<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K


(Mark One)

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

                   For the fiscal year ended December 31, 1997

                                       OR

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



                          Commission file number 1-1363



                               ENVIROSOURCE, INC.
             (Exact name of Registrant as specified in its charter)



                  Delaware                          34-0617390
          (State or other jurisdiction of        (I.R.S. Employer
         incorporation or organization)         Identification No.)



1155 Business Center Drive, Horsham, PA                  19044-3454
(Address of principal executive offices)                 (Zip Code)


Registrant's telephone number, including area code:
(215) 956-5500

Securities registered pursuant to Section 12(b) of the Act:

                                     Name of each exchange on
     Title of each class                which registered

  Common Stock, par value $.05        The Pacific Exchange
        per share

<PAGE>


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 Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's  knowledge,  in definitive  proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant was $52,200,765 as of March 2, 1998.

The number of shares  outstanding  of the  Registrant's  Common  Stock as of the
close of business on March 2, 1998 was 40,713,765.



<PAGE>



                                     PART I

ITEM 1.  Business.

THE COMPANY

     EnviroSource,   Inc.(the  "Company")  supplies  industrial  customers  with
specialized  services,  primarily  the  recycling,  handling,  stabilization  or
landfilling of environmentally  sensitive wastes or by-products.  These services
are generally  provided pursuant to long term contracts which enable the Company
to integrate its processes with those of its customers.  The Company's principal
business segments are (a) the IMS segment, which provides slag processing, metal
recovery,  materials  handling,  scrap  management and a wide range of specialty
services, such as scarfing and high speed flame cutting, for the steel industry;
and (b) the Technologies  segment,  which provides hazardous waste treatment and
disposal  services,   waste   stabilization   services,   engineering,   project
management, construction,  regulatory assistance and laboratory services for the
steel industry and other industrial and governmental customers.

     The Company conducts its operations  exclusively  through its subsidiaries.
International Mill Service, Inc. and its subsidiaries ("IMS") constitute the IMS
segment  (formerly named the Industrial  Environmental  Services  segment),  and
EnviroSource Technologies,  Inc.("Technologies",  formerly known as EnviroSource
Treatment & Disposal  Services,  Inc.)  through its  Envirosafe  and  Conversion
Systems  subsidiaries,  constitutes the Technologies segment (formerly named the
Treatment & Disposal Services segment).

     References  herein to the Company  include its  subsidiaries as well as its
Ohio  predecessor,  NEOAX,  Inc.,  except where the context requires  otherwise.
"Note"  references  herein  are to Notes to  Consolidated  Financial  Statements
appearing elsewhere in this Report.

DEVELOPMENT OF THE COMPANY

     The Company's  predecessor  was originally  incorporated in Ohio in 1915 as
White Motor Corporation.  Its name was changed to Northeast Ohio Axle, Inc. when
it emerged from reorganization  proceedings in 1983 and was changed again in May
1986 to NEOAX, Inc. ("NEOAX").  In June 1987, NEOAX  reincorporated in Delaware.
On November 14, 1989, the Company changed its name to EnviroSource, Inc.


<PAGE>


     EnviroSource's  present business units originally  represented a portion of
the operations of IU International  Corporation ("IU  International").  Early in
1988,  the Company  acquired IU  International  with the goal of  establishing a
substantial  operating  company  centered  primarily on the Company's stable and
growing steel industry business relationships and prospects.  Between March 1988
and the end of 1991,  the Company  disposed of all the  businesses  it had owned
prior  to  the  IU   International   acquisition   and   virtually   all  of  IU
International's   operations   and  assets   other  than  the  present  IMS  and
Technologies  segments and  IMSAMET,  Inc.  (discussed  below),  completing  its
transformation into an environmental services company.

     During 1993, the Company  completed a comprehensive  recapitalization  (the
"Recapitalization")  designed to increase the  Company's  liquidity  and capital
resources, improve operating and financial flexibility,  reduce interest expense
and preferred dividend requirements, and enhance the Company's ability to pursue
the growth opportunities in its businesses.  The  Recapitalization  included the
sale of Common  Stock to an  affiliate of Freeman  Spogli & Co.  ("FS&Co.")  and
another  investor  (collectively,  the  "Investors")  and  the  purchase  by the
Investors of certain equity securities from The Dyson-Kissner-Moran  Corporation
("DKM") and WM Financial  Corporation  ("WM  Financial").  The sale of stock and
warrants to FS&Co. and the subsequent related transfers of stock are hereinafter
referred to as the "FSC Transaction." As a result of the FSC Transaction, FS&Co.
owns approximately 47% of the Common Stock of the Company.

     In addition, in July 1993 the Company sold $220 million principal amount of
9-3/4% Senior Notes Due 2003 (the "1993  Notes").  A significant  portion of the
proceeds  from the sale of the  Senior  Notes  was used to retire  $150  million
principal amount of the Company's 14% Extendible Reset Senior Subordinated Notes
Due 1998.

     During the fourth quarter of 1993 and throughout  1994 and 1995 the Company
took a number of steps to reduce costs and  terminate  unprofitable  operations.
These steps included (i) terminating certain recycling units, (ii) discontinuing
efforts to obtain a hazardous waste landfill  permit in  Pennsylvania  and (iii)
reorganizing  the  Envirosafe  and  Conversion   Systems   businesses  into  the
Technologies business unit.

     To further  reduce costs and increase  profitability,  in February 1996 the
Company announced a major  reorganization of its headquarters  organization that
saved the Company approximately $4.3 million in 1996 and $5 million in 1997. The
reorganization  included the closing of the Company's corporate  headquarters in
Stamford,   Connecticut   and  the   Technologies   headquarters   in   Horsham,


<PAGE>

Pennsylvania. Activities of both offices were moved to IMS's offices in Horsham,
Pennsylvania in June 1996.  Headcount was reduced by  approximately  50 persons,
primarily from Technologies.  The Company recorded charges of approximately $4.4
million during 1996 for the reorganization. The Company has recently embarked on
a profit  improvement  program  that is  intended  to lower  costs and  increase
revenues significantly in the latter quarters of 1998 and beyond.

     In November  1996,  the Company  announced  that it had signed a definitive
agreement to sell IMSAMET,  Inc., an aluminum recycling and reclamation company,
in order to focus the Company's efforts upon its steel-related businesses.  This
sale was completed in January 1997.

     In September  1997,  the Company  issued $50 million of 9-3/4% Senior Notes
Due 2003,  Series B, (the "1997 Notes") having  substantially  the same terms as
the Company's 1993 Notes. The Company used substantially all of the net proceeds
to repay  borrowings  under the  Company's  bank credit  facility  that had been
incurred to finance capital expenditures.

BUSINESS SEGMENTS


     IMS

     The Company has served the steel  industry  for over 60 years.  The Company
believes it increases its customers'  productivity  by providing  cost-effective
and  reliable  on-site  reclamation  of steel  and iron and a  variety  of other
specialized  services that are essential to the efficient  functioning  of steel
mills.

     North  America's steel mills operate in a highly  competitive  environment.
Services  that  help to reduce  their  total  process  costs  are  therefore  of
significant   value.  IMS  generally   provides  recycling  and  metal  recovery
operations under long-term contracts with a diversified customer base of over 55
steel mill sites in North America,  including  integrated mills,  mini-mills and
specialty  mills.  Using  specially  designed  equipment,  IMS  provides a total
recycling  solution  by  processing  slag (a  by-product  of steel  production),
recovering  valuable  metallics and selling the residual aggregate for road base
and other uses. These services are economically and environmentally  attractive.
Moreover,  the effective  removal of slag on a continuous basis is critical to a
steel mill's ability to remain in operation.

<PAGE>

     The  Company  has  successfully  pursued  a  strategy  of  building  on its
leadership  position by offering an expanded range of services that enhance mill
productivity and provide IMS with growth  opportunities.  These services include
processing  blast  furnace iron scrap  through an  IMS-developed  iron  crushing
process, as well as specialized  materials  handling.  IMS has used rubber-tired
carriers at two integrated  steel mills to move steel slabs throughout the mill,
which is  significantly  more  cost-effective  than  traditional  rail and crane
systems.  IMS's  services  also  include a  proprietary  specialized  steel slab
surface conditioning process (called scarfing) that helps its customers increase
product  yields and improve  product  quality,  while  gaining  measurable  cost
savings.  This service is currently  provided at six steel mills, with a seventh
facility scheduled to commence operations later in 1998.

     IMS has a diversified customer base, with approximately 45% of its revenues
coming from  integrated  steel  producers and 55% from  mini-mills and specialty
mills. IMS's largest site is at USX Corporation's Gary Works, in Gary,  Indiana,
the  largest  steel  mill in the U.S.  USX  accounted  for 20% of the  Company's
consolidated  revenues of continuing  operations in each of 1997,  1996 and 1995
(including  revenues  attributable  to services  performed  by the  Technologies
segment). Long term contracts governing the related services expire between 1999
and 2007. Over the next several years, the maintenance of USX as a customer will
be material to the Company's consolidated revenues and operating income.

     Substantially all of IMS's services are provided on-site at steel mills, by
IMS employees using IMS-owned equipment.  IMS's services are integrated with the
operations of its  customers,  providing  for strong  working  partnerships.  If
necessary, most equipment can be relocated, but this has not often been required
as  contracts  are  generally  long-term  and IMS has a history of high  renewal
rates.

     Competition.  Competition in IMS's markets is based primarily on quality of
     -----------
service,  reliability,  technology  and  price.  In its core  steel  reclamation
business,  the Company believes that IMS services customers  accounting for more
than 30% of total domestic steel production.  IMS has one large competitor and a
number of smaller  competitors,  including  several  new  entrants.  The Company
believes  that  IMS's  leading  market  position  is based  on its  reliability,
responsiveness to customer needs, capital resources and breadth of expertise.


<PAGE>



     TECHNOLOGIES

     Technologies, through its Envirosafe and Conversion Systems business units,
has been dedicated to the safe,  economical treatment and disposal of industrial
and hazardous wastes since 1976. Through its Envirosafe subsidiaries, Envirosafe
Services of Ohio,  Inc. and Envirosafe  Services of Idaho,  Inc.  (collectively,
"Envirosafe"),  Technologies owns major commercial hazardous waste treatment and
disposal facilities in Ohio and Idaho. Envirosafe services some of the country's
largest steel companies, as well as companies in other industries and government
agencies.  Envirosafe  has  reoriented  its  business to focus more on its steel
mini-mill  customers'  production  and less on the  volatile  waste  remediation
business.

     Envirosafe  has  approximately  3-1/2  million  cubic  yards  of  permitted
disposal  capacity.  In 1992,  Envirosafe  Services of Ohio, Inc. received final
approval to expand its Ohio facility and in 1993 completed  construction  of the
first phase of a 2.6  million  cubic yard  disposal  cell.  The second  phase of
construction  of this cell was completed in December 1994 and approval to accept
waste was obtained in January 1995. The third phase of construction of this cell
is currently underway. In late 1993, Envirosafe Services of Idaho, Inc. received
final  approval  to expand an active  disposal  cell at its Idaho  facility  and
completed construction of the second phase of such cell.

     In the last few years,  the Company  completed a number of capital projects
in order to maintain  and  enhance  its  competitive  position.  These  projects
included a new  state-of-the-art  stabilization  and debris handling facility in
Ohio and a new debris handling facility and expanded  stabilization  capacity in
Idaho. Enhanced stabilization  capability has allowed the Company to utilize its
proprietary  Super  Detox(R)  technology for the  stabilization  of electric arc
furnace  ("EAF")  dust at both its Ohio and  Idaho  facilities.  See below for a
discussion of Super Detox(R).  In addition,  a rail transfer facility was opened
in Idaho in 1993  and was  upgraded  in  1995.  New rail  service  into the Ohio
facility  became  available  during  November  1996,  giving the Company what it
believes to be the only major hazardous waste treatment and disposal facility in
the United States with such direct rail service.

     The Ohio and Idaho facilities hold operating  permits,  issued by state and
federal environmental agencies under the Resource Conservation and Recovery Act,
as amended  ("RCRA"),  that require renewal and modification  from time to time.
The Company  expects that it will obtain the renewals and  modifications  to its
permits  that it  requires  to  continue  to provide  landfill  capacity  in its
approved disposal cells well into the next decade.  Historically,  the Company's
hazardous  waste  treatment  and  disposal  services  business has been somewhat

<PAGE>

seasonal,  with the first  quarter of the year  tending  to be slower  depending
primarily  on the extent to which  winter  weather  conditions   affected  waste
remediation projects. However, the Company believes that the increased volume of
EAF dust stabilized at its Ohio and Idaho facilities has made this business less
seasonal.

     Envirosafe  and its  competitors  and  customers  are subject to a complex,
evolving array of federal,  state and local  environmental laws and regulations.
Such requirements not only can affect the demand for Envirosafe's  services, but
could also  require the Company to incur  significant  costs for such matters as
facility upgrading, remediation or other corrective action, facility closure and
post-closure  maintenance  and  monitoring.  It  is  possible  that  the  future
imposition  of additional  environmental  compliance  requirements  could have a
material  adverse  effect on  Technologies  results of  operations  or financial
condition,  but the Company is unable to predict  any such future  requirements.
The Company believes that the Consolidated  Financial  Statements  appropriately
reflect all  presently  known  compliance  costs in  accordance  with  generally
accepted accounting principles.  Stringent  interpretation of environmental laws
and regulations  governing  hazardous waste treatment and disposal facilities by
state and federal  regulators  also subjects  Envirosafe to violations and fines
from time to time, none of which has been material to the Company.  In fact, the
Company believes that it has one of the best environmental compliance records in
the industry.

     Technologies  currently  operates  and  maintains a captive  landfill for a
domestic steel mill pursuant to a service  contract.  Technologies  is currently
exploring additional  opportunities for providing captive landfill services,  as
well as specialized environmental engineering and related services.

     Technologies' Conversion Systems unit is the sole licensee of a proprietary
technology  (Super Detox(R)) for stabilizing EAF dust - a listed hazardous waste
(KO61) under RCRA  generated by steel mills - that renders the EAF dust suitable
for  landfilling  in  non-hazardous  waste  landfills  and for  possible  reuse.
Technologies  currently operates an EAF dust  stabilization  facility on-site at
one  of  the  largest   domestic   mini-mills,   and  provides   Super  Detox(R)
stabilization  for EAF dust at both of its  regional  Envirosafe  Ohio and Idaho
facilities.  During 1995, 1996 and 1997,  Technologies  entered into a number of
new  contracts  to receive and process  EAF dust at its  Envirosafe  facilities.
Technologies  actively continues to market this process to other U.S. mini-mills
and is exploring additional opportunities internationally for its Super Detox(R)
technology.

<PAGE>


     In June  1995,  Conversion  Systems  received  from the U.S.  Environmental
Protection  Agency ("USEPA") a generic  delisting for Super Detox(R)  stabilized
EAF dust, which designates EAF dust treated  utilizing this proprietary  process
as a non-hazardous  waste. If desired, the delisted material can be deposited in
a non-hazardous  waste landfill.  The generic  delisting  status for the process
will save  Technologies  and its  customers  the time and  expense  involved  in
petitioning USEPA on a  facility-by-facility  basis for delisting status.  USEPA
and the Illinois Department of Environmental  Regulation  previously had granted
site  specific  delistings  for this  process.  In addition,  in November  1995,
Technologies  received from the Idaho Department of Health and Welfare a generic
delisting for EAF dust stabilized at its Idaho regional  facility  utilizing the
Super Detox(R) process; this ruling essentially has the same effect as the USEPA
delisting.

     The  Company  believes  that the  Super  Detox(R)  technology  provides  an
environmentally safer and more cost-effective solution than the off-site thermal
process currently employed by a large portion of the mini-mill industry.

     Horsehead Resource Development Company, Inc. ("Horsehead"), a competitor of
Technologies in the EAF dust management business, filed a petition for review of
the USEPA delisting.  Horsehead's petition for review of the USEPA delisting was
unanimously  denied in December 1997.  Horsehead  filed a petition for rehearing
concerning  such denial which was also  denied;  accordingly,  Horsehead  has no
further rights of appeal concerning the USEPA delisting. Horsehead also appealed
the Illinois delisting.  This appeal was denied;  accordingly,  Horsehead has no
further rights of appeal  concerning the Illinois  delisting.  In any event, the
Federal  delisting is not necessary for the Company to continue these operations
at its Ohio and Idaho treatment and disposal facilities.

     Conversion  Systems has provided  electric  utilities with turn-key design,
engineering and  installation of systems for the  stabilization  of wet scrubber
effluent and boiler ash residues  produced at  coal-fired  power  plants.  These
systems convert the sludge resulting from wet scrubber removal of sulfur dioxide
from  power  plant  emissions  into  a  concrete-like   material   suitable  for
environmentally   responsible  landfilling.   Conversion  Systems  substantially
completed its last major project of this type in 1995.  However,  in response to
Phase II of the "Acid Rain"  provisions of the Clean Air Act Amendments of 1990,
additional  opportunities could be available to Conversion Systems,  although it
is not yet clear how many power  plants,  if any, will install wet scrubbers and
elect or be required to include stabilization units.
<PAGE>

     Competition.  The Company's hazardous waste treatment and disposal business
     -----------
is characterized by intense competition.  Technologies' principal competition in
EAF dust  stabilization  is  Horsehead,  a  thermal  metal  recovery  processor.
Although  Horsehead  historically  had  accounted  for at least  60% of the U.S.
market,  the Company  believes that this percentage has decreased  significantly
within the last two years as Technologies has gained market share.

     There are a limited number of competitors in the off-site  hazardous  waste
landfill  business (there are 19 active,  permitted  commercial  hazardous waste
landfills in the U.S.),  only two of which operate more than two landfills,  and
several  competitors  engaged in the  treatment  or  stabilization  of hazardous
waste.  Competition  in this  industry  is based on  service,  site and  process
integrity  and  the  all-in  cost  of  disposal,   which   includes   treatment,
stabilization and transportation costs and taxes.  Expanded use of rail services
and  additions  to  stabilization  services  will further  improve  Envirosafe's
competitive  position.  The market for  hazardous  waste  services  generally is
geographically  broad, but is narrowed depending on factors such as the types of
waste a facility is  permitted  to accept,  the types of  services  offered by a
facility,  the cost of operation of a facility and the proximity of the facility
to the customer.

     The market for wet scrubber  stabilization units has been dormant and it is
difficult  to  determine  the number and nature of  Conversion  System's  viable
competitors.


SEGMENT DATA

     See Note J for  information  concerning  revenues and  operating  income by
segment for the years ended December 31, 1997,  1996 and 1995 and the percentage
of  total  revenues  contributed  by each  class  of  service  of the  Company's
continuing operations for each such year.

EMPLOYEES


     At March 1, 1998,  the Company  employed  approximately  1,750  persons.  A
majority of the hourly employees in the IMS segment are covered by site-specific
collective   bargaining   agreements   with  various   unions,   including   the
International  Union of Operating  Engineers,  the United  Steelworkers  and the
International  Brotherhood  of  Teamsters.  Several of these  contracts  will be
renegotiated  in 1998.  All  other  contracts  will be  renegotiated  in 1999 or
thereafter. Also, all of the hourly employees in the Technologies segment belong
to unions,  either the  International  Brotherhood of Teamsters or the Operating
Engineers.  The Company  believes it has a good  working  relationship  with its
employees.

<PAGE>


ITEM 2.  Properties.

HEADQUARTERS

     The Company  maintains its  headquarters  at a single  location in Horsham,
Pennsylvania  in leased  premises.  Until June  1996,  the  Company's  corporate
headquarters  were located in leased  premises in Stamford,  Connecticut and the
headquarters  of  Technologies  were  located in  separate  leased  premises  in
Horsham, Pennsylvania.

IMS

     IMS has  operations  providing  metal  recovery and other services at steel
mills throughout the continental United States and in Canada.  Equipment located
at the  sites  operated  by IMS  and  its  subsidiaries  includes  prefabricated
storage,  shop and office  structures,  pot  carriers,  slab  haulers,  loaders,
railcars,   cranes,  trucks,  metal  recovery  plants  and  crushers  and  other
specialized  mobile and stationary  equipment used in metal-recovery  operations
and  industrial  service  work,  most of  which is  owned.  In  addition  to its
headquarters, IMS leases office space near Pittsburgh, Pennsylvania.

     Management  believes  that the physical  facilities  for the  Company's IMS
segment are adequate for its operations and provide sufficient  capacity to meet
its   anticipated   requirements.   The  metal  recovery  and  slag   processing
installations  are generally  located at specific  customer  facilities  and are
adequate to handle current levels of customer  operations and anticipated future
needs for current customers.

TECHNOLOGIES

     Envirosafe owns substantially all of the land, buildings and equipment used
in its  treatment and disposal  operations in Oregon,  Ohio and near Grand View,
Idaho.  Conversion  Systems owns the building and equipment at one stabilization
facility  in  Illinois  and  one  in  Pennsylvania  and  leases  land  for  both
facilities.  Technologies continues to lease space in Horsham,  Pennsylvania and
Ohio relating to former  locations,  and it is actively seeking to sublease 100%
of these locations.

<PAGE>

     Assuming the timely  completion of subsequent  phases under existing permit
authority,  Envirosafe  expects  to  maintain  ample  hazardous  waste  disposal
capacity into the next decade.  Management believes that the physical facilities
for Technologies are adequate for its operations and provide sufficient capacity
to meet its anticipated requirements.

ITEM 3.  Legal Proceedings.

     The Company is a party to litigation and proceedings  arising in the normal
course of its present or former  businesses.  In the opinion of management,  the
outcome of such  litigation  and  proceedings  will not have a material  adverse
effect on the Company's financial condition or results of operations.


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

     Not applicable.


                                      *     *     *



EXECUTIVE OFFICERS OF THE COMPANY

         The Company's executive officers are as follows:

Name                              Age            Position

Ronald P. Spogli                   50            Chairman of the Board; Director

Louis A. Guzzetti, Jr.             59            President and Chief Executive
                                                        Officer; Director

George E. Fuehrer                  49            Senior Vice President, Planning
                                                        and Business Development

Aarne Anderson                     57            Vice President, Taxes

William B. Davis                   47            Vice President and Treasurer

Bradley W. Harris                  38            Controller

Leon Z. Heller                     48            Vice President, General Counsel
                                                        and Secretary

James C. Hull                      60            Vice President and Chief
                                                        Financial Officer
<PAGE>


     The specified age of each  Executive  Officer of the Company is as of March
31, 1998.

     Officers are elected  annually and hold office until their  successors  are
elected and qualified.

     Ronald P. Spogli became a director and Chairman of the Company in May 1993.
Mr. Spogli is a founding  partner of Freeman  Spogli & Co. He is also a director
of Brylane,  Inc.,  Buttrey Food and Drug Stores Company,  Calmar,  Inc. and The
Pantry, Inc.

     Louis A.  Guzzetti,  Jr.  has  been a  director  and  President  and  Chief
Executive Officer of the Company since October 1986.

     Aarne Anderson has been employed by the Company since May 1980,  except for
the period  from  August 1983  through  April 1984  during  which he served as a
consultant to the  Disposition  Assets Trustee in the Company's  reorganization.
Mr. Anderson was elected Vice President, Taxes in August 1985.

     William B. Davis was elected Vice President of the Company in February 1995
and has been Treasurer of the Company since September 1991. Mr. Davis joined the
Company in July 1987 as Assistant Treasurer.

     George E.  Fuehrer  has been  employed  by the  Company  since 1982 and has
served as its Senior Vice President,  Planning & Business Development since June
1997, and its Senior Vice  President,  Planning since May 1989. Mr. Fuehrer also
served as President of IMSAMET,  Inc., a former subsidiary of the Company,  from
November  1995 until  January  1997.  From June 1988 until May 1989 he served as
Senior  Vice  President  - Finance of the  Company.  He was its  Treasurer  from
November 1984 until May 1989. Mr. Fuehrer also served as Vice President  Finance
from February 1984 until June 1988.

     Bradley W. Harris has been the Company's  Controller  since September 1996,
when he joined the Company.  From August 1981 to September  1996 Mr.  Harris was
employed by Ernst & Young LLP, most recently as a Senior Manager.

     Leon Z. Heller was elected Vice  President of the Company in February  1998
and has served as the Company's  General  Counsel and Secretary  since September
1996.  Mr.  Heller  also has been the Vice  President  and  General  Counsel  of
International  Mill Service,  Inc., a subsidiary of the Company,  since February
1991.

     James C. Hull has been the Company's  Vice  President  and Chief  Financial
Officer since May 1989, when he joined the Company.


<PAGE>


                                     PART II


ITEM 5.  Market  for  the  Registrant's  Common  Equity  and Related Stockholder
         Matters.

     The Company's Common Stock trades on The Nasdaq Stock Market (SM) under the
symbol "ENSO" and on The Pacific  Exchange  under the symbol "ES". The following
table sets forth the high and low sales  prices for the Common Stock for each of
the calendar quarters of 1997 and 1996, based upon prices supplied by The Nasdaq
Stock Market.

                                   1997                      1996
                                   ----                      ----
                            High         Low          High         Low
First Quarter              $2.69        $1.75        $4.25        $3.13
Second Quarter              2.13         1.19         4.38         3.38
Third Quarter               2.75         1.94         4.06         3.38
Fourth Quarter              3.06         2.13         3.88         2.44


     The Company is not currently in compliance  with new Nasdaq National Market
maintenance standards. In order to continue the listing of its Common Stock as a
Nasdaq  National  Market  security,  the Company  intends to seek exemption from
these standards or take action to become compliant.

     The  Company  has not paid a cash  dividend  on its Common  Stock since the
confirmation of its plan of  reorganization  in November 1983 and has no present
plan to pay cash dividends. The Company is currently prohibited from paying cash
dividends on its Common Stock by its bank credit agreement and by the indentures
under which the 1993 Notes and the 1997 Notes were issued.

     On March 1, 1998 the Company had  approximately  3,200 holders of record of
its Common Stock.

<PAGE>
ITEM 6.   Selected Financial Data

     The  information  presented  below should be read in  conjunction  with the
Consolidated  Financial  Statements  and Notes  thereto,  including Note B which
describes the 1997, 1996 and 1995 unusual items.
 <TABLE>
 <CAPTION>

<S>                                 <C>          <C>          <C>          <C>          <C>
                                      1997         1996         1995         1994         1993
                                  ------------ ------------ ------------ ------------ ------------
                                             (In thousands, except for per share amounts)

Revenues                            $227,678     $212,789      $223,722     $230,434    $246,927
Costs and expenses                   205,387      188,443       189,233      193,914     222,224
Unusual items, net (1)                 1,300        5,471        (2,624)                  18,200
                                    --------     --------     ---------    ---------    --------
Operating income                      20,991       18,875        37,113       36,250       6,503
Interest income                        1,223        1,356         1,133          983       1,177
Interest expense                     (29,308)     (28,187)      (23,483)     (21,974)    (25,261)
                                    --------     --------     ---------     --------    --------
Income (loss) from continuing
   operations before income taxes     (7,094)      (7,956)       14,763       15,529     (17,581)
Income tax (expense) benefit          (1,368)       3,266        (5,208)      (4,280)     (2,549)
                                    --------     --------     ---------     --------    --------
Income (loss) from continuing
   operations                         (8,462)      (4,690)        9,555       11,249     (20,130)
Income (loss) from discontinued
   IMSAMET operations (2)              9,600          399           949         (190)     (1,444)
                                    --------     --------     ---------     --------    --------
Income (loss) before extraordinary
   loss and cumulative effect of
   accounting change                   1,138       (4,291)       10,504       11,059     (21,574)
Extraordinary debt extinguishment
   loss                                                            (806)                 (21,930)
Cumulative effect of accounting
   change                               (639)                                             (2,302)
                                    --------     --------     ---------     --------    --------
Net income (loss)                   $    499     $ (4,291)    $   9,698     $ 11,059    $(45,806)
                                    ========     ========     =========     ========    ========

Income (loss) applicable to
   common shares and equivalents
   (3)                              $    499     $ (4,442)    $   7,959     $ 10,457    $(48,988)
                                    ========     ========     =========     ========    ========

Income (loss) per common share:
   Continuing operations            $   (.21)    $   (.12)    $     .19     $    .26    $   (.69)
   Discontinued operations               .24          .01           .03                     (.04)
   Extraordinary loss                                              (.02)                    (.64)
   Cumulative effect of accounting
      change                            (.02)                                               (.07)
                                    ---------    --------     ---------     --------    --------
   Net income (loss)                $    .01     $   (.11)    $     .20     $    .26    $  (1.44)
                                    ========     ========     =========     ========    ========

Average common shares and
   equivalents                        40,533       40,443        40,527       40,292      34,009

<PAGE>

                                      1997         1996          1995         1994         1993
                                  ------------ ------------ ------------ -----------  ------------
                                                            (in thousands)
Total assets                        $413,302     $459,909      $444,436     $442,872    $419,282
Working capital deficiency              (779)      (8,762)      (34,099)      (8,275)    (17,396)
Debt (non-current)                   281,614      268,424       275,158      259,263     233,297
Redeemable preferred stock
   (non-current)                           -            -             -       31,396      38,711
Stockholders' equity                  40,211       39,057        32,604       24,521      14,217
</TABLE>

Notes
-----

     (1) After related  income  taxes,  1997 unusual items reduced net income by
         approximately  $.8  million  or $.02  per  share,  1996  unusual  items
         increased the net loss by approximately  $3.6 million or $.09 per share
         and 1995 unusual items reduced net income by  approximately  $1 million
         or $.02 per share.  See Note B. The 1993 unusual  items  consisted of a
         $22 million  restructuring  charge and a credit from reducing estimated
         IU International  liabilities that together reduced net income by $17.6
         million or $.52 per share.
     (2) See Note D.
     (3) Includes gains from buying back Class G preferred  stock of $.2 million
         or $.01 per share in 1996,  $1.7 million or $.04 per share in 1995, $.6
         million or $.01 per share in 1994 and $3.2 million or $.09 per share in
         1993.

<PAGE>

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

RESULTS OF OPERATIONS

1997 VERSUS 1996

                                                              1997
                                   Year Ended            better  (worse)
                                  December 31              than 1996
                                  -----------              ---------
                               1997        1996*         Amount        %
                               ----        -----         ------        -
                                    (Dollars in thousands)

REVENUES
  IMS                        $185,587     $180,002     $  5,585       3%
  Technologies                 42,091       32,787        9,304      28%
                             --------     --------     --------
                             $227,678     $212,789     $ 14,889       7%
                             ========     ========     ========


GROSS PROFIT
  IMS                        $ 42,320     $ 46,690     $ (4,370)     (9%)
  Technologies                  5,235          821        4,414     538%
                             --------     --------     --------
                             $ 47,555     $ 47,511     $     44       -
                             ========     ========     ========

OPERATING INCOME (LOSS)
  IMS                        $ 26,494     $ 31,476     $ (4,982)    (16%)
  Technologies                   (173)      (4,534)       4,361      96%
  Corporate headquarters       (4,030)      (2,596)      (1,434)    (55)%
  Unusual items, net           (1,300)      (5,471)       4,171      76%
                             --------     --------     --------
                             $ 20,991     $ 18,875     $  2,116      11%
                             ========     ========     ========

*1996 operating income (loss) amounts have been reclassified consistent with the
method used to classify 1997 results.

     IMS 1997  revenues  increased  $5.6  million  or 3% over  1996.  Most steel
industry  customer sites reported  strong  production.  Alexander Mill Services,
Inc.,  acquired in May 1996,  contributed  $10.1  million to revenues in 1997 as
compared with $6.6 million in the prior year.  However,  revenue  increases were
largely  offset by a  revenue  reduction  resulting  from a strike  (settled  in
mid-August)  by a major steel customer's  employees  and the mid-1996  loss of a
steel  industry  customer  that  accounted for $4.6 million of revenues in 1996.
Technologies'  revenues increased  significantly in 1997 as compared to 1996 due
to a sharp  increase in the volume of EAF dust (a  hazardous waste  produced  by
steel  mini-mills)  processed  at  the  Company's  Ohio  and   Idaho   treatment
facilities.

     IMS gross profit decreased due to the effects of the strike and the loss of
a significant  customer as outlined  above and because a 1996  ownership  change
disrupted   production  at  another   customer's  steel  mill  throughout  1997.
Technologies' gross profit increased due to the  increase  in  EAF dust disposal
volume.

<PAGE>


     Selling,  general and  administative  expenses  increased  $2.1  million as
compared to 1996. Cost savings  realized as a result of the 1996  reorganization
were more than offset by an increase in legal fees and expenses  attributable to
litigation  between the Company and its  largest  competitor  in  the  EAF  dust
processing market, severance and other costs.

     Unusual items,  net. The 1997 unusual charges of $1.3 million were recorded
     -------------------
for costs to satisfy  regulatory  requirements  at disposal sites that have been
inactive  since  before  the  Company's  1988  acquisition  of IU  International
Corporation ("IU  International")  and to vacate an additional office as part of
the Company's further consolidation of its operations.  After related income tax
benefits,  the 1997  unusual  charges  reduced net income by  approximately  $.9
million or $.02 per share.

     In 1996 unusual  items  included  $4.4 million of charges for the Company's
1996  reorganization,  $1.2 million to settle the last disputed  matter from the
Company's  1993  restructuring  and $.8  million of closure  costs for  inactive
disposal sites. Partially offsetting these charges was a $.9 million credit from
reducing estimated  liabilities remaining from the Company's 1988 acquisition of
IU International. After related income tax benefits, the unusual items increased
the loss from continuing  operations by  approximately  $3.6 million or $.09 per
share.

     Even  though  debt  levels  were  lower in 1997 (the  Company paid down $56
million of debt in the first quarter with proceeds  from the sale of its IMSAMET
subsidiary),  interest expense of continuing  operations  increased $1.1 million
primarily because $3.3 million of consolidated interest expense was allocated to
discontinued  operations  in the  prior  year  and also  because  the  Company's
average effective interest rate was slightly higher in 1997.

     In 1996 the  Company  recorded  a $4.4  million  deferred  tax  credit  (as
discussed below),  without which the 1996 loss from continuing  operations would
have been more than $9 million as  compared  with the 1997 loss from  continuing
operations of $8.5 million (after a negligible  deferred tax credit).  In 1997 a
$9.6  million  gain  from  selling  IMSAMET  and a $.6  million  charge  for the
cumulative  effect of a mandatory  accounting change together with the loss from
continuing operations resulted in net income of $.5 million.

DEFERRED INCOME TAXES

     The  Company  has  determined  that it is more likely than not that it will
earn  enough  taxable  income over the next  several  years to realize the $15.3
million of deferred tax assets  recognized in its balance sheet.  Realization of
this amount will  require  cumulative  taxable  earnings  of  approximately  $44
million.  When the  consolidated  results of continuing  operations for the four
most recent fiscal years are adjusted by (1) excluding  unusual  items,  and (2)
adding back goodwill  amortization  (which is not  deductible for tax purposes),
the pre-tax earnings, as adjusted, total over $32 million and average $8 million
annually. On this basis, the Company would realize the $15.3 million of deferred
tax assets within  approximately  six years. On the other hand,  because its net
operating loss carryforwards expire well into the future, the Company would also
realize $15.3 million of deferred tax assets if, counting only profitable years,
it earns $44 million of taxable  income during the fifteen year period ending in
2012,  so long as the  cumulative  amount of such  earnings  reaches at least $8
million by 2005,  $19 million by 2006,  $28 million by 2008, $39 million by 2009
and $42 million by 2010.

<PAGE>

     In making its  determination  that it is more  likely than not that it will
earn enough  taxable income to realize $15.3 million of net deferred tax assets,
the Company considered (1) its cumulative consolidated results of operations for
the four most  recent  fiscal  years,  (2) the  reduction  in  interest  expense
obtained by applying the IMSAMET net  proceeds to reduce debt,  (3) ongoing cost
savings achieved with its 1996 reorganization,  and (4) profit improvements from
treating  increased  volumes of EAF dust with  its  proprietary Super  Detox (R)
technology.   Factors  which  could  negatively affect this determination  would
include (1) loss of a major customer or customers, (2) prolonged work  stoppages
at major customers,  (3)  a  major  decline  in  United  States  steel  industry
production,  and (4) a material  decrease  in  the  level  of EAF dust currently
treated with the Company's proprietary Super Detox(R)  technology.

     In 1996 the  Company  recognized  $26  million of net  deferred  income tax
assets in its  balance  sheet.  The $26  million  of income  tax  benefits  were
credited  as  follows:  $4.4  million  reduced  the 1996  loss  from  continuing
operations;  $10.9 million  reduced  goodwill in the balance sheet  (because the
related   deferred   tax  assets   arose  from  IU   International   acquisition
obligations);  and $10.7 million increased capital in excess of par value in the
balance sheet  (because the related  deferred tax asset arose from net operating
loss carryforwards that originated prior to the Company's 1983 reorganization).

     As described  further in Note C, the Company has additional  income tax net
operating loss carryforwards and other deferred tax assets that are available to
further reduce any future federal income tax payments.

<PAGE>

1996 VERSUS 1995

                                                              1996
                                   Year Ended            better (worse)
                                  December 31,             than 1995
                                  ------------             ---------
                              1996         1995          Amount        %
                              ----         ----          ------        -
                                     (Dollars in thousands)

REVENUES
  IMS                        $180,002     $181,081     $ (1,079)      (1%)
  Technologies                 32,787       42,641       (9,854)     (23%)
                             --------     --------     --------
                             $212,789     $223,722     $(10,933)      (5%)
                             ========     ========     ========

GROSS PROFIT
  IMS                        $ 46,690     $ 51,523     $ (4,833)      (9%)
  Technologies                    821        9,129       (8,308)     (91%)
                             --------     --------     --------
                             $ 47,511     $ 60,652     $(13,141)     (22%)
                             ========     ========     ========

OPERATING INCOME (LOSS)
  IMS                        $ 33,668     $ 39,360     $ (5,692)     (14%)
  Technologies                 (4,760)       1,611       (6,371)       -
  Corporate headquarters       (4,562)      (6,482)       1,920       30%
  Unusual items, net           (5,471)       2,624       (8,095)       -
                             --------     --------     --------
                             $ 18,875     $ 37,113     $(18,238)     (49%)
                             ========     ========     ========

     Although  conditions in the steel  industry  remained  generally  favorable
throughout  1996,  IMS  revenues  decreased  slightly.  The  Company's  May 1996
acquisition  of  Alexander  Mill  Services,  Inc.  contributed  $6.6  million to
revenues in the year,  but the increase was largely  offset by the mid-1996 loss
of a steel  industry  customer  that  accounted  for $8.3 million of revenues in
1995.  At the  beginning  of the 1996 fourth  quarter,  a major  steel  industry
customer's  employees  commenced a strike that continued in 1997.  That customer
contributed $3 million of revenues in the 1995 fourth quarter.  Also in 1996 our
largest steel industry customer  experienced an explosion and a 60-day outage at
its largest blast furnace.  Technologies  revenues  decreased  primarily because
1995  revenues  included over $8 million from the last major phase of a scrubber
sludge stabilization  system contract.  Revenues also declined because treatment
and  disposal  tonnage  was lower  during  the  first six  months of 1996 due to
overall depressed market conditions.  However,  a year-to-year  tonnage increase
was realized during the second half of 1996 as the Company  obtained  additional
contracts to stabilize EAF dust.

     IMS gross  profit  decreased  due to the  strike and blast  furnace  outage
discussed above together with somewhat lower profit margins at a number of other
steel industry customer sites.  Technologies gross profit declined primarily due
to decreases in treatment  and disposal  volumes and margins and the lack of new
stabilization system contracts.


<PAGE>


     Selling,  general  and  administrative  expenses  decreased  $3 million due
primarily  to the  effects  of the  1996  reorganization  discussed  in the next
paragraph.

     Unusual items,  net. In 1996 unusual items included $4.4 million of charges
     -------------------
for  the  Company's  1996   reorganization,   which  was  initiated  to  improve
productivity  and reduce costs.  The  reorganization  consisted  principally  of
consolidating  the Company's  headquarters  functions in a single location.  The
Company's corporate  headquarters in Stamford,  Connecticut and the Technologies
segment's headquarters in Horsham, Pennsylvania were closed and their activities
moved to the IMS  headquarters  building,  also in  Horsham.  As a result of the
reorganization,  approximately  50  positions  were  eliminated,  mostly  in the
Technologies segment. Cost savings of $4.3 million were realized during the year
and ongoing  annual  savings were expected to  approximate  $5 million.  In 1996
unusual items also included  charges of $1.2 million to settle the last disputed
matter from the  Company's  1993  restructuring  and $.8  million of  additional
closure costs for waste  disposal sites that have been inactive since before the
Company's  1988  acquisition of IU  International.  Partially  offsetting  these
charges is a $.9 million credit from reducing  estimated  liabilities  remaining
from the Company's 1988  acquisition of IU  International.  After related income
tax  benefits,  the 1996 unusual items  increased  the net loss from  continuing
operations by approximately $3.6 million or $.09 per share.

     During  1995  the  Company  favorably  resolved  a  number  of  liabilities
resulting from its 1988 IU International acquisition,  primarily liabilities for
insurance  matters.  The benefit of these  developments  was partially offset by
additional charges for other matters arising from the same acquisition.  The net
credit to income in 1995  amounted to $3.6 million.  The Company also  increased
its  estimate of costs to  complete  its 1993  restructuring  by $.2 million and
incurred $1 million of  termination  costs for additional  headcount  reductions
during  1995.  After  related  income tax expense of $3.5  million,  these items
reduced net income by approximately $1 million or $.02 per share.

     Interest expense  increased $4.7 million for the year due to higher average
debt levels,  primarily to finance the retirement of Class G preferred stock and
also due to the Alexander acquisition.

     Due  to the  factors  described  above  and  including  the  income  of the
discontinued operations, the Company incurred a net loss of $4.3 million in 1996
as  compared  with  income  of  $10.5  million  before  an  extraordinary   debt
extinguishment loss in 1995.

     There was a minimal Class G preferred  stock  dividend  requirement in 1996
because most of the Class G stock was retired at a $.2 million gain in the first
quarter and all of the remaining Class G stock was redeemed by July 15, 1996.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     The Company's  liquidity  requirements  arise primarily from the funding of
its  capital  expenditures,  its  Technologies  segment's  trust fund  payments,
working capital needs and debt service  obligations.  Historically,  the Company
has met such  requirements  with cash flows  generated  by  operations  and with
additional debt financing.

     The  Company  expects  1998  capital  expenditures  of $25 to $30  million,
primarily for equipment  replacements,  new services,  development of additional
landfill capacity and improvements to waste treatment facilities. Scheduled debt
repayments  amount to $5.8  million in 1998  (excluding  $8 million of revolving
credit borrowings repaid in January 1998).

     Technologies  landfill permits require it to fund closure and  post-closure
monitoring and  maintenance  obligations by making  essentially   non-refundable
trust fund  payments.  These  payments  totaled $1.5  million in 1997.  Based on
current  regulations,  planned  improvements to waste  treatment  facilities and
permitted  capacity,  such payments are expected to amount to  approximately  $2
million 1998,  including the  reinvestment of Idaho trust fund earnings that the
Company includes in interest income. Thereafter,  such payments are not expected
to  exceed  the   reinvestment   of  trust  fund  earnings,   based  on  current
requirements.

     The  consolidated  balance sheet reflects  negative  working capital of $.8
million at December 31, 1997, due to including in current liabilities $8 million
of revolving credit borrowings because they were repaid in January 1998.

     Upon the sale of IMSAMET,  the Company applied the net proceeds to pay down
bank  borrowings  and  reduced  the amount of its bank  credit  facility  to $65
million  of  revolving  credit  borrowing  and  letter  of credit  capacity.  In
September  1997, the Company issued $50 million of 9-3/4% Senior Notes due 2003,
Series B, having  substantially  the same terms as the  Company's  existing $220
million of 9-3/4% Senior Notes due 2003.  Most of the net proceeds  were used to
pay off the  outstanding  balance on the Company's bank credit facility that had
been  incurred  to  finance  capital  expenditures.  In  conjunction  with  this
transaction,  the borrowing  capacity under the bank credit facility was reduced
to $50 million,  declining  12.5% in each of January 1999 and 2000. The facility
terminates  in January  2001.  As of December 31, 1997,  $8 million of revolving
credit  borrowings  (repaid in January 1998) and $6.6 million of standby letters
of credit were outstanding.

     Cash on hand,  funds from operations and borrowing  capacity under the bank
credit facility are expected to satisfy the Company's  normal operating and debt
service requirements through the term of the credit facility.

<PAGE>

     Because its businesses are  environmentally-oriented,  and therefore highly
regulated,  the  Company  is  subject to  violations  alleged  by  environmental
regulators and, occasionally, fines. Such violations and fines have not had, and
are not expected to have, a material  impact on the  Company's  business.  It is
possible  that the future  imposition  of  additional  environmental  compliance
requirements  could have a material  adverse effect on the Company's  results of
operations or financial condition, but the Company is unable to predict any such
future requirements. See Note O, in which environmental compliance is discussed.

YEAR 2000

     Within the last two years, the Company has purchased new software  packages
for most of its computer  systems and is currently  purchasing and  implementing
new software for the rest. By early 1999, all the Company's software will either
be  designed  to  accommodate  the "year 2000"  transition  or upgraded  through
routine software  releases from reliable software  suppliers.  Related costs are
not expected to be significant.

<PAGE>

ITEM 8. Financial Statements and Supplementary Data.

     See the financial  statements and schedules  attached hereto and  listed in
Item 14(a)(1) and (a)(2) hereof.


ITEM 9. Changes  in  and  Disagreements  with  Accountants  on  Accounting   and
        Financial Disclosure.

     Not applicable.

<PAGE>

                                    PART III


ITEM 10.  Directors and Executive Officers of the Company.

     Reference  is made to the  information  set forth  under the  headings  (i)
"Election  of  Class  C  Directors"  and  "Section  16(a)  Beneficial  Ownership
Reporting  Compliance" in the Company's  Proxy Statement to be filed pursuant to
Regulation  14A under the  Securities Act of 1934 within 120 days after December
31, 1997 and (ii)  "Executive  Officers of the Company" in Part I of this Annual
Report on Form 10-K, which information is incorporated herein by reference.

ITEM 11.  Executive Compensation.

     Reference is made to the information set forth under the heading "Executive
Compensation"  in  the  Company's  Proxy  Statement  to  be  filed  pursuant  to
Regulation  14A under the  Securities Act of 1934 within 120 days after December
31, 1997, which information is incorporated herein by reference.

ITEM 12.  Security Ownership of Certain Beneficial Owners and
          Management.

     Reference is made to the information set forth under the heading  "Security
Ownership of Certain  Beneficial  Owners and  Management" in the Company's Proxy
Statement to be filed  pursuant to Regulation  14A under the  Securities  Act of
1934 within 120 days after December 31, 1997, which  information is incorporated
herein by reference.

ITEM 13.  Certain Relationships and Related Transactions.

     Reference is made to the information  set forth under the heading  "Certain
Transactions"  in  the  Company's  Proxy  Statement  to  be  filed  pursuant  to
Regulation  14A under the  Securities Act of 1934 within 120 days after December
31, 1997, which information is incorporated herein by reference.


<PAGE>


                                     PART IV

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

     (a)  Documents Filed as Part of this Report.
          --------------------------------------

     (1)  Financial Statements.
          --------------------

     The  following  Consolidated  Financial  Statements  of the Company and its
subsidiaries are included in this Report:

     Report of Independent Auditors

     Consolidated Balance Sheets at December 31, 1997 and 1996

     Consolidated Statements of Operations for the Years Ended
     December 31, 1997, 1996 and 1995

     Consolidated Statements  of   Stockholders'  Equity  for  the  Years  Ended
     December 31, 1997, 1996 and 1995

     Consolidated Statements of Cash  Flows  for  the  Years  Ended December 31,
     1997, 1996 and 1995

     Notes to Consolidated Financial Statements

     (2)  Financial Statement Schedules.
          -----------------------------

     The following  schedules to the  Consolidated  Financial  Statements of the
Company and its subsidiaries are included in this Report:

     Schedules
     ---------

     II -  Valuation and Qualifying Accounts

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


<PAGE>


     (3)   Exhibits.
           ---------

     3.1  - Amended  and  Restated   Certificate   of   Incorporation   of  the
            Company (incorporated herein by reference  to Appendix A (pages A-1
            to A-3) to the Company's Proxy Statement  filed  April 29, 1996, in
            respect of  its  1996  Annual  Meeting  of  Stockholders  (File No.
            1-1363)).

     3.2 -  Amendment  of Amended  and  Restated  Certificate  of  Incorporation
            (incorporated  herein  by  reference  to  Page  2 to  the  Company's
            Proxy Statement filed April 30, 1997,  in respect of its 1997 Annual
            Meeting of Stockholders (File No. 1-1363))

     3.3 -  By-Laws of the Company (incorporated herein by reference to  Exhibit
            C (pages  C-1 to C-9) to the Company's Proxy Statement  filed  April
            24,  1987,  in  respect  of its 1987 Annual  Meeting of Stockholders
            (File No. 1-1363)).

     3.4 -  Amendment to  the  By-Laws  of  the  Company (incorporated herein by
            reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K
            for the fiscal year ended December 31, 1987 (File No. 1-1363)).

     3.5 -  By-Law Amendment Adopted March 26, 1997 By Unanimous Written Consent
            of the Board of Directors,  Effective  June  19, 1997  (incorporated
            by  reference to Exhibit 3.5 to the Company's  Quarterly  Report  on
            Form  10-Q  for the  fiscal quarter ended June 30, 1997 (File No. 1-
            1363)).

     4.1 -  Loan and  Security  Agreement,  dated as of April 6, 1993,   between
            IMS Funding  Corporation  and  Greyhound Financial Corporation. (The
            Company agrees to furnish a copy of such agreement to the Commission
            upon request).

     4.2 -  Agreement  Amending  Loan  and  Security  Agreement  and   Corporate
            Guarantee Agreement, dated as of December  8,  1995,  between FINOVA
            Capital  Corporation  (formerly  known  as  Greyhound  Financial
            Corporation),  IMS  Funding  Corporation,  and  International  Mill
            Service,  Inc.  (The Company  agrees  to  furnish  a  copy  of  such
            agreement to the Commission upon request).

     4.3 -  Indenture, dated as of  July 1, 1993, between the Company and United
            States  Trust  Company  of New York, as  Trustee,  relating  to  the
            Company's 9-3/4% Senior Notes due 2003, including the  form  of such
            Notes  attached  as  Exhibit  A  thereto  (incorporated  herein   by
            reference to Exhibit 4.10  to the Company's Quarterly Report on Form
            10-Q for the fiscal quarter ended June 30, 1993 (File No. 1-1363)).

<PAGE>


     4.4 -  First  Supplemental Indenture, dated as of November 2, 1995, between
            the Company and United States Trust Company of New York, as Trustee,
            relating to the Company's 9-3/4% Senior Notes due 2003 (incorporated
            herein  by  reference  to  Exhibit  4.15  to the Company's Quarterly
            Report on  Form 10-Q for the fiscal quarter ended September 30, 1995
            (File No. 1-1363)).

     4.5 -  Second Supplemental  Indenture,  dated  as  of  September  24, 1997,
            between the Company and United States  Trust Company of New York, as
            Trustee, relating to the company's  9-3/4%  Senior  Notes  due  2003
            (incorporated  herein  by  reference to Exhibit 4.5 to the Company's
            Quarterly Report on Form 10-Q for the fiscal quarter ended September
            30, 1997 (File No. 1-1363).

     4.6 - Indenture,  dated as of September  30, 1997,  between the Company and
           United  States  Trust  Company of  New  York,  as  Trustee,  relating
           to the Company's 9-3/4%  Senior Notes due 2003,  Series B,  including
           the form of such Notes  attached  as Exhibit A thereto  (incorporated
           herein by reference to Exhibit 4.6 to the Company's Quarterly  Report
           on Form 10-Q for the  fiscal  quarter  ended September 30, 1997 (File
           No. 1-1363).

     4.7 - Registration Rights Agreement,  dated as of September 30, 1997, among
           the Company and Morgan Stanley Dean  Witter, Jeffries & Company, Inc.
           and   NationsBanc  Capital  Markets,  Inc. (incorporated   herein  by
           reference  to  Exhibit  4.7 to the Company's Quarterly Report on Form
           10-Q  for  the  fiscal  quarter ended September 30, 1997 (File No. 1-
           1363)

     4.8 - Registration Rights Agreement, dated as of  May 13, 1993,  among  the
           Company, FS Equity  Partners  II, L.P., The IBM Retirement Plan Trust
           Fund and Enso Partners, L.P. (incorporated  herein  by  reference  to
           Exhibit  4.29  to  Amendment  No. 1  to  the  Company's  Registration
           Statement on Form S-1, filed June 14, 1993 (File No. 33-62050)).

     4.9 - Loan Agreement, dated as  of  June  1,  1994,  between the Industrial
           Development  Corporation  of  Owyhee  County,  Idaho  and  Envirosafe
           Services  of  Idaho,  Inc. relating  to $8,500,000 Industrial Revenue
           Bonds, Series  1994.  (The  Company  agrees to furnish a copy of such
           agreement to the Commission upon request).

<PAGE>


    4.10 - Credit  Agreement,  dated as of December 19, 1995, among the Company,
           International  Mill  Service,  Inc.,  the  lenders  parties  thereto,
           NationsBank, N.A., as Administrative Agent,  and  Credit  Lyonnais as
           Syndication  Agent  (incorporated herein by reference to Exhibit 4.14
           to the Company's Annual Report on Form 10-K for the fiscal year ended
           December 31, 1995 (File No. 1-1363)).

    4.11 - First  Amendment, dated as of May 15, 1996, to the  Credit Agreement,
           dated as of December 19,  1995, among the Company, International Mill
           Service, Inc., the lenders parties  thereto,  NationsBank,  N.A.,  as
           Administrative  Agent,  and  Credit  Lyonnais  as  Syndication  Agent
           (incorporated  herein  by  reference to Exhibit 4.15 to the Company's
           Quarterly Report on Form 10-Q for  the  fiscal quarter ended June 30,
           1996 (File No. 1-1363)).

    4.12 - Second  Amendment,  dated  as  of  December  23,  1996, to the Credit
           Agreement,  dated  as  of  December  19,  1995,  among  the  Company,
           International  Mill  Service,  Inc.,  the  lenders  parties  thereto,
           NationsBank,  N.A.,  as  Administrative Agent, and Credit Lyonnais as
           Syndication Agent (incorporated  herein  by reference to Exhibit 4.13
           to the Company's Annual Report on Form 10-K for the fiscal year ended
           December 31, 1996 (File No. 1-1363)).

    4.13 - Third  Amendment,  dated effective as of June 30, 1997, to the Credit
           Agreement,  dated  as  of  December  19,  1995,  among  the  Company,
           International Mill  Service,   Inc.,   the  lenders  parties  hereto,
           NationsBank, N.A., as  Administrative  Agent,  and Credit Lyonnais as
           Syndication Agent  (incorporated  herein by reference to Exhibit 4.14
           to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
           ended June 30, 1997 (File No. 1-1363)).

    4.14 - Fourth  Amendment,  dated  as  of  September  23, 1997, to the Credit
           Agreement,  dated  as  of  December  19,  1995,  among  the  Company,
           International  Mill  Service,  Inc.,  the  lenders  parties  thereto,
           NationsBank,  N.A.,  as  Administrative Agent, and Credit Lyonnais as
           Syndication Agent (incorporated  herein  by reference to Exhibit 4.18
           to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
           ended September 30, 1997 (File No. 1-1363)).

<PAGE>


   4.15*- Fifth Amendment, dated as of March 5, 1998, to the Credit  Agreement,
           dated as of December 19, 1995, among the Company, International  Mill
           Service, Inc., the  lenders parties  thereto,  NationsBank,  N.A., as
           Administrative  Agent, and Credit Lyonnais as Syndication Agent.

   10.1 -  Restated  Incentive  Stock  Option  Plan  of  the Company, as amended
           (incorporated herein by  reference  to  Exhibit  A  to  the Company's
           Registration Statement on Form S-8, filed January 17, 1989 (File No.
           33-26633)).

   10.2 -  Promissory Note of Louis A. Guzzetti,  Jr.,  dated  March  31,  1993,
           payable to the Company, amending and replacing  the  Promissory Notes
           dated October 15, 1987, March 31, 1991 and  March 31,  1992  and  the
           Letter Amendments dated April 13, 1991 and May 12, 1992 (incorporated
           herein by reference to Exhibit 10.13 to Post-Effective  Amendment No.
           1  to  the  Company's  Registration  Statement  on  Form  S-1,  filed
           September 16, 1993 (File No. 33-46930)).

   10.3 -  Promissory  Notes  of  Aarne Anderson,  George  E.  Fuehrer  and  Mr.
           Guzzetti, dated as of April 1, 1993, payable to the Company, amending
           and replacing the Promissory Notes dated  January 13,  1989, April 1,
           1991 and April 1, 1992 (incorporated  herein  by reference to Exhibit
           10.17 to Post-Effective  Amendment  No. to the Company's Registration
           Statement on Form S-1, filed September 16, 1993 (File No. 33-46930)).

   10.4 - Stock Option Agreement, dated March 18, 1992, between the Company  and
          Raymond P.  Caldiero  (incorporated   herein  by  reference to Exhibit
          10.20 to the Company's Annual Report on Form  10-K for the fiscal year
          ended  December 31, 1992 (File No. 1-1363)).

   10.5 - Stock Option Agreement,  dated March 18, 1992, between the Company and
          Jeffrey  G.  Miller  (incorporated  herein   by   reference to Exhibit
          10.21 to the Company's Annual Report on Form 10-K  for the fiscal year
          ended  December 31, 1992 (File No. 1-1363)).

   10.6 - Amendment, dated August  5, 1993, to the Stock Option Agreement, dated
          March   18,   1992,   between   the  Company  and  Jeffrey  G.  Miller
          (incorporated herein by reference to Exhibit 10.22  to  Post-Effective
          Amendment  No. 1  to the Company's Registration Statement on Form S-1,
          filed September 16, 1993(File No. 33-46930)).


<PAGE>

   10.7 - Stock Option Agreement,  dated August 5, 1993, between the Company and
          Wallace  B. Askins (incorporated  herein by reference to Exhibit 10.23
          to  Post-Effective  Amendment  No. 1  to  the  Company's  Registration
          Statement on Form S-1, filed September 16, 1993 (File No. 33-46930)).

   10.8 - 1993  Stock  Option  Plan  of  the  Company  (incorporated  herein  by
          reference  to  Exhibit  10.21 to Amendment  No.  1  to  the  Company's
          Registration Statement  on Form S-1, filed June 14, 1993 (File No. 33-
          62050)).

   10.9 - EnviroSource,  Inc.  Stock  Option  Plan for Non-Affiliated Directors,
          dated  as  of  January  1, 1995 (incorporated herein by  reference  to
          Exhibit 10.14  to  the  Company's Annual Report on Form  10-K  for the
          fiscal  year ended  December  31,  1994 (File No. 1-1363)).

  10.10 - Supplemental Executive  Retirement  Plan  of  the  Company,  effective
          January 1, 1995 (incorporated  herein by reference to Exhibit 10.19 to
          the Company's Annual Report on Form 10-K  for  the  fiscal  year ended
          December 31, 1994 (File No. 1-1363)).

  10.11 - Employment Agreement,  dated November 5, 1996, between the Company and
          Aarne Anderson (incorporated herein  by reference to Exhibit  10.12 to
          the  Company's  Quarterly  Report  on  Form  10-Q for the period ended
          September 30, 1996 (File No. 1-1363)).

  10.12 - Employment Agreement, dated November 5, 1996,  between the Company and
          William B. Davis (incorporated herein by reference to Exhibit 10.13 to
          the  Company's  Quarterly  Report  on  Form  10-Q for the period ended
          September 30, 1996 (File No. 1-1363)).

  10.13 - Employment Agreement, dated  November 5, 1996, between the Company and
          James C. Hull (incorporated herein by  reference  to Exhibit  10.14 to
          the  Company's  Quarterly  Report  on Form 10-Q for the  period  ended
          September 30, 1996 (File No. 1-1363))

  10.14 - Stock Purchase Agreement,  dated  November 26, 1996, by and among IMCO
          Recycling Inc.,  IMSAMET,  Inc.  and EnviroSource, Inc.  (incorporated
          herein by  reference to Exhibit 10.1 to the  Company's  Form 8-K filed
          January  21,  1997 (File  No. 1-1363)).

<PAGE>


  10.15 - Amendment  No. 1, dated  as  of  January  21,  1997, to Stock Purchase
          Agreement, dated November 26, 1996, by  and among IMCO Recycling Inc.,
          IMSAMET, Inc. and EnviroSource, Inc. (incorporated herein by reference
          to Exhibit 10.2 to the Company's Form 8-K filed January 21, 1997 (File
          No. 1-1363))

  21.1* - Subsidiaries of the Company

  23.1* - Consent of Ernst & Young LLP

     (b) Reports on Form 8-K.
         -------------------

     During the last quarter of the fiscal year ended December 31, 1997, the
Company filed no Current Reports on Form 8-K.


* Filed herewith.


<PAGE>


                                   SIGNATURES


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

Dated:  March 31, 1998
                                                  ENVIROSOURCE, INC.



                                                  By: /s/ LOUIS A. GUZZETTI, JR.
                                                      --------------------------
                                                      Louis A. Guzzetti, Jr.
                                                      President and Chief
                                                      Executive Officer


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the  following  persons on behalf of the Company
and in the capacities indicated on March 31, 1998.

Signature                                       Title

/s/ LOUIS A. GUZZETTI, JR.                      President and Chief Executive
--------------------------
Louis A. Guzzetti, Jr.                          Officer (Principal Executive
                                                Officer) and Director

/s/ JAMES C. HULL                               Vice President and Chief
-----------------
James C. Hull                                   Financial Officer (Principal
                                                Financial and Accounting
                                                Officer)

/s/ RONALD P. SPOGLI                            Chairman of the Board of
--------------------
Ronald P. Spogli                                Directors


/s/ WALLACE B. ASKINS                           Director
---------------------
Wallace B. Askins


/s/ RAYMOND P. CALDIERO                         Director
-----------------------
Raymond P. Caldiero

<PAGE>

/s/ ROBERT N. GURNITZ                           Director
---------------------
Robert N. Gurnitz

/s/ JEFFREY G. MILLER                           Director
---------------------
Jeffrey G. Miller


/s/ JON D. RALPH                                Director
----------------
Jon D. Ralph


/s/ JOHN M. ROTH                                Director
----------------
John M. Roth

/s/ J. FREDERICK SIMMONS                        Director
------------------------
J. Frederick Simmons

<PAGE>
REPORT OF INDEPENDENT AUDITORS


Stockholders and Board of Directors
EnviroSource, Inc.



We have audited the  accompanying  consolidated  balance sheets of EnviroSource,
Inc. as of December 31, 1997 and 1996, and the related  consolidated  statements
of operations,  stockholders' equity, and cash flows for each of the three years
in the period ended  December 31, 1997.  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  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
EnviroSource,  Inc. at December 31, 1997 and 1996, and the consolidated  results
of its  operations  and its cash flows for each of the three years in the period
ended  December 31, 1997,  in  conformity  with  generally  accepted  accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered  in  relation  to the basic  financial  statements  taken as a whole,
present fairly in all material respects the information set forth therein.

As discussed in Note A to the financial statements,  in 1997 the Company changed
its method of accounting for systems development costs.


                                                       /s/Ernst & Young LLP



Stamford, Connecticut
February 13, 1998
<PAGE>



                               ENVIROSOURCE, INC.
                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)


                                                  December 31,
                                                  ------------
                                               1997          1996
                                               ----          ----
ASSETS
Current assets:
  Cash and cash equivalents                  $  9,942     $  9,678
  Accounts receivable, less allowance for
    doubtful accounts of $701 in 1997 and
    $1,220 in 1996                             33,260       31,550
  Net current assets of discontinued
    IMSAMET operations                                      34,864
  Net deferred income taxes                     2,755       15,200
  Other current assets                          3,966        4,686
                                             --------     --------
          Total current assets                 49,923       95,978

Property, plant and equipment:
  Land and improvements                         1,184          887
  Landfill development                         27,993       29,701
  Buildings and improvements                   24,824       25,501
  Machinery and equipment                     234,359      214,768
                                             --------     --------
                                              288,360      270,857
  Less allowance for depreciation            (144,978)    (128,392)
                                             --------     --------
                                              143,382      142,465

Goodwill, less amortization                   132,766      138,635
Closure trust funds and deferred charges,
  less amortization                            33,810       34,139
Landfill permits, less amortization            23,849       23,064
Net deferred income taxes                      12,582       10,800
Debt issuance costs, less amortization         10,130        8,442
Other assets                                    6,860        6,386
                                             --------      -------
                                             $413,302     $459,909
                                             ========     ========

See notes to consolidated financial statements.

<PAGE>

                               ENVIROSOURCE, INC.
                   CONSOLIDATED BALANCE SHEETS - continued
                             (Dollars in thousands)


                                                    December 31,
                                                    ------------
                                                1997           1996
                                                ----           ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable                           $  12,194       $  9,302
  Salaries, wages and related benefits           7,173          7,253
  Insurance obligations                          5,789          6,187
  Estimated reorganization and
    restructuring costs                            963          2,207
  Other current liabilities                     10,797         15,287
  Current portion of debt                       13,786         64,504
                                             ---------       --------
          Total current liabilities             50,702        104,740

Long term debt:
  9-3/4% Senior Notes due 2003                 270,000        220,000
  Other long term debt                          11,614         48,424

Other liabilities                               40,775         47,688

Stockholders' equity:
  Common stock, par value $.05 per share,
    shares authorized - 60,000,000, shares
    issued and outstanding - 40,713,765
    in 1997 and 40,351,446 in 1996               2,036          2,018
  Capital in excess of par value               174,194        173,472
  Accumulated deficit                         (134,132)      (134,631)
  Stock purchase loans receivable from
          officers                                (663)          (810)
  Canadian translation adjustment               (1,224)          (992)
                                              --------       --------
          Total stockholders' equity            40,211         39,057
                                              --------       --------
                                              $413,302       $459,909
                                              ========       ========


See notes to consolidated financial statements

<PAGE>

                               ENVIROSOURCE, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              (Dollars in thousands, except for per share amounts)


                                             Years Ended December 31,
                                             ------------------------

                                         1997          1996            1995
                                         ====          ====            ====

Revenues                               $227,678      $212,789        $223,722

Cost of revenues                        180,123       165,278         163,070
Selling, general and
  administrative expenses                25,264        23,165          26,163
Unusual items, net                        1,300         5,471          (2,624)
                                       --------      --------        --------
Operating income                         20,991        18,875          37,113

Interest income                           1,223         1,356           1,133
Interest expense                        (29,308)      (28,187)        (23,483)
                                       --------      --------        --------
(Loss) income from continuing
  operations before income taxes         (7,094)       (7,956)         14,763

Income tax (expense) benefit:
  Current                                (1,399)       (1,134)         (1,262)
  Deferred                                   31         4,400          (3,946)
                                       --------      --------        --------
                                         (1,368)        3,266          (5,208)
                                       --------      --------        --------
(Loss) income from
  continuing operations                  (8,462)       (4,690)          9,555

Income from discontinued
  IMSAMET operations, after taxes         9,600           399             949
                                       --------      --------        --------
Income (loss) before extraordinary
  loss and cumulative effect of
  accounting change                       1,138        (4,291)         10,504

Extraordinary debt extinguishment
  loss                                                                   (806)

Cumulative effect of accounting
  change                                   (639)
                                       --------      --------        --------
Net income (loss)                           499        (4,291)          9,698

Preferred stock dividend
  requirements, reduced by
  retirement gain of $250 in 1996                        (151)         (1,739)
                                       --------      --------        --------
Income (loss) applicable to
  common shares and equivalents        $    499      $ (4,442)       $  7,959
                                       ========      ========        ========

Income (loss) per share:
  Continuing operations                 $  (.21)     $   (.12)        $   .19
  Discontinued operations                   .24           .01             .03
  Extraordinary loss                                                     (.02)
  Cumulative effect of
    accounting change                      (.02)
                                        -------      --------         -------
  Net income (loss)                     $   .01      $   (.11)        $   .20
                                        =======      ========         =======

Weighted average common (and in
  1995 equivalent) shares                40,533        40,443          40,527

See notes to consolidated financial statements.


<PAGE>

                               ENVIROSOURCE, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (Dollars in thousands)
<TABLE>
<CAPTION>

                                             Capital in                      Stock      Canadian
                                   Common     Excess of     Accumulated     Purchase   Translation
                                   Stock      Par Value       Deficit        Loans     Adjustment     Total
                                   -----      ---------       -------        -----     ----------     -----
<S>                              <C>           <C>           <C>            <C>          <C>        <C>

Balance January 1, 1995          $ 2,005       $162,573      $(138,148)     $(840)       $(1,069)   $ 24,521
  Common stock issued
    (100,485 shares)                   5              7                                                   12
  Net income                                                     9,698                                 9,698
  Preferred stock dividends
    and accretion                                               (1,739)                               (1,739)
  Translation adjustment                                                                     112         112
                                 -------       --------      ---------      -----        -------    --------
BALANCE DECEMBER 31, 1995          2,010        162,580       (130,189)      (840)          (957)     32,604

  Common stock issued
    (157,202 shares)                   8            192                                                  200
  Deferred income tax benefit                    10,700                                               10,700
  Net loss                                                      (4,291)                               (4,291)
  Preferred stock dividends
    and accretion                                                 (401)                                 (401)
  Preferred stock retirement
    gain                                                           250                                   250
  Loan repayment                                                               30                         30
  Translation adjustment                                                                     (35)        (35)
                                 -------       --------      ---------      -----        -------     --------
BALANCE DECEMBER 31, 1996          2,018        173,472       (134,631)      (810)          (992)     39,057

  Common stock issued
    (362,319 shares)                  18            722                                                  740
  Net income                                                       499                                   499
  Loan repayment                                                              147                        147
  Translation adjustment                                                                    (232)       (232)
                                 -------       --------      ---------      -----        -------    --------
Balance December 31, 1997        $ 2,036       $174,194      $(134,132)     $(663)       $(1,224)   $ 40,211
                                 =======       ========      =========      ======       =======    ========
</TABLE>

See notes to consolidated financial statements.
<PAGE>

                               ENVIROSOURCE, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)



                                                    Years Ended December 31,
                                                    ------------------------

                                                 1997          1996      1995
                                                 ----          ----      ----
OPERATING ACTIVITIES
Income (loss) before extraordinary loss and
  cumulative effect of accounting change      $ 1,138      $ (4,291)   $10,504
Adjustments to reconcile income (loss)
  to cash provided by operating activities:
    Deferred income taxes                      11,969        (4,400)     4,346
    Gain from sale of IMSAMET                 (21,600)
    Depreciation                               26,492        26,261     24,545
    Amortization                               11,029         9,715      9,071
    Unusual items, net of payments               (628)        1,766     (6,816)
    Changes in working capital                   (271)       (2,562)       368
    Other, net                                  2,394         1,674       (113)
                                              -------        ------    -------
Cash provided by operating activities          30,523        28,163     41,905
                                              -------        ------    -------
INVESTING ACTIVITIES
Property, plant and equipment:
  Additions                                   (29,354)      (21,883)   (32,560)
  Proceeds from dispositions                      883         2,930        383
Net proceeds from sale of IMSAMET              56,464
Purchase of Alexander Mill Services, Inc.
  (net of cash acquired)                                     (5,953)
Landfill permit additions and closure
  expenditures                                 (4,044)       (3,186)    (1,125)
Closure trust fund payments                    (1,515)       (1,530)    (9,087)
Ongoing cash flows related to
  IU International acquisition                (10,808)       (1,901)    (9,600)
Other                                          (1,117)         (798)    (2,299)
                                              -------        ------     ------
Cash provided (used) by investing
  activities                                   10,509       (32,321)   (54,288)
                                              -------        ------     ------
FINANCING ACTIVITIES
Debt issuance                                  82,000        60,000     75,188
Debt repayment                               (119,528)      (21,372)   (60,173)
Debt issuance costs                            (3,240)         (102)    (2,624)
Retirement of preferred stock                               (33,242)       (42)
Sale of common stock                                            185         12
                                              -------        ------     ------
Cash provided (used) by financing
  activities                                  (40,768)        5,469     12,361
                                              -------        ------     ------
CASH AND CASH EQUIVALENTS
  Increase (decrease) during year                 264         1,311        (22)
  Beginning of year                             9,678         8,367      8,389
                                              -------        ------     ------
  End of year                                 $ 9,942      $  9,678    $ 8,367
                                              =======       =======    =======

See notes to consolidated financial statements.


<PAGE>
                               ENVIROSOURCE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A -- ACCOUNTING POLICIES

Principles of consolidation:  The consolidated  financial statements include the
---------------------------
accounts  of  the  Company  and  its  subsidiaries.  Intercompany  accounts  and
transactions have been eliminated.  Certain amounts reported in prior years have
been reclassified for comparative purposes.

Use  of  estimates:   Preparing   financial   statements   in   accordance  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.

Cash equivalents: Cash equivalents are highly liquid investments with maturities
----------------
of three months or less when acquired.

Property,  plant and equipment: Property, plant and equipment is stated at cost.
------------------------------
Depreciation  is  computed  by  the  straight-line method based on the following
lives: buildings and improvements -- 10 to 30 years and machinery and  equipment
 -- 3 to 25 years. Landfill development costs are depreciated based on the ratio
of cubic yards of disposal  capacity  utilized to total cubic yards of  disposal
capacity.

Landfill  permits:   Costs  to  acquire   and   maintain  landfill  permits  are
-----------------
deferred and  amortized  based on the ratio of cubic yards of disposal  capacity
utilized to total cubic yards of disposal capacity. Accumulated amortization was
$16.7 million and $14.6 million at December 31, 1997 and 1996.

Closure trust funds and deferred charges:   Idaho  landfill  closure  costs  and
----------------------------------------
post-closure  obligations  (accrued as  liabilities  in the  balance  sheet) are
secured  by a trust fund  invested  in U.S.  government  and  government  agency
securities.  These  investments,  totaling  $14.3  million and $12.8  million at
December  31,  1997 and  1996,  are  classified  as  "available-for-sale,"  have
maturities of one month to ten years and are carried at market  value.  Interest
income and realized gains and losses are  recognized in earnings.  Excess funds,
if any, will revert to the Company.

Ohio   landfill   trust  fund   balances   represent  deferred  charges that are
amortized  as part  of  closure  costs.  These  trusts  (also  invested  in U.S.
government  and  government  agency  securities)  will fund the latter stages of
closure activity and all post-closure  activity in perpetuity.  Excess funds, if
any, revert to the State of Ohio; accordingly, no interest income is recognized.
Accumulated  amortization was $14 million and $12.1 million at December 31, 1997
and 1996.

<PAGE>

                              ENVIROSOURCE, INC.
                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)


NOTE A -- ACCOUNTING POLICIES - continued

Closure  costs:   The   estimated   costs  of  future  closure and  post-closure
--------------
monitoring  and  maintenance  of landfills are amortized or accrued based on the
ratio of cubic  yards of  disposal  capacity  utilized  to total  cubic yards of
disposal capacity.  Closure costs are similar to landfill development costs, but
are generally incurred for aboveground  construction.  Closure  cost accruals of
$10.1  million and $8.8 million are included in other long-term  liabilities  at
December 31, 1997 and 1996.

Goodwill:   The   excess  of   purchase   price over fair value of net assets of
--------
acquired   businesses  is  recorded  as  an  asset  and   amortized   using  the
straight-line  method over periods of 15 to 40 years.  Accumulated  amortization
was $48.8  million and $44 million at  December  31, 1997 and 1996.  Most of the
goodwill is identified  with the Company's  excellent  reputation  and long-term
relationships within the steel industry.  The carrying value of goodwill will be
reviewed if facts and  circumstances  suggest that it may be  impaired.  If this
review indicates that the goodwill will not be recoverable,  as determined based
on anticipated cash flows over the remaining  amortization  period, the carrying
value of the goodwill will be reduced based on the  discounted  present value of
the anticipated cash flows.

Revenues:   Most  of  the   Company's   revenues are  recognized as services are
--------
provided.  Revenues  of $8  million  in 1995 were from  long-term  contracts  to
design,  supply and construct "wet scrubber  sludge"  stabilization  systems for
electric  utilities.  Revenues from such  contracts  were  recognized  using the
percentage-of-completion  method,  with progress toward  completion  measured in
labor hours.  Such  contracts  were  segmented  between  "design and supply" and
"construction," and a separate profit margin was recognized for each segment.

Accounting  Change:  Pursuant to Emerging Issues Task Force (EITF) Issue No. 97-
-----------------
-13, the Company  changed its  accounting  policy for systems development costs.
Previously,  substantially  all direct  costs  relating  to systems  development
were   capitalized,   including   certain   consulting costs to select software.
Under EITF Issue No. 97-13, such costs must be expensed  as  incurred,   so  the
unamortized  balance of these costs  totaling  $639,000 as of September 30, 1997
was written off as a  cumulative  accounting  change in the fourth quarter.

Earnings per share:  In 1997,  the  Financial Accounting Standards Board  (FASB)
------------------
issued  Statement  No. 128,  Earnings per Share.  Statement 128 replaces primary
and  fully diluted earnings per share with basic and diluted earnings per share.
Unlike  primary  earnings  per  share, basic earnings per share is calculated by
dividing  income (loss)  applicable  to  common  shares by the weighted  average
number of shares outstanding during the period, excluding any  dilutive  effects
of options and warrants. Diluted earnings per  share  includes  the  effects  of
common  stock  equivalents  outstanding during the period and is very similar to
the previously reported fully diluted earnings per share. All earnings per share
amounts  for  all  periods  are  presented  in  conformity  with  Statement  128
requirements.

<PAGE>

                              ENVIROSOURCE, INC.
                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)


NOTE A -- ACCOUNTING POLICIES - continued

Basic and diluted earnings per share amounts  were  the  same  in  1997 and 1996
because  there is no dilution when there is a loss from  continuing  operations.
Basic and diluted  earnings per share amounts were identical in 1995 because the
dilutive effects of options and warrants were minimal.

Stock-based  compensation  plans:  The  Company  follows  Accounting  Principles
--------------------------------
Board Opinion No. 25,  Accounting  for Stock Issued to Employees,  in accounting
for  stock-based  compensation  plans and  discloses  the fair  value of options
granted and pro forma earnings as permitted by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation.

New FASB  Statements:  In  June  1997,  the  FASB  issued  Statement   No.  130,
--------------------
"Reporting Comprehensive  Income"  and  Statement  No. 131,  "Disclosures  about
Segments of an Enterprise and Related  Information."  Further, in February 1998,
the  FASB  issued   statement   No.  132,  "Pension   and  Other  Postretirement
Disclosures."  The  new statements  are effective in 1998. The Company is in the
process  of  evaluating the  disclosure  requirements  of  the  new  statements,
the adoption of which will have  minimal  impact  on  the  Company's   financial
statements.

NOTE B -- UNUSUAL ITEMS, NET

1995  -  The   Company    purchased    IU    International    Corporation   ("IU
----
International")  in 1988. During 1995 the Company favorably resolved a number of
liabilities resulting from that acquisition, primarily liabilities for insurance
matters  (Note G). The benefit of these  developments  was  partially  offset by
additional charges for other matters arising from the same acquisition.  The net
credit to income in 1995  amounted to $3.6 million.  The Company also  increased
its  estimate of costs to  complete  its 1993  restructuring  by $.2 million and
incurred $1 million of  termination  costs for additional  headcount  reductions
during  1995.  After  related  income tax expense of $3.5  million,  these items
reduced net income by approximately $1 million or $.02 per share.

1996 -   During   1996  the   Company   reduced  its  estimates  of  liabilities
----
remaining from the IU International  acquisition by $.9 million and recorded $.8
million of  additional  closure  costs for waste  disposal  sites that have been
inactive since before the Company's 1988  acquisition of IU  International.  The
Company also settled the last disputed matter from its 1993 restructuring, which
resulted in an  additional  charge of $1.2  million for a  terminated  recycling
unit. Additionally,  the Company provided $4.4 million (including $2 million for
severance costs,  $1.3 million for costs of vacated offices and abandoned assets
and $1.1  million  for  other  costs)  for its 1996  reorganization,  which  was
initiated to improve productivity and reduce costs. The reorganization consisted
principally of consolidating  all of the Company's  headquarters  functions in a
single location. The Company's corporate  headquarters in Stamford,  Connecticut
and the Technologies segment's headquarters in Horsham, Pennsylvania were closed
and their activities moved to the IMS headquarters building, also in Horsham. As
a result, approximately 50 positions were eliminated, mostly in the Technologies
segment.  In addition to severance and related  costs,  a liability was recorded
<PAGE>

                              ENVIROSOURCE, INC.
                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)


NOTE B -- UNUSUAL ITEMS, NET - continued

for occupancy  expenses related to vacated  facilities and abandoned assets were
written  off.  During 1996 $5.1 million of such costs (including $2.2 million of
severance  costs,  $1.3  million  of  costs  related  to  terminated   recycling
activities, $1 million of costs for vacated offices and abandoned assets and $.6
million of other costs) were charged against the liability, leaving a balance of
$3.4 million for  remaining  costs.  After  related  income tax benefits of $1.9
million,  the 1996 unusual items  increased the net loss by  approximately  $3.6
million or $.09 per share.

1997 - During 1997, $1.9 million  (including $.7 million of severance costs, $.4
----
million of vacated office costs,  $.4 million of terminated  recycling  activity
costs  and  $.4  million  of  other  costs)  of  costs  were   charged   against
restructuring and  reorganization liabilities, leaving a balance of $1.5 million
at December 31, 1997.  Also  during 1997,  $1.3 million of unusual  charges were
recorded for costs to satisfy  regulatory  requirements  at waste disposal sites
that have been inactive since  before  the  Company's  1988  acquisition  of  IU
International  and to vacate  another  office.  Costs totaling $2.5 million were
charged against these and other unusual item liabilities, leaving  a balance for
remaining  costs of $1.5 million at December 31, 1997.  After related income tax
benefits,  the 1997 unusual  charges  reduced  net income by  approximately  $.8
million or $.02 per share.

NOTE C -- INCOME TAXES

The components of income tax benefit  (expense)  attributable to continuing
operations are as follows (in thousands)


                                           1997        1996          1995
                                           ----        ----          ----
Current:
  State                                $ (1,170)    $  (916)     $ (1,001)
  Canadian                                 (229)       (218)         (261)
                                       --------     -------      --------
                                         (1,399)     (1,134)       (1,262)

Deferred:
  Federal                                    31       4,400        (3,946)
                                       --------     -------      --------
                                       $ (1,368)    $ 3,266      $ (5,208)
                                       ========     =======      ========

Canadian income before income taxes amounted to $.7 million in 1997 and $.6
million in 1996 and 1995.

Income tax benefit  (expense)  varies from amounts  computed by applying the
35% federal statutory rate for the following reasons (in thousands):


                                          1997        1996          1995
                                          ----        ----          ----

Benefit (expense) of pre-tax
  (loss) income from continuing
  operations at statutory rate         $  2,483     $ 2,785      $ (5,167)
Goodwill amortization                    (1,692)     (1,718)       (1,733)
Effect of (increasing) reducing
  deferred tax valuation allowance       (1,454)      3,100         2,253
Effect of state and Canadian
  income taxes                             (761)       (595)         (683)
Other                                        56        (306)          122
                                       --------     -------      --------
                                       $ (1,368)    $ 3,266      $ (5,208)
                                       ========     =======      ========
<PAGE>

                              ENVIROSOURCE, INC.
                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)


NOTE C -- INCOME TAXES - continued

Deferred  income  taxes  reflect  the  net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows (in thousands):


                                                              1997         1996
                                                              ----         ----

Deferred tax assets:
  Net operating loss carryforwards                        $ 85,643     $ 87,993
  Capital loss carryforwards                                   248        4,564
  Allowance for a doubtful receivable and insurance
    accruals that would result in capital losses                 -        5,018
  Other insurance accruals                                   2,937        2,810
  Reorganization and restructuring accrual                     655        1,280
  Pension and other postretirement benefits accruals         4,331        5,095
  Closure cost accruals                                      3,655        3,332
  Other accruals                                             6,842        6,473
                                                          --------     --------
          Total deferred tax assets                        104,311      116,565
  Valuation allowance                                      (70,554)     (69,100)
                                                          --------     --------

          Net deferred tax assets                           33,757       47,465

Deferred tax liabilities:
  Tax over book depreciation plus IU International
    acquisition purchase price allocation to
    property, plant, and equipment                          (8,817)     (10,870)
  Tax over book post-closure deductions                     (5,710)      (6,288)
  Tax over book landfill permit amortization                (3,893)      (4,012)
  Other                                                                    (295)
                                                          --------     ---------
          Total deferred tax liabilities                   (18,420)     (21,465)
                                                          --------     ---------
          Net deferred taxes                              $ 15,337     $ 26,000
                                                          ========     ========

The   Company   recognized   $26   million  of  net  deferred  tax assets in the
balance  sheet in the fourth  quarter of 1996.  Of that amount,  $12 million was
realized  when the  Company  utilized  income tax loss  carryforwards  and other
deferred  tax assets to  eliminate  income tax payments on the January 1997 gain
from  selling its IMSAMET  subsidiary  (Note D). The balance of $14 million from
1996  and  an  additional   net   benefit   of   $1.3   million   in  1997   was
recognized because the Company  has  determined  that it is more likely than not
that it will earn sufficient taxable income during  the  next  several  years to
realize  at  least  that much tax benefit  from  utilizing  net  operating  loss
carryforwards and  other  deferred  tax  assets  to  reduce  income  taxes  that
otherwise  would be payable in cash.

Virtually  the entire $1.3  million 1997 income  tax  benefit  was  credited  to
goodwill  (because the related  deferred tax assets arose from IU  International
acquisition obligations - Note G). However, the valuation allowance increased by
a net $1.5 million  because the deferred tax benefit  applicable  to  continuing
operations for the year was more than offset by the reversal of a portion of the
valuation  allowance that was credited to capital in excess of par value in 1996
that is not expected to be realized (discussed in the next paragraph).

<PAGE>

                              ENVIROSOURCE, INC.
                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

NOTE C -- INCOME TAXES - continued

The $26 million 1996 income tax benefit  (recognized  by reducing the  valuation
allowance)  was  credited  as  follows:  $4.4  million  reduced  the  loss  from
continuing  operations;  $10.9  million was  credited to goodwill  (because  the
related   deferred   tax  assets   arose  from  IU   International   acquisition
obligations);  and  $10.7  million  increased  capital  in  excess  of par value
(because  the  related  deferred  tax  assets  arose  from  net  operating  loss
carryforwards that originated prior to the Company's 1983  reorganization).  The
valuation allowance was reduced by an additional $29.3 million, primarily due to
the expiration of some of the net operating loss  carryforwards  that originated
prior to the Company's 1983 reorganization.

In 1995 the  valuation  allowance  was  reduced by $6.6  million,  of which $2.3
million was  credited to reduce  income tax expense and the balance was credited
to reduce  goodwill  (because  the  related  deferred  tax assets  arose from IU
International  acquisition  obligations),   resulting  in  deferred  income  tax
expense.

The  Company  continues  to  carry  a  sizable  valuation  allowance against the
remainder of its deferred tax assets,  primarily  because $51 million of the $86
million  deferred tax asset relates to net  operating  loss  carryforwards  that
expire in 1998.  The balance of the $86 million  represents  net operating  loss
carryforwards  that for the most part will not expire for six or more years. The
deferred tax assets other than  carryforwards  represent items already reflected
in the financial  statements that will become  available to reduce future income
taxes as they become deductible for tax purposes.

Net  operating  loss  carryforwards  totaling  $245  million  expire as follows:
$147  million  in  1998, $1 million in 2001, $15 million in 2003, $46 million in
2005, $11 million in 2006, $9 million in 2008, $11 million  in 2009,  $3 million
in  2010,  and  $2  million  in  2011.  In  1993   the   Company   underwent   a
recapitalization that resulted in  an  "ownership  change"  (as  defined  in the
Internal Revenue Code) that could limit the future use of the net operating loss
carryforwards that expire through 2006. However,  based on a comprehensive study
of its overall tax position,  the Company does not believe this  limitation will
affect its ability to utilize its net operating loss carryforwards.

Any   additional   income  tax  benefits  attributable  to  net  operating  loss
carryforwards that originated prior to the Company's 1983 reorganization will be
credited  to  capital  in excess of par value.  Additional  income tax  benefits
attributable to IU  International  acquisition  obligations  will be credited to
goodwill.  Additional  income tax benefits  attributable  to other  deferred tax
assets will reduce future income tax expense.  Subject to limitations  discussed
in the  preceding  paragraph and the  Company's  ability to generate  sufficient
future taxable income,  upon  recognition of additional net deferred tax assets,
the $70.6  million  valuation  allowance  would be credited  as  follows:  $48.8
million  to capital in excess of par value,  $8.8  million to  goodwill  and $13
million to reduce income tax expense.

<PAGE>


                              ENVIROSOURCE, INC.
                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)


NOTE D -- SALE OF IMSAMET

In  January  1997,  the  Company  sold  the  capital  stock of IMSAMET,  Inc., a
wholly-owned  subsidiary that performed  recycling and waste management services
for the  aluminum  industry,  for $58 million  realizing a pre-tax gain of $19.6
million. In the third quarter, a purchase price adjustment increased the pre-tax
gain by $2 million. After deferred income tax charges, the gain amounted to $9.6
million  or $.24 per  share.  The  proceeds  from the  sale  were  used to repay
revolving credit  borrowings and expenses  related to the transaction.  The gain
from the sale in 1997 and IMSAMET's  1996 and 1995 results have been  classified
as discontinued operations.

Summarized results of discontinued operations are as follows (in thousands):

                                             1997        1996        1995
                                             ----        ----        ----
Gain from sale                            $ 21,600    $      -    $      -
Revenues                                         -      37,399      40,962
                                          --------    --------    --------
                                          $ 21,600    $ 37,399    $ 40,962
                                          ========    ========    ========

Income before income taxes                $ 21,600    $    399    $  1,349
Deferred income tax expense                (12,000)          -        (400)
                                          --------    --------    --------
Income from discontinued
  operations                              $  9,600    $    399    $    949
                                          ========    ========    ========

Interest  expense of $3.3 million in 1996 and $3.6 million in 1995 was allocated
to  discontinued  operations  based on the ratio of the net assets of IMSAMET to
consolidated  net assets (equal to  stockholders'  equity plus debt not directly
attributable to specific operations).

NOTE E -- ALEXANDER MILL SERVICES ACQUISITION

The  Company   purchased   Alexander   Mill   Services,  Inc.  ("AMS"),  a metal
reclamation  company serving the mini-mill sector of the steel industry,  in May
1996. The results of AMS' operations are included in the consolidated statements
of operations from the acquisition date. Pro forma results of operations,  as if
this  transaction  occurred at the beginning of each period,  are as follows (in
thousands, except per share amounts):

<PAGE>
                               ENVIROSOURCE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE E -- ALEXANDER MILL SERVICES ACQUISITION - continued


                                                     1996          1995
                                                     ----          ----
                                                        (Unaudited)
Pro forma revenues                                 $217,205      $234,221
Pro forma (loss) income before extraordinary loss    (3,640)       11,101
Pro forma net (loss) income                          (3,640)       10,205
Pro forma net (loss) income per share              $   (.09)     $    .21

The pro forma  information  is not  necessarily  indicative  of the results that
would have  occurred  had the  transaction  taken place at the  beginning of the
respective periods.

The  cost  of  the  acquisition  was  $9 million (including $2.6 million that is
payable to the former owner over three and one-half  years with  interest)  plus
the  assumption of $7.2 million of debt. In allocating the purchase  price,  $11
million was charged to goodwill.


NOTE F -- DEBT

        Debt is summarized as follows (in thousands):

                                                       1997         1996
                                                       ----         ----
9-3/4% Senior Notes due 2003                         $270,000     $220,000
Bank credit facility                                    8,000       89,000
Industrial revenue bond financings,
        equipment loans and other                      17,400       23,928
                                                     --------     --------
                                                      295,400      332,928
Less current maturities                               (13,786)     (64,504)
                                                     --------     --------
Long-term debt                                       $281,614     $268,424
                                                     ========     ========

At December 31, 1997, required  principal payments by year are as follows: $13.8
million in 1998 (including $8 million of revolving credit borrowings  repaid  in
January),  $2.2 million in 1999, $.8 million in 2000,  $8.6 million in 2002  and
$270 million in 2003.

In  September  1997,  the  Company issued $50 million of 9-3/4% Senior Notes due
2003, Series B, having  substantially  the same terms as the Company's  existing
$220 million of 9-3/4% Senior Notes due 2003. Most of the net proceeds were used
to pay off the  outstanding  balance on the Company's bank credit  facility that
had been  incurred  to finance  capital  expenditures.  All of the Senior  Notes
(10.5% effective rate including  amortization of issuance costs) are redeemable,
in whole or in part,  at the  Company's  option after June 15, 1998 at 104.9% of
principal   amount,  declining   to   100%   by  June 15, 2001. Upon a change in
control (as  defined),  the Company  must offer to purchase  the Senior Notes at
101% of principal  amount.  The Senior  Notes  indenture  contains  restrictions
customarily  found  in such  agreements,  such as  limits  on  indebtedness  and
payments with respect to capital stock.


<PAGE>

                              ENVIROSOURCE, INC.
                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

NOTE F -- DEBT - continued

In December 1995, the Company entered into a $100 million, five-year bank credit
facility.  This resulted in an  extraordinary  debt  extinguishment  loss of $.8
million,  consisting  of the  unamortized  issuance  costs of the previous  bank
credit agreement. Upon the sale of IMSAMET in January 1997 (Note D), the Company
applied  the net  proceeds  to repay bank  facility  borrowings  and reduced the
amount of the facility to $65 million of revolving  credit  borrowing and letter
of credit  capacity.  In  conjunction  with the  issuance of the Senior Notes in
September  1997,  the amount of the  facility  was reduced to $50  million.  The
amount of revolving credit  borrowing and letter of credit capacity  declines by
12.5% in each of January 1999 and 2000.  Interest rates,  the commitment fee and
letter of credit  fees are based on a pricing  ratio (as  defined).  Interest on
borrowings  is at the bank's prime rate plus from .25% to 1.25% (8.5% plus 1.25%
at  December  31,  1997)  or  at  Eurodollar   rates  plus  from  1.5%  to  2.5%
(approximately  5.91% plus 2.5% at December 31,  1997).  The  commitment  fee is
currently .5% per annum on the unutilized portion of the facility.

Outstanding  letter of credit fees are currently  2.75% per annum.  The facility
(1) is secured by accounts  receivable,  the Company's  investments in stock and
intercompany  notes  of  its  subsidiaries,  and a  majority  of  the  Company's
property,  plant and equipment, (2) prohibits the payment of cash dividends, and
(3) contains covenants that require the Company to meet certain financial ratios
and tests.  The facility  terminates in January 2001. At December 31, 1997, $6.6
million  of  standby  letters  of credit  were  outstanding  under the  facility
(approximately  $4.6  million  secures  liabilities  already  reflected  in  the
consolidated balance sheet).

Industrial  revenue  bond  financings  of  $8.6 million carry a weighted average
effective interest rate of 9.3%. Equipment loans and other debt carry a weighted
average effective interest rate of 10%.

NOTE G -- IU INTERNATIONAL OBLIGATIONS

The  Company  has  certain  ongoing   obligations   resulting   from   the  1988
acquisition  of IU  International  that are  unrelated  to  current  operations.
Current liabilities  include  acquisition  obligations of $3 million at December
31, 1997 and $6.8 million at December 31, 1996. These amounts  represent ongoing
obligations for insurance, employee benefits and other matters. Payments on such
obligations  amounted to $10.8  million in 1997,  $1.9  million in 1996 and $9.6
million in 1995.  The  Company  paid $6.9  million of the 1997 amount and issued
362,319  shares of common  stock  valued at $.7  million to resolve an  employee
benefit  dispute  related  to the IU  International  acquisition  for the amount
previously recorded in the financial statements.

Non-current other liabilities includes IU International  acquisition obligations
of $21 million at December  31, 1997 and $28.5  million at December 31, 1996 for
insurance, employee benefits and income tax matters.


<PAGE>
                              ENVIROSOURCE, INC.
                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)


NOTE H -- STOCKHOLDERS' EQUITY

A  total  of   3,150,535   shares  of  the  Company's  common  stock  have  been
reserved  for stock  options  (Note I).  Under  the  terms of the  Senior  Notes
indenture and bank credit facility, the Company may not declare or pay dividends
or make cash distributions to the common stockholders.

In 1995 warrants to purchase  695,652 shares of the Company's common stock at $4
per  share and  200,000  shares at $3.50  per  share  were  exercised  using the
cashless exercise feature (by the surrender of shares of common stock subject to
the  warrants),  resulting  in the  issuance of 95,685  shares of the  Company's
common  stock.  In 1996,  102,002  shares of common  stock were  issued upon the
cashless  exercise of warrants to purchase the  Company's  common stock at seven
cents per share.

An affiliate of Freeman Spogli & Co. owns approximately  47%  of  the  Company's
common stock.

The Company is authorized to issue 5.6 million  shares of preferred  stock,  par
value $.25 per share,  with such terms and  conditions  as shall be specified by
the Company's Board of Directors.


NOTE I -- STOCK OPTIONS

The  Company  maintains  plans that  provide  incentive  stock  options and non-
qualified  stock  options  to key  employees to purchase shares of the Company's
common stock. The terms,  conditions and numbers of shares are determined by the
Compensation  and Stock Option  Committee of the Board of  Directors.  Incentive
stock  options may not be granted at  exercise  prices less than the fair market
value of the stock at the time of grant.  Non-qualified stock options may not be
granted at exercise prices less than 50% of the fair market value at the time of
grant.  Options generally vest over three or five year periods.  At December 31,
1997, options for 923,820 shares were available for future grants.

In 1995 the Company adopted a stock option plan for outside  directors that  are
not affiliated with Freeman Spogli & Co. Under the plan, on January  1  of  each
each year each outside  director is granted  options to purchase 5,000 shares of
the Company's  common stock at the prior  year-end  market price.  The plan also
allows these directors to elect to receive below-market options in lieu of their
annual  directors' fees. In 1997 and 1996 one director and in 1995 two directors
elected to receive such options in lieu of their $15,000 annual directors' fees.
All options granted under the plan become  exercisable on the following  January
1. At December 31, 1997, options for 629,855  shares were  available  for future
grants.

In addition,  three outside  directors  hold options,  granted prior to 1995, to
purchase 60,000 shares of the Company's common stock at exercise prices equal to
the fair market value at the time of grant.

<PAGE>
                              ENVIROSOURCE, INC.
                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

NOTE I -- STOCK OPTIONS - continued

Option activity is summarized below:


                                             1997         1996          1995
                                             ----         ----          ----
Shares under option at January 1         1,663,776     1,591,642     1,286,885
Options granted                            106,000       298,509       435,082
Options exercised at average exercise
  prices of $2.80 in 1996 and
  $2.50 in 1995                                          (55,200)       (4,800)
Options expired or cancelled              (172,916)     (171,175)     (125,525)
                                          --------      --------     ---------
Shares under options at December 31      1,596,860     1,663,776     1,591,642
                                         =========     =========     =========

Options exercisable at December 31       1,185,773     1,049,011       886,485
                                         =========     =========     =========


At December 31, 1997, option exercise prices ranged  from  $1.44  to  $8.25  per
share and the  weighted  average  was $4.04 per  share.  These  options,  with a
weighted  average  remaining  contractual  life of 5.4 years,  expire on various
dates from January 1998 through October 2007.  During 1997 the weighted  average
exercise price of options  granted was $1.93 per share and of options  cancelled
was $3.93 per share.

Using the  Black-Scholes  option pricing model, the estimated per share weighted
average fair values of stock  options  granted  were $1.17  during  1997,  $2.16
during 1996 and $2.15 during 1995. Assumptions made in determining the estimates
of fair value include:  risk-free  interest rates of 5.5% in 1997,  5.6% in 1996
and 6.4% in 1995,  a  volatility  factor of .48 in 1997 and .46 in 1996 and 1995
and a weighted-average expected life of 8 years for all three years.

Summarized  information about stock options  outstanding at December 31, 1997 as
follows:

                                Weighted-
                                 Average       Weighted-               Weighted-
  Range of      Number of       Remaining       Average    Number of    Average
  Exercise      Options        Contractual      Exercise    Options     Exercise
   Prices      Outstanding        Life           Price    Exercisable     Price
   ------      -----------        ----           -----    -----------     -----

$1.44 to $3.00     335,429     5.9 years         $ 2.38       230,429     $ 2.59
$3.01 to $4.50   1,042,931     6.1                 3.93       736,844       3.99
$4.51 to $8.25     218,500     1.0                 7.10       218,500       7.10
                 ---------                                  ---------
$1.44 to $8.25   1,596,860     5.4                 4.04     1,185,773       4.29
                 =========                                  =========

The following table summarizes the pro forma effects assuming  compensation cost
for such  awards  had  been  recorded  based  upon  estimated  fair  values  (in
thousands, except for per share amounts):

<PAGE>

                              ENVIROSOURCE, INC.
                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)


NOTE I -- STOCK OPTIONS - continued


                                             1997         1996           1995
                                             ----         ----           ----
Pro forma net (loss) income               $   213      $ (4,591)       $ 9,509

Pro forma net (loss) income per share     $   .01      $   (.12)       $   .19

Because  the  Company's  options  vest over three or five year  periods and only
options  granted in 1995, 1996 and 1997 are reflected in the  calculations,  the
pro forma  disclosures are not likely to be  representative  of future pro forma
amounts.

NOTE J -- BUSINESS SEGMENTS

The Company's  business  segments are: IMS, which  provides  recycling and other
specialized  services for the steel industry,  and Technologies,  which operates
hazardous   waste  disposal   landfills  and  provides   waste   management  and
stabilization  services  for the steel  industry,  as well as companies in other
industries and governmental agencies.

Information  by business  segment for the three years ended December 31, 1997 is
as follows (in thousands):


                                              1997         1996           1995
                                              ----         ----           ----
REVENUES
  IMS                                      $185,587     $180,002       $181,081
  Technologies                               42,091       32,787         42,641
                                           --------     --------       --------
                                           $227,678     $212,789       $223,722
                                           ========     ========       ========

UNUSUAL ITEM (CHARGES) CREDITS, NET
  IMS                                      $     69     $ (1,697)      $   (904)
  Technologies                               (1,491)      (3,252)          (100)
  Corporate headquarters                        122         (522)         3,628
                                           --------     --------       --------
                                           $ (1,300)    $ (5,471)      $  2,624
                                           ========     ========       ========

TOTAL OPERATING INCOME (LOSS)
  IMS                                        26,563     $ 31,971       $ 38,456
  Technologies                               (1,664)      (8,012)         1,511
  Corporate headquarters                     (3,908)      (5,084)        (2,854)
                                           --------     --------       --------
                                           $ 20,991     $ 18,875       $ 37,113
                                           ========     ========       ========

INDENTIFIABLE ASSETS
  IMS                                      $252,584     $252,958       $258,691
  Technologies                              131,231      130,683        136,516
  Corporate headquarters                     29,487       41,404         13,142
                                           --------     --------       --------
                                            413,302      425,045        408,349
  Discontinued operations                         -       34,864         36,087
                                           --------     --------       --------
                                           $413,302     $459,909       $444,436
                                           ========     ========       ========


<PAGE>
                               ENVIROSOURCE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE J -- BUSINESS SEGMENTS - continued


                                        1997          1996          1995
                                        ----          ----          ----
DEPRECIATION AND AMORTIZATION
  IMS                                 $ 25,925      $ 24,045     $ 21,972
  Technologies                          10,807         7,569        7,286
  Corporate headquarters                   789         1,398        1,333
                                      --------      --------     --------
                                        37,521        33,012       30,591
  Discontinued operations                    -         2,964        3,025
                                      --------      --------     --------
                                      $ 37,521      $ 35,976     $ 33,616
                                      ========      ========     ========
CAPITAL EXPENDITURES
  IMS                                 $ 21,002      $ 16,227     $ 23,939
  Technologies                           8,342         4,761        6,345
  Corporate headquarters                    10             5           81
                                      --------      --------     --------
                                        29,354        20,993       30,365
  Discontinued operations                    -           890        2,195
                                      --------      --------     --------
                                      $ 29,354      $ 21,883     $ 32,560
                                      ========      ========     ========

Corporate  headquarters  expenses and assets  support both segments but  are not
directly associated with either.  Corporate  assets consist  principally of cash
and cash equivalents, net deferred tax  assets  and  unamortized  debt  issuance
costs.

Revenues of approximately $46.2 million in 1997, $43.1 million in 1996 and $43.9
million in 1995 were from USX Corporation, the Company's largest steel  industry
customer.  Accounts  receivable due from USX  Corporation  totaled  $4.2 million
at December 31, 1997. At  December 31,  1997,   $26.3  million  of  consolidated
accounts  receivable  result from services performed for domestic steel industry
customers. IMS customers and operations are located throughout the United States
and  Canada.  Technologies  landfills  are in Idaho and Ohio. Foreign operations
are not significant.

The following  table sets forth the  percentage of total revenue  contributed by
each class of services during the three years ended December 31, 1997:


                                           1997          1996          1995
                                           ----          ----          ----
Industrial recycling                       67.8%         70.5%         66.7%

Specialized services                       13.7%         14.1%         14.2%

Waste stabilization and disposal           18.5%         15.2%         15.5%

Stabilization system design,
  supply and construction                                  .2%          3.6%
                                          ------        -----         -----
                                          100.0%        100.0%        100.0%
                                          =====         =====         =====

<PAGE>
                               ENVIROSOURCE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE K -- RETIREMENT PLANS

The  Company  has  several  non-contributory  defined   benefit   pension  plans
covering  certain  salaried  and hourly  employees.  The plans  provide  pension
benefits that are based on varying levels of service and compensation. Assets of
the plans are  principally  common  stocks,  fixed  income  securities  and cash
equivalents.   The  Company's  contributions  are  based  on  funding  standards
established by the Employee Retirement Income Security Act of 1974.

Net periodic  pension cost for defined  benefit plans includes the following (in
thousands):


                                           1997          1996          1995
                                           ----          ----          ----

Service cost-benefits earned
  during the period                       $  700        $  763        $  787
Interest cost on projected
  benefit obligations                      1,533         1,386         1,393
Actual gain on plan assets                (4,248)       (2,576)       (2,860)
Net amortization and deferral              2,558         1,066         1,341
                                          ------         -----         -----
Net periodic pension costs                $  543        $  639        $  661
                                          ======        ======        ======

The funded status, calculated principally using measurement dates of October 31,
1997 and 1996, and the liability  accrued in the consolidated  balance sheet for
defined benefit plans are as shown below (in thousands):


                                                1997          1996
                                                ----          ----
Actuarial present value of benefit
  obligations:
    Vested                                   $ 21,385      $ 19,070
                                             ========      ========
    Accumulated                              $ 21,395      $ 19,081
                                             ========      ========
    Projected                                $ 21,585      $ 19,205
Plan assets at fair value                      21,766        19,183
                                             --------      --------
Projected benefit obligations (less than)
  in excess of plan assets                       (181)           22
Unrecognized net income (loss)                    362          (391)
Prior service gain not yet recognized in
  net periodic pension cost                     3,477         3,985
Other                                             256           168
                                             --------      --------
Pension liability                            $  3,914      $  3,784
                                             ========      ========

The  actuarial  present  value  of  projected benefit obligations was determined
using  discount  rates of 7.25% in 1997 and 7.75% in 1996.  The expected  annual
long-term rate of return on plan assets used in determining net periodic pension
cost was 8.5% in both years.

<PAGE>
                               ENVIROSOURCE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE K -- RETIREMENT PLANS - continued

The  Company  also  sponsors  several  defined contribution retirement plans for
which  contributions  and costs are based on percentages of defined  earnings of
participating employees. Costs for these plans amounted to $1.7 million in 1997,
$1.8 million in 1996 and $1.6 million in 1995.

In  addition,  for the  benefit  of certain  unionized  employees,  the  Company
participates in defined benefit  multiemployer pension plans, for which reliable
information  concerning the Company's  share of related  estimated plan benefits
and assets is not  available,  and defined  contribution  multiemployer  pension
plans.  Costs for multiemployer  pension plans amounted to $1.8 million in 1997,
$1.6 million in 1996 and $1.7 million in 1995.

The Company also has several defined benefit  postretirement  plans that provide
varying amounts of medical and death benefits,  primarily to retired  employees.
The  actuarially  computed  cost for these plans was $.4 million in 1997 and $.5
million  in 1996 and  1995.  The  Company  funds  postretirement  benefits  on a
"pay-as-you-go" basis.

The  Company  also  participates  in  several defined contribution multiemployer
plans that provide health care and other welfare  benefits to certain  unionized
employees  during  their  working  lives and after  retirement.  Costs for these
plans  amounted  to $2 million in 1997, $1.6 million in 1996 and $1.7 million in
1995.

The Company incurred  postretirement benefit obligations in connection with  the
IU International  acquisition (Note G).  Other  long-term  liabilities   include
$4.6  million of such  obligations  at  December  31,  1997 and $4.8  million at
December 31, 1996 based on a discount  rate of 7.25%.  Future cost  increases in
health care benefits are assumed to be 11% in 1997, decreasing 1% per year to 5%
to 2002 and  remaining at that level  thereafter.  Increasing  these rates by 1%
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1997 by $.3 million and would not have had a material impact on the
cost for 1997.

NOTE L -- SUPPLEMENTAL CASH FLOW INFORMATION

Amortization   in   the    consolidated    statement   of  cash  flows  includes
amortization  of  goodwill,  landfill  permits and deferred  charges  related to
landfill  closure  together with  non-cash  interest  costs.  Changes in working
capital include the following (in thousands):


                                        1997          1996          1995
                                        ----          ----          ----
Accounts receivable                  $ (2,000)     $  4,971       $ 7,221
Other current assets                      425         1,611          (549)
Accounts payable and other
  current liabilities                   1,304        (9,144)       (6,304)
                                     --------      --------       -------
Cash provided (used)                 $   (271)     $ (2,562)      $   368
                                     ========      ========       =======


<PAGE>

                               ENVIROSOURCE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE L -- SUPPLEMENTAL CASH FLOW INFORMATION - continued

Closure trust fund payments include the following activity (in thousands):


                                        1997          1996          1995
                                        ----          ----          ----
Purchases of investments             $ (1,654)     $ (8,105)    $ (17,643)
Sales of investments                      139         6,575         8,556
                                     --------      --------     ---------
Cash used                            $ (1,515)     $ (1,530)    $  (9,087)
                                     ========      ========     =========

Ongoing  net  cash  flows  related  to  the  IU  International  acquisition  are
principally payments of non-recurring pre-acquisition obligations.

The Company paid  interest of $28.8  million in 1997,  $28.9 million in 1996 and
$26.3 million in 1995, excluding capitalized interest of $.2 million in 1995.

The Company paid income  taxes,  net of refunds,  of $1.1  million in 1997,  $.8
million in 1996 and $1.2 million in 1995.

NOTE M -- FINANCIAL INSTRUMENTS

The  estimated  fair values of financial  instruments  carried in the  Company's
consolidated balance sheet are as follows (in thousands):


                                             1997                    1996
                                             ----                    ----
                                    Carrying       Fair     Carrying     Fair
                                     Amounts      Values     Amounts     Value
                                     -------      ------     -------     -----
Long-term debt                       $281,614    $286,339   $268,424    $255,224
Other non-current assets
        and stock purchase loans        1,441       1,326      1,797       1,671

The fair values of  financial   instruments   included  in  current  assets  and
liabilities  approximate  their carrying  amounts.  The fair value of fixed-rate
long-term debt, which is thinly traded,  is based on management's best knowledge
of recent trading prices.  The fair values of other non-current assets and stock
purchase loans are estimated  using  discounted cash flow analysis and borrowing
rates in the Company's bank credit facility.

NOTE N -- RELATED PARTY TRANSACTIONS

In  January  1989,  loans  were  made to certain executive  officers to purchase
common stock of the Company. The loans, as amended,  bear interest at 6% and are
due in April 1998.  Each year half of the annual interest is payable in cash and
half is added to the outstanding principal balance. The loans require payment in
full within 30 days of termination  and provide for  forgiveness in the event of
the  employee's  death.  As of December 31, 1997,  stock purchase loans due from
officers totaled $663,000 and accrued interest receivable totaled $223,000.




<PAGE>
                               ENVIROSOURCE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE N -- RELATED PARTY TRANSACTIONS - continued

In April 1986,  the Company made a loan to an executive  officer having the same
terms,  as amended,  as the stock purchase  loans. As of December 31, 1997, this
loan and accrued interest totaled $509,000.

NOTE O -- COMMITMENTS AND CONTINGENCIES

Future minimum lease payments for non-cancelable operating leases as of December
31, 1997 amount to $8.2 million in 1998,  $6.3 million in 1999,  $3.7 million in
2000,  $2.3 million in 2001,  $1.8 million in 2002 and $2.1 million  thereafter.
Operating  leases are primarily for machinery and equipment.  Rental expense was
$10.2 million in 1997 and 1995 and $10.1 million in 1996.

At December 31, 1997,  the Company had made  commitments  to spend $13.4 million
for equipment  additions and  improvements  to waste  treatment  facilities.  To
secure  its  obligations  to  close  its  landfills  and  perform   post-closure
monitoring  and  maintenance  procedures,  the Company must make  payments  into
closure trust funds. Based on current regulations, planned improvements to waste
treatment  facilities  and  permitted  capacity,  such  payments are expected to
amount to approximately $2 million in 1998,  including the reinvestment of Idaho
trust fund earnings that the Company  includes in interest  income.  Thereafter,
such  payments  are not  expected  to  exceed  the  reinvestment  of trust  fund
earnings, based on current requirements.

The Company's Ohio and Idaho  facilities  hold operating permits issued by state
and  federal  environmental  agencies  under  the  Resource   Conservation   and
Recovery Act, as amended,  that require  renewal and  modification  from time to
time. The Company expects that it will obtain the renewals and  modifications to
its permits  that it requires  to continue to provide  landfill  capacity in its
approved disposal cells well into the next decade.

The  Company  and  its  competitors  and  customers  are subject  to  a complex,
evolving array of federal,  state and local  environmental laws and regulations.
In particular,  such  requirements  not only can affect the demand for treatment
and disposal  services,  but could also require the Company to incur significant
costs for such matters as facility  upgrading,  remediation or other  corrective
action,  facility  closure and  post-closure  maintenance and monitoring.  It is
possible  that the future  imposition  of  additional  environmental  compliance
requirements  could have a material  adverse effect on the Company's  results of
operations or financial condition, but the Company is unable to predict any such
future  requirements.  The  Company  believes  that the  consolidated  financial
statements  appropriately  reflect  all  presently  known  compliance  costs  in
accordance with generally accepted accounting principles.

The Company is a party to litigation  and  proceedings  arising  in  the  normal
course of its present or former  businesses.  In the opinion of management,  the
outcome of such matters will not have a material adverse effect on the Company's
financial condition or results of operations.


<PAGE>
                               ENVIROSOURCE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE P -- SELECTED  QUARTERLY  FINANCIAL DATA (UNAUDITED)
(In thousands,  except per share amounts)


                              Fourth        Third         Second        First
                              Quarter       Quarter       Quarter      Quarter
                              -------       -------       -------      -------
1997
Revenues                      $ 58,701      $ 57,149      $ 57,231     $ 54,597
Gross profit                    11,976        11,538        13,222       10,819
Unusual charges                   (800)         (500)            -            -
Operating income                 4,473         5,613         6,837        4,068

Income (loss):
  Continuing operations         (3,274)       (3,857)            7       (1,338)
  Discontinued operations            -         1,300             -        8,300
  Cumulative effect of change
    in accounting                 (639)            -             -            -
Net income (loss)               (3,913)       (2,557)            7        6,962

Income (loss) per share:
  Continuing operations       $   (.08)     $   (.09)     $      -      $  (.03)
  Discontinued operations            -           .03             -          .20
  Cumulative effect of change
    in accounting                 (.02)            -             -            -
                              --------      --------      --------      -------
Net income (loss)             $   (.10)     $   (.06)     $      -      $   .17
                              ========      ========      ========      =======


After  deferred  income  taxes,  1997 unusual  charges  (Note B) amounted to $.3
million  ($.01 per share) in the third  quarter and $.5 million ($.01 per share)
in the fourth quarter.


                              Fourth         Third         Second      First
                              Quarter        Quarter       Quarter     Quarter
                              -------        -------       -------     -------
1996
Revenues                     $  52,634      $ 54,651      $ 52,546    $  52,958
Gross profit                     9,627        12,337        13,052       12,495
Unusual items, net                 129          (960)       (1,240)      (3,400)
Operating income                 4,098         6,093         6,230        2,454
Income (loss):
  Continuing operations            898        (2,088)       (1,044)      (2,456)
  Discontinued operations         (312)          279           524          (92)
Net income (loss)                  586        (1,809)         (520)      (2,548)

Income (loss) per share:
  Continuing operations       $    .02      $   (.05)      $  (.03)    $   (.07)
  Discontinued operations         (.01)          .01           .02
                              --------      --------       -------     --------
Net income (loss)             $    .01      $   (.04)      $  (.01)    $   (.07)
                              ========      ========       =======     ========

<PAGE>
                               ENVIROSOURCE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE P -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - continued

After deferred income taxes,  1996 unusual items (Note B) affected income (loss)
from continuing  operations as follows:  losses of $2.2 million ($.06 per share)
in the first quarter, $.8 million ($.02 per share) in the second quarter and $.9
million  ($.02 per share) in the third  quarter.  Of the $4.4  million  deferred
income tax benefit (Note C), $1.3 million was applicable to the pre-tax loss for
the year and the other $3.1 million  represents  additional  tax benefits in the
fourth  quarter.  If the $1.3 million were allocated among the quarters based on
an effective tax rate for the year, the losses from continuing  operations would
have been as follows:  $3.3 million ($.08 per share) in the first  quarter,  $.8
million ($.02 per share) in the second  quarter and $.8 million ($.02 per share)
in the third quarter.

Due to rounding,  quarterly per share amounts do not necessarily add to the full
year amounts.


<PAGE>
                         ENVIROSOURCE, INC.                     SCHEDULE II
<TABLE>
<CAPTION>

                       VALUATION AND QUALIFYING ACCOUNTS


                 Years ended December 31, 1997, 1996, and 1995
                             (Dollars in thousands)





                                                          Additions
                                                  -------------------------

                                   Balance at     Charged to     Charged to                  Balance at
                                   beginning      costs and      other          Deductions     end of
Description                        of period      expenses       accounts          (A)         period
-----------                        ---------      --------       --------          ---         ------
<S>                                <C>           <C>                            <C>            <C>

  1997
  ----

  Allowance for doubtful accounts   $ 1,220       $   158                       $  677         $   701
                                    =======       =======                       ======         =======

  1996
  ----

  Allowance for doubtful accounts   $   729       $   728                       $  237         $ 1,220
                                    =======       =======                       ======         =======

  1995
  ----

  Allowance for doubtful accounts   $   616       $   149                       $   36         $   729
                                    =======       =======                       ======         =======
</TABLE>



(A) Amounts written off.


<PAGE>

                                  EXHIBIT INDEX




   Number                           Description                           Page

   4.15                Fifth Amendment, dated as of March 5, 1998,     EXHIBIT 1
                       to the Credit Agreement, dated as of December
                       19, 1995, among the Company, International Mill
                       Service, Inc., the Lenders parties thereto,
                       NationsBank, N.A., as Administrative Agent, and
                       Credit Lyonnais as Syndication Agent.

   21.1                Subsidiaries of the Company                     EXHIBIT 2

   23.1                Consent of Ernst & Young LLP                    EXHIBIT 3