation                  (700)            (653)            (442)
Taxes on foreign income in excess of
  Federal rate                                           -               62             (681)
Foreign losses with no tax benefit                       -                -              623
Other                                                   52               96             (286)
                                             -----------------------------------------------
                                             $      13,519  $         5,018  $       (16,132)
                                             ===============================================
</TABLE>

                                      -51-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

10. Income Taxes (continued)

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

<TABLE>
<CAPTION>
                                                                      December 31
                                                                1998              1999
                                                          --------------------------------
                                                                    (In thousands)
<S>                                                       <C>               <C>
Deferred tax liabilities:
  Property, plant and equipment                           $      (70,852)   $      (49,206)
  Inventory                                                       (7,360)          (11,997)
  Other                                                           (4,084)           (4,470)
                                                          --------------------------------
Gross deferred tax liabilities                                   (82,296)          (65,673)

Deferred tax assets:
  Employee retirement plans                                       75,447            74,434
  Accrued liabilities                                             18,454            12,385
  New York State investment tax credit
    carryforward                                                   1,016             1,040
  Other                                                            2,883             2,865
                                                          --------------------------------
Gross deferred tax assets                                         97,800            90,274
                                                          --------------------------------
Net deferred taxes                                        $       15,504    $       25,051
                                                          ================================
</TABLE>

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

<TABLE>
<CAPTION>
                                                                      December 31
                                                                1998              1999
                                                          --------------------------------
                                                                    (In thousands)
<S>                                                       <C>               <C>
Prepaid expenses and other current assets                 $       12,382    $        5,291
Other assets                                                       3,122            26,552
Other long-term liabilities                                            -            (6,792)
                                                          --------------------------------
Net deferred taxes                                        $       15,504    $       25,051
                                                          ================================
</TABLE>

                                      -52-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

11. Fair Value of Financial Instruments

Forward Purchase Contracts

As part of its risk management strategy, the Company periodically purchases
forward contracts, some of which may be settled in cash, to manage its exposure
to changes in commodity prices, primarily nickel. The contracts mature
principally in 2000. At December 31, 1999, the Company had open purchase
contracts, none of which are expected to be settled in cash, with a notional
principal value of approximately $40,048,000. The fair value of the material
covered by these contracts, based on the December 31, 1999 price quoted on the
London Metal Exchange, was approximately $46,238,000. At December 31, 1999,
substantially all of the forward contracts were designated and were effective as
hedges for firm price sales agreements the Company had entered into. Unrealized
gains and losses on these forward contracts have been deferred.

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, 1999, the Company had the
following outstanding forward contracts to buy or sell currencies at the
following rates:

     o Buy $2,338,000 at an average rate to GBP of $1.66
     o Buy $1,000,000 at an average rate to FF of $0.16
     o Sell DM 1,173,000 at an average rate to USD of DM 1.81
     o Sell ITL 579,000,000 at an average rate to GBP of ITL 2,943
     o Sell EUR 945,000 at an average rate to USD of EUR 0.97
     o Sell EUR 200,000 at an average rate to JPY of EUR 0.008
     o Sell EUR 522,000 at an average rate to GBP of EUR 1.51

The fair value of forward currency and currency option contracts for any
individual currency and in the aggregate is not significant.

Interest Rate Swap Agreements

To manage its exposure to interest rate fluctuations, the Company has interest
rate swap agreements with a notional amount of $65,000,000 through September 15,
2003 based on LIBOR at 5.95% and $65,000,000 through September 15, 2003 based on
LIBOR at 5.76%. Under these agreements, the Company pays interest at fixed rates
based upon the established LIBOR rates plus the applicable margins set forth in
the Credit Agreement, and receives payments based upon the variable rates. Net
payments or receipts under the swap agreements are recorded as adjustments to
interest expense. The fair value of the swap agreements is approximately
$1,000,000.

                                      -53-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

11. Fair Value of Financial Instruments (continued)

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 instrument is comprised
of notes that are repriced on a short-term basis. The fair values of the
Company's off-balance-sheet instruments are based on the settlement of the
agreements.

12. 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 $70,000 per year. The total estimated
costs of approximately $2.0 million have been discounted at an annual rate of 5%
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
perform contingent 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
$1.8 million. The Company has reserved a total of approximately $2.9 million
with respect to the Ludlow Landfill and North Gravel Pit.

                                      -54-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

12. Commitments and Contingencies (continued)

Environmental (continued)

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.

One of the Company's domestic subsidiaries (Huntington Alloys, "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 the Company's Huntington, 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. The Company is not able to reasonably
estimate what the ultimate loss, if any, will be with respect to these matters.

The Company is also a defendant in several actions by plaintiffs seeking damages
for alleged health problems resulting from exposure to manganese in welding
products, and one action in which the plaintiff alleges exposure to manganese
originating in wastewater from the Company's Huntington, West Virginia facility.
The cases are at various stages of pleading and discovery. 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.

                                      -55-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

12. Commitments and Contingencies (continued)

Other

In March 1999, the Company received a subpoena from a federal grand jury
investigating possible violations of the federal antitrust laws in the nickel
industry. The Company is responding to the subpoena but cannot at this time
determine what further action may be taken by the grand jury or the United
States Justice Department's Antitrust Division, which is submitting evidence to
the grand jury.

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.

In December 1999, the Company brought an action against Inco Limited ("Inco")
and certain of Inco's direct or indirect subsidiaries (collectively, the
"Sellers") alleging fraud, misrepresentation and breach of contract in
connection with the Acquisition, and seeking compensatory and punitive damages.
The Sellers have responded by making a motion to dismiss the complaint and have
indicated that they may assert counterclaims against the Company. At this time,
the Company is unable to assess what the ultimate outcome of this matter will
be.

13. Preferred Stock

In connection with the 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
$6,423,000 at December 31, 1999 ($0 at December 31, 1998).

                                      -56-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

14. Capital Stock

Effective February 26, 1997, the Company sold 3,075,000 shares of its common
stock at $16.50 per share in an initial public offering. Proceeds from the
offering, net of underwriting discounts and commissions and other related
expenses totaling approximately $4.8 million, were approximately $46.0 million.
The proceeds were used primarily to reduce the Company's outstanding
indebtedness.

15. 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. 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 expire 10
years from the date of grant. 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, 1997, 1998 and 1999 follows:

<TABLE>
<CAPTION>
                                      1997                  1998                  1999
                                ----------------------------------------------------------------
                                          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        -  $     -      295,500   $ 16.50     413,000  $  16.28
Granted                          295,500    16.50      117,500     15.74     344,100      4.93
                                --------              --------              --------

Outstanding - end of year        295,500  $ 16.50      413,000   $ 16.28     757,100  $  11.12
                                ========              ========              ========

Exercisable at end of year             -        -            -         -     186,917  $  16.34
                                ========              ========              ========

Weighted-average fair value
  of options granted during
  the year                      $   7.62              $   9.15              $   3.91
                                ========              ========              ========
</TABLE>

                                      -57-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

15. Stock Options and Restricted Stock (continued)

The following table summarizes information for stock options outstanding and
exercisable at December 31, 1999:

<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       344,100        9.57 years       $ 4.93               -          $      -
$8.25               14,000        9.00 years         8.25           4,667              8.25
$16.00 - 17.00     399,000        7.43 years        16.56         182,250             16.55
</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>
                                                        1997          1998           1999
                                                   --------------------------------------
<S>                                                <C>           <C>            <C>
Risk free interest rate                                    6%            6%             6%
Dividend yield                                             0%            0%             0%
Volatility factor of the expected market
  price of the Company's common stock                  0.364         0.544          0.931
Weighted-average expected life of the
  option (in years)                                        6             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
                                                        1997           1998          1999
                                                   ------------------------------------------
                                                    (In thousands, except per share amounts)
<S>                                                <C>           <C>            <C>
Net income (loss)                                  $     22,697  $       9,345  $    (25,972)
Net income (loss) per share (basic and diluted)            1.51           0.53         (2.09)
</TABLE>

                                      -58-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

15. Stock Options and Restricted Stock (continued)

During 1997, the Company awarded 4,000 shares of restricted stock to two
executive officers under the Stock Incentive Plan. A total of 2,000 shares
vested immediately at the date of grant, and the remaining 2,000 shares became
vested during 1998. The weighted-average fair value of the shares that vested
during 1998 was $16.75 per share. The weighted-average fair value of the shares
that vested during 1997 was $18.00 per share.

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 starting in 2000. The
remaining restricted stock will vest based upon achievement of certain
performance objectives.

16. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, net of related tax, is
as follows:

                                                 December 31
                                            1998            1999
                                        ---------------------------
                                               (In thousands)

Minimum pension liability adjustment    $    (1,571)    $       (11)
Currency translation adjustment                (340)         (5,249)
                                        ---------------------------
                                        $    (1,911)    $    (5,260)
                                        ===========================

17. Business Segment Information

The Company has identified 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 (previously Inco Alloys North America) and
Wiggin Alloys (previously Inco Alloys Europe) 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.

                                      -59-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

17. Business Segment Information (continued)

Segment information as of and for the years ended December 31, 1998 and 1999 is
as follows. For 1997, the Company consisted solely of the Premium Alloys
segment.

<TABLE>
<CAPTION>
                                Premium     Huntington    Wiggin
                                 Alloys       Alloys      Alloys       Corporate      Total
                             -----------------------------------------------------------------
                                                      (In thousands)
<S>                          <C>           <C>          <C>           <C>          <C>
1998
Sales to external customers  $   174,997   $    50,253  $    27,976   $         -  $   253,226
Intersegment sales                   220         8,287        3,140             -       11,647
Operating income (loss)           26,346        (8,662)       1,428        (1,059)      18,053
Depreciation and amortization      4,562         2,233          541           886        8,222
Total assets                     146,961       470,094      175,748        47,351      840,154
Capital expenditures               9,061         5,620        5,583             -       20,264

1999
Sales to external customers  $   126,826   $   319,491  $   155,932   $         -  $   602,249
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
</TABLE>

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

<TABLE>
<CAPTION>
                                                             Year ended December 31
                                                        1997          1998          1999
                                                   ----------------------------------------
                                                                (In thousands)
<S>                                                <C>           <C>           <C>
Net sales
United States                                      $    128,247  $    165,457  $    325,604
United Kingdom                                            4,909        18,915        67,340
France                                                   29,902        23,788        57,811
Other                                                    23,013        45,066       151,494
                                                   ----------------------------------------
                                                   $    186,071  $    253,226  $    602,249
                                                   ========================================

Long-lived assets
United States                                      $     39,727  $    271,525  $    245,609
United Kingdom                                                -        33,587        32,533
Other                                                         -         3,913           361
                                                   ----------------------------------------
                                                   $     39,727  $    309,025  $    278,503
                                                   ========================================
</TABLE>

                                      -60-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

18. Earnings per Share

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

<TABLE>
<CAPTION>
                                                   1997            1998            1999
                                             -----------------------------------------------
                                                 (In thousands, except per share amounts)
<S>                                          <C>             <C>             <C>
Numerator:
  Net income (loss)                          $        23,002 $         9,840 $       (25,310)
  Preferred stock dividends                                -           1,071           6,423
                                             -----------------------------------------------
  Numerator for basic earnings per share -
    income available to common shareholders           23,002           8,769         (31,733)

  Effect of dilutive securities:
    Preferred stock dividends                              -               -               -
                                             -----------------------------------------------
  Numerator for diluted earnings per share -
    income available to common shareholders
    after assumed conversions                $        23,002 $         8,769 $       (31,733)
                                             ===============================================

Denominator:
  Denominator for basic earnings per share -
    weighted-average shares outstanding               15,004          15,479          15,479

  Effect of dilutive securities:
    Employee stock options                                12               -               -
    Preferred stock                                        -               -               -
                                             -----------------------------------------------
  Denominator for diluted earnings
    per share - adjusted
    weighted-average shares                           15,016          15,479          15,479
                                             ===============================================
Basic earnings per share                     $          1.53 $          0.57 $         (2.05)
                                             ===============================================
Diluted earnings per share                   $          1.53 $          0.57 $         (2.05)
                                             ===============================================
</TABLE>

Potential common shares resulting from stock options and convertible preferred
stock at December 31, 1998 and 1999 were excluded from the calculation of
diluted earnings per share because their inclusion would have had an
antidilutive effect on earnings per share.

                                      -61-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

19. Statement of Cash Flow - Supplemental Disclosures

Selected cash payments and noncash activities were as follows:

<TABLE>
<CAPTION>
                                                             Year ended December 31
                                                        1997         1998           1999
                                                   ----------------------------------------
                                                                (In thousands)
<S>                                                <C>           <C>           <C>
Cash paid during the year for:
  Interest                                         $        750  $      1,166  $     25,243
  Income taxes                                           12,570        11,483         1,870

Non-cash activities:
  Intangible pension asset                         $        138  $        (21) $        (21)
  Accumulated pension adjustment                           (201)        1,075        (1,560)
  Deferred taxes                                           (161)          659          (957)
                                                   ----------------------------------------
    Net accrued pension liability                  $       (224) $      1,713  $     (2,538)
                                                   ========================================
</TABLE>

During 1998, the Company financed $17,000,000 of the non-competition agreement
with the issuance of 340,000 shares of non-voting Series A Convertible Preferred
Stock.

20. Concentrations

For the year ended December 31, 1997, sales made to the Company's three largest
customers represented approximately 21%, 11% and 10%, respectively, of the
Company's total sales. For the year ended December 31, 1998, sales made to the
Company's largest customer represented approximately 16%, of the Company's total
sales. No other customers, in any year, represented over 10% of the Company's
total sales.

At December 31, 1997, accounts receivable from three customers represented
approximately 37% of total accounts receivable. No other customers accounted for
over 10% of the Company's total accounts receivable at December 31, 1997, 1998
or 1999.

Approximately 61% of the Company's employees are represented by nine separate
domestic and international collective bargaining agreements which terminate at
various times between November 2000 and August 2003. Approximately 20% of the
labor force is covered by collective bargaining agreements that will expire
within one year.

                                      -62-
<PAGE>

                           Special Metals Corporation
             Notes to Consolidated Financial Statements (continued)

21. Quarterly Financial Data (unaudited)

The following is a summary of the quarterly results of operations for the years
ended December 31, 1998 and 1999:

<TABLE>
<CAPTION>
                                                         Fiscal Quarter
                                         First        Second        Third         Fourth
                                    ------------------------------------------------------
                                          (In thousands, except per share amounts)
<S>                                 <C>            <C>           <C>           <C>
Year ended December 31, 1998:

Net sales                           $    49,191    $    43,852   $    41,645   $   118,538
Gross profit                             11,678          8,814         7,820         5,804
Net income (loss)                         6,335          4,611         4,089        (5,195)
Net income (loss) attributable to
  common shareholders                     6,335          4,611         4,089        (6,266)
Earnings per common share,
  basic and assuming dilution              0.41           0.30          0.26         (0.40)

Year ended December 31, 1999:

Net sales                               151,708        158,842       139,344       152,355
Gross profit                              8,771         19,451        10,967           574
Net loss                                 (6,693)          (337)       (5,445)      (12,835)
Net loss attributable to common
  shareholders                           (8,299)        (1,943)       (7,051)      (14,440)
Earnings per common share,
  basic and assuming dilution             (0.54)         (0.13)        (0.46)        (0.93)
</TABLE>

                                      -63-
<PAGE>

Schedule II - Valuation and Qualifying Accounts
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, 1999:
  Deducted from asset accounts:
    Allowance for doubtful accounts     $     3,179  $     (167) $   (43) (d) $    75 (b) $     2,894
    Allowance for obsolescence                7,526       1,497     (109) (d)       -           8,914
                                        -------------------------------------------------------------
  Total                                 $    10,705  $    1,330  $  (152)     $    75     $    11,808
                                        =============================================================

Year ended December 31, 1998:
  Deducted from asset accounts:
    Allowance for doubtful accounts     $       168  $        8  $ 3,358 (a)  $   355 (b) $     3,179
    Allowance for obsolescence                1,297         674    5,775 (a)      220 (c)       7,526
                                        -------------------------------------------------------------
  Total                                 $     1,465  $      682  $ 9,133      $   575     $    10,705
                                        =============================================================

Year ended December 31, 1997:
  Deducted from asset accounts:
    Allowance for doubtful accounts     $       120  $       48  $     -      $     -     $       168
    Allowance for obsolescence                1,110         261        -           74 (c)       1,297
                                        -------------------------------------------------------------
  Total                                 $     1,230  $      309  $     -      $    74     $     1,465
                                        =============================================================
</TABLE>

(a) Valuation allowances of businesses acquired.
(b) Uncollectible accounts written off, net of recoveries.
(c) Physical inventory adjustments
(d) Impact of foreign currency translation adjustments

Item 9 - Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure

         None.

                                      -64-
<PAGE>

                                    Part III

Item 10. Directors and Executive Officers of the Registrant

        The information regarding Directors and Executive Officers of the
Company will be included in the Company's definitive Proxy Statement to be filed
with the Securities and Exchange Commission prior to April 29, 2000.

Item 11. Executive Compensation

        The information regarding Executive Compensation will be included in the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission prior to April 29, 2000.

Item 12. Security Ownership of Certain Beneficial Owners and Management

        The information regarding Security Ownership of Certain Beneficial
Owners and Management will be included in the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission prior to April
29, 2000.

Item 13. Certain Relationships and Related Transactions

        The information regarding Certain Relationships and Related Transactions
will be included in the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission prior to April 29, 2000.

                                      -65-
<PAGE>

                                     Part IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

                                                                        Page in
                                                                       Form 10-K
                                                                       ---------
(a)     The following are filed as part of this report:

(1)     Audited financial statements of the Company as of December 31,
        1998 and 1999, and for the three years in the period ended        32
        December 31, 1999.

(2)     Financial statement schedule

        II - Valuation and Qualifying Accounts                            64

        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

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).

                                      -66-
<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 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 filed with the Securities and Exchange Commission August 11,
           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 filed
           November 12, 1998).

                                      -67-
<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 *+ Employment Agreement, dated April 15, 1999 between the Company and T.
           Grant John.

10.20.2 *+ Restricted Stock Award Agreement between the Company and T. Grant
           John.

10.20.3 *+ Nonqualified Stock Option Agreement between the Company and T. Grant
           John.

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).

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).

                                      -68-
<PAGE>

10.25      First Amendment to the Credit Agreement 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 filed on May 17, 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.

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.

10.28 *    Subordinated Loan Agreement dated as of December 17, 1999 between the
           Company and SIMA.

10.29 *    Debt Subordination Agreement dated as of December 29, 1999 by and
           among the Company, SIMA and Credit Lyonnais New York Branch.

21.1 *     Subsidiaries of the Company

23.1 *     Consent of Ernst & Young LLP

27.1 *     Financial Data Schedule

------------------
*       Filed herewith.
+       Management contract or compensatory plan or arrangement.

(b)     Reports on Form 8-K

        None.

(c)     Exhibits

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

                                      -69-
<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 March 29, 2000.


                                   By: /s/ Donald R. Muzyka
                                       --------------------
                                       Donald R. Muzyka, President and
                                       Chief Executive Officer

                                      -70-
<PAGE>

        BE IT KNOWN TO ALL BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Donald C. Darling and Donald R. Muzyka
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.


/s/ Robert D. Halverstadt  Chairman of the Board                  March 24, 2000
-------------------------
Robert D. Halverstadt

/s/ Donald R. Muzyka       President, Chief Executive Officer     March 29, 2000
-------------------------  and Director (Principal Executive
Donald R. Muzyka           Officer)

/s/ Donald C. Darling      Chief Financial Officer and Director   March 29, 2000
-------------------------  (Principal Financial and Accounting
Donald C. Darling          Officer)

/s/ Robert F. Dropkin      Director                               March 29, 2000
-------------------------
Robert F. Dropkin

/s/ Edouard Duval          Director                               March 27, 2000
-------------------------
Edouard Duval

/s/ Antoine G. Treuille    Director                               March 27, 2000
-------------------------
Antoine G. Treuille

/s/ Raymond F. Decker      Director                               March 25, 2000
-------------------------
Raymond F. Decker

/s/ Andrew R. Dixey        Director                               March 24, 2000
-------------------------
Andrew R. Dixey

                                      -71-
<PAGE>

                                  EXHIBIT INDEX


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).

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).

                                       72
<PAGE>

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 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 filed with the Securities and Exchange Commission August 11,
           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 filed
           November 12, 1998).

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)).

                                       73
<PAGE>

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 *+ Employment Agreement, dated April 15, 1999 between the Company and T.
           Grant John.

10.20.2 *+ Restricted Stock Award Agreement between the Company and T. Grant
           John.

10.20.3 *+ Nonqualified Stock Option Agreement between the Company and T. Grant
           John.

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).

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).

                                       74
<PAGE>

10.25      First Amendment to the Credit Agreement 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 filed on May 17, 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.

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.

10.28 *    Subordinated Loan Agreement dated as of December 17, 1999 between the
           Company and SIMA.

10.29 *    Debt Subordination Agreement dated as of December 29, 1999 by and
           among the Company, SIMA and Credit Lyonnais New York Branch.

21.1 *     Subsidiaries of the Company

23.1 *     Consent of Ernst & Young LLP

27.1 *     Financial Data Schedule

------------------
*       Filed herewith.
+       Management contract or compensatory plan or arrangement.

                                       75