<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, 1996

                               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                       


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.  [ ]

The aggregate market value of the voting stock held by non-
affiliates of the registrant was $51,368,470 as of March 5,
1997.

The number of shares outstanding of the Registrant's Common
Stock as of the close of business on March 5, 1997 was
40,351,446.

<PAGE>

                             PART I



ITEM 1.  Business.
         --------

THE COMPANY
-----------

     EnviroSource,  Inc. (the  "Company")  supplies  industrial  customers  with
long-term,    specialized   services,   primarily   the   recycling,   handling,
stabilization or landfilling of environmentally sensitive wastes or by-products.
The  Company's  principal  business  segments are the  Industrial  Environmental
Services  segment,  which  provides  metals  reclamation,  recycling  and  other
specialized  services  for the steel  industry,  and the  Treatment  &  Disposal
Services segment, which provides hazardous waste treatment and disposal services
and waste stabilization services for industrial and governmental customers.

     The Company conducts its operations  exclusively  through its subsidiaries.
International  Mill Service,  Inc. and its subsidiaries  ("IMS")  constitute the
Industrial Environmental Services segment, and EnviroSource Treatment & Disposal
Services,   Inc.("TDS"),   through  its  Envirosafe   and   Conversion   Systems
subsidiaries, constitutes 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  Industrial
Environmental  Services and Treatment & Disposal  Services  segments and IMSAMET
(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 48% 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 "Senior 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 TDS
business unit.
<PAGE>

     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 is expected to save
approximately   $5  million   annually  in  1997  and  years   thereafter.   The
reorganization  included the closing of the Company's corporate  headquarters in
Stamford,  Connecticut  and  the  TDS  headquarters  in  Horsham,  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
TDS. The Company recorded charges of approximately  $4.4 million during 1996 for
the reorganization.

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

BUSINESS SEGMENTS
-----------------

     INDUSTRIAL ENVIRONMENTAL SERVICES
     ---------------------------------

     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.  During the second  quarter of 1996,  IMS  purchased a smaller steel mill
services company, thereby increasing its steel mill customer base.

     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 provides  recycling and metal recovery  operations under
long-term  contracts  at over 50 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 and surface conditioning. IMS
has  enhanced  the slab  hauling  process by using  rubber-tired  carriers  that
straddle steel slabs to move them more  efficiently  throughout  the mill.  This
service, currently in place at two integrated steel mills, 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.
 
     IMS  has a  diversified  customer  base,  with  approximately  half  of its
revenues  coming from  integrated  steel  producers and half 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%, 20% and 22%
of the Company's  consolidated  revenues of continuing  operations in 1996, 1995
and 1994 respectively  (including revenues attributable to services performed by
the Treatment & Disposal Services  segment).  Long term contracts  governing the
related services expire between late 1997 and 2001. 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,
using IMS  employees  and  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,  IMS services  customers  responsible for  approximately  one-third of
total domestic steel  production.  IMS has one large competitor and many smaller
competitors. 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>

    TREATMENT & DISPOSAL SERVICES
    -----------------------------

     TDS, 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"),  TDS owns major commercial hazardous waste treatment and disposal
facilities in Ohio and Idaho.  Envirosafe services some of the country's largest
steel,  chemical,  energy,  automotive,   aerospace,   electronics  and  utility
companies, as well as numerous government agencies.

     Envirosafe has  approximately  4 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.  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 each of 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 hazardous waste  treatment and disposal  facility in the
United States with such direct rail service.
<PAGE>

     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
seasonal,  with the first  quarter of the year  tending  to be slower  depending
primarily on winter weather conditions.

     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 TDS'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.  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.

     TDS  currently  operates  and  maintains a captive  landfill for a domestic
steel mill pursuant to a service contract. TDS is currently exploring additional
opportunities for providing captive landfill services.
<PAGE>

     TDS's Conversion Systems unit 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 may be available to Conversion Systems.  Although it is
not yet clear how many power plants will install wet  scrubbers  and elect or be
required  to  include   stabilization  units,  the  Company  believes  that  its
technology will continue to provide the utility  industry with a  cost-effective
and environmentally  desirable waste management solution.  The Company continues
to explore  opportunities  for  utilizing  its flue gas  desulfurization  sludge
stabilization expertise in the Eastern European market as well.

     Conversion  Systems also is the sole licensee of a  proprietary  technology
(Super Detox(R)) for stabilizing  electric arc furnace dust - a listed hazardous
waste  (KO61)  under RCRA  generated  by steel mills - that renders the EAF dust
suitable for landfilling in non-hazardous  landfills and for possible reuse. TDS
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 each of its regional Envirosafe Ohio and Idaho facilities.  During 1994,
1995 and 1996, TDS entered into a number of new contracts to receive and process
EAF dust at its  Envirosafe  facilities.  TDS 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 allows TDS to handle EAF dust treated  utilizing its proprietary
process as a non-hazardous  waste. The generic  delisting status for the process
will save TDS and its  customers  the time and expense  involved in  petitioning
USEPA on a  facility-by-facility  basis for delisting status.  USEPA, as well as
the Illinois Department of Environmental Regulation, previously has granted site
specific  delistings  for this  process.  In  addition,  in November  1995,  TDS
received from the Idaho Department of Health and Welfare a generic delisting for
Super  Detox(R)-stabilized EAF dust which 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
TDS in the EAF dust management business,  has filed a petition for review of the
USEPA and  Illinois  delistings.  The  Company  believes  that such  appeals are
without merit and ultimately will be denied.  In any event, the delisting is not
necessary  for the Company to continue  these  operations  at its Ohio and Idaho
sites.

     Competition.  The Company's hazardous waste treatment and disposal business
     -----------
is  characterized  by intense  competition.  Envirosafe  has a limited number of
competitors  in the off-site  hazardous  waste landfill  business  (there are 19
active,  permitted  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.
<PAGE>

     TDS's principal competition in electric arc furnace flue dust stabilization
is  Horsehead,   a  thermal  metal  recovery   processor.   Although   Horsehead
historically had accounted for at least 60% of the U.S. market,  within the last
year TDS has gained  significant  market  share.  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.  However,  TDS expects to
encounter   increased   competition   through  the  decade  from  wet   scrubber
manufacturers  as well as from wet scrubber  technologies  and processes that do
not, or purport not to, require sludge stabilization units. Competition in these
businesses is based primarily on price, quality of service,  technical expertise
and the environmental integrity of the process.

DISCONTINUED OPERATIONS
-----------------------

     The IMSAMET operations,  which the Company sold in January 1997, served the
aluminum  industry.  At its Idaho  facility,  IMSAMET  processed  used  aluminum
beverage cans ("UBCs") and aluminum  dross and scrap.  At facilities  located in
Arizona (through a 70% owned  partnership) and Utah,  IMSAMET reclaimed aluminum
from dross, a by-product of the aluminum production process.  IMSAMET also had a
50% interest in a Utah  partnership,  Solar  Aluminum  Technology  Services,  to
recycle saltcake (a by-product generated in the recovery of aluminum from dross)
into marketable aluminum metal concentrate, aluminum oxide and salt brine, using
a proprietary wet milling system.

SEGMENT DATA
------------

     See Note J for  information  concerning  revenues and  operating  income by
segment for the years ended December 31, 1996,  1995 and 1994 and the percentage
of  total  revenues  contributed  by each  class  of  service  of the  Company's
continuing operations for each such year.
<PAGE>

EMPLOYEES
---------

     At March 1, 1997,  the Company  employed  approximately  1,800  persons.  A
majority  of the  hourly  employees  in the  Industrial  Environmental  Services
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 1997.  All other  contracts  will be
renegotiated in 1998 or thereafter.  Fewer than 30 Treatment & Disposal Services
segment hourly employees are also unionized.  The Company believes it has a good
working relationship with its employees.


ITEM 2.  Properties.
         ----------

HEADQUARTERS
------------

     The Company now 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 TDS were  located  in  separate  leased  premises  in  Horsham,
Pennsylvania.
     
INDUSTRIAL ENVIRONMENTAL SERVICES
---------------------------------

     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
Industrial  Environmental  Services  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.
<PAGE>

TREATMENT & DISPOSAL SERVICES
-----------------------------
    
     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. In addition to its headquarters, TDS leases office space in Ohio and
Idaho. 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 TDS 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.



                  *               *               *     


<PAGE>

EXECUTIVE OFFICERS OF THE COMPANY
---------------------------------

    The Company's executive officers are as follows:


Name                    Age       Position

Ronald P. Spogli        48        Chairman of the Board; Director

Louis A. Guzzetti, Jr.  57        President and Chief Executive
                                  Officer; Director

George E. Fuehrer       48        Senior Vice President, Planning

Aarne Anderson          56        Vice President, Taxes

William B. Davis        46        Vice President and Treasurer

Bradley W. Harris       37        Controller

Leon Z. Heller          47        General Counsel and Secretary

James C. Hull           59        Vice President and Chief
                                  Financial Officer 

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

     Ronald P. Spogli became a director and Chairman of the Board 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.
<PAGE>

     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 since May 1989. Mr. Fuehrer also
served as President of IMSAMET 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  has  been  the  Vice  President  and  General  Counsel  of
International  Mill Service,  Inc., a subsidiary of the Company,  since February
1991. Mr. Heller has served as the Company's General Counsel and Secretary since
September 1996.

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


                            PART II


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

     The Company's Common Stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market 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 1996 and 1995,  based
upon prices supplied by The National Association of Securities Dealers ("NASD").
<TABLE>
<CAPTION>

                             1996                1995     
<S>                     <C>       <C>       <C>       <C> 
         
                        High      Low       High      Low
                        ----      ---       ----      ---
First Quarter          $4.25     $3.13     $4.50     $3.25
Second Quarter          4.38      3.38      4.75      4.00
Third Quarter           4.06      3.38      4.63      2.88
Fourth Quarter          3.88      2.44      3.25      2.50
</TABLE>

     The  Company  is not  currently  in  technical  compliance  with one of the
requirements for continued  designation of its Common Stock as a Nasdaq National
Market tier  security.  The NASD  indicated to the Company in March 1992 that it
did not intend to commence  formal  proceedings  to remove the Common Stock from
the Nasdaq  National  Market  tier.  It is possible  that in the future the NASD
could seek to do so, but the NASD has a procedure  for seeking  exemptions  from
its requirements,  which the Company would seek to utilize if necessary.  If the
Common  Stock  were  removed  from the Nasdaq  National  Market  tier,  it would
continue  to be  eligible  for  inclusion  in the  regular  Nasdaq  inter-dealer
quotation system.

     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 indenture
under which the Senior Notes were issued.

     At March 5, 1997 the Company had  approximately  3,300 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 1996 and 1995 unusual items.
<TABLE>
<CAPTION>



                                                      1996         1995       1994       1993       1992            
                                                      ----         ----       ----       ----       ----            
                                                         (In thousands, except for per share amounts)
<S>                                                <C>          <C>        <C>        <C>        <C>    

Revenues                                           $212,789     $223,722   $230,434   $246,927   $207,864 
Costs and expenses                                  189,264      189,233    193,914    222,224    185,483 
Unusual items, net (1)                                4,650       (2,624)               18,200                     
                                                      -----       -------  --------     ------   --------                 
Operating income                                     18,875       37,113     36,520      6,503     22,381 
Interest income                                       1,356        1,133        983      1,177      1,060 
Interest expense                                    (28,187)     (23,483)   (21,974)   (25,261)   (29,572)
                                                    --------     --------   --------   --------   --------
Income (loss) from continuing operations
 before income taxes                                 (7,956)      14,763     15,529    (17,581)    (6,131)
Income tax (benefit) expense                          3,266       (5,208)    (4,280)    (2,549)    (1,299)
                                                      -----       -------    -------    -------    -------
Income (loss) from continuing operations             (4,690)       9,555     11,249    (20,130)    (7,430)
Income (loss) from discontinued operations(2)           399          949       (190)    (1,444)      (108)
                                                        ---          ---       ----     ------       ---- 
                                                                  
Income (loss) before extraordinary loss                
 and cumulative effect of accounting change          (4,291)      10,504     11,059    (21,574)    (7,538)
Extraordinary debt extinguishment loss                              (806)              (21,930)                   
Cumulative effect of income tax accounting
  change                                                                                (2,302)                    
                                                   --------     --------   --------   --------   -------- 
Net income (loss)                                  $ (4,291)    $  9,698   $ 11,059   $(45,806)  $ (7,538)
                                                   =========     ========   ========   ========   ======== 
                                                 

Income (loss) applicable to common shares
 and equivalents (3)                               $ (4,442)    $  7,959   $ 10,457   $(48,988)  $(11,633)
                                                   ========     ========   ========   ========   ======== 
               
Income (loss) per common share:
  Continuing operations                            $   (.12)    $    .19   $    .26   $   (.69)  $   (.52)
  Discontinued operations                               .01          .03                  (.04)           
  Extraordinary loss                                                (.02)                 (.64)              
  Cumulative effect of accounting change                                                  (.07)       
                                                   --------     --------   --------        ----  ---------         
                                                                                                  
  Net income (loss)                                $   (.11)    $    .20   $    .26   $  (1.44)  $   (.52)
                                                 ==========     ========   ========   ========   ======== 

Average common shares and equivalents                40,443       40,527     40,292     34,009     22,251 
                                     (continued on next page)
<PAGE>


                                                      1996         1995       1994       1993       1992  
                                                      ----         ----       ----       ----       ----  
                                                                        (in thousands)
Total assets                                       $459,909     $444,436    $442,872   $419,282   $436,483 

Working capital deficiency (4)                       (8,762)     (34,099)     (8,275)   (17,396)    (5,138)

Debt (non-current)                                  268,424      275,158     259,263    233,297    231,405 

Redeemable preferred stock (non-current)                -           -         31,396     38,711     43,850 

Stockholders' equity                                 39,057       32,604      24,521     14,217     20,549 
</TABLE>

Notes
-----

     (1)  After related  income taxes,  1996 unusual items reduced net income by
          approximately  $3  million  or $.08 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 and $1.7 million or $.04 per share in 1994.

     (4)  The 1996 working capital deficiency was virtually  eliminated upon the
          January 1997 sale of the  Company's  IMSAMET  subsidiary.  See the pro
          forma balance sheet on pages S-2 and S-3.

<PAGE>
ITEM 7.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations.
         -------------------------------------------------

RESULTS OF OPERATIONS
---------------------

1996 VERSUS 1995
----------------
<TABLE>
<CAPTION>

                                                                                    1996
                                                       Year ended              better(worse)
                                                      December 31,               than 1995              
                                                      ------------             -------------             
                                                                 
         
                                                      1996      1995           Amount     %     
                                                      ----      ----           ------     -     
                                                        (Dollars in thousands)
Revenues
<S>                                              <C>          <C>            <C>         <C>  
    Industrial Environmental Services            $ 180,002    $ 181,081      $ (1,079)   (1%) 
    Treatment & Disposal Services                   32,787       42,641        (9,854)  (23%) 
                                                    ------       ------        ------   
                                                 $ 212,789    $ 223,722      $(10,933)   (5%) 
                                                 =========    =========      ========      

Gross Profit
    Industrial Environmental Services            $  46,690    $  51,523      $ (4,833)   (9%) 
    Treatment & Disposal Services                        -        9,129        (9,129) (100%) 
                                                    ------        -----        ------   
                                                 $  46,690    $  60,652      $(13,962)  (23%) 
                                                 =========    =========      =========                   
Operating Income (Loss)
    Industrial Environmental Services            $  33,668    $  39,360      $ (5,692)  (14%) 
    Treatment & Disposal Services                   (5,581)       1,611        (7,192)     -   
    Corporate headquarters                          (4,562)      (6,482)        1,920    30%  
    Unusual items, net                              (4,650)       2,624        (7,274)     -
                                                    ------        -----        ------       
                                                 $  18,875    $  37,113      $(18,238)  (49%) 
                                                 =========    =========      ========    ===   
</TABLE>

     Although  conditions in the steel  industry  remained  generally  favorable
throughout 1996, Industrial  Environmental Services 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 continues 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.  Treatment & Disposal  Services  revenues
decreased primarily because 1995 revenues included over $7 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 electric arc furnace dust (a
hazardous waste produced by steel mini-mills).
<PAGE>

     Industrial  Environmental Services 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. Treatment & Disposal
Services  gross profit  declined to zero primarily due to decreases in treatment
and  disposal  volumes  and  margins  and the lack of new  stabilization  system
contracts.   Treatment  &  Disposal  Services  also  recorded  $1.2  million  of
additional closure costs for inactive waste treatment and disposal facilities in
1996, as compared with a $1 million  reduction of expected  closure costs for an
inactive landfill site in 1995.

     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 Treatment &
Disposal Services  segment's  headquarters in Horsham,  Pennsylvania were closed
and  their  activities  moved to the  International  Mill  Service  headquarters
building,  also in Horsham. As a result of the reorganization,  approximately 50
positions were eliminated,  mostly in the Treatment & Disposal Services segment.
Cost savings of $4.3 million were  realized  during the year and ongoing  annual
savings  should  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.  Partially  offsetting these charges is a $.9 million credit
from  reducing   estimated   liabilities   remaining  from  the  Company's  1988
acquisition of IU International Corporation ("IU International").  After related
income  tax  benefit,  the  unusual  items  increased  the loss from  continuing
operations by approximately $3 million or $.08 per share.

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

     Current income tax expense  consists of state and foreign  taxes.  Deferred
income taxes are discussed in the next section.

     The Company  completed  the sale of its IMSAMET  subsidiary in January 1997
for a gain of $8.3 million or $.21 per share, after taxes, that will be included
in first quarter results. Accordingly, IMSAMET's results have been classified as
discontinued operations.

     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.

DEFERRED INCOME TAXES
---------------------

     In 1996 the  Company  recognized  $26  million of net  deferred  income tax
assets in its balance  sheet.  These assets  represent  tax benefits the Company
expects to realize over the next several  years by utilizing its income tax loss
carryforwards  and other  deferred tax assets to reduce  income taxes that would
otherwise be payable in cash.

     Of the $26  million,  $11.3  million  will be  realized  when  the  Company
utilizes  income  tax loss  carryforwards  and  other  deferred  tax  assets  to
eliminate  income tax payments on the January 1997 gain from selling its IMSAMET
subsidiary.  In addition, the Company has determined that it is more likely than
not that it will earn  enough  taxable  income to realize  the  remaining  $14.7
million over the next  several  years.  Realization  of this amount will require
cumulative taxable earnings of approximately $42 million.  When the consolidated
results of continuing operations for the three most recent 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
$33 million and average $11 million  annually.  On this basis, the Company would
realize $14.7 million of deferred tax assets within approximately four years. On
the other hand,  because its net operating loss  carryforwards  expire well into
the future,  the Company would also realize $14.7 million of deferred tax assets
if,  counting  only  profitable  years,  it earns $42 million of taxable  income
during the fourteen year period ending in 2010, so long as the cumulative amount
of such earnings  reaches at least $10 million by 2005, $21 million by 2006, $30
million by 2008 and $39 million by 2009.
<PAGE>

     In making its  determination  that it is more  likely than not that it will
earn enough  taxable  income to realize $26 million of net  deferred tax assets,
the Company considered (1) its cumulative consolidated results of operations for
the three most recent 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  electric  arc  furnace  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 electric arc
furnace dust  currently  treated with the Company's  proprietary  Super Detox(R)
technology.

     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  - Note G);  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). Of the $4.4 million that
reduced the 1996 loss from continuing operations, $1.3 million was applicable to
the pre-tax loss for the year and the other $3.1 million  represents  additional
tax benefits that reduced the loss from continuing operations by $.08 per share.
Deferred  tax charges of $4.3 million or $.11 per share in 1995 and $1.7 million
or $.04 per share in 1994 arose from utilizing deferred tax assets  attributable
to IU  International  acquisition  obligations  with  corresponding  credits  to
goodwill.

     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>

1995 VERSUS 1994
----------------
<TABLE>
<CAPTION>                                              

                                                                                    1995
                                                       Year ended              better(worse)
                                                      December 31,               than 1994              
                                                      ------------               ---------              
                                                                        
          
                                                     1995      1994            Amount     %     
                                                     ----      ----            ------     -     
                                                        (Dollars in thousands)
Revenues
<S>                                               <C>        <C>             <C>        <C>  
    Industrial Environmental Services             $ 181,081  $ 177,396       $  3,685     2%   
    Treatment & Disposal Services                    42,641     53,038        (10,397)  (20%) 
                                                     ------     ------        -------     
                                                  $ 223,722  $ 230,434       $ (6,712)   (3%) 
                                                  =========  =========       ========      

Gross Profit
    Industrial Environmental Services             $  51,523  $  50,619       $    904     2%  
    Treatment & Disposal Services                     9,129     14,936         (5,807)  (39%) 
                                                      -----     ------         ------   
                                                  $  60,652  $  65,555       $ (4,903)   (7%) 
                                                  =========  =========       ========   

Operating Income (Loss)
    Industrial Environmental Services             $  39,360  $  36,105       $  3,255     9%  
    Treatment & Disposal Services                     1,611      6,339         (4,728)  (75%) 
    Corporate headquarters                           (6,482)    (5,924)          (558)   (9%) 
    Unusual items, net                                2,624                     2,624     -
                                                      -----    -------          -----         
                                                  $  37,113  $  36,520       $    593     2%  
                                                  =========  =========       ========    

</TABLE>

     Industrial  Environmental  Services revenue increased primarily due to high
production  volumes resulting from generally  favorable  conditions in the steel
industry.  Treatment & Disposal Services revenue decreased due to a reduction in
landfill  disposal  volume  and lower  landfilling  prices for  hazardous  waste
clean-up projects,  resulting from continuing depressed market conditions. These
decreases were partially offset by a higher proportion of higher-priced  tonnage
requiring stabilization prior to landfilling.

     Industrial  Environmental Services gross profit improvements paralleled the
revenue increases.  The Treatment & Disposal Services gross profit reduction was
primarily due to lower landfill profits, which paralleled the revenue reduction.
That  segment's  1995 gross  profit  benefited  from a $1 million  reduction  of
expected  closure  costs at an inactive  landfill  site.  Reduced  profits  from
long-term contracts to design and supply scrubber sludge  stabilization  systems
for electric  utilities  were offset by improved  profits  from other  services.
During  1995  the  Treatment  &  Disposal   Services   segment   embarked  on  a
comprehensive  marketing  program  to  attract  additional  landfill  volume  by
treating  steel  mill  electric  arc  furnace  dust with its  proprietary  Super
Detox(R)  technology.  Treatment & Disposal Services began processing this waste
stream at its landfills in the latter part 1995.
<PAGE>


     Selling,  general and  administrative  expenses  were $2.9 million lower in
1995. Industrial  Environmental  Services' costs were $2.4 million lower in 1995
due primarily to headcount reductions. The $1.1 million improvement at Treatment
& Disposal  Services  resulted  principally  from  headcount  reductions,  lower
marketing costs and lower performance-based compensation. Corporate headquarters
costs increased by $.6 million due to litigation expenses.

     Unusual items, net. During 1995 the Company favorably  resolved a number of
     ------------------
liabilities  resulting from its 1988 acquisition of IU International,  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,  before
taxes.  The Company also  increased  its estimate of costs to complete the final
steps of 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 $1.5 million,  primarily due to a higher average
debt level.

     Income  tax  expense   increased  $.9  million  primarily  because  of  the
disproportionately  high  federal  taxes  not  payable  in cash  related  to the
aforementioned net unusual items, partially offset by lower state taxes payable.

     In 1995 the Company entered into a new five-year bank credit facility,  and
recorded a $.8 million  extraordinary debt  extinguishment loss to write off the
unamortized issuance costs of its previous bank credit agreement.

     Due to the factors described above and including  discontinued  operations,
1995 net income,  after deducting the $.8 million  extraordinary loss and the $1
million adverse after-tax effect of the unusual items, was $9.7 million compared
with $11.1 million in 1994.

     Class G  preferred  stock  dividend  requirements  in 1995 were $.5 million
lower than in 1994, due to retirements  during 1994. 1994 benefitted from a $1.7
million gain from  purchasing and retiring Class G redeemable  preferred  stock,
which amounted to $.04 per share.
<PAGE>

     The impact of inflation on revenues and results of operations  has not been
significant.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     The Company's  liquidity  requirements  arise primarily from the funding of
its capital  expenditures,  Treatment & Disposal  Services  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  1997  capital  expenditures  of $20 to $25  million,
primarily  for  equipment  replacements,   development  of  additional  landfill
capacity  and  improvements  to  waste  treatment  facilities.   Scheduled  debt
repayments amount to $5.5 million in 1997.

     Treatment & Disposal  Services' landfill permits require it to fund closure
and post-closure  monitoring and maintenance  obligations by making  essentially
nonrefundable  trust fund  payments.  These  payments  declined  sharply to $1.5
million in 1996.  Based on current  regulations,  planned  improvements to waste
treatment  facilities  and  permitted  capacity,  such  payments are expected to
amount to approximately $2.8 million in 1997 and $2.4 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  consolidated  balance sheet reflects  negative working capital of $8.8
million  at  December  31,  1996.  However,  the  sale of  IMSAMET  (Note D) and
application of the proceeds to reduce debt virtually eliminated this deficiency,
as shown in the pro forma balance sheet as of December 31, 1996.

     On March 15,  1995, a  multiemployer  pension  plan  contacted  the Company
concerning a potential claim against the Company for deficiencies in the payment
of  withdrawal  liabilities  by a subsidiary  that was sold by IU  International
Corporation prior to the Company's  acquisition of IU International in 1988. See
Note N. The Company  believes any such claim is  unwarranted  and, if such claim
were asserted, would contest any such claim vigorously.  The Company believes it
would ultimately prevail on the merits. However, under the Multiemployer Pension
Plan Amendments Act of 1980, the federal statute  governing such plans, the plan
trustees could require the Company to make  substantial  monthly payments before
any issues are arbitrated or litigated.  If onerous monthly payments are imposed
by the plan,  the Company will take any and all actions it deems  necessary  and
appropriate  to  protect  itself  until  the  matter  can be  arbitrated  and/or
litigated on its merits.  The Company  continues to believe that the  underlying
facts and circumstances support a conclusion that these matters will be resolved
with no  material  adverse  effect  on its  financial  condition.  However,  the
resolution of such matters,  which  potentially  could take place in the current
fiscal year,  could result in a charge that is material to results of operations
and cash flows in a single accounting period.
<PAGE>


     Upon the sale of IMSAMET,  the Company applied the net proceeds to pay down
bank borrowings,  and also reduced the amount of its bank credit facility to $65
million of revolving credit  borrowing and letter of credit  capacity.  By early
February  1997,  revolving  credit  borrowings  amounted to $31 million and $7.3
million of standby  letters of credit were  outstanding.  The bank  facility was
amended to accommodate the sale of IMSAMET,  including  changes to the financial
covenants  that require the Company to meet certain  financial  ratios and tests
during 1997.  To remain in  compliance  with the bank  facility  during 1998 and
thereafter,  the Company will need to obtain further adjustments to the required
financial  ratios and tests  throughout the remaining term of the facility.  The
Company and the banks that are parties to the facility  intend to further  amend
such ratios and tests. The $65 million amount of the credit facility declines by
12.5% in each of January  1999 and 2000 and the credit  facility  terminates  in
January 2001.

     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.

     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 N, in which environmental compliance is discussed.

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  B  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,  1996 and (ii)  "Executive  Officers  of the  Registrant"  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, 1996, 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, 1996, 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, 1996, 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, 1996 and 1995

       Consolidated Statements of Operations for the Years Ended
       December 31, 1996, 1995 and 1994

       Consolidated Statements of Stockholders' Equity for the    
       Years Ended December 31, 1996, 1995 and 1994 

       Consolidated Statements of Cash Flows for the Years Ended
       December 31, 1996, 1995 and 1994

       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 -  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)).

    3.3 -  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)).

    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 -  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)).

    4.6 -  Warrant to purchase shares of Common Stock of
           the Company issued to FS Equity Partners II,
           L.P., dated as of May 13, 1993 (incorporated
           herein by reference to Exhibit 4.30 to Amendment
           No. 1 to the Company's Registration Statement on
           Form S-1, filed June 14, 1993 (File No. 33-62050)).

    4.7 -  Warrant to purchase shares of Common Stock of
           the Company issued to The IBM Retirement Plan
           Trust Fund, dated as of May 13, 1993 (incorporated
           herein by reference to Exhibit 4.31 to Amendment
           No. 1 to the Company's Registration Statement on
           Form S-1, filed June 14, 1993 (File No. 33-62050)).

    4.8 -  Warrant to purchase shares of Common Stock of
           the Company issued to Enso Partners, L.P.,
           dated as of May 13, 1993 (incorporated herein by
           reference to Exhibit 4.32 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 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 - Assignment and Acceptance, dated as of February
           8, 1996, between NationsBank, N.A. and Banque Paribas;
           and Assignment and Acceptance, dated as of February
           8, 1996, between Credit Lyonnais New York Branch and    
           Banque Paribas (incorporated herein by reference to    
           Exhibit 4.13 to the Company's Quarterly Report on Form 
           10-Q for the fiscal quarter ended March 31, 1996 (File 
           No. 1-1363)).

    4.12 - 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)).

    4.13*- 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.   

    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)).

    
    *Filed herewith
           
<PAGE>

    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)).


<PAGE>

  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)).

  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  -  Stock Option Agreement, dated November 1, 1993,
           between the Company and Arthur R. Seder, Jr.
           (incorporated herein by reference to Exhibit
           10.12 to the Company's Annual Report on Form
           10-K for the fiscal year ended December 31,
           1993 (File No. 1-1363)).

  10.9  -  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)).

  10.10  - 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)).

  10.11  - 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)).
<PAGE>

  
  10.12  - 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)).
    
  10.13 -  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)).

  10.14 -  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))

  10.15 -  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 for January
           21, 1997 (File 1-1363)).

  10.16 -  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 for 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,  1996,  the
Company filed no Current Reports on Form 8-K.

<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 28, 1997
                                   ENVIROSOURCE, INC.

                                                                             
                                   /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 28, 1997.

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
<PAGE>

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


/s/ MARK J. DORAN                   Director
-----------------
Mark J. Doran


/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/ CHARLES P. RULLMAN, JR.         Director
---------------------------
Charles P. Rullman, Jr.


/s/ ARTHUR R. SEDER, JR.            Director
-----------------------
Arthur R. Seder, Jr.


/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, 1996 and 1995, and the related  consolidated  statements
of operations,  stockholders' equity, and cash flows for each of the three years
in the period ended  December 31, 1996.  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, 1996 and 1995, and the consolidated  results
of its  operations  and its cash flows for each of the three years in the period
ended  December 31, 1996,  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,
presents fairly in all material respects the information set forth therein.


                                  /S/ ERNST & YOUNG LLP

Stamford, Connecticut
February 21, 1997
<PAGE>
<TABLE>
<CAPTION>
                               ENVIROSOURCE, INC.
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

                                                          December 31,                               
                                                  ------------------------------
<S>                                              <C>           <C>        <C>
                                                  Pro Forma
                                                    1996       1996       1995  
                                                    ----       ----       ----  
                                                 (Unaudited)   
ASSETS
Current assets:
  Cash and cash equivalents                        $  9,678  $  9,678   $  8,367
  Accounts receivable, less allowance
    for doubtful accounts of $1,220
    in 1996 and $729 in 1995                         31,550    31,550     33,558
  Net current assets of discontinued
    IMSAMET operations                                         34,864      2,559
  Net deferred income taxes                           3,900    15,200           
  Other current assets                                4,686     4,686      5,666
                                                      -----     -----      -----
    Total current assets                             49,814    95,978     50,150
                                                    

Property, plant and equipment: 
  Land and improvements                                 887       887        894
  Landfill development                               29,701    29,701     29,577
  Buildings and improvements                         25,501    25,501     24,128
  Machinery and equipment                           214,768   214,768    202,912
                                                    -------   -------    -------
                                                    270,857   270,857    257,511
  Less allowance for depreciation                  (128,392) (128,392)  (114,044)
                                                   --------  --------   -------- 
                                             
                                                    142,465   142,465    143,467

Goodwill, less amortization                         138,635   138,635    144,589 
Closure trust funds and deferred
  charges, less amortization                         34,139    34,139     33,867
Landfill permits, less amortization                  23,064    23,064     22,549
Net non-current assets of discontinued 
  IMSAMET operations                                                      33,528
Net deferred income taxes                            10,800    10,800     
Debt issuance costs, less amortization                8,442     8,442      9,625 
Other assets                                          6,386     6,386      6,661 
                                                      -----     -----      ----- 
                                                   $413,745  $459,909   $444,436 
                                                   ========  ========   ======== 


</TABLE>



See notes to consolidated financial statements.
                       


<PAGE>
<TABLE>
<CAPTION>

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

                                                          December 31,                                
                                                   -----------------------------
                                                   Pro Forma
                                                     1996       1996      1995  
                                                     ----       ----      ----  
                                                   (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
<S>                                                <C>        <C>       <C>     
  Accounts payable                                 $  9,302   $  9,302  $ 11,762
  Salaries, wages and related benefits                7,253      7,253     9,500
  Insurance obligations                               6,187      6,187     6,233 
  Estimated reorganization and
    restructuring costs                               2,207      2,207     1,779
  Other current liabilities                          16,823     15,287    13,359
  Current portion of debt                             8,504     64,504     8,524 
  Class G redeemable preferred stock                                      33,092
                                                      -----     ------    ------
      Total current liabilities                      50,276    104,740    84,249

Long-term debt                                      268,424    268,424   275,158 

Other liabilities                                    47,688     47,688    52,425

Stockholders' equity:
  Common stock, par value $.05 per share,
    shares authorized-60,000,000, shares
    issued and outstanding-40,351,446 in
    1996 and 40,194,244 in 1995                       2,018      2,018     2,010
  Capital in excess of par value                    173,472    173,472   162,580
  Accumulated deficit                              (126,331)  (134,631) (130,189)
  Stock purchase loans receivable from 
    officers                                           (810)      (810)     (840)
  Canadian translation adjustment                      (992)      (992)     (957)
                                                       ----       ----      ---- 
      Total stockholders' equity                     47,357     39,057    32,604 
                                                     ------     ------    ------ 

                                                   $413,745   $459,909  $444,436 
                                                   ========   ========  ======== 




</TABLE>

See notes to consolidated financial statements.
<PAGE>

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

                                           Years Ended December 31,            
                                       -----------------------------
                                        1996         1995        1994            
                                        ----         ----        ----            
<S>                                  <C>          <C>         <C>       
Revenues                             $  212,789   $  223,722  $  230,434

Cost of revenues                        166,099      163,070     164,879 
Selling, general and 
  administrative expenses                23,165       26,163      29,035 
Unusual items, net                        4,650       (2,624)            
                                          -----       ------      ------       
Operating income                         18,875       37,113      36,520

Interest income                           1,356        1,133         983 
Interest expense                        (28,187)     (23,483)    (21,974)
                                        -------      -------     ------- 

(Loss) income from continuing           
  operations before income taxes         (7,956)      14,763      15,529

Income tax (expense) benefit:
  Current                                (1,134)      (1,262)     (2,576)
  Deferred                                4,400       (3,946)     (1,704)
                                          -----       ------      ------ 
                                          3,266       (5,208)     (4,280)
                                          -----       ------       ----- 
(Loss) income from 
  continuing operations                  (4,690)       9,555      11,249 

Income (loss) from discontinued
  IMSAMET operations                        399          949        (190)
                                            ---          ---        ---- 

(Loss) income before
  extraordinary loss                     (4,291)      10,504      11,059 
Extraordinary debt
  extinguishment loss                                   (806)            
                                         ------         ----      ------             

Net (loss) income                        (4,291)       9,698      11,059 

Preferred stock dividend 
  requirements, reduced by
  retirement gains of $250 
  in 1996 and $1,685 in 1994               (151)      (1,739)       (602)
                                           ----       ------        ---- 

(Loss) income applicable to 
  common shares and equivalents      $   (4,442)  $    7,959  $   10,457 
                                     ==========   ==========  ========== 

(Loss) income per share: 
  Continuing operations              $     (.12)  $      .19  $      .26
                                     ==========   ==========  ==========
  Before extraordinary loss          $     (.11)  $      .22  $      .26
                                     ==========   ==========  ==========
  Net (loss) income                  $     (.11)  $      .20  $      .26
                                     ==========   ==========  ==========
       
  Weighted average common and
    common equivalent shares             40,443       40,527      40,292 

See notes to consolidated financial statements.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
  

                               ENVIROSOURCE, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (Dollars in thousands)
  

                                                    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, 1994                   $  2,003  $ 162,461  $ (148,605)   $   (840)   $   (802) $  14,217 
 Common stock issued
  (41,500 shares)                                2        112                                            114 
 Net income                                                        11,059                             11,059 
 Preferred stock dividends
   and accretion                                                   (2,287)                            (2,287)
 Preferred stock 
   retirement gain                                                  1,685                              1,685 
 Translation adjustment                                                                      (267)      (267)
                                             -----    -------     -------        -----       ----       ---- 
BALANCE DECEMBER 31, 1994                    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 
                                          ========  =========   =========     =======   =========   ======== 

</TABLE>

See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
                               EnviroSource, Inc.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)


                                          Years Ended December 31,                

                                        -----------------------------
                                            1996      1995      1994           
                                            ----      ----      ----           
OPERATING ACTIVITIES
<S>                                      <C>       <C>       <C>      
(Loss) income before extraordinary loss  $ (4,291) $ 10,504  $ 11,059 
Adjustments to reconcile (loss) income
  before extraordinary loss to cash
  provided by operating activities:
    Deferred income taxes                  (4,400)    4,346     1,704
    Depreciation                           26,261    24,545    24,352 
    Amortization                            9,715     9,071    10,656 
    Unusual items, net of payments            945    (6,816)   (5,686)
    Changes in working capital             (1,741)      368    (4,079)
    Other, net                              1,674      (113)    4,010
                                            -----      ----     -----
Cash provided by operating activities      28,163    41,905    42,016 
                                           ------    ------    ------ 

INVESTING ACTIVITIES
Property, plant and equipment:
  Additions                               (21,883)  (32,560)  (39,261)
  Proceeds from dispositions                2,930       383       594 
Purchase of Alexander Mill Services, Inc.
  (net of cash acquired)                   (5,953)
Landfill permit additions and
  closure expenditures                     (3,186)   (1,125)   (1,199)
Closure trust fund payments                (1,530)   (9,087)  (12,866)
Ongoing net cash flows related to
  IU International acquisition             (1,901)   (9,600)   (2,471)
Other                                        (798)   (2,299)   (5,620)
                                             ----    ------    ------ 
Cash used by investing activities         (32,321)  (54,288)  (60,823)
                                          -------   -------   ------- 

FINANCING ACTIVITIES
Debt issuance                              60,000    75,188    41,500 
Debt repayment                            (21,372)  (60,173)  (13,035)
Debt issuance costs                          (102)   (2,624)     (643)
Retirement of preferred stock             (33,242)      (42)  (11,322)
Sale of common stock                          185        12       114 
                                              ---        --       --- 
Cash provided by financing activities       5,469    12,361    16,614 
                                            -----    ------    ------ 

CASH AND CASH EQUIVALENTS
  Increase (decrease) during the year       1,311       (22)   (2,193)
  Beginning of year                         8,367     8,389    10,582 
                                            -----     -----    ------ 
  End of year                            $  9,678  $  8,367  $  8,389 
                                         ========  ========  ======== 

</TABLE>

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 -- 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
$14.6 million and $13.3 million at December 31, 1996 and 1995.

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  $12.8  million and $11.4  million at
December  31,  1996 and  1995,  are  classified  as  "available-for-sale,"  have
maturities of four months 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.
<PAGE>


NOTE A -- ACCOUNTING POLICIES -- CONTINUED
------------------------------------------

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 $12.1  million and $10.9  million at December 31,
1996 and 1995.

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
$8.8  million and $9.2 million are included in other  long-term  liabilities  at
December 31, 1996 and 1995.

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 $44  million and $39  million at  December  31,  1996 and 1995.  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.

<PAGE>

NOTE A -- ACCOUNTING POLICIES -- CONTINUED
------------------------------------------

Revenues:  Most of the  Company's  revenues are  recognized as services are
---------
provided.  Revenues  of $8  million  in 1995 and $6.9  million in 1994 were from
long-term  contracts  to design,  supply and  construct  "wet  scrubber  sludge"
stabilization  systems for electric utilities.  Revenues from such contracts are
recognized  using the  percentage-of-completion  method,  with  progress  toward
completion measured in labor hours. Such contracts are segmented between "design
and supply" and  "construction",  and a separate profit margin is recognized for
each segment.

Earnings per share:  Per share amounts are  calculated  by dividing  income
-------------------
(loss)  applicable  to common  shares and  equivalents  by the weighted  average
number of common shares and equivalents outstanding during the period.

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.

Pro forma balance sheet: The pro forma balance sheet presents the financial
-----------------------
position of the Company  assuming the January 1997 sale of IMSAMET (Note D) took
place as of December 31, 1996.




<PAGE>

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. 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 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  Treatment  &  Disposal   Services   segment's
headquarters in Horsham,  Pennsylvania were closed and their activities moved to
the International  Mill Service  headquarters  building,  also in Horsham.  As a
result,  approximately 50 positions were  eliminated,  mostly in the Treatment &
Disposal  Services  segment.  After related  income tax benefit of $1.6 million,
these  items  increased  the net loss by  approximately  $3  million or $.08 per
share.

In addition to payments required for the above items, the caption "unusual
items, net of payments" in the consolidated statements of cash flows includes
payments related to a restructuring charge in the fourth quarter of 1993.

<PAGE>

NOTE C -- INCOME TAXES
----------------------

The components of income tax benefit (expense) attributable to
continuing operations are as follows (in thousands):
<TABLE>
<CAPTION>

<S>                                     <C>              <C>              <C>  

                                        1996             1995             1994
                                        ----             ----             ----
  Current:
  State                            $    (916)       $  (1,001)       $  (2,310)
  Canadian                              (218)            (261)            (266)   
                                        ----             ----             ----    
                                      (1,134)          (1,262)          (2,576)                                        
Deferred: 
  Federal                              4,400           (3,946)          (1,704)
                                       -----           ------           ------ 
                                   $   3,266        $  (5,208)       $  (4,280)
                                   =========        =========        ========= 
</TABLE>

Canadian  income  before  income taxes  amounted to $.6 million in 1996 and
1995 and $.7 million in 1994.

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

                                         1996            1995             1994 
                                         ----            ----             ---- 
Benefit (expense) of pre-tax 
  (loss) income from continuing
  operations at statutory
  rate                             $   2,785        $  (5,167)       $  (5,369)
Goodwill amortization                 (1,718)          (1,733)          (1,751)
Effect of reducing deferred
  tax valuation allowance              3,100            2,253            4,375 
Effects of state and Canadian
  income taxes                          (595)            (683)          (1,535)
Other                                   (306)             122                  
                                        ----              ---        --------- 
                                   $   3,266        $  (5,208)       $  (4,280)
                                   =========        =========        ========= 


<PAGE>

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):

                                                         December 31,         
                                                       ----------------
                                                       1996        1995        
                                                       ----        ----         
Deferred tax assets:
  Net operating loss carryforwards                   $ 87,993  $114,099 
  Capital loss carryforwards                            4,564     3,870 
  Allowance for a doubtful receivable
    and insurance accruals that would
    result in capital losses                            5,018     6,682 
  Other insurance accruals                              2,810     3,084 
  Reorganization and restructuring 
    accrual                                             1,280     1,108 
  Pension and other postretirement 
    benefits accruals                                   5,095     5,012 
  Closure cost accruals                                 3,332     3,304 
  Other accruals                                        6,473     9,391 
                                                        -----     ----- 
    Total deferred tax assets                         116,565   146,550 
  Valuation allowance                                 (69,100) (124,425)
                                                      -------  -------- 
   Net deferred tax assets                             47,465    22,125 
                                                       ------    ------ 
  
Deferred tax liabilities:
  Tax over book depreciation plus
    IU International acquisition purchase 
    price allocation to property, plant 
    and equipment                                     (10,870)  (11,671)
  Tax over book post-closure deductions                (6,288)   (6,483)
  Tax over book landfill permit 
    amortization                                       (4,012)   (3,747)
  Other                                                  (295)     (224)
                                                         ----      ---- 
    Total deferred tax liabilities                    (21,465)  (22,125)
                                                      -------   ------- 
    Net deferred taxes                               $ 26,000  $    -0- 
                                                     ========    ======  
<PAGE>


NOTE C -- INCOME TAXES -- CONTINUED
-----------------------------------

The  Company  recognized  $26  million  of net  deferred  tax assets in the
balance sheet in the fourth quarter of 1996. Of this amount,  $11.3 million will
be realized when the Company  utilizes 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 was recognized because
the  Company  has  determined  that 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.

The income tax benefits  that  resulted  from  recording the $26 million of
deferred tax assets (by  reducing  the  valuation  allowance)  were  credited as
follows:  $4.4 million reduced the 1996 loss from continuing  operations;  $10.9
million was credited to goodwill  (because the related deferred tax assets arose
from  IU  International  acquisition  obligations-Note  G);  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 and 1994 the  valuation  allowance  was reduced by $6.6
million and $6.1 million,  respectively.  Of these amounts $2.3 million and $4.4
million were credited to reduce income tax expense. In both years, the remaining
valuation  allowance  reductions were 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 sizeable  valuation  allowance against the
remainder of its deferred tax assets,  primarily  because $55 million of the $88
million  deferred tax asset  represents  net operating loss  carryforwards  that
expire in 1997 and 1998. The balance of the $88 million represents net operating
loss  carryforwards  that for the most  part will not  expire  for seven 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.

<PAGE>


NOTE C -- INCOME TAXES -- CONTINUED
-----------------------------------

Net operating loss  carryforwards  totaling $251 million expire as follows:
$10 million in 1997,  $147 million in 1998,  $1 million in 2000,  $15 million in
2003,  $46 million in 2005,  $11 million in 2006, $9 million in 2008, $9 million
in  2009,   and  $3  million  in  2010.   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 $69.1  million  valuation  allowance  would be credited  as  follows:  $44.4
million to capital in excess of par value,  $8.9  million to goodwill  and $15.8
million to reduce income tax expense.



<PAGE>

NOTE D -- SALE OF IMSAMET
-------------------------

On January 21,  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.  After a deferred income tax charge,  the gain amounted to $8.3 million
or $.21 per share.  The proceeds from the sale were used to repay $56 million of
revolving credit borrowings and expenses related to the transaction.

The assets and  liabilities of IMSAMET have been  classified in the balance
sheet as net assets of discontinued  operations and consist of the following (in
thousands):

                                                      December 31,   
                                                      ---------------
                                                   1996         1995 
                                                   ----         ---- 
Accounts receivable                              $  3,882     $ 3,650           
Property, plant and equipment, net                 17,929      19,095           
Goodwill, less amortization                        10,338      10,666
Other assets                                        6,861       7,922 
                                                   ------      ------
  Total assets of IMSAMET                          39,010      41,333

Accounts payable                                    1,210       1,363           
Accrued expenses                                    1,380       1,441
Other liabilities                                   1,556       1,569
Debt                                                              873
                                                    -----         ---
  Total liabilities of IMSAMET                      4,146       5,246
                                                    -----       -----
Net assets of discontinued operations            $ 34,864    $ 36,087
                                                 ========    ========

IMSAMET's  results have been classified in the statement of operations as income
(loss)  from  discontinued   operations.   Summarized  results  of  discontinued
operations are as follows (in thousands):

<TABLE>
<S>                                    <C>                   <C>            <C>   
                                       1996                  1995           1994  
                                       ----                  ----           ----  
Revenues                            $   37,399            $  40,962      $  29,081
                                    ==========            =========      =========
Income (loss) before 
 income taxes                       $      399            $   1,349      $    (190)
Deferred income tax
 expense                                                        400               
                                    ----------                  ---      ---------        
Income (loss) from                
 discontinued operations            $      399            $     949      $    (190)
                                    ==========            =========      ========= 
</TABLE>

<PAGE>

NOTE D -- SALE OF IMSAMET -- CONTINUED
--------------------------------------

Interest expense of $3.3 million in 1996, $3.6 million in 1995, and $3.2 million
in 1994 has been 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  statement  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): 

                                                        Year ended 
                                                        December 31,
                                                        ------------
                                                        (Unaudited) 
                                                    1996             1995
                                                    ----             ----
 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,  $10.7
million was charged to goodwill.

<PAGE>

NOTE F -- DEBT
--------------

Debt is summarized as follows (in thousands):

                                                       December 31,            
                                                  ----------------------
                                                  1996              1995      
                                                  ----              ----       

9-3/4% Senior Notes                            $ 220,000         $ 220,000 
Bank Credit Facility                              89,000            44,000 
Industrial revenue bond financings,
  equipment loans and other                       23,928            19,682 
                                                  ------            ------ 
                                                 332,928           283,682 
Less current maturities                           64,504             8,524 
                                                  ------             ----- 
Long-term debt                                 $ 268,424         $ 275,158 
                                               =========         ========= 

At December 31, 1996,  required  principal  payments for each of the  succeeding
five years are: $64.5 million in 1997 (including $59 million of revolving credit
borrowings  repaid by early  February),  $5.8  million in 1998,  $2.1 million in
1999, $.8 million in 2000 and $31 million in 2001.

The 9-3/4% Senior Notes (10.3% effective rate including amortization of issuance
costs) are due in 2003 and 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.

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.


<PAGE>


NOTE F -- DEBT -- CONTINUED
---------------------------

Upon the sale of IMSAMET (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,  declining by 12.5%
in each of  January  1999 and 2000 and  terminating  in January  2001.  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%  (8.25% plus 1.25% at December 31,  1996) or at  Eurodollar  rates plus
from 1.5% to 2.5%  (approximately  5.53% plus 2.5% at December  31,  1996).  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 is secured by accounts  receivable  and the  Company's  investments  in
stock  and  intercompany  notes of its  subsidiaries.  By early  February  1997,
revolving credit  borrowings had been reduced to $31 million and $7.3 million of
standby letters of credit were outstanding.

The bank facility prohibits cash dividends and contains financial covenants that
require the Company to meet certain financial ratios and tests. The facility was
amended to accommodate the sale of IMSAMET,  including  changes to the financial
ratios and tests required during 1997.

Industrial  revenue bond  financings  of $8.8 million  carry a weighted  average
effective interest rate of 9.3%. Equipment loans and other debt carry a weighted
average effective interest rate of 9.8%.

<PAGE>

NOTE G -- IU INTERNATIONAL ACQUISITION 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 $6.8 million at December 31, 1996
and  $7.1  million  at  December  31,  1995.  These  amounts  represent  ongoing
obligations for insurance,  employee benefits and other matters. As in the past,
such payments will be reduced by IU  International-related  recoveries,  if any.
Payments on such obligations, reduced by recoveries, amounted to $1.9 million in
1996, $9.6 million in 1995 and $2.5 million in 1994.

Non-current other liabilities includes IU International  acquisition obligations
of $28.5 million at December 31, 1996 and $32.3 million at December 31, 1995 for
insurance, employee benefits, income tax matters and other disputed matters.

NOTE H -- STOCKHOLDERS' EQUITY 
-------------------------------

Warrants to purchase  200,000 shares of the Company's  common stock at $3.50 per
share expire on January 1, 1998. The warrants may be exercised  using a cashless
exercise  feature (by the  surrender  of shares of common  stock  subject to the
warrants).  An affiliate of Freeman  Spogli & Co.  ("Freeman  Spogli") that is a
47.5%  stockholder  holds warrants for 87% of such shares and The IBM Retirement
Plan Trust Fund,  a 6.6%  stockholder,  holds 12%. 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, resulting
in the issuance of 95,685 shares of the Company's common stock.

In 1996,  warrants to purchase  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.

A total of 3,440,235 shares of the Company's common stock have been reserved for
the warrants  described above and 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.
<PAGE>


NOTE H -- STOCKHOLDERS' EQUITY -- CONTINUED
-------------------------------------------

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,
1996, options for 920,320 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.  Under the plan, on January 1 of 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 1996 one  director  and in 1995 two  directors  elected to
receive such options.  All options granted under the plan become  exercisable on
the  following  January 1. At December 31, 1996 options for 656,139  shares were
available for future grants.

The Company  previously  granted the four outside  directors options outside the
option plans to purchase 80,000 shares of the Company's common stock at exercise
prices equal to the fair market value at the time of grant.

<PAGE>

NOTE I -- STOCK OPTIONS -- CONTINUED 
-------------------------------------

Option activity is summarized below:
                                                       Shares                  
                                       --------------------------------------
                                       1996             1995             1994 

Shares under option at Jan. 1       1,591,642        1,286,885        1,656,100 
Options granted                       298,509          435,082           48,740 
Options exercised (at average
  exercise prices of $2.80 in
  1996, $2.50 in 1995 and $2.74
  in 1994                             (55,200)          (4,800)         (41,500)
Options expired or cancelled         (171,175)        (125,525)        (376,455)
                                     --------         --------         -------- 
Shares under option at Dec. 31      1,663,776        1,591,642        1,286,885 
                                    =========        =========        ========= 
Options exercisable at Dec. 31      1,049,011          866,485          612,200 
                                    =========          =======          ======= 

At December  31, 1996,  option  exercise  prices  ranged from $2.50 to $8.25 per
share and the  weighted  average  was $4.16 per  share.  These  options,  with a
weighted-average  remaining  contractual  life of 6.4  years,  expire on various
dates from January 1997 through December 2006. During 1996 the  weighted-average
exercise price of options  granted was $3.62 per share and of options  cancelled
was $4.68 per share.

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


NOTE I -- STOCK OPTIONS -- CONTINUED
------------------------------------

Summarized information about stock options outstanding at
December 31, 1996 is as follows:

                        Options Outstanding          Options Exercisable    
                        -------------------------- -----------------------
                              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  
    ------      -----------     ----       -----   -----------    -----  
$2.50 to $4.00     911,776    7.5 years    $3.35      406,011     $3.02
 4.01 to  5.50     513,000    6.5           4.25      404,000      4.25
 5.51 to  8.25     239,000    2.1           7.07      239,000      7.07
                   -------                          ---------
 2.50 to  8.25   1,663,776    6.4           4.16    1,049,011      4.42
                 =========                          =========     
                     

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):

                                             1996                      1995  
                                             ----                      ----  

Pro forma net(loss)income                 $(4,591)                 $  9,509

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

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


<PAGE>


NOTE J -- BUSINESS SEGMENTS
---------------------------

The Company's business segments are: Industrial  Environmental  Services,  which
provides  recycling and other specialized  services for the steel industry,  and
Treatment & Disposal Services, which operates hazardous waste disposal landfills
and provides waste management and stabilization services for the steel, electric
utility and other industries.

Information  by business  segment for the three  years ended  December  31, 1996
follows (in thousands):

                                         1996          1995             1994   
                                         ----          ----             ----   
REVENUES
--------
 Industrial Environmental Services     $ 180,002    $ 181,081        $ 177,396  
 Treatment & Disposal Services            32,787       42,641           53,038 
                                          ------       ------           ------ 
                                       $ 212,789    $ 223,722        $ 230,434
                                       =========    =========        =========

UNUSUAL ITEM (CHARGES) CREDITS, NET                 
-----------------------------------
 Industrial Environmental Services     $  (1,697)   $    (904)       $    (580) 
 Treatment & Disposal Services            (2,431)        (100)             580 
 Corporate headquarters                     (522)       3,628           
                                            ----        -----        ---------
                                       $  (4,650  ) $   2,624        $       -
                                       =========    =========        =========
                                      

TOTAL OPERATING INCOME (LOSS)
-----------------------------
 Industrial Environmental Services     $  31,971    $  38,456        $  35,525  
 Treatment & Disposal Services            (8,012)       1,511            6,919 
 Corporate headquarters                   (5,084)      (2,854)          (5,924)
                                          ------       ------           ------ 
                                       $  18,875    $  37,113        $  36,520
                                       =========    =========        =========

IDENTIFIABLE ASSETS    
-------------------
 Industrial Environmental Services     $ 252,958    $ 258,691        $ 256,027  
 Treatment & Disposal Services           130,683      136,516          135,138 
 Corporate headquarters                   41,404       13,142           16,296 
                                          ------       ------           ------ 
                                         425,045      408,349          407,461
 Discontinued operations                  34,864       36,087           35,411 
                                         -------      -------          -------
                                       $ 459,909    $ 444,436        $ 442,872
                                       =========    =========        =========

DEPRECIATION AND AMORTIZATION
-----------------------------
 Industrial Environmental Services     $  24,045    $  21,972        $  21,520  
 Treatment & Disposal Services             7,569        7,286            9,988 
 Corporate headquarters                    1,398        1,333            1,209 
                                           -----        -----            ----- 
                                          33,012       30,591           32,717
 Discontinued operations                   2,964        3,025            2,291 
                                           -----        -----            ----- 
                                       $  35,976    $  33,616        $  35,008
                                       =========    =========        =========
<PAGE>

NOTE J -- BUSINESS SEGMENTS -- CONTINUED
----------------------------------------

CAPITAL EXPENDITURES 
---------------------
 Industrial Environmental Services     $  16,227    $  23,939        $  14,274  
 Treatment & Disposal Services             4,761        6,345           17,428 
 Corporate headquarters                        5           81               78 
                                               -           --               -- 
                                          20,993       30,365           31,780
 Discontinued operations                     890        2,195            7,481 
                                             ---        -----            ----- 
                                       $  21,883    $  32,560        $  39,261
                                       =========    =========        =========

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  $43  million in 1996,  $44  million in 1995 and $51
million in 1994 were from USX Corporation,  the Company's largest steel industry
customer.   At  December  31,  1996,  $23.2  million  of  consolidated  accounts
receivable result from services performed for domestic steel industry customers.
Industrial   Environmental   Services   customers  and  operations  are  located
throughout the United States and Canada. Treatment & Disposal Services 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, 1996:

                                            1996          1995          1994 
                                            ----          ----          ---- 
Industrial recycling                         70.5%        66.7%          63.2%

Specialized services                         14.1         14.2           13.8 

Waste stabilization 
  and disposal                               15.2         15.5           20.0 

Stabilization system design, 
  supply and construction                      .2          3.6            3.0   
                                               --          ---            ---   
                                            100.0%       100.0%         100.0%
                                            =====        =====          ===== 


<PAGE>



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):
                                              1996          1995          1994 
                                              ----          ----          ---- 

Service cost-benefits 
  earned during the period                 $   763       $   787       $   868 
Interest cost on projected
  benefit obligations                        1,386         1,393         1,276 
Actual gain on plan assets                  (2,576)       (2,860)         (238)
Net amortization and deferral                1,066         1,341        (1,083)
                                             -----         -----        ------ 
Net periodic pension cost                  $   639       $   661       $   823 
                                           =======       =======       ======= 
<PAGE>


NOTE K -- RETIREMENT PLANS -- CONTINUED
---------------------------------------

The funded status, calculated principally using measurement dates of October 31,
1996 and 1995, and the liability  accrued in the consolidated  balance sheet for
defined benefit plans are as shown below (in thousands):

                                                        December 31,           
                                                      ----------------        
                                                      1996        1995         
                                                      ----        ----         

Actuarial present value of
  benefit obligations:
   Vested                                          $  19,070   $  19,342 
                                                   =========   ========= 
   Accumulated                                     $  19,081   $  19,355 
                                                   =========   ========= 
   Projected                                       $  19,205   $  19,485 
Plan assets at fair value                             19,183      16,349 
                                                      ------      ------ 
Projected benefit obligations
  in excess of plan assets                                22       3,136 
Unrecognized net loss                                   (391)     (2,633)
Prior service gain not yet recognized 
  in net periodic pension cost                         3,985       4,333 
Other                                                    168         311 
                                                         ---         --- 
Pension liability                                  $   3,784   $   5,147 
                                                   =========   ========= 

The actuarial  present value of projected  benefit  obligations  was  determined
using  discount  rates of 7.75% in 1996 and 7.25% in 1995.  The expected  annual
long-term rate of return on plan assets used in determining net periodic pension
cost was 8.5% in both years.

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 $1.8 million in 1996,
$1.6 million in 1995 and $1.5 million in 1994.


<PAGE>

NOTE K -- RETIREMENT PLANS -- CONTINUED
---------------------------------------

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 $1.6 million in 1996
and $1.7 million in 1995 and 1994.

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 $.5 million in 1996 and 1995
and $.4  million  in  1994.  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, which includes both current and postretirement benefit costs, amounted to
$1.6 million in 1996 and 1994 and $1.7 million in 1995.

The Company incurred  postretirement  benefit obligations in connection with the
IU International  acquisition  (Note G). As of December 31, 1996 and 1995, other
long-term  liabilities  includes $4.8 million and $5 million,  respectively,  of
such  obligations,  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%
in 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, 1996 by $.3 million and would not have had a material impact on the
cost for 1996.

<PAGE>

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 noncash  interest  costs.  Changes in working  capital include the
following (in thousands):

                                          1996          1995          1994     
                                          ----          ----          ----     

Accounts receivable                 $    4,971    $    7,221     $  (8,483)
Other current assets                     1,611          (549)           38 
Accounts payable and other
  current liabilities                   (8,323)       (6,304)        4,366 
                                        ------        ------         ----- 

Cash provided (used)                $   (1,741)   $      368     $  (4,079)
                                    ==========    ==========     ========= 

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

                                          1996          1995          1994     
                                          ----          ----          ----     

Purchases of investments            $   (8,105)   $  (17,643)    $ (16,193)
Sales of investments                     6,575         8,556         3,327 
                                         -----         -----         ----- 
Net cash used                       $   (1,530)   $   (9,087)    $ (12,866)
                                    ==========    ==========     ========= 

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

The Company paid interest of $28.9 million in 1996, $26.3 million in 1995, $23.7
million in 1994,  excluding  capitalized interest of $.2 million in 1995 and $.6
million in 1994.

The Company  paid income  taxes,  net of refunds,  of $.8 million in 1996,  $1.2
million in 1995, and $1.6 million in 1994.

<PAGE>

NOTE M -- FINANCIAL INSTRUMENTS
-------------------------------

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

                                                  December 31,                 
                                            -----------------------            
                                            1996               1995       
                                  --------------------  --------------------
                                  Carrying      Fair      Carrying      Fair   
                                   Amounts     Values     Amounts      Values 
                                   -------     ------     -------      ------ 


Long-term debt                    $268,424   $255,224     $275,158    $252,092
Other non-current 
  assets and stock
  purchase loans                     1,797      1,671        3,602       3,329 


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 -- COMMITMENTS AND CONTINGENCIES
---------------------------------------

Future minimum lease payments for non-cancelable operating leases as of December
31, 1996 amount to $7.1 million in 1997,  $6.1 million in 1998,  $4.6 million in
1999,  $2.2 million in 2000,  $.8 million in 2001 and $2.7  million  thereafter.
Operating  leases are primarily for machinery and equipment.  Rental expense was
$10.1 million in 1996, 10.2 million in 1995, and $7.8 million in 1994.

At December  31,  1996,  the Company  had made  commitments  to spend $11.6
million for equipment additions and improvements to waste treatment  facilities.
To secure  its  obligations  to close its  landfills  and  perform  post-closure

<PAGE>


NOTE N -- COMMITMENTS AND CONTINGENCIES -- CONTINUED
----------------------------------------------------


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 $2.8 million in 1997 and $2.4 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.

At December 31, 1996, the Company was contingently  liable for $7.3 million
of  letters  of credit  outstanding  under  its bank  credit  facility  of which
approximately  $6.1  million  secures   liabilities  already  reflected  in  the
consolidated balance sheet.

IU International  Corporation ("IU  International")  sold P-I-E Nationwide,
Inc.  ("PIE") in 1985. PIE commenced  bankruptcy  proceedings in 1990 and ceased
operations,  which  triggered  withdrawal  liabilities to certain  multiemployer
pension  plans,  estimated by PIE in 1990 to aggregate $58 million.  In 1991 the
trustees of the largest plan sought  information from the Company for the stated
purpose of determining whether the circumstances of IU International's 1985 sale
of PIE would justify a claim against the Company for any  deficiencies  in PIE's
payment of withdrawal  liabilities to such plan. Such plan did not again contact
the Company  concerning  this matter until March 15, 1995,  when the Company was
advised that such plan's  consideration as to whether it would assert a claim is
ongoing.  The Company  believes any such claim is unwarranted and, if such claim
were asserted, would contest any such claim vigorously.  The Company believes it
would ultimately prevail on the merits. However, under the Multiemployer Pension
Plan Amendments Act of 1980, the federal statute  governing such plans, the plan
trustees could require the Company to make  substantial  monthly payments before
any issues are arbitrated or litigated.  If onerous monthly payments are imposed
by the plan,  the Company will take any and all actions it deems  necessary  and
appropriate  to  protect  itself  until  the  matter  can be  arbitrated  and/or
litigated on its merits. The Company continues to believe that the underlying
<PAGE>

NOTE N -- COMMITMENTS AND CONTINGENCIES -- CONTINUED
----------------------------------------------------


facts and  circumstances  support a conclusion  that these  matters will be
resolved with no material  adverse effect on its financial  condition.  However,
the  resolution  of such  matters,  which  potentially  could  take place in the
current  fiscal  year,  could  result in a charge that is material to results of
operations and cash flows in a single accounting period.

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>

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

                               Fourth      Third     Second       First
                               Quarter    Quarter    Quarter     Quarter 
                               -------    -------    -------     ------- 
1996*
Revenues                       $52,634    $54,651    $52,546     $52,958
Gross profit                     8,806     12,337     13,052      12,495  
Unusual items, net                 950       (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)
                                  ====      =====      =====       ===== 

1995*     
Revenues                       $53,835    $55,215    $54,349     $60,323 
Gross profit                    15,144     15,715     14,567      15,226
Unusual items, net                 674      1,150        800 
Operating income                 9,337     10,276      9,187       8,313
Income:
 Continuing operations           2,401      2,850      2,782       1,522 
 Discontinued operations            77        288        531          53 
Extraordinary loss                (806)                                       
Net income                       1,672      3,138      3,313       1,575  
Income per share:
 Continuing operations            $.05       $.06       $.06        $.03 
 Discontinued operations                      .01        .01             
 Extraordinary loss               (.02)                                 
                                  ----       ----       ----        ----
 Net income                       $.03       $.07       $.07        $.03 
                                  ====       ====       ====        ==== 

* Discontinued operations reclassified in all periods.

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; $.6 million income ($.01
<PAGE>

per  share)  in the  fourth  quarter.  Also,  fourth  quarter  income  from
continuing  operations  was reduced $.5  million  ($.01 per share) by  increased
closure costs related to inactive  waste  treatment  sites.  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.

In 1995,  after the  disproportionate  effect  of  deferred  income  taxes,
unusual items affected income from continuing operations as follows: $.5 million
income  ($.01 per share) in the second  quarter,  $.1 million loss (no per share
effect)  in the third  quarter  and $1.5  million  loss  ($.04 per share) in the
fourth  quarter.  Also,  1995 fourth  quarter  operating  income and income from
continuing  operations  benefited  by $1 million  ($.03 per share) from  reduced
expected closure costs at an inactive landfill site.

Due to rounding,  quarterly per share amounts do not necessarily add to the
full year amounts.
<PAGE>
<TABLE>
<CAPTION>
                                                                     SCHEDULE II

                               ENVIROSOURCE, INC.

                        VALUATION AND QUALIFYING ACCOUNTS

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                             (DOLLARS IN THOUSANDS)


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

1996
----

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

1995
----

Allowance for doubtful 
   accounts                       $     616    $     149                   $         36     $      729
                                  =========    =========                   ============     ==========

1994
----

Allowance for doubtful 
   accounts                       $     944    $     143                   $        471     $      616
                                  =========    =========                   ============     ==========

</TABLE>

(A)  Amounts written off.

<PAGE>


                        EXHIBIT INDEX

Number                 Description                    Page

4.13            Second Amendment, dated as of       EXHIBIT 1
                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.   

21.1            Subsidiaries of the Company.        EXHIBIT 2

23.1            Consent of Ernst & Young LLP.       EXHIBIT 3