<PAGE>

   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 1996
 
                                                     REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933

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

                           SPECIAL METALS CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                       <C>                                       <C>
                DELAWARE                                    3356                                   25-1445468
    (STATE OR OTHER JURISDICTION OF             (PRIMARY STANDARD INDUSTRIAL           (IRS EMPLOYER IDENTIFICATION NO.)
     INCORPORATION OR ORGANIZATION)             CLASSIFICATION CODE NUMBER)
</TABLE>
 
                            ------------------------
 
                           4317 MIDDLESETTLEMENT ROAD
                             NEW HARTFORD, NY 13413
                                 (315) 798-2900
              (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
       INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

                            ------------------------
 
                            ROBERT F. DROPKIN, ESQ.
               VICE PRESIDENT, SECRETARY AND CHIEF LEGAL COUNSEL
                           SPECIAL METALS CORPORATION
                           4317 MIDDLESETTLEMENT ROAD
                             NEW HARTFORD, NY 13413
                                 (315) 798-2900
           (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                   INCLUDING AREA CODE, OF AGENT FOR SERVICE)

                            ------------------------
 
                                   Copies to:
 
<TABLE>

<S>                                                             <C>
                   ROBERT B. SCHUMER, ESQ.                                       JOHN D. MORRISON, JR., ESQ.
           PAUL, WEISS, RIFKIND, WHARTON & GARRISON                                  SHEARMAN & STERLING
                 1285 AVENUE OF THE AMERICAS                                         599 LEXINGTON AVENUE
                   NEW YORK, NEW YORK 10019                                        NEW YORK, NEW YORK 10022
                        (212) 373-3000                                                  (212) 848-4000
</TABLE>
 
                            ------------------------
 
     APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
 
     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
 
     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
 
     If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
 
     If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

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

 
                        CALCULATION OF REGISTRATION FEE
 
<TABLE>
<CAPTION>
                                                                                     PROPOSED MAXIMUM
                                                                                         AGGREGATE
                              TITLE OF EACH CLASS OF                                     OFFERING            AMOUNT OF
                           SECURITIES TO BE REGISTERED                                   PRICE(1)        REGISTRATION FEE
<S>                                                                                  <C>                 <C>
Common Stock, par value $.01 per share............................................      $62,000,000         $18,788.00
</TABLE>
 
(1) Estimated pursuant to Rule 457 solely for purposes of calculating the
    registration fee.
 
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT

SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<PAGE>

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.  THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE.  THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY  NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.


PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED DECEMBER 20, 1996
 
                                               SHARES


                                     [LOGO]

                           SPECIAL METALS CORPORATION

                                  COMMON STOCK

                            ------------------------
 
 OF THE        SHARES OF COMMON STOCK BEING OFFERED HEREBY,        SHARES ARE
   BEING SOLD BY THE COMPANY AND        SHARES ARE BEING SOLD BY THE SELLING
 STOCKHOLDERS. SEE 'PRINCIPAL AND SELLING STOCKHOLDERS.' THE COMPANY WILL NOT
  RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF THE SHARES OF COMMON STOCK BY
      THE SELLING STOCKHOLDERS. PRIOR TO THE OFFERING, THERE HAS BEEN NO
      PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY
      ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE WILL BE
      BETWEEN $    AND $    . SEE        'UNDERWRITERS' FOR A DISCUSSION
          OF THE FACTORS CONSIDERED IN DETERMINING THE INITIAL PUBLIC
                                OFFERING PRICE.
 
                            ------------------------
 
       APPLICATION WILL BE MADE FOR QUOTATION OF THE COMMON STOCK ON THE
                NASDAQ NATIONAL MARKET UNDER THE SYMBOL 'SMCX.'
 
                            ------------------------
 
      SEE 'RISK FACTORS' BEGINNING ON PAGE 10 FOR INFORMATION THAT SHOULD
                    BE CONSIDERED BY PROSPECTIVE INVESTORS.
                                       
                            ------------------------
 
 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
      EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
          SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
              COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
              THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY

                            IS A CRIMINAL OFFENSE.
 
                            ------------------------
 
                               PRICE $    A SHARE
 
                            ------------------------
 
<TABLE>
<CAPTION>
                                                                   UNDERWRITING                            PROCEEDS TO
                                                 PRICE TO         DISCOUNTS AND        PROCEEDS TO           SELLING
                                                  PUBLIC         COMMISSIONS (1)       COMPANY (2)         STOCKHOLDERS
                                            ------------------  ------------------  ------------------  ------------------
<S>                                         <C>                 <C>                 <C>                 <C>
Per Share.................................          $                   $                   $                   $
Total(3)..................................          $                   $                   $                   $
</TABLE>
 
------------
     (1) The Company and the Selling Stockholders have agreed to indemnify the
         Underwriters against certain liabilities, including liabilities under
         the Securities Act of 1933. See 'Underwriters.'

     (2) Before deducting expenses payable by the Company estimated at
         $                  .

     (3) The Company and the Selling Stockholders have granted to the
         Underwriters an option, exercisable within 30 days of the date hereof,
         to purchase up to an aggregate of       additional Shares at the price
         to public less underwriting discounts and commissions, for the purpose
         of covering over-allotments, if any. If the Underwriters exercise such
         option in full, the total price to public, underwriting discounts and
         commissions, proceeds to Company and proceeds to Selling Stockholders
         will be $        , $        , $        and $        , respectively. See
         'Underwriters.'
 
                            ------------------------
 
    The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Shearman & Sterling, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about                , 1997, at the
office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment
therefor in immediately available funds.
 
                            ------------------------
 
MORGAN STANLEY & CO.                                        SALOMON BROTHERS INC
       INCORPORATED
 
              , 1997


<PAGE>

[Artwork: Cutaway diagram of a jet engine indicating component parts made from
the Company's superalloys and special alloys]








 
     IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
 
                                       2

<PAGE>

     NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.

                            ------------------------
 
     For investors outside the United States: No action has been or will be
taken in any jurisdiction by the Company, any Selling Stockholder or any
Underwriter that would permit a public offering of the Common Stock or
possession or distribution of this Prospectus in any jurisdiction where action
for that purpose is required, other than in the United States. Persons into
whose possession this Prospectus comes are required by the Company, the Selling
Stockholders and the Underwriters to inform themselves about, and to observe any
restrictions as to, the offering of the Common Stock and the distribution of
this Prospectus.
 
     In this Prospectus, references to 'dollars' and '$' are to United States
dollars, and the terms 'United States' and 'U.S.' mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction. As used in this Prospectus, the term 'jet engine' means all
turbine aircraft engines including turbo jet, turbo fan, turbo shaft and turbo
prop engines.

                            ------------------------
 
     Until          , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a Prospectus
when acting as Underwriters and with respect to their unsold allotments or
subscriptions.

                            ------------------------
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                                                              PAGE
                                                                                                              ----
<S>                                                                                                           <C>
Available Information......................................................................................      4
Prospectus Summary.........................................................................................      5

Risk Factors...............................................................................................     10
The Company................................................................................................     16
Use of Proceeds............................................................................................     16
Dividend Policy............................................................................................     16
Capitalization.............................................................................................     17
Dilution...................................................................................................     18
Selected Financial and Operating Data......................................................................     19
Management's Discussion and Analysis of Financial Condition and Results of Operations......................     21
Business...................................................................................................     29
Management.................................................................................................     47
Certain Transactions.......................................................................................     52
Principal and Selling Stockholders.........................................................................     55
Description of Capital Stock...............................................................................     57
Shares Eligible for Future Sale............................................................................     59
Certain United States Federal Tax Consequences To Non-United States Holders of Common Stock................     60
Underwriters...............................................................................................     62
Legal Matters..............................................................................................     64
Experts....................................................................................................     64
Index to Financial Statements..............................................................................    F-1
</TABLE>
 
                            ------------------------
 
     For so long as the Company's Common Stock is quoted on the Nasdaq National
Market or any national securities exchange, the Company intends to furnish its
stockholders with annual reports containing financial statements audited by an
independent public accounting firm and quarterly reports for the first three
quarters of each fiscal year containing unaudited financial information.
 
                                       3


<PAGE>

                             AVAILABLE INFORMATION
 
     The Company has filed with the Securities and Exchange Commission (the
'Commission') a registration statement on Form S-1 (together with all amendments
and exhibits, the 'Registration Statement') under the Securities Act of 1933, as
amended (the 'Securities Act') with respect to the Common Stock offered hereby.
This Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement and to the schedules and exhibits thereto. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected, without charge, and copies may be obtained, at prescribed rates, at
the public reference facilities of the Commission maintained at Judiciary Plaza,
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies of the
Registration Statement may also be inspected, without charge, at the
Commission's regional offices at Seven World Trade Center, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. In addition, copies of the Registration Statement may
be obtained by mail at prescribed rates, from the Commission's Public Reference

Section at Judiciary Plaza, 450 Fifth Street, N.W. Washington, D.C. 20549. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants (such as the Company)
that file electronically with the Commission. The address of such site is:
http://www.sec.gov.
 
     Statements contained in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract, agreement or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
 
     As a result of the Offering, the Company will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, as amended, and, in accordance therewith, will file periodic reports,
proxy statements and other information with the Commission. Such periodic
reports, proxy statements and other information will be available for inspection
and copying at the public reference facilities, regional offices and Web site
referred to above.
 
                                       4

<PAGE>

                               PROSPECTUS SUMMARY
 
     The following summary should be read in conjunction with, and is qualified
in its entirety by reference to, the more detailed information and the Financial
Statements of the Company, including the notes thereto, appearing elsewhere in
this Prospectus. Unless otherwise indicated, the information in this Prospectus
assumes (i) the consummation of the merger of the Company with Special Metals
and Technologies Corporation ('SMTC') pursuant to which each share of common
stock of SMTC will be exchanged for 12,400 shares of Common Stock of the Company
and (ii) that the Underwriters' over-allotment option is not exercised.
References in this Prospectus to the 'Company' or 'Special Metals' refer to
Special Metals Corporation, its subsidiaries and their predecessors, or any of
them, depending on the context. Certain information contained in this summary
and elsewhere in this Prospectus, including information with respect to the
Company's plans and strategy for its business, are forward-looking statements.
For a discussion of important factors which could cause actual results to differ
materially from the forward-looking statements contained herein, see 'Risk
Factors.'
 
                                  THE COMPANY
 
     Special Metals is one of the world's leading producers of superalloy and
special alloy long products. Superalloys are highly engineered metal alloys
designed to withstand extreme heat and stress and are principally used in the
manufacture of jet engine parts. Compared to any other known metal or material,
superalloys offer a superior combination of heat resistance, high temperature
corrosion resistance, toughness and strength. Special alloys have unique
physical, chemical, and/or mechanical properties which are optimized by the
Company's melting and processing capabilities. In 1952, a predecessor of Special
Metals pioneered the melting technology that led to the practical development of

the superalloys that are the critical materials used in the 'hot' section of
modern jet engines. The Company believes that its 45 million pounds of vacuum
induction melting capacity makes it one of the largest producers in the
superalloy industry and that its substantial market share, comprehensive product
line, proprietary know-how and technological experience make it a leader in its
field. Special Metals' total net sales have increased from $80.4 million in 1993
to $132.2 million in 1995. The Company's backlog was approximately $148.8
million at December 10, 1996 compared to approximately $81.8 million at December
31, 1995. For the first nine months of 1996, approximately 77% of the Company's
net sales were to jet engine component manufacturers. The Company's products are
also used in other technically demanding applications, such as land-based power
generating equipment, oil well drilling hardware, die materials, chemical
processing applications and medical applications.
 
     Special Metals operates three divisions. The Superalloy Billet and Bar
Division manufactures a wide array of wrought superalloy and special alloy
products in billet, bar and cast form, which are used primarily in jet engines.
This division also produces 'shape memory' alloys, such as Nitinol, which are
primarily used in medical and dental applications. The Company believes it has
the leading worldwide market share of approximately 32% (excluding China and the
countries of the former Soviet Union) in superalloy billet products and a North
American market share of approximately 20% in superalloy bar products. The
Powder Division produces powder metallurgy superalloy products for military jet
engines and the latest generation of large commercial jet engines and is the
world's largest independent manufacturer of superalloy powder products. The
Dental Division is the leading North American producer of amalgamable dental
alloys. In 1995, the Superalloy Billet and Bar Division, the Powder Division and
the Dental Division accounted for 85%, 10% and 5%, respectively, of the
Company's net sales.
 
INDUSTRY OVERVIEW
 
     Superalloys were originally developed to meet the highly demanding design
requirements of jet engines and are currently used to make jet engine components
such as turbine blades, vanes, disks, rings, seals and shafts. These
applications require very high strength, toughness and resistance to metal
fatigue and creep while operating in environments where temperatures can
sometimes exceed 2,200degreesF. Management believes that over 70% of all
superalloy sales worldwide are to jet engine component manufacturers. Superalloy
products are also used in other technically demanding applications such as
land-based power generating equipment, oil well drilling hardware, die materials
and chemical processing applications. The complexity of the production process
is reflected in the Company's relatively high average selling prices of $9.92
and $12.44 per pound shipped of superalloys and special alloys, respectively,
for the first nine months of 1996, compared to the average selling price of
other metals such as carbon steel sheet, stainless steel sheet and aluminum,
which currently range from $.17 to $1.25 per pound shipped. The highly
demanding technical nature of superalloy products, specialized multi-stage
production processes and the stringency of jet engine manufacturers'
qualification requirements and certification processes have created what
management believes are high barriers to entry in the superalloy industry.
 
     The superalloy industry has recently entered a period of increased demand
primarily because of improving conditions in the aerospace industry. The

superalloy industry reached a cyclical and historical peak in 1990 and
subsequently declined to a cyclical bottom in 1993. Management believes that the
demand for superalloy long products has almost doubled since 1993 and that the
industry (including the Company) is operating at close to 100% of
 
                                       5

<PAGE>

available capacity. As a result, since 1993, there have been significant
increases in market prices for superalloy products. Based on industry data, the
Company believes that the superalloy industry will operate at a utilization rate
in excess of 90% for the next three years and that demand for superalloy
products will increase at a 6% to 10% annual rate for the next three years. See
'Business--Industry Overview.'
 
     In 1995, the commercial aircraft industry started to recover from the
recession of the early 1990s. The firm order backlog of The Boeing Co.
('Boeing'), McDonnell Douglas Corp. ('McDonnell Douglas') and Airbus Industrie,
as reported by The Airline Monitor, increased to 1,869 planes at December 31,
1995 from 1,742 planes at December 31, 1994. Roll-outs of commercial aircraft
with more than 100 seats are expected to increase by more than 40% from 1995 to
1997. Boeing's production rate is scheduled to increase from 18 aircraft per
month in early 1996 to over 30 aircraft per month by mid-1997. More importantly,
the number of wide-body aircraft under production or on order is increasing,
which is expected to increase demand for larger engines and larger components
made with superalloys. The superalloy industry has substantially benefitted from
this recovery. The Company believes that demand for jet engines will remain
strong through 1999 because of projected increases in revenue passenger miles
both domestically and internationally (especially in the Pacific Rim) and the
imposition of federal Stage III noise regulations in the United States, which
will require airlines to replace existing Stage II engines or retrofit such
engines with engine hush kits. In addition, because of Federal Aviation
Administration regulations mandating maintenance of aircraft engines based in
part on the number of hours flown and the number of takeoff and landing cycles,
a large number of commercial aircraft built in the 1980s are scheduled to
undergo engine rebuilds in the next five years. As a result management believes
that demand for jet engine spare parts will remain strong.
 
BUSINESS STRATEGY
 
     The Company's primary objective is to continue the growth of its superalloy
and special alloy business and to focus on both the aerospace and non-aerospace
markets. To achieve its objectives, the Company has implemented a business
strategy which is designed to: (i) capitalize on the Company's leading position
in the aerospace market; (ii) develop new products and markets; (iii) continue
to reduce the Company's costs; and (iv) explore potential acquisitions.
 
     Capitalize on Leading Position in Aerospace Market.  Special Metals'
largest single product line is superalloy billet used primarily in the
manufacture of jet engines. Management believes the Company's worldwide market
share (excluding China and the countries of the former Soviet Union) in
superalloy billet was approximately 32% in 1995 and, in certain key high
technology applications, approached 40%. To meet the increased level of

aerospace demand, the Company has increased its annual billet production
capacity by 15% during 1996.
 
     The Company believes that its capital investment programs and commitment to
high quality have contributed to its ability to obtain a wider variety of user
certifications from major jet engine producers, such as General Electric Company
('General Electric'), Rolls Royce Plc ('Rolls Royce'), Pratt & Whitney, a
division of United Technologies Corporation ('Pratt & Whitney'), and Societe
Nationale D'Etude Et De Construction De Moteurs D'Aviation ('SNECMA'), than any
of its competitors. Over the last five years (principally in 1991 and 1992), the
Company invested over $20 million in new state-of-the-art forging and melting
facilities and over the next five years, the Company currently plans to invest
an additional $50 million to expand and modernize its facilities.
 
     Develop New Products and Markets.  Special Metals plans to grow its
business through the development of new products and new applications and
markets for its existing products. Between 1990 and 1996, Special Metals engaged
in an aggressive product line expansion effort. Over 20% of the Company's net
sales in 1995 were from sales of enhancements of existing products or new
products that did not exist in 1990. Given the brief commercial history of
superalloys, the non-aerospace market for superalloy products is relatively
immature. The Company believes that it is well positioned to exploit this market
and capitalize on new opportunities.
 
     Continue to Reduce Costs.  The Company has undertaken numerous projects to
maintain and improve its efficiency and cost position over the last few years.
Since 1992, Special Metals has enhanced its operating leverage, reduced its
billet cycle time by 33%, and improved its inventory turnover by 37%. The
Company continues to pursue opportunities to further reduce costs and improve
efficiency.
 
     Explore Potential Acquisitions.  The Company will examine opportunities to
acquire or invest in companies, technologies or products that complement the
Company's business or its product offerings. In particular, the Company will 
consider acquisitions or investments that will leverage its expertise in
superalloy and special alloy products and enable it to enter new markets or sell
new products. Currently, the Company has no agreements or understandings
regarding any such acquisition or investment. See 'Risk Factors--Risks
Associated With Potential Acquisitions.'
 
                                       6

     
<PAGE>
                                  THE OFFERING
 
<TABLE>
<S>                                                 <C>        <C>
Common Stock offered by the Company...............             shares

Common Stock offered by the Selling
  Stockholders....................................             shares
                                                    --------

     Total........................................             shares
                                                    =========


Common Stock to be outstanding after the
  Offering(1).....................................  shares
 
Use of Proceeds...................................  The net proceeds to the company will be used to repay
                                                    indebtedness under the Company's credit facility and, if
                                                    available following the repayment of such indebtedness, for
                                                    general corporate purposes, including working capital and
                                                    capital expenditures. The Company will not receive any
                                                    proceeds from the sale by the Selling Stockholders of the
                                                    Common Stock in the Offering. See 'Use of Proceeds.'
 
Proposed Nasdaq National Market symbol............  'SMCX'
</TABLE>
 
------------------
(1) Does not include      shares of Common Stock reserved for issuance upon the
    exercise of options under the Special Metals Corporation 1997 Long-Term
    Stock Incentive Plan (the 'Stock Option Plan').
 
                                  RISK FACTORS
 
     PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY CERTAIN FACTORS RELATING TO
AN INVESTMENT IN THE COMPANY. SEE 'RISK FACTORS.'
 
                                       7


<PAGE>

                      SUMMARY FINANCIAL AND OPERATING DATA
 
     The following table presents certain historical and pro forma financial and
operating data of the Company for the periods indicated. Results for the nine
months ended September 30, 1996 are not necessarily indicative of the results to
be expected for the year ended December 31, 1996. The financial data set forth
below should be read in conjunction with 'Selected Financial and Operating
Data,' 'Management's Discussion and Analysis of Financial Condition and Results
of Operations' and the Financial Statements of the Company and the notes thereto
included elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                                                                             NINE MONTHS ENDED
                                                     YEAR ENDED DECEMBER 31,                   SEPTEMBER 30,
                                        --------------------------------------------------   ------------------
                                          1991      1992       1993      1994       1995      1995       1996
                                        --------   -------   --------   -------   --------   -------   --------
                                                                                                (UNAUDITED)
                                                  (IN THOUSANDS, EXCEPT PER POUND AND PER SHARE DATA)
<S>                                     <C>        <C>       <C>        <C>       <C>        <C>       <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................  $111,940   $87,849   $ 80,412   $95,510   $132,245   $92,566   $120,540
Cost of goods sold....................   103,766    87,849     84,304    93,625    114,752    80,370     99,733

                                        --------   -------   --------   -------   --------   -------   --------
  Gross profit (loss).................     8,174        --     (3,892)    1,885     17,493    12,196     20,807
Selling, general and administrative
  expenses............................     6,457     4,660      4,141     4,313      5,207     3,384      3,723
                                        --------   -------   --------   -------   --------   -------   --------
  Operating income (loss).............     1,717    (4,660)    (8,033)   (2,428)    12,286     8,812     17,084
Interest expense......................     3,587     3,169      3,912     4,361      4,727     3,572      3,096
                                        --------   -------   --------   -------   --------   -------   --------
Income (loss) before income taxes and
  extraordinary item..................    (1,870)   (7,829)   (11,945)   (6,789)     7,559     5,240     13,988
Income tax expense (benefit)(1).......      (166)   (2,139)       197        99        354       245     (1,901)
                                        --------   -------   --------   -------   --------   -------   --------
Income (loss) before extraordinary
  item................................    (1,704)   (5,690)   (12,142)   (6,888)     7,205     4,995     15,889
Extraordinary item(2).................        --     3,840         --        --         --        --         --
                                        --------   -------   --------   -------   --------   -------   --------
  Net income (loss)...................  $ (1,704)  $(1,850)  $(12,142)  $(6,888)  $  7,205   $ 4,995   $ 15,889
                                        --------   -------   --------   -------   --------   -------   --------
                                        --------   -------   --------   -------   --------   -------   --------
 
Net income (loss) per share...........  $   (.14)  $  (.15)  $   (.98)  $  (.56)  $    .58   $   .40   $   1.28
Weighted average common shares
  outstanding.........................    12,400    12,400     12,400    12,400     12,400    12,400     12,400
 
Pro forma(3):
  Net income..........................                                            $                    $
  Net income per share................                                            $                    $
  Weighted average common
     shares outstanding...............
 
OTHER DATA:
Depreciation and amortization ........  $  5,849   $ 5,941   $  6,561   $ 7,200   $  6,281   $ 4,594   $  3,212
Capital expenditures..................     9,922     5,677        793       975      1,963     1,228      1,877
 
Pounds shipped:
  Superalloys.........................    13,277    11,269     10,932    12,253     14,907    10,568     10,626
  Special alloys(4)...................       214       368        712     1,181      1,541     1,084      1,025
  Toll conversion.....................     4,096     6,077     13,934    14,267     11,612     9,299      7,757
 
Average net sales per pound shipped:
  Superalloys.........................  $   7.74   $  7.00   $   6.31   $  6.48   $   7.58   $  7.48   $   9.92
  Special alloys......................     36.12     21.44      12.55     10.56      10.32      9.12      12.44
  Toll conversion.....................       .35       .24        .18       .26        .30       .30        .30
 
Backlog (at period end)(5)............  $ 47,952   $34,878   $ 31,385   $40,711   $ 81,846   $80,010   $135,690
</TABLE>
 
                                          (footnotes on next page)
 
                                       8

<PAGE>
 
<TABLE>

<CAPTION>
                                                                                          AS OF SEPTEMBER 30, 1996
                                                                                         --------------------------
                                                                                          ACTUAL     AS ADJUSTED(3)
                                                                                         --------    --------------
<S>                                                                                      <C>         <C>
BALANCE SHEET DATA:
Working capital.......................................................................   $ 47,096       $
Total assets..........................................................................    119,976
Current portion of long-term debt and capital lease obligations.......................      6,772
Long-term debt (excluding current maturities).........................................     35,560
Long-term capital lease obligations (excluding current maturities)....................        593            593
Subordinated notes payable(6).........................................................      9,500          9,500
Stockholders' equity..................................................................     31,802
</TABLE>
 
------------------
(1) Income tax expense for the nine months ended September 30, 1996 differs from
    the amount which is derived by applying the combined statutory income tax
    rates due to the utilization of previously unrecognized net operating loss
    and other tax carryforwards and the recognition of previously unrecognized
    deferred income tax assets.
 
(2) Represents an extraordinary gain from forgiveness of debt owed to an
    affiliate of one of the Company's principal stockholders. The per share
    impact of the extraordinary gain was $.31.
 
(3) Gives effect to (i) the Offering and (ii) the application of the net
    proceeds therefrom to repay indebtedness under the Company's credit
    facility. At November 30, 1996, approximately $49.0 million was outstanding
    under the Company's credit facility. Assuming that the transactions
    described above occurred as of January 1, 1995, the Company's interest
    expense would have been $_____ and $_____ for 1995 and the nine months
    ended September 30, 1996, respectively, and the Company's net income would
    have been $_____ and $_____, respectively. See 'Use of Proceeds' and
    'Management's Discussion and Analysis of Financial Condition and Results
    of Operations.'
 
(4) Includes dental alloys, shape memory alloys and high strength stainless
    steel.
 
(5) The Company defines backlog as firm purchase orders, which are generally
    subject to cancellation by the customer subject to, in certain
    circumstances, payment of specified charges.
 
(6) Represents subordinated notes held by certain of the Company's principal
    stockholders (the 'Subordinated Notes'). In October and November 1996, the
    Company repaid an aggregate of $6.5 million of indebtedness under the
    Subordinated Notes. The Company intends to repay the remaining $3.0 million
    balance on the Subordinated Notes prior to the consummation of the Offering.
 
                                       9


<PAGE>

                                  RISK FACTORS
 
     An investment in the shares of Common Stock offered hereby involves various
risks. Prior to investing in the Common Stock being offered hereby, prospective
investors should carefully consider the factors set forth below, together with
the other information set forth in this Prospectus.
 
CYCLICALITY; DEPENDENCE ON AEROSPACE INDUSTRY
 
     Demand for the Company's superalloy and special alloy products is cyclical
and is affected by the cyclical nature of the aerospace industry. Sales of the
Company's products to the aerospace industry accounted for approximately 68%,
69%, 70% and 77% of the Company's net sales in 1993, 1994, 1995 and the nine
months ended September 30, 1996, respectively.
 
     The demand by commercial airlines for new aircraft historically has been
closely related to the state of the U.S. and world economies. The large number
of aircraft delivered in the late 1980s and early 1990s and the airline
industry's widespread losses created excess capacity in the air carrier system.
After this period, airlines and leasing companies deferred existing new aircraft
orders and, to a lesser degree, canceled orders. These deferrals and
cancellations adversely affected the volume and price of orders placed with the
manufacturers of commercial aircraft engine components and their suppliers,
including the Company. Because of the comparatively high level of fixed costs
associated with the Company's manufacturing processes, changes in volume can
result in significant variations in net income. Recently, the U.S. commercial
airline industry has reported profits, excess capacity has been reduced and
orders for new aircraft reported by major aircraft manufacturers have increased.
However, there can be no assurance that the improved operating performance of
the commercial airline industry will continue or that deliveries of large
commercial aircraft will not be deferred or cancelled in the future. Any
developments in the aerospace market resulting in a reduction in the rate of
future aircraft deliveries, including cancellations and deferrals of scheduled
deliveries, could have a material adverse effect on the Company. Also, the
cyclical nature of the superalloy industry could adversely affect the Company's
ability to finance its capital expenditure program and acquisitions. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
 
HISTORY OF LOSSES
 
     The Company's results of operations for the years 1991 through 1994 reflect
the severe downturn in market conditions experienced generally by the superalloy
industry over that period. The Company incurred losses before extraordinary
items of $26.4 million from 1991 through 1994. In addition, from March 1993 to
September 1994, the Company had insufficient cash flow to make certain interest
and term loan principal payments under a credit agreement with certain lenders
(the 'Prior Credit Agreement') and entered into a series of standstill
agreements with such lenders. Following the amendment and restatement of the
Prior Credit Agreement in December 1994, the Company remained in compliance with
all of its obligations in respect of the Prior Credit Agreement until it was

refinanced in October 1996.
 
     The Company operated profitably in 1995 and in the first three quarters of
1996. Continuing profitable operations will be dependent, among other things,
on: market demand and prices for the Company's superalloys and special alloy
products, particularly demand and pricing in the aerospace industry; competition
and capacity utilization in the superalloy industry; timing and pricing of
long-term firm price contracts; the Company's ability to increase prices for its
products to a level that exceeds any increases in production costs;
manufacturing improvement and cost reduction efforts; any material adverse
developments or market instabilities in the supply of the Company's raw
materials; and the absence of a general economic downturn in North America,
Europe or the rest of the world. The failure of the Company to sustain
profitability could hinder its ability to respond effectively to market
conditions, to make capital expenditures and to take advantage of business
opportunities, the failure to perform any of which could have a material adverse
effect on the Company's financial condition and results of operations. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
 
                                       10

<PAGE>

CUSTOMER CONCENTRATION
 
     A substantial portion of the Company's business is conducted with a
relatively small number of large customers, including affiliates of SIMA. The 
Company's top 10 customers accounted for 67% of the Company's net sales in 1995.
In 1995, each of Wyman-Gordon Forgings Inc. ('Wyman-Gordon'), Ladish Company and
Transmet, a division of Steiner S.A. ('Transmet'), and an affiliate of SIMA
accounted for  approximately 17%, 11% and 10%, respectively, of the Company's
net sales. In 1994, the Company's two largest customers accounted for
approximately 22% and 13%, respectively, of the Company's total sales and in
1993, the Company's two largest customers each accounted for approximately 12%
of the Company's total sales. Loss of a significant customer could have a
material adverse effect on the Company.
 
AVAILABILITY AND COST OF RAW MATERIALS; HEDGING
 
     The major raw materials used in the production of superalloys and special
alloys are scrap and various virgin materials such as nickel, chromium, cobalt,
columbium, molybdenum, titanium and aluminum. Over half of the raw materials
consumed in superalloy production is scrap, either internally generated scrap
from the Company's own production process or scrap purchased on the open market
or from customers. Virgin raw materials are generally purchased directly from
producers. Commercial deposits of certain metals used by the Company are found
in only a few parts of the world. The availability and prices of these metals
may be influenced by cartels, changes in world politics, unstable governments in
exporting nations and inflation. Shortages of, and price increases for, certain
raw materials used by the Company have occurred in the past and may occur in the
future, which could have a material adverse effect on the Company.
 
     As described above, a substantial portion of the Company's raw materials

used in production are commodities, such as nickel, that are subject to wide
price fluctuations. The price the Company pays for nickel is usually based upon
quoted prices on the London Metal Exchange ('LME') plus a premium due to
quality, location, and volume purchased. Although certain of the Company's 1996
product orders provide for price adjustments to reflect changes in the price of
raw materials, a substantial majority of the Company's product orders currently
are, and in the future are expected to be, made pursuant to firm price
contracts, which do not provide for raw material price adjustments. To attempt
to mitigate the risks associated with raw material price fluctuations and to
match raw material purchases with firm price product orders, the Company often
enters into firm price contracts for the purchase of virgin raw materials from
suppliers and for the purchase of scrap from customers or hedges the price of
nickel. Although the Company uses commercially reasonable efforts to collect
cancellation penalties if a customer cancels a firm price purchase order, there
can be no assurance that the Company will receive cancellation penalties which
are adequate to cover any raw material losses incurred by the Company as a
result of its hedging activities. At September 30, 1996, the Company had
commodity swap agreements covering a portion of its nickel requirements for the
period from October 1996 through December 1997, for a total purchase price of
approximately $8.7 million. The fair market value of the material covered by
these agreements, based on the September 30, 1996 price quoted on the LME, was
approximately $7.7 million. The Company's manufacturing specifications require
higher grades of nickel than those available on the LME or other commodities
exchanges. Therefore, the LME contracts only provide hedging on the price of
such materials and do not guarantee the actual delivery of usable raw materials.
There can be no assurance that the hedging and other techniques implemented by
the Company will be successful in eliminating or reducing the effects of
fluctuation in the prices of the Company's raw materials or that the Company
will not incur losses on such transactions.
 
DEPENDENCE ON ESSENTIAL MACHINERY AND EQUIPMENT
 
     The Company's principal manufacturing assets used in its Billet and Bar
Division (which accounted for approximately 85% of net sales in 1995) are
located at its melting, rolling and finishing production facility in New
Hartford, New York and at its forge shop in Dunkirk, New York. The Dunkirk
facility relies to a significant extent upon ingot produced at the New Hartford
facility and the New Hartford facility relies to a significant extent on the
forging capacity of the Dunkirk facility. Any production failures, shutdowns or
other significant problems at either the New Hartford or the Dunkirk facility
could have a material adverse effect on the Company's financial condition and
results of operation. The Company believes that it maintains adequate property
damage insurance to provide for reconstruction of damaged equipment, as well as
business interruption
 
                                       11

<PAGE>

insurance to mitigate losses resulting from any production shutdown caused by
insured loss; however, there can be no assurance that such insurance coverage
will be adequate to cover such losses.
 
     The Company's manufacturing processes are dependent on the reliable

operation of its machinery and equipment. The Company's manufacturing facilities
have been operating at near capacity for the last four quarters. The Company has
certain critical pieces of machinery and equipment which may require significant
lead times to complete necessary repairs or replacements and the functions of
which may not be easily replaced by an outside contractor on commercially
acceptable terms. Any such event could result in a disruption in the Company's
production or distribution which could have a material adverse effect on the
Company. See 'Business--Products and Markets.'
 
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
 
     The Company will examine opportunities to acquire or invest in companies,
technologies or products that complement the Company's business or its product
offerings. Any future acquisitions may result in a potentially dilutive issuance
of equity securities, the incurrence of additional debt, reduction of existing
cash balances, the amortization of expenses related to goodwill and other
intangible assets or other charges to operations, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Future acquisitions could involve numerous additional
risks, including difficulties in the assimilation of the operations, products,
services and personnel of any acquired company, the diversion of management's
attention from other business concerns, the disruption of the Company's
business, the entry into markets in which the Company has little or no direct
prior experience and potential loss of key employees of any acquired company. 
The Company has no agreements or understandings regarding any such acquisition
or investment. See also '--Limitations on Payments of Dividends; Restrictive
Covenants.'
 
COMPETITION
 
     The superalloy industry is highly competitive and dominated by a few major
producers. The Company competes primarily on the basis of the ability to meet
customers' product specifications, quality, price and delivery schedules. Many
of the Company's competitors are part of large, diversified metals companies
which may have substantially greater capital resources and, in some cases, lower
raw material or labor costs than the Company. Moreover, the Company's
competitors have recently added and may in the future add production capacity
which, when coupled with the competitive nature of the superalloy industry, may
exert downward pressure on prices and therefore the Company's margins. Finally,
despite large start-up costs and technological requirements for entry into the
superalloy business, recent attempts have been made to enter the superalloy
industry, including a joint venture partly owned by one of the Company's largest
customers. Successful entry of new competitors into the superalloy industry
could have a material adverse effect on the business, financial condition,
results of operations or cash flows of the Company. See 'Business--Competition.'
 
LABOR MATTERS
 
     As of September 30, 1996, approximately 390 (or 68%) of the Company's
approximately 570 employees worked under four collective bargaining agreements.

The Company's agreement with the local branch of the International Association
of Machinists and Aerospace Workers (the 'IAM') representing 55 hourly workers
at its Princeton, Kentucky facility expires in August 1997. Also, the Company's
agreement with the local branch of the IAM representing approximately 290 hourly
workers at its New Hartford, New York facility, expires in August, 1998. The
remaining labor agreements expire in 1999. In 1992, a two-week strike by the IAM
occurred at the Company's New Hartford facility. While the Company considers its
employee relations to be good, there can be no assurance that satisfactory new
collective bargaining agreements will be negotiated when the applicable
collective bargaining agreements expire or that future work stoppages would not
have a material adverse effect on the business, financial condition, results of
operations or cash flows of the Company. See 'Business--Employees.'
 
                                       12

<PAGE>

ENVIRONMENTAL REGULATIONS
 
     The Company's facilities are engaged in activities regulated by extensive
federal, state, local and foreign environmental and worker safety and health
laws and regulations, including those relating to air emissions, wastewater
discharges, the handling and disposal of solid and hazardous wastes and the
remediation of contamination caused by the release of hazardous substances in
the past. The Company uses substantial quantities of substances that are
considered hazardous or toxic under federal, state and/or local environmental,
worker safety and health laws and regulations. The Company's operations pose a
continuing risk of accidental releases of, and worker exposure to, hazardous or
toxic substances. There is also a risk that governmental environmental
requirements, or enforcement thereof, may become more stringent in the future
and that the Company may be subject to legal proceedings brought by private
parties or governmental agencies with respect to environmental matters. Although
the Company believes that it is in substantial compliance with applicable
requirements of environmental laws, there can be no assurance that some, or all,
of the risks discussed under this heading or in 'Business--Environmental
Matters' will not result in liabilities that are material to the Company's
business, results of operations, financial condition or cash flows.
 
     At September 30, 1996, the Company had total reserves of approximately $3.5
million to cover future costs arising from known environmental liabilities for
remediation and operation and maintenance of remediation systems, including
costs relating to its own properties and certain sites at which the Company's
wastes have been identified. The Company's actual future expenditures, however,
for remediation of environmental conditions existing at its properties and at
these other locations cannot be conclusively determined at this time.
Furthermore, additional locations at which wastes generated by the Company may
have been released or disposed, and of which the Company is currently unaware,
may in the future become the subject of remediation for which the Company may be
liable, in whole or in part. Accordingly, it is possible that the Company could
become subject to environmental liabilities in the future that could result in a
material adverse effect on the Company's business, results of operations,
financial condition or cash flows.
 
DEPENDENCE UPON KEY MANAGEMENT

 
     The Company's ability to maintain its competitive position is dependent to
a large degree on the services of its senior management team, including Donald
R. Muzyka, President and Chief Executive Officer. On average, the Company's
executive officers have served with the Company for 11 years each. Although Dr.
Muzyka and certain of the Company's other senior managers will have employment
agreements with the Company prior to the consummation of the Offering, there can
be no assurance that such individuals will remain with the Company. The loss of
the services of any of these individuals or an inability to attract and retain
additional senior management personnel could have a material adverse effect on
the Company. There can be no assurance that the Company will be able to retain
its existing senior management personnel or to attract additional qualified
senior management personnel. See 'Management.'
 
CONTROL BY PRINCIPAL STOCKHOLDERS
 
     Upon completion of the Offering, Societe Industrielle de Materiaux Avances
S.A. ('SIMA'), LWH Holding S.A. ('LWH') and Advanced Materials Investments
Holding S.A. ('AMI,' and, together with SIMA and LWH, the 'Principal
Stockholders') will beneficially own approximately      % of the outstanding
Common Stock (approximately      % if the Underwriters' over-allotment option is
exercised in full). Under an amended and restated stockholders agreement among
the Company and the Principal Stockholders (the 'Stockholders Agreement'), the
Principal Stockholders have agreed to vote all shares of Common Stock owned by
them unanimously as a group in accordance with the instructions of the holders
of a majority of such shares. In addition, the Company has agreed to nominate a
number of persons for election as directors who are designated by the Principal
Stockholders based on the ownership percentage of the Principal Stockholders.
The Stockholders Agreement provides that 56% of the nominees for director (four
based on the present board of seven directors) may be designated by the
Principal Stockholders so long as the Principal Stockholders beneficially own
35% or more of the outstanding Common Stock. Because SIMA will beneficially own
a majority of the shares of Common Stock held by the Principal Stockholders upon
completion of the Offering, SIMA will be able to control the business, policies
and affairs of the Company, including the election of directors and major
corporate transactions. The concentration of beneficial ownership of the Company
may have the effect
 
                                       13

<PAGE>

of delaying, deferring or preventing a change in control of the Company, may
discourage bids for the Common Stock at a premium over the market price of the
Common Stock and may otherwise adversely affect the market price of the Common
Stock. See '--Antitakeover Provisions,' and 'Principal and Selling
Stockholders-- Stockholders Agreement.'
 
     For a description of certain relationships between the Company and the
Principal Stockholders, see 'Certain Transactions.' The common equity of SIMA is
beneficially owned by members of the Duval family and certain related parties.
Edouard Duval, a director of the Company, is a Directeur General of SIMA and has
a minority equity interest in SIMA. SIMA holds a controlling interest in Aubert
& Duval, a French steel and alloy producer. Although 

Aubert & Duval and the Company currently compete in certain limited product 
lines, the Company believes that this competition is not material to the Company
and that it is unlikely that the companies will compete in a material manner in
the superalloy and special alloy business in the future. However, there can be
no assurance that a conflict of interest may not arise in the future. There are
currently no contractual relationships between the companies which limit
competition.
 
ABSENCE OF PRIOR PUBLIC MARKET
 
     Prior to the Offering, there has been no public market for the Common
Stock. Although the Common Stock is expected to be approved for quotation on the
NASDAQ National Market, there can be no assurance that an active trading market
will develop or be sustained following the Offering. There can be no assurance
that market prices for the Common Stock after the Offering will equal or exceed
the initial public offering price per share set forth on the cover page of this
Prospectus. The initial public offering price of the Common Stock will be
determined by negotiation among the Company, the Selling Stockholders and the
Underwriters and may not be indicative of the market price for the Common Stock
following the Offering. See 'Underwriters--Pricing of Offering.' The market
price of the Common Stock could be subject to significant fluctuations in
response to various factors and events, including the liquidity of the market
for shares of Common Stock, differences between the Company's actual financial
or operating results and those expected by investors and analysts, pricing and
competition in the superalloy industry, new statutes or regulations or changes
in interpretations of existing statutes and regulations affecting the Company's
business or the superalloy or aerospace industries in general, changes in
general market conditions and broad market fluctuations.
 
DILUTION
 
     Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution of $     per share (assuming an initial public offering 
price of $     per share) of the Common Stock from the public offering price. 
See 'Dilution.'
 
POSSIBLE ADVERSE IMPACT ON STOCK PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
 
     Future sales of substantial amounts of Common Stock in the public market
following the Offering, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock and the ability
of the Company to raise capital by issuing its equity securities. Following the
Offering, the Company will have outstanding         shares of Common Stock. Of
these, the         shares offered hereby will be freely transferable by persons
other than 'affiliates' of the Company without restriction or further
registration under the Securities Act. The remaining            outstanding
shares of Common Stock will be owned by the Principal Stockholders and will be
'restricted securities.' Subject to the lockup arrangements described below,
these 'restricted' shares of Common Stock will be registrable upon demand by the
Principal Stockholders and will be eligible for sale without registration under
the Securities Act in accordance with Rule 144 ('Rule 144') promulgated under
the Securities Act. In connection with the Offering, the Company and the
Principal Stockholders have agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated, they will not sell or otherwise transfer or

dispose of any shares of Common Stock for a period of 180 days after the date
hereof other than the shares of Common Stock offered hereby and certain other
exceptions. In addition,         shares of Common Stock are reserved for
issuance upon the exercise of stock options under the Stock Option Plan and the
issuance of such shares will be registered under the Securities Act. See 'Shares
Eligible for Future Sale,' 'Management--Stock Option Plan,' and 'Certain
Transactions--Transactions with Principal Stockholders--Registration Rights.'
 
                                       14

<PAGE>

LIMITATIONS ON PAYMENT OF DIVIDENDS; RESTRICTIVE COVENANTS
 
     The Company has never declared or paid any dividends on its Common Stock.
Any future decisions as to the payment of dividends will be at the discretion of
the Company's Board of Directors, subject to applicable law. The Company's
ability to pay dividends is also limited by the terms of the Company's Credit
Agreement, dated as of October 18, 1996, among the Company, Credit Lyonnais New
York Branch and the financial institutions from time to time party thereto (the
'Credit Agreement'). The Credit Agreement requires the Company to maintain
certain financial ratios and minimum consolidated net worth. The Credit
Agreement also contains covenants restricting the ability of the Company to pay
dividends, make certain restricted payments, incur additional indebtedness, make
certain investments, create liens, guarantee indebtedness, sell or acquire
assets, enter into mergers or consolidations, and form subsidiaries, which may
restrict the ability of the Company to expand its manufacturing capacity or make
acquisitions. In addition, amounts borrowed under the Company's revolving line
of credit under the Credit Agreement may only be used to finance working capital
needs and to repay outstanding indebtedness. See 'Dividend Policy' and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
 
ANTI-TAKEOVER PROVISIONS
 
     Certain provisions of the Company's Restated Certificate of Incorporation
(the 'Certificate of Incorporation') and Amended and Restated By-laws (the
'By-laws'), as well as provisions of the Delaware General Corporation Law (the
'DGCL'), may have the effect of delaying, deferring or preventing a change of
control of the Company, including transactions in which stockholders might
otherwise receive a substantial premium for their shares over then current
market prices. For example, under the Certificate of Incorporation, the Board of
Directors (or a committee thereof) is authorized to issue one or more series of
preferred stock having such designations, rights and preferences as may be
determined by the Board. Also, the Certificate of Incorporation and the By-laws
provide for a classified Board of Directors, and the By-laws provide advance
notice procedures for stockholders to submit proposals for consideration at
stockholders' meetings or to nominate persons for election as directors. See
also '--Control by Principal Stockholders,' 'Principal and Selling
Stockholders--Stockholders Agreement' and 'Description of Capital Stock.'
 
                                       15


<PAGE>

                                  THE COMPANY
 
     The Company's superalloy business commenced operations as part of the Utica
Drop Forge Company ('Utica Drop Forge') in 1952 with the successful introduction
of the world's first production vacuum melting furnace. Operations continued as
a division of Utica Drop Forge until 1961, when Special Metals Corporation was
formed as a separate, publicly-owned, Delaware corporation listed on the New
York Stock Exchange. In 1965, Special Metals was purchased by a predecessor of
Allegheny International Inc. ('AI') and operated as a wholly-owned subsidiary of
AI until 1983, when AI sold its interest in Special Metals to Astrotech
International Corporation ('Astrotech').
 
     In 1987, Astrotech sold all of the outstanding capital stock of the Company
to SMTC, a holding company owned by certain of the Principal Stockholders. Prior
to the date of the Offering, SMTC was merged with and into Special Metals (the
'Merger'). As a result, the Principal Stockholders received 12,400 shares of
Common Stock in exchange for each share of Common Stock of SMTC held by them.
The Company's principal executive offices are located at 4317 Middlesettlement
Road, New Hartford, NY 13413. Its telephone number is (315) 798-2900.
 
                                USE OF PROCEEDS
 
     The net proceeds to the Company from the Offering, assuming an initial
public offering price of $     per share (the midpoint of the range set forth on
the cover page of this Prospectus) and after deducting the estimated offering
expenses and underwriting discounts and commissions, are estimated to be $
million. The Company will not receive any proceeds from the sale by the Selling
Stockholders of the Common Stock in the Offering.
 
     The Company will use substantially all of the net proceeds of the Offering
received by it to repay outstanding indebtedness under the revolving credit
facility under the Credit Agreement (the 'Revolving Facility') and the term loan
under the Credit Agreement (the 'Term Loan'). Amounts borrowed under the
Revolving Facility fluctuate depending on the working capital needs of the
Company. If the net proceeds of the Offering are insufficient to repay all
outstanding amounts under the Credit Agreement, the Company intends to repay all
outstanding indebtedness under the Revolving Facility and a portion of the
outstanding indebtedness under the Term Loan. If any net proceeds from the
Offering remain after the repayment of all outstanding indebtedness under the
Credit Agreement, the Company intends to use such remaining net proceeds for
general corporate purposes, including working capital and capital expenditures.
 
     Amounts borrowed under the Credit Agreement bear interest at variable rates
and, at November 30, 1996, averaged approximately 6.6%. On November 30, 1996,
approximately $29.0 million was outstanding under the Revolving Facility and $20
million was outstanding under the Term Loan. All amounts outstanding under the
Revolving Facility mature on October 17, 2001 and all amounts outstanding under
the Term Loan must be repaid between October 17, 1997 and October 17, 2001.
After repayment, amounts may be reborrowed under the Revolving Facility, but may
not be reborrowed under the Term Loan. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources.'

 
                                DIVIDEND POLICY
 
     Since August 1987, the Company has not declared or paid any dividends on
its Common Stock and does not currently pay cash dividends on its Common Stock.
Any future decision as to the payment of dividends will be at the discretion of
the Company's Board of Directors, subject to applicable law. The Company's
ability to pay dividends is also limited by certain covenants of the Credit
Agreement, such as the restricted payment covenant. See 'Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources.'
 
                                       16

<PAGE>

                                 CAPITALIZATION
 
     The following table sets forth the short-term debt and capitalization of
the Company as of September 30, 1996 and as adjusted to reflect (i) the Offering
at an assumed initial public offering price of $     per share (the midpoint of
the range set forth on the cover page of this Prospectus) and (ii) the
application of the net proceeds therefrom to repay the indebtedness under the
Credit Agreement. This table should be read in conjunction with 'Use of
Proceeds,' 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and the Financial Statements of the Company and the notes
thereto included elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                                                                              AS OF SEPTEMBER 30,
                                                                                                      1996
                                                                                             ----------------------
                                                                                             ACTUAL     AS ADJUSTED
                                                                                             -------    -----------
                                                                                                 (IN THOUSANDS)
 
<S>                                                                                          <C>        <C>
Current portion of long-term debt and capital lease obligations...........................   $ 6,772      $
                                                                                             -------    -----------
                                                                                             -------    -----------
Long-term debt, excluding current maturities
  Long-term capital lease obligations.....................................................   $   593      $   593
  Credit Agreement(1).....................................................................    35,550
  Subordinated Notes(2)...................................................................     9,500        9,500
  Other...................................................................................        10           10
                                                                                             -------    -----------
     Total long-term debt.................................................................    45,653
                                                                                             -------    -----------
Stockholders' equity:
  Common Stock, par value $.01 per share: 35,000,000 shares authorized; 12,400,000 shares
     issued and outstanding actual;        shares issued and outstanding as adjusted(3)...       124
  Preferred Stock, par value $.01 per share: 10,000,000 shares authorized; no shares
     issued and outstanding...............................................................        --           --

  Paid-in surplus.........................................................................    25,876
  Pension adjustment......................................................................      (479)        (479)
  Retained earnings.......................................................................     6,281        6,281
                                                                                             -------    -----------
     Total stockholders' equity...........................................................    31,802
                                                                                             -------    -----------
       Total capitalization...............................................................   $77,455      $
                                                                                             -------    -----------
                                                                                             -------    -----------
</TABLE>
 
------------------
(1) Under the Revolving Facility of the Credit Agreement, the Company may
    borrow, repay and re-borrow from time to time, the lesser of (a) $40 million
    or (b) the Company's borrowing base. The Credit Agreement defines the
    Company's borrowing base as the sum of 85% of eligible accounts receivable
    and 60% of eligible inventory. As of October 31, 1996, the borrowing base
    was $48.1 million. The Company's ability to borrow under the Credit
    Agreement is subject to the satisfaction of various conditions including
    compliance with certain financial covenants.
 
(2) In October and November 1996, the Company repaid an aggregate of $6.5
    million of indebtedness under the Subordinated Notes. The Company intends to
    repay the remaining $3.0 million balance on the Subordinated Notes prior to
    the consummation of the Offering.
 
(3) Excludes        shares of Common Stock reserved for issuance pursuant to the
    Stock Option Plan, under which options to purchase        shares at the
    initial public offering price will be granted effective on the date of the
    Offering. See 'Management--Stock Option Plan' and 'Description of Capital
    Stock.'
 
                                       17

<PAGE>

                                    DILUTION
 
     At September 30, 1996, the net tangible book value of the Company after
giving effect to the Merger but prior to the Offering would have been
approximately $27.8 million, or $2.24 per share. Net tangible book value per
share of Common Stock is determined by dividing the number of shares of Common
Stock outstanding into the net tangible book value of the Company (total
tangible assets less total liabilities) without giving effect to the possible
exercise of stock options which will be granted by the Company upon consummation
of the Offering under its Stock Option Plan. After giving effect to the Offering
at an assumed initial public offering of      per share (the midpoint of the
range set forth on the cover page of this Prospectus) and the application of the
net proceeds therefrom as set forth in 'Use of Proceeds,' the net tangible book
value at such date would have been $       million, or $     per share,
representing an immediate increase in net tangible book value of $     per
share. Accordingly, purchasers of the Common Stock in the Offering would sustain
an immediate dilution of $     per share.
 

     The following table illustrates such per share dilution:
 
<TABLE>
<S>                                                      <C>         <C>
Assumed initial public offering price..................              $
  Net tangible book value as of September 30, 1996.....  $
  Increase in net tangible book value attributable to
     the Offering(1)...................................  $           $
                                                         ----------
Pro forma net tangible book value after the Offering...              $
                                                                     ----------
Dilution to new investors in the Offering(2)...........              $
                                                                     ----------
                                                                     ----------
</TABLE>
 
------------------
(1) After deduction of underwriting discounts and commissions and estimated
    offering expenses.
 
(2) Dilution is determined by subtracting the net tangible book value per share
    after completion of the Offering from the assumed initial public offering
    price per share of the Common Stock.
 
     The following table summarizes, on a pro forma basis as of September 30,
1996, the differences between the holders of Common Stock prior to the Offering,
as a group, and the new investors in the Common Stock offered by the Company,
with respect to the number of shares purchased, the total consideration paid and
the average price paid per share, based upon an assumed initial public offering
price of $     per share:
 
<TABLE>
<CAPTION>
                                                                  SHARES
                                                               PURCHASED(1)       TOTAL CONSIDERATION
                                                             -----------------    -------------------    AVERAGE PRICE
                                                             NUMBER    PERCENT     AMOUNT     PERCENT      PER SHARE
                                                             ------    -------    --------    -------    -------------
<S>                                                          <C>       <C>        <C>         <C>        <C>
Existing stockholders(2)(3)...............................                        $                         $
New investors.............................................
                                                             ------    -------    --------    -------
Total.....................................................              100.0%    $            100.0%
                                                             ------    -------    --------    -------
                                                             ------    -------    --------    -------
</TABLE>
 
------------------
(1) If the Underwriters' over-allotment option is exercised in full, the number
    of shares of Common Stock held by existing stockholders would be reduced to
       % of the total number of shares to be outstanding after the Offering and
    the number of shares of Common Stock held by new investors would be
    increased to    or    % of the total number of shares of Common Stock to be
    outstanding after the Offering.

 
(2) Excludes      shares of Common Stock reserved for issuance pursuant to the
    Stock Option Plan, under which options to purchase      shares at the
    initial public offering price will be granted effective on the date of the
    Offering. See 'Management--Stock Option Plan' and 'Description of Capital
    Stock.'
 
(3) Sales by the Selling Stockholders in the Offering will cause the number of
    shares of Common Stock held by the existing Stockholders to be reduced, and
    the number of shares to be held by the new investors to be increased, by
         . See 'Principal and Selling Stockholders.'
 
                                       18

<PAGE>

                     SELECTED FINANCIAL AND OPERATING DATA
 
     The following selected financial data as of and for the years ended
December 31, 1991, 1992, 1993, 1994 and 1995 have been derived from the
Company's audited Financial Statements. The following selected financial data as
of and for the nine months ended September 30, 1995 and 1996 have been derived
from the Company's unaudited Financial Statements. In the opinion of management,
such unaudited financial statements reflect all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of the Company's
financial position and results of operations for such periods. Results for the
nine months ended September 30, 1996 are not necessarily indicative of the
results to be expected for the year ended December 31, 1996. The financial data
set forth below should be read in conjunction with the information under
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and the Financial Statements of the Company and the notes thereto
included elsewhere in this Prospectus.
 
<TABLE>
<CAPTION>
                                                                                             NINE MONTHS ENDED
                                                 YEAR ENDED DECEMBER 31,                       SEPTEMBER 30,
                                 -------------------------------------------------------    --------------------
                                   1991        1992        1993       1994        1995        1995        1996
                                 --------    --------    --------    -------    --------    --------    --------
                                               (IN THOUSANDS, EXCEPT PER POUND AND PER SHARE DATA)
                                                                                                (UNAUDITED)
<S>                              <C>         <C>         <C>         <C>        <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Net sales.....................   $111,940    $ 87,849    $ 80,412    $95,510    $132,245    $ 92,566    $120,540
Cost of goods sold............    103,766      87,849      84,304     93,625     114,752      80,370      99,733
                                 --------    --------    --------    -------    --------    --------    --------
  Gross profit (loss).........      8,174          --      (3,892)     1,885      17,493      12,196      20,807
Selling, general and
  administrative expenses.....      6,457       4,660       4,141      4,313       5,207       3,384       3,723
                                 --------    --------    --------    -------    --------    --------    --------
  Operating income (loss).....      1,717      (4,660)     (8,033)    (2,428)     12,286       8,812      17,084
Interest expense..............      3,587       3,169       3,912      4,361       4,727       3,572       3,096
                                 --------    --------    --------    -------    --------    --------    --------
Income (loss) before income
  taxes and extraordinary
  item........................     (1,870)     (7,829)    (11,945)    (6,789)      7,559       5,240      13,988
Income tax expense
  (benefit)(1)................       (166)     (2,139)        197         99         354         245      (1,901)
                                 --------    --------    --------    -------    --------    --------    --------
Income (loss) before
  extraordinary item..........     (1,704)     (5,690)    (12,142)    (6,888)      7,205       4,995      15,889
Extraordinary item(2).........         --       3,840          --         --          --          --          --
                                 --------    --------    --------    -------    --------    --------    --------
  Net income (loss)...........   $ (1,704)   $ (1,850)   $(12,142)   $(6,888)   $  7,205    $  4,995    $ 15,889
                                 --------    --------    --------    -------    --------    --------    --------
                                 --------    --------    --------    -------    --------    --------    --------
Net income (loss) per share...   $   (.14)   $   (.15)   $   (.98)   $  (.56)   $    .58    $    .40    $   1.28

Weighted average common shares
  outstanding.................     12,400      12,400      12,400     12,400      12,400      12,400      12,400

OTHER DATA:
Depreciation and
  amortization................   $  5,849    $  5,941    $  6,561    $ 7,200    $  6,281    $  4,594    $  3,212
Capital expenditures..........      9,922       5,677         793        975       1,963       1,228       1,877
Pounds shipped:
  Superalloys.................     13,277      11,269      10,932     12,253      14,907      10,568      10,626
  Special alloys(3)...........        214         368         712      1,181       1,541       1,084       1,025
  Toll conversion.............      4,096       6,077      13,934     14,267      11,612       9,299       7,757
Average net sales per pound
  shipped:
  Superalloys.................   $   7.74    $   7.00    $   6.31    $  6.48    $   7.58    $   7.48    $   9.92
  Special alloys..............      36.12       21.44       12.55      10.56       10.32        9.12       12.44
  Toll conversion.............        .35         .24         .18        .26         .30         .30         .30
Backlog (at period end)(4)....   $ 47,952    $ 34,878    $ 31,385    $40,711    $ 81,846    $ 80,010    $135,690
</TABLE>
 
                                          (footnotes on next page)
 
                                       19

<PAGE>
 
<TABLE>
<CAPTION>
                                                                                             NINE MONTHS ENDED
                                                 YEAR ENDED DECEMBER 31,                       SEPTEMBER 30,
                                 -------------------------------------------------------    --------------------
                                   1991        1992        1993       1994        1995        1995        1996
                                 --------    --------    --------    -------    --------    --------    --------
                                               (IN THOUSANDS, EXCEPT PER POUND AND PER SHARE DATA)
BALANCE SHEET DATA (AT PERIOD END):                                                             (UNAUDITED)
<S>                              <C>         <C>         <C>         <C>        <C>         <C>         <C>
Working capital...............   $ 38,830    $ 35,216    $ 32,378    $29,287    $ 35,779    $ 32,652    $ 46,596
Total assets..................    110,027     108,651      98,779     91,901     106,945     105,376     119,976
Current portion of long-term
  debt and capital lease
  obligations.................      3,010       2,193       3,210      4,233       5,270       5,018       6,772
Long-term debt (excluding
  current maturities).........     48,500      50,500      47,500     45,500      40,810      41,050      35,560
Long-term capital lease
  obligations (excluding
  current maturities).........         --       1,359       1,174        965         777         814         593
Subordinated notes
  payable(5)..................         --       2,000       8,500      8,500       8,500       8,500       9,500
Stockholders' equity..........     30,066      28,216      16,074      8,987      15,666      13,982      31,802
</TABLE>
 
------------------
(1) Income tax expense for the nine months ended September 30, 1996 differs from
    the amount which is derived by applying the combined statutory income tax
    rates due to the utilization of previously unrecognized net operating loss
    and other tax carryforwards and the recognition of previously unrecognized

    deferred income tax assets.
 
(2) Represents an extraordinary gain from forgiveness of debt owed to an
    affiliate of one of the Company's principal stockholders. The per share
    impact of the extraordinary gain was $.31 per share.
 
(3) Includes dental alloys, shape memory alloys and high strength stainless
    steel.
 
(4) The Company defines backlog as firm purchase orders, which are generally
    subject to cancellation by the customer subject to, in certain
    circumstances, payment of specified charges.
 
(5) In October and November 1996, the Company repaid an aggregate of $6.5
    million of indebtedness under the Subordinated Notes. The Company intends to
    repay the remaining $3.0 million balance on the Subordinated Notes prior to
    the consummation of the Offering.
 
                                       20

<PAGE>

                          MANAGEMENT'S DISCUSSION AND
                      ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
 
     The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the Financial Statements of the
Company and the notes thereto included elsewhere in this Prospectus. Certain
information contained below are forward-looking statements. See 'Risk Factors'
for a discussion of important factors which could cause actual results to differ
materially from the forward-looking statements contained herein.
 
OVERVIEW
 
     The Company manufactures superalloys and special alloys, which are highly
engineered metal alloys designed to withstand extreme heat, stress and
corrosion. Special Metals operates three divisions. The Superalloy Billet and
Bar Division manufactures a wide array of wrought superalloy and special alloy
products in billet, bar and cast form, which are used primarily in jet engines.
This division also produces 'shape memory' alloys, such as Nitinol, which are
primarily used in medical and dental applications. The Powder Division produces
powder metallurgy superalloy products for military jet engines and the latest
generation of large commercial jet engines and is the world's largest
independent manufacturer of superalloy powder products. The Dental Division is
the leading North American producer of amalgamable dental alloys. In 1995, the
Superalloy Billet and Bar Division, the Powder Division and the Dental Division
accounted for 85%, 10% and 5%, respectively, of the Company's net sales of
$132.2 million.
 
     Historically, approximately 70% of the superalloys produced were consumed
by the aerospace industry for use in jet engine components. As a result, the
aerospace industry, which is highly cyclical, has had a significant effect on
the overall sales and profitability of the superalloy industry. During 1993,

1994 and 1995 and the nine months ended September 30, 1996, the Company's
estimated sales to jet engine component manufacturers totaled 68%, 69%, 70% and
77%, respectively, of the Company's net sales. The percentage of net sales to
jet engine component manufacturers increased during the nine months ended
September 30, 1996 as a result of a substantial increase in demand from the
aerospace industry. See 'Risk Factors--Cyclicality; Dependence on Aerospace
Industry.'
 
     The superalloy industry has recently entered a period of increased demand
primarily because of improving conditions in the aerospace industry. The
superalloy industry reached a cyclical and historical peak in 1990 and
subsequently declined to a cyclical bottom in 1993. Management believes that
demand for superalloy long products has almost doubled since 1993 and that the
industry (including the Company) is operating at close to 100% of available
capacity. As a result, since 1993, there have been significant increases in
market prices for superalloy products. Based on industry data, the Company
believes that the superalloy industry will operate at a utilization rate in
excess of 90% for the next three years and that demand for superalloy products
will increase at a 6% to 10% annual rate for the next three years. See
'Business--Industry Overview.'
 
     In 1995, the commercial aircraft industry started to recover from the
recession of the early 1990s. The firm order backlog of Boeing, McDonnell
Douglas and Airbus Industrie, as reported by The Airline Monitor, increased to
1,869 planes at December 31, 1995 from 1,742 planes at December 31, 1994.
Roll-outs of commercial aircraft with more than 100 seats are expected to
increase by more than 40% from 1995 to 1997. Boeing's production rate is
scheduled to increase from 18 aircraft per month in early 1996 to over 30
aircraft per month by mid-1997. More importantly, the number of wide-body
aircraft under production or on order is increasing, which is expected to
increase demand for larger engines and larger components made with superalloys.
The superalloy industry has substantially benefitted from this recovery. The
Company believes that demand for jet engines will remain strong through 1999
because of projected increases in revenue passenger miles both domestically and
internationally (especially in the Pacific Rim) and the imposition of federal
Stage III noise regulations in the United States, which will require airlines to
replace existing Stage II engines or retrofit such engines with engine hush
kits. In addition, because of Federal Aviation Administration regulations
mandating maintenance of aircraft engines based in part on the number of hours
flown and the number of takeoff and landing cycles, a large number of commercial
aircraft built in the 1980s are scheduled to undergo engine rebuilds in the next
five years. As a result of these factors, management believes that demand for
jet engine spare parts will remain strong.
 
                                       21

<PAGE>

     Net Sales.  Net sales include sales of the Company's superalloy and special
alloy products and income earned from toll conversion. Sales of the Company's
products are made under standard orders, under one-year supply contracts and
long-term firm price contracts. For the nine months ended September 30, 1996,
approximately 70% of the pounds shipped of the Company's billet and bar products
were sold under standard orders or under one-year supply contracts. The

remaining 30% of the pounds shipped of the Company's billet and bar products for
the nine months ended September 30, 1996 were sold at firm prices under
long-term contracts negotiated in 1993 at the bottom of the aerospace cycle.
Since the early 1990s, long-term firm price contracts have become more prevalent
in the superalloy industry because jet engine manufacturers need to quote firm
prices to airlines for jet engines to be delivered several years in the future.
Because of the adverse business conditions prevailing when the long-term firm
price contracts were negotiated in 1993, the pricing on the contracts was very
unfavorable to superalloy producers and resulted in severely depressed margins
in the superalloy industry from 1994 to 1996. Special Metals recognized losses
on these long-term firm price contracts in 1994 and 1995 and generally did not
earn a profit on such contracts in the nine months ended September 30, 1996.
Substantially all of the firm price contracts concluded in 1993 are due to
expire in 1996, with a minor portion of shipments for 1996 orders carrying over
into 1997. The current market prices for superalloy products have returned to
acceptable levels. During 1996, the Company began negotiations with certain
customers to enter into new long-term firm price contracts which, if entered
into, are expected to provide improvements compared to the expiring contracts.
See 'Business--Pricing.'
 
     Export sales represent a significant portion of the Company's business. In
1993, 1994, 1995 and the nine months ended September 30, 1996, sales to
purchasers outside of the United States totaled 28%, 25%, 35% and 27% of the
Company's net sales, respectively. All of the Company's export sales are
conducted in U.S. dollars.
 
     Costs of Goods Sold.  The superalloy industry is characterized by high
capital investment and high fixed costs, and profitability is therefore
significantly affected by changes in volume. Variable costs such as raw
materials, labor, supplies and energy (primarily electricity) generally account
for over three-fourths of the Company's costs of goods sold. Fixed costs, such
as indirect overhead and depreciation, constitute the remainder of the Company's
cost of goods sold. The Company has undertaken numerous projects to maintain and
improve its efficiency and cost position over the last few years. See
'Business--Business Strategy.'
 
     A substantial portion of the Company's raw material used in production are
commodities, such as nickel, that are subject to wide price fluctuations. The
price the Company pays for nickel is usually based upon quoted prices on the LME
plus a premium due to quality, location, and volume purchased. Although certain
of the Company's 1996 product orders provide for certain price adjustments to
reflect changes in the price of raw materials, a substantial majority of the
Company's current product orders currently are, and in the future are expected
to be, made pursuant to firm price sales contracts, which do not provide for raw
material price adjustments. To attempt to mitigate the risks associated with raw
material price fluctuations and to match raw material purchases with firm price
product orders, the Company often enters into firm price contracts for the
purchase of virgin raw materials from suppliers and for the purchase of scrap
from customers or hedges the price of nickel. At September 30, 1996, the Company
had commodity swap agreements covering a portion of its nickel requirements for
the period from October through December 1997, for a total purchase price of
approximately $8.7 million. The fair value of the material covered by these
agreements, based on the September 30, 1996 price quoted on the LME, was
approximately $7.7 million. Unrealized gains and losses on the contracts are

deferred and are recognized in income during the periods affected. See 'Risk
Factors--Availability and Cost of Raw Materials; Hedging.'
 
     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses represent costs associated with sales and marketing,
research and development, compensation expenses and legal expenses. During 1993,
1994, 1995 and the nine months ended September 30, 1996, increases in selling,
general and administrative expenses have primarily resulted from increased sales
of the Company's products. Selling, general and administrative expenses as a
percentage of the Company's net sales have declined from 5.2% in 1993 to 3.1%
for the nine months ended September 30, 1996, primarily as a result of increased
sales and cost control programs.
 
     Income Taxes.  The Company's effective income tax rate in 1993 and 1994
varied from the U.S. statutory rate due to losses which resulted in temporary
differences between book and taxable income for which recognition of a deferred
tax asset was not considered appropriate at the time. The Company's effective
income tax rate in 1995 varied from the U.S. statutory rate due to utilization
of net operating loss carryforwards. See
 
                                       22

<PAGE>

Note 11 to the Financial Statements of the Company included elsewhere in this
Prospectus. Statement of Financial Accounting Standards No. 109 ('SFAS 109')
requires a valuation allowance when it is more likely than not that some
portion, or all, of the deferred tax assets will not be realized. SFAS No. 109
further states that forming a conclusion that a valuation allowance is not
needed is difficult when there is evidence that the deferred tax asset may not
be realized, such as cumulative losses in recent years. The Company incurred
losses in 1991 through 1994, and as a result, a valuation allowance was recorded
which substantially reduced the deferred tax assets. During 1995, and continuing
into 1996, the Company utilized substantial amounts of its net operating loss
and alternative minimum tax credit carryforwards. This use of available tax
carryforwards, together with the Company's recent profitability and the
Company's expectations for profitable operating results in the fourth quarter of
1996 and the year 1997, have resulted in the elimination, during 1996, of
substantially all of the valuation allowance previously recorded. As a result,
in the future, the Company does not expect that its effective tax rate will be
as favorable as it was during 1995 and the nine months ended September 30, 1996.
 
RESULTS OF OPERATIONS
 
     The following table sets forth, for the periods indicated, statement of
operations data as a percentage of net sales.
 
<TABLE>
<CAPTION>
                                                                                            NINE MONTHS
                                                                                               ENDED
                                                                YEAR ENDED DECEMBER 31,    SEPTEMBER 30,
                                                                -----------------------    --------------
                                                                1993     1994     1995     1995     1996

                                                                -----    -----    -----    -----    -----
<S>                                                             <C>      <C>      <C>      <C>      <C>
Net sales....................................................   100.0%   100.0%   100.0%   100.0%   100.0%
Cost of goods sold...........................................   104.8     98.0     86.8     86.8     82.7
                                                                -----    -----    -----    -----    -----
  Gross profit (loss)........................................    (4.8)     2.0     13.2     13.2     17.3
Selling, general and administrative expenses.................     5.2      4.5      3.9      3.7      3.1
                                                                -----    -----    -----    -----    -----
  Operating income (loss)....................................   (10.0)    (2.5)     9.3      9.5     14.2
Interest expense.............................................     4.9      4.6      3.6      3.9      2.6
                                                                -----    -----    -----    -----    -----
Income (loss) before income taxes............................   (14.9)    (7.1)     5.7      5.6     11.6
Income taxes expense (benefit)...............................      .2       .1       .3       .2     (1.6)
                                                                -----    -----    -----    -----    -----
  Net income (loss)..........................................   (15.1)    (7.2)     5.4      5.4     13.2
                                                                -----    -----    -----    -----    -----
                                                                -----    -----    -----    -----    -----
</TABLE>
 
     NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995
 
     Net Sales.  Net sales increased $28.0 million, or 30.2%, from $92.6 million
for the nine months ended September 30, 1995 to $120.6 million for the nine
months ended September 30, 1996. This increase was principally due to a shift in
the Company's product mix toward higher value-added products and improved
pricing. Average net sales per pound of superalloy shipped increased $2.44, or
32.6%, from $7.48 in the nine-month period in 1995 to $9.92 during the
comparable period in 1996. Average net sales per pound of special alloys shipped
increased $3.32, or 36.4%, from $9.12 in the nine-month period in 1995 to $12.44
during the comparable period in 1996. Pounds of superalloys shipped increased
slightly from 10.57 million pounds in the nine months ended September 30, 1995
to 10.63 million pounds in the nine months ended September 30, 1996 and pounds
of special alloys shipped decreased slightly from 1.08 million pounds in the
nine months ended September 30, 1995 to 1.03 million pounds in the nine months
ended September 30, 1996.
 
     Cost of Goods Sold.  Cost of goods sold increased $19.4 million, or 24.1%,
from $80.4 million for the nine months ended September 30, 1995 to $99.7 million
for the nine months ended September 30, 1996, primarily as a result of increased
sales partially offset by improved manufacturing efficiencies and cost reduction
programs. As a percentage of net sales, cost of goods sold decreased from 86.8%
in the nine months ended September 30, 1995 to 82.7% in the nine months ended
September 30, 1996.
 
     Gross Profit.  Gross profit increased $8.6 million, or 70.6% from $12.2
million for the nine months ended September 30, 1995 to $20.8 million for the
nine months ended September 30, 1996. This increase was due primarily to
increased sales, cost reduction programs and improved manufacturing
efficiencies.
 
     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased $0.3 million, or 10.0% from $3.4 million for
the nine months ended September 30, 1995 to $3.7 million for the nine months

ended September 30, 1996. The increase was due primarily to the increase in net
sales. Selling,
 
                                       23

<PAGE>

general and administrative expenses as a percentage of net sales decreased from
3.7% for the nine months ended September 30, 1995 to 3.1% for the nine months
ended September 30, 1996.
 
     Operating Income.  Operating income increased $8.3 million, or 93.9% from
$8.8 million for the nine months ended September 30, 1995 to $17.1 million for
the nine months ended September 30, 1996. Operating income as a percentage of
net sales increased from 9.5% for the nine months ended September 30, 1995 to
14.2% for the nine months ended September 30, 1996 as a result of increased net
sales offset in part by increased expenses.
 
     Interest Expense.  Interest expense decreased $.5 million, or 13.3%, from
$3.6 million for the nine months ended September 30, 1995 to $3.1 million for
the nine months ended September 30, 1996. This decrease was due primarily to a
decrease in average debt outstanding and to an overall decrease in interest
rates.
 
     Income Taxes.  The Company had an income tax expense of $245,000 for the
nine months ended September 30, 1995, compared to an income tax benefit of $1.9
million for the nine months ended September 30, 1996. The Company's effective
income tax rate for the nine months ended September 30, 1995 and 1996 varied
from the U.S. statutory rate due to utilization of net operating losses and
alternative minimum tax credit carryforwards and, in 1996 only, also due to the
recognition of previously unrecognized deferred tax assets of $5.8 million.
 
     Net Income.  Net income increased 218% from $5.0 million for the nine
months ended September 30, 1995 to $15.9 million for the nine months ended
September 30, 1996. Net income as a percentage of net sales increased from 5.4%
for the nine months ended September 30, 1995 to 13.2% for the nine months ended
September 30, 1996 primarily as a result of stronger demand for the Company's
products by the aerospace industry, cost reduction programs, improved
manufacturing efficiencies and recognition of certain unrecognized deferred tax
assets.
 
     YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
 
     Net Sales.  Net sales increased $36.7 million, or 38.5%, from $95.5 million
in 1994 to $132.2 million in 1995. This increase was principally due to
increased sales volume of the Company's products and improved pricing related to
much stronger demand from customers in the aerospace industry. Pounds of
superalloys shipped increased 2.66 million pounds, or 21.7%, from 12.25 million
pounds in 1994 to 14.91 million pounds in 1995 and pounds of special alloys
shipped increased by 360,000 pounds, or 30.5%, from 1.18 million pounds in 1994
to 1.54 million pounds in 1995. Average net sales per pound of superalloy
shipped increased $1.10, or 17.0%, from $6.48 in 1994 to $7.58 in 1995. Average
net sales per pound of special alloys shipped decreased $0.24, or 2.3%, from
$10.56 in 1994 to $10.32 in 1995.

 
     Cost of Goods Sold.  Costs of goods sold increased $21.1 million, or 22.6%,
from $93.6 million in 1994 to $114.7 million in 1995, primarily as a result of
increased sales partially offset by improved manufacturing efficiencies and cost
reduction programs. As a percentage of net sales, cost of goods sold decreased
from 98.0% in 1994 to 86.8% in 1995.
 
     Gross Profit.  Gross profit increased $15.6 million from $1.9 million in
1994 to $17.5 million in 1995. This increase was due primarily to increased
sales, cost reduction programs, and improved manufacturing efficiencies.
 
     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased $.9 million, or 20.7%, from $4.3 million in
1994 to $5.2 million in 1995. The increase was due primarily to increased
professional expenses and the increase in net sales in 1995 partially offset by
cost reduction programs. Selling, general and administrative expenses as a
percentage of net sales decreased from 4.5% in 1994 to 3.9% in 1995.
 
     Operating Income (Loss).  Operating income (loss) increased $14.7 million
from a loss of $2.4 million in 1994 to income of $12.3 million in 1995.
Operating income (loss) as a percentage of net sales increased from (2.5)% in
1994 to 9.3% in 1995 as a result of the stronger demand for the Company's
products in the aerospace industry, cost reduction programs and improved
manufacturing efficiencies.
 
     Interest Expense.  Interest expense increased $.3 million, or 8.4% from
$4.4 million in 1994 to $4.7 million in 1995. This increase was due primarily to
an increase in interest rates partially offset by a decrease in the average debt
outstanding.
 
     Income Taxes.  Income tax expenses increased $255,000 from $99,000 in 1994
to $354,000 in 1995 due primarily to increased income before income taxes. The
Company's effective income tax rate in 1994 varied from the U.S. statutory rate
due to losses which resulted in temporary differences between book and taxable
income for
 
                                       24

<PAGE>

which recognition of a deferred tax asset was not considered appropriate at the
time. The Company's effective income tax rate in 1995 varied from the U.S.
statutory rate due to utilization of net operating loss carryforwards. See Note
11 to the Financial Statements of the Company.
 
     Net Income (Loss).  Net income (loss) increased $14.1 million from a loss
of $6.9 million in 1994 to income of $7.2 million in 1995. Net income (loss) as
a percentage of net sales increased from (7.2)% in 1994 to 5.4% in 1995 as a
result of the stronger demand for the Company's products in the aerospace
industry, cost reduction programs and improved manufacturing efficiencies.
 
     YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993
 
     Net Sales.  Net sales increased $15.1 million, or 18.8%, from $80.4 million

in 1993 to $95.5 million in 1994. This increase was principally due to stronger
demand from customers in the aerospace industry. Pounds of superalloys shipped
increased by 1.32 million pounds, or 12.1%, from 10.93 million pounds in 1993 to
12.25 million pounds in 1994 and pounds of special alloys shipped increased by
469,000 pounds, or 65.9%, from 712,000 pounds in 1993 to 1.18 million pounds in
1994. Average net sales per pound of superalloy shipped increased $0.17, or
2.7%, from $6.31 in 1993 to $6.48 in 1994. Average net sales per pound of
special alloy shipped decreased $1.99, or 15.8%, from $12.55 in 1993 to $10.56
in 1994.
 
     Cost of Goods Sold.  Costs of goods sold increased $9.3 million, or 11.1%,
from $84.3 million in 1993 to $93.6 million in 1994, primarily as a result of
increased sales partially offset by improved manufacturing efficiencies and cost
reduction programs. As a percentage of net sales, cost of goods sold decreased
from 104.8% in 1993 to 98.0% in 1994.
 
     Gross Profit (Loss).  Gross profit increased $5.8 million from a loss of
$3.9 million in 1993 to a gain of $1.9 million in 1994. This increase was due to
several factors, including increased sales, cost reduction programs, and
improved manufacturing efficiencies.
 
     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased $.2 million, or 4.2% from $4.1 million in
1993 to $4.3 million in 1994. The increase was due primarily to the increase in
net sales, offset somewhat by cost reduction programs. Selling, general and
administrative expenses as a percentage of net sales decreased from 5.2% in 1993
to 4.5% in 1994.
 
     Operating Income (Loss).  Operating loss decreased $5.6 million from a loss
of $8.0 million in 1993 to a loss of $2.4 million in 1994. Operating loss as a
percentage of net sales decreased from 10.0% in 1993 to 2.5% in 1994 as a result
of increased sales of the Company's products, cost reduction programs and
improved manufacturing efficiencies.
 
     Interest Expense.  Interest expense increased $.4 million, or 11.5%, from
$3.9 million in 1993 to $4.4 million in 1994. This increase was due primarily to
an increase in the average debt outstanding due to increased working capital
requirements resulting from the increase in net sales, and an overall increase
in interest rates.
 
     Income Taxes.  Income tax expenses decreased by $98,000 from $197,000 in
1993 to $99,000 in 1994 due primarily to decreased income before income taxes.
The Company's effective income tax rate in 1993 and 1994 varied from the U.S.
statutory rate due to losses which resulted in temporary differences between
book and taxable income for which recognition of a deferred tax asset was not
considered appropriate.
 
     Net Income (Loss).  Net loss decreased $5.2 million from a loss of $12.1
million in 1993 to a loss of $6.9 million in 1994. Net loss as a percentage of
net sales decreased from 15.1% in 1993 to 7.2% in 1994 as a result of the
stronger demand for the Company's products in the aerospace industry, cost
reduction programs and improved manufacturing efficiencies.
 
LIQUIDITY AND CAPITAL RESOURCES

 
     The Company's historical liquidity needs arose primarily from capital
investments, working capital requirements, and principal and interest payments
on indebtedness. The Company has historically met these liquidity requirements
with funds generated from operations and from short-term and long-term debt
financing (including borrowings from the Principal Stockholders). The Company's
business is capital intensive and requires substantial expenditures for, among
other things, the purchase and maintenance of equipment used in the
manufacturing process and compliance with environmental laws. See 'Risk
Factors--Environmental Regulations,' 'Certain Transactions--Transactions with
Principal Stockholders--Lines of Credit' and 'Certain Transactions--Subordinated
Notes.'
 
                                       25

<PAGE>

     Net cash provided by operating activities was $.2 million, $1.3 million,
and $6.9 million for 1993, 1994 and 1995, respectively. Net cash provided by
operating activities was $4.7 million and $3.4 million for the nine-month
periods ended September 30, 1995 and 1996, respectively. Improvements in cash
flows from operating activities are principally the result of improved operating
results, offset by increased working capital requirements attributable to
increases in accounts receivable and inventory due to increased sales in 1995
and the first nine months of 1996.
 
     From March 1993 to September 1994, the Company had insufficient cash flow
to make certain interest and term loan principal payments under the Prior Credit
Agreement. As a result, the Company and the lenders under the Prior Credit
Agreement entered into a series of standstill agreements pursuant to which such
lenders agreed not to accelerate the indebtedness outstanding under the Prior
Credit Agreement for a specified period of time. Such standstill agreements
terminated and all remaining interest due was paid in the fourth quarter of
1994. Following the amendment and restatement of Prior Credit Agreement in
December 1994, the Company remained in compliance with all of its obligations in
respect of the Prior Credit Agreement until it was refinanced in October 1996.
 
     Capital expenditures were $.8 million, $1.0 million and $2.0 million for
the years 1993, 1994 and 1995, respectively. Capital expenditures were $1.2
million and $1.9 million for the nine-month periods ended September 30, 1995 and
1996, respectively.
 
     At September 30, 1996, the Company had $52.4 million of outstanding
indebtedness and capitalized lease obligations, consisting principally of $42.0
million of borrowings under the Credit Agreement, $9.5 million of outstanding
indebtedness under the Subordinated Notes and $.9 million of capital lease
obligations. The Company's outstanding indebtedness fluctuates depending on the
Company's working capital needs. Since September 30, 1996, the Company has
borrowed an additional $7 million under the Credit Agreement. The Company repaid
$6.5 million of the outstanding amounts under the Subordinated Notes in October
and November 1996 and intends to repay the remaining $3.0 million balance on the
Subordinated Notes prior to the consummation of the Offering. The Company
intends to use substantially all of the net proceeds from the Offering to repay
outstanding indebtedness under the Credit Agreement. If the net proceeds of the

Offering are insufficient to repay all amounts outstanding under the Credit
Agreement, the Company intends to repay all outstanding indebtedness under the
Revolving Facility and a portion of the outstanding indebtedness under the Term
Loan. If the net proceeds from the Offering are sufficient to pay all
outstanding indebtedness under the Credit Agreement, any remaining net proceeds
from the Offering will be used for general corporate purposes, including working
capital and capital expenditures. See 'Use of Proceeds.'
 
     Following the completion of the Offering, the Company's principal sources
of funds will be (i) funds generated from operations and (ii) borrowings under
the Revolving Facility of the Credit Agreement. Under the Revolving Facility of
the Credit Agreement, the Company may borrow, repay, and re-borrow from time to
time, the lesser of (a) $40 million or (b) the Company's borrowing base. The
Credit Agreement defines the Company's borrowing base as the sum of 85% of
eligible accounts receivable and 60% of eligible inventory. As of October 31,
1996, the borrowing base was $48.1 million. The Company's ability to borrow
under the Credit Agreement is subject to the satisfaction of various conditions
including compliance with certain financial covenants. In addition, amounts
borrowed under the Revolving Facility may only be used to finance working
capital needs and to repay outstanding indebtedness. The amount the Company may
borrow under the Revolving Facility is reduced by the aggregate amount of any
letters of credit issued for the account of the Company. All advances under the
Credit Agreement bear interest at the Company's option at (i) a base rate, which
is the higher of the bank's short-term commercial reference rate or the Federal
Funds rate plus .25%, (ii) the Eurodollar rate, which is the New York interbank
offered rate, plus 1.25% or (iii) the London Interbank Offered Rate ('LIBOR'),
plus 1.25%. An annual commitment fee of .25% on the unused available working
capital commitment is due monthly. All amounts outstanding under the Revolving
Facility mature on October 17, 2001. In connection with the Company's
obligations under the Credit Agreement, the Company has granted security
interests in the Company's receivables, inventory and general intangibles. The
Credit Agreement also contains covenants restricting the ability of the Company
to pay dividends, make certain restricted payments, incur additional
indebtedness, make certain investments, create liens, guarantee indebtedness,
sell or acquire assets, enter into mergers or consolidations, form subsidiaries
and enter into transactions with affiliates. The Company is also subject to
certain financial tests relating to, among other things, its consolidated net
worth, its consolidated leverage ratio and the ratio of its senior debt to
consolidated EBITDA. The Company may prepay amounts owing
 
                                       26

<PAGE>

under the Credit Agreement at its option at any time. See 'Risk
Factors--Limitations on Payment of Dividends; Restrictive Covenants.'
 
     Over the next five years, the Company plans to invest over $50 million (or
approximately $10 million per year) in capital expenditures to expand and
modernize its melting, forging and finishing equipment, install a
state-of-the-art information system and make other investments to maintain its
technological leadership and reduce production costs. In addition to planned
capital expenditures, the Company expects to evaluate from time to time
potential acquisitions. Potential acquisitions may include investments in

companies, technologies or products that complement the Company's business or
products. Sources of funds for such acquisitions could include funds generated
from operations or alternative sources of debt or equity capital. Certain
covenants in the Credit Agreement, such as the investment limitation covenant,
the merger and acquisition covenant and certain financial covenants may restrict
or limit the Company's ability to enter into or complete an acquisition. Under
such circumstances, the Company would need to amend, obtain a waiver of or
refinance the Credit Agreement. See 'Risk Factors--Risks Associated With
Potential Acquisitions.'
 
     The Company expects that cash flow from operations and net proceeds of the
Offering will be adequate to meet its anticipated operating requirements, debt
service requirements and planned capital expenditures over the next 12 months.
However, to the extent that the Company's cash flow and net proceeds of the
Offering are insufficient to fund its capital expenditure program due to a
cyclical downturn in the superalloy industry or otherwise, the Company will be
dependent upon borrowings under the Credit Agreement or alternative sources of
debt or equity capital. In addition, as described above, the Company may need to
obtain additional debt or equity capital to fund any potential acquisitions. If
the Company is unable to borrow under the Credit Agreement or to obtain funds
from alternative sources of debt or equity capital, the Company may not be able
to fund its capital expenditures or potential acquisitions and its business
could be materially adversely affected.
 
QUARTERLY RESULTS OF OPERATIONS
 
     The following tables present the Company's quarterly operating data for
1994, 1995 and the first three quarters of 1996. Although the Company's business
is not seasonal, operating results have varied from quarter to quarter due to
industry cyclicality, fluctuations of raw material prices and general global
economic conditions. In addition, results in the third quarter are adversely
affected by a one to two-week shutdown of the Company's manufacturing facilities
for equipment maintenance and results in the fourth quarter are adversely
affected by a one-week shutdown for the Christmas holiday.
 
<TABLE>
<CAPTION>
                                         1994 QUARTERS                               1995 QUARTERS
                            ----------------------------------------    ----------------------------------------
                             FIRST     SECOND      THIRD     FOURTH      FIRST     SECOND      THIRD     FOURTH
                            -------    -------    -------    -------    -------    -------    -------    -------
                                                     (IN THOUSANDS EXCEPT PERCENTAGES)
<S>                         <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Net sales................   $23,519    $26,678    $21,662    $23,651    $27,862    $35,148    $29,556    $39,679
Cost of goods sold.......    22,930     25,340     21,072     24,283     24,279     29,799     26,291     34,383
                            -------    -------    -------    -------    -------    -------    -------    -------
Gross profit (loss)......       589      1,338        590       (632)     3,583      5,349      3,265      5,296
Selling, general and
  administrative
  expenses...............     1,099      1,196      1,086        932      1,135      1,144      1,104      1,824
                            -------    -------    -------    -------    -------    -------    -------    -------
Operating income (loss)..      (510)       142       (496)    (1,564)     2,448      4,205      2,161      3,472
Operating income (loss)
  margin.................      (2.1)%      .5%       (2.2)%     (6.6)%     8.7%      11.9%       7.3%       8.7%

Interest expense.........     1,007      1,120      1,232      1,002      1,193      1,213      1,164      1,157
                            -------    -------    -------    -------    -------    -------    -------    -------
Income (loss) before
  income taxes...........    (1,517)      (978)    (1,728)    (2,566)     1,255      2,992        997      2,315
Income tax expense.......        27         26         27         19         27         27         27        273
                            -------    -------    -------    -------    -------    -------    -------    -------
Net income (loss)........   $(1,544)   $(1,004)   $(1,755)   $(2,585)   $ 1,228    $ 2,965    $   970    $ 2,042
                            -------    -------    -------    -------    -------    -------    -------    -------
                            -------    -------    -------    -------    -------    -------    -------    -------
</TABLE>
 
                                       27

<PAGE>

 
<TABLE>
<CAPTION>
                                                                                  1996 QUARTERS
                                                                          -----------------------------
                                                                           FIRST     SECOND      THIRD
                                                                          -------    -------    -------
                                                                              (IN THOUSANDS EXCEPT
                                                                                  PERCENTAGES)
<S>                                                                       <C>        <C>        <C>
Net sales..............................................................   $39,639    $43,727    $37,174
Cost of goods sold.....................................................    33,428     35,820     30,485
                                                                          -------    -------    -------
Gross profit...........................................................     6,211      7,907      6,689
Selling, general and administrative expenses...........................     1,183      1,264      1,276
                                                                          -------    -------    -------
Operating income.......................................................     5,028      6,643      5,413
Operating income margin................................................     12.6%      15.1%      14.5%
Interest expense.......................................................     1,087      1,003      1,006
                                                                          -------    -------    -------
Income before income taxes.............................................     3,941      5,640      4,407
Income tax expense (benefit)...........................................     1,018      1,631     (4,550)
                                                                          -------    -------    -------
Net income.............................................................   $ 2,923    $ 4,009    $ 8,957
                                                                          -------    -------    -------
                                                                          -------    -------    -------
</TABLE>
 
BACKLOG
 
     As of December 10, 1996, the Company's backlog orders aggregated
approximately $148.8 million, compared to approximately $81.8 million at
December 31, 1995. The increase in backlog orders is primarily due to an
increase in orders for jet engines worldwide and increased demand for jet engine
spare parts. The Company defines backlog as firm purchase orders, which are
generally subject to cancellation by the customer subject to, in certain
circumstances, payment of specified charges. Substantially all orders in the
backlog at December 10, 1996 are expected to be shipped within the 12 months
beginning January 1, 1997. Due to the cyclical nature of order entry experienced

by the Company and its dependence on the aerospace industry, there can be no
assurance that order entry will continue at current levels or that current firm
purchase orders will not be canceled or delayed. See 'Risk Factors--Cyclicality;
Dependence on Aerospace Industry.'
 
     Order to shipment lead times can be a competitive factor as well as
indicative of the strength of demand for superalloy products. The Company's
current average manufacturing lead time for its cast/wrought superalloy products
is approximately five to ten weeks, although due to current backlog levels, lead
times from order to shipment have lengthened to up to 52 weeks. The Company
believes that its lead times are comparable with those offered by its
competitors.
 
INFLATION
 
     Although the Company's sales and results of operations are affected by the
prices of raw materials used to make its products and the cyclicality of the
aerospace industry, the Company does not believe that general economic inflation
has had a material effect on its results of operation for the periods presented.
 
ENVIRONMENTAL AND OTHER CONTINGENCIES
 
     For a description of certain environmental liabilities and related 
matters, see 'Risk Factors-- Environmental Regulations' and
'Business--Environmental Matters.'
 
                                       28

<PAGE>

                                    BUSINESS
 
GENERAL
 
     Special Metals is one of the world's leading producers of superalloy and
special alloy long products. Superalloys are highly engineered metal alloys
designed to withstand extreme heat and stress and are principally used in the
manufacture of jet engine parts. Compared to any other known metal or material,
superalloys offer a superior combination of heat resistance, high temperature

corrosion resistance, toughness and strength. Special alloys have unique
physical, chemical, and/or mechanical properties which are optimized by the
Company's melting and processing capabilities. In 1952, a predecessor of Special
Metals pioneered the melting technology that led to the practical development of
the superalloys that are the critical materials used in the 'hot' section of
modern jet engines. The Company believes that its 45 million pounds of vacuum
induction melting capacity makes it one of the largest producers in the
superalloy industry and that its substantial market share, comprehensive product
line, proprietary know-how and technological experience make it a leader in its
field. Special Metals' total net sales have increased from $80.4 million in 1993
to $132.2 million in 1995. The Company's backlog was approximately $148.8
million at December 10, 1996 compared to approximately $81.8 million at December
31, 1995. For the first nine months of 1996, approximately 77% of the Company's
net sales were to jet engine component manufacturers. The Company's products are
also used in other technically demanding applications, such as land-based power
generating equipment, oil well drilling hardware, die materials, chemical
processing applications and medical applications.
 
     Special Metals operates three divisions. The Superalloy Billet and Bar
Division manufactures a wide array of wrought superalloy and special alloy
products in billet, bar and cast form, which are used primarily in jet engines.
This division also produces 'shape memory' alloys, such as Nitinol, which are
primarily used in medical and dental applications. The Company believes it has
the leading worldwide market share of approximately 32% (excluding China and the
countries of the former Soviet Union) in superalloy billet products and a 
North American market share of approximately 20% in superalloy bar products. The
Powder Division produces powder metallurgy superalloy products for military jet
engines and the latest generation of large commercial jet engines and is the
world's largest independent manufacturer of superalloy powder products. The
Dental Division is the leading North American producer of amalgamable dental
alloys. In 1995, the Superalloy Billet and Bar Division, the Powder Division and
the Dental Division accounted for 85%, 10% and 5%, respectively, of the
Company's net sales.
 
INDUSTRY OVERVIEW
 
     Superalloys are primarily nickel-based alloys containing varying amounts of
other elements, such as chromium, cobalt, columbium, molybdenum, titanium and
aluminum. Superalloys were originally developed to meet the highly demanding
design requirements of jet engines and are currently used to make jet engine
components such as turbine blades, vanes, disks, rings, seals and shafts. These
applications require very high strength, toughness and resistance to metal
fatigue and creep while operating in environments where temperatures can
sometimes exceed 2,200degreesF. These engine components are designed to
withstand the high stress and high temperatures associated with aircraft
takeoffs and landings, when maximum power is applied for thrust and reverse
thrust. The highly demanding technical nature of superalloy products,
specialized multi-stage production processes and the stringency of jet engine
manufacturers' qualification requirements and certification processes have
created what Management believes are high barriers to entry in the superalloy
industry. Management believes that over 70% of all superalloy sales worldwide
are to jet engine component manufacturers. Superalloy products are also used in
other technically demanding applications such as land-based power generating
equipment, oil well drilling hardware, die materials and chemical processing

applications. The complexity of the production process is reflected in the
Company's relatively high average selling prices of $9.92 and $12.44 per pound
shipped of superalloys and special alloys, respectively, for the first nine
months of 1996, compared to the average selling price of other metals such as
carbon steel sheet, stainless steel sheet and aluminum, which currently range
from $.17 to $1.25 per pound shipped. The chart set forth below illustrates the
end uses of superalloy products during 1995.
 
                                       29
<PAGE>

[Pie chart: Superalloy End Use Markets for Bar/Billet Products, 1995. 
Data: Aerospace 79%; Petrochemical 12%; Power Generation 2%; Fasteners 6%;
All others 1%. Source: Marketronics.]

     The aerospace industry, which is highly cyclical, has had a significant
impact on the sales and profitability of the superalloy industry. The superalloy
industry reached a cyclical and historical peak in 1990 and subsequently
declined to a cyclical bottom in 1993. Management estimates that between 1990
and 1993, industry capacity utilization fell from approximately 100% to 67%. The
steep decline was the result of a severe downturn in commercial aircraft
deliveries, the Gulf War, a recession, an over-ordering of aircraft in the late
1980s and excess industry capacity. The downturn was exacerbated because the
aerospace industry was shifting to 'lean' manufacturing, which substantially
reduced cycle times and inventories. Special Metals estimates that inventory
reductions between 1990 and 1994 eliminated as much as a full year of production
of superalloy billet and bar product. During this recession, approximately 40
million pounds of inefficient industry vacuum induction melt capacity (or 20% of
total industry vacuum induction melt capacity) was eliminated.
 
     In 1995, the commercial aircraft industry started to recover from the
recession of the early 1990s. The firm order backlog of Boeing, McDonnell
Douglas and Airbus Industrie, as reported by The Airline Monitor, increased to
1,869 planes at December 31, 1995 from 1,742 planes at December 31, 1994.
Roll-outs of commercial aircraft with more than 100 seats are expected to
increase by more than 40% from 1995 to 1997. Boeing's production rate is
scheduled to increase from 18 aircraft per month in early 1996 to over 30
aircraft per month by mid-1997. More importantly, the number of wide-body
aircraft under production or on order is increasing, which is expected to
increase demand for larger engines and larger components made with superalloys.
The superalloy industry has substantially benefitted from this recovery. The
Company believes that demand for jet engines will remain strong through 1999
because of projected increases in revenue passenger miles both domestically and
internationally (especially in the Pacific Rim) and the imposition of federal
Stage III noise regulations in the United States, which will require airlines to
replace existing Stage II engines or retrofit such engines with engine hush
kits.
 
     The superalloy industry is also benefiting from a significant increase in
demand for jet engine spare parts. This increase is attributed to a combination
of factors. First, when the aerospace cycle was strong from 1985 to 1990,
hundreds of new aircraft were delivered. Because of Federal Aviation
Administration regulations mandating maintenance of aircraft based in part on
the number of hours flown and the number of takeoff and landing cycles, from
1995 to 2001, these aircraft are scheduled to undergo engine rebuilds, which

will require replacement parts containing superalloy products. Second, the
airlines and engine companies are increasing their spare part stocks, which fell
below required levels during the early 1990s. Third, because of increased
activity
                                       30
<PAGE>
and a return to profitability, the airlines now are flying older, previously
grounded aircraft, which generally require more spare parts than newer aircraft.
 
     Demand for superalloy long products has almost doubled since 1993 from 16
million pounds to 30 million pounds in 1996. Management believes that the
industry is operating at close to 100% of available capacity. As a result, since
1993, there have been significant increases in prices for superalloy products.
Based on industry data, the Company believes that demand for superalloy products
will increase at a 6 to 10% annual rate for the next three years and that,
despite certain announced capacity expansion programs scheduled to occur in the
next five years, including capital expenditures planned by the Company of $50
million, the superalloy industry will operate at a utilization rate in excess of
90% for the next three years. Although capacity can be added by existing
producers, installation times for critical equipment often exceeds one year and
prevents capacity from being increased quickly in times of strong demand.
 
[Graph of Worldwide (excluding China and countries of the former Soviet Union)
Shipments of Wrought/Cast Supperalloys. Data:

            World Shipments              U.S. Shipments
Year      (millions of pounds)        (millions of pounds)
----      --------------------        --------------------
1990              127                           95
1991              117                           89
1992               95                           70
1993               80                           60
1994               92                           70
1995              111                           84
1996F             120                           90
2000F             160                          120
Source: Marketronics]

BUSINESS STRATEGY
 
     The Company's primary objective is to continue the growth of its superalloy
and special alloy business and to focus on both the aerospace and non-aerospace
markets. To achieve its objectives, the Company has implemented a business
strategy which is designed to: (i) capitalize on the Company's leading position
in the aerospace market; (ii) develop new products and markets; (iii) continue
to reduce the Company's costs; and (iv) explore potential acquisitions.
 
     Capitalize on Leading Position in Aerospace Market.  Special Metals'
largest single product line is superalloy billet used primarily in the
manufacture of jet engines. Management believes the Company's worldwide market
share (excluding China and the countries of the former Soviet Union) in
superalloy billet was approximately 32% in 1995 and, in certain key high
technology applications, approached 40%. To meet the increased level of
aerospace demand, the Company has increased its annual billet melting capacity
by 15% during 1996.
 
     The Company believes that its capital investment programs and commitment to
high quality have contributed to its ability to obtain a wider variety of
certifications from major jet engine producers such as General Electric, Rolls
Royce, Pratt & Whitney and SNECMA, than any of its competitors. Over the last
five
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<PAGE>

years (principally in 1991 and 1992), the Company invested over $20 million in
new state-of-the-art forging and melting facilities, and over the next five
years, the Company currently plans to invest an additional $50 million to 
expand and modernize its facilities.
 
     Develop New Products and Markets.  Special Metals plans to grow its
business through the development of new products and new applications and
markets for its existing products. Between 1990 and 1996, Special Metals engaged
in an aggressive product line expansion effort. Improved superalloys, corrosion
resistant alloys, shape memory alloys, new dental products and high strength
stainless steels were added to the Company's product line. Over 20% of the
Company's net sales in 1995 were from sales of enhancements of existing products
or new products that did not exist in 1990. Given the brief commercial history
of superalloys, the non-aerospace market for superalloy products is relatively
immature. The Company believes that it is well positioned to exploit this market
and capitalize on new opportunities. Special Metals intends to continue its
growth efforts by increasing sales of its products to commercial markets and by
seeking to develop new products.
 
     Continue to Reduce Costs.  The Company has undertaken numerous projects to
maintain and improve its efficiency and cost position over the last few years.
Since 1992, Special Metals has enhanced its operating leverage, reduced its
billet cycle time by 33%, and improved its inventory turnover by 37%. The
Company continues to pursue opportunities to further reduce costs and improve
efficiency.
 
     Explore Potential Acquisitions.  The Company will examine opportunities to
acquire or invest in companies, technologies or products that complement the
Company's business or its product offerings. In particular, the Company will 
consider acquisitions or investments that will leverage its expertise in
superalloy and special alloy products and enable it to enter new markets or sell
new products. Currently, the Company has no agreements or understandings
regarding any such acquisition or investment. See 'Risk Factors--Risks
Associated With Potential Acquisitions.'
 
PRODUCTS AND MARKETS
 
     The Company's products include superalloy ingots and wrought products such
as billets, bars, and wire manufactured by the Superalloy Billet and Bar
Division. These products are sold to casters, forgers, machine shops,
fabricators, and independent distributors, which use these products primarily in
the manufacture of jet engine parts and in other critical applications that
require heat resistance, high temperature corrosion resistance, toughness and
strength. The Superalloy Billet and Bar Division also produces advanced
specialty metals, including shape memory alloys, such as Nitinol. The Powder
Division produces powder metallurgy superalloy products in the form of loose
powder, billet and bar which are used in military jet engines and the latest
generation of large commercial jet engines. The Dental Division produces
amalgamable silver-based dental alloys.
 
     Management estimates major end use markets for the Company's products in
1995 were: jet engines (70%); power generation (12%), distributors (6%); and

medical applications (6%). Management believes distributors sell the Company's
products for use in oil and gas exploration and production, chemical processing
and for jet engine parts.
 
     BILLETS
 
     Billets are produced by taking an ingot manufactured at the Company's New
Hartford, New York facility and forging it at the Company's Dunkirk, New York
facility to a smaller diameter. The forging process involves heating an ingot to
a precisely controlled high temperature and reducing its diameter in a large
forging press. The reduction of an ingot into a billet refines the grain
structure of the ingot into a fine uniform structure that is both tough and
ductile. Billets are sold to forgers for production into a wide range of parts
that are used primarily in the hot section of an aircraft jet engine. Disks,
rings, spacers, shafts, and casings are forged from billet.
 
     Billet is sold as either 'standard grain' or 'fine grain.' Fine grain
processing facilitates the subsequent quality control of superalloys through
ultrasonic inspection to detect smaller discontinuities in the superalloy. Fine
grain billet is used in more advanced jet engines where great strength and low
defect levels are required. Fine grain billet was developed in the late 1980s
and early 1990s and typically has been available only in diameters 10 inches or
smaller. Special Metals' new forging press allows the production of larger fine
grain superalloy billets, which the Company believes gives it a unique
competitive advantage. The new larger engines
 
                                       32

<PAGE>

used on the Boeing 777, such as the Trent, GE90 and PWA4084, require larger
diameter, heavier disks. These large disks are very difficult to produce from
smaller diameter billet, and the availability of large fine grain billet allows
the forger to eliminate operations, improve yield and reduce cycle time, thereby
producing a part at lower total cost and enhancing the competitiveness of the
forger's product to its own customers. During 1993, 1994, 1995 and the first
nine months of 1996, 37%, 37%, 40% and 52% of the Company's net sales were
derived from billet sales.
 
     BAR
 
     Bar products are manufactured by rolling a billet to a smaller cross
section on either one of two rolling mills. The rolling process involves heating
the billet to a precisely controlled temperature and then reducing its diameter
by passing it back and forth between shaped rolls. The rolling process reduces
the diameter, lengthens the product, and refines the grain structure.
 
     Special Metals sells a wider range of alloys in bar product than it does in
billet or ingot product. Bars are sold to machine shops, forgers and
distributors. One application for bar products is to produce disks and shafts
for the hot section of smaller jet engines and auxiliary power units. During
1993, 1994, 1995 and the nine months ended September 30, 1996, 21%, 21%, 21% and
20% of the Company's net sales were derived from bar product.
 

     INGOTS
 
     Ingots are long cylindrical alloy castings that are the primary product of
the Company's New Hartford, New York melting facility. As sold to the market,
ingots range in diameter from 3.5 inches to 34 inches and weigh up to 46,000
pounds. Ingots are manufactured by melting scrap and virgin raw materials,
casting the molten metal into a mold, and, in most cases, remelting them once or
twice. The primary attributes of an ingot are its chemistry, homogeneity, and
structure. Ingots are sold to either casters or forgers, and the largest single
end use market for ingots is large disks used in power generation turbines. In
1996, the Company consumed substantially all of its total ingot production to
produce billet, bar and other wrought products. The remainder of ingot
production was sold to third parties. During 1993, 1994, 1995 and the first nine
months of 1996, 11%, 11%, 11% and 4% of the Company's net sales were derived
from third party ingot sales.
 
     NITINOL
 
     Nitinol represents a group of titanium/nickel alloys that have unique shape
memory and flexibility properties. Shape memory alloys can be formed into a
product, bent or twisted into a different shape, and then be easily returned to
their original shape. Nitinol's major uses are in medical applications such as
orthodontic wire, stents, catheter guide wires and eye glass frames and
industrial applications such as temperature control devices and clamping
devices. Nitinol is sold primarily as fine wire. Although currently relatively
small, the Nitinol product market is expected to grow over the next five years.
 
     POWDERS
 
     In the most advanced jet engines, the requirements for strength, high
temperature corrosion resistance and toughness exceed the capabilities of
conventionally cast/wrought superalloys. In these applications, alloys have been
developed that cannot be processed using normal ingot metallurgy. Instead,
powder metallurgical techniques are needed to produce the product. Special
Metals developed and pioneered powder metallurgical processing of superalloys in
the 1960s and remains the leading independent producer of powder metallurgy
superalloys. Powder metallurgy superalloys are produced at the Company's
Princeton, Kentucky facility. During 1993, 1994, 1995 and the nine months ended
September 30, 1996, 12%, 12%, 10% and 10% of the Company's net sales were
derived from powder products. The Company believes that there are substantial
growth prospects in the superalloy powder market.
 
     DENTAL PRODUCTS
 
     The Dental Division designs, manufactures, and markets silver-based
amalgamable alloys used primarily for tooth fillings. The products are in the
form of very fine powder produced by melting, alloying, and atomizing alloys of
silver, copper, tin, palladium and other materials. The Dental Division produces
both finished alloy ready for packaging and distribution (about 90% of sales)
and master components that are blended to produce the final product. A number of
the Dental Division's products are covered by patents extending to 2000 and
beyond.
 
                                       33


<PAGE>

Approximately 16% of the Dental Division's 1995 net sales were to European
customers. Management estimates that the Company has a 50% share in the North
American market compared to an estimated 5% share of the European market. The
Company believes that an opportunity exists to expand its sales of dental
products in select emerging foreign markets with potential for growth.
 
     TOLL CONVERSION
 
     In addition to its manufactured products, the Company sells toll conversion
services, primarily forging and melting, to other metal-working companies. Toll
conversion allows the Company to sell excess equipment capacity that may exist
for short periods of time, or may result from an imbalance of capacity between
various units in the Company.
 
PRODUCTION PROCESS
 
     Superalloys are more difficult to manufacture than titanium alloys and
lower performance alloys, such as stainless steels. Superalloys are vacuum
induction melted followed by vaccum arc remelting or electro-slag remelting or
both. Stainless steels, on the other hand, are usually electric arc melted
followed by argon-oxygen-decarburization, while titanium alloys are typically
vacuum arc remelted two or three times. The resulting superalloy is much more
difficult to process than stainless steels or titanium alloys because, by
design, superalloys retain their strength and toughness at high temperatures.
Consequently, deforming superalloys requires greater force than stainless steels
or titanium alloys. Also, because of the need to control grain structure,
superalloy deformation processes are more complex than those used for stainless
steels and most titanium alloys. Certain of the Company's superalloys may
undergo up to 14 distinct stages of melting, remelting, forging and rolling over
a period of weeks before they achieve the customer's specifications.
 
     Due to the critical nature of the applications in which the Company's
products are used and the stringency of customer specifications, the process of
producing superalloy is highly demanding and complex. Quality control is
critical. The Company's Superalloy Billet and Bar Division is ISO 9002 certified
and certified by the National Aerospace and Defense Contractors Accreditation
Program ('NADCAP'), a private accreditation organization recognized by the jet
engine industry. The Company employs state of the art melting and furnace
technology and processes.
 
     Special Metals has pioneered a number of 'total quality' activities, and,
in 1994, embarked on a Continuous Flow Manufacturing ('CFM') program. CFM
reduces queue times and speeds the flow of products through the plant. Since
1992, the Company has reduced cycle times by 33% and significantly reduced
work-in-process inventories.
 
     INGOT METALLURGY
 
     As illustrated in the diagram below, production of wrought superalloys
using ingot metallurgy techniques involves several basic steps: An initial
melting in a vacuum induction melting ('VIM') furnace; secondary melting in

either a vacuum arc remelt ('VAR') furnace, or an electroslag remelting ('ESR')
furnace; or, in the case of the highest quality materials, remelting in both ESR
and VAR furnaces. Melting and remelting are followed by thermomechanical
processing on a forging press and then by finishing and inspection.
 
                                       34

<PAGE>

[Diagram depicting ingot metallurgy process steps: vacuum induction melting of
raw material into ingot; vacuum arc remelting of ingot; forging of ingot into
billets; finishing of product by grinding, peeling and end clearing; inspection;
and shipping.]
 



     Special Metals' New Hartford facility has one of the largest melting
complexes in the superalloy industry, with three VIM furnaces of 44,000 pound,
12,000 pound, and 7,000 pound capacity, respectively, as well as seven VAR
furnaces and two ESR furnaces. Upon its scheduled completion in 1997, the
addition of a VAR furnace and a major upgrade of the 44,000 pound VIM furnace at
a cost of approximately $5 million are expected to increase ingot capacity by
15%. Special Metals is a fully integrated producer and does not rely on outside
manufacturers to produce its primary wrought superalloy product line.
 
     Vacuum Induction Melting.  Vacuum induction melting is a process that
converts virgin and scrap raw materials into homogeneous alloys. The primary
advantage of VIM is that it prevents the reactive alloy elements, such as
aluminum, titanium, zirconium, and hafnium, from oxidizing and forming
nonmetallic defects which severely limit the mechanical integrity of the alloy.
In addition, VIM is useful for removing deleterious volatile elements, such as
bismuth and lead, which are commonly found in raw materials and which
drastically reduce mechanical properties necessary to achieve strength and
toughness in superalloys. Gaseous elements, such as hydrogen, oxygen and
nitrogen, can also be removed.
 
     A VIM furnace is made up of a large vacuum chamber containing a refractory
crucible, induction heating coils, a pour system and large ingot molds. The
Company's primary VIM furnace is one of the largest in the world and, although
rated at 44,000 pounds, can melt up to 46,000 pounds of superalloy in a single
heat. To prepare a melt, raw materials are introduced into the furnace through a
vacuum lock which maintains the melt under a vacuum. Generally, virgin raw
materials are melted first and degassed before any reactive elements are added.
Scrap or revert raw material is then added and melted. Once the deleterious
elements are reduced to an acceptable level, the heat's chemistry is verified
and any alloy chemistry corrections are made. It is not uncommon that up to 28
key elements will be controlled to within very tight tolerances. The melt is
then poured into individual molds to produce ingots weighing typically 10,000 to
14,000 pounds each.
 
     The ingots produced from the VIM process are generally 'clean' and have the
desired uniform chemistry but are not acceptable in terms of the as-solidified
structure. The VIM ingots are therefore subsequently remelted once or twice to
achieve the customer's cleanliness and structure requirements.
 
     Vacuum Arc Remelting.  VAR is used for the secondary melt process, which

converts VIM ingots into a cleaner ingot with greatly improved chemical and
physical homogeneity. The process consists of welding a stub to one end of the
VIM ingot, suspending the VIM ingot in a water-cooled copper crucible that is
inside a vacuum chamber, and subsequently striking an electric arc between the
end of the VIM ingot and the crucible bottom. As the arc is maintained,
sufficient heat is generated to melt the VIM ingot, dripping it into the
crucible to form a VAR ingot. In general, the greater the current applied in the
arc, the faster the melt rate. Typically, a 17-inch VIM ingot is remelted into a
20-inch VAR ingot in about 20 hours. The methods of controlling the melt rate
and the parameters that are used to melt a particular alloy are usually very
specific to the alloy and the furnace and are critical to obtaining the desired
product. As a result of the slow remelting process in a vacuum, further melt
 
                                       35

<PAGE>

refining occurs, deleterious low density oxide and nitride inclusions float out,
and an ingot with a controlled grain structure is formed.
 
     Electroslag Remelting.  ESR is similar in principle to VAR in that the
initial ingot is slowly remelted into a larger diameter ingot. The primary
difference is that the melting does not occur in a vacuum but through a reactive
molten slag that is resistance-heated by an electric current flowing through it.
As molten metal drops from the VIM ingot it passes through the molten slag which
purifies the metal before it settles into the molten pool of the new ingot. ESR
is particularly useful in further refining the sulfur levels of the alloy.
 
     Some premium grades of superalloys use a triple melting process that
includes both ESR and VAR. The melt sequence for these superalloys is VIM,
followed by ESR, then VAR. The additional ESR melt step is used to further
refine the alloy, remove more nonmetallic inclusions and to provide a more sound
ingot for VAR processing. Triple-melted superalloys are considered to be
superior in some applications because they provide more consistent mechanical
properties.
 
     Given the extreme conditions under which superalloys must operate, the
overall production process is more technically demanding than that of other
metals such as titanium and stainless steels. The melting of titanium alloys is
similar to that used for superalloys in that both use VAR processing. One
primary difference between superalloys and titanium alloys is that VIM is used
to form the primary superalloy ingots whereas titanium alloy production uses
multiple VAR melts to obtain uniform chemistries and structure. ESR cannot be
used for titanium because of titanium's severely reactive nature. Special Metals
does not melt production quantities of titanium-based alloys.
 
     The manufacturers of stainless steels generally do not use vacuum melting
because the alloys that they make do not contain large amounts of reactive
elements such as aluminum and titanium. Stainless steels are also generally not
required to have the same cleanliness as superalloys. There are specific grades
of specialty stainless steel that do require vacuum melting to insure
cleanliness. These grades are typically used for special electronic or medical
applications. ESR processing is frequently used to make stainless steels and
other specialty alloys. In contrast, the Company's high strength stainless steel

products use VIM and the Company's other sophisticated processing techniques to
ensure their strength and integrity.
 
     Thermo-mechanical Processing.  After satisfactory solidification structures
are obtained, the superalloy ingot is heat-treated at controlled temperatures of
up to 2,200degreesF for up to 48 hours to improve the micro-chemical homogeneity
of the ingot and then press-forged to produce a smaller diameter billet. The
forging process serves to shape the ingot into billet, refine the ingot's
microstructure and enhance its mechanical properties through highly controlled
deformation. Because superalloys are designed to have high strength at high
temperatures, the thermo-mechanical processing of these alloys requires
equipment that is capable of applying high stresses at high temperatures at high
rates of speed. A typical superalloy ingot must be heated to temperatures of
1,800-2,100degreesF, forged, and reheated for numerous cycles before the desired
sizes and structures are obtained. Superalloys can only be forged within a very
narrow temperature range, as compared to other alloyed metals such as stainless
steel.
 
     Special Metals' Dunkirk forge plant is one of the most modern forging
facilities in the North American superalloy industry. In 1992, Special Metals
installed a state-of-the-art 4,000 ton, high speed forging press. This press
offers a unique combination of high forging force, very high speed and precise
control of press position and press speed, all of which features are designed to
achieve highly controlled deformation of the hot ingot. This combination of
great power and high speed enables Special Metals to produce very high quality
products. The press also produces large diameter (in excess of 10 inches) fine
grain superalloy billets. New, larger jet engines, such as those used in
Boeing's 777 aircraft, require larger internal parts, the manufacture of which,
in turn, requires larger and heavier superalloy billets. The Company believes
that its ability to produce large diameter fine grain superalloy billets gives
it a competitive advantage. Prior to the installation of Special Metals' 4,000
tons forging press in 1992, the largest diameter fine grain billet available in
the superalloy industry was 10 inches. The press facility has also been upgraded
with new forging furnaces and is being further upgraded with more heating
capacity and a re-engineering of the smaller 2,000 ton press to increase its
speed and productivity. These upgrades are expected to be completed in early
1997 at a cost of approximately $800,000.
 
     Bar Products.  In addition to wrought superalloy billet, Special Metals
produces superalloy bar products. Bar product processing is similar to billet
processing from melting through forging. After forging, billets are rolled at
the New Hartford facility into smaller round sections and finished for shipment
to machine shops and forgers.
 
                                       36

<PAGE>

     Finishing and Inspection.  After forging, superalloy billets are returned
to the New Hartford facility for finishing, which involves various cutting,
peeling, and inspection and testing operations. The New Hartford facility has a
complete array of finishing facilities, along with extensive chemical,
metallurgical, and mechanical test facilities.
 

     Once superalloy product is forged to billet or rolled to bar it goes
through a variety of rigid inspection procedures to certify that it meets the
customer's specification. Billet ends are cropped to remove any ingot end-
effects. Slices are taken to verify macrostructures and microstructures and to
test mechanical properties. The billet surface is peeled to remove surface
irregularities and to provide a suitable surface for ultrasonic inspection which
is used to locate any defects in the billet, sometimes as small as 1/64th of an
inch in diameter.
 
     The final product is certified for chemistry, microstructure, mechanical
properties and ultrasonic inspection. All products are carefully serialized to
form a traceable reference. Even after many years of service, the process
history of a given jet engine component can be quickly traced back to the
component manufacturer, forging process, melting heats and raw materials.
 
     POWDER METALLURGY
 
     As illustrated in the chart below, powder metallurgy operations begin with
the melting of master alloy using the VIM technique described above at the New
Hartford facility.
 



[Diagram depicting powder metallurgy process steps: gas atomization into powder;
classify; blend; containerize; extrude into billet product or hot isostatic
press into near net shape product].
 



     In order to make a superalloy billet from powder, a master alloy is made
using VIM processing techniques described above. Once its chemistry is
satisfactory, the master alloy is taken to the Company's Princeton facility
where it is remelted in a VIM furnace, poured into a cup and then transferred
into a nozzle that atomizes the molten metal by breaking up the liquid stream
with a high pressure inert gas, typically argon. The atomized metal is collected
under an inert environment to prevent surface contamination of the powder
surfaces. The powder is sieved to very specific sizes and collected in a sealed
stainless steel container, evacuated to remove gases, and then reconsolidated by
either hot isostatic pressing or extrusion. The result is a billet with uniform
chemistry and uniform metallurgical structure.
 
     The overall process of making powder superalloys requires very careful
control and very clean conditions to make sure the millions of powder particles
do not become contaminated with defects before they are reconsolidated.
Superalloy billets made from powder are typically inspected for defects that are
much smaller than can be detected in conventionally processed billets. These
billets are sold to the forging industry and used in the most critical
applications where the highest strength and integrity are required. Formerly
found primarily in military jet engines, powder metallurgy superalloys are now
beginning to be used in the more advanced commercial jet engines.
 
                                       37

<PAGE>

     Production equipment at the Princeton facility includes two 2,000 pound
vacuum melt furnaces with associated inert gas atomization units. These units
are supported by a full range of vacuum and inert gas powder handling

facilities. The plant's manufacturing is supported by chemical, mechanical and
metallurgical test facilities. The sole contractor that provides extrusion
services to the Company is a producer of powder-based products.
 
     The Company recently received a patent on a superalloy process that has the
potential of reducing the cost of powder metallurgy superalloys and enhancing
the mechanical processing. The process, called 'SS-HIP,' consists of
containerizing the powder superalloy via conventional methods and then hot
isostatically pressing the container at temperatures very near the point that
the alloy begins to melt. Initial testing has shown that this novel thermal
treatment alters the metallurgical structure in such a way that the material is
more amenable to hot-working in a conventional manner similar to processes used
for cast/wrought alloys. If future applications of this development are
successful, the need for extrusion services outside of the Company could be
reduced. The patented process also has the potential to produce billets that
could be directly forged into components using conventional equipment instead of
the more expensive 'isothermal processing' that is needed for present products.
The Company is also developing a new process which may increase yields and
reduce costs.
 
     POWDER METALLURGY DENTAL ALLOYS
 
     Powder alloys that are used for dental amalgam restorations are
manufactured at the Company's Ann Arbor, Michigan facility. Powder alloys for
dental amalgam are produced by melting, alloying and atomizing alloys of silver,
copper, tin, palladium and other materials. Environmental conditions for
atomizing silver-copper-tin alloys are less demanding than superalloys and do
not require the carefully controlled inert handling conditions. The following
diagram depicts the dental alloy production process.
 



[Diagram depicting dental alloy production process steps: Atomization; drying;
classification; heat treating; characterization and/or mechanical processing;
alloying; blending; inspection; bulk packaging or encapsulation.]



 
     Atomization can be achieved using various gases and sometimes water. Dental
alloys are carefully controlled to maintain critical powder shape and size
distributions and thermal treatments to meet the desired product
characteristics. Some dental alloy products are blended to create complex
characteristics. Most of the powder dental alloy that the Company manufactures
is sold in bulk form to distributors that repackage it for sale to dentists.
Specific dental alloys are designed for properties such as handling
characteristics, expansion, corrosion, short-term strength, long-term strength,
and affordability. The Dental Division pioneered the development of atomized
powder based amalgam alloys which are far superior to the former 'cut' dental
alloys. The division's products are highly regarded for their outstanding
strength, resistance to corrosion, low leakage, and outstanding carving and
polishing properties.
 
                                       38

<PAGE>

RAW MATERIALS
 

     The major raw materials used in the production of superalloys and special
alloys are scrap and various virgin materials such as nickel, chromium, cobalt,
columbium, molybdenum, titanium and aluminum. Over half of the raw materials
consumed in superalloy production is scrap, either internally generated scrap
from the Company's own production process, or scrap purchased on the open market
or from customers. Virgin raw materials are generally purchased directly from
producers. Although there can be no assurances, the Company believes that a
number of suppliers can produce sufficient quantities of either scrap or virgin
raw materials and that it is not dependent on any one supplier for any of the
raw materials used to manufacture its products.
 
     Commercial deposits of certain metals used by the Company are found in only
a few parts of the world. The availability and prices of these metals may be
influenced by cartels, changes in world politics, unstable governments in
exporting nations and inflation. Shortages of, and price increases for, certain
raw materials used by the Company have occurred in the past and may occur in the
future, which could have a material adverse effect on the Company.
 
     As described above, a substantial portion of the Company's raw materials
used in production are commodities, such as nickel, that are subject to wide
price fluctuations. The price the Company pays for nickel is usually based upon
quoted prices on the LME plus a premium due to quality, location, and volume
purchased. Although certain of the Company's 1996 product orders provide for
price adjustments to reflect changes in the price of raw materials, a
substantial majority of the Company's product orders currently are, and in the
future are expected to be, made pursuant to firm price sales contracts which do
not provide for raw material price adjustments. To attempt to mitigate the risks
associated with raw material price fluctuations and to match raw material
purchases with firm price product orders, the Company often enters into firm
price contracts for the purchase of virgin raw materials from suppliers and for
the purchase of scrap from customers or hedges the price of nickel. See 'Risk
Factors--Availability and Cost of Raw Materials; Hedging' and 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview.'
 
PRICING
 
     Pricing of superalloys can be volatile and often moves in concert with key
raw materials, such as nickel and cobalt. Sales of the Company's products are
made under standard orders, under one-year supply contracts and long-term firm
price contracts. For the nine months ended September 30, 1996, approximately 70%
of the pounds shipped of the Company's billet and bar products were sold under
standard orders or under one-year supply contracts. The remaining 30% of the
pounds shipped of the Company's billet and bar products for the nine months
ended September 30, 1996 were sold at firm prices under long-term contracts
negotiated in 1993 at the bottom of the aerospace cycle. Since the early 1990s,
long term firm price sales contracts have become more prevalent in the
superalloy industry because jet engine manufacturers need to quote firm prices
to airlines for jet engines to be delivered several years in the future. In
1993, at the bottom of the aerospace cycle, the major jet engine manufacturers
negotiated three year firm price sales agreements with their forging vendors,
who, in turn, negotiated three year contracts with superalloy suppliers. Because
of the adverse business conditions prevailing when the contracts were
negotiated, the pricing on the contracts was very unfavorable to superalloy

producers and resulted in severely depressed margins in the superalloy industry
from 1994 to 1996. Special Metals recognized losses on these long-term firm
price contracts in 1994 and 1995 and generally did not earn a profit on such
contracts during the nine months ended September 30, 1996. Substantially all of
these firm price sales contracts concluded in 1993 are due to expire into 1996,
with a minor portion of shipments for 1996 orders carrying over into 1997. The
current market prices for superalloy products have returned to acceptable 
levels. During 1996, Special Metals began negotiations with certain customers to
enter into new long-term supply contracts, which, if entered into, are expected
to provide significant improvements compared to the expiring contracts.
 
     Firm price sales contracts will continue to be a significant part of the
superalloy industry because the end users of superalloy products, primarily jet
engine companies, need to be able to quote firm prices to the airlines for
engines to be delivered several years in the future. The Company attempts to
minimize raw material price risks in connection with its firm price contracts by
hedging prices of raw materials, purchasing raw materials
 
                                       39

<PAGE>

under fixed price arrangements and entering into scrap purchase arrangements
with customers. See '--Raw Materials.'
 
MARKETING AND DISTRIBUTION
 
     Special Metals has a 14 person sales department consisting of an outside
sales force and inside sales personnel. In certain foreign markets, the Company
relies on agents to sell its products. Regular contacts and key relationships
between Special Metals and significant customers are maintained by executive,
sales, financial, production, technical and quality control personnel. The
Company has a program of regular meetings with key executives of customers.
Through the combined efforts of the Company's direct sales organization and its
technical staff, the Company works closely with customers in order to identify,
develop and support diverse applications for its superalloy and special alloy
products and to anticipate its customers' and end-user future materials
requirements.
 
     Special Metals has historically made products to specific customer orders.
However, as part of its diversification strategy, the Company has recently
increased sales of superalloy product through its warehouse distribution
facility in Oceanside, California. From 1990 to 1995, sales through distributors
increased from less than 1% to approximately 6% of the Company's net sales.
 
     There are a small number of large consumers of superalloy long products in
the world, and Special Metals believes it enjoys good relations with all of
them. A substantial portion of the Company's business is conducted with a
relatively small number of large customers, including affiliates of SIMA. 
The  Company's top 10 customers accounted for 67% of the Company's net sales in
1995. In 1995, each of Wyman-Gordon, Ladish Company and Transmet, an affiliate
of SIMA, accounted for approximately 17%, 11% and 10%, respectively, of the
Company's net sales. In 1994, the Company's two largest customers each accounted
for approximately 22% and 13%, respectively, of the Company's total sales and in

 
1993, the Company's two largest customers each accounted for approximately 12%
of the Company's total sales. See 'Risk Factors--Customer Concentration.'
      
     Although the Powder Division sells its products to approximately 12
customers, it is substantially dependent on its two largest customers. In 1993,
1994, 1995 and the nine months ended September 30, 1996, sales to the two
largest customers of the Powder Division constituted between 79% and 92% of the
division's net sales. The majority of the division's sales result from long term
supply arrangements with aircraft engine manufacturers and their suppliers.
 
     The Dental Division supplies powder alloys to approximately nine of the
leading dental supply firms. The supply firms package the alloys and market them
to dental supply houses under well established trade names.
 
COMPETITION
 
     The superalloy industry is highly competitive. The market for superalloys
is global and is dominated by a few major producers. The Company's major
competitors include Carpenter Technology Corporation, Allegheny Teledyne, Inco
Alloys International, a division of Inco Ltd., and Western Australian Specialty
Alloys Pty. Ltd. The Company competes primarily on the basis of ability to meet
customers' product specifications, quality, price and delivery schedules. Many
of the Company's competitors are subsidiaries or divisions of large, diversified
metals companies which may have substantially greater capital resources, and, in
some cases, lower raw material or labor costs than the Company. During the
downturn of the early 1990s, one superalloy producer went out of business,
leading to some industry consolidation and a reduction in capacity. However, the
Company's competitors have recently added and may in the future add production
capacity which, when coupled with the competitive nature of the superalloy
industry, may exert downward pressure on prices. In particular, Carpenter
Technology Corporation has announced the installation of a new 20 ton VIM
furnace and two new VAR furnaces. The installations will be completed in 1997.
 
                                       40

<PAGE>

     Special Metals is primarily dedicated to the superalloy and special alloy
business. In spite of progress in diversifying, Special Metals still derives
over 70% of its revenues from the production of wrought and powder superalloys
sold to the jet engine market. Other large producers of superalloys are
divisions of large stainless steel companies or specialty steel producers who
also make superalloys as part of a larger array of product lines. Although these
competitors may have greater financial resources than the Company, the Company
believes that its primary focus on the superalloy industry provides it with a
competitive advantage. However, because of its greater exposure to the
superalloy business, the Company will be more adversely affected than its

competitors in a downturn in the superalloy business.
 
     Management believes that the superalloy industry is characterized by high
barriers to entry. The startup and continuing capital costs of operating in the
superalloy business are significant. In addition, all superalloy producers must
secure 'certifications' by both the key consumers of superalloys as well as the
major engine producers, such as General Electric, Rolls Royce, Pratt & Whitney
and SNECMA. These certifications are difficult to obtain because extensive
product evaluations, including engine testing, is usually required. Management
believes Special Metals has the most extensive list of certifications in the
industry. Finally, superalloy technology is difficult to transfer or acquire.
Significant scientific and engineering knowledge is required, and there exists a
significant degree of 'art' in the superalloy production process. As a leader in
the development of superalloys, the Company has developed significant
proprietary technology and expertise. Although certain manufacturing and
management techniques have become standard in the industry, the need to
simultaneously control the precise chemistry of up to 28 different elements
while controlling advanced melting technology and sophisticated thermomechanical
processing, makes it difficult to enter or learn the superalloy business.
Despite these difficulties, recent attempts have been made to enter the
superalloy industry, including a joint venture which is partly owned by
Wyman-Gordon, one of the Company's largest customers. Successful entry of new
competitors into the superalloy industry could have a material adverse effect on
the business, financial condition, results of operations or cash flows of the
Company.
 
FACILITIES
 
     Set forth below is a list of the Company's principal manufacturing
facilities. The Company leases its facilities in New Hartford, New York,
Dunkirk, New York and Princeton, Kentucky from government agencies under
arrangements in which it pays rent in lieu of taxes and has options to purchase
such facilities at a nominal purchase price. These arrangements for the New
Hartford, Dunkirk and Princeton facilities expire in 1997, 2001 and 2000,
respectively. Although no assurance can be given, the Company expects to renew
the arrangement for the New Hartford facility. The Princeton facility lease is
subject to extensions for an additional 15 years beyond the current term. The
facility in Ann Arbor, Michigan is owned.

<TABLE>
<CAPTION>
LOCATION OF FACILITY                        SIZE (SQ. FT.)       PRIMARY ACTIVITY
--------------------------------------      --------------       --------------------------------------
<S>                                         <C>                  <C>
New Hartford, New York                          352,000          Melting Plant and Finishing Plant
Dunkirk, New York                                98,000          Forging Plant
Princeton, Kentucky                              70,000          Powder Metallurgy Plant
Ann Arbor, Michigan                               9,000          Dental Alloy Plant
</TABLE>
 
     The Company's physical and production assets consist of a melt shop, a
rolling facility, a finishing plant, a forge shop, and complete superalloy
powder and dental amalgam plants. Special Metals' melting, rolling and finishing

operations are all located in its New Hartford, New York facility which also
houses the Company's corporate headquarters. Special Metals' melt shop operates
what the Company believes to be one of the largest VIM furnaces now in
production in the super alloy industry. The VIM furnace can produce ingots of up
to 46,000 pounds and can produce ingots large enough to make certain gas turbine
parts required by the power generation industry. The other primary melting
equipment includes two additional VIM production furnaces with capacities of
12,000 pounds and 7,000 pounds, respectively, as well as several smaller
development units. The secondary and tertiary melting equipment consists of
seven VAR furnaces and two ESR furnaces. Special Metals' bar rolling facility
operates a 22 inch roughing mill and a 16 inch finishing mill. The finishing
plant consists of complete facilities for finishing bar from one-half inch
diameter to 18 inch diameter superalloy billet, including straightening,
grinding, peeling and modern ultrasonic inspection equipment. The New Hartford
plant also houses
 
                                       41

<PAGE>

research facilities, a production test facility and a process laboratory in
which the Company conducts small scale production of new products and alloys
prior to full scale production.
 
     The Company's forge shop is located in Dunkirk, New York in a plant that
houses two forging presses. The newer of the two presses is a 4,000 ton high
speed press which is a double manipulator, computer controlled unit. The other
unit is a 2,000 ton press that has been modernized and is also an automated,
double manipulator, computer controlled unit. Due to its high operating
throughput and the advanced level of automation of its two presses and the
plant's support equipment, management believes that the Dunkirk facility is one
of the most cost-effective plants of its type in the superalloy industry.
 
     The Company's plant for producing powder-based superalloy products was
built in 1971 and is located in Princeton, Kentucky. The Princeton facility
includes two vacuum-argon atomizing furnaces along with all of the necessary
storage and classification equipment that provide inert gas or vacuum processing
of powders until they are reconstituted in bar, billet or shaped forms. The
plant also is equipped to finish, cut, ultrasonically inspect, and ship forging
mults for the industry. Special Metals believes its Princeton facility is one of
the most modern and largest capacity plants of its type in the superalloy
industry.
 
     The Company's dental amalgam plant is located in Ann Arbor, Michigan and is
equipped to make many variations of dental restoration alloys. This facility
includes both water and gas atomizing equipment as well as full classification
and processing equipment.
 
     The Company believes that its capital investment programs and commitment to
high quality have contributed to its ability to obtain more certifications to
supply superalloys and special alloys than any of its competitors. Over the last
five years, the Company invested over $20 million in a state-of-the-art forging
press, new melting facilities, and continuous flow manufacturing to reduce
costs, improve manufacturing cycle times, and improve product quality. Over the

next five years, the Company plans to invest an additional $50 million to expand
and modernize its melting, forging and finishing equipment, install a
state-of-the-art information system and make other investments to maintain its
technological leadership and reduce its production costs.
 
RESEARCH AND DEVELOPMENT
 
     The Company believes it is a leader in the development of technology for
the manufacture of premium wrought and powder nickel-based superalloys. The goal
of the Company's research and development operations is to reduce the cost of
producing its core business products, develop and improve proprietary alloys and
processes, and apply its technology to the manufacture of specialty alloys and
materials for new non-aerospace markets. The Company's research, technical
development and metallurgical production efforts are staffed by approximately 25
individuals with engineering and sciences degrees. The Company conducts research
activities at its New Hartford, Princeton and Ann Arbor facilities. The New
Hartford research facility includes laboratories for physical and mechanical
metallurgical analysis and a stand alone process laboratory for the small scale
processing of vacuum melted alloys which is used for internally supported
development efforts and external sales of developmental materials and specialty
alloys, including the Company's shape memory alloys, such as Nitinol. The
research and development staff works closely with the Company's production staff
and sales force to improve existing products and processes.
 
     In addition, the Company is presently an active participant in the
Specialty Metals Processing Consortium ('SMPC') whose membership includes other
superalloy producers. SMPC's purpose is to pursue melting and solidification
technology and to better understand the very complex nature of alloy melting and
solidification. SMPC's research is conducted at the Sandia National Laboratory
and also includes industrial experiments conducted at the member companies.
Funding for the consortium is made up of membership fees and matching monies
from the U.S. Department of Energy and other sources.
 
     Non-aerospace special alloys under development include products in the
Company's shape memory alloy product line. These products, such as Nitinol,
utilize precise alloy chemistries and thermomechanical processing and are being
designed for use in medical, dental and consumer products. Other non-aerospace
products under development include proprietary dental alloys, such as a recently
patented restoration alloy system that offers a unique combination of properties
and handling characteristics during application.
 
                                       42

<PAGE>

     The Company spent $1.1 million, $1.3 million, $1.3 million and $1.2 million
during 1993, 1994, 1995 and the nine months ended September 30, 1996 for
research and development activities.
 
ENVIRONMENTAL MATTERS
 
     The Company's facilities are engaged in activities regulated by extensive
federal, state, local and foreign environmental and worker safety and health
laws and regulations, including those relating to air emissions, wastewater

discharges, the handling and disposal of solid and hazardous wastes and the
remediation of contamination caused by the release of hazardous substances in
the past. In the U.S., such laws include the Federal Clean Air Act, the Clean
Water Act, the Resource Conservation and Recovery Act ('RCRA'), the
Comprehensive Environmental Response, Compensation and Liability Act ('CERCLA')
and analogous state laws. The Company uses substantial quantities of substances
that are considered hazardous or toxic under federal, state and/or local
environmental, worker safety and health laws and regulations. The Company's
operations pose a continuing risk of accidental releases of, and worker exposure
to, hazardous or toxic substances. There is also a risk that government
environmental requirements, or enforcement thereof, may become more stringent in
the future and that the Company may be subject to legal proceedings brought by
private parties or governmental agencies with respect to environmental
matters. Although the Company believes that it is in substantial compliance
with applicable requirements of environmental laws, there can be no assurance
that some, or all, of the risks discussed under this heading will not result in
liabilities that are material to the Company's business, results of operations,
financial condition or cash flows.
 
     The Company's facilities have been used for industrial purposes for a
substantial period and, over such time, these facilities have used substances or
generated and disposed of wastes which are hazardous. For example, the Company
used substantial quantities of polychlorinated biphenyls ('PCBs') at its New
Hartford facility through the 1970s. Sites at which the Company's wastes have
been released or otherwise come to be located, and for which the Company
currently faces potentially material environmental remediation liabilities, are
described below. At September 30, 1996, the Company had total reserves of
approximately $3.5 million to cover future costs arising from known
environmental liabilities for remediation and operation and maintenance of
remediation systems, including costs relating to its own properties and certain
sites at which the Company's wastes have been identified. The Company's actual
future expenditures, however, for remediation of environmental conditions
existing at its properties and at these other locations cannot be conclusively
determined at this time. Furthermore, additional locations at which wastes
generated by the Company may have been released or disposed, and of which the
Company is currently unaware, may in the future become the subject of
remediation for which the Company may be liable, in whole or in part.
Accordingly, it is possible that the Company could become subject to
environmental liabilities in the future that could result in a material adverse
effect on the Company's business, results of operations, financial condition or
cash flows.
 
     The Company's policy is to continually strive to improve environmental
performance. From time to time, the Company may be subject to environmental
regulatory enforcement under various statutes, resolution of which typically
involves the establishment of compliance programs and may involve the payment of
penalties, but to date no material penalties have been incurred. The Company
incurred average annual expenditures for environmental protection and compliance
of less than $220,000 for 1994, 1995 and 1996 and its capital budget provides
for less than $150,000 for such expenditures in 1997. However, the imposition of
more strict standards or requirements under environmental laws and the
possibility of increased enforcement could result in expenditures in excess of
amounts estimated to be required for such matters.
 

     The Company is currently involved in the following potentially material
environmental matters or proceedings:
 
     Clayville, New York.  The State of New York identified the Company as a
potentially responsible party ('PRP') under CERCLA for the release or threatened
release of hazardous substances at Ludlow Landfill, Clayville, New York, due to
the Company's generation of certain industrial wastes, including PCB wastes,
believed to have been disposed at the landfill (the 'Site'). CERCLA imposes
strict, joint and several liability for investigatory and clean-up costs. The
State of New York brought a federal action against Ludlow Sand and Gravel
Company, Ludlow Sanitary Landfill, Inc., James Ludlow and Kevin Ludlow
(collectively, 'Ludlow') under CERCLA, common law nuisance and state statutory
law, seeking the recovery of its response costs,
 
                                       43

<PAGE>

damages to natural resources, closure of the landfill and penalties. Ludlow, in
turn, brought a third-party action for indemnification and/or contribution
against the Company and four other generators of wastes allegedly sent to the
Site.
 
     A consent judgment was entered, resolving the litigation with respect to
the Company. Under the terms of the consent judgment, claims against Ludlow, the
Company and Chesebrough Pond's (the 'Settling Defendants') are settled and the
Site is required to be closed and remediated pursuant to an approved remedial
plan (the 'ARP') as defined in the consent judgment. The Company is obligated
under the consent judgment to pay all remediation costs required to implement
the ARP in excess of the funds in a trust account established by the Consent
Judgment. The trust account has received monies paid by the Settling Defendants
as well as a specified percentage of the settlement funds obtained to date from
a contribution action brought by the Company and Chesebrough-Pond's against
non-settling users of the landfill. The trust account currently has
approximately $100,000. Further recovery in the contribution action against the
non-settling users is not anticipated to be more than $75,000.
 
     The Company has completed the ARP with respect to the main body of the
Site. However, completion of the remedy in one area (the 'North Gravel Pit') was
delayed because of PCB contamination discovered in the course of excavation in
that area. A work plan designed to determine the extent of contamination in the
North Gravel Pit and select an appropriate remedial alternative has been
approved by the New York State Department of Environmental Conservation ('DEC')
but not yet completed by the Company's environmental engineers. In the interim,
the Company has assumed its responsibility for onsite treatment of the leachate
generated at the project site and subsurface discharge of the treated leachate.
 
     The cost of the investigative and remedial work which will ultimately be
required in the North Gravel Pit cannot be estimated until the investigation
specified in the work plan is complete and a remedial alternative is determined.
Therefore, it is possible that liabilities in respect of this site could have a
material adverse effect on the Company's business, results of operations,
financial condition and cash flow. Based upon preliminary information, the
Company estimates that the cost will be at least $1.0 million and the Company

has provided for this amount in its financial statements.
 
     The Company will be responsible for the cost of post-closure operation and
maintenance ('O&M') at the Site for a period of thirty (30) years, and part of
the required O&M activities will include groundwater monitoring. These costs are
estimated for the main body of the site to be approximately $150,000 per year in
years one and two and approximately $90,000 per year in years three through 30
for a total of $2.8 million. The Company has established a reserve of $1.8
million in respect of these expenses based upon the present value of these
expenses using a discount rate of 4%. In addition, there are contingent
post-closure activities. It cannot be determined which, if any, of the
contingent activities the Company will need to perform.
 
     Universal Waste Site.  In the mid 1980s, the owners/operators of Universal
Waste in Utica, New York (the 'Universal Waste Site') were cited by the DEC in a
formal enforcement proceeding for cleanup of the site which was allegedly
contaminated with PCBs and trichloroethylene. The owner of the Universal Wastes
Site requested by motion that the Company be named as an indispensable party to
that proceeding. The DEC, however, took the position that the Company should not
be named as an indispensable party. The Company believes that at least four
other potentially responsible parties have been identified with respect to the
contamination at the site. A consent order has been executed obligating the site
operator to conduct a preliminary site assessment on a portion of the property.
The preliminary site assessment is underway. The DEC is also conducting a
separate preliminary site assessment. The Company is presently not involved in
investigating the alleged contamination.
 
     Based upon the limited information available to its environmental
engineers, the Company has established a reserve of $575,000. However, because
of the preliminary nature of the investigation, it is not possible, at this
time, to provide a reasonable estimate as to the ultimate cost of any
investigative or remedial work which will be required, or the Company's share,
if any, of such costs. Therefore, it is possible that liabilities could arise in
respect of this site that could have a material adverse effect on the Company's
business, results of operations, financial condition and cash flows.
 
                                       44

<PAGE>

     Quanta Resources Site.  In August 1990, the Company received notification
from the United States Environmental Protection Agency (the 'EPA') that it is
considered a potentially responsible party under CERCLA at a site in Syracuse,
New York (the 'Quanta Resources Site'). The Company, together with approximately
20 other potentially responsible parties, formalized an agreement by which it
paid the sum of $27,500 towards contribution for removal costs of the EPA
associated with waste material at the site. The total sum collected
(approximately $1 million) was paid directly to the EPA. In September 1996, the
Company received notification from the EPA asking the Company to attend another
meeting with respect to the site. The EPA requested approximately $200,000 to
investigate further removal and cleanup actions. The Company, together with
approximately 60 other potentially responsible parties, formalized an agreement
by which it paid the sum of $5,000 towards the investigation. The investigation
is to be managed by the potentially responsible parties. The extent of

additional regulatory action which may be required at the site is unclear. It is
not possible, at this time, to provide a reasonable estimate as to the cost of
any further investigative or remedial work which will be required or the
Company's share, if any, of such costs. Therefore, it is possible that
liabilities could arise in respect of this site that could have a material
effect on the Company's business, results of operations, financial condition and
cash flows.
 
     Al-Tech Site.  Al-Tech Specialty Steel Corporation ('Al-Tech') occupies a
parcel of realty adjacent to the Company's Dunkirk, New York, facility. In 1988,
Al-Tech advised the Company that a cooling pond located on its property was
contaminated with PCBs. At the time, the Company utilized the pond as a source
of non-contact cooling water. The Company conducted a PCB investigation
(including sampling) of its facilities. The Company's investigation did not
indicate any connection between contamination in the pond and the Company's
operations. A recent edition of an Al-Tech newsletter indicated that Al-Tech has
retained a consultant to conduct a RCRA Facility Investigation ('RFI') at its
facility in Dunkirk, New York to determine whether or not chemical constituents,
from past and present activities at the site, have impacted the environment. The
Company has no other information on which to estimate reasonably the cost of
further investigative or remedial work at the Al-Tech site, or the Company's
share, if any, of such costs. Depending on the development of any information
connecting the Company to this site, it is possible that liabilities could arise
in respect of this site that could have a material adverse effect on the
Company's business, results of operations, financial condition and cash flows.
 
     New Hartford Site.  In 1986, the DEC approved the Company's plan for the
closure of a waste impoundment containing spent acid waste at its New Hartford
facility. The impoundment is now maintained pursuant to the RCRA Corrective
Action Program. In September 1993 the Company submitted a Voluntary RCRA
Facility Investigation Report to the DEC to monitor ground water for metals in
the area of the Company's waste impoundment. Based on test results from the
spring of 1994 to the spring of 1996, it appears that further remediation may
not be necessary, and the Company does not believe that it will incur any
material liability in connection with this matter. The Company will continue to
perform groundwater monitoring at the site pursuant to the RCRA Corrective
Action Program. Depending on the results, it is possible that further
investigative or remedial activity could be required in respect of this matter
and that the liabilities in respect thereof could have a material effect on the
Company's business, results of operations, financial condition and cash flows.
 
     New Hartford SPDES Permit Issue.  One outfall out of five permitted under
the Company's State Pollution Discharge Elimination System permit at its New
Hartford facility has been out of compliance from time to time with respect to
PCB limits. The current limit for PCBs in the Company's permit is .5 parts per
billion. The Company had certain sections of its sewers jet-cleaned during the
summer of 1996 to reduce or eliminate further incidences of noncompliance. The
DEC has notified the Company that it plans to modify the Company's permit limit
for PCBs to .3 parts per billion. The Company met the .3 parts per billion
limit six out of twelve months in 1995 and eight out of the first ten months in
1996. The Company has obtained a preliminary estimate of $120,000 to install
additional storm water treatment equipment designed to consistently meet the
proposed DEC .3 parts per billion limit. Although the Company cannot at this
time provide a reasonable estimate of any additional costs that may be required,

the Company does not believe it will incur any material liability in connection
with this matter.
 
     Ann Arbor EPCRA Violation Complaint.  In early December, 1996, the Company
received a Notice of Intent to File Civil Administrative Complaint from the EPA.
In the notice, EPA stated its intent to commence an administrative proceeding
against the Company under the Emergency Planning and Community Right to Know Act
based upon the alleged failure of the Company's Ann Arbor, Michigan facility to
timely file with EPA
 
                                       45

<PAGE>

certain forms disclosing the amount and type of silver used at the facility for
the years 1991 and 1992. EPA invited the Company to provide EPA with information
relating to the alleged offense. The Company intends to avail itself of this
opportunity. The Company has not yet been informed of the amount of the civil
penalty or the nature of the corrective work which EPA intends to seek in this
matter but the Company does not expect the penalty or the cost of the corrective
work to be a material amount.
 
     Other Matters.  The Company is on notice of, and involved in, certain other
environmental matters which have been settled or are at various stages of
discussion, negotiation or settlement which the Company does not believe to be
material.
 
PATENTS AND TRADEMARKS
 
     The Company continually seeks patent protection with respect to its
technical developments. The Company currently holds 19 U.S. and numerous foreign
patents. Several of the alloys produced by the Company's dental division are
covered by one or more of these patents. The manufacturing technology presently
used by the Company does not benefit from patent protection. The Company
recently received a patent on a superalloy process that has the potential of
reducing the cost of powder superalloys and enhancing mechanical processing. The
Company has registered the trademark UDIMET, which refers to superalloys
produced by the Company in the United States and other countries. The Company
believes that it has taken commercially reasonable steps to protect its material
patents, trademarks and proprietary processes.
 
EMPLOYEES
 
     As of September 30, 1996, the Company employed approximately 570 persons.
Of these, approximately 390 (or 68%) work under four collective bargaining
agreements. The Company's agreement with the local branch of the IAM
representing approximately 55 hourly workers at its Princeton, Kentucky facility
expires in August 1997. The Company's agreement with the the local branch of the
IAM, representing approximately 290 hourly workers at its New Hartford facility
expires in August 1998. The remaining labor agreements expire in 1999. In 1992,
a two-week strike by the IAM occurred at the Company's New Hartford facility.
While the Company considers its employee relations to be good, there can be no
assurance that satisfactory new collective bargaining agreements will be
negotiated when the applicable collective bargaining agreements expire or that

future work stoppages would not have a material adverse effect on the business,
financial condition, results of operations or cash flows of the Company. See
'Risk Factors--Labor Matters.'
 
LEGAL PROCEEDINGS
 
     From time to time, the Company is involved in litigation relating to a
claim arising out of its operations in the normal course of business. Except as
described in '--Environmental Matters,' the Company does not believe that it is
a party to any litigation at the present time that could have a material adverse
effect on the business, financial condition, results of operations or cash flows
of the Company.
 
                                       46


<PAGE>

                                   MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
     The following table sets forth certain information with respect to the
executive officers and directors of the Company:
 
<TABLE>
<CAPTION>
NAME                                               AGE   POSITIONS
------------------------------------------------   ---   ------------------------------------------------
<S>                                                <C>   <C>
Donald R. Muzyka................................   58    President, Chief Executive Officer and Director
Donald C. Darling...............................   44    Vice President--Administration, Chief Financial
                                                           Officer and Director
Robert F. Dropkin...............................   55    Vice President, Secretary, Chief Legal Counsel
                                                           and Director
Gernant E. Maurer...............................   47    Vice President--Technology
Thomas E. MacDonald.............................   53    Vice President--Sales/Marketing and Product
                                                           Management
James D. Page...................................   54    Vice President--Operations
Robert D. Halverstadt...........................   77    Chairman of the Board of Directors
Raymond F. Decker...............................   66    Director
Edouard Duval...................................   52    Director
Antoine G. Treuille.............................   48    Director
</TABLE>
 
     Prior to the date of the Offering, the Company's Board of Directors will be
classified into three classes which consist of, as nearly as practicable, an
equal number of directors. The members of each class will serve staggered
three-year terms. Messrs. Darling, Dropkin and Decker will be Class I directors,
Messrs. Halverstadt and Treuille will be Class II directors and Messrs. Duval
and Muzyka will be Class III directors. Nominees for director will be divided
among the three classes upon their election or appointment. The terms of Class
I, Class II and Class III directors expire at the annual meeting of stockholders
to be held in 1998, 1999 and 2000, respectively. See 'Description of Capital
Stock--Certain Provisions of the Company's Certificate of Incorporation and
By-Laws--Classified Board of Directors.'
 
     Dr. Muzyka has been President and a director of Special Metals since
joining the Company in 1990. He was appointed Chief Executive Officer in October
1996. Before joining the Company, Dr. Muzyka held several executive positions
serving the aerospace industries. He has 36 years of metals-related experience,
including service with Cabot Corporation, Carpenter Technology Corporation
('Cartech'), and Pratt & Whitney. Dr. Muzyka holds several degrees, including a
Ph.D. in Material Science from the Thayer School of Engineering-Dartmouth
College. Dr. Muzyka is also a director of Aviall, Inc., an aircraft parts
distributor and CSM Industries, a metals company.
 
     Mr. Darling has been Vice President--Administration and Chief Financial
Officer since September, 1993 and served as Vice President and Chief Financial
Officer since 1989. He joined Specials Metals in 1980, serving in supervisory,

financial planning, and strategic management positions. He has 20 years of
metals-related experience and holds degrees in Business Management, including a
Masters in Accounting, from the School of Management-SUNY/Binghamton. Mr.
Darling has been a director of the Company since 1991.
 
     Mr. Dropkin has been Vice President and Chief Legal Counsel since 1985 and
Secretary since 1987. He joined Special Metals in 1984. Prior to that he held
various legal positions with Cabot Corporation and Allegheny Ludlum Industries
and has 28 years of metals-related experience. Mr. Dropkin holds a metallurgical
engineering degree, and a J.D. degree from George Washington University. Mr.
Dropkin has been a director of the Company since 1987.
 
     Mr. MacDonald has been Vice President--Sales/Marketing and Product
Management since joining the Company in 1991. Prior to that he was Vice
President of Market Development with Slater Steel Corporation and held positions
with Cartech and LTV Steel Company, Inc., a subsidiary of the LTV Corporation.
He has 30 years of metals-related experience and holds a degree in Metallurgical
Engineering, with a Masters in Business Administration, from the University of
Michigan.
 
                                       47

<PAGE>

     Dr. Maurer has been Vice President--Technology since 1987 and has served in
several management positions, including Director of Technology, since joining
Special Metals in 1976. He has 25 years of metals-related experience and holds
several degrees, including a Ph.D. in Materials Engineering from Rensselaer
Polytechnic Institute.
 
     Mr. Page has been Vice President--Operations since joining the Company in
August 1993. Prior to that he was Vice President of Operations with the RMI
Titanium Company from July 1990 to August 1993 and held positions with Titanium
Metals Corporation, Howmet Corporation, and NF&M Corporations. He has 28 years
of metals-related experience, and holds a degree in Engineering, Physics and a
Masters in Aeronautical Engineering from Cornell University.
 
     Mr. Halverstadt has been Chairman of the Board since 1987 and was President
of the Company from 1974 to 1982. Prior to that, he was Group Vice President of
the Product and Process Group at Booz Allen and Hamilton with responsibility for
its contract research and engineering businesses, including Foster D. Snell,
Inc., the biological and chemical company, Design and Development, Inc., the
electro-mechanical engineering company, and the Environmental Resources Group.
Earlier he was Manager of the Thomson Engineering Laboratory at General Electric
in Lynn, Massachusetts, responsible for materials development and application in
the General Electric line of small gas turbine engines. He holds a degree from
Case Institute of Technology and is a director of Carus Corporation, a
manufacturer of manganese-based chemicals.
 
     Dr. Decker has been a director of the Company since 1990. He is founder of
USP Holdings, Inc. and Thixomat, Inc., companies that commercialize materials
technology, and has been the Chairman of the Board of such companies since 1989.
Dr. Decker was Vice President for Research of Michigan Technological University
from 1982 to 1986 and Vice President for Corporate Technology of Inco, Ltd. from

1978 to 1982. He was President of ASM International, the largest technical
society for metals, in 1987. Dr. Decker holds a Ph.D. from the University of
Michigan and has specialized in superalloys for 46 years. Dr. Decker is a
director of Lindberg Corporation, a heat treating and die casting company,
Packer Group, a foundry products and failure analysis firm, and Wavemat, Inc., a
microwave equipment manufacturer.
 
     Mr. Duval has been a director of the Company since 1987. He is Directeur
General of Aubert & Duval, a French steel and alloy producer, and SIMA, a 
holding company which controls Aubert & Duval and other industrial firms. Mr.
Duval has more than 20 years experience at Aubert & Duval and SIMA in the
marketing, sale and management of superalloy and special metallurgical products
for both aerospace and industrial applications.
 
     Mr. Treuille has been a director of the Company since 1987. He is currently
President of Charter Pacific Corporation, a financial services company. From May
1993 to March 1996, he was a Senior Vice President of Desai Capital Management,
Inc., an investment management company, and, from August 1985 to April 1993, he
was an Executive Vice President at Entrecanales Inc., a private investment
company. He currently serves as a director of Eye Care Center of America, Inc.
and BIC Corp., a private company.
 
DIRECTOR COMPENSATION AND COMMITTEES
 
     Currently, non-employee and non-affiliate directors receive an annual fee
of $6,000 plus $600 for each meeting of the Board of Directors or committee of
the Board of Directors that they attend. Commencing after the Offering,
non-employee directors will receive a $14,000 annual fee plus $1,000 for each
meeting of the Board of Directors or committee of the Board of Directors that
they attend.
 
     The Board of Directors has established, effective upon the completion of
the Offering, a Compensation Committee and an Audit Committee. The Compensation
Committee, composed of Mr. Halverstadt and Mr. Duval, will establish salaries,
incentives and other forms of compensation for the Company's directors and
officers and will recommend policies relating to the Company's benefit plans.
The Audit Committee, composed of Dr. Decker and Mr. Treuille, will oversee the
engagement of the Company's independent auditors and, together with the
Company's independent auditors, will review the Company's accounting practices,
internal accounting controls and financial results.
 
EXECUTIVE COMPENSATION
 
     The following table sets forth information with respect to the compensation
of the Company's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company (collectively, the 'Named
Executive Officers') for the fiscal year ended December 31, 1995. The principal
components of such individuals' current cash compensation are the annual base
salary and annual bonus included
 
                                       48

<PAGE>


in the Summary Compensation Table. Also described below is the estimated future
compensation such individuals can receive under the Company's retirement plans.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                                           ANNUAL COMPENSATION
                                                                                     --------------------------------
                                                                                                       ALL OTHER
NAME AND PRINCIPAL POSITION                                              SALARY($)   BONUS($)(1)   COMPENSATION($)(2)
-----------------------------------------------------------------------  ---------   -----------   ------------------
<S>                                                                      <C>         <C>           <C>
Donald R. Muzyka
  President and Chief Executive Officer................................  $ 185,558    $  53,288         $  5,820
James D. Page
  Vice President--Operations...........................................    112,958       30,269            4,959
Robert F. Dropkin
  Vice President, Secretary and Chief Legal Counsel....................    112,899       33,766            4,975
Thomas E. MacDonald
  Vice President--Sales & Marketing and Product Management.............    112,488       30,139            4,588
Gernant E. Maurer
  Vice President--Technology...........................................    108,010       30,056            4,588
</TABLE>
 
------------------
(1) Includes discretionary bonuses earned by the Named Executive Officers and
    amounts earned pursuant to the Company's 1995 Profit Sharing Plan. All
    salaried employees were eligible to participate in the Company's 1995 Profit
    Sharing Plan. The plan provided for a profit sharing pool equal to 10% of
    the Company's year-end after tax profit. The profit sharing pool was divided
    among participants based on the midpoint of their salary grade. The 
    Company has adopted a similar plan for 1996.
 
(2) Includes the Company match under the Special Metals Corporation 401(k) Plan
    (Salaried Employees), a defined contribution plan established under section
    401(k) of the Internal Revenue Code of 1986, as amended (the 'Code') and the
    value of premiums paid for group term life policies in excess of $50,000.
 
     Prior to the completion of the Offering, it is anticipated that the Company
will review all existing and potential compensation arrangements for the
executive officers of the Company. Depending upon the outcome of its review, one
or more of the Company's compensation arrangements with its executive officers
may be amended or terminated or new compensation arrangements may be adopted.
 
SALARIED EMPLOYEE RETIREMENT PLAN
 
     The Amended and Restated Pension Plan for Salaried Employees of Special
Metals Corporation (the 'Salaried Retirement Plan') covers full-time and
part-time salaried employees of Special Metals and is intended to meet the
requirements of section 401(a) of the Code. Generally, under the Salaried
Retirement Plan participants with five years of service become entitled to
receive a basic retirement benefit upon retirement at age 65. Benefits under the
Salaried Retirement Plan are calculated using a career average benefit formula

which has been updated, from time to time, to make adjustments for final average
earnings. For participants who retire or terminate their employment after
December 31, 1994, the retirement benefit equals the sum of: (i) 1.25% of final
average earnings as of December 31, 1994 multiplied by years of service as of
December 31, 1994 to the extent total years of service do not exceed 35; (ii)
0.50% of final average earnings as of December 31, 1994 multiplied by years of
service as of December 31, 1994 in excess of 35; (iii) 1.25% of average monthly
earnings commencing January 1, 1995 multiplied by years of service after
December 31, 1994 to the extent total years of service do not exceed 35; and
(iv) .50% of average monthly earnings commencing January 1, 1995 multiplied by
years of service after December 31, 1994 in excess of 35. In calculating
benefits, 'final average earnings' is the average of the highest five
consecutive years of earnings out of the last ten years, as of December 31,
1994. Earnings taken into account for calculating benefits under the plan
include base salary, bonuses, profit sharing, overtime, commissions and
deferrals made under certain plans maintained by the Company, including any Code
section 401(k) savings plan or Code section 125 cafeteria plan, and are subject
to limits imposed by the Code, including Code section 401(a)(17) (generally,
limiting compensation to $150,000 per year, as indexed). Payments are made in
the form of a joint and survivor annuity (for married employees) or single life
annuity (for single employees), unless another form of benefit is elected by the
participant in accordance with the terms of the plan. The plan contains
provisions for early retirement benefits and supplements, special retirement
benefits and
 
                                       49

<PAGE>

supplements for termination due to a plant or department reorganization or
closing, payments upon disability and spousal death benefits. The estimated
annual benefit payable under the Salaried Retirement Plan at age 65 is $29,773,
$29,042, $36,616, $33,429 and $62,897 for each of Dr. Muzyka, Messrs. Page,
Dropkin and MacDonald and Dr. Maurer, respectively, assuming annual salary
increases of 5.0% and 3.0% annual increases in the compensation limit under Code
Section 401(a)(17).
 
EQUITY RIGHTS PLAN
 
     The Special Metals Corporation Equity Appreciation Rights Plan (the 'Equity
Rights Plan') provides for the grant of rights to receive cash payments based on
the appreciation of the book value of the Company ('Rights'). Each Right is
based on the total book value of the Company, divided by 10,000,000. Rights are
generally exercisable from the fifth anniversary of the date of grant until the
tenth anniversary of the date of grant, or earlier in the event of a 'change of
control' of the Company, termination without cause, retirement at age 65, death
or disability. Rights are forfeited in the event the holder is terminated by the
Company for 'cause.' Dr. Muzyka is the only current participant in the Equity
Rights Plan. He has received 50,000 Rights, none of which were granted in the
fiscal year ended December 31, 1995. As of December 31, 1995, 10,000 of such
Rights were exercisable until 2000. The remaining 40,000 Rights will become
exercisable in 10,000 Right increments in 1996 through 1999 and will be
exercisable for five years after becoming exercisable.
 

     The following table summarizes the value of Dr. Muzyka's Rights under the
Equity Rights Plan as of December 31, 1995.
 
<TABLE>
<CAPTION>
                                                             NUMBER OF UNITS        VALUE OF UNEXERCISED
                                                          UNDERLYING UNEXERCISED        IN-THE-MONEY
                                                             OPTIONS/SARS AT           OPTIONS/SARS AT
                                                          DECEMBER 31, 1995 (#)     DECEMBER 31, 1995 ($)
<S>                                                       <C>                       <C>
                                                               EXERCISABLE/             EXERCISABLE/
NAME                                                          UNEXERCISABLE             UNEXERCISABLE
-------------------------------------------------------   ----------------------    ---------------------
Donald R. Muzyka                                               10,000/40,000               -- / --
</TABLE>
 
SUPPLEMENTAL RETIREMENT INCOME PLAN
 
     The Company has adopted the Special Metals Corporation Supplemental
Retirement Income Plan (the 'SRIP') which covers only Dr. Muzyka. The SRIP is
intended to grant Dr. Muzyka supplemental retirement benefits equal to the
difference between (i) the benefits that Dr. Muzyka would have received under
his prior employer's pension plan had he remained at his prior employer until he
was age 65, based on his 'average compensation' (as defined in the SRIP) at
Special Metals and (ii) his vested accrued benefits under the prior employer's
pension plan and the Salaried Retirement Plan. Compensation for purposes of the
SRIP includes bonus and profit sharing payments and amounts of income deferred
under deferred compensation plans of the Company. Benefits under the SRIP will
ratably vest over a 10-year period subject to immediate vesting upon a 'change
of control' of the Company (as defined in the SRIP) and special and accelerated
vesting provisions in the event of death, disability or other termination of
employment. Based on Dr. Muzyka's compensation and years of service, he would be
entitled to estimated annual benefits of $39,479 under the SRIP at normal
retirement age (65).
 
STOCK OPTION PLAN
 
     In December 1996, the Board of Directors of the Company adopted, and the
Company's stockholders approved, the Special Metals Corporation 1997 Long-Term
Stock Incentive Plan. The Stock Option Plan will be administered either by the 
Board of Directors of the Company or by a committee comprised of Directors who
are 'Non-Employee directors' (within the meaning of Rule 16b-3 Exchange Act of
1934) and 'outside directors' (within the meaning of section 162(m) of the
Code.) The Board of Directors or such committee is referred to as the 'Stock
Plan Committee.' Approximately          employees including any officer or other
key employee or consultant to the Company or any of its subsidiaries shall be
eligible to be designated as a participant under the Stock Option Plan. The
Stock Plan Committee has the sole and complete authority to determine the
participants to whom awards shall be granted under the Stock Option Plan.
 
                                       50


<PAGE>

     Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the Stock Option Plan authorizes the grant of awards to
participants with respect to a maximum of        shares of the Company's Common
Stock ('Shares'), which awards may be made in the form of (i) nonqualified stock
options; (ii) stock options intended to qualify as incentive stock options under
section 422 of the Code; (iii) stock appreciation rights; (iv) restricted stock
and/or restricted stock units; (v) performance awards and (vi) other stock based
awards; provided that the maximum number of shares that may be awarded to any
employee in any calendar year in the form of stock options and stock
appreciation rights may not exceed          . If, after the effective date of
the Stock Option Plan, any Shares covered by an award granted under the Stock
Option Plan, or to which such an award relates, are forfeited, or if an award
has expired, terminated or been canceled for any reason whatsoever (other than
by reason of exercise or vesting), then the Shares covered by such award shall
again be, or shall become, Shares with respect to which awards may be granted
under the Stock Option Plan.
 
     Awards of options, stock appreciation rights, restricted stock units,
performance awards and other stock based awards granted under the Stock Option
Plan shall be subject to such terms, including exercise price, circumstances of
forfeiture and conditions and timing of exercise (if applicable), as may be
determined by the Stock Plan Committee. Stock options that are intended to
qualify as incentive stock options will be subject to terms and conditions that
comply with such rules as may be prescribed by section 422 of the Code. Payment
in respect of the exercise of an option granted under the Stock Option Plan may
be made in cash, or its equivalent, or (i) by exchanging Shares owned by the
optionee which are not the subject of any pledge or other security interest and
which have been owned by such optionee for at least six months) or (ii) through
delivery of irrevocable instructions to a broker to deliver promptly to the
Company an amount equal to the aggregate exercise price, or by a combination of
the foregoing, provided that the combined value of all cash and cash equivalents
and the fair market value of such Shares so tendered to the Company as of the
date of such tender is at least equal to the aggregate exercise price of the
option.
 
     The Board of Directors of the Company may amend, alter, suspend,
discontinue, or terminate the Stock Option Plan or any portion thereof at any
time; provided that no such amendment, alteration, suspension, discontinuation
or termination shall be made without stockholder approval if such approval is
necessary to comply with any tax or regulatory requirement and provided further
that no such amendment may materially and adversely affect any participant in
the Stock Option Plan without such participant's consent.
 
     Anticipated Awards.  Prior to the date of the Offering, it is expected that
grants of stock options under the Stock Option Plan will be made to certain
officers of the Company (including all of the Company's executive officers).
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     During the fiscal year ended December 31, 1995, the Company had no
Compensation Committee. Decisions regarding compensation for 1995 were made by
the Company's senior management with the advice of Mr. Duval. Following

completion of the Offering, compensation decisions will be made by the
Compensation Committee and the Stock Plan Committee.
 
                                       51


<PAGE>

                              CERTAIN TRANSACTIONS
 
TRANSACTIONS WITH PRINCIPAL STOCKHOLDERS.
 
     Prior to the Offering, the Principal Stockholders owned all of the
Company's outstanding Common Stock. Upon the completion of the Offering, the
Principal Stockholders will beneficially own approximately    % of the Company's
outstanding Common Stock (approximately    % if the Underwriters' over-allotment
option is exercised in full). By virtue of the Stockholders Agreement, SIMA will
be able to control the business, policies and affairs of the Company, including
the election of directors and major corporate transactions. SIMA is beneficially
owned by members of the Duval family and certain related parties. Edouard Duval,
a director of the Company, is a Directeur General of SIMA and has a minority
equity interest in SIMA. See 'Principal and Selling Stockholders.'
 
     The Company and the Principal Stockholders have from time to time entered
into various business transactions and agreements, and the Company and the
Principal Stockholders may from time to time enter into additional transactions
and agreements in the future. See Note 10 in the Financial Statements of the
Company included elsewhere in this Prospectus. It is possible that conflicts of
interest could arise in the future. The following is a summary of the material
agreements and transactions between the Company and the Principal Stockholders.
 
  Technology Exchange Agreement
 
     Upon completion of the Offering, the Company and SIMA will enter into a
technology exchange agreement (the 'Technology Exchange Agreement'). During the
term of the Technology Exchange Agreement, subject to certain exceptions, SIMA
and the Company are required, to the best of their ability and subject to
government controls and other limitations imposed by pre-existing agreements
with third parties, to furnish all technical information pertaining to the
manufacture of high temperature alloys and other alloys and materials, as may be
needed and requested by the other to further develop and diversify its
respective business. Under the agreement, SIMA and the Company will periodically
provide technical and manufacturing persons to consult and advise each other.
The Technology Exchange Agreement may be terminated by either party upon 30
days' advance written notice to the other party.
 
     In 1996, the Company paid $300,000 to SIMA pursuant to a previously
terminated technology assistance agreement.
 
  Managerial Assistance Agreement
 
     Upon completion of the Offering, the Company and SIMA will also enter into
a managerial assistance agreement (the 'Managerial Assistance Agreement'). The
Managerial Assistance Agreement provides that SIMA will provide the Company with

information and advice regarding the management of its existing business and the
expansion of the Company's business into new products and markets. The Company
will (i) compensate SIMA for managerial assistance at a rate of $2,500 per work
day for executive level management persons, a rate of $1,300 per work day for
senior management persons and at a rate of $1,000 per working day for middle
management persons and (ii) reimburse SIMA for telecommunication charges, travel
costs and subsistence while traveling, to the extent that such expenses are
reasonable and for the benefit of the Company. The Managerial Assistance
Agreement may be terminated by either party upon 30 days' advance written notice
to the other party.
 
  Registration Rights
 
     Under a registration rights agreement (the 'Registration Rights Agreement')
among the Company and the Principal Stockholders, the Company has granted the
Principal Stockholders the right to require, subject to the terms and conditions
set forth therein, the Company to register shares of Common Stock held by the
Principal Stockholders (the 'Registrable Securities') for sale in accordance
with their intended method of disposition thereof (a 'demand registration'). The
holders of a majority of the Registrable Securities may request one demand
registration per year. In addition, so long as any Principal Stockholder
continues to hold at least 5% of the outstanding Common Stock, such Principal
Stockholder shall also have the right to request one demand registration. The
Principal Stockholders may not require more than one demand registration each
year.
 
                                       52

<PAGE>

Additionally, the Company has granted to each Principal Stockholder the right,
subject to certain exceptions, to participate in registrations of Common Stock
initiated by the Company on its own behalf or on behalf of its stockholders (a
'piggy-back registration'). The Company is required to pay expenses (other than
underwriting discounts and commissions) incurred by the Principal Stockholders
in connection with the demand and piggy-back registrations. Subject to certain
limitations specified in the Registration Rights Agreement, the Principal
Stockholders' registration rights are assignable to third parties. The
Registration Rights Agreement contains indemnification and contribution
provisions by the Company for the benefit of the Principal Stockholders and
their respective permitted assigns and their related persons. Each Principal
Stockholder's rights under the Registration Rights Agreement will terminate if
such Principal Stockholder ceases to own at least 5% of the outstanding Common
Stock. The Registration Statement of which this Prospectus is a part constitutes
a piggy-back registration for purposes of the Registration Rights Agreement and
AMI and LWH have requested that        shares of Common Stock be included in the
Offering. As a result, the Company expects to incur approximately $       of
expenses in connection with the Offering and will indemnify the Selling
Stockholders for certain liabilities, including liabilities under the Securities
Act.
 
  Subordinated Notes
 
     In 1992 and 1993, the Company borrowed funds from SIMA and LWH under the

Subordinated Notes. The outstanding amount of the Subordinated Notes was $8.5
million at each of December 31, 1993, 1994 and 1995. The Subordinated Notes
mature on demand and bear interest at a rate equal to LIBOR plus 1.5%. The
Subordinated Notes are subordinate to the Company's obligations under the Credit
Agreement. Accrued interest on the Subordinated Notes totaled approximately
$472,000, $937,000 and $1.59 million at December 31, 1993, 1994 and 1995,
respectively. The weighted average interest rate on the Subordinated Notes at
December 31, 1995 was 7.47%. The Subordinated Notes are expected to be fully
repaid prior to the consummation of the Offering.
 
  Lines of Credit
 
     From December 1994 to October 1996, SIMA provided the Company with a $6
million line of credit. During 1995 and 1996, the Company borrowed and repaid
various amounts under the line of credit. The maximum amounts outstanding were
$2.0 million and $2.5 million in 1995 and 1996, respectively. Interest was paid
at a rate of LIBOR plus 2.25%. In 1995 and 1996, the Company paid $37,418 and
$76,932 in interest under the line of credit. The line of credit terminated upon
establishment of the Cash Flow Support Agreement described below and all
outstanding amounts under the line of credit were repaid in October 1996.
 
     Under the Cash Flow Support Agreement, dated as of October 18, 1996,
between SIMA and the Company in favor of Credit Lyonnais, New York branch (the
'Cash Flow Support Agreement'), SIMA agreed to make loans of up to $6 million to
the Company in the event of certain financial and payment defaults under the
Credit Agreement. Amounts borrowed under the agreement bear interest at a rate
set by SIMA based on market rates and are payable upon demand. Amounts borrowed
under the Cash Flow Support Agreement are subordinated to the Company's
obligations under the Credit Agreement. No amounts are currently outstanding
under the Cash Flow Support Agreement. The Company and SIMA intend to negotiate
termination of the Cash Flow Support Agreement upon completion of the Offering.
 
  Affiliate Sales
 
     During 1993, 1994 and 1995, the Company sold superalloy and special alloy
products to affiliates of SIMA. The net revenues from such sales were $7.9
million, $9.3 million and $15.0 million in 1993, 1994 and 1995, respectively.
Management believes that the terms of such sales are no less favorable to the
Company than the terms that it would have obtained in transactions with
unaffiliated third parties. The Company may sell superalloy and special alloy
products to affiliates of SIMA in the future.
 
                                       53

<PAGE>

  Raw materials
 
     In the past, from time to time, the Company and affiliates of SIMA have
sold raw materials to each other. Management believes that the terms of such
sales are no less favorable to the Company than the terms that it would have
obtained in transactions with unaffiliated third parties. The Company and SIMA
expect that such sales may occur in the future.
 

  Insurance
 
     The Company and Aubert & Duval share common insurance coverage for
aircraft/space liabilities, contingent liabilities and excess liabilities
greater than $10 million but less than $50 million. The Company is charged a pro
rata premium based on the net sales of the covered parties. The Company was
charged $162,000, $160,000 and $206,000 for such premiums in 1993, 1994 and
1995, respectively. The Company believes that the insurance coverage provided to
it is more favorable than the insurance coverage that it could obtain as a
stand-alone entity. The Company intends to continue this common insurance
coverage following completion of the Offering.
 
CONSULTING ARRANGEMENTS
 
     The Company has regularly engaged Robert D. Halverstadt, Chairman of the
Board of Directors, and Applied Innovative Management Engineering ('AIME'), a
sole proprietorship of Mr. Halverstadt, as consultants. In 1993, 1994 and 1995,
Mr. Halverstadt and AIME received approximately $145,000, $143,000 and $174,000,
respectively, in fees and expense reimbursements. The Company intends to
continue to employ Mr. Halverstadt and AIME as consultants in the future.
 
     The Company also has consulting agreements with Mr. Treuille for financial
services advice and Mr. Decker for technical advice. During 1993, 1994 and 1995,
the fees paid and expenses reimbursed under each of these consulting agreements
did not exceed $60,000.
 
FUTURE TRANSACTIONS
 
     Following completion of the Offering, it will be the policy of the Company
to engage in transactions with affiliated parties on terms which, when taken
together with all transactions between the Company and such affiliate, are, in
the opinion of the Company, no less favorable to the Company than those that
could be obtained from unaffiliated third parties.
 
                                       54

<PAGE>

                       PRINCIPAL AND SELLING STOCKHOLDERS
 
     The following table sets forth certain information with respect to the
beneficial ownership of shares of Common Stock by (i) all persons known by the
Company to own beneficially more than 5% of the Common Stock, (ii) each of the
Company's directors, (iii) each of the Named Executive Officers and (iv) by all
directors and executive officers as a group. Unless otherwise noted, the address
of each person listed is in care of the Company, 4317 Middlesettlement Road, New
Hartford, New York 13413.
<TABLE>
<CAPTION>
                                                        SHARES OF COMMON STOCK
                                                          BENEFICIALLY OWNED
                                                          PRIOR TO OFFERING
                                           ------------------------------------------------         NUMBER
NAME AND ADDRESS OF                                NUMBER                  PERCENTAGE             OF SHARES

BENEFICIAL OWNER                                 OF SHARES                  OF CLASS           BEING OFFERED(1)
----------------------------------------   ----------------------    ----------------------    ----------------
<S>                                        <C>                       <C>                       <C>
Societe Industrielle de Materiaux
  Avances(2)(3).........................          5,952,000                   48.0%                 --
LWH Holding S.A.(3)(4)..................          3,968,000                   32.0%
Advanced Materials Investments Holding,
  S.A.(3)(5)............................          2,480,000                   20.0%
Donald R. Muzyka........................          --                      --                        --
Robert F. Dropkin.......................          --                      --                        --
Gernant E. Maurer.......................          --                      --                        --
Thomas E. MacDonald.....................          --                      --                        --
James D. Page...........................          --                      --                        --
Robert D. Halverstadt...................          --                      --                        --
Edouard Duval(2)........................          --                      --                        --
Antoine Treuille........................          --                      --                        --
Raymond F. Decker.......................          --                      --                        --
Donald C. Darling.......................          --                      --                        --
All Directors and Executive Officers as
  a group (10 persons)..................          --                      --                        --
 
<CAPTION>
                                                       SHARES OF COMMON STOCK
                                                         BENEFICIALLY OWNED
                                                           AFTER OFFERING
                                          ------------------------------------------------
NAME AND ADDRESS OF                               NUMBER                  PERCENTAGE
BENEFICIAL OWNER                                OF SHARES                  OF CLASS
----------------------------------------  ----------------------    ----------------------
<S>                                        <C>                      <C>
Societe Industrielle de Materiaux
  Avances(2)(3).........................         5,952,000
LWH Holding S.A.(3)(4)..................
Advanced Materials Investments Holding,
  S.A.(3)(5)............................
Donald R. Muzyka........................         --                      --
Robert F. Dropkin.......................         --                      --
Gernant E. Maurer.......................         --                      --
Thomas E. MacDonald.....................         --                      --
James D. Page...........................         --                      --
Robert D. Halverstadt...................         --                      --
Edouard Duval(2)........................         --                      --
Antoine Treuille........................         --                      --
Raymond F. Decker.......................         --                      --
Donald C. Darling.......................         --                      --
All Directors and Executive Officers as
  a group (10 persons)..................         --                      --
</TABLE>
 
------------------
(1) Without giving effect to the Underwriters' over-allotment option. The
    Selling Stockholders have granted the Underwriters an option, exercisable
    within 30 days of the date of this Prospectus, to purchase up to an
    aggregate of          additional shares of Common Stock for the purpose of

    covering over-allotments, if any, as follows:          ,          shares and
             ,          shares.
 
(2) SIMA's address is 41, Rue de Villiers, BP120, 92202 Neuilly Sur Seine,
    Cedex, France. Mr. Duval's address is in care of SIMA. The common equity of
    SIMA is beneficially owned by members of the Duval family and certain
    related parties. Edouard Duval, a director of the Company, is a Directeur
    General of SIMA and has a minority equity interest in SIMA.
 
(3) The Company, SIMA, AMI and LWH have entered into the Stockholders Agreement,
    which provides for certain voting rights, nominating rights and transfer
    restrictions. See '--Stockholders Agreement.'
 
(4) LWH's address is Boulevard Royal 3, L-2449 Luxembourg. Carlos Luis Landin
    beneficially owns 100% of the capital stock of LWH and may be deemed to
    beneficially own the shares of Common Stock owned of record by LWH after the
    Offering. Mr. Landin's address is in care of LWH.
 
(5) AMI's address is 3A Rue Guillaume Kroll, L-1882 Luxembourg. Jean Chauveau
    beneficially owns 100% of the capital stock of AMI and may be deemed to
    beneficially own the shares of Common Stock owned of record by AMI after the
    Offering. Mr. Chauveau's address is in care of AMI.
 
STOCKHOLDERS AGREEMENT
 
     Upon completion of the Offering, the Principal Stockholders will
beneficially own approximately   % of the outstanding Common Stock (  % of the
Underwriters' over-allotment option is exercised in full). Under the
Stockholders Agreement, the Principal Stockholders have agreed to vote all
shares of Common Stock beneficially owned by them (the 'Principal Shareholder
Shares') unanimously as a group in accordance with the instructions
 
                                       55

<PAGE>

of the holders of a majority of the Principal Stockholder Shares. In addition,
as indicated in the table below, the Company has agreed to nominate a number of
persons for election as directors who are designated by the holders of a
majority of the Principal Stockholders Shares (based on the aggregate Common
Stock ownership percentage of the Principal Stockholders).
 
<TABLE>
<CAPTION>
      PERCENTAGE OF DIRECTOR
      NOMINEES DESIGNATED BY             OUTSTANDING COMMON STOCK
    PRINCIPAL STOCKHOLDERS(1)         HELD BY PRINCIPAL STOCKHOLDERS
----------------------------------  ----------------------------------
<S>                                 <C>
                56%                            35% or more
                42%                   27% or more but less than 35%
                28%                   19% or more but less than 27%
                14%                   10% or more but less than 19%
                 0%                           Less than 10%

</TABLE>
 
------------------
(1) Percentage rounded up to the nearest whole number.
 
Based on the present board size of seven, the Principal Stockholders will be
able to designate at least four nominees for election to the Board of Directors
of the Company upon completion of the Offering. The Company has agreed to use
its best efforts to cause the election of such nominees. If a director who is
designated by the Principal Stockholders resigns, is removed or dies, the
Company has agreed to elect another director designated by the Principal
Stockholders to the extent that the Principal Stockholders are entitled to
designate such director under the formula described above. The Stockholders
Agreement also contains transfer restrictions relating to the Principal
Stockholder Shares. A Principal Stockholder may not sell its shares of Common
Stock unless it first offers such shares to one or both of the other Principal
Stockholders at a price equal to the lower of (i) the proposed sale price and
(ii) the average sales price of the Common Stock on the Nasdaq National Market
over the 20 trading day period prior to the exercise date of the right of first
refusal. Under the Stockholders Agreement, each of the Principal Stockholders
and the Company has agreed not to hire any employee of any other party to the
Stockholder's Agreement without the prior consent of such other party. The
Stockholders Agreement will terminate when the Principal Stockholders
beneficially own, in the aggregate, less than 10% of the outstanding Common
Stock of the Company.
 
                                       56

<PAGE>

                          DESCRIPTION OF CAPITAL STOCK
 
     The following summary information is qualified in its entirety by the
provisions of the Company's Certificate of Incorporation and By-laws, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. See 'Available Information.'
 
     Upon completion of the Offering, the authorized capital stock of the
Company will consist of 35,000,000 shares of Common Stock, par value $.01 per
share, and 10,000,000 shares of preferred stock, par value $.01 per share
('Preferred Stock'). Currently there are 12,400,000 shares of Common Stock
outstanding held by three persons and there are no shares of Preferred Stock
outstanding.
 
     Prior to the Offering, there has been no public market for the Common
Stock. See 'Risk Factors--Absence of Prior Public Market.'
 
COMMON STOCK
 
     Voting Rights.  The Company's Certificate of Incorporation provides that
holders of Common Stock are entitled to one vote per share held of record on all
matters submitted to a vote of stockholders. The stockholders are not entitled
to vote cumulatively for the election of directors. The Company and the
Principal Stockholders have entered into the Stockholders Agreement which

governs the voting of the Common Stock held by the Principal Stockholders. See
'Principal and Selling Stockholders--Stockholders Agreement.'
 
     Dividends.  Subject to the rights of any Preferred Stock which may be
outstanding, each holder of Common Stock on the applicable record date is
entitled to receive dividends if, as and when declared by the Board of
Directors. Under Delaware law, a corporation may declare and pay dividends out
of surplus, or if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or the preceding year. No dividends may be
declared, however, if the capital of the corporation has been diminished by
depreciation in the value of its property, losses or otherwise to an amount less
than the aggregate amount of capital represented by any issued and outstanding
stock having a preference on the distribution of assets. See 'Dividend Policy.'
 
     Other Rights.  Stockholders of the Company have no preemptive or other
rights to subscribe for additional shares. Subject to any rights of the holders
of any Preferred Stock that may be issued subsequent to the Offering, all
holders of Common Stock are entitled to share equally on a share-for-share basis
in any assets available for distribution to stockholders on liquidation,
dissolution or winding up of the Company. No shares of Common Stock are subject
to conversion, redemption or a sinking fund. All outstanding shares of Common
Stock are, and the Common Stock to be outstanding upon completion of the
Offering will be, fully paid and nonassessable.
 
     Transfer Agent and Registrar.  The Transfer Agent and Registrar for the
Common Stock is American Stock Transfer & Trust Company.
 
PREFERRED STOCK
 
     The Company's Board of Directors (or a committee thereof) is authorized to
issue, without further authorization from stockholders, up to 10,000,000 shares
of Preferred Stock in one or more series and to determine, at the time of
creating each series, the distinctive designation of, and the number of shares
in, the series, its dividend rate, the number of votes, if any, for each share
of such series, the price and terms on which such shares may be redeemed, the
terms of any applicable sinking fund, the amount payable upon liquidation,
dissolution or winding up, the conversion rights, if any, and such other rights,
preferences and priorities of such series as the Board of Directors (or a
committee thereof) may be permitted to fix under the laws of the State of
Delaware as in effect at the time such series is created. The issuance of
Preferred Stock could adversely affect the voting power of the holders of Common
Stock and could have the effect of delaying, deferring or preventing a change in
control of the Company. The Company has no present plan to issue any shares of
Preferred Stock.
 
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
 
     Certain provisions of the Certificate of Incorporation and By-laws of the
Company summarized below may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider in its best interest, including an attempt that might result in
the receipt of a premium over the market price for the shares held by
stockholders.
 

     Classified Board of Directors.  The Certificate of Incorporation and the
By-laws provide for the Board of Directors to be divided into three classes of
directors serving staggered three-year terms. Notwithstanding the foregoing, the
term of any director who is also an officer of the Company shall automatically
end if he or she ceases to be an employee of the Company. As a result,
approximately one-third of the Board of Directors will be
 
                                       57

<PAGE>

elected each year. Moreover, under DGCL, in the case of a corporation having a
classified board, stockholders may remove a director only for cause. This
provision, when coupled with the provision of the By-laws authorizing only the
Board of Directors to fill vacant directorships, will preclude a stockholder
from removing incumbent directors without cause and simultaneously gaining
control of the Board of Directors by filling the vacancies created by such
removal with its own nominees.
 
     Special Meeting of Stockholders.  The Certificate of Incorporation and the
By-laws provide that special meetings of stockholders of the Company may be
called only by the Board of Directors, the Chairman of the Board of Directors or
the President. This provision will make it more difficult for stockholders to
take actions opposed by the Board of Directors.
 
     Stockholder Action by Written Consent.  The Certificate of Incorporation
and the By-laws provide that no action required or permitted to be taken at any
annual or special meeting of the stockholders of the Company may be taken
without a meeting, and the power of stockholders of the Company to consent in
writing, without a meeting, to the taking of any action is specifically denied.
 
     Advance Notice Requirements for Stockholder Proposals and Director
Nominations.  The By-laws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual or special meeting of stockholders, must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Company not less than 30 days nor more than 60 days' prior to the meeting;
provided, however, that in the event that less than 40 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be received no later than the close
of business on the tenth day following the day on which such notice of the date
of the meeting was mailed or such public discourse was made. The By-laws also
specify certain requirements for a stockholder's notice to be in proper written
form. These provisions may preclude some stockholders from bringing matters
before the stockholders at an annual or special meeting or from making
nominations for directors at an annual or special meeting.
 
LIMITATION ON DIRECTORS' LIABILITY
 
     The Company has included in its Certificate of Incorporation provisions to
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages from a
director resulting from breaches of fiduciary duty (including breaches resulting

from grossly negligent behavior). This provision does not eliminate liability
for breaches of the duty of loyalty, acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, violations
under Section 174 of the DGCL concerning the unlawful payment of dividends or
stock redemptions or repurchases or for any transaction from which the director
derived an improper personal benefit. However, these provisions will not limit
the liability of the Company's Directors under Federal securities laws. The
Company believes that these provisions are necessary to attract and retain
qualified persons as directors and officers.
 
SECTION 203 OF THE DELAWARE LAW
 
     Section 203 of the DGCL prohibits publicly held Delaware corporations from
engaging in a 'business combination' with an 'interested stockholder' for a
period of three years following the date of the transaction in which the person
or entity became an interested stockholder, unless (i) prior to such date,
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder is approved by the Board of
Directors of the corporation, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the outstanding voting stock of the
corporation (excluding for this purpose certain shares owned by persons who are
directors and also officers of the corporation and by certain employee benefit
plans) or (iii) on or after such date the business combination is approved by
the Board of Directors of the corporation and by the affirmative vote (and not
by written consent) of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. For the purposes of Section 203, a
'business combination' is broadly defined to include mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. An 'interested stockholder' is a person who, together with
affiliates and associates, owns (or within the immediately preceding three years
did own) 15% or more of the corporation's voting stock.
 
                                       58


<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Upon completion of the Offering, the Company will have outstanding
shares of Common Stock. Of these shares, the shares sold in the Offering will be
freely tradeable without restriction or further registration under the
Securities Act, except for any shares purchased or acquired by an 'affiliate' of
the Company (as that term is defined under the rules and regulations of the
Securities Act), which shares will be subject to the resale limitations of Rule
144. The remaining            outstanding shares of Common Stock were issued to
the Principal Stockholders in connection with the Merger and are 'restricted
securities' as that term is defined in Rule 144 that may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including the exemptions contained under Rule 144.
 
     In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted securities for at least two years,
including a person who may be deemed to be an affiliate of the Company, is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock of
the Company (       shares immediately after the Offering) or (ii) the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which a notice of sale is filed with the Commission. A
person (or persons whose shares are aggregated) who is not at any time during
the 90 days preceding a sale an 'affiliate' is entitled to sell such shares
under Rule 144, commencing three years after the date such shares were acquired
from the Company or an affiliate of the Company, without regard to the volume
limitations described above. Sales under Rule 144 are subject to certain other
restrictions relating to the manner of sale, notice and the availability of
current public information about the Company.
 
     Subject to the lockup arrangements described below,            shares of
Common Stock owned by the Principal Stockholders will be eligible for sale in
the public market subject to the volume and other limitations described above
because the Principal Stockholders will be deemed to have held such shares for
more than two years. Each of the Company and the Principal Stockholders has
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated, it will not (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock (provided that such shares
or securities are either currently owned by such person or are thereafter
acquired from the Company) or (ii) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences of ownership of
such shares of Common Stock, whether any such transaction described in clause
(i) or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise, for a period of 180 days after the date hereof
subject to certain exceptions. See 'Underwriters.'
 
     Pursuant to the Registration Rights Agreement, the Company will grant the
Principal Stockholders, subject to certain exceptions, demand and piggy-back

registration rights. See 'Certain Transactions--Transactions with Principal
Stockholders--Registration Rights.'
 
     In addition to the outstanding shares of Common Stock described above, an
aggregate of        shares of Common Stock have been reserved for issuance to
employees, officers and Directors upon exercise of stock options, of which stock
options for        shares of Common Stock will be granted effective on the date
of the Offering. The Company anticipates filing a registration statement on Form
S-8 under the Securities Act to register all of the shares of Common Stock
issuable or reserved for future issuance under the Stock Option Plan. Thus,
shares purchased upon exercise of options granted pursuant to the Stock Option
Plan generally will be available for resale in the public market to the extent
the lock-up arrangements with Morgan Stanley & Co. Incorporated have expired,
except that any such shares issued to affiliates are subject to the volume
limitations and certain other restrictions of Rule 144. See 'Management--Stock
Option Plan.'
 
     Prior to the Offering, there has been no public market for the Common Stock
of the Company and no prediction can be made as to the effect, if any, that the
sale or availability for sale of shares of Common Stock will have on the market
price of the Common Stock. Nevertheless, sales of significant amounts of such
shares in the public market, or the perception that such sales may occur, could
adversely affect the market price of Common Stock and could impair the Company's
future ability to raise capital through an offering of its equity securities.
 
                                       59

<PAGE>

                 CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
                  TO NON-UNITED STATES HOLDERS OF COMMON STOCK
 
     The following is a general discussion of certain U.S. Federal income and
estate tax consequences of the ownership and disposition of Common Stock by a
'Non-United States Holder.' A 'Non-United States Holder' is a person or entity
that, for U.S. Federal income tax purposes, is (i) a non-resident alien
individual, (ii) a foreign corporation or partnership, or (iii) a non-resident
fiduciary of a foreign estate or trust.
 
     This discussion is based on the Internal Revenue Code of 1986, as amended
(the 'Code'), and administrative interpretations as of the date hereof, all of
which may be changed either retroactively or prospectively. This discussion does
not address all aspects of U.S. Federal income and estate taxation that may be
relevant to Non-United States Holders in light of their particular circumstances
and does not address any tax consequences arising under the laws of any state,
local or foreign taxing jurisdiction.
 
     Prospective holders should consult their tax advisors with respect to the
United States Federal, state, local and Non-United States income and other tax
consequences to them of holding and disposing of Common Stock.
 
DIVIDENDS
 
     Subject to the discussion below, dividends paid to a Non-United States

Holder of Common Stock generally will be subject to withholding tax at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty
unless the dividend is effectively connected with the conduct of a trade or
business within the United States, or, if an income tax treaty applies, is
attributable to a United States permanent establishment of the Non-United States
Holder and the Non-United States Holder provides the payor with proper
documentation (Form 4224). In order to claim the benefit of an applicable tax
treaty rate, a Non-United States Holder may have to file with the Company or its
dividend paying agent an exemption or reduced treaty rate certificate or letter
in accordance with the terms of such treaty. Under current United States
Treasury regulations, for purposes of determining whether tax is to be withheld
at a 30% rate or at a reduced rate as specified by an income tax treaty, the
Company ordinarily will presume that dividends paid to the address in a foreign
country are paid to a resident of such country absent knowledge that such
presumption is not warranted. However, under proposed United States Treasury
regulations which have not yet been put into effect, additional certification
requirements would apply after December 1, 1997. See '--Information Reporting
Requirements and Backup Withholding.'
 
     In the case of dividends that are effectively connected with the Non-United
States Holder's conduct of a trade or business within the United States or, if
an income tax treaty applies, is attributable to a United States permanent
establishment of the Non-United States Holder, the Non-United States Holder will
generally be subject to regular U.S. income tax in the same manner as if the
Non-United States Holder were a United States resident. A Non-United States
corporation receiving effectively connected dividends also may be subject to an
additional branch profits tax which is imposed, under certain circumstances, at
a rate of 30% (or such lower rate as may be specified by an applicable treaty)
of the Non-United States corporation's 'effectively connected earnings and
profits,' subject to certain adjustments.
 
GAIN ON DISPOSITION OF COMMON STOCK
 
     A Non-United States Holder generally will not be subject to U.S. Federal
income tax with respect to gain realized on a sale or other disposition of
Common Stock unless (i) the gain is effectively connected with a trade or
business of such Non-United States Holder in the U.S., (ii) in the case of
certain Non-United States Holders who are non-resident alien individuals and
hold the Common Stock as a capital asset, such individuals are present in the
U.S. for 183 or more days in the taxable year of the disposition and either (a)
such individuals have a 'tax home' (as defined for United States Federal income
tax purposes) in the U.S., or (b) the gain is attributable to an office or other
fixed place of business maintained by such individuals in the U.S., (iii) the
Non-United States Holder is subject to tax, pursuant to the provisions of U.S.
tax law applicable to certain U.S. expatriates whose loss of U.S. citizenship
had as one of its principal purposes the avoidance of U.S. taxes, or (iv) the
Company is or has been a 'United States real property holding corporation'
within the meaning of section 897(c)(2) of the Code and, assuming that the
Common Stock is regularly traded on an established securities market for tax
purposes, the Non-United States Holder held, directly or indirectly, at any time
within the five-year period
 
                                       60


<PAGE>

preceding such disposition more than 5% of the outstanding Common Stock. The
Company is not, and does not anticipate becoming, a United States real property
holding corporation.
 
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
 
     Under United States Treasury regulations, the Company must report annually
to the Internal Revenue Service and to each Non-United States Holder the amount
of dividends paid to such holder and the tax withheld with respect to such
dividends. These information reporting requirements apply even if withholding
was not required because the dividends were effectively connected with a trade
or business in the United States of the Non-United States Holder or withholding
was reduced or eliminated by an applicable income tax treaty. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-United States
Holder is a resident under the provisions of an applicable income tax treaty or
agreement.
 
     United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements)
generally will not apply to (i) dividends paid to Non-United States Holders that
are subject to the 30% withholding discussed above (or that are not so subject
because a tax treaty applies that reduces or eliminates such 30% withholding) or
(ii) under current law, dividends paid to a Non-United States Holder at an
address outside of the United States. However, under proposed United States
Treasury regulations, in the case of dividends paid after December 31, 1997
(December 31, 1999 in the case of dividends paid to accounts in existence on or
before the date that is 60 days after the propsed United States Treasury
regulations are published as final regulations), a Non-United States Holder
generally would be subject to backup withholding at a 31% rate, unless certain
certification procedures (or, in the case of payments made outside the United
States with respect to an offshore account, certain documentary evidence
procedures) are complied with, directly or through an intermediary.
 
     Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of Common Stock
to beneficial owners that are not 'exempt recipients' and that fail to provide
in the manner required certain indentifying information.
 
     The payment of the proceeds of the disposition of Common Stock to or
through the U.S. office of a broker is subject to information reporting unless
the disposing holder, under penalty of perjury, certifies its Non-United States
status or otherwise establishes an exemption. Generally, U.S. information
reporting and backup withholding will not apply to a payment of disposition
proceeds if the payment is made outside the U.S. through a Non-United States
office of a non-United States broker. However, information reporting
requirements (but not backup withholding) will apply to a payment of disposition
proceeds outside the U.S. if (A) the payment is made through an office outside
the U.S. of a broker that is either (i) a U.S. person, (ii) a foreign person
which derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the U.S. or (iii) a 'controlled foreign

corporation' for U.S. Federal income tax purposes and (B) the broker fails to
maintain documentary evidence that the holder is a Non-United States Holder and
that certain conditions are met, or that the holder otherwise is entitled to an
exemption.
 
     Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
 
FEDERAL ESTATE TAX
 
     An individual Non-United States Holder who is treated as the owner of or
has made certain lifetime transfers of an interest in the Common Stock will be
required to include the value thereof in his gross estate for U.S. Federal
estate tax purposes, and may be subject to U.S. Federal estate tax unless an
applicable estate tax treaty provides otherwise. Estates of non-resident aliens
are generally allowed a statutory credit which generally has the effect of
offsetting the U.S. Federal estate tax imposed on the first $60,000 of the
taxable estate.
 
                                       61

<PAGE>

                                  UNDERWRITERS
 
     Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the 'Underwriting Agreement'), the Company and the
Selling Stockholders have agreed to sell        and        shares, respectively,
of the Company's Common Stock, and the Underwriters named below, for whom Morgan
Stanley & Co. Incorporated and Salomon Brothers Inc are serving as
Representatives, have severally agreed to purchase the respective number of
shares of Common Stock set forth opposite the names of such Underwriters below:
 
<TABLE>
<CAPTION>
                                                                                               NUMBER OF
          NAME                                                                                  SHARES
--------------------------------------------------------------------------------------------   ---------
<S>                                                                                            <C>
Morgan Stanley & Co. Incorporated...........................................................
Salomon Brothers Inc .......................................................................
 
                                                                                               ---------
       Total................................................................................
                                                                                               ---------
                                                                                               ---------
</TABLE>
 
     The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their

counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the Underwriters' over-allotment option described below) if any such
shares are taken.
 
     The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the Price to Public set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $          per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $          per share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Underwriters.
 
     Application will be made for quotation of the Common Stock on the Nasdaq
National Market under the symbol 'SMCX.'
 
     At the request of the Company, the Underwriters have reserved up to
shares of Common Stock for sale at the initial public offering price to
non-executive employees and other individuals having relationships with the
Company. The number of shares available for sale to the general public will be
reduced to the extent such individuals purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the Underwriters
to the general public on the same basis as the other shares offered hereby.
Reserved shares purchased by such individuals will, except as restricted by
applicable securities laws, be available for resale following the Offering.
 
     Pursuant to the Underwriting Agreement, the Company and the Selling
Stockholders have granted to the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to        additional shares of
Common Stock at the public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The Underwriters may exercise such
option to purchase solely for the purpose of covering over-allotments, if any,
made in connection with the offering of the shares of Common Stock offered
hereby. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Common Stock as the
 
                                       62

<PAGE>

number set forth next to such Underwriter's name in the preceding table bears to
the total number of shares of Common Stock offered by the Underwriters hereby.
 
     The Company and each of the Principal Stockholders have agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated, it will
not (i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock (provided that such shares or
securities are either currently owned by such person or are thereafter acquired
from the Company) or (ii) enter into any swap or other agreement that transfers,

in whole or in part, any of the economic consequences of ownership of such
shares of Common Stock, whether any such transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise, for a period of 180 days after the date
hereof, other than (x) the sale to the Underwriters of the shares of Common
Stock offered hereby or (y) the issuance by the Company of shares of Common
Stock upon the exercise of any options granted or shares of Common Stock issued
pursuant to existing benefit plans of the Company.
 
     Each of the Underwriters has represented and, during the period of six
months after the date hereof, agreed that (a) it has not offered or sold and
will not offer or sell any shares of Common Stock in the United Kingdom except
to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purpose of
their business or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations (1995) (the 'Regulations'); (b) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the Regulations with respect to anything done by it in
relation to the shares of Common Stock offered hereby in, from or otherwise
involving the United Kingdom; and (c) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of the shares of Common Stock if that person
is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996, or is a person to whom such
document may otherwise lawfully be issued or passed on.
 
     It is possible that more than 10% of the proceeds of the Offering, not
including underwriting compensation, will be received by entities who are
National Association of Securities Dealers, Inc. (the 'NASD') members or who are
affiliated with NASD members who are participating in the Offering. Therefore,
the Offering is being conducted in accordance with NASD Conduct Rule 2710 ('Rule
2710').
 
     In compliance with Rule 2710, the initial public offering price can be no
higher than that recommended by a 'qualified independent underwriter.' Morgan
Stanley & Co. Incorporated is assuming the responsibilities of acting as
qualified independent underwriter and the initial offering price of the shares
of Common Stock offered hereby will not be higher than the initial public
offering price recommended by Morgan Stanley & Co. Incorporated. In connection
with the Offering, Morgan Stanley & Co. Incorporated in its role as 'qualified
independent underwriter' has performed due diligence investigations and reviewed
and participated in the preparation of the Registration Statement of which this
Prospectus is a part. In addition, the Underwriters may not confirm sales to any
discretionary account without the prior written approval of the customer.
 
     The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
 
PRICING OF OFFERING
 
     Prior to the Offering, there has been no public market for the shares of
Common Stock of the Company. Consequently, the initial public offering price for

the Common Stock will be determined by negotiation among the Company, the
Selling Stockholders, and the Underwriters. Among the factors to be considered
in determining the initial public offering price will be the Company's record of
operations, the Company's current financial condition and future prospects, the
experience of its management, the economics of its industry in general, the
general condition of the equity securities market and the market prices of
similar securities of companies considered comparable to the Company and such
other factors as may be deemed relevant. There can be no assurance that a
regular trading market for the shares of Common Stock will develop after the
Offering or, if developed, that a public trading market can be sustained. There
can also be no assurance that the prices at which
 
                                       63

<PAGE>

the Common Stock will sell in the public market after the Offering will not be
lower than the price at which it is issued by the Underwriters in the Offering.
 
                                 LEGAL MATTERS
 
     The validity of the Common Stock offered hereby will be passed upon for the
Company by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York. Certain
legal matters will be passed upon for the Underwriters by Shearman & Sterling,
New York, New York.
 
                                    EXPERTS
 
     The financial statements of the Company at December 31, 1995 and December
31, 1994 and for each of the three years in the period ended December 31, 1995,
appearing elsewhere in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
herein and in the Registration Statement, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
 
                                       64

<PAGE>

                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                                             PAGE
                                                                                                             ----
<S>                                                                                                          <C>
FINANCIAL STATEMENTS
Report of Independent Auditors............................................................................    F-2
Balance Sheets as of December 31, 1994 and 1995...........................................................    F-3
Statements of Operations and Retained Earnings (Accumulated Deficit) for the
  years ended December 31, 1993, 1994, and 1995...........................................................    F-4
Statements of Cash Flows for the years ended December 31, 1993, 1994, and 1995............................    F-5
Notes to Financial Statements.............................................................................    F-6
 
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets as of September 30, 1995 and 1996 (unaudited)..............................................   F-21
Statements of Operations and Retained Earnings (Accumulated Deficit) for the
  nine months ended September 30, 1995 and 1996 (unaudited)...............................................   F-22
Statements of Cash Flows for the nine months ended September 30, 1995
  and 1996 (unaudited)....................................................................................   F-23
Notes to Interim Financial Statements (unaudited).........................................................   F-24
</TABLE>
 
                                      F-1

<PAGE>
                         REPORT OF INDEPENDENT AUDITORS
 
Board of Directors
Special Metals Corporation
 
We have audited the accompanying balance sheets of Special Metals Corporation as
of December 31, 1994 and 1995, and the related statements of operations and
retained earnings (accumulated deficit) and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Special Metals Corporation at
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
 
                                          /s/ ERNST & YOUNG LLP
 
Buffalo, New York
February 14, 1996,
except for Note 19, as to which the date is
December 18, 1996
 
                                      F-2

<PAGE>
                           SPECIAL METALS CORPORATION
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                    ----------------------------
                                                                                        1994            1995
                                                                                    ------------    ------------
<S>                                                                                 <C>             <C>
                                     ASSETS
Current assets:
  Cash...........................................................................   $  1,929,258    $  2,612,797
  Accounts receivable, less allowance for doubtful accounts of $75,000 for 1994
     and $100,000 for 1995.......................................................     18,341,619      26,869,181
  Inventories....................................................................     29,101,594      39,056,340
  Prepaid expenses...............................................................        268,422         260,097
  Deferred taxes.................................................................        202,275         202,275
                                                                                    ------------    ------------
Total current assets.............................................................     49,843,168      69,000,690
 
Property, plant and equipment....................................................     35,903,364      33,559,461
Other assets.....................................................................      6,154,513       4,384,777
                                                                                    ------------    ------------
Total assets.....................................................................   $ 91,901,045    $106,944,928
                                                                                    ------------    ------------
                                                                                    ------------    ------------
 
                      LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
  Accounts payable...............................................................   $  7,031,269    $ 14,828,183
  Accrued payroll and employee benefits..........................................      6,397,866       7,671,415
  Accrued other liabilities......................................................      2,799,091       5,002,399
  Income taxes payable...........................................................         94,414         449,262
  Current portion of long-term debt..............................................      4,010,000       5,000,000
  Current obligation under capital leases........................................        223,497         270,263
                                                                                    ------------    ------------
Total current liabilities........................................................     20,556,137      33,221,522
 
Long-term debt...................................................................     45,500,000      40,810,000
Long-term obligation under capital leases........................................        965,330         776,942
Subordinated notes payable.......................................................      8,500,000       8,500,000
Other long-term liabilities......................................................      7,392,420       7,970,299
                                                                                    ------------    ------------
Total liabilities................................................................     82,913,887      91,278,763
 
Commitments and contingencies
 
Shareholder's equity:
  Common stock, $0.01 par value, 35,000,000 shares authorized, 12,400,000 shares
     issued and outstanding......................................................        124,000         124,000
  Paid-in surplus................................................................     25,876,000      25,876,000
  Pension adjustment.............................................................       (198,572)       (724,884)

  Accumulated deficit............................................................    (16,814,270)     (9,608,951)
                                                                                    ------------    ------------
Total shareholder's equity.......................................................      8,987,158      15,666,165
                                                                                    ------------    ------------
Total liabilities and shareholder's equity.......................................   $ 91,901,045    $106,944,928
                                                                                    ------------    ------------
                                                                                    ------------    ------------
</TABLE>
 
                            See accompanying notes.
 
                                      F-3
<PAGE>
                           SPECIAL METALS CORPORATION
      STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                    ------------------------------------------------
                                                                             1993                      1994
                                                                    ----------------------    ----------------------
<S>                                                                 <C>                       <C>
Net sales........................................................        $      80,412,286         $      95,509,977
Cost of goods sold...............................................               84,304,390                93,625,339
                                                                    ----------------------    ----------------------
                                                                                (3,892,104)                1,884,638
 
Selling, general and administrative expenses.....................                4,140,806                 4,313,101
                                                                    ----------------------    ----------------------
Operating income (loss)..........................................               (8,032,910)               (2,428,463)
 
Interest expense.................................................                3,911,856                 4,361,058
                                                                    ----------------------    ----------------------
 
Income (loss) before income taxes................................              (11,944,766)               (6,789,521)
 
Income tax expense...............................................                  196,740                    99,177
                                                                    ----------------------    ----------------------
Net income (loss)................................................              (12,141,506)               (6,888,698)
 
Retained earnings (accumulated deficit)..........................
  Beginning of year..............................................                2,215,934                (9,925,572)
                                                                    ----------------------    ----------------------
  End of year....................................................        $      (9,925,572)        $     (16,814,270)
                                                                    ----------------------    ----------------------
                                                                    ----------------------    ----------------------
 
Net income (loss) per share......................................        $           (0.98)        $           (0.56)
                                                                    ----------------------    ----------------------
                                                                    ----------------------    ----------------------
 
Weighted average shares outstanding..............................               12,400,000                12,400,000
                                                                    ----------------------    ----------------------
                                                                    ----------------------    ----------------------
 
<CAPTION>
 
                                                                            1995
                                                                   ----------------------
<S>                                                                 <C>
Net sales........................................................       $     132,244,734
Cost of goods sold...............................................             114,751,837
                                                                   ----------------------
                                                                               17,492,897
Selling, general and administrative expenses.....................               5,207,191
                                                                   ----------------------
Operating income (loss)..........................................              12,285,706
Interest expense.................................................               4,726,797
                                                                   ----------------------
Income (loss) before income taxes................................               7,558,909
Income tax expense...............................................                 353,590
                                                                   ----------------------
Net income (loss)................................................               7,205,319
Retained earnings (accumulated deficit)..........................
  Beginning of year..............................................             (16,814,270)
                                                                   ----------------------
  End of year....................................................       $      (9,608,951)
                                                                   ----------------------
                                                                   ----------------------
Net income (loss) per share......................................       $            0.58
                                                                   ----------------------
                                                                   ----------------------
Weighted average shares outstanding..............................              12,400,000
                                                                   ----------------------
                                                                   ----------------------
</TABLE>
 
                            See accompanying notes.
 
                                      F-4

<PAGE>
                           SPECIAL METALS CORPORATION
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                       ------------------------------------------
                                                                           1993           1994           1995
                                                                       ------------    -----------    -----------
<S>                                                                    <C>             <C>            <C>
OPERATING ACTIVITIES
Net income (loss)...................................................   $(12,141,506)   $(6,888,698)   $ 7,205,319
Adjustments to reconcile net income (loss) to net cash provided by
  operating activities:
  Depreciation and amortization.....................................      6,560,922      7,199,934      6,281,165
  Provision for doubtful accounts...................................         75,000       (125,000)        25,000
  Loss on sale of fixed assets......................................             --         17,684          5,336
  Provision for deferred income taxes...............................      1,254,157             --             --
  Change in assets and liabilities:
     Accounts receivable............................................      2,748,919     (5,345,300)    (8,552,562)
     Inventories....................................................      5,299,075      3,084,324     (9,954,746)
     Prepaid expenses...............................................        (14,818)        31,033          8,325
     Income taxes...................................................       (540,590)     1,261,326        354,848
     Accounts payable...............................................     (2,428,569)       288,535      7,796,914
     Accrued payroll and employee benefits..........................       (522,446)       866,627      1,433,266
     Accrued other liabilities......................................       (378,184)      (182,193)     2,203,308
     Other long-term liabilities....................................        283,289      1,095,600         51,567
                                                                       ------------    -----------    -----------
Net cash provided by operating activities...........................        195,249      1,303,872      6,857,740
 
INVESTING ACTIVITIES
Capital expenditures................................................       (792,660)      (975,389)    (1,963,297)
Proceeds from sale of fixed assets..................................             --          6,296          2,500
                                                                       ------------    -----------    -----------
Net cash used in investing activities...............................       (792,660)      (969,093)    (1,960,797)
 
FINANCING ACTIVITIES
Net proceeds from (repayment of) revolving credit facilities........     (2,000,000)     1,500,000        300,000
Proceeds from subordinated notes payable............................      6,500,000             --             --
Net repayments of term loans........................................             --     (2,500,000)    (4,000,000)
Financing and other deferred costs..................................        (36,706)    (1,316,831)      (273,667)
Payments on capital lease obligations...............................       (168,382)      (205,470)      (239,737)
                                                                       ------------    -----------    -----------
Net cash provided by (used in) financing activities.................      4,294,912     (2,522,301)    (4,213,404)
                                                                       ------------    -----------    -----------
Net increase (decrease) in cash.....................................      3,697,501     (2,187,522)       683,539
Cash at beginning of year...........................................        419,279      4,116,780      1,929,258
                                                                       ------------    -----------    -----------
Cash at end of year.................................................   $  4,116,780    $ 1,929,258    $ 2,612,797
                                                                       ------------    -----------    -----------
                                                                       ------------    -----------    -----------
</TABLE>
 

                            See accompanying notes.
 
                                      F-5
<PAGE>
                           SPECIAL METALS CORPORATION
                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1993, 1994 AND 1995
 
1. ACCOUNTING POLICIES
 
  Description of Business
 
     Special Metals Corporation (the 'Company'), a manufacturer of superalloys,
is a wholly-owned subsidiary of Special Metals and Technologies Corporation
('SMTC'), a holding company established for that sole purpose. SMTC has no other
operations other than its investment in the Company.
 
     The Company sells its products world-wide, with a substantial portion being
sold to customers in the aerospace industry. The Company performs periodic
credit evaluations of its customers' financial condition and generally does not
require collateral. An allowance for doubtful accounts is maintained at a level
which management believes is sufficient to cover potential credit losses.
 
  Revenue Recognition
 
     The Company recognizes revenue at the time of shipment to the customer.
 
  Inventories
 
     Inventories are valued at the lower of cost or market. Cost is determined
on the FIFO (first-in, first-out) method of accounting.
 
  Property, Plant and Equipment
 
     Property, plant and equipment are stated at cost and depreciated on the
straight-line method based on the estimated useful lives of the assets. The cost
of property, plant and equipment held under capital leases is equal to the lower
of the net present value of the minimum lease payments, using interest rates
appropriate at the inception of the lease, or the fair value of the leased
property, plant and equipment at the inception of the lease. Depreciation
expense includes the amortization of property, plant and equipment recorded
under capital leases.
 
  Patents
 
     Patents are stated at cost and are being amortized on the straight-line
method over their expected useful lives which average 8.5 years.
 
  Excess of Purchase Price Over Net Assets Acquired
 
     The excess of purchase price over net assets acquired is being amortized on
the straight-line method over 40 years. The Company periodically reviews this
asset to assess recoverability. Impairments would be recognized in operating
results if a permanent reduction in value were to occur.

 
  Impairment of Long-Lived Assets
 
     In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, 'Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of' ('SFAS 121').
Under the provisions of this accounting standard, asset carrying amounts are
required to be reviewed whenever events or circumstances indicate that such
carrying amounts may not be recoverable. When considered impaired, the
accounting standard requires that the carrying amount of the asset be reduced,
by a charge to income, to its current fair value. With regards to assets to be
disposed of, the accounting standard requires such assets to be reported at the
lower of carrying amount or fair value less cost to sell. The Company adopted
SFAS 121 effective January 1, 1996. The adoption of the accounting standard had
no impact on the Company's results of operations or financial position.
 
                                      F-6
<PAGE>
                           SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
1. ACCOUNTING POLICIES--(CONTINUED)
  Taxes on Income
 
     Effective January 1, 1993, the Company adopted Statement of Accounting
Standards No. 109, 'Accounting for Income Taxes,' which requires a change from
the deferred method of accounting for income taxes to the asset and liability
method. The effect of this change was not significant to the 1993 results of
operations. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of temporary differences by applying enacted
statutory rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.
The effect of a change in tax rates is recognized in the period that includes
the enactment date.
 
  Post-Retirement Benefits
 
     Certain employees may be eligible for post-retirement health care and life
insurance benefits upon retirement from the Company. As more fully disclosed in
Note 9, effective January 1, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 106, 'Employer's Accounting for
Postretirement Benefits Other Than Pensions.'
 
  Environmental Liabilities
 
     Environmental expenditures that relate to current or future revenues are
expensed or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations and that are not allocable to current or
future earnings are expensed. Liabilities for environmental costs are recognized
when environmental assessments or clean-ups are probable and the associated
costs can be reasonably estimated.
 

  Research and Development Costs
 
     Product research and development costs are charged to expense as incurred.
Research and development expense for the years ended December 31, 1993, 1994 and
1995 was $1,118,000, $1,288,000 and $1,313,000, respectively.
 
  Purchase Contracts
 
     The Company periodically uses commodity swap agreements to hedge against
price fluctuations of raw materials, principally nickel, used in the
manufacturing process. The swap agreements are intended to hedge long-term sales
agreements of the Company. Under the swap agreements, the Company receives or
makes payments based on the difference between a specified price and the market
price of the material. Unrealized gains and losses on the swap agreements are
deferred and are recognized in income, in conjunction with the transaction being
hedged.
 
  Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
                                      F-7

<PAGE>
                           SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
2. INVENTORIES
 
     Inventories consist of the following:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                        --------------------------
                                                           1994           1995
                                                        -----------    -----------
<S>                                                     <C>            <C>
Raw materials and supplies...........................   $ 6,505,769    $10,511,647
Work-in-process......................................    22,595,825     28,544,693
                                                        -----------    -----------
                                                        $29,101,594    $39,056,340
                                                        -----------    -----------
                                                        -----------    -----------
</TABLE>
 
3. PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment consist of the following:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                        --------------------------
                                                           1994           1995
                                                        -----------    -----------
<S>                                                     <C>            <C>
Land.................................................   $ 1,271,716    $ 1,271,716
Buildings and improvements...........................    17,791,251     17,848,497
Machinery and equipment..............................    45,428,197     47,353,650
Furniture and fixtures...............................       356,562        356,562
Construction-in-progress.............................       642,964        699,527
                                                        -----------    -----------
                                                         65,490,690     67,529,952
Less accumulated depreciation........................    29,587,326     33,970,491
                                                        -----------    -----------
                                                        $35,903,364    $33,559,461
                                                        -----------    -----------
                                                        -----------    -----------
</TABLE>
 
     Depreciation expense for the years ended December 31, 1993, 1994 and 1995
was $4,913,000, $5,649,000 and $4,397,000, respectively.
 
                                      F-8

<PAGE>
                           SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
4. OTHER ASSETS
 
     Other long-term assets consist of the following:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                        --------------------------
                                                           1994           1995
                                                        -----------    -----------
<S>                                                     <C>            <C>
Patents..............................................   $ 8,472,000    $ 8,472,000
Excess of purchase price over net assets acquired....     3,911,950      3,911,950
Agreement not to compete.............................        64,250         64,250
Deferred financing costs.............................     1,372,847      1,289,976
Deferred lease costs.................................        75,843         75,843
                                                        -----------    -----------
                                                         13,896,890     13,814,019
Less accumulated amortization........................     7,995,888      9,523,036
                                                        -----------    -----------
                                                          5,901,002      4,290,983
Intangible pension asset.............................       196,280         36,563
Other................................................        57,231         57,231
                                                        -----------    -----------
                                                        $ 6,154,513    $ 4,384,777
                                                        -----------    -----------
                                                        -----------    -----------
</TABLE>
 
5. LONG-TERM DEBT
 
     Long-term debt outstanding was as follows:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                        --------------------------
                                                           1994           1995
                                                        -----------    -----------
<S>                                                     <C>            <C>
Credit Agreement:
  Term loans.........................................   $22,000,000    $18,000,000
  Revolving line of credit...........................    27,500,000     27,800,000
Other................................................        10,000         10,000
                                                        -----------    -----------
                                                         49,510,000     45,810,000
Current portion......................................     4,010,000      5,000,000
                                                        -----------    -----------

                                                        $45,500,000    $40,810,000
                                                        -----------    -----------
                                                        -----------    -----------
</TABLE>
 
     The Company has entered into an Amended and Restated Credit Agreement dated
December 15, 1994 which provides for the following credit facility:
 
          o Class A term loan of $19,000,000 (less $7,000,000 subsequently
            repaid), payable in increasing quarterly installments ranging from
            $1,250,000 to $1,750,000 through 1998 on the dates specified in the
            agreement;
 
          o Class B aggregate term loans of $6,000,000, payable January 2, 1998;
 
          o Revolving credit facility of up to $30,000,000, subject to a
            borrowing base computation which is described below, payable January
            2, 1998.
 
     All advances under the Credit Agreement bear interest at either a base
rate, as defined, plus a margin of 3/4%, or a rate equal to the eurodollar rate,
which equates to the New York interbank offered rate, plus a margin of 2 1/4%.
Interest is payable periodically in arrears. An annual commitment fee of 1/4% on
the unused available working capital commitment is due quarterly.
 
     The weighted-average interest rate on the obligations outstanding at
December 31, 1995 was 8.07%.
 
                                      F-9
<PAGE>
                           SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
5. LONG-TERM DEBT--(CONTINUED)
     Under the revolving credit facility, the Company may borrow, repay, and
re-borrow from time to time, the lesser of (a) $30,000,000 or (b) the Company's
borrowing base. The Credit Agreement defines the Company's borrowing base as the
sum of 85% of eligible accounts receivable and 60% of eligible inventory. The
amount the Company may borrow against the revolving credit facility is reduced
by the aggregate amount of any letters of credit issued for the account of the
Company.
 
     Mandatory prepayments are required in the amount of the net proceeds from
certain transactions not in the ordinary course of business (including the sale
of significant operating assets, the sale or issuance of capital stock, or
employer reversions from employee benefit plan terminations). These mandatory
prepayments will be applied first to the Class A term loans, then to the Class B
term loans, and finally as a permanent reduction of the revolving credit
facility commitment. The Company may also make additional prepayments at its
option.
 
     In connection with the Company's obligations under the Credit Agreement,

the Company has granted mortgages or other security interests in substantially
all of the Company's assets now owned or hereafter acquired. The Company is also
subject to certain affirmative and negative covenants.
 
     The aggregate maturities of long-term debt are as follows:
 
<TABLE>
<CAPTION>
                                        TERM LOANS     LINE OF CREDIT     OTHER        TOTAL
                                        -----------    --------------    -------    -----------
<S>                                     <C>            <C>               <C>        <C>
1996.................................   $ 5,000,000     $         --     $    --    $ 5,000,000
1997.................................     5,250,000               --          --      5,250,000
1998.................................     7,750,000       27,800,000          --     35,550,000
2000.................................            --               --      10,000         10,000
                                        -----------    --------------    -------    -----------
                                        $18,000,000     $ 27,800,000     $10,000    $45,810,000
                                        -----------    --------------    -------    -----------
                                        -----------    --------------    -------    -----------
</TABLE>
 
6. CAPITAL LEASE OBLIGATIONS
 
     The Company entered into non-cancelable leases for certain equipment. The
leases expire in 1997 through 2000 and contain bargain purchase options. The
property held under capital leases is included in the balance sheet as follows:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                           ------------------------
                                                              1994          1995
                                                           ----------    ----------
<S>                                                        <C>           <C>
Equipment...............................................   $1,725,645    $1,823,760
Less: accumulated amortization..........................      413,614       577,361
                                                           ----------    ----------
                                                           $1,312,031    $1,246,399
                                                           ----------    ----------
                                                           ----------    ----------
</TABLE>
 
                                      F-10
<PAGE>
                           SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
6. CAPITAL LEASE OBLIGATIONS--(CONTINUED)
     Future minimum lease payments for equipment under capital leases at
December 31, 1995 is as follows:
 


<TABLE>
<S>                                                           <C>
1996........................................................  $    349,916
1997........................................................       335,414
1998........................................................       328,753
1999........................................................       190,966
2000........................................................         3,962
                                                              ------------
                                                                 1,209,011
Less: amount representing interest..........................       161,806
                                                              ------------
Present value of net minimum lease payments (including
  long-term obligations of $776,942)........................  $  1,047,205
                                                              ------------
                                                              ------------
</TABLE>
 
7. OPERATING LEASES
 
     The Company leases certain equipment under operating leases which contain
renewal options and escalation clauses in some cases. Rental expense under these
leases amounted to approximately $556,000, $525,000 and $500,000 for the years
ended December 31, 1993, 1994 and 1995, respectively. The following amounts
represent future minimum payments under operating leases with initial or
remaining noncancelable terms extending beyond one year:
 
<TABLE>
<S>                                                             <C>
1996..........................................................  $  267,868
1997..........................................................     137,510
1998..........................................................     111,414
1999..........................................................      44,256
2000..........................................................      44,256
</TABLE>
 
8. RETIREMENT PLANS
 
     The Company has several noncontributory defined benefit pension plans
covering substantially all employees of the Company. Benefits for salaried
employees are based on a percentage of career average earnings multiplied by
years of benefit service. Benefits for certain hourly employees under the plans
are based on a percentage of final average earnings multiplied by years of
benefit service. Benefits for remaining hourly employees under the plans are
based on years of service multiplied by pre-established benefit rates. The
Company's funding policy is to contribute annually at least the minimum amount
required by the Employee Retirement Income Security Act of 1974, as amended
('ERISA'). Unrecognized differences between actual experience and that assumed
and prior service costs are amortized on a straight-line basis over a period
approximating the average remaining service period for active employees.
 
                                      F-11

<PAGE>
                           SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
8. RETIREMENT PLANS--(CONTINUED)
     Net pension cost included the following:
 
<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                              -----------------------------------------
                                                                 1993           1994           1995
                                                              -----------    -----------    -----------
<S>                                                           <C>            <C>            <C>
Service cost--benefits earned during the period............   $   792,857    $   813,781    $   724,144
Interest cost on projected benefit obligation..............     2,125,898      2,288,129      2,416,313
Actual return on plan assets...............................    (2,549,375)        (6,501)    (4,636,283)
Net amortization and deferral..............................     1,014,398     (1,666,588)     2,996,976
                                                              -----------    -----------    -----------
Net periodic pension cost..................................   $ 1,383,778    $ 1,428,821    $ 1,501,150
                                                              -----------    -----------    -----------
                                                              -----------    -----------    -----------
</TABLE>
 
     The following table sets forth the Plans' funded status:
 
<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                  --------------------------
                                                                     1994           1995
                                                                  -----------    -----------
<S>                                                               <C>            <C>
Actuarial present value of accumulated benefit obligation,
  including vested benefit obligations of $25,847,000 and
  $30,022,000, respectively....................................   $26,981,600    $31,211,000
                                                                  -----------    -----------
                                                                  -----------    -----------
Projected benefit obligation...................................   $29,384,300    $31,650,000
Plan assets at fair value......................................    22,937,800     26,830,100
                                                                  -----------    -----------
Projected benefit obligation in excess of plan assets..........    (6,446,500)    (4,819,900)
Unrecognized net loss..........................................     2,033,100      2,959,400
Prior service cost (credit)....................................       644,800     (2,225,500)
Adjustment to recognize minimum pension liability..............      (394,900)      (761,000)
                                                                  -----------    -----------
Pension liability recorded in financial statements.............   $(4,163,500)   $(4,847,000)
                                                                  -----------    -----------
                                                                  -----------    -----------
</TABLE>
 
     The pension liability is recorded in the balance sheet as follows:

 
<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                     ------------------------
                                                                        1994          1995
                                                                     ----------    ----------
<S>                                                                  <C>           <C>
Accrued payroll and employee benefits.............................   $1,643,630    $1,800,900
Other long-term liabilities.......................................    2,519,870     3,046,100
                                                                     ----------    ----------
                                                                     $4,163,500    $4,847,000
                                                                     ----------    ----------
                                                                     ----------    ----------
</TABLE>
 
     The projected benefit obligation is based on a weighted-average assumed
discount rate of 8.5% at December 31, 1994 and 7.5% at December 31, 1995, and an
assumed rate of compensation increase of 4%-5% at both December 31, 1994 and
1995. The decrease in the discount rate from 8.5% to 7.5% increased the vested
benefit obligation, accumulated benefit obligation, and projected benefit
obligation by $3,100,000, $3,194,000, and $3,268,000, respectively. The
weighted-average expected long-term rate of return on plan assets used to
determine the expected return on plan assets in net periodic pension cost 
was 9%.
 
     During 1995, the benefit formula for certain hourly employees was amended.
This amendment reduced the projected benefit obligation, with a corresponding
adjustment to unrecognized prior service cost, by approximately $2,500,000.
 
     Assets of the plans are commingled in a Master Trust which invests in a
variety of investment vehicles.
 
                                      F-12
<PAGE>
                           SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
8. RETIREMENT PLANS--(CONTINUED)
     The Company also sponsors a defined contribution plan covering all salaried
employees. Participants may elect to contribute basic contributions between 1%
and 15% of base compensation. Basic contributions consist solely of elective
deferrals which may be excluded from the participant's gross income for Federal
tax purposes pursuant to Section 401(k) of the Code. A participant may also
elect to contribute additional after-tax contributions of up to 10% for each
plan year up to the annual limit on elective deferrals under the Internal
Revenue Code of 1986. The Company may, at the sole discretion of its Board of
Directors, contribute, as a matching contribution, an amount not to exceed 50%
of the participants' basic contributions up to a maximum of 4%. In addition, the
Company may, at its sole discretion, make discretionary contributions which are
allocated to participants in accordance with the Plan provisions. The Company
recorded a charge for such contributions of approximately $0, $100,000 and

$200,000 in 1993, 1994 and 1995, respectively.
 
     During 1994 the Company implemented a defined contribution plan covering
all employees covered by the collective bargaining agreement between the Company
and I.A.M.--Local Lodge #2310. Participants may elect to contribute basic
contributions between 1% and 15% of compensation. Basic contributions consist
solely of elective deferrals which may be excluded from the participant's gross
income for Federal tax purposes pursuant to Section 401(k) of the Code. A
participant may also elect to contribute additional after-tax contributions of
up to 10%. The Company may, at its sole discretion, make discretionary
contributions which are allocated to participants in accordance with the Plan
provisions. There were no Company contributions made to the plan in 1994 or
1995.
 
9. POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE BENEFITS
 
     The Company provides certain healthcare and life insurance benefits to
eligible retired employees and their spouses. Participants generally become
eligible for these benefits after achieving certain age and years of service
requirements. Employees at certain of the Company's facilities are not eligible
for postretirement healthcare and life insurance benefits. For certain hourly
employees retiring after August 1, 1989, healthcare coverage ceases after the
retiree reaches age 65. Health and life insurance benefits are provided through
insurance contracts. The health insurance plans are contributory and contain
other cost-sharing features such as deductibles, coinsurance, and lifetime
maximums. Life insurance benefits are generally a factor of final compensation
for salaried employees and are pre-defined for eligible hourly employees. The
Company's current policy is to fund these benefits on a pay-as-you-go basis.
 
     Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, 'Employers' Accounting for Postretirement Benefits
Other Than Pensions,' which requires that the estimated cost of postretirement
benefits be accrued over the period earned. Prior to 1993, the Company
recognized the costs of these benefits on the pay-as-you-go basis. The
accumulated postretirement benefit obligation at adoption was $4,681,000 and
will be recognized over 20 years.
 
                                      F-13

<PAGE>
                           SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
9. POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE BENEFITS--(CONTINUED)
     The amounts recognized in the Company's balance sheets, in other long-term
liabilities, were as follows:
 
<TABLE>
<CAPTION>
                                                                   HEALTH         LIFE
                                                                    CARE       INSURANCE       TOTAL
                                                                 ----------    ----------    ----------
<S>                                                              <C>           <C>           <C>
DECEMBER 31, 1995:
  Accumulated postretirement benefits obligation:
     Retirees.................................................   $1,450,400    $  979,400    $2,429,800
     Fully eligible active participants.......................      263,500       288,900       552,400
     Other active participants................................    1,841,200       419,400     2,260,600
                                                                 ----------    ----------    ----------
  Total accumulated postretirement benefits obligation........    3,555,100     1,687,700     5,242,800
  Unrecognized transition obligation..........................    2,787,200     1,190,800     3,978,000
  Unrecognized net (gain) loss................................      (77,300)        4,700       (72,600)
                                                                 ----------    ----------    ----------
  Accrued postretirement obligation...........................   $  845,200    $  492,200    $1,337,400
                                                                 ----------    ----------    ----------
                                                                 ----------    ----------    ----------
DECEMBER 31, 1994:
  Accumulated postretirement benefits obligation:
     Retirees.................................................   $2,116,100    $  860,300    $2,976,400
     Fully eligible active participants.......................      154,700       240,000       394,700
     Other active participants................................    1,181,900       294,500     1,476,400
                                                                 ----------    ----------    ----------
  Total accumulated postretirement benefits obligation........    3,452,700     1,394,800     4,847,500
  Unrecognized transition obligation..........................    2,951,200     1,261,000     4,212,200
  Unrecognized net (gain) loss................................      (41,300)     (261,800)     (303,100)
                                                                 ----------    ----------    ----------
  Accrued postretirement obligation...........................   $  542,800    $  395,600    $  938,400
                                                                 ----------    ----------    ----------
                                                                 ----------    ----------    ----------
</TABLE>
 
                                      F-14

<PAGE>
                           SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
9. POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE BENEFITS--(CONTINUED)
     Net periodic postretirement benefit costs included the following:
 
<TABLE>
<CAPTION>
                                                                       HEALTH       LIFE
                                                                        CARE      INSURANCE     TOTAL
                                                                      --------    ---------    --------
<S>                                                                   <C>         <C>          <C>
1995:
  Service cost--benefits earned during the period..................   $ 51,400    $  14,200    $ 65,600
  Interest cost....................................................    264,300      121,200     385,500
  Amortization.....................................................    150,800       58,200     209,000
                                                                      --------    ---------    --------
  Net periodic postretirement benefit cost.........................   $466,500    $ 193,600    $660,100
                                                                      --------    ---------    --------
                                                                      --------    ---------    --------
1994:
  Service cost--benefits earned during the period..................   $ 60,500    $  25,700    $ 86,200
  Interest cost....................................................    259,800      106,400     366,200
  Amortization.....................................................    164,000       61,800     225,800
                                                                      --------    ---------    --------
  Net periodic postretirement benefit cost.........................   $484,300    $ 193,900    $678,200
                                                                      --------    ---------    --------
                                                                      --------    ---------    --------
1993:
  Service cost--benefits earned during the period..................   $ 54,800    $  22,400    $ 77,200
  Interest cost....................................................    252,200      112,100     364,300
  Amortization.....................................................    164,000       70,200     234,200
                                                                      --------    ---------    --------
  Net periodic postretirement benefit cost.........................   $471,000    $ 204,700    $675,700
                                                                      --------    ---------    --------
                                                                      --------    ---------    --------
</TABLE>
 
     For measuring the postretirement benefit obligation, an 11% annual rate of
increase in the net medical claims cost was assumed. The rate was assumed to
decrease gradually to 5.5% in 2005 and remain at that level thereafter. Retiree
contributions were assumed to increase at the same rates as the annual rate of
increase in the net medical claims cost. In addition, it was assumed that the
retirees would continue to pay for all Medicare Part B premiums. Increasing the
annual rate of increase in the net medical claims cost by one percentage point
in each year would increase the accumulated postretirement benefit obligation by
$194,000 and would increase the service cost and interest cost components of net
periodic postretirement benefit cost by $4,000 and $14,000, respectively. The
discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% in 1995 and 8.5% in 1994. The change in the discount rate
increased the accumulated postretirement benefit obligation at December 31, 1995

by approximately $417,000.
 
     The unrecognized transition obligation is being amortized on a
straight-line basis over 20 years. Unrecognized gains and losses are amortized
on a straight-line basis over the average remaining service period of active
participants.
 
10. RELATED PARTY TRANSACTIONS
 
     The Company has received advances from two of its parent company's
shareholders. The amount outstanding at December 31, 1994 and 1995 was
$8,500,000. This debt is supported by notes and is subordinate to the Company's
obligations under its Credit Agreement. In addition, the Company's senior
lenders have placed restrictions on the repayment of these amounts. As a result
of these restrictions, amounts owing to shareholders under the subordinate notes
payable have been classified as long-term. Accrued interest on these obligations
totaled $937,000 and $1,587,000 at December 31, 1994 and 1995, respectively.
These amounts are included in accrued other liabilities. The weighted average
interest rate is 5% at December 31, 1994 and 7.47% at December 31, 1995.
 
                                      F-15
<PAGE>
                           SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
10. RELATED PARTY TRANSACTIONS--(CONTINUED)
     The Company also has a $6,000,000 line of credit available from one of its
parent company's shareholders. No amounts were outstanding on this line at
December 31, 1995 and 1994.
 
     During the years ended December 31, 1993, 1994 and 1995, the Company made
sales to affiliated companies totalling $7,850,000, $9,332,000 and $15,028,000,
respectively.
 
     The Company and an affiliate have shared common insurance coverage for
aircraft and space liabilities, contingent liabilities and excess liabilities
greater than $10 million but less than $50 million. The Company is charged a pro
rata premium based on the net sales of the covered parties. The Company was
charged $162,000, $160,000, and $206,000 for the years ended December 31, 1993,
1994 and 1995.
 
11. INCOME TAXES
 
     As discussed in Note 1, in 1993 the Company adopted Statement of Accounting
Standards No. 109, 'Accounting for Income Taxes,' which requires a change from
the deferred method of accounting for income taxes to the asset and liability
method. The effect of this change was not significant to the 1993 results of
operations. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of temporary differences by applying enacted
statutory rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
The effect of a change in tax rates is recognized in the period that includes

the enactment date.
 
     Income tax expense (benefit) consists of the following:
 
<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                              -----------------------------------------
                                                                 1993           1994           1995
                                                              -----------    -----------    -----------
<S>                                                           <C>            <C>            <C>
Current:
  Federal..................................................   $(1,150,000)   $        --    $   250,000
  State....................................................        92,583         99,177        103,590
                                                              -----------    -----------    -----------
                                                               (1,057,417)        99,177        353,590
Deferred...................................................     1,254,157             --             --
                                                              -----------    -----------    -----------
                                                              $   196,740    $    99,177    $   353,590
                                                              -----------    -----------    -----------
                                                              -----------    -----------    -----------
</TABLE>
 
     Income tax expense (benefit) differs from the amount computed by applying
the statutory income tax rate as follows:
 
<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                              -----------------------------------------
                                                                 1993           1994           1995
                                                              -----------    -----------    -----------
<S>                                                           <C>            <C>            <C>
Income before income taxes at 34%..........................   $(4,128,100)   $(2,342,200)   $ 2,570,000
Permanent income tax disallowances.........................         7,100         23,800         23,000
State taxes, net of federal benefit........................        61,100         65,500         68,400
Net losses with no tax benefit and other changes in
  valuation allowance......................................     4,314,600      2,318,300             --
Benefit of net operating loss carryforwards................            --             --     (2,307,800)
Other......................................................       (57,960)        33,777            (10)
                                                              -----------    -----------    -----------
                                                              $   196,740    $    99,177    $   353,590
                                                              -----------    -----------    -----------
                                                              -----------    -----------    -----------
</TABLE>
 
                                      F-16
<PAGE>
                           SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
11. INCOME TAXES--(CONTINUED)

     The Company has approximately $3,000,000 of net operating loss
carryforwards available to offset future federal regular taxable income and
approximately $150,000 of net operating loss carryforwards available to offset
future federal alternative minimum taxable income. These carryforwards will
expire in 2008-2009.
 
     The Company was subject to the provisions of the corporate alternative
minimum tax ('AMT') in certain prior years. The AMT is imposed at a fixed
statutory rate of 20% on the Company's alternative minimum taxable income which
is determined by making statutory adjustments to the Company's regular taxable
income. The Company has AMT credit carryforwards of approximately $2,100,000
which will be available, indefinitely, to reduce future regular federal income
taxes payable in the event that regular taxes exceed the AMT.
 
     General business credits, including investment credits and research and
development credits, are accounted for using the flow-through method. The
Company has research and development credit carryforwards of approximately
$247,000 available to reduce future federal income taxes. These credits will
expire in 2002 through 2005.
 
     Deferred tax liabilities and assets are recorded in the Company's balance
sheets as follows:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                        ---------------------------
                                                            1994           1995
                                                        ------------    -----------
<S>                                                     <C>             <C>
Deferred tax liabilities
  Property, plant and equipment......................   $ (1,848,000)   $(1,190,300)
  Other long-term assets.............................       (130,800)       (26,000)
                                                        ------------    -----------
Gross deferred tax liabilities.......................     (1,978,800)    (1,216,300)
 
Deferred tax assets:
  AMT credit carryforward............................      1,894,900      2,055,600
  Federal net operating loss carryforward............      3,906,400      1,021,400
  New York State net operating loss carryforward.....        840,000        480,000
  New York State investment tax credit
     carryforward....................................      1,500,000      1,600,000
  Accrued liabilities................................      3,010,500      2,649,600
  Employee retirement plans..........................      1,683,000      1,785,600
  Inventory..........................................        376,500        256,900
  Other..............................................        302,275        317,375
                                                        ------------    -----------
                                                          13,513,575     10,166,475
  Valuation allowance................................    (11,332,500)    (8,747,900)
                                                        ------------    -----------
Net deferred tax assets..............................      2,181,075      1,418,575
                                                        ------------    -----------
Net deferred taxes...................................   $    202,275    $   202,275
                                                        ------------    -----------

                                                        ------------    -----------
</TABLE>
 
     The valuation allowance at December 31, 1993 was $8,674,500.
 
                                      F-17
<PAGE>
                           SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
12. OTHER LONG-TERM LIABILITIES
 
     Other long-term liabilities consist of the following:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                        ---------------------------
                                                            1994           1995
                                                        ------------    -----------
<S>                                                     <C>             <C>
Pension obligation...................................   $  2,519,870    $ 3,046,100
Post retirement benefits obligation..................        938,400      1,337,400
Environmental reserves...............................      2,817,437      2,965,625
Contract loss reserve................................        480,000             --
Other................................................        636,713        621,174
                                                        ------------    -----------
                                                        $  7,392,420    $ 7,970,299
                                                        ------------    -----------
                                                        ------------    -----------
</TABLE>
 
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  Commodity Swap Agreement
 
     The Company periodically uses commodity swap agreements to hedge against
price fluctuations of raw materials, principally nickel, used in the
manufacturing process. At December 31, 1995, the Company had open swap
agreements with a notional principal value of approximately $6,400,000. The fair
value of the material covered by these contracts, based on the December 31, 1995
price quoted on the London Metal Exchange, was approximately $7,000,000. At
December 31, 1995, the Company had entered into sales agreements which will
require amounts of material in excess of the amount covered by the swap
agreements.
 
  Fair Value Disclosure
 
     The carrying amounts reported in the Company's balance sheets for cash
approximate fair value. The carrying amounts reported in the Company's balance
sheets for long-term debt, including current portion, and subordinated notes
payable approximate fair value, as the underlying long-term debt instrument is

comprised of notes that are repriced on a short-term basis, and the subordinated
notes carry a variable-rate interest which is adjusted on a short-term basis.
 
14. BUSINESS SEGMENT INFORMATION
 
     The Company considers its operations to be one industry segment, specialty
metals. All significant operations are in the United States. Total export sales,
by geographic area, were as follows:
 
<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                   -----------------------------------------
                                                      1993           1994           1995
                                                   -----------    -----------    -----------
<S>                                                <C>            <C>            <C>
Europe..........................................   $18,337,200    $20,079,400    $37,105,400
Middle East.....................................     2,902,800      2,977,500      7,082,700
Other...........................................     1,257,800        952,500      2,442,100
                                                   -----------    -----------    -----------
                                                   $22,497,800    $24,009,400    $46,630,200
                                                   -----------    -----------    -----------
                                                   -----------    -----------    -----------
</TABLE>
 
15. STATEMENT OF CASH FLOW--SUPPLEMENTAL DISCLOSURES
 
     The Company's actual cash payments (receipts) for interest (net of amounts
capitalized) and income taxes were $3,023,000 and ($533,000), respectively, for
the year ended December 31, 1993, $4,435,000 and $(1,171,000), respectively, for
the year ended December 31, 1994 and $4,090,000 and ($2,000), respectively, for
the year ended December 31, 1995.
 
                                      F-18
<PAGE>
                           SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
15. STATEMENT OF CASH FLOW--SUPPLEMENTAL DISCLOSURES--(CONTINUED)
     Non-cash activities:
 
<TABLE>
<CAPTION>
                                                     1994         1995
                                                   ---------    ---------
<S>                                                <C>          <C>
Intangible pension asset........................   $(967,709)   $(159,717)
Accumulated pension adjustment..................     198,572      526,312
                                                   ---------    ---------
Accrued pension liability.......................   $(769,137)   $ 366,595
                                                   ---------    ---------
                                                   ---------    ---------

</TABLE>
 
     During 1996, the Company acquired $98,000 of fixed assets which were
directly offset by capital lease liabilities.
 
16. COMMITMENTS AND CONTINGENCIES
 
  Environmental
 
     The Company is subject to loss contingencies pursuant to various federal,
state and local environmental laws, and is currently involved in several actions
regarding the clean-up of disposal sites alleged to contain hazardous and/or
toxic wastes generated over a number of years including the following.
 
     The Company, with contribution from other parties, performed remedial
actions at a site in Clayville, New York (the 'Ludlow Landfill'), except for
adjoining property known as the 'North Gravel Pit.' The New York State
Department of Environmental Conservation ('DEC') has advised the Company that
all work performed to date is acceptable. Notwithstanding the fact that the
remediation work has been completed (except for the North Gravel Pit) the DEC
may seek a post-excavation claim for biota monitoring, which is an environmental
assessment procedure. This claim is not anticipated to be material. The Company
is also responsible for operation and maintenance costs for a period of 30
years. The costs for this are estimated to be approximately $150,000 per year in
years one and two, and approximately $90,000 in the remaining years. The total
estimated costs of approximately $2.8 million have been discounted at an annual
rate of 4% in the accompanying financial statements.The Company may also be
required to perform contingent post-closure activities. It is not possible to
determine which, if any, of the contingent activities the Company will need to
perform. Contamination has also been discovered at the North Gravel Pit site,
and a study is currently underway to determine the extent of the contamination
and to select an appropriate remedial alternative. This study is expected to be
completed in the second half of 1997. It is not possible to provide a reasonable
estimate as to the cost of any remedial work which will be required in the North
Gravel Pit until the study is complete and a remedial alternative is determined.
Based upon preliminary information, the Company estimates the cost will be at
least $500,000 and the Company has established a reserve in this amount. The 
Company has reserved a total of approximately $2.3 million with respect to the
Ludlow Landfill and North Gravel Pit.
 
     The Company is also involved in a site in Utica, New York which is 
alleged to be contaminated. In the mid 1980s, the owners/operators of Universal
Waste in Utica, New York (the 'Universal Waste Site') were cited by the DEC in a
formal enforcement proceeding for cleanup of the site which was allegedly
contaminated. The owner of the Universal Waste Site requested by motion that the
Company be named as an indispensable party to that proceeding. The DEC, however,
took the position that the Company should not be named as an indispensable
party. The Company believes that at least four other potentially responsible
parties have been identified with respect to the contamination at the site. A
consent order has been executed obligating the site operator to conduct a
preliminary site assessment on a portion of the property.

The preliminary site assessment is underway. The DEC is also conducting a
separate preliminary site assessment. The Company is presently not involved in
investigating the alleged contamination. Based upon the limited information
available to its environmental engineers, the Company has established a reserve
of $575,000.
 
                                      F-19
<PAGE>
                           SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
16. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
However, because of the preliminary nature of the investigation, it is not
possible, at this time, to provide a reasonable estimate as to the ultimate cost
of any investigative or remedial work which will be required, or the Company's
share, if any, of such costs.
 
     The Company is on notice of, and involved in, certain other environmental 
matters which have been settled or are at various stages of discussion,
negotiation or settlement which the Company does not believe to be material.

     Although the Company believes that it is in substantial compliance with
applicable requirements of environmental laws, there can be no assurance that
some, or all, of the risks noted previously will not result in liabilities that
are material to the Company's business, results of operations, financial
positions, or cash flows.
 
  Other
 
     From time to time, the Company is involved in legal proceedings relating to
claims arising out of its operations in the normal course of business. The
Company does not believe that it is a party to any proceedings at the present
time that could have a material adverse effect on the business, financial
condition, results of operations or cash flows of the Company.
 
17. MAJOR CUSTOMERS
 
     For the year ended December 31, 1993, sales made to the Company's two
largest customers represented approximately 12% each, of the Company's total
sales. For the year ended December 31, 1994, sales made to the Company's two
largest customers represented approximately 22% and 13%, respectively, of the
Company's total sales. For the year ended December 31, 1995, sales made to the
Company's three largest customers represented approximately 17%, 11% and 10%,
respectively, of the Company's total sales. No other customers, in any year,
represented over 10% of the Company's total sales.
 
     At December 31, 1994, accounts receivable from two customers represented
approximately 39% of total accounts receivable. At December 31, 1995, accounts
receivable from three customers represented approximately 43% of total accounts
receivable. No other customers accounted for over 10% of the Company's total
accounts receivable at December 31, 1994 and 1995.
 
18. EQUITY APPRECIATION RIGHTS PLAN
 
     The Company has an Equity Appreciation Rights Plan ('Rights Plan') which
provides for the grant of rights to receive cash payments based on the

appreciation of the book value of the Company, as defined ('Rights'). Rights may
generally be exercised from the fifth anniversary of the date of grant through
the tenth anniversary of the date of grant, or earlier in the event of a change
in control, termination without cause, retirement, death or disability. Rights
are forfeited in the event the holder is terminated by the Company for cause, as
defined. Each Right is based on the total book value of the Company, divided by
10,000,000. At December 31, 1994 and 1995, 50,000 Rights were outstanding, of
which 10,000 were currently exercisable. As of December 31, 1995, no material
amounts had accrued under the Rights Plan.
 
19. SUBSEQUENT EVENTS
 
     On December 18, 1996, the Company's Board of Directors authorized a merger
of SMTC and the Company, with the Company being the surviving corporation (the
'Merger'). In the Merger, each holder of common stock of SMTC will receive
12,400 shares of the Company's common stock for each share of SMTC common stock
and all shares of the Company's common stock outstanding prior to the Merger
will be cancelled. The Board's authorization was made in anticipation of, and
is subject to, an initial public offering of the Company's common stock, which
is anticipated to take place in the first quarter of 1997.
 
     All share and per-share amounts in the accompanying financial statements
have been retroactively adjusted to reflect the Merger.
 
                                      F-20

<PAGE>
                           SPECIAL METALS CORPORATION
                                 BALANCE SHEETS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                           SEPTEMBER 30,
                                                                                    ----------------------------
                                                                                        1995            1996
                                                                                    ------------    ------------
<S>                                                                                 <C>             <C>
                                     ASSETS
Current assets:
  Cash...........................................................................   $  1,242,538    $  1,067,728
  Accounts receivable, less allowance for doubtful accounts of $61,000
     for 1995 and $50,000 for 1996...............................................     21,702,238      29,019,445
  Inventories....................................................................     42,767,200      46,474,297
  Prepaid expenses...............................................................        457,444         460,331
  Deferred taxes.................................................................        202,275       3,700,000
                                                                                    ------------    ------------
Total current assets.............................................................     66,371,695      80,721,801
Property, plant and equipment....................................................     33,932,250      32,925,432
Deferred taxes...................................................................             --       2,546,000
Other assets.....................................................................      5,072,214       3,783,147
                                                                                    ------------    ------------
Total assets.....................................................................   $105,376,159    $119,976,380
                                                                                    ------------    ------------
                                                                                    ------------    ------------
 
                      LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
  Accounts payable...............................................................   $ 15,166,326    $ 12,908,555
  Accrued payroll and employee benefits..........................................      7,604,003       8,118,532
  Accrued other liabilities......................................................      5,591,571       4,752,010
  Income taxes payable...........................................................        339,984       1,074,659
  Current portion of long-term debt..............................................      4,760,000       6,500,000
  Current obligation under capital leases........................................        257,750         272,484
                                                                                    ------------    ------------
Total current liabilities........................................................     33,719,634      33,626,240
Long-term debt...................................................................     41,050,000      35,560,000
Long-term obligation under capital leases........................................        813,596         592,779
Subordinated notes payable.......................................................      8,500,000       9,500,000
Other long-term liabilities......................................................      7,311,420       8,895,549
                                                                                    ------------    ------------
Total liabilities................................................................     91,394,650      88,174,568
Commitments and contingencies
Shareholder's equity:
  Common stock, $0.01 par value, 35,000,000 shares authorized, 12,400,000 shares
     issued and outstanding......................................................        124,000         124,000
  Paid-in surplus................................................................     25,876,000      25,876,000
  Pension adjustment.............................................................       (198,573)       (478,885)
  Retained earnings (accumulated deficit)........................................    (11,819,918)      6,280,697
                                                                                    ------------    ------------

Total shareholder's equity.......................................................     13,981,509      31,801,812
                                                                                    ------------    ------------
Total liabilities and shareholder's equity.......................................   $105,376,159    $119,976,380
                                                                                    ------------    ------------
                                                                                    ------------    ------------
</TABLE>
 
                            See accompanying notes.
 
                                      F-21
<PAGE>
                           SPECIAL METALS CORPORATION
      STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                         NINE MONTHS ENDED
                                                                                           SEPTEMBER 30,
                                                                                    ----------------------------
                                                                                        1995            1996
                                                                                    ------------    ------------
<S>                                                                                 <C>             <C>
Net sales........................................................................   $ 92,565,989    $120,540,377
Cost of goods sold...............................................................     80,369,758      99,733,176
                                                                                    ------------    ------------
                                                                                      12,196,231      20,807,201
Selling, general and administrative expenses.....................................      3,384,259       3,722,578
                                                                                    ------------    ------------
Operating income.................................................................      8,811,972      17,084,623
Interest expense.................................................................      3,572,408       3,096,210
                                                                                    ------------    ------------
Income before income taxes.......................................................      5,239,564      13,988,413
Income tax expense (benefit).....................................................        245,212      (1,901,235)
                                                                                    ------------    ------------
Net income.......................................................................      4,994,352      15,889,648
Retained earnings (accumulated deficit)
  Beginning of period............................................................    (16,814,270)     (9,608,951)
                                                                                    ------------    ------------
  End of period..................................................................   $(11,819,918)   $  6,280,697
                                                                                    ------------    ------------
                                                                                    ------------    ------------
Net income per share.............................................................   $       0.40    $       1.28
                                                                                    ------------    ------------
                                                                                    ------------    ------------
Weighted average shares outstanding..............................................     12,400,000      12,400,000
                                                                                    ------------    ------------
                                                                                    ------------    ------------
</TABLE>
 
                            See accompanying notes.
 
                                      F-22

<PAGE>
                           SPECIAL METALS CORPORATION
                            STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                        NINE MONTHS ENDED
                                                                                          SEPTEMBER 30,
                                                                                  ------------------------------
                                                                                      1995              1996
                                                                                  ------------      ------------
<S>                                                                               <C>               <C>
OPERATING ACTIVITIES
Net income.....................................................................   $  4,994,352      $ 15,889,648
Adjustments to reconcile net income to net cash provided by operating
  activities:
  Depreciation and amortization................................................      4,594,456         3,212,338
  Provision for doubtful accounts..............................................        (13,961)          (49,555)
  Loss on sale of fixed assets.................................................          5,336                --
  Provision for deferred income taxes..........................................             --        (5,797,725)
  Change in assets and liabilities:
     Accounts receivable.......................................................     (3,346,658)       (2,100,709)
     Inventories...............................................................    (13,665,606)       (7,417,957)
     Prepaid expenses..........................................................       (189,022)         (200,234)
     Income taxes..............................................................        245,570           625,397
     Accounts payable..........................................................      8,135,057        (1,919,628)
     Accrued payroll and employee benefits.....................................      1,206,137           447,117
     Accrued other liabilities.................................................      2,792,480          (250,389)
     Other long-term liabilities...............................................        (81,000)          925,250
                                                                                  ------------      ------------
Net cash provided by operating activities......................................      4,677,141         3,363,553
 
INVESTING ACTIVITIES
Capital expenditures...........................................................     (1,228,126)       (1,877,311)
Proceeds from sale of fixed assets.............................................          2,500                --
                                                                                  ------------      ------------
Net cash used in investing activities..........................................     (1,225,626)       (1,877,311)
 
FINANCING ACTIVITIES
Net repayment of revolving credit facilities...................................       (700,000)               --
Proceeds from subordinated notes payable.......................................             --         1,000,000
Net repayments of term loans...................................................     (3,000,000)       (3,750,000)
Financing and other deferred costs.............................................       (222,639)          (50,540)
Payments on capital lease obligations..........................................       (215,596)         (230,771)
                                                                                  ------------      ------------
Net cash provided by financing activities......................................     (4,138,235)       (3,031,311)
                                                                                  ------------      ------------
Net decrease in cash...........................................................       (686,720)       (1,545,069)
Cash at beginning of year......................................................      1,929,258         2,612,797
                                                                                  ------------      ------------
Cash at end of year............................................................   $  1,242,538      $  1,067,728
                                                                                  ------------      ------------
                                                                                  ------------      ------------

</TABLE>
 
                            See accompanying notes.
 
                                      F-23
<PAGE>
                           SPECIAL METALS CORPORATION
                     NOTES TO INTERIM FINANCIAL STATEMENTS
                                  (UNAUDITED)
                          SEPTEMBER 30, 1995 AND 1996
 
NOTE 1.
 
     The unaudited financial information furnished herein reflects all
adjustments, which in the opinion of management are of a normal recurring
nature, to fairly state the Company's financial position and results from
operations for the periods presented. This information should be read in
conjunction with the Company's audited financial statements for the year ended
December 31, 1995.
 
     The results of operations for the nine-month period ended September 30,
1996 are not necessarily indicative of the results to be expected for the entire
year ended December 31, 1996.
 
NOTE 2.
 
     Inventories consist of the following:
 
<TABLE>
<CAPTION>
                                                                         SEPTEMBER 30,
                                                                  ----------------------------
                                                                      1995            1996
                                                                  ------------    ------------
<S>                                                               <C>             <C>
Raw materials and supplies.....................................   $ 10,261,677    $ 13,216,466
Work-in-process................................................     32,505,523      33,257,831
                                                                  ------------    ------------
                                                                  $ 42,767,200    $ 46,474,297
                                                                  ------------    ------------
                                                                  ------------    ------------
</TABLE>
 
NOTE 3.
 
Environmental
 
     The Company is subject to loss contingencies pursuant to various federal,
state and local environmental laws, and is currently involved in several actions
regarding the clean-up of disposal sites alleged to contain hazardous and/or
toxic wastes generated over a number of years including the following.
 
     The Company, with contributions from other parties, performed remedial
actions at a site in Clayville, New York (the 'Ludlow Landfill'), except for

adjoining property known as the 'North Gravel Pit.' The New York State
Department of Environmental Conservation ('DEC') has advised the Company that
all work performed to date is acceptable. Notwithstanding the fact that the
remediation work has been completed (except for the North Gravel Pit) the DEC
may seek a post-excavation claim for biota monitoring, which is an environmental
assesment procedure. This claim is not anticipated to be material. The Company
is also responsible for operation and maintenance costs for a period of 30
years. The costs for this are estimated to be approximately $150,000 per year in
years one and two, and approximately $90,000 in the remaining years. The total
estimated costs of approximately $2.8 million have been discounted at an annual
rate of 4% in the accompanying financial statements. The Company may also be
required to perform contingent post-closure activities. It is not possible to
determine which, if any, of the contingent activities the Company will need to
perform. Contamination has also been discovered at the North Gravel Pit site,
and a study is currently underway to determine the extent of the contamination
and to select an appropriate remedial alternative. This study is expected to be
completed in the second half of 1997. It is not possible to provide a reasonable
estimate as to the cost of any remedial work which will be required in the North
Gravel Pit until the study is complete and a remedial alternative is determined.
Based upon preliminary information, the Company estimates the cost will be at
least $1.0 million and the Company has established a reserve in this amount. 
The Company has reserved a total of approximately $2.8 million with respect to
the Ludlow Landfill and North Gravel Pit.
 
                                      F-24
<PAGE>
     The Company is also involved in a site in Utica, New York (the 'Universal
Waste Site') which is alleged to be contaminated. In the mid 1980s, the
owners/operators of Universal Waste in Utica, New York were cited by the DEC in
a formal enforcement proceeding for cleanup of the site which was allegedly
contaminated. The owner of the Universal Waste Site requested by motion that the
Company be named as an indispensable party to that proceeding. The DEC, however,
took the position that the Company should not be named as an indispensable
party. The Company believes that at least four other potentially responsible
parties have been identified with respect to the contamination at the site. A
consent order has been executed obligating the site operator to conduct a
preliminary site assessment on a portion of the property. The preliminary site
assessment is underway. The DEC is also conducting a separate preliminary site
assessment. The Company is presently not involved in investigating the alleged
contamination. Based upon the limited information available to its environmental
engineers, the Company has established a reserve of $575,000. However, because
of the preliminary nature of the investigation, it is not possible, at this
time, to provide a reasonable estimate as to the ultimate cost of any
investigative or remedial work which will be required, or the Company's share,
if any, of such costs.
 
     The Company is on notice of, and involved in, certain other
environmental matters which have been settled or are at various stages of
discussion, negotiation or settlement which the Company does not believe to be
material.

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

 
Other
 
     From time to time, the Company is involved in legal proceedings relating to
claims arising out of its operations in the normal course of business. The
Company does not believe that it is a party to any proceedings at the present
time that could have a material adverse effect on the business, financial
condition, results of operations or cash flows of the Company.
 
NOTE 4.
 
     Income tax expense for the nine months ended September 30, 1995 differs
from the amount which would be expected by applying the combined statutory
income tax rates due to utilization of previously unrecognized net operating
loss and other tax carryforwards. Income tax expense for the nine months ended
September 30, 1996 differs from the amount which would be expected by applying
the combined statutory income tax rates due to utilization of previously
unrecognized net operating loss and other tax carryforwards, and due to the
recognition of previously unrecognized deferred income tax assets of $5,800,000.
 
NOTE 5.
 
     On October 18, 1996, the Company entered into a Credit Agreement (the
'Credit Agreement') and refinanced all amounts owing under the Amended and
Restated Credit Agreement dated December 15, 1994. The Credit Agreement provides
for the following credit facility:
 
          o Term loan of $20,000,000, payable in annual installments of
            $4,000,000 beginning October 17, 1997;
 
          o Revolving credit facility of up to $40,000,000, subject to a
            borrowing base computation which is described below, payable October
            17, 2001.
 
     All advances under the Credit Agreement bear interest at a base rate, as
defined, or a rate equal to the eurodollar rate, which equates to the New York
interbank offered rate, plus a margin of 1.25%, or a rate equal to the London
interbank offered rate, plus a margin of 1.25%. Interest is payable periodically
in arrears. An annual commitment fee of 0.25% on the unused available revolving
credit commitment is due quarterly.
 
     Under the revolving credit facility, the Company may borrow, repay, and
re-borrow from time to time, the lesser of (a) $40,000,000 or (b) the Company's
borrowing base. The Credit Agreement defines the Company's borrowing base as the
sum of 85% of eligible accounts receivable and 60% of eligible inventory. The
amount the Company may borrow against the working capital loans is reduced by
the aggregate amount of any letters of credit issued for the account of the
Company.
 
     The Company may prepay amounts owing under the Credit Agreement at its
option at any time.
 
                                      F-25
<PAGE>

     In connection with the Company's obligations under the Credit Agreement,
the Company has granted security interests in the Company's accounts receivable,
inventory and general intangibles now owned or hereafter acquired. The Company
is also subject to certain affirmative and negative covenants.
 
NOTE 6.
 
     On December 18, 1996, the Company's Board of Directors authorized a merger
of SMTC and the Company, with the Company being the surviving corporation (the
'Merger'). In the Merger, each holder of common stock of SMTC will receive
12,400 shares of the Company's common stock for each share of SMTC common stock
and all shares of the Company's common stock outstanding prior to the Merger
will be cancelled. The Board's authorization was made in anticipation of, and
is subject to, an initial public offering of the Company's common stock, which
is anticipated to take place in the first quarter of 1997.
 
     All share and per-share amounts in the accompanying financial statements
have been retroactively adjusted to reflect the Merger.
 
                                      F-26

<PAGE>

                           SPECIAL METALS CORPORATION


<PAGE>
                                    PART II
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
     The following table sets forth the various expenses payable in connection
with the offering of the shares being registered hereby, other than underwriting
discounts and commissions. All the amounts shown are estimates, except the
Securities and Exchange Commission registration fee and the NASD filing fee. All
of such expenses are being borne by the Company.
 
<TABLE>
<S>                                                                                            <C>
SEC registration fee........................................................................   $ 18,788
NASD filing fee.............................................................................      6,700
NASDAQ listing fee..........................................................................      *
Accounting fees and expenses................................................................      *
Legal fees and expenses.....................................................................      *
Printing and engraving expenses.............................................................      *
Registrar and transfer agent's fees.........................................................      *
Miscellaneous fees and expenses.............................................................      *
                                                                                               --------
       Total................................................................................   $  *
                                                                                               --------
                                                                                               --------
</TABLE>
 
------------------
*To be filed by amendment
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Section 102(b)(7) of the DGCL permits a provision in the certificate of
incorporation of each corporation organized thereunder, eliminating or limiting,
with certain exceptions, the personal liability of a director to the corporation
or its stockholders for monetary damages for certain breaches of fiduciary duty
as a director. The Certificate of Incorporation of the Company eliminates the
personal liability of directors to the fullest extent permitted by Delaware law.
 
     Section 145 of the DGCL ('Section 145'), in summary, empowers a Delaware
corporation, within certain limitations, to indemnify its officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement, actually and reasonably incurred by them
in connection with any suit or proceeding other than by or on behalf of the
corporation, if they acted in good faith and in a manner reasonably believed to
be in or not opposed to the best interest of the corporation, and, with respect
to a criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful.
 
     With respect to actions by or on behalf of the corporation, Section 145
permits a corporation to indemnify its officers, directors, employees and agents
against expenses (including attorneys' fees) actually and reasonably incurred in
connection with the defense or settlement of such action or suit, provided such

person meets the standard of conduct described in the preceding paragraph,
except that no indemnification is permitted in respect of any claim where such
person has been found liable to the corporation, unless the Court of Chancery or
the court in which such action or suit was brought approves such indemnification
and determines that such person is fairly and reasonably entitled to be
indemnified.
 
     Article Eight of the Certificate of Incorporation of the Company provides
for the indemnification of officers and directors and certain other parties (the
'Indemnitees') of the Company to the fullest extent permitted by law.
 
     The Underwriting Agreement provides for indemnification by the Underwriters
of the Company, its directors and officers, and persons who control the Company
within the meaning of Section 15 of the Securities Act for certain liabilities.
 
     The Registration Rights Agreement provides for indemnification of the
Company, its directors and officers, and persons who control the Company within
the meaning of Section 15 of the Securities Act for certain liabilities,
including liabilities arising thereunder.
 
                                      II-1
<PAGE>

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
     Prior to the date of the Offering, 12,400,000 shares of Common Stock were
issued to the Principal Stockholders in connection with the Merger. These
securities will be issued in reliance on the exemption from registration
contained in Section 4(2) of the Securities Act.
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
  (a) Exhibits
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER   DESCRIPTION OF DOCUMENT
------   --------------------------------------------------------------------------------------------------------
<S>      <C>
 1.1*    Form of Underwriting Agreement among the Company, the Selling Stockholders and the Underwriters.
 3.1*    Amended and Restated Certificate of Incorporation of the Company.
 3.2*    Amended and Restated By-laws of the Company.
 4.1     Credit Agreement, dated as of October 18, 1996, among the Company, Credit Lyonnais New York Branch
           ('Credit Lyonnais') and the financial institutions from time to time party thereto.
 4.2*    Amendment No. 1 to the Credit Agreement among the Company, Credit Lyonnais New York Branch and the
           financial institutions named therein.
 4.3*    Letter from the Company to the Securities and Exchange Commission agreeing to file certain debt
           instruments.
 5.1*    Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
10.1*    Form of Registration Rights Agreement among the Company, SIMA, LWH and AMI.
10.2*    Form of Amended and Restated Stockholders Agreement among the Company, SIMA, LWH and AMI.
10.3*    Form of Technology Exchange Agreement between the Company and SIMA.
10.4*    Form of Managerial Assistance Agreement between the Company and SIMA.

10.5     Cash Flow Support Agreement, dated as of October 18, 1996, between the Company and SIMA in favor of
           Credit Lyonnais New York Branch.
10.6     Subordinated Note in favor of LWH, dated October 1, 1994.
10.7     Subordinated Note in favor of SIMA, dated October 1, 1994.
10.8     Subordination Agreement, dated as of October 18, 1996 among the Company, SIMA and Credit Lyonnais.
10.09    Lease Agreement, dated as of February 1, 1994 between the Oneida County Development Agency and the Company.
10.10    Payment In Lieu of Taxes Agreement, dated as of February 1, 1994, by and between the Oneida County
           Industrial Development Agency and the Company.
10.11    Lease, dated as of November 1, 1990 between the County of Chautauqua Industrial Development Agency and the
           Company.
10.12    Payment In Lieu of Taxes Agreement, dated as of November 1, 1990 by and between the Company and the County
           of Chautauqua Industrial Development Agency.
10.13    Amended and Restated Lease, dated as of September 1, 1990 between the City of Princeton, Kentucky and the 
           Company.
10.14    Special Metals Corporation Equity Appreciation Rights Plan
10.15    Special Metals Corporation Supplemental Retirement Income Plan
10.16*   Form of Special Metals Corporation 1997 Long-Term Stock Incentive Plan, together with Form of Stock
           Option Award Agreement.
21.1     Subsidiaries of the Company.
</TABLE>
 
                                      II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER   DESCRIPTION OF DOCUMENT
------   --------------------------------------------------------------------------------------------------------
<S>      <C>
23.1     Consent of Ernst & Young LLP.
23.2*    Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).
24.1     Power of Attorney (see signature pages).
27.1     Financial Data Schedule
</TABLE>
------------------
* To be filed by amendment.
 
  (b) Financial Statement Schedules
 
     The following financial statement schedules are included herein;
 
     Schedule II--Valuation and qualifying accounts
 
     All other schedules are omitted because they are either not required, not
applicable or the required information is included in the financial statements
or notes thereto.
 
ITEM 17. UNDERTAKINGS
 
     The Company hereby undertakes to provide to the underwriters at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
 

     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to its Certificate of Incorporation, By-laws, the Underwriting
Agreement or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
 
     The Company hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities Act
     of 1933, the information omitted from the form of prospectus filed as part
     of this Registration Statement in reliance upon Rule 430A and contained in
     a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
     or 497(h) under the Securities Act shall be deemed to be a part of this
     Registration Statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
     Act of 1933, each post-effective amendment that contains a form of
     prospectus shall be deemed to be a new Registration Statement relating to
     the securities offered therein, and the offering of such securities at that
     time shall be deemed to be the initial bona fide offering thereof.
 
                                      II-3

<PAGE>
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New Hartford, State of
New York, on the 20th day of December, 1996.
 
                                          SPECIAL METALS CORPORATION

                                          By:        /s/ DONALD R. MUZYKA
                                              ----------------------------------
                                              Name: Donald R. Muzyka
                                              Title: President and Chief 
                                                       Executive Officer
 
                               POWER OF ATTORNEY
 
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Donald R. Muzyka, Robert F. Dropkin and
Donald C. Darling and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities (until revoked in writing), to
sign any and all amendments, including post-effective amendments, to this
Registration Statement, and any registration statement relating to the same
offering as this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) and the Securities Act of 1933, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or his or their
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
 
                                      II-4

<PAGE>
     Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                   NAME                                        TITLE                             DATE
------------------------------------------  -------------------------------------------   ------------------
 
<S>                                         <C>                                           <C>
        /s/ ROBERT D. HALVERSTADT           Chairman of the Board of Directors             December 20, 1996
------------------------------------------
          Robert D. Halverstadt
 
           /s/ DONALD R. MUZYKA             President, Chief Executive Officer             December 20, 1996
------------------------------------------  and Director (Principal Executive Officer)
             Donald R. Muzyka
 
          /s/ DONALD C. DARLING             Chief Financial Officer (Principal             December 20, 1996
------------------------------------------  Financial and Accounting Officer)
            Donald C. Darling               and Director
 
          /s/ ROBERT F. DROPKIN             Director                                       December 20, 1996
------------------------------------------
            Robert F. Dropkin
 
            /s/ EDOUARD DUVAL               Director                                       December 20, 1996
------------------------------------------
              Edouard Duval
 
         /s/ ANTOINE G. TREUILLE            Director                                       December 20, 1996
------------------------------------------
           Antoine G. Treuille
 
          /s/ RAYMOND F. DECKER             Director                                       December 20, 1996
------------------------------------------
            Raymond F. Decker
</TABLE>
 
                                      II-5

<PAGE>
                               INDEX TO FINANCIAL
                              STATEMENT SCHEDULES
 
<TABLE>
<CAPTION>
                                                                                                              PAGE
                                                                                                              ----
<S>                                                                                                           <C>
Report of Independent Auditors.............................................................................   S-2
Schedule II--Valuation and Qualifying Accounts.............................................................   S-3
</TABLE>
 
                                      S-1

<PAGE>
                         REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors
Special Metals Corporation
 
We have audited the balance sheets of Special Metals Corporation as of December
31, 1994 and 1995, and the related statements of operations and retained
earnings (accumulated deficit) and cash flows for each of the three years in the
period ended December 31, 1995, and have issued our report thereon dated
February 14, 1996 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 16(b) of
this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
 
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
 
                                          /s/ ERNST & YOUNG LLP
 
Buffalo, New York
February 14, 1996
 
                                      S-2

<PAGE>
                                                                     SCHEDULE II
 
                       VALUATION AND QUALIFYING ACCOUNTS
                           SPECIAL METALS CORPORATION
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                            ADDITIONS
                                                                   ---------------------------
                                                     BALANCE AT                     CHARGED TO                  BALANCE AT
                                                     BEGINNING      CHARGED TO        OTHER                       END OF
DESCRIPTION                                          OF PERIOD        EXPENSE        ACCOUNTS     DEDUCTIONS      PERIOD
--------------------------------------------------   ----------    -------------    ----------    ----------    ----------
<S>                                                  <C>           <C>              <C>           <C>           <C>
Year ended December 31, 1995:
  Deducted from asset accounts:
     Allowance for doubtful accounts..............     $   75          $  41           $             $ 16(a)      $  100
     Allowance for obsolescence...................      1,377            143                          551(b)         969
                                                     ----------       ------        ----------    ----------    ----------
       Total......................................     $1,452          $ 184           $  0          $567         $1,069
                                                     ----------       ------        ----------    ----------    ----------
                                                     ----------       ------        ----------    ----------    ----------
 
Year ended December 31, 1994:
  Deducted from asset accounts:
     Allowance for doubtful accounts..............     $  200          $ (61)          $             $ 64(a)      $   75
     Allowance for obsolescence...................      1,620            282                          525(b)       1,377
                                                     ----------       ------        ----------    ----------    ----------
       Total......................................     $1,820          $ 221           $  0          $589         $1,452
                                                     ----------       ------        ----------    ----------    ----------
                                                     ----------       ------        ----------    ----------    ----------
 
Year ended December 31, 1993:
  Deducted from asset accounts:
     Allowance for doubtful accounts..............     $  125          $  82           $             $  7(a)      $  200
     Allowance for obsolescence...................      1,382            561                          323(b)       1,620
                                                     ----------       ------        ----------    ----------    ----------
       Total......................................     $1,507          $ 643           $  0          $330         $1,820
                                                     ----------       ------        ----------    ----------    ----------
                                                     ----------       ------        ----------    ----------    ----------
</TABLE>
 
------------------
(a) Uncollectible accounts written off, net of recoveries.
 
(b) Obsolete inventory disposals, physical inventory adjustments, and
    adjustments for material reclaimed or ultimately sold.
 
                                      S-3

<PAGE>
                                                     REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                    EXHIBITS
                                   FILED WITH
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
 
                            ------------------------
 
                           SPECIAL METALS CORPORATION
                            ------------------------
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<PAGE>
                                 EXHIBIT INDEX 
<TABLE>
<CAPTION>
EXHIBIT                                                                                                    SEQUENTIAL
NUMBER   DESCRIPTION                                                                                        PAGE NO.
------   -----------------------------------------------------------------------------------------------   -----------
<S>      <C>   <C>                                                                                         <C>
 1.1*     --   Form of Underwriting Agreement among the Company, the Selling Stockholders and the
               Underwriters.
 3.1*     --   Amended and Restated Certificate of Incorporation of the Company.
 3.2*     --   Amended and Restated By-laws of the Company.
 4.1      --   Credit Agreement, dated as of October 18, 1996, among the Company, Credit Lyonnais New
               York Branch ('Credit Lyonnais') and the financial institutions from time to time party
               thereto.
 4.2*     --   Amendment No. 1 to the Credit Agreement among the Company, Credit Lyonnais New York
               Branch and the financial institutions named therein.
 4.3*     --   Letter from the Company to the Securities and Exchange Commission agreeing to file
               certain debt instruments.
 5.1*     --   Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
10.1*     --   Form of Registration Rights Agreement among the Company, SIMA, LWH and AMI.
10.2*     --   Form of Amended and Restated Stockholders Agreement among the Company, SIMA, LWH and AMI.
10.3*     --   Form of Technology Exchange Agreement between the Company and SIMA.
10.4*     --   Form of Managerial Assistance Agreement between the Company and SIMA.
10.5      --   Cash Flow Support Agreement, dated as of October 18, 1996, between the Company and SIMA
               in favor of Credit Lyonnais New York Branch.
10.6      --   Subordinated Note in favor of LWH, dated October 1, 1994.
10.7      --   Subordinated Note in favor of SIMA, dated October 1, 1994.
10.8      --   Subordination Agreement, dated as of October 18, 1996 among the Company, SIMA and Credit
               Lyonnais.
10.09     --   Lease Agreement, dated as of February 1, 1994 between the Oneida County Development Agency
               and the Company.
10.10     --   Payment In Lieu of Taxes Agreement, dated as of February 1, 1994, by and between the
               Oneida County Industrial Development Agency and the Company.
10.11     --   Lease, dated as of November 1, 1990 between the County of Chautauqua Industrial Development
               Agency and the Company.
10.12     --   Payment In Lieu of Taxes Agreement, dated as of November 1, 1990 by and between the Company
               and the County of Chautauqua Industrial Development Agency.
10.13     --   Amended and Restated Lease, dated as of September 1, 1990 between the City of Princeton,
               Kentucky and the Company.
10.14     --   Special Metals Corporation Equity Appreciation Rights Plan
10.15     --   Special Metals Corporation Supplemental Retirement Income Plan
10.16*    --   Form of Special Metals Corporation 1997 Long-Term Stock Incentive Plan, together with
               Form of Stock Option Award Agreement.
21.1      --   Subsidiaries of the Company.
23.1      --   Consent of Ernst & Young LLP.
23.2*     --   Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).
24.1      --   Power of Attorney (see signature pages).
27.1      --   Financial Data Schedule
</TABLE>
------------------
* To be filed by amendment.
[{"type": "S-1", "sequence": "1", "description": "REGISTRATION STATEMENT", "secsgml_size_bytes": 422151}]
{"company-data": {"conformed-name": "SPECIAL METALS CORP", "cik": "0001028965", "assigned-sic": "", "irs-number": "251445468", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-18499", "film-number": "96684428"}, "business-address": {"street1": "4312 MIDDLE SETTLEMENT ROAD", "city": "NEW HARTFORD", "state": "NY", "zip": "13413", "phone": "3157982900"}, "mail-address": {"street1": "SPECIAL METALS CORP", "street2": "4317 MIDDLE SETTLEMENT ROAD", "city": "HARTFORD", "state": "NY", "zip": "13413"}}
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 1996
 
                                                     REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933

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

                           SPECIAL METALS CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE                                    3356                                   25-1445468
    (STATE OR OTHER JURISDICTION OF             (PRIMARY STANDARD INDUSTRIAL           (IRS EMPLOYER IDENTIFICATION NO.)
     INCORPORATION OR ORGANIZATION)             CLASSIFICATION CODE NUMBER)
------------------------
 
                           4317 MIDDLESETTLEMENT ROAD
                             NEW HARTFORD, NY 13413
                                 (315) 798-2900
              (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
       INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

                            ------------------------
 
                            ROBERT F. DROPKIN, ESQ.
               VICE PRESIDENT, SECRETARY AND CHIEF LEGAL COUNSEL
                           SPECIAL METALS CORPORATION
                           4317 MIDDLESETTLEMENT ROAD
                             NEW HARTFORD, NY 13413
                                 (315) 798-2900
           (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
                   INCLUDING AREA CODE, OF AGENT FOR SERVICE)

                            ------------------------
 
                                   Copies to:
ROBERT B. SCHUMER, ESQ.                                       JOHN D. MORRISON, JR., ESQ.
           PAUL, WEISS, RIFKIND, WHARTON & GARRISON                                  SHEARMAN & STERLING
                 1285 AVENUE OF THE AMERICAS                                         599 LEXINGTON AVENUE
                   NEW YORK, NEW YORK 10019                                        NEW YORK, NEW YORK 10022
                        (212) 373-3000                                                  (212) 848-4000
------------------------
 
     APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
 
     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
 
     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
 
     If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
 
     If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

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

 
                        CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM
                                                                                         AGGREGATE
                              TITLE OF EACH CLASS OF                                     OFFERING            AMOUNT OF
                           SECURITIES TO BE REGISTERED                                   PRICE(1)        REGISTRATION FEE
Common Stock, par value $.01 per share............................................      $62,000,000         $18,788.00
(1) Estimated pursuant to Rule 457 solely for purposes of calculating the
    registration fee.
 
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT

SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.  THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE.  THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY  NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED DECEMBER 20, 1996
 
                                               SHARES

                                     [LOGO]

                           SPECIAL METALS CORPORATION

                                  COMMON STOCK

                            ------------------------
 
 OF THE        SHARES OF COMMON STOCK BEING OFFERED HEREBY,        SHARES ARE
   BEING SOLD BY THE COMPANY AND        SHARES ARE BEING SOLD BY THE SELLING
 STOCKHOLDERS. SEE 'PRINCIPAL AND SELLING STOCKHOLDERS.' THE COMPANY WILL NOT
  RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF THE SHARES OF COMMON STOCK BY
      THE SELLING STOCKHOLDERS. PRIOR TO THE OFFERING, THERE HAS BEEN NO
      PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY
      ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE WILL BE
      BETWEEN $    AND $    . SEE        'UNDERWRITERS' FOR A DISCUSSION
          OF THE FACTORS CONSIDERED IN DETERMINING THE INITIAL PUBLIC
                                OFFERING PRICE.
 
                            ------------------------
 
       APPLICATION WILL BE MADE FOR QUOTATION OF THE COMMON STOCK ON THE
                NASDAQ NATIONAL MARKET UNDER THE SYMBOL 'SMCX.'
 
                            ------------------------
 
      SEE 'RISK FACTORS' BEGINNING ON PAGE 10 FOR INFORMATION THAT SHOULD
                    BE CONSIDERED BY PROSPECTIVE INVESTORS.
                                       
                            ------------------------
 
 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
      EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
          SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
              COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
              THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY

                            IS A CRIMINAL OFFENSE.
 
                            ------------------------
 
                               PRICE $    A SHARE
 
                            ------------------------
UNDERWRITING                            PROCEEDS TO
                                                 PRICE TO         DISCOUNTS AND        PROCEEDS TO           SELLING
                                                  PUBLIC         COMMISSIONS (1)       COMPANY (2)         STOCKHOLDERS
                                            ------------------  ------------------  ------------------  ------------------
Per Share.................................          $                   $                   $                   $
Total(3)..................................          $                   $                   $                   $
------------
     (1) The Company and the Selling Stockholders have agreed to indemnify the
         Underwriters against certain liabilities, including liabilities under
         the Securities Act of 1933. See 'Underwriters.'

     (2) Before deducting expenses payable by the Company estimated at
         $                  .

     (3) The Company and the Selling Stockholders have granted to the
         Underwriters an option, exercisable within 30 days of the date hereof,
         to purchase up to an aggregate of       additional Shares at the price
         to public less underwriting discounts and commissions, for the purpose
         of covering over-allotments, if any. If the Underwriters exercise such
         option in full, the total price to public, underwriting discounts and
         commissions, proceeds to Company and proceeds to Selling Stockholders
         will be $        , $        , $        and $        , respectively. See
         'Underwriters.'
 
                            ------------------------
 
    The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Shearman & Sterling, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about                , 1997, at the
office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment
therefor in immediately available funds.
 
                            ------------------------
 
MORGAN STANLEY & CO.                                        SALOMON BROTHERS INC
       INCORPORATED
 
              , 1997
[Artwork: Cutaway diagram of a jet engine indicating component parts made from
the Company's superalloys and special alloys]

 
     IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
 
                                       2
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.

                            ------------------------
 
     For investors outside the United States: No action has been or will be
taken in any jurisdiction by the Company, any Selling Stockholder or any
Underwriter that would permit a public offering of the Common Stock or
possession or distribution of this Prospectus in any jurisdiction where action
for that purpose is required, other than in the United States. Persons into
whose possession this Prospectus comes are required by the Company, the Selling
Stockholders and the Underwriters to inform themselves about, and to observe any
restrictions as to, the offering of the Common Stock and the distribution of
this Prospectus.
 
     In this Prospectus, references to 'dollars' and '$' are to United States
dollars, and the terms 'United States' and 'U.S.' mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction. As used in this Prospectus, the term 'jet engine' means all
turbine aircraft engines including turbo jet, turbo fan, turbo shaft and turbo
prop engines.

                            ------------------------
 
     Until          , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a Prospectus
when acting as Underwriters and with respect to their unsold allotments or
subscriptions.

                            ------------------------
 
                               TABLE OF CONTENTS
PAGE
                                                                                                              ----
Available Information......................................................................................      4
Prospectus Summary.........................................................................................      5

Risk Factors...............................................................................................     10
The Company................................................................................................     16
Use of Proceeds............................................................................................     16
Dividend Policy............................................................................................     16
Capitalization.............................................................................................     17
Dilution...................................................................................................     18
Selected Financial and Operating Data......................................................................     19
Management's Discussion and Analysis of Financial Condition and Results of Operations......................     21
Business...................................................................................................     29
Management.................................................................................................     47
Certain Transactions.......................................................................................     52
Principal and Selling Stockholders.........................................................................     55
Description of Capital Stock...............................................................................     57
Shares Eligible for Future Sale............................................................................     59
Certain United States Federal Tax Consequences To Non-United States Holders of Common Stock................     60
Underwriters...............................................................................................     62
Legal Matters..............................................................................................     64
Experts....................................................................................................     64
Index to Financial Statements..............................................................................    F-1
------------------------
 
     For so long as the Company's Common Stock is quoted on the Nasdaq National
Market or any national securities exchange, the Company intends to furnish its
stockholders with annual reports containing financial statements audited by an
independent public accounting firm and quarterly reports for the first three
quarters of each fiscal year containing unaudited financial information.
 
                                       3
AVAILABLE INFORMATION
 
     The Company has filed with the Securities and Exchange Commission (the
'Commission') a registration statement on Form S-1 (together with all amendments
and exhibits, the 'Registration Statement') under the Securities Act of 1933, as
amended (the 'Securities Act') with respect to the Common Stock offered hereby.
This Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement and to the schedules and exhibits thereto. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected, without charge, and copies may be obtained, at prescribed rates, at
the public reference facilities of the Commission maintained at Judiciary Plaza,
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies of the
Registration Statement may also be inspected, without charge, at the
Commission's regional offices at Seven World Trade Center, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. In addition, copies of the Registration Statement may
be obtained by mail at prescribed rates, from the Commission's Public Reference

Section at Judiciary Plaza, 450 Fifth Street, N.W. Washington, D.C. 20549. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants (such as the Company)
that file electronically with the Commission. The address of such site is:
http://www.sec.gov.
 
     Statements contained in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract, agreement or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
 
     As a result of the Offering, the Company will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, as amended, and, in accordance therewith, will file periodic reports,
proxy statements and other information with the Commission. Such periodic
reports, proxy statements and other information will be available for inspection
and copying at the public reference facilities, regional offices and Web site
referred to above.
 
                                       4
PROSPECTUS SUMMARY
 
     The following summary should be read in conjunction with, and is qualified
in its entirety by reference to, the more detailed information and the Financial
Statements of the Company, including the notes thereto, appearing elsewhere in
this Prospectus. Unless otherwise indicated, the information in this Prospectus
assumes (i) the consummation of the merger of the Company with Special Metals
and Technologies Corporation ('SMTC') pursuant to which each share of common
stock of SMTC will be exchanged for 12,400 shares of Common Stock of the Company
and (ii) that the Underwriters' over-allotment option is not exercised.
References in this Prospectus to the 'Company' or 'Special Metals' refer to
Special Metals Corporation, its subsidiaries and their predecessors, or any of
them, depending on the context. Certain information contained in this summary
and elsewhere in this Prospectus, including information with respect to the
Company's plans and strategy for its business, are forward-looking statements.
For a discussion of important factors which could cause actual results to differ
materially from the forward-looking statements contained herein, see 'Risk
Factors.'
 
                                  THE COMPANY
 
     Special Metals is one of the world's leading producers of superalloy and
special alloy long products. Superalloys are highly engineered metal alloys
designed to withstand extreme heat and stress and are principally used in the
manufacture of jet engine parts. Compared to any other known metal or material,
superalloys offer a superior combination of heat resistance, high temperature
corrosion resistance, toughness and strength. Special alloys have unique
physical, chemical, and/or mechanical properties which are optimized by the
Company's melting and processing capabilities. In 1952, a predecessor of Special
Metals pioneered the melting technology that led to the practical development of

the superalloys that are the critical materials used in the 'hot' section of
modern jet engines. The Company believes that its 45 million pounds of vacuum
induction melting capacity makes it one of the largest producers in the
superalloy industry and that its substantial market share, comprehensive product
line, proprietary know-how and technological experience make it a leader in its
field. Special Metals' total net sales have increased from $80.4 million in 1993
to $132.2 million in 1995. The Company's backlog was approximately $148.8
million at December 10, 1996 compared to approximately $81.8 million at December
31, 1995. For the first nine months of 1996, approximately 77% of the Company's
net sales were to jet engine component manufacturers. The Company's products are
also used in other technically demanding applications, such as land-based power
generating equipment, oil well drilling hardware, die materials, chemical
processing applications and medical applications.
 
     Special Metals operates three divisions. The Superalloy Billet and Bar
Division manufactures a wide array of wrought superalloy and special alloy
products in billet, bar and cast form, which are used primarily in jet engines.
This division also produces 'shape memory' alloys, such as Nitinol, which are
primarily used in medical and dental applications. The Company believes it has
the leading worldwide market share of approximately 32% (excluding China and the
countries of the former Soviet Union) in superalloy billet products and a North
American market share of approximately 20% in superalloy bar products. The
Powder Division produces powder metallurgy superalloy products for military jet
engines and the latest generation of large commercial jet engines and is the
world's largest independent manufacturer of superalloy powder products. The
Dental Division is the leading North American producer of amalgamable dental
alloys. In 1995, the Superalloy Billet and Bar Division, the Powder Division and
the Dental Division accounted for 85%, 10% and 5%, respectively, of the
Company's net sales.
 
INDUSTRY OVERVIEW
 
     Superalloys were originally developed to meet the highly demanding design
requirements of jet engines and are currently used to make jet engine components
such as turbine blades, vanes, disks, rings, seals and shafts. These
applications require very high strength, toughness and resistance to metal
fatigue and creep while operating in environments where temperatures can
sometimes exceed 2,200degreesF. Management believes that over 70% of all
superalloy sales worldwide are to jet engine component manufacturers. Superalloy
products are also used in other technically demanding applications such as
land-based power generating equipment, oil well drilling hardware, die materials
and chemical processing applications. The complexity of the production process
is reflected in the Company's relatively high average selling prices of $9.92
and $12.44 per pound shipped of superalloys and special alloys, respectively,
for the first nine months of 1996, compared to the average selling price of
other metals such as carbon steel sheet, stainless steel sheet and aluminum,
which currently range from $.17 to $1.25 per pound shipped. The highly
demanding technical nature of superalloy products, specialized multi-stage
production processes and the stringency of jet engine manufacturers'
qualification requirements and certification processes have created what
management believes are high barriers to entry in the superalloy industry.
 
     The superalloy industry has recently entered a period of increased demand
primarily because of improving conditions in the aerospace industry. The

superalloy industry reached a cyclical and historical peak in 1990 and
subsequently declined to a cyclical bottom in 1993. Management believes that the
demand for superalloy long products has almost doubled since 1993 and that the
industry (including the Company) is operating at close to 100% of
 
                                       5
available capacity. As a result, since 1993, there have been significant
increases in market prices for superalloy products. Based on industry data, the
Company believes that the superalloy industry will operate at a utilization rate
in excess of 90% for the next three years and that demand for superalloy
products will increase at a 6% to 10% annual rate for the next three years. See
'Business--Industry Overview.'
 
     In 1995, the commercial aircraft industry started to recover from the
recession of the early 1990s. The firm order backlog of The Boeing Co.
('Boeing'), McDonnell Douglas Corp. ('McDonnell Douglas') and Airbus Industrie,
as reported by The Airline Monitor, increased to 1,869 planes at December 31,
1995 from 1,742 planes at December 31, 1994. Roll-outs of commercial aircraft
with more than 100 seats are expected to increase by more than 40% from 1995 to
1997. Boeing's production rate is scheduled to increase from 18 aircraft per
month in early 1996 to over 30 aircraft per month by mid-1997. More importantly,
the number of wide-body aircraft under production or on order is increasing,
which is expected to increase demand for larger engines and larger components
made with superalloys. The superalloy industry has substantially benefitted from
this recovery. The Company believes that demand for jet engines will remain
strong through 1999 because of projected increases in revenue passenger miles
both domestically and internationally (especially in the Pacific Rim) and the
imposition of federal Stage III noise regulations in the United States, which
will require airlines to replace existing Stage II engines or retrofit such
engines with engine hush kits. In addition, because of Federal Aviation
Administration regulations mandating maintenance of aircraft engines based in
part on the number of hours flown and the number of takeoff and landing cycles,
a large number of commercial aircraft built in the 1980s are scheduled to
undergo engine rebuilds in the next five years. As a result management believes
that demand for jet engine spare parts will remain strong.
 
BUSINESS STRATEGY
 
     The Company's primary objective is to continue the growth of its superalloy
and special alloy business and to focus on both the aerospace and non-aerospace
markets. To achieve its objectives, the Company has implemented a business
strategy which is designed to: (i) capitalize on the Company's leading position
in the aerospace market; (ii) develop new products and markets; (iii) continue
to reduce the Company's costs; and (iv) explore potential acquisitions.
 
     Capitalize on Leading Position in Aerospace Market.  Special Metals'
largest single product line is superalloy billet used primarily in the
manufacture of jet engines. Management believes the Company's worldwide market
share (excluding China and the countries of the former Soviet Union) in
superalloy billet was approximately 32% in 1995 and, in certain key high
technology applications, approached 40%. To meet the increased level of

aerospace demand, the Company has increased its annual billet production
capacity by 15% during 1996.
 
     The Company believes that its capital investment programs and commitment to
high quality have contributed to its ability to obtain a wider variety of user
certifications from major jet engine producers, such as General Electric Company
('General Electric'), Rolls Royce Plc ('Rolls Royce'), Pratt & Whitney, a
division of United Technologies Corporation ('Pratt & Whitney'), and Societe
Nationale D'Etude Et De Construction De Moteurs D'Aviation ('SNECMA'), than any
of its competitors. Over the last five years (principally in 1991 and 1992), the
Company invested over $20 million in new state-of-the-art forging and melting
facilities and over the next five years, the Company currently plans to invest
an additional $50 million to expand and modernize its facilities.
 
     Develop New Products and Markets.  Special Metals plans to grow its
business through the development of new products and new applications and
markets for its existing products. Between 1990 and 1996, Special Metals engaged
in an aggressive product line expansion effort. Over 20% of the Company's net
sales in 1995 were from sales of enhancements of existing products or new
products that did not exist in 1990. Given the brief commercial history of
superalloys, the non-aerospace market for superalloy products is relatively
immature. The Company believes that it is well positioned to exploit this market
and capitalize on new opportunities.
 
     Continue to Reduce Costs.  The Company has undertaken numerous projects to
maintain and improve its efficiency and cost position over the last few years.
Since 1992, Special Metals has enhanced its operating leverage, reduced its
billet cycle time by 33%, and improved its inventory turnover by 37%. The
Company continues to pursue opportunities to further reduce costs and improve
efficiency.
 
     Explore Potential Acquisitions.  The Company will examine opportunities to
acquire or invest in companies, technologies or products that complement the
Company's business or its product offerings. In particular, the Company will 
consider acquisitions or investments that will leverage its expertise in
superalloy and special alloy products and enable it to enter new markets or sell
new products. Currently, the Company has no agreements or understandings
regarding any such acquisition or investment. See 'Risk Factors--Risks
Associated With Potential Acquisitions.'
 
                                       6
THE OFFERING
Common Stock offered by the Company...............             shares

Common Stock offered by the Selling
  Stockholders....................................             shares
                                                    --------

     Total........................................             shares
                                                    =========

Common Stock to be outstanding after the
  Offering(1).....................................  shares
 
Use of Proceeds...................................  The net proceeds to the company will be used to repay
                                                    indebtedness under the Company's credit facility and, if
                                                    available following the repayment of such indebtedness, for
                                                    general corporate purposes, including working capital and
                                                    capital expenditures. The Company will not receive any
                                                    proceeds from the sale by the Selling Stockholders of the
                                                    Common Stock in the Offering. See 'Use of Proceeds.'
 
Proposed Nasdaq National Market symbol............  'SMCX'
------------------
(1) Does not include      shares of Common Stock reserved for issuance upon the
    exercise of options under the Special Metals Corporation 1997 Long-Term
    Stock Incentive Plan (the 'Stock Option Plan').
 
                                  RISK FACTORS
 
     PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY CERTAIN FACTORS RELATING TO
AN INVESTMENT IN THE COMPANY. SEE 'RISK FACTORS.'
 
                                       7
SUMMARY FINANCIAL AND OPERATING DATA
 
     The following table presents certain historical and pro forma financial and
operating data of the Company for the periods indicated. Results for the nine
months ended September 30, 1996 are not necessarily indicative of the results to
be expected for the year ended December 31, 1996. The financial data set forth
below should be read in conjunction with 'Selected Financial and Operating
Data,' 'Management's Discussion and Analysis of Financial Condition and Results
of Operations' and the Financial Statements of the Company and the notes thereto
included elsewhere in this Prospectus.
NINE MONTHS ENDED
                                                     YEAR ENDED DECEMBER 31,                   SEPTEMBER 30,
                                        --------------------------------------------------   ------------------
                                          1991      1992       1993      1994       1995      1995       1996
                                        --------   -------   --------   -------   --------   -------   --------
                                                                                                (UNAUDITED)
                                                  (IN THOUSANDS, EXCEPT PER POUND AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales.............................  $111,940   $87,849   $ 80,412   $95,510   $132,245   $92,566   $120,540
Cost of goods sold....................   103,766    87,849     84,304    93,625    114,752    80,370     99,733

                                        --------   -------   --------   -------   --------   -------   --------
  Gross profit (loss).................     8,174        --     (3,892)    1,885     17,493    12,196     20,807
Selling, general and administrative
  expenses............................     6,457     4,660      4,141     4,313      5,207     3,384      3,723
                                        --------   -------   --------   -------   --------   -------   --------
  Operating income (loss).............     1,717    (4,660)    (8,033)   (2,428)    12,286     8,812     17,084
Interest expense......................     3,587     3,169      3,912     4,361      4,727     3,572      3,096
                                        --------   -------   --------   -------   --------   -------   --------
Income (loss) before income taxes and
  extraordinary item..................    (1,870)   (7,829)   (11,945)   (6,789)     7,559     5,240     13,988
Income tax expense (benefit)(1).......      (166)   (2,139)       197        99        354       245     (1,901)
                                        --------   -------   --------   -------   --------   -------   --------
Income (loss) before extraordinary
  item................................    (1,704)   (5,690)   (12,142)   (6,888)     7,205     4,995     15,889
Extraordinary item(2).................        --     3,840         --        --         --        --         --
                                        --------   -------   --------   -------   --------   -------   --------
  Net income (loss)...................  $ (1,704)  $(1,850)  $(12,142)  $(6,888)  $  7,205   $ 4,995   $ 15,889
                                        --------   -------   --------   -------   --------   -------   --------
                                        --------   -------   --------   -------   --------   -------   --------
 
Net income (loss) per share...........  $   (.14)  $  (.15)  $   (.98)  $  (.56)  $    .58   $   .40   $   1.28
Weighted average common shares
  outstanding.........................    12,400    12,400     12,400    12,400     12,400    12,400     12,400
 
Pro forma(3):
  Net income..........................                                            $                    $
  Net income per share................                                            $                    $
  Weighted average common
     shares outstanding...............
 
OTHER DATA:
Depreciation and amortization ........  $  5,849   $ 5,941   $  6,561   $ 7,200   $  6,281   $ 4,594   $  3,212
Capital expenditures..................     9,922     5,677        793       975      1,963     1,228      1,877
 
Pounds shipped:
  Superalloys.........................    13,277    11,269     10,932    12,253     14,907    10,568     10,626
  Special alloys(4)...................       214       368        712     1,181      1,541     1,084      1,025
  Toll conversion.....................     4,096     6,077     13,934    14,267     11,612     9,299      7,757
 
Average net sales per pound shipped:
  Superalloys.........................  $   7.74   $  7.00   $   6.31   $  6.48   $   7.58   $  7.48   $   9.92
  Special alloys......................     36.12     21.44      12.55     10.56      10.32      9.12      12.44
  Toll conversion.....................       .35       .24        .18       .26        .30       .30        .30
 
Backlog (at period end)(5)............  $ 47,952   $34,878   $ 31,385   $40,711   $ 81,846   $80,010   $135,690
(footnotes on next page)
 
                                       8
AS OF SEPTEMBER 30, 1996
                                                                                         --------------------------
                                                                                          ACTUAL     AS ADJUSTED(3)
                                                                                         --------    --------------
BALANCE SHEET DATA:
Working capital.......................................................................   $ 47,096       $
Total assets..........................................................................    119,976
Current portion of long-term debt and capital lease obligations.......................      6,772
Long-term debt (excluding current maturities).........................................     35,560
Long-term capital lease obligations (excluding current maturities)....................        593            593
Subordinated notes payable(6).........................................................      9,500          9,500
Stockholders' equity..................................................................     31,802
------------------
(1) Income tax expense for the nine months ended September 30, 1996 differs from
    the amount which is derived by applying the combined statutory income tax
    rates due to the utilization of previously unrecognized net operating loss
    and other tax carryforwards and the recognition of previously unrecognized
    deferred income tax assets.
 
(2) Represents an extraordinary gain from forgiveness of debt owed to an
    affiliate of one of the Company's principal stockholders. The per share
    impact of the extraordinary gain was $.31.
 
(3) Gives effect to (i) the Offering and (ii) the application of the net
    proceeds therefrom to repay indebtedness under the Company's credit
    facility. At November 30, 1996, approximately $49.0 million was outstanding
    under the Company's credit facility. Assuming that the transactions
    described above occurred as of January 1, 1995, the Company's interest
    expense would have been $_____ and $_____ for 1995 and the nine months
    ended September 30, 1996, respectively, and the Company's net income would
    have been $_____ and $_____, respectively. See 'Use of Proceeds' and
    'Management's Discussion and Analysis of Financial Condition and Results
    of Operations.'
 
(4) Includes dental alloys, shape memory alloys and high strength stainless
    steel.
 
(5) The Company defines backlog as firm purchase orders, which are generally
    subject to cancellation by the customer subject to, in certain
    circumstances, payment of specified charges.
 
(6) Represents subordinated notes held by certain of the Company's principal
    stockholders (the 'Subordinated Notes'). In October and November 1996, the
    Company repaid an aggregate of $6.5 million of indebtedness under the
    Subordinated Notes. The Company intends to repay the remaining $3.0 million
    balance on the Subordinated Notes prior to the consummation of the Offering.
 
                                       9
RISK FACTORS
 
     An investment in the shares of Common Stock offered hereby involves various
risks. Prior to investing in the Common Stock being offered hereby, prospective
investors should carefully consider the factors set forth below, together with
the other information set forth in this Prospectus.
 
CYCLICALITY; DEPENDENCE ON AEROSPACE INDUSTRY
 
     Demand for the Company's superalloy and special alloy products is cyclical
and is affected by the cyclical nature of the aerospace industry. Sales of the
Company's products to the aerospace industry accounted for approximately 68%,
69%, 70% and 77% of the Company's net sales in 1993, 1994, 1995 and the nine
months ended September 30, 1996, respectively.
 
     The demand by commercial airlines for new aircraft historically has been
closely related to the state of the U.S. and world economies. The large number
of aircraft delivered in the late 1980s and early 1990s and the airline
industry's widespread losses created excess capacity in the air carrier system.
After this period, airlines and leasing companies deferred existing new aircraft
orders and, to a lesser degree, canceled orders. These deferrals and
cancellations adversely affected the volume and price of orders placed with the
manufacturers of commercial aircraft engine components and their suppliers,
including the Company. Because of the comparatively high level of fixed costs
associated with the Company's manufacturing processes, changes in volume can
result in significant variations in net income. Recently, the U.S. commercial
airline industry has reported profits, excess capacity has been reduced and
orders for new aircraft reported by major aircraft manufacturers have increased.
However, there can be no assurance that the improved operating performance of
the commercial airline industry will continue or that deliveries of large
commercial aircraft will not be deferred or cancelled in the future. Any
developments in the aerospace market resulting in a reduction in the rate of
future aircraft deliveries, including cancellations and deferrals of scheduled
deliveries, could have a material adverse effect on the Company. Also, the
cyclical nature of the superalloy industry could adversely affect the Company's
ability to finance its capital expenditure program and acquisitions. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
 
HISTORY OF LOSSES
 
     The Company's results of operations for the years 1991 through 1994 reflect
the severe downturn in market conditions experienced generally by the superalloy
industry over that period. The Company incurred losses before extraordinary
items of $26.4 million from 1991 through 1994. In addition, from March 1993 to
September 1994, the Company had insufficient cash flow to make certain interest
and term loan principal payments under a credit agreement with certain lenders
(the 'Prior Credit Agreement') and entered into a series of standstill
agreements with such lenders. Following the amendment and restatement of the
Prior Credit Agreement in December 1994, the Company remained in compliance with
all of its obligations in respect of the Prior Credit Agreement until it was

refinanced in October 1996.
 
     The Company operated profitably in 1995 and in the first three quarters of
1996. Continuing profitable operations will be dependent, among other things,
on: market demand and prices for the Company's superalloys and special alloy
products, particularly demand and pricing in the aerospace industry; competition
and capacity utilization in the superalloy industry; timing and pricing of
long-term firm price contracts; the Company's ability to increase prices for its
products to a level that exceeds any increases in production costs;
manufacturing improvement and cost reduction efforts; any material adverse
developments or market instabilities in the supply of the Company's raw
materials; and the absence of a general economic downturn in North America,
Europe or the rest of the world. The failure of the Company to sustain
profitability could hinder its ability to respond effectively to market
conditions, to make capital expenditures and to take advantage of business
opportunities, the failure to perform any of which could have a material adverse
effect on the Company's financial condition and results of operations. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
 
                                       10
CUSTOMER CONCENTRATION
 
     A substantial portion of the Company's business is conducted with a
relatively small number of large customers, including affiliates of SIMA. The 
Company's top 10 customers accounted for 67% of the Company's net sales in 1995.
In 1995, each of Wyman-Gordon Forgings Inc. ('Wyman-Gordon'), Ladish Company and
Transmet, a division of Steiner S.A. ('Transmet'), and an affiliate of SIMA
accounted for  approximately 17%, 11% and 10%, respectively, of the Company's
net sales. In 1994, the Company's two largest customers accounted for
approximately 22% and 13%, respectively, of the Company's total sales and in
1993, the Company's two largest customers each accounted for approximately 12%
of the Company's total sales. Loss of a significant customer could have a
material adverse effect on the Company.
 
AVAILABILITY AND COST OF RAW MATERIALS; HEDGING
 
     The major raw materials used in the production of superalloys and special
alloys are scrap and various virgin materials such as nickel, chromium, cobalt,
columbium, molybdenum, titanium and aluminum. Over half of the raw materials
consumed in superalloy production is scrap, either internally generated scrap
from the Company's own production process or scrap purchased on the open market
or from customers. Virgin raw materials are generally purchased directly from
producers. Commercial deposits of certain metals used by the Company are found
in only a few parts of the world. The availability and prices of these metals
may be influenced by cartels, changes in world politics, unstable governments in
exporting nations and inflation. Shortages of, and price increases for, certain
raw materials used by the Company have occurred in the past and may occur in the
future, which could have a material adverse effect on the Company.
 
     As described above, a substantial portion of the Company's raw materials

used in production are commodities, such as nickel, that are subject to wide
price fluctuations. The price the Company pays for nickel is usually based upon
quoted prices on the London Metal Exchange ('LME') plus a premium due to
quality, location, and volume purchased. Although certain of the Company's 1996
product orders provide for price adjustments to reflect changes in the price of
raw materials, a substantial majority of the Company's product orders currently
are, and in the future are expected to be, made pursuant to firm price
contracts, which do not provide for raw material price adjustments. To attempt
to mitigate the risks associated with raw material price fluctuations and to
match raw material purchases with firm price product orders, the Company often
enters into firm price contracts for the purchase of virgin raw materials from
suppliers and for the purchase of scrap from customers or hedges the price of
nickel. Although the Company uses commercially reasonable efforts to collect
cancellation penalties if a customer cancels a firm price purchase order, there
can be no assurance that the Company will receive cancellation penalties which
are adequate to cover any raw material losses incurred by the Company as a
result of its hedging activities. At September 30, 1996, the Company had
commodity swap agreements covering a portion of its nickel requirements for the
period from October 1996 through December 1997, for a total purchase price of
approximately $8.7 million. The fair market value of the material covered by
these agreements, based on the September 30, 1996 price quoted on the LME, was
approximately $7.7 million. The Company's manufacturing specifications require
higher grades of nickel than those available on the LME or other commodities
exchanges. Therefore, the LME contracts only provide hedging on the price of
such materials and do not guarantee the actual delivery of usable raw materials.
There can be no assurance that the hedging and other techniques implemented by
the Company will be successful in eliminating or reducing the effects of
fluctuation in the prices of the Company's raw materials or that the Company
will not incur losses on such transactions.
 
DEPENDENCE ON ESSENTIAL MACHINERY AND EQUIPMENT
 
     The Company's principal manufacturing assets used in its Billet and Bar
Division (which accounted for approximately 85% of net sales in 1995) are
located at its melting, rolling and finishing production facility in New
Hartford, New York and at its forge shop in Dunkirk, New York. The Dunkirk
facility relies to a significant extent upon ingot produced at the New Hartford
facility and the New Hartford facility relies to a significant extent on the
forging capacity of the Dunkirk facility. Any production failures, shutdowns or
other significant problems at either the New Hartford or the Dunkirk facility
could have a material adverse effect on the Company's financial condition and
results of operation. The Company believes that it maintains adequate property
damage insurance to provide for reconstruction of damaged equipment, as well as
business interruption
 
                                       11
insurance to mitigate losses resulting from any production shutdown caused by
insured loss; however, there can be no assurance that such insurance coverage
will be adequate to cover such losses.
 
     The Company's manufacturing processes are dependent on the reliable

operation of its machinery and equipment. The Company's manufacturing facilities
have been operating at near capacity for the last four quarters. The Company has
certain critical pieces of machinery and equipment which may require significant
lead times to complete necessary repairs or replacements and the functions of
which may not be easily replaced by an outside contractor on commercially
acceptable terms. Any such event could result in a disruption in the Company's
production or distribution which could have a material adverse effect on the
Company. See 'Business--Products and Markets.'
 
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
 
     The Company will examine opportunities to acquire or invest in companies,
technologies or products that complement the Company's business or its product
offerings. Any future acquisitions may result in a potentially dilutive issuance
of equity securities, the incurrence of additional debt, reduction of existing
cash balances, the amortization of expenses related to goodwill and other
intangible assets or other charges to operations, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Future acquisitions could involve numerous additional
risks, including difficulties in the assimilation of the operations, products,
services and personnel of any acquired company, the diversion of management's
attention from other business concerns, the disruption of the Company's
business, the entry into markets in which the Company has little or no direct
prior experience and potential loss of key employees of any acquired company. 
The Company has no agreements or understandings regarding any such acquisition
or investment. See also '--Limitations on Payments of Dividends; Restrictive
Covenants.'
 
COMPETITION
 
     The superalloy industry is highly competitive and dominated by a few major
producers. The Company competes primarily on the basis of the ability to meet
customers' product specifications, quality, price and delivery schedules. Many
of the Company's competitors are part of large, diversified metals companies
which may have substantially greater capital resources and, in some cases, lower
raw material or labor costs than the Company. Moreover, the Company's
competitors have recently added and may in the future add production capacity
which, when coupled with the competitive nature of the superalloy industry, may
exert downward pressure on prices and therefore the Company's margins. Finally,
despite large start-up costs and technological requirements for entry into the
superalloy business, recent attempts have been made to enter the superalloy
industry, including a joint venture partly owned by one of the Company's largest
customers. Successful entry of new competitors into the superalloy industry
could have a material adverse effect on the business, financial condition,
results of operations or cash flows of the Company. See 'Business--Competition.'
 
LABOR MATTERS
 
     As of September 30, 1996, approximately 390 (or 68%) of the Company's
approximately 570 employees worked under four collective bargaining agreements.

The Company's agreement with the local branch of the International Association
of Machinists and Aerospace Workers (the 'IAM') representing 55 hourly workers
at its Princeton, Kentucky facility expires in August 1997. Also, the Company's
agreement with the local branch of the IAM representing approximately 290 hourly
workers at its New Hartford, New York facility, expires in August, 1998. The
remaining labor agreements expire in 1999. In 1992, a two-week strike by the IAM
occurred at the Company's New Hartford facility. While the Company considers its
employee relations to be good, there can be no assurance that satisfactory new
collective bargaining agreements will be negotiated when the applicable
collective bargaining agreements expire or that future work stoppages would not
have a material adverse effect on the business, financial condition, results of
operations or cash flows of the Company. See 'Business--Employees.'
 
                                       12
ENVIRONMENTAL REGULATIONS
 
     The Company's facilities are engaged in activities regulated by extensive
federal, state, local and foreign environmental and worker safety and health
laws and regulations, including those relating to air emissions, wastewater
discharges, the handling and disposal of solid and hazardous wastes and the
remediation of contamination caused by the release of hazardous substances in
the past. The Company uses substantial quantities of substances that are
considered hazardous or toxic under federal, state and/or local environmental,
worker safety and health laws and regulations. The Company's operations pose a
continuing risk of accidental releases of, and worker exposure to, hazardous or
toxic substances. There is also a risk that governmental environmental
requirements, or enforcement thereof, may become more stringent in the future
and that the Company may be subject to legal proceedings brought by private
parties or governmental agencies with respect to environmental matters. Although
the Company believes that it is in substantial compliance with applicable
requirements of environmental laws, there can be no assurance that some, or all,
of the risks discussed under this heading or in 'Business--Environmental
Matters' will not result in liabilities that are material to the Company's
business, results of operations, financial condition or cash flows.
 
     At September 30, 1996, the Company had total reserves of approximately $3.5
million to cover future costs arising from known environmental liabilities for
remediation and operation and maintenance of remediation systems, including
costs relating to its own properties and certain sites at which the Company's
wastes have been identified. The Company's actual future expenditures, however,
for remediation of environmental conditions existing at its properties and at
these other locations cannot be conclusively determined at this time.
Furthermore, additional locations at which wastes generated by the Company may
have been released or disposed, and of which the Company is currently unaware,
may in the future become the subject of remediation for which the Company may be
liable, in whole or in part. Accordingly, it is possible that the Company could
become subject to environmental liabilities in the future that could result in a
material adverse effect on the Company's business, results of operations,
financial condition or cash flows.
 
DEPENDENCE UPON KEY MANAGEMENT

 
     The Company's ability to maintain its competitive position is dependent to
a large degree on the services of its senior management team, including Donald
R. Muzyka, President and Chief Executive Officer. On average, the Company's
executive officers have served with the Company for 11 years each. Although Dr.
Muzyka and certain of the Company's other senior managers will have employment
agreements with the Company prior to the consummation of the Offering, there can
be no assurance that such individuals will remain with the Company. The loss of
the services of any of these individuals or an inability to attract and retain
additional senior management personnel could have a material adverse effect on
the Company. There can be no assurance that the Company will be able to retain
its existing senior management personnel or to attract additional qualified
senior management personnel. See 'Management.'
 
CONTROL BY PRINCIPAL STOCKHOLDERS
 
     Upon completion of the Offering, Societe Industrielle de Materiaux Avances
S.A. ('SIMA'), LWH Holding S.A. ('LWH') and Advanced Materials Investments
Holding S.A. ('AMI,' and, together with SIMA and LWH, the 'Principal
Stockholders') will beneficially own approximately      % of the outstanding
Common Stock (approximately      % if the Underwriters' over-allotment option is
exercised in full). Under an amended and restated stockholders agreement among
the Company and the Principal Stockholders (the 'Stockholders Agreement'), the
Principal Stockholders have agreed to vote all shares of Common Stock owned by
them unanimously as a group in accordance with the instructions of the holders
of a majority of such shares. In addition, the Company has agreed to nominate a
number of persons for election as directors who are designated by the Principal
Stockholders based on the ownership percentage of the Principal Stockholders.
The Stockholders Agreement provides that 56% of the nominees for director (four
based on the present board of seven directors) may be designated by the
Principal Stockholders so long as the Principal Stockholders beneficially own
35% or more of the outstanding Common Stock. Because SIMA will beneficially own
a majority of the shares of Common Stock held by the Principal Stockholders upon
completion of the Offering, SIMA will be able to control the business, policies
and affairs of the Company, including the election of directors and major
corporate transactions. The concentration of beneficial ownership of the Company
may have the effect
 
                                       13
of delaying, deferring or preventing a change in control of the Company, may
discourage bids for the Common Stock at a premium over the market price of the
Common Stock and may otherwise adversely affect the market price of the Common
Stock. See '--Antitakeover Provisions,' and 'Principal and Selling
Stockholders-- Stockholders Agreement.'
 
     For a description of certain relationships between the Company and the
Principal Stockholders, see 'Certain Transactions.' The common equity of SIMA is
beneficially owned by members of the Duval family and certain related parties.
Edouard Duval, a director of the Company, is a Directeur General of SIMA and has
a minority equity interest in SIMA. SIMA holds a controlling interest in Aubert
& Duval, a French steel and alloy producer. Although 

Aubert & Duval and the Company currently compete in certain limited product 
lines, the Company believes that this competition is not material to the Company
and that it is unlikely that the companies will compete in a material manner in
the superalloy and special alloy business in the future. However, there can be
no assurance that a conflict of interest may not arise in the future. There are
currently no contractual relationships between the companies which limit
competition.
 
ABSENCE OF PRIOR PUBLIC MARKET
 
     Prior to the Offering, there has been no public market for the Common
Stock. Although the Common Stock is expected to be approved for quotation on the
NASDAQ National Market, there can be no assurance that an active trading market
will develop or be sustained following the Offering. There can be no assurance
that market prices for the Common Stock after the Offering will equal or exceed
the initial public offering price per share set forth on the cover page of this
Prospectus. The initial public offering price of the Common Stock will be
determined by negotiation among the Company, the Selling Stockholders and the
Underwriters and may not be indicative of the market price for the Common Stock
following the Offering. See 'Underwriters--Pricing of Offering.' The market
price of the Common Stock could be subject to significant fluctuations in
response to various factors and events, including the liquidity of the market
for shares of Common Stock, differences between the Company's actual financial
or operating results and those expected by investors and analysts, pricing and
competition in the superalloy industry, new statutes or regulations or changes
in interpretations of existing statutes and regulations affecting the Company's
business or the superalloy or aerospace industries in general, changes in
general market conditions and broad market fluctuations.
 
DILUTION
 
     Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution of $     per share (assuming an initial public offering 
price of $     per share) of the Common Stock from the public offering price. 
See 'Dilution.'
 
POSSIBLE ADVERSE IMPACT ON STOCK PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
 
     Future sales of substantial amounts of Common Stock in the public market
following the Offering, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock and the ability
of the Company to raise capital by issuing its equity securities. Following the
Offering, the Company will have outstanding         shares of Common Stock. Of
these, the         shares offered hereby will be freely transferable by persons
other than 'affiliates' of the Company without restriction or further
registration under the Securities Act. The remaining            outstanding
shares of Common Stock will be owned by the Principal Stockholders and will be
'restricted securities.' Subject to the lockup arrangements described below,
these 'restricted' shares of Common Stock will be registrable upon demand by the
Principal Stockholders and will be eligible for sale without registration under
the Securities Act in accordance with Rule 144 ('Rule 144') promulgated under
the Securities Act. In connection with the Offering, the Company and the
Principal Stockholders have agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated, they will not sell or otherwise transfer or

dispose of any shares of Common Stock for a period of 180 days after the date
hereof other than the shares of Common Stock offered hereby and certain other
exceptions. In addition,         shares of Common Stock are reserved for
issuance upon the exercise of stock options under the Stock Option Plan and the
issuance of such shares will be registered under the Securities Act. See 'Shares
Eligible for Future Sale,' 'Management--Stock Option Plan,' and 'Certain
Transactions--Transactions with Principal Stockholders--Registration Rights.'
 
                                       14
LIMITATIONS ON PAYMENT OF DIVIDENDS; RESTRICTIVE COVENANTS
 
     The Company has never declared or paid any dividends on its Common Stock.
Any future decisions as to the payment of dividends will be at the discretion of
the Company's Board of Directors, subject to applicable law. The Company's
ability to pay dividends is also limited by the terms of the Company's Credit
Agreement, dated as of October 18, 1996, among the Company, Credit Lyonnais New
York Branch and the financial institutions from time to time party thereto (the
'Credit Agreement'). The Credit Agreement requires the Company to maintain
certain financial ratios and minimum consolidated net worth. The Credit
Agreement also contains covenants restricting the ability of the Company to pay
dividends, make certain restricted payments, incur additional indebtedness, make
certain investments, create liens, guarantee indebtedness, sell or acquire
assets, enter into mergers or consolidations, and form subsidiaries, which may
restrict the ability of the Company to expand its manufacturing capacity or make
acquisitions. In addition, amounts borrowed under the Company's revolving line
of credit under the Credit Agreement may only be used to finance working capital
needs and to repay outstanding indebtedness. See 'Dividend Policy' and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
 
ANTI-TAKEOVER PROVISIONS
 
     Certain provisions of the Company's Restated Certificate of Incorporation
(the 'Certificate of Incorporation') and Amended and Restated By-laws (the
'By-laws'), as well as provisions of the Delaware General Corporation Law (the
'DGCL'), may have the effect of delaying, deferring or preventing a change of
control of the Company, including transactions in which stockholders might
otherwise receive a substantial premium for their shares over then current
market prices. For example, under the Certificate of Incorporation, the Board of
Directors (or a committee thereof) is authorized to issue one or more series of
preferred stock having such designations, rights and preferences as may be
determined by the Board. Also, the Certificate of Incorporation and the By-laws
provide for a classified Board of Directors, and the By-laws provide advance
notice procedures for stockholders to submit proposals for consideration at
stockholders' meetings or to nominate persons for election as directors. See
also '--Control by Principal Stockholders,' 'Principal and Selling
Stockholders--Stockholders Agreement' and 'Description of Capital Stock.'
 
                                       15
THE COMPANY
 
     The Company's superalloy business commenced operations as part of the Utica
Drop Forge Company ('Utica Drop Forge') in 1952 with the successful introduction
of the world's first production vacuum melting furnace. Operations continued as
a division of Utica Drop Forge until 1961, when Special Metals Corporation was
formed as a separate, publicly-owned, Delaware corporation listed on the New
York Stock Exchange. In 1965, Special Metals was purchased by a predecessor of
Allegheny International Inc. ('AI') and operated as a wholly-owned subsidiary of
AI until 1983, when AI sold its interest in Special Metals to Astrotech
International Corporation ('Astrotech').
 
     In 1987, Astrotech sold all of the outstanding capital stock of the Company
to SMTC, a holding company owned by certain of the Principal Stockholders. Prior
to the date of the Offering, SMTC was merged with and into Special Metals (the
'Merger'). As a result, the Principal Stockholders received 12,400 shares of
Common Stock in exchange for each share of Common Stock of SMTC held by them.
The Company's principal executive offices are located at 4317 Middlesettlement
Road, New Hartford, NY 13413. Its telephone number is (315) 798-2900.
 
                                USE OF PROCEEDS
 
     The net proceeds to the Company from the Offering, assuming an initial
public offering price of $     per share (the midpoint of the range set forth on
the cover page of this Prospectus) and after deducting the estimated offering
expenses and underwriting discounts and commissions, are estimated to be $
million. The Company will not receive any proceeds from the sale by the Selling
Stockholders of the Common Stock in the Offering.
 
     The Company will use substantially all of the net proceeds of the Offering
received by it to repay outstanding indebtedness under the revolving credit
facility under the Credit Agreement (the 'Revolving Facility') and the term loan
under the Credit Agreement (the 'Term Loan'). Amounts borrowed under the
Revolving Facility fluctuate depending on the working capital needs of the
Company. If the net proceeds of the Offering are insufficient to repay all
outstanding amounts under the Credit Agreement, the Company intends to repay all
outstanding indebtedness under the Revolving Facility and a portion of the
outstanding indebtedness under the Term Loan. If any net proceeds from the
Offering remain after the repayment of all outstanding indebtedness under the
Credit Agreement, the Company intends to use such remaining net proceeds for
general corporate purposes, including working capital and capital expenditures.
 
     Amounts borrowed under the Credit Agreement bear interest at variable rates
and, at November 30, 1996, averaged approximately 6.6%. On November 30, 1996,
approximately $29.0 million was outstanding under the Revolving Facility and $20
million was outstanding under the Term Loan. All amounts outstanding under the
Revolving Facility mature on October 17, 2001 and all amounts outstanding under
the Term Loan must be repaid between October 17, 1997 and October 17, 2001.
After repayment, amounts may be reborrowed under the Revolving Facility, but may
not be reborrowed under the Term Loan. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources.'

 
                                DIVIDEND POLICY
 
     Since August 1987, the Company has not declared or paid any dividends on
its Common Stock and does not currently pay cash dividends on its Common Stock.
Any future decision as to the payment of dividends will be at the discretion of
the Company's Board of Directors, subject to applicable law. The Company's
ability to pay dividends is also limited by certain covenants of the Credit
Agreement, such as the restricted payment covenant. See 'Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources.'
 
                                       16
CAPITALIZATION
 
     The following table sets forth the short-term debt and capitalization of
the Company as of September 30, 1996 and as adjusted to reflect (i) the Offering
at an assumed initial public offering price of $     per share (the midpoint of
the range set forth on the cover page of this Prospectus) and (ii) the
application of the net proceeds therefrom to repay the indebtedness under the
Credit Agreement. This table should be read in conjunction with 'Use of
Proceeds,' 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and the Financial Statements of the Company and the notes
thereto included elsewhere in this Prospectus.
AS OF SEPTEMBER 30,
                                                                                                      1996
                                                                                             ----------------------
                                                                                             ACTUAL     AS ADJUSTED
                                                                                             -------    -----------
                                                                                                 (IN THOUSANDS)
Current portion of long-term debt and capital lease obligations...........................   $ 6,772      $
                                                                                             -------    -----------
                                                                                             -------    -----------
Long-term debt, excluding current maturities
  Long-term capital lease obligations.....................................................   $   593      $   593
  Credit Agreement(1).....................................................................    35,550
  Subordinated Notes(2)...................................................................     9,500        9,500
  Other...................................................................................        10           10
                                                                                             -------    -----------
     Total long-term debt.................................................................    45,653
                                                                                             -------    -----------
Stockholders' equity:
  Common Stock, par value $.01 per share: 35,000,000 shares authorized; 12,400,000 shares
     issued and outstanding actual;        shares issued and outstanding as adjusted(3)...       124
  Preferred Stock, par value $.01 per share: 10,000,000 shares authorized; no shares
     issued and outstanding...............................................................        --           --

  Paid-in surplus.........................................................................    25,876
  Pension adjustment......................................................................      (479)        (479)
  Retained earnings.......................................................................     6,281        6,281
                                                                                             -------    -----------
     Total stockholders' equity...........................................................    31,802
                                                                                             -------    -----------
       Total capitalization...............................................................   $77,455      $
                                                                                             -------    -----------
                                                                                             -------    -----------
------------------
(1) Under the Revolving Facility of the Credit Agreement, the Company may
    borrow, repay and re-borrow from time to time, the lesser of (a) $40 million
    or (b) the Company's borrowing base. The Credit Agreement defines the
    Company's borrowing base as the sum of 85% of eligible accounts receivable
    and 60% of eligible inventory. As of October 31, 1996, the borrowing base
    was $48.1 million. The Company's ability to borrow under the Credit
    Agreement is subject to the satisfaction of various conditions including
    compliance with certain financial covenants.
 
(2) In October and November 1996, the Company repaid an aggregate of $6.5
    million of indebtedness under the Subordinated Notes. The Company intends to
    repay the remaining $3.0 million balance on the Subordinated Notes prior to
    the consummation of the Offering.
 
(3) Excludes        shares of Common Stock reserved for issuance pursuant to the
    Stock Option Plan, under which options to purchase        shares at the
    initial public offering price will be granted effective on the date of the
    Offering. See 'Management--Stock Option Plan' and 'Description of Capital
    Stock.'
 
                                       17
DILUTION
 
     At September 30, 1996, the net tangible book value of the Company after
giving effect to the Merger but prior to the Offering would have been
approximately $27.8 million, or $2.24 per share. Net tangible book value per
share of Common Stock is determined by dividing the number of shares of Common
Stock outstanding into the net tangible book value of the Company (total
tangible assets less total liabilities) without giving effect to the possible
exercise of stock options which will be granted by the Company upon consummation
of the Offering under its Stock Option Plan. After giving effect to the Offering
at an assumed initial public offering of      per share (the midpoint of the
range set forth on the cover page of this Prospectus) and the application of the
net proceeds therefrom as set forth in 'Use of Proceeds,' the net tangible book
value at such date would have been $       million, or $     per share,
representing an immediate increase in net tangible book value of $     per
share. Accordingly, purchasers of the Common Stock in the Offering would sustain
an immediate dilution of $     per share.
 

     The following table illustrates such per share dilution:
Assumed initial public offering price..................              $
  Net tangible book value as of September 30, 1996.....  $
  Increase in net tangible book value attributable to
     the Offering(1)...................................  $           $
                                                         ----------
Pro forma net tangible book value after the Offering...              $
                                                                     ----------
Dilution to new investors in the Offering(2)...........              $
                                                                     ----------
                                                                     ----------
------------------
(1) After deduction of underwriting discounts and commissions and estimated
    offering expenses.
 
(2) Dilution is determined by subtracting the net tangible book value per share
    after completion of the Offering from the assumed initial public offering
    price per share of the Common Stock.
 
     The following table summarizes, on a pro forma basis as of September 30,
1996, the differences between the holders of Common Stock prior to the Offering,
as a group, and the new investors in the Common Stock offered by the Company,
with respect to the number of shares purchased, the total consideration paid and
the average price paid per share, based upon an assumed initial public offering
price of $     per share:
SHARES
                                                               PURCHASED(1)       TOTAL CONSIDERATION
                                                             -----------------    -------------------    AVERAGE PRICE
                                                             NUMBER    PERCENT     AMOUNT     PERCENT      PER SHARE
                                                             ------    -------    --------    -------    -------------
Existing stockholders(2)(3)...............................                        $                         $
New investors.............................................
                                                             ------    -------    --------    -------
Total.....................................................              100.0%    $            100.0%
                                                             ------    -------    --------    -------
                                                             ------    -------    --------    -------
------------------
(1) If the Underwriters' over-allotment option is exercised in full, the number
    of shares of Common Stock held by existing stockholders would be reduced to
       % of the total number of shares to be outstanding after the Offering and
    the number of shares of Common Stock held by new investors would be
    increased to    or    % of the total number of shares of Common Stock to be
    outstanding after the Offering.

 
(2) Excludes      shares of Common Stock reserved for issuance pursuant to the
    Stock Option Plan, under which options to purchase      shares at the
    initial public offering price will be granted effective on the date of the
    Offering. See 'Management--Stock Option Plan' and 'Description of Capital
    Stock.'
 
(3) Sales by the Selling Stockholders in the Offering will cause the number of
    shares of Common Stock held by the existing Stockholders to be reduced, and
    the number of shares to be held by the new investors to be increased, by
         . See 'Principal and Selling Stockholders.'
 
                                       18
SELECTED FINANCIAL AND OPERATING DATA
 
     The following selected financial data as of and for the years ended
December 31, 1991, 1992, 1993, 1994 and 1995 have been derived from the
Company's audited Financial Statements. The following selected financial data as
of and for the nine months ended September 30, 1995 and 1996 have been derived
from the Company's unaudited Financial Statements. In the opinion of management,
such unaudited financial statements reflect all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of the Company's
financial position and results of operations for such periods. Results for the
nine months ended September 30, 1996 are not necessarily indicative of the
results to be expected for the year ended December 31, 1996. The financial data
set forth below should be read in conjunction with the information under
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and the Financial Statements of the Company and the notes thereto
included elsewhere in this Prospectus.
NINE MONTHS ENDED
                                                 YEAR ENDED DECEMBER 31,                       SEPTEMBER 30,
                                 -------------------------------------------------------    --------------------
                                   1991        1992        1993       1994        1995        1995        1996
                                 --------    --------    --------    -------    --------    --------    --------
                                               (IN THOUSANDS, EXCEPT PER POUND AND PER SHARE DATA)
                                                                                                (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Net sales.....................   $111,940    $ 87,849    $ 80,412    $95,510    $132,245    $ 92,566    $120,540
Cost of goods sold............    103,766      87,849      84,304     93,625     114,752      80,370      99,733
                                 --------    --------    --------    -------    --------    --------    --------
  Gross profit (loss).........      8,174          --      (3,892)     1,885      17,493      12,196      20,807
Selling, general and
  administrative expenses.....      6,457       4,660       4,141      4,313       5,207       3,384       3,723
                                 --------    --------    --------    -------    --------    --------    --------
  Operating income (loss).....      1,717      (4,660)     (8,033)    (2,428)     12,286       8,812      17,084
Interest expense..............      3,587       3,169       3,912      4,361       4,727       3,572       3,096
                                 --------    --------    --------    -------    --------    --------    --------
Income (loss) before income
  taxes and extraordinary
  item........................     (1,870)     (7,829)    (11,945)    (6,789)      7,559       5,240      13,988
Income tax expense
  (benefit)(1)................       (166)     (2,139)        197         99         354         245      (1,901)
                                 --------    --------    --------    -------    --------    --------    --------
Income (loss) before
  extraordinary item..........     (1,704)     (5,690)    (12,142)    (6,888)      7,205       4,995      15,889
Extraordinary item(2).........         --       3,840          --         --          --          --          --
                                 --------    --------    --------    -------    --------    --------    --------
  Net income (loss)...........   $ (1,704)   $ (1,850)   $(12,142)   $(6,888)   $  7,205    $  4,995    $ 15,889
                                 --------    --------    --------    -------    --------    --------    --------
                                 --------    --------    --------    -------    --------    --------    --------
Net income (loss) per share...   $   (.14)   $   (.15)   $   (.98)   $  (.56)   $    .58    $    .40    $   1.28

Weighted average common shares
  outstanding.................     12,400      12,400      12,400     12,400      12,400      12,400      12,400

OTHER DATA:
Depreciation and
  amortization................   $  5,849    $  5,941    $  6,561    $ 7,200    $  6,281    $  4,594    $  3,212
Capital expenditures..........      9,922       5,677         793        975       1,963       1,228       1,877
Pounds shipped:
  Superalloys.................     13,277      11,269      10,932     12,253      14,907      10,568      10,626
  Special alloys(3)...........        214         368         712      1,181       1,541       1,084       1,025
  Toll conversion.............      4,096       6,077      13,934     14,267      11,612       9,299       7,757
Average net sales per pound
  shipped:
  Superalloys.................   $   7.74    $   7.00    $   6.31    $  6.48    $   7.58    $   7.48    $   9.92
  Special alloys..............      36.12       21.44       12.55      10.56       10.32        9.12       12.44
  Toll conversion.............        .35         .24         .18        .26         .30         .30         .30
Backlog (at period end)(4)....   $ 47,952    $ 34,878    $ 31,385    $40,711    $ 81,846    $ 80,010    $135,690
(footnotes on next page)
 
                                       19
NINE MONTHS ENDED
                                                 YEAR ENDED DECEMBER 31,                       SEPTEMBER 30,
                                 -------------------------------------------------------    --------------------
                                   1991        1992        1993       1994        1995        1995        1996
                                 --------    --------    --------    -------    --------    --------    --------
                                               (IN THOUSANDS, EXCEPT PER POUND AND PER SHARE DATA)
BALANCE SHEET DATA (AT PERIOD END):                                                             (UNAUDITED)
Working capital...............   $ 38,830    $ 35,216    $ 32,378    $29,287    $ 35,779    $ 32,652    $ 46,596
Total assets..................    110,027     108,651      98,779     91,901     106,945     105,376     119,976
Current portion of long-term
  debt and capital lease
  obligations.................      3,010       2,193       3,210      4,233       5,270       5,018       6,772
Long-term debt (excluding
  current maturities).........     48,500      50,500      47,500     45,500      40,810      41,050      35,560
Long-term capital lease
  obligations (excluding
  current maturities).........         --       1,359       1,174        965         777         814         593
Subordinated notes
  payable(5)..................         --       2,000       8,500      8,500       8,500       8,500       9,500
Stockholders' equity..........     30,066      28,216      16,074      8,987      15,666      13,982      31,802
------------------
(1) Income tax expense for the nine months ended September 30, 1996 differs from
    the amount which is derived by applying the combined statutory income tax
    rates due to the utilization of previously unrecognized net operating loss
    and other tax carryforwards and the recognition of previously unrecognized

    deferred income tax assets.
 
(2) Represents an extraordinary gain from forgiveness of debt owed to an
    affiliate of one of the Company's principal stockholders. The per share
    impact of the extraordinary gain was $.31 per share.
 
(3) Includes dental alloys, shape memory alloys and high strength stainless
    steel.
 
(4) The Company defines backlog as firm purchase orders, which are generally
    subject to cancellation by the customer subject to, in certain
    circumstances, payment of specified charges.
 
(5) In October and November 1996, the Company repaid an aggregate of $6.5
    million of indebtedness under the Subordinated Notes. The Company intends to
    repay the remaining $3.0 million balance on the Subordinated Notes prior to
    the consummation of the Offering.
 
                                       20
MANAGEMENT'S DISCUSSION AND
                      ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
 
     The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the Financial Statements of the
Company and the notes thereto included elsewhere in this Prospectus. Certain
information contained below are forward-looking statements. See 'Risk Factors'
for a discussion of important factors which could cause actual results to differ
materially from the forward-looking statements contained herein.
 
OVERVIEW
 
     The Company manufactures superalloys and special alloys, which are highly
engineered metal alloys designed to withstand extreme heat, stress and
corrosion. Special Metals operates three divisions. The Superalloy Billet and
Bar Division manufactures a wide array of wrought superalloy and special alloy
products in billet, bar and cast form, which are used primarily in jet engines.
This division also produces 'shape memory' alloys, such as Nitinol, which are
primarily used in medical and dental applications. The Powder Division produces
powder metallurgy superalloy products for military jet engines and the latest
generation of large commercial jet engines and is the world's largest
independent manufacturer of superalloy powder products. The Dental Division is
the leading North American producer of amalgamable dental alloys. In 1995, the
Superalloy Billet and Bar Division, the Powder Division and the Dental Division
accounted for 85%, 10% and 5%, respectively, of the Company's net sales of
$132.2 million.
 
     Historically, approximately 70% of the superalloys produced were consumed
by the aerospace industry for use in jet engine components. As a result, the
aerospace industry, which is highly cyclical, has had a significant effect on
the overall sales and profitability of the superalloy industry. During 1993,

1994 and 1995 and the nine months ended September 30, 1996, the Company's
estimated sales to jet engine component manufacturers totaled 68%, 69%, 70% and
77%, respectively, of the Company's net sales. The percentage of net sales to
jet engine component manufacturers increased during the nine months ended
September 30, 1996 as a result of a substantial increase in demand from the
aerospace industry. See 'Risk Factors--Cyclicality; Dependence on Aerospace
Industry.'
 
     The superalloy industry has recently entered a period of increased demand
primarily because of improving conditions in the aerospace industry. The
superalloy industry reached a cyclical and historical peak in 1990 and
subsequently declined to a cyclical bottom in 1993. Management believes that
demand for superalloy long products has almost doubled since 1993 and that the
industry (including the Company) is operating at close to 100% of available
capacity. As a result, since 1993, there have been significant increases in
market prices for superalloy products. Based on industry data, the Company
believes that the superalloy industry will operate at a utilization rate in
excess of 90% for the next three years and that demand for superalloy products
will increase at a 6% to 10% annual rate for the next three years. See
'Business--Industry Overview.'
 
     In 1995, the commercial aircraft industry started to recover from the
recession of the early 1990s. The firm order backlog of Boeing, McDonnell
Douglas and Airbus Industrie, as reported by The Airline Monitor, increased to
1,869 planes at December 31, 1995 from 1,742 planes at December 31, 1994.
Roll-outs of commercial aircraft with more than 100 seats are expected to
increase by more than 40% from 1995 to 1997. Boeing's production rate is
scheduled to increase from 18 aircraft per month in early 1996 to over 30
aircraft per month by mid-1997. More importantly, the number of wide-body
aircraft under production or on order is increasing, which is expected to
increase demand for larger engines and larger components made with superalloys.
The superalloy industry has substantially benefitted from this recovery. The
Company believes that demand for jet engines will remain strong through 1999
because of projected increases in revenue passenger miles both domestically and
internationally (especially in the Pacific Rim) and the imposition of federal
Stage III noise regulations in the United States, which will require airlines to
replace existing Stage II engines or retrofit such engines with engine hush
kits. In addition, because of Federal Aviation Administration regulations
mandating maintenance of aircraft engines based in part on the number of hours
flown and the number of takeoff and landing cycles, a large number of commercial
aircraft built in the 1980s are scheduled to undergo engine rebuilds in the next
five years. As a result of these factors, management believes that demand for
jet engine spare parts will remain strong.
 
                                       21
Net Sales.  Net sales include sales of the Company's superalloy and special
alloy products and income earned from toll conversion. Sales of the Company's
products are made under standard orders, under one-year supply contracts and
long-term firm price contracts. For the nine months ended September 30, 1996,
approximately 70% of the pounds shipped of the Company's billet and bar products
were sold under standard orders or under one-year supply contracts. The

remaining 30% of the pounds shipped of the Company's billet and bar products for
the nine months ended September 30, 1996 were sold at firm prices under
long-term contracts negotiated in 1993 at the bottom of the aerospace cycle.
Since the early 1990s, long-term firm price contracts have become more prevalent
in the superalloy industry because jet engine manufacturers need to quote firm
prices to airlines for jet engines to be delivered several years in the future.
Because of the adverse business conditions prevailing when the long-term firm
price contracts were negotiated in 1993, the pricing on the contracts was very
unfavorable to superalloy producers and resulted in severely depressed margins
in the superalloy industry from 1994 to 1996. Special Metals recognized losses
on these long-term firm price contracts in 1994 and 1995 and generally did not
earn a profit on such contracts in the nine months ended September 30, 1996.
Substantially all of the firm price contracts concluded in 1993 are due to
expire in 1996, with a minor portion of shipments for 1996 orders carrying over
into 1997. The current market prices for superalloy products have returned to
acceptable levels. During 1996, the Company began negotiations with certain
customers to enter into new long-term firm price contracts which, if entered
into, are expected to provide improvements compared to the expiring contracts.
See 'Business--Pricing.'
 
     Export sales represent a significant portion of the Company's business. In
1993, 1994, 1995 and the nine months ended September 30, 1996, sales to
purchasers outside of the United States totaled 28%, 25%, 35% and 27% of the
Company's net sales, respectively. All of the Company's export sales are
conducted in U.S. dollars.
 
     Costs of Goods Sold.  The superalloy industry is characterized by high
capital investment and high fixed costs, and profitability is therefore
significantly affected by changes in volume. Variable costs such as raw
materials, labor, supplies and energy (primarily electricity) generally account
for over three-fourths of the Company's costs of goods sold. Fixed costs, such
as indirect overhead and depreciation, constitute the remainder of the Company's
cost of goods sold. The Company has undertaken numerous projects to maintain and
improve its efficiency and cost position over the last few years. See
'Business--Business Strategy.'
 
     A substantial portion of the Company's raw material used in production are
commodities, such as nickel, that are subject to wide price fluctuations. The
price the Company pays for nickel is usually based upon quoted prices on the LME
plus a premium due to quality, location, and volume purchased. Although certain
of the Company's 1996 product orders provide for certain price adjustments to
reflect changes in the price of raw materials, a substantial majority of the
Company's current product orders currently are, and in the future are expected
to be, made pursuant to firm price sales contracts, which do not provide for raw
material price adjustments. To attempt to mitigate the risks associated with raw
material price fluctuations and to match raw material purchases with firm price
product orders, the Company often enters into firm price contracts for the
purchase of virgin raw materials from suppliers and for the purchase of scrap
from customers or hedges the price of nickel. At September 30, 1996, the Company
had commodity swap agreements covering a portion of its nickel requirements for
the period from October through December 1997, for a total purchase price of
approximately $8.7 million. The fair value of the material covered by these
agreements, based on the September 30, 1996 price quoted on the LME, was
approximately $7.7 million. Unrealized gains and losses on the contracts are

deferred and are recognized in income during the periods affected. See 'Risk
Factors--Availability and Cost of Raw Materials; Hedging.'
 
     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses represent costs associated with sales and marketing,
research and development, compensation expenses and legal expenses. During 1993,
1994, 1995 and the nine months ended September 30, 1996, increases in selling,
general and administrative expenses have primarily resulted from increased sales
of the Company's products. Selling, general and administrative expenses as a
percentage of the Company's net sales have declined from 5.2% in 1993 to 3.1%
for the nine months ended September 30, 1996, primarily as a result of increased
sales and cost control programs.
 
     Income Taxes.  The Company's effective income tax rate in 1993 and 1994
varied from the U.S. statutory rate due to losses which resulted in temporary
differences between book and taxable income for which recognition of a deferred
tax asset was not considered appropriate at the time. The Company's effective
income tax rate in 1995 varied from the U.S. statutory rate due to utilization
of net operating loss carryforwards. See
 
                                       22
Note 11 to the Financial Statements of the Company included elsewhere in this
Prospectus. Statement of Financial Accounting Standards No. 109 ('SFAS 109')
requires a valuation allowance when it is more likely than not that some
portion, or all, of the deferred tax assets will not be realized. SFAS No. 109
further states that forming a conclusion that a valuation allowance is not
needed is difficult when there is evidence that the deferred tax asset may not
be realized, such as cumulative losses in recent years. The Company incurred
losses in 1991 through 1994, and as a result, a valuation allowance was recorded
which substantially reduced the deferred tax assets. During 1995, and continuing
into 1996, the Company utilized substantial amounts of its net operating loss
and alternative minimum tax credit carryforwards. This use of available tax
carryforwards, together with the Company's recent profitability and the
Company's expectations for profitable operating results in the fourth quarter of
1996 and the year 1997, have resulted in the elimination, during 1996, of
substantially all of the valuation allowance previously recorded. As a result,
in the future, the Company does not expect that its effective tax rate will be
as favorable as it was during 1995 and the nine months ended September 30, 1996.
 
RESULTS OF OPERATIONS
 
     The following table sets forth, for the periods indicated, statement of
operations data as a percentage of net sales.
NINE MONTHS
                                                                                               ENDED
                                                                YEAR ENDED DECEMBER 31,    SEPTEMBER 30,
                                                                -----------------------    --------------
                                                                1993     1994     1995     1995     1996

                                                                -----    -----    -----    -----    -----
Net sales....................................................   100.0%   100.0%   100.0%   100.0%   100.0%
Cost of goods sold...........................................   104.8     98.0     86.8     86.8     82.7
                                                                -----    -----    -----    -----    -----
  Gross profit (loss)........................................    (4.8)     2.0     13.2     13.2     17.3
Selling, general and administrative expenses.................     5.2      4.5      3.9      3.7      3.1
                                                                -----    -----    -----    -----    -----
  Operating income (loss)....................................   (10.0)    (2.5)     9.3      9.5     14.2
Interest expense.............................................     4.9      4.6      3.6      3.9      2.6
                                                                -----    -----    -----    -----    -----
Income (loss) before income taxes............................   (14.9)    (7.1)     5.7      5.6     11.6
Income taxes expense (benefit)...............................      .2       .1       .3       .2     (1.6)
                                                                -----    -----    -----    -----    -----
  Net income (loss)..........................................   (15.1)    (7.2)     5.4      5.4     13.2
                                                                -----    -----    -----    -----    -----
                                                                -----    -----    -----    -----    -----
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995
 
     Net Sales.  Net sales increased $28.0 million, or 30.2%, from $92.6 million
for the nine months ended September 30, 1995 to $120.6 million for the nine
months ended September 30, 1996. This increase was principally due to a shift in
the Company's product mix toward higher value-added products and improved
pricing. Average net sales per pound of superalloy shipped increased $2.44, or
32.6%, from $7.48 in the nine-month period in 1995 to $9.92 during the
comparable period in 1996. Average net sales per pound of special alloys shipped
increased $3.32, or 36.4%, from $9.12 in the nine-month period in 1995 to $12.44
during the comparable period in 1996. Pounds of superalloys shipped increased
slightly from 10.57 million pounds in the nine months ended September 30, 1995
to 10.63 million pounds in the nine months ended September 30, 1996 and pounds
of special alloys shipped decreased slightly from 1.08 million pounds in the
nine months ended September 30, 1995 to 1.03 million pounds in the nine months
ended September 30, 1996.
 
     Cost of Goods Sold.  Cost of goods sold increased $19.4 million, or 24.1%,
from $80.4 million for the nine months ended September 30, 1995 to $99.7 million
for the nine months ended September 30, 1996, primarily as a result of increased
sales partially offset by improved manufacturing efficiencies and cost reduction
programs. As a percentage of net sales, cost of goods sold decreased from 86.8%
in the nine months ended September 30, 1995 to 82.7% in the nine months ended
September 30, 1996.
 
     Gross Profit.  Gross profit increased $8.6 million, or 70.6% from $12.2
million for the nine months ended September 30, 1995 to $20.8 million for the
nine months ended September 30, 1996. This increase was due primarily to
increased sales, cost reduction programs and improved manufacturing
efficiencies.
 
     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased $0.3 million, or 10.0% from $3.4 million for
the nine months ended September 30, 1995 to $3.7 million for the nine months

ended September 30, 1996. The increase was due primarily to the increase in net
sales. Selling,
 
                                       23
general and administrative expenses as a percentage of net sales decreased from
3.7% for the nine months ended September 30, 1995 to 3.1% for the nine months
ended September 30, 1996.
 
     Operating Income.  Operating income increased $8.3 million, or 93.9% from
$8.8 million for the nine months ended September 30, 1995 to $17.1 million for
the nine months ended September 30, 1996. Operating income as a percentage of
net sales increased from 9.5% for the nine months ended September 30, 1995 to
14.2% for the nine months ended September 30, 1996 as a result of increased net
sales offset in part by increased expenses.
 
     Interest Expense.  Interest expense decreased $.5 million, or 13.3%, from
$3.6 million for the nine months ended September 30, 1995 to $3.1 million for
the nine months ended September 30, 1996. This decrease was due primarily to a
decrease in average debt outstanding and to an overall decrease in interest
rates.
 
     Income Taxes.  The Company had an income tax expense of $245,000 for the
nine months ended September 30, 1995, compared to an income tax benefit of $1.9
million for the nine months ended September 30, 1996. The Company's effective
income tax rate for the nine months ended September 30, 1995 and 1996 varied
from the U.S. statutory rate due to utilization of net operating losses and
alternative minimum tax credit carryforwards and, in 1996 only, also due to the
recognition of previously unrecognized deferred tax assets of $5.8 million.
 
     Net Income.  Net income increased 218% from $5.0 million for the nine
months ended September 30, 1995 to $15.9 million for the nine months ended
September 30, 1996. Net income as a percentage of net sales increased from 5.4%
for the nine months ended September 30, 1995 to 13.2% for the nine months ended
September 30, 1996 primarily as a result of stronger demand for the Company's
products by the aerospace industry, cost reduction programs, improved
manufacturing efficiencies and recognition of certain unrecognized deferred tax
assets.
 
     YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
 
     Net Sales.  Net sales increased $36.7 million, or 38.5%, from $95.5 million
in 1994 to $132.2 million in 1995. This increase was principally due to
increased sales volume of the Company's products and improved pricing related to
much stronger demand from customers in the aerospace industry. Pounds of
superalloys shipped increased 2.66 million pounds, or 21.7%, from 12.25 million
pounds in 1994 to 14.91 million pounds in 1995 and pounds of special alloys
shipped increased by 360,000 pounds, or 30.5%, from 1.18 million pounds in 1994
to 1.54 million pounds in 1995. Average net sales per pound of superalloy
shipped increased $1.10, or 17.0%, from $6.48 in 1994 to $7.58 in 1995. Average
net sales per pound of special alloys shipped decreased $0.24, or 2.3%, from
$10.56 in 1994 to $10.32 in 1995.

 
     Cost of Goods Sold.  Costs of goods sold increased $21.1 million, or 22.6%,
from $93.6 million in 1994 to $114.7 million in 1995, primarily as a result of
increased sales partially offset by improved manufacturing efficiencies and cost
reduction programs. As a percentage of net sales, cost of goods sold decreased
from 98.0% in 1994 to 86.8% in 1995.
 
     Gross Profit.  Gross profit increased $15.6 million from $1.9 million in
1994 to $17.5 million in 1995. This increase was due primarily to increased
sales, cost reduction programs, and improved manufacturing efficiencies.
 
     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased $.9 million, or 20.7%, from $4.3 million in
1994 to $5.2 million in 1995. The increase was due primarily to increased
professional expenses and the increase in net sales in 1995 partially offset by
cost reduction programs. Selling, general and administrative expenses as a
percentage of net sales decreased from 4.5% in 1994 to 3.9% in 1995.
 
     Operating Income (Loss).  Operating income (loss) increased $14.7 million
from a loss of $2.4 million in 1994 to income of $12.3 million in 1995.
Operating income (loss) as a percentage of net sales increased from (2.5)% in
1994 to 9.3% in 1995 as a result of the stronger demand for the Company's
products in the aerospace industry, cost reduction programs and improved
manufacturing efficiencies.
 
     Interest Expense.  Interest expense increased $.3 million, or 8.4% from
$4.4 million in 1994 to $4.7 million in 1995. This increase was due primarily to
an increase in interest rates partially offset by a decrease in the average debt
outstanding.
 
     Income Taxes.  Income tax expenses increased $255,000 from $99,000 in 1994
to $354,000 in 1995 due primarily to increased income before income taxes. The
Company's effective income tax rate in 1994 varied from the U.S. statutory rate
due to losses which resulted in temporary differences between book and taxable
income for
 
                                       24
which recognition of a deferred tax asset was not considered appropriate at the
time. The Company's effective income tax rate in 1995 varied from the U.S.
statutory rate due to utilization of net operating loss carryforwards. See Note
11 to the Financial Statements of the Company.
 
     Net Income (Loss).  Net income (loss) increased $14.1 million from a loss
of $6.9 million in 1994 to income of $7.2 million in 1995. Net income (loss) as
a percentage of net sales increased from (7.2)% in 1994 to 5.4% in 1995 as a
result of the stronger demand for the Company's products in the aerospace
industry, cost reduction programs and improved manufacturing efficiencies.
 
     YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993
 
     Net Sales.  Net sales increased $15.1 million, or 18.8%, from $80.4 million

in 1993 to $95.5 million in 1994. This increase was principally due to stronger
demand from customers in the aerospace industry. Pounds of superalloys shipped
increased by 1.32 million pounds, or 12.1%, from 10.93 million pounds in 1993 to
12.25 million pounds in 1994 and pounds of special alloys shipped increased by
469,000 pounds, or 65.9%, from 712,000 pounds in 1993 to 1.18 million pounds in
1994. Average net sales per pound of superalloy shipped increased $0.17, or
2.7%, from $6.31 in 1993 to $6.48 in 1994. Average net sales per pound of
special alloy shipped decreased $1.99, or 15.8%, from $12.55 in 1993 to $10.56
in 1994.
 
     Cost of Goods Sold.  Costs of goods sold increased $9.3 million, or 11.1%,
from $84.3 million in 1993 to $93.6 million in 1994, primarily as a result of
increased sales partially offset by improved manufacturing efficiencies and cost
reduction programs. As a percentage of net sales, cost of goods sold decreased
from 104.8% in 1993 to 98.0% in 1994.
 
     Gross Profit (Loss).  Gross profit increased $5.8 million from a loss of
$3.9 million in 1993 to a gain of $1.9 million in 1994. This increase was due to
several factors, including increased sales, cost reduction programs, and
improved manufacturing efficiencies.
 
     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased $.2 million, or 4.2% from $4.1 million in
1993 to $4.3 million in 1994. The increase was due primarily to the increase in
net sales, offset somewhat by cost reduction programs. Selling, general and
administrative expenses as a percentage of net sales decreased from 5.2% in 1993
to 4.5% in 1994.
 
     Operating Income (Loss).  Operating loss decreased $5.6 million from a loss
of $8.0 million in 1993 to a loss of $2.4 million in 1994. Operating loss as a
percentage of net sales decreased from 10.0% in 1993 to 2.5% in 1994 as a result
of increased sales of the Company's products, cost reduction programs and
improved manufacturing efficiencies.
 
     Interest Expense.  Interest expense increased $.4 million, or 11.5%, from
$3.9 million in 1993 to $4.4 million in 1994. This increase was due primarily to
an increase in the average debt outstanding due to increased working capital
requirements resulting from the increase in net sales, and an overall increase
in interest rates.
 
     Income Taxes.  Income tax expenses decreased by $98,000 from $197,000 in
1993 to $99,000 in 1994 due primarily to decreased income before income taxes.
The Company's effective income tax rate in 1993 and 1994 varied from the U.S.
statutory rate due to losses which resulted in temporary differences between
book and taxable income for which recognition of a deferred tax asset was not
considered appropriate.
 
     Net Income (Loss).  Net loss decreased $5.2 million from a loss of $12.1
million in 1993 to a loss of $6.9 million in 1994. Net loss as a percentage of
net sales decreased from 15.1% in 1993 to 7.2% in 1994 as a result of the
stronger demand for the Company's products in the aerospace industry, cost
reduction programs and improved manufacturing efficiencies.
 
LIQUIDITY AND CAPITAL RESOURCES

 
     The Company's historical liquidity needs arose primarily from capital
investments, working capital requirements, and principal and interest payments
on indebtedness. The Company has historically met these liquidity requirements
with funds generated from operations and from short-term and long-term debt
financing (including borrowings from the Principal Stockholders). The Company's
business is capital intensive and requires substantial expenditures for, among
other things, the purchase and maintenance of equipment used in the
manufacturing process and compliance with environmental laws. See 'Risk
Factors--Environmental Regulations,' 'Certain Transactions--Transactions with
Principal Stockholders--Lines of Credit' and 'Certain Transactions--Subordinated
Notes.'
 
                                       25
Net cash provided by operating activities was $.2 million, $1.3 million,
and $6.9 million for 1993, 1994 and 1995, respectively. Net cash provided by
operating activities was $4.7 million and $3.4 million for the nine-month
periods ended September 30, 1995 and 1996, respectively. Improvements in cash
flows from operating activities are principally the result of improved operating
results, offset by increased working capital requirements attributable to
increases in accounts receivable and inventory due to increased sales in 1995
and the first nine months of 1996.
 
     From March 1993 to September 1994, the Company had insufficient cash flow
to make certain interest and term loan principal payments under the Prior Credit
Agreement. As a result, the Company and the lenders under the Prior Credit
Agreement entered into a series of standstill agreements pursuant to which such
lenders agreed not to accelerate the indebtedness outstanding under the Prior
Credit Agreement for a specified period of time. Such standstill agreements
terminated and all remaining interest due was paid in the fourth quarter of
1994. Following the amendment and restatement of Prior Credit Agreement in
December 1994, the Company remained in compliance with all of its obligations in
respect of the Prior Credit Agreement until it was refinanced in October 1996.
 
     Capital expenditures were $.8 million, $1.0 million and $2.0 million for
the years 1993, 1994 and 1995, respectively. Capital expenditures were $1.2
million and $1.9 million for the nine-month periods ended September 30, 1995 and
1996, respectively.
 
     At September 30, 1996, the Company had $52.4 million of outstanding
indebtedness and capitalized lease obligations, consisting principally of $42.0
million of borrowings under the Credit Agreement, $9.5 million of outstanding
indebtedness under the Subordinated Notes and $.9 million of capital lease
obligations. The Company's outstanding indebtedness fluctuates depending on the
Company's working capital needs. Since September 30, 1996, the Company has
borrowed an additional $7 million under the Credit Agreement. The Company repaid
$6.5 million of the outstanding amounts under the Subordinated Notes in October
and November 1996 and intends to repay the remaining $3.0 million balance on the
Subordinated Notes prior to the consummation of the Offering. The Company
intends to use substantially all of the net proceeds from the Offering to repay
outstanding indebtedness under the Credit Agreement. If the net proceeds of the

Offering are insufficient to repay all amounts outstanding under the Credit
Agreement, the Company intends to repay all outstanding indebtedness under the
Revolving Facility and a portion of the outstanding indebtedness under the Term
Loan. If the net proceeds from the Offering are sufficient to pay all
outstanding indebtedness under the Credit Agreement, any remaining net proceeds
from the Offering will be used for general corporate purposes, including working
capital and capital expenditures. See 'Use of Proceeds.'
 
     Following the completion of the Offering, the Company's principal sources
of funds will be (i) funds generated from operations and (ii) borrowings under
the Revolving Facility of the Credit Agreement. Under the Revolving Facility of
the Credit Agreement, the Company may borrow, repay, and re-borrow from time to
time, the lesser of (a) $40 million or (b) the Company's borrowing base. The
Credit Agreement defines the Company's borrowing base as the sum of 85% of
eligible accounts receivable and 60% of eligible inventory. As of October 31,
1996, the borrowing base was $48.1 million. The Company's ability to borrow
under the Credit Agreement is subject to the satisfaction of various conditions
including compliance with certain financial covenants. In addition, amounts
borrowed under the Revolving Facility may only be used to finance working
capital needs and to repay outstanding indebtedness. The amount the Company may
borrow under the Revolving Facility is reduced by the aggregate amount of any
letters of credit issued for the account of the Company. All advances under the
Credit Agreement bear interest at the Company's option at (i) a base rate, which
is the higher of the bank's short-term commercial reference rate or the Federal
Funds rate plus .25%, (ii) the Eurodollar rate, which is the New York interbank
offered rate, plus 1.25% or (iii) the London Interbank Offered Rate ('LIBOR'),
plus 1.25%. An annual commitment fee of .25% on the unused available working
capital commitment is due monthly. All amounts outstanding under the Revolving
Facility mature on October 17, 2001. In connection with the Company's
obligations under the Credit Agreement, the Company has granted security
interests in the Company's receivables, inventory and general intangibles. The
Credit Agreement also contains covenants restricting the ability of the Company
to pay dividends, make certain restricted payments, incur additional
indebtedness, make certain investments, create liens, guarantee indebtedness,
sell or acquire assets, enter into mergers or consolidations, form subsidiaries
and enter into transactions with affiliates. The Company is also subject to
certain financial tests relating to, among other things, its consolidated net
worth, its consolidated leverage ratio and the ratio of its senior debt to
consolidated EBITDA. The Company may prepay amounts owing
 
                                       26
under the Credit Agreement at its option at any time. See 'Risk
Factors--Limitations on Payment of Dividends; Restrictive Covenants.'
 
     Over the next five years, the Company plans to invest over $50 million (or
approximately $10 million per year) in capital expenditures to expand and
modernize its melting, forging and finishing equipment, install a
state-of-the-art information system and make other investments to maintain its
technological leadership and reduce production costs. In addition to planned
capital expenditures, the Company expects to evaluate from time to time
potential acquisitions. Potential acquisitions may include investments in

companies, technologies or products that complement the Company's business or
products. Sources of funds for such acquisitions could include funds generated
from operations or alternative sources of debt or equity capital. Certain
covenants in the Credit Agreement, such as the investment limitation covenant,
the merger and acquisition covenant and certain financial covenants may restrict
or limit the Company's ability to enter into or complete an acquisition. Under
such circumstances, the Company would need to amend, obtain a waiver of or
refinance the Credit Agreement. See 'Risk Factors--Risks Associated With
Potential Acquisitions.'
 
     The Company expects that cash flow from operations and net proceeds of the
Offering will be adequate to meet its anticipated operating requirements, debt
service requirements and planned capital expenditures over the next 12 months.
However, to the extent that the Company's cash flow and net proceeds of the
Offering are insufficient to fund its capital expenditure program due to a
cyclical downturn in the superalloy industry or otherwise, the Company will be
dependent upon borrowings under the Credit Agreement or alternative sources of
debt or equity capital. In addition, as described above, the Company may need to
obtain additional debt or equity capital to fund any potential acquisitions. If
the Company is unable to borrow under the Credit Agreement or to obtain funds
from alternative sources of debt or equity capital, the Company may not be able
to fund its capital expenditures or potential acquisitions and its business
could be materially adversely affected.
 
QUARTERLY RESULTS OF OPERATIONS
 
     The following tables present the Company's quarterly operating data for
1994, 1995 and the first three quarters of 1996. Although the Company's business
is not seasonal, operating results have varied from quarter to quarter due to
industry cyclicality, fluctuations of raw material prices and general global
economic conditions. In addition, results in the third quarter are adversely
affected by a one to two-week shutdown of the Company's manufacturing facilities
for equipment maintenance and results in the fourth quarter are adversely
affected by a one-week shutdown for the Christmas holiday.
1994 QUARTERS                               1995 QUARTERS
                            ----------------------------------------    ----------------------------------------
                             FIRST     SECOND      THIRD     FOURTH      FIRST     SECOND      THIRD     FOURTH
                            -------    -------    -------    -------    -------    -------    -------    -------
                                                     (IN THOUSANDS EXCEPT PERCENTAGES)
Net sales................   $23,519    $26,678    $21,662    $23,651    $27,862    $35,148    $29,556    $39,679
Cost of goods sold.......    22,930     25,340     21,072     24,283     24,279     29,799     26,291     34,383
                            -------    -------    -------    -------    -------    -------    -------    -------
Gross profit (loss)......       589      1,338        590       (632)     3,583      5,349      3,265      5,296
Selling, general and
  administrative
  expenses...............     1,099      1,196      1,086        932      1,135      1,144      1,104      1,824
                            -------    -------    -------    -------    -------    -------    -------    -------
Operating income (loss)..      (510)       142       (496)    (1,564)     2,448      4,205      2,161      3,472
Operating income (loss)
  margin.................      (2.1)%      .5%       (2.2)%     (6.6)%     8.7%      11.9%       7.3%       8.7%

Interest expense.........     1,007      1,120      1,232      1,002      1,193      1,213      1,164      1,157
                            -------    -------    -------    -------    -------    -------    -------    -------
Income (loss) before
  income taxes...........    (1,517)      (978)    (1,728)    (2,566)     1,255      2,992        997      2,315
Income tax expense.......        27         26         27         19         27         27         27        273
                            -------    -------    -------    -------    -------    -------    -------    -------
Net income (loss)........   $(1,544)   $(1,004)   $(1,755)   $(2,585)   $ 1,228    $ 2,965    $   970    $ 2,042
                            -------    -------    -------    -------    -------    -------    -------    -------
                            -------    -------    -------    -------    -------    -------    -------    -------
27
1996 QUARTERS
                                                                          -----------------------------
                                                                           FIRST     SECOND      THIRD
                                                                          -------    -------    -------
                                                                              (IN THOUSANDS EXCEPT
                                                                                  PERCENTAGES)
Net sales..............................................................   $39,639    $43,727    $37,174
Cost of goods sold.....................................................    33,428     35,820     30,485
                                                                          -------    -------    -------
Gross profit...........................................................     6,211      7,907      6,689
Selling, general and administrative expenses...........................     1,183      1,264      1,276
                                                                          -------    -------    -------
Operating income.......................................................     5,028      6,643      5,413
Operating income margin................................................     12.6%      15.1%      14.5%
Interest expense.......................................................     1,087      1,003      1,006
                                                                          -------    -------    -------
Income before income taxes.............................................     3,941      5,640      4,407
Income tax expense (benefit)...........................................     1,018      1,631     (4,550)
                                                                          -------    -------    -------
Net income.............................................................   $ 2,923    $ 4,009    $ 8,957
                                                                          -------    -------    -------
                                                                          -------    -------    -------
BACKLOG
 
     As of December 10, 1996, the Company's backlog orders aggregated
approximately $148.8 million, compared to approximately $81.8 million at
December 31, 1995. The increase in backlog orders is primarily due to an
increase in orders for jet engines worldwide and increased demand for jet engine
spare parts. The Company defines backlog as firm purchase orders, which are
generally subject to cancellation by the customer subject to, in certain
circumstances, payment of specified charges. Substantially all orders in the
backlog at December 10, 1996 are expected to be shipped within the 12 months
beginning January 1, 1997. Due to the cyclical nature of order entry experienced

by the Company and its dependence on the aerospace industry, there can be no
assurance that order entry will continue at current levels or that current firm
purchase orders will not be canceled or delayed. See 'Risk Factors--Cyclicality;
Dependence on Aerospace Industry.'
 
     Order to shipment lead times can be a competitive factor as well as
indicative of the strength of demand for superalloy products. The Company's
current average manufacturing lead time for its cast/wrought superalloy products
is approximately five to ten weeks, although due to current backlog levels, lead
times from order to shipment have lengthened to up to 52 weeks. The Company
believes that its lead times are comparable with those offered by its
competitors.
 
INFLATION
 
     Although the Company's sales and results of operations are affected by the
prices of raw materials used to make its products and the cyclicality of the
aerospace industry, the Company does not believe that general economic inflation
has had a material effect on its results of operation for the periods presented.
 
ENVIRONMENTAL AND OTHER CONTINGENCIES
 
     For a description of certain environmental liabilities and related 
matters, see 'Risk Factors-- Environmental Regulations' and
'Business--Environmental Matters.'
 
                                       28
BUSINESS
 
GENERAL
 
     Special Metals is one of the world's leading producers of superalloy and
special alloy long products. Superalloys are highly engineered metal alloys
designed to withstand extreme heat and stress and are principally used in the
manufacture of jet engine parts. Compared to any other known metal or material,
superalloys offer a superior combination of heat resistance, high temperature

corrosion resistance, toughness and strength. Special alloys have unique
physical, chemical, and/or mechanical properties which are optimized by the
Company's melting and processing capabilities. In 1952, a predecessor of Special
Metals pioneered the melting technology that led to the practical development of
the superalloys that are the critical materials used in the 'hot' section of
modern jet engines. The Company believes that its 45 million pounds of vacuum
induction melting capacity makes it one of the largest producers in the
superalloy industry and that its substantial market share, comprehensive product
line, proprietary know-how and technological experience make it a leader in its
field. Special Metals' total net sales have increased from $80.4 million in 1993
to $132.2 million in 1995. The Company's backlog was approximately $148.8
million at December 10, 1996 compared to approximately $81.8 million at December
31, 1995. For the first nine months of 1996, approximately 77% of the Company's
net sales were to jet engine component manufacturers. The Company's products are
also used in other technically demanding applications, such as land-based power
generating equipment, oil well drilling hardware, die materials, chemical
processing applications and medical applications.
 
     Special Metals operates three divisions. The Superalloy Billet and Bar
Division manufactures a wide array of wrought superalloy and special alloy
products in billet, bar and cast form, which are used primarily in jet engines.
This division also produces 'shape memory' alloys, such as Nitinol, which are
primarily used in medical and dental applications. The Company believes it has
the leading worldwide market share of approximately 32% (excluding China and the
countries of the former Soviet Union) in superalloy billet products and a 
North American market share of approximately 20% in superalloy bar products. The
Powder Division produces powder metallurgy superalloy products for military jet
engines and the latest generation of large commercial jet engines and is the
world's largest independent manufacturer of superalloy powder products. The
Dental Division is the leading North American producer of amalgamable dental
alloys. In 1995, the Superalloy Billet and Bar Division, the Powder Division and
the Dental Division accounted for 85%, 10% and 5%, respectively, of the
Company's net sales.
 
INDUSTRY OVERVIEW
 
     Superalloys are primarily nickel-based alloys containing varying amounts of
other elements, such as chromium, cobalt, columbium, molybdenum, titanium and
aluminum. Superalloys were originally developed to meet the highly demanding
design requirements of jet engines and are currently used to make jet engine
components such as turbine blades, vanes, disks, rings, seals and shafts. These
applications require very high strength, toughness and resistance to metal
fatigue and creep while operating in environments where temperatures can
sometimes exceed 2,200degreesF. These engine components are designed to
withstand the high stress and high temperatures associated with aircraft
takeoffs and landings, when maximum power is applied for thrust and reverse
thrust. The highly demanding technical nature of superalloy products,
specialized multi-stage production processes and the stringency of jet engine
manufacturers' qualification requirements and certification processes have
created what Management believes are high barriers to entry in the superalloy
industry. Management believes that over 70% of all superalloy sales worldwide
are to jet engine component manufacturers. Superalloy products are also used in
other technically demanding applications such as land-based power generating
equipment, oil well drilling hardware, die materials and chemical processing

applications. The complexity of the production process is reflected in the
Company's relatively high average selling prices of $9.92 and $12.44 per pound
shipped of superalloys and special alloys, respectively, for the first nine
months of 1996, compared to the average selling price of other metals such as
carbon steel sheet, stainless steel sheet and aluminum, which currently range
from $.17 to $1.25 per pound shipped. The chart set forth below illustrates the
end uses of superalloy products during 1995.
 
                                       29
[Pie chart: Superalloy End Use Markets for Bar/Billet Products, 1995. 
Data: Aerospace 79%; Petrochemical 12%; Power Generation 2%; Fasteners 6%;
All others 1%. Source: Marketronics.]

     The aerospace industry, which is highly cyclical, has had a significant
impact on the sales and profitability of the superalloy industry. The superalloy
industry reached a cyclical and historical peak in 1990 and subsequently
declined to a cyclical bottom in 1993. Management estimates that between 1990
and 1993, industry capacity utilization fell from approximately 100% to 67%. The
steep decline was the result of a severe downturn in commercial aircraft
deliveries, the Gulf War, a recession, an over-ordering of aircraft in the late
1980s and excess industry capacity. The downturn was exacerbated because the
aerospace industry was shifting to 'lean' manufacturing, which substantially
reduced cycle times and inventories. Special Metals estimates that inventory
reductions between 1990 and 1994 eliminated as much as a full year of production
of superalloy billet and bar product. During this recession, approximately 40
million pounds of inefficient industry vacuum induction melt capacity (or 20% of
total industry vacuum induction melt capacity) was eliminated.
 
     In 1995, the commercial aircraft industry started to recover from the
recession of the early 1990s. The firm order backlog of Boeing, McDonnell
Douglas and Airbus Industrie, as reported by The Airline Monitor, increased to
1,869 planes at December 31, 1995 from 1,742 planes at December 31, 1994.
Roll-outs of commercial aircraft with more than 100 seats are expected to
increase by more than 40% from 1995 to 1997. Boeing's production rate is
scheduled to increase from 18 aircraft per month in early 1996 to over 30
aircraft per month by mid-1997. More importantly, the number of wide-body
aircraft under production or on order is increasing, which is expected to
increase demand for larger engines and larger components made with superalloys.
The superalloy industry has substantially benefitted from this recovery. The
Company believes that demand for jet engines will remain strong through 1999
because of projected increases in revenue passenger miles both domestically and
internationally (especially in the Pacific Rim) and the imposition of federal
Stage III noise regulations in the United States, which will require airlines to
replace existing Stage II engines or retrofit such engines with engine hush
kits.
 
     The superalloy industry is also benefiting from a significant increase in
demand for jet engine spare parts. This increase is attributed to a combination
of factors. First, when the aerospace cycle was strong from 1985 to 1990,
hundreds of new aircraft were delivered. Because of Federal Aviation
Administration regulations mandating maintenance of aircraft based in part on
the number of hours flown and the number of takeoff and landing cycles, from
1995 to 2001, these aircraft are scheduled to undergo engine rebuilds, which

will require replacement parts containing superalloy products. Second, the
airlines and engine companies are increasing their spare part stocks, which fell
below required levels during the early 1990s. Third, because of increased
activity
                                       30
and a return to profitability, the airlines now are flying older, previously
grounded aircraft, which generally require more spare parts than newer aircraft.
 
     Demand for superalloy long products has almost doubled since 1993 from 16
million pounds to 30 million pounds in 1996. Management believes that the
industry is operating at close to 100% of available capacity. As a result, since
1993, there have been significant increases in prices for superalloy products.
Based on industry data, the Company believes that demand for superalloy products
will increase at a 6 to 10% annual rate for the next three years and that,
despite certain announced capacity expansion programs scheduled to occur in the
next five years, including capital expenditures planned by the Company of $50
million, the superalloy industry will operate at a utilization rate in excess of
90% for the next three years. Although capacity can be added by existing
producers, installation times for critical equipment often exceeds one year and
prevents capacity from being increased quickly in times of strong demand.
 
[Graph of Worldwide (excluding China and countries of the former Soviet Union)
Shipments of Wrought/Cast Supperalloys. Data:

            World Shipments              U.S. Shipments
Year      (millions of pounds)        (millions of pounds)
----      --------------------        --------------------
1990              127                           95
1991              117                           89
1992               95                           70
1993               80                           60
1994               92                           70
1995              111                           84
1996F             120                           90
2000F             160                          120
Source: Marketronics]

BUSINESS STRATEGY
 
     The Company's primary objective is to continue the growth of its superalloy
and special alloy business and to focus on both the aerospace and non-aerospace
markets. To achieve its objectives, the Company has implemented a business
strategy which is designed to: (i) capitalize on the Company's leading position
in the aerospace market; (ii) develop new products and markets; (iii) continue
to reduce the Company's costs; and (iv) explore potential acquisitions.
 
     Capitalize on Leading Position in Aerospace Market.  Special Metals'
largest single product line is superalloy billet used primarily in the
manufacture of jet engines. Management believes the Company's worldwide market
share (excluding China and the countries of the former Soviet Union) in
superalloy billet was approximately 32% in 1995 and, in certain key high
technology applications, approached 40%. To meet the increased level of
aerospace demand, the Company has increased its annual billet melting capacity
by 15% during 1996.
 
     The Company believes that its capital investment programs and commitment to
high quality have contributed to its ability to obtain a wider variety of
certifications from major jet engine producers such as General Electric, Rolls
Royce, Pratt & Whitney and SNECMA, than any of its competitors. Over the last
five
                                       31
years (principally in 1991 and 1992), the Company invested over $20 million in
new state-of-the-art forging and melting facilities, and over the next five
years, the Company currently plans to invest an additional $50 million to 
expand and modernize its facilities.
 
     Develop New Products and Markets.  Special Metals plans to grow its
business through the development of new products and new applications and
markets for its existing products. Between 1990 and 1996, Special Metals engaged
in an aggressive product line expansion effort. Improved superalloys, corrosion
resistant alloys, shape memory alloys, new dental products and high strength
stainless steels were added to the Company's product line. Over 20% of the
Company's net sales in 1995 were from sales of enhancements of existing products
or new products that did not exist in 1990. Given the brief commercial history
of superalloys, the non-aerospace market for superalloy products is relatively
immature. The Company believes that it is well positioned to exploit this market
and capitalize on new opportunities. Special Metals intends to continue its
growth efforts by increasing sales of its products to commercial markets and by
seeking to develop new products.
 
     Continue to Reduce Costs.  The Company has undertaken numerous projects to
maintain and improve its efficiency and cost position over the last few years.
Since 1992, Special Metals has enhanced its operating leverage, reduced its
billet cycle time by 33%, and improved its inventory turnover by 37%. The
Company continues to pursue opportunities to further reduce costs and improve
efficiency.
 
     Explore Potential Acquisitions.  The Company will examine opportunities to
acquire or invest in companies, technologies or products that complement the
Company's business or its product offerings. In particular, the Company will 
consider acquisitions or investments that will leverage its expertise in
superalloy and special alloy products and enable it to enter new markets or sell
new products. Currently, the Company has no agreements or understandings
regarding any such acquisition or investment. See 'Risk Factors--Risks
Associated With Potential Acquisitions.'
 
PRODUCTS AND MARKETS
 
     The Company's products include superalloy ingots and wrought products such
as billets, bars, and wire manufactured by the Superalloy Billet and Bar
Division. These products are sold to casters, forgers, machine shops,
fabricators, and independent distributors, which use these products primarily in
the manufacture of jet engine parts and in other critical applications that
require heat resistance, high temperature corrosion resistance, toughness and
strength. The Superalloy Billet and Bar Division also produces advanced
specialty metals, including shape memory alloys, such as Nitinol. The Powder
Division produces powder metallurgy superalloy products in the form of loose
powder, billet and bar which are used in military jet engines and the latest
generation of large commercial jet engines. The Dental Division produces
amalgamable silver-based dental alloys.
 
     Management estimates major end use markets for the Company's products in
1995 were: jet engines (70%); power generation (12%), distributors (6%); and

medical applications (6%). Management believes distributors sell the Company's
products for use in oil and gas exploration and production, chemical processing
and for jet engine parts.
 
     BILLETS
 
     Billets are produced by taking an ingot manufactured at the Company's New
Hartford, New York facility and forging it at the Company's Dunkirk, New York
facility to a smaller diameter. The forging process involves heating an ingot to
a precisely controlled high temperature and reducing its diameter in a large
forging press. The reduction of an ingot into a billet refines the grain
structure of the ingot into a fine uniform structure that is both tough and
ductile. Billets are sold to forgers for production into a wide range of parts
that are used primarily in the hot section of an aircraft jet engine. Disks,
rings, spacers, shafts, and casings are forged from billet.
 
     Billet is sold as either 'standard grain' or 'fine grain.' Fine grain
processing facilitates the subsequent quality control of superalloys through
ultrasonic inspection to detect smaller discontinuities in the superalloy. Fine
grain billet is used in more advanced jet engines where great strength and low
defect levels are required. Fine grain billet was developed in the late 1980s
and early 1990s and typically has been available only in diameters 10 inches or
smaller. Special Metals' new forging press allows the production of larger fine
grain superalloy billets, which the Company believes gives it a unique
competitive advantage. The new larger engines
 
                                       32
used on the Boeing 777, such as the Trent, GE90 and PWA4084, require larger
diameter, heavier disks. These large disks are very difficult to produce from
smaller diameter billet, and the availability of large fine grain billet allows
the forger to eliminate operations, improve yield and reduce cycle time, thereby
producing a part at lower total cost and enhancing the competitiveness of the
forger's product to its own customers. During 1993, 1994, 1995 and the first
nine months of 1996, 37%, 37%, 40% and 52% of the Company's net sales were
derived from billet sales.
 
     BAR
 
     Bar products are manufactured by rolling a billet to a smaller cross
section on either one of two rolling mills. The rolling process involves heating
the billet to a precisely controlled temperature and then reducing its diameter
by passing it back and forth between shaped rolls. The rolling process reduces
the diameter, lengthens the product, and refines the grain structure.
 
     Special Metals sells a wider range of alloys in bar product than it does in
billet or ingot product. Bars are sold to machine shops, forgers and
distributors. One application for bar products is to produce disks and shafts
for the hot section of smaller jet engines and auxiliary power units. During
1993, 1994, 1995 and the nine months ended September 30, 1996, 21%, 21%, 21% and
20% of the Company's net sales were derived from bar product.
 

     INGOTS
 
     Ingots are long cylindrical alloy castings that are the primary product of
the Company's New Hartford, New York melting facility. As sold to the market,
ingots range in diameter from 3.5 inches to 34 inches and weigh up to 46,000
pounds. Ingots are manufactured by melting scrap and virgin raw materials,
casting the molten metal into a mold, and, in most cases, remelting them once or
twice. The primary attributes of an ingot are its chemistry, homogeneity, and
structure. Ingots are sold to either casters or forgers, and the largest single
end use market for ingots is large disks used in power generation turbines. In
1996, the Company consumed substantially all of its total ingot production to
produce billet, bar and other wrought products. The remainder of ingot
production was sold to third parties. During 1993, 1994, 1995 and the first nine
months of 1996, 11%, 11%, 11% and 4% of the Company's net sales were derived
from third party ingot sales.
 
     NITINOL
 
     Nitinol represents a group of titanium/nickel alloys that have unique shape
memory and flexibility properties. Shape memory alloys can be formed into a
product, bent or twisted into a different shape, and then be easily returned to
their original shape. Nitinol's major uses are in medical applications such as
orthodontic wire, stents, catheter guide wires and eye glass frames and
industrial applications such as temperature control devices and clamping
devices. Nitinol is sold primarily as fine wire. Although currently relatively
small, the Nitinol product market is expected to grow over the next five years.
 
     POWDERS
 
     In the most advanced jet engines, the requirements for strength, high
temperature corrosion resistance and toughness exceed the capabilities of
conventionally cast/wrought superalloys. In these applications, alloys have been
developed that cannot be processed using normal ingot metallurgy. Instead,
powder metallurgical techniques are needed to produce the product. Special
Metals developed and pioneered powder metallurgical processing of superalloys in
the 1960s and remains the leading independent producer of powder metallurgy
superalloys. Powder metallurgy superalloys are produced at the Company's
Princeton, Kentucky facility. During 1993, 1994, 1995 and the nine months ended
September 30, 1996, 12%, 12%, 10% and 10% of the Company's net sales were
derived from powder products. The Company believes that there are substantial
growth prospects in the superalloy powder market.
 
     DENTAL PRODUCTS
 
     The Dental Division designs, manufactures, and markets silver-based
amalgamable alloys used primarily for tooth fillings. The products are in the
form of very fine powder produced by melting, alloying, and atomizing alloys of
silver, copper, tin, palladium and other materials. The Dental Division produces
both finished alloy ready for packaging and distribution (about 90% of sales)
and master components that are blended to produce the final product. A number of
the Dental Division's products are covered by patents extending to 2000 and
beyond.
 
                                       33
Approximately 16% of the Dental Division's 1995 net sales were to European
customers. Management estimates that the Company has a 50% share in the North
American market compared to an estimated 5% share of the European market. The
Company believes that an opportunity exists to expand its sales of dental
products in select emerging foreign markets with potential for growth.
 
     TOLL CONVERSION
 
     In addition to its manufactured products, the Company sells toll conversion
services, primarily forging and melting, to other metal-working companies. Toll
conversion allows the Company to sell excess equipment capacity that may exist
for short periods of time, or may result from an imbalance of capacity between
various units in the Company.
 
PRODUCTION PROCESS
 
     Superalloys are more difficult to manufacture than titanium alloys and
lower performance alloys, such as stainless steels. Superalloys are vacuum
induction melted followed by vaccum arc remelting or electro-slag remelting or
both. Stainless steels, on the other hand, are usually electric arc melted
followed by argon-oxygen-decarburization, while titanium alloys are typically
vacuum arc remelted two or three times. The resulting superalloy is much more
difficult to process than stainless steels or titanium alloys because, by
design, superalloys retain their strength and toughness at high temperatures.
Consequently, deforming superalloys requires greater force than stainless steels
or titanium alloys. Also, because of the need to control grain structure,
superalloy deformation processes are more complex than those used for stainless
steels and most titanium alloys. Certain of the Company's superalloys may
undergo up to 14 distinct stages of melting, remelting, forging and rolling over
a period of weeks before they achieve the customer's specifications.
 
     Due to the critical nature of the applications in which the Company's
products are used and the stringency of customer specifications, the process of
producing superalloy is highly demanding and complex. Quality control is
critical. The Company's Superalloy Billet and Bar Division is ISO 9002 certified
and certified by the National Aerospace and Defense Contractors Accreditation
Program ('NADCAP'), a private accreditation organization recognized by the jet
engine industry. The Company employs state of the art melting and furnace
technology and processes.
 
     Special Metals has pioneered a number of 'total quality' activities, and,
in 1994, embarked on a Continuous Flow Manufacturing ('CFM') program. CFM
reduces queue times and speeds the flow of products through the plant. Since
1992, the Company has reduced cycle times by 33% and significantly reduced
work-in-process inventories.
 
     INGOT METALLURGY
 
     As illustrated in the diagram below, production of wrought superalloys
using ingot metallurgy techniques involves several basic steps: An initial
melting in a vacuum induction melting ('VIM') furnace; secondary melting in

either a vacuum arc remelt ('VAR') furnace, or an electroslag remelting ('ESR')
furnace; or, in the case of the highest quality materials, remelting in both ESR
and VAR furnaces. Melting and remelting are followed by thermomechanical
processing on a forging press and then by finishing and inspection.
 
                                       34
[Diagram depicting ingot metallurgy process steps: vacuum induction melting of
raw material into ingot; vacuum arc remelting of ingot; forging of ingot into
billets; finishing of product by grinding, peeling and end clearing; inspection;
and shipping.]
 

     Special Metals' New Hartford facility has one of the largest melting
complexes in the superalloy industry, with three VIM furnaces of 44,000 pound,
12,000 pound, and 7,000 pound capacity, respectively, as well as seven VAR
furnaces and two ESR furnaces. Upon its scheduled completion in 1997, the
addition of a VAR furnace and a major upgrade of the 44,000 pound VIM furnace at
a cost of approximately $5 million are expected to increase ingot capacity by
15%. Special Metals is a fully integrated producer and does not rely on outside
manufacturers to produce its primary wrought superalloy product line.
 
     Vacuum Induction Melting.  Vacuum induction melting is a process that
converts virgin and scrap raw materials into homogeneous alloys. The primary
advantage of VIM is that it prevents the reactive alloy elements, such as
aluminum, titanium, zirconium, and hafnium, from oxidizing and forming
nonmetallic defects which severely limit the mechanical integrity of the alloy.
In addition, VIM is useful for removing deleterious volatile elements, such as
bismuth and lead, which are commonly found in raw materials and which
drastically reduce mechanical properties necessary to achieve strength and
toughness in superalloys. Gaseous elements, such as hydrogen, oxygen and
nitrogen, can also be removed.
 
     A VIM furnace is made up of a large vacuum chamber containing a refractory
crucible, induction heating coils, a pour system and large ingot molds. The
Company's primary VIM furnace is one of the largest in the world and, although
rated at 44,000 pounds, can melt up to 46,000 pounds of superalloy in a single
heat. To prepare a melt, raw materials are introduced into the furnace through a
vacuum lock which maintains the melt under a vacuum. Generally, virgin raw
materials are melted first and degassed before any reactive elements are added.
Scrap or revert raw material is then added and melted. Once the deleterious
elements are reduced to an acceptable level, the heat's chemistry is verified
and any alloy chemistry corrections are made. It is not uncommon that up to 28
key elements will be controlled to within very tight tolerances. The melt is
then poured into individual molds to produce ingots weighing typically 10,000 to
14,000 pounds each.
 
     The ingots produced from the VIM process are generally 'clean' and have the
desired uniform chemistry but are not acceptable in terms of the as-solidified
structure. The VIM ingots are therefore subsequently remelted once or twice to
achieve the customer's cleanliness and structure requirements.
 
     Vacuum Arc Remelting.  VAR is used for the secondary melt process, which

converts VIM ingots into a cleaner ingot with greatly improved chemical and
physical homogeneity. The process consists of welding a stub to one end of the
VIM ingot, suspending the VIM ingot in a water-cooled copper crucible that is
inside a vacuum chamber, and subsequently striking an electric arc between the
end of the VIM ingot and the crucible bottom. As the arc is maintained,
sufficient heat is generated to melt the VIM ingot, dripping it into the
crucible to form a VAR ingot. In general, the greater the current applied in the
arc, the faster the melt rate. Typically, a 17-inch VIM ingot is remelted into a
20-inch VAR ingot in about 20 hours. The methods of controlling the melt rate
and the parameters that are used to melt a particular alloy are usually very
specific to the alloy and the furnace and are critical to obtaining the desired
product. As a result of the slow remelting process in a vacuum, further melt
 
                                       35
refining occurs, deleterious low density oxide and nitride inclusions float out,
and an ingot with a controlled grain structure is formed.
 
     Electroslag Remelting.  ESR is similar in principle to VAR in that the
initial ingot is slowly remelted into a larger diameter ingot. The primary
difference is that the melting does not occur in a vacuum but through a reactive
molten slag that is resistance-heated by an electric current flowing through it.
As molten metal drops from the VIM ingot it passes through the molten slag which
purifies the metal before it settles into the molten pool of the new ingot. ESR
is particularly useful in further refining the sulfur levels of the alloy.
 
     Some premium grades of superalloys use a triple melting process that
includes both ESR and VAR. The melt sequence for these superalloys is VIM,
followed by ESR, then VAR. The additional ESR melt step is used to further
refine the alloy, remove more nonmetallic inclusions and to provide a more sound
ingot for VAR processing. Triple-melted superalloys are considered to be
superior in some applications because they provide more consistent mechanical
properties.
 
     Given the extreme conditions under which superalloys must operate, the
overall production process is more technically demanding than that of other
metals such as titanium and stainless steels. The melting of titanium alloys is
similar to that used for superalloys in that both use VAR processing. One
primary difference between superalloys and titanium alloys is that VIM is used
to form the primary superalloy ingots whereas titanium alloy production uses
multiple VAR melts to obtain uniform chemistries and structure. ESR cannot be
used for titanium because of titanium's severely reactive nature. Special Metals
does not melt production quantities of titanium-based alloys.
 
     The manufacturers of stainless steels generally do not use vacuum melting
because the alloys that they make do not contain large amounts of reactive
elements such as aluminum and titanium. Stainless steels are also generally not
required to have the same cleanliness as superalloys. There are specific grades
of specialty stainless steel that do require vacuum melting to insure
cleanliness. These grades are typically used for special electronic or medical
applications. ESR processing is frequently used to make stainless steels and
other specialty alloys. In contrast, the Company's high strength stainless steel

products use VIM and the Company's other sophisticated processing techniques to
ensure their strength and integrity.
 
     Thermo-mechanical Processing.  After satisfactory solidification structures
are obtained, the superalloy ingot is heat-treated at controlled temperatures of
up to 2,200degreesF for up to 48 hours to improve the micro-chemical homogeneity
of the ingot and then press-forged to produce a smaller diameter billet. The
forging process serves to shape the ingot into billet, refine the ingot's
microstructure and enhance its mechanical properties through highly controlled
deformation. Because superalloys are designed to have high strength at high
temperatures, the thermo-mechanical processing of these alloys requires
equipment that is capable of applying high stresses at high temperatures at high
rates of speed. A typical superalloy ingot must be heated to temperatures of
1,800-2,100degreesF, forged, and reheated for numerous cycles before the desired
sizes and structures are obtained. Superalloys can only be forged within a very
narrow temperature range, as compared to other alloyed metals such as stainless
steel.
 
     Special Metals' Dunkirk forge plant is one of the most modern forging
facilities in the North American superalloy industry. In 1992, Special Metals
installed a state-of-the-art 4,000 ton, high speed forging press. This press
offers a unique combination of high forging force, very high speed and precise
control of press position and press speed, all of which features are designed to
achieve highly controlled deformation of the hot ingot. This combination of
great power and high speed enables Special Metals to produce very high quality
products. The press also produces large diameter (in excess of 10 inches) fine
grain superalloy billets. New, larger jet engines, such as those used in
Boeing's 777 aircraft, require larger internal parts, the manufacture of which,
in turn, requires larger and heavier superalloy billets. The Company believes
that its ability to produce large diameter fine grain superalloy billets gives
it a competitive advantage. Prior to the installation of Special Metals' 4,000
tons forging press in 1992, the largest diameter fine grain billet available in
the superalloy industry was 10 inches. The press facility has also been upgraded
with new forging furnaces and is being further upgraded with more heating
capacity and a re-engineering of the smaller 2,000 ton press to increase its
speed and productivity. These upgrades are expected to be completed in early
1997 at a cost of approximately $800,000.
 
     Bar Products.  In addition to wrought superalloy billet, Special Metals
produces superalloy bar products. Bar product processing is similar to billet
processing from melting through forging. After forging, billets are rolled at
the New Hartford facility into smaller round sections and finished for shipment
to machine shops and forgers.
 
                                       36
Finishing and Inspection.  After forging, superalloy billets are returned
to the New Hartford facility for finishing, which involves various cutting,
peeling, and inspection and testing operations. The New Hartford facility has a
complete array of finishing facilities, along with extensive chemical,
metallurgical, and mechanical test facilities.
 

     Once superalloy product is forged to billet or rolled to bar it goes
through a variety of rigid inspection procedures to certify that it meets the
customer's specification. Billet ends are cropped to remove any ingot end-
effects. Slices are taken to verify macrostructures and microstructures and to
test mechanical properties. The billet surface is peeled to remove surface
irregularities and to provide a suitable surface for ultrasonic inspection which
is used to locate any defects in the billet, sometimes as small as 1/64th of an
inch in diameter.
 
     The final product is certified for chemistry, microstructure, mechanical
properties and ultrasonic inspection. All products are carefully serialized to
form a traceable reference. Even after many years of service, the process
history of a given jet engine component can be quickly traced back to the
component manufacturer, forging process, melting heats and raw materials.
 
     POWDER METALLURGY
 
     As illustrated in the chart below, powder metallurgy operations begin with
the melting of master alloy using the VIM technique described above at the New
Hartford facility.
 

[Diagram depicting powder metallurgy process steps: gas atomization into powder;
classify; blend; containerize; extrude into billet product or hot isostatic
press into near net shape product].
 

     In order to make a superalloy billet from powder, a master alloy is made
using VIM processing techniques described above. Once its chemistry is
satisfactory, the master alloy is taken to the Company's Princeton facility
where it is remelted in a VIM furnace, poured into a cup and then transferred
into a nozzle that atomizes the molten metal by breaking up the liquid stream
with a high pressure inert gas, typically argon. The atomized metal is collected
under an inert environment to prevent surface contamination of the powder
surfaces. The powder is sieved to very specific sizes and collected in a sealed
stainless steel container, evacuated to remove gases, and then reconsolidated by
either hot isostatic pressing or extrusion. The result is a billet with uniform
chemistry and uniform metallurgical structure.
 
     The overall process of making powder superalloys requires very careful
control and very clean conditions to make sure the millions of powder particles
do not become contaminated with defects before they are reconsolidated.
Superalloy billets made from powder are typically inspected for defects that are
much smaller than can be detected in conventionally processed billets. These
billets are sold to the forging industry and used in the most critical
applications where the highest strength and integrity are required. Formerly
found primarily in military jet engines, powder metallurgy superalloys are now
beginning to be used in the more advanced commercial jet engines.
 
                                       37
Production equipment at the Princeton facility includes two 2,000 pound
vacuum melt furnaces with associated inert gas atomization units. These units
are supported by a full range of vacuum and inert gas powder handling

facilities. The plant's manufacturing is supported by chemical, mechanical and
metallurgical test facilities. The sole contractor that provides extrusion
services to the Company is a producer of powder-based products.
 
     The Company recently received a patent on a superalloy process that has the
potential of reducing the cost of powder metallurgy superalloys and enhancing
the mechanical processing. The process, called 'SS-HIP,' consists of
containerizing the powder superalloy via conventional methods and then hot
isostatically pressing the container at temperatures very near the point that
the alloy begins to melt. Initial testing has shown that this novel thermal
treatment alters the metallurgical structure in such a way that the material is
more amenable to hot-working in a conventional manner similar to processes used
for cast/wrought alloys. If future applications of this development are
successful, the need for extrusion services outside of the Company could be
reduced. The patented process also has the potential to produce billets that
could be directly forged into components using conventional equipment instead of
the more expensive 'isothermal processing' that is needed for present products.
The Company is also developing a new process which may increase yields and
reduce costs.
 
     POWDER METALLURGY DENTAL ALLOYS
 
     Powder alloys that are used for dental amalgam restorations are
manufactured at the Company's Ann Arbor, Michigan facility. Powder alloys for
dental amalgam are produced by melting, alloying and atomizing alloys of silver,
copper, tin, palladium and other materials. Environmental conditions for
atomizing silver-copper-tin alloys are less demanding than superalloys and do
not require the carefully controlled inert handling conditions. The following
diagram depicts the dental alloy production process.
 

[Diagram depicting dental alloy production process steps: Atomization; drying;
classification; heat treating; characterization and/or mechanical processing;
alloying; blending; inspection; bulk packaging or encapsulation.]

 
     Atomization can be achieved using various gases and sometimes water. Dental
alloys are carefully controlled to maintain critical powder shape and size
distributions and thermal treatments to meet the desired product
characteristics. Some dental alloy products are blended to create complex
characteristics. Most of the powder dental alloy that the Company manufactures
is sold in bulk form to distributors that repackage it for sale to dentists.
Specific dental alloys are designed for properties such as handling
characteristics, expansion, corrosion, short-term strength, long-term strength,
and affordability. The Dental Division pioneered the development of atomized
powder based amalgam alloys which are far superior to the former 'cut' dental
alloys. The division's products are highly regarded for their outstanding
strength, resistance to corrosion, low leakage, and outstanding carving and
polishing properties.
 
                                       38
RAW MATERIALS
 

     The major raw materials used in the production of superalloys and special
alloys are scrap and various virgin materials such as nickel, chromium, cobalt,
columbium, molybdenum, titanium and aluminum. Over half of the raw materials
consumed in superalloy production is scrap, either internally generated scrap
from the Company's own production process, or scrap purchased on the open market
or from customers. Virgin raw materials are generally purchased directly from
producers. Although there can be no assurances, the Company believes that a
number of suppliers can produce sufficient quantities of either scrap or virgin
raw materials and that it is not dependent on any one supplier for any of the
raw materials used to manufacture its products.
 
     Commercial deposits of certain metals used by the Company are found in only
a few parts of the world. The availability and prices of these metals may be
influenced by cartels, changes in world politics, unstable governments in
exporting nations and inflation. Shortages of, and price increases for, certain
raw materials used by the Company have occurred in the past and may occur in the
future, which could have a material adverse effect on the Company.
 
     As described above, a substantial portion of the Company's raw materials
used in production are commodities, such as nickel, that are subject to wide
price fluctuations. The price the Company pays for nickel is usually based upon
quoted prices on the LME plus a premium due to quality, location, and volume
purchased. Although certain of the Company's 1996 product orders provide for
price adjustments to reflect changes in the price of raw materials, a
substantial majority of the Company's product orders currently are, and in the
future are expected to be, made pursuant to firm price sales contracts which do
not provide for raw material price adjustments. To attempt to mitigate the risks
associated with raw material price fluctuations and to match raw material
purchases with firm price product orders, the Company often enters into firm
price contracts for the purchase of virgin raw materials from suppliers and for
the purchase of scrap from customers or hedges the price of nickel. See 'Risk
Factors--Availability and Cost of Raw Materials; Hedging' and 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview.'
 
PRICING
 
     Pricing of superalloys can be volatile and often moves in concert with key
raw materials, such as nickel and cobalt. Sales of the Company's products are
made under standard orders, under one-year supply contracts and long-term firm
price contracts. For the nine months ended September 30, 1996, approximately 70%
of the pounds shipped of the Company's billet and bar products were sold under
standard orders or under one-year supply contracts. The remaining 30% of the
pounds shipped of the Company's billet and bar products for the nine months
ended September 30, 1996 were sold at firm prices under long-term contracts
negotiated in 1993 at the bottom of the aerospace cycle. Since the early 1990s,
long term firm price sales contracts have become more prevalent in the
superalloy industry because jet engine manufacturers need to quote firm prices
to airlines for jet engines to be delivered several years in the future. In
1993, at the bottom of the aerospace cycle, the major jet engine manufacturers
negotiated three year firm price sales agreements with their forging vendors,
who, in turn, negotiated three year contracts with superalloy suppliers. Because
of the adverse business conditions prevailing when the contracts were
negotiated, the pricing on the contracts was very unfavorable to superalloy

producers and resulted in severely depressed margins in the superalloy industry
from 1994 to 1996. Special Metals recognized losses on these long-term firm
price contracts in 1994 and 1995 and generally did not earn a profit on such
contracts during the nine months ended September 30, 1996. Substantially all of
these firm price sales contracts concluded in 1993 are due to expire into 1996,
with a minor portion of shipments for 1996 orders carrying over into 1997. The
current market prices for superalloy products have returned to acceptable 
levels. During 1996, Special Metals began negotiations with certain customers to
enter into new long-term supply contracts, which, if entered into, are expected
to provide significant improvements compared to the expiring contracts.
 
     Firm price sales contracts will continue to be a significant part of the
superalloy industry because the end users of superalloy products, primarily jet
engine companies, need to be able to quote firm prices to the airlines for
engines to be delivered several years in the future. The Company attempts to
minimize raw material price risks in connection with its firm price contracts by
hedging prices of raw materials, purchasing raw materials
 
                                       39
under fixed price arrangements and entering into scrap purchase arrangements
with customers. See '--Raw Materials.'
 
MARKETING AND DISTRIBUTION
 
     Special Metals has a 14 person sales department consisting of an outside
sales force and inside sales personnel. In certain foreign markets, the Company
relies on agents to sell its products. Regular contacts and key relationships
between Special Metals and significant customers are maintained by executive,
sales, financial, production, technical and quality control personnel. The
Company has a program of regular meetings with key executives of customers.
Through the combined efforts of the Company's direct sales organization and its
technical staff, the Company works closely with customers in order to identify,
develop and support diverse applications for its superalloy and special alloy
products and to anticipate its customers' and end-user future materials
requirements.
 
     Special Metals has historically made products to specific customer orders.
However, as part of its diversification strategy, the Company has recently
increased sales of superalloy product through its warehouse distribution
facility in Oceanside, California. From 1990 to 1995, sales through distributors
increased from less than 1% to approximately 6% of the Company's net sales.
 
     There are a small number of large consumers of superalloy long products in
the world, and Special Metals believes it enjoys good relations with all of
them. A substantial portion of the Company's business is conducted with a
relatively small number of large customers, including affiliates of SIMA. 
The  Company's top 10 customers accounted for 67% of the Company's net sales in
1995. In 1995, each of Wyman-Gordon, Ladish Company and Transmet, an affiliate
of SIMA, accounted for approximately 17%, 11% and 10%, respectively, of the
Company's net sales. In 1994, the Company's two largest customers each accounted
for approximately 22% and 13%, respectively, of the Company's total sales and in

 
1993, the Company's two largest customers each accounted for approximately 12%
of the Company's total sales. See 'Risk Factors--Customer Concentration.'
      
     Although the Powder Division sells its products to approximately 12
customers, it is substantially dependent on its two largest customers. In 1993,
1994, 1995 and the nine months ended September 30, 1996, sales to the two
largest customers of the Powder Division constituted between 79% and 92% of the
division's net sales. The majority of the division's sales result from long term
supply arrangements with aircraft engine manufacturers and their suppliers.
 
     The Dental Division supplies powder alloys to approximately nine of the
leading dental supply firms. The supply firms package the alloys and market them
to dental supply houses under well established trade names.
 
COMPETITION
 
     The superalloy industry is highly competitive. The market for superalloys
is global and is dominated by a few major producers. The Company's major
competitors include Carpenter Technology Corporation, Allegheny Teledyne, Inco
Alloys International, a division of Inco Ltd., and Western Australian Specialty
Alloys Pty. Ltd. The Company competes primarily on the basis of ability to meet
customers' product specifications, quality, price and delivery schedules. Many
of the Company's competitors are subsidiaries or divisions of large, diversified
metals companies which may have substantially greater capital resources, and, in
some cases, lower raw material or labor costs than the Company. During the
downturn of the early 1990s, one superalloy producer went out of business,
leading to some industry consolidation and a reduction in capacity. However, the
Company's competitors have recently added and may in the future add production
capacity which, when coupled with the competitive nature of the superalloy
industry, may exert downward pressure on prices. In particular, Carpenter
Technology Corporation has announced the installation of a new 20 ton VIM
furnace and two new VAR furnaces. The installations will be completed in 1997.
 
                                       40
Special Metals is primarily dedicated to the superalloy and special alloy
business. In spite of progress in diversifying, Special Metals still derives
over 70% of its revenues from the production of wrought and powder superalloys
sold to the jet engine market. Other large producers of superalloys are
divisions of large stainless steel companies or specialty steel producers who
also make superalloys as part of a larger array of product lines. Although these
competitors may have greater financial resources than the Company, the Company
believes that its primary focus on the superalloy industry provides it with a
competitive advantage. However, because of its greater exposure to the
superalloy business, the Company will be more adversely affected than its

competitors in a downturn in the superalloy business.
 
     Management believes that the superalloy industry is characterized by high
barriers to entry. The startup and continuing capital costs of operating in the
superalloy business are significant. In addition, all superalloy producers must
secure 'certifications' by both the key consumers of superalloys as well as the
major engine producers, such as General Electric, Rolls Royce, Pratt & Whitney
and SNECMA. These certifications are difficult to obtain because extensive
product evaluations, including engine testing, is usually required. Management
believes Special Metals has the most extensive list of certifications in the
industry. Finally, superalloy technology is difficult to transfer or acquire.
Significant scientific and engineering knowledge is required, and there exists a
significant degree of 'art' in the superalloy production process. As a leader in
the development of superalloys, the Company has developed significant
proprietary technology and expertise. Although certain manufacturing and
management techniques have become standard in the industry, the need to
simultaneously control the precise chemistry of up to 28 different elements
while controlling advanced melting technology and sophisticated thermomechanical
processing, makes it difficult to enter or learn the superalloy business.
Despite these difficulties, recent attempts have been made to enter the
superalloy industry, including a joint venture which is partly owned by
Wyman-Gordon, one of the Company's largest customers. Successful entry of new
competitors into the superalloy industry could have a material adverse effect on
the business, financial condition, results of operations or cash flows of the
Company.
 
FACILITIES
 
     Set forth below is a list of the Company's principal manufacturing
facilities. The Company leases its facilities in New Hartford, New York,
Dunkirk, New York and Princeton, Kentucky from government agencies under
arrangements in which it pays rent in lieu of taxes and has options to purchase
such facilities at a nominal purchase price. These arrangements for the New
Hartford, Dunkirk and Princeton facilities expire in 1997, 2001 and 2000,
respectively. Although no assurance can be given, the Company expects to renew
the arrangement for the New Hartford facility. The Princeton facility lease is
subject to extensions for an additional 15 years beyond the current term. The
facility in Ann Arbor, Michigan is owned.
LOCATION OF FACILITY                        SIZE (SQ. FT.)       PRIMARY ACTIVITY
--------------------------------------      --------------       --------------------------------------
New Hartford, New York                          352,000          Melting Plant and Finishing Plant
Dunkirk, New York                                98,000          Forging Plant
Princeton, Kentucky                              70,000          Powder Metallurgy Plant
Ann Arbor, Michigan                               9,000          Dental Alloy Plant
The Company's physical and production assets consist of a melt shop, a
rolling facility, a finishing plant, a forge shop, and complete superalloy
powder and dental amalgam plants. Special Metals' melting, rolling and finishing

operations are all located in its New Hartford, New York facility which also
houses the Company's corporate headquarters. Special Metals' melt shop operates
what the Company believes to be one of the largest VIM furnaces now in
production in the super alloy industry. The VIM furnace can produce ingots of up
to 46,000 pounds and can produce ingots large enough to make certain gas turbine
parts required by the power generation industry. The other primary melting
equipment includes two additional VIM production furnaces with capacities of
12,000 pounds and 7,000 pounds, respectively, as well as several smaller
development units. The secondary and tertiary melting equipment consists of
seven VAR furnaces and two ESR furnaces. Special Metals' bar rolling facility
operates a 22 inch roughing mill and a 16 inch finishing mill. The finishing
plant consists of complete facilities for finishing bar from one-half inch
diameter to 18 inch diameter superalloy billet, including straightening,
grinding, peeling and modern ultrasonic inspection equipment. The New Hartford
plant also houses
 
                                       41
research facilities, a production test facility and a process laboratory in
which the Company conducts small scale production of new products and alloys
prior to full scale production.
 
     The Company's forge shop is located in Dunkirk, New York in a plant that
houses two forging presses. The newer of the two presses is a 4,000 ton high
speed press which is a double manipulator, computer controlled unit. The other
unit is a 2,000 ton press that has been modernized and is also an automated,
double manipulator, computer controlled unit. Due to its high operating
throughput and the advanced level of automation of its two presses and the
plant's support equipment, management believes that the Dunkirk facility is one
of the most cost-effective plants of its type in the superalloy industry.
 
     The Company's plant for producing powder-based superalloy products was
built in 1971 and is located in Princeton, Kentucky. The Princeton facility
includes two vacuum-argon atomizing furnaces along with all of the necessary
storage and classification equipment that provide inert gas or vacuum processing
of powders until they are reconstituted in bar, billet or shaped forms. The
plant also is equipped to finish, cut, ultrasonically inspect, and ship forging
mults for the industry. Special Metals believes its Princeton facility is one of
the most modern and largest capacity plants of its type in the superalloy
industry.
 
     The Company's dental amalgam plant is located in Ann Arbor, Michigan and is
equipped to make many variations of dental restoration alloys. This facility
includes both water and gas atomizing equipment as well as full classification
and processing equipment.
 
     The Company believes that its capital investment programs and commitment to
high quality have contributed to its ability to obtain more certifications to
supply superalloys and special alloys than any of its competitors. Over the last
five years, the Company invested over $20 million in a state-of-the-art forging
press, new melting facilities, and continuous flow manufacturing to reduce
costs, improve manufacturing cycle times, and improve product quality. Over the

next five years, the Company plans to invest an additional $50 million to expand
and modernize its melting, forging and finishing equipment, install a
state-of-the-art information system and make other investments to maintain its
technological leadership and reduce its production costs.
 
RESEARCH AND DEVELOPMENT
 
     The Company believes it is a leader in the development of technology for
the manufacture of premium wrought and powder nickel-based superalloys. The goal
of the Company's research and development operations is to reduce the cost of
producing its core business products, develop and improve proprietary alloys and
processes, and apply its technology to the manufacture of specialty alloys and
materials for new non-aerospace markets. The Company's research, technical
development and metallurgical production efforts are staffed by approximately 25
individuals with engineering and sciences degrees. The Company conducts research
activities at its New Hartford, Princeton and Ann Arbor facilities. The New
Hartford research facility includes laboratories for physical and mechanical
metallurgical analysis and a stand alone process laboratory for the small scale
processing of vacuum melted alloys which is used for internally supported
development efforts and external sales of developmental materials and specialty
alloys, including the Company's shape memory alloys, such as Nitinol. The
research and development staff works closely with the Company's production staff
and sales force to improve existing products and processes.
 
     In addition, the Company is presently an active participant in the
Specialty Metals Processing Consortium ('SMPC') whose membership includes other
superalloy producers. SMPC's purpose is to pursue melting and solidification
technology and to better understand the very complex nature of alloy melting and
solidification. SMPC's research is conducted at the Sandia National Laboratory
and also includes industrial experiments conducted at the member companies.
Funding for the consortium is made up of membership fees and matching monies
from the U.S. Department of Energy and other sources.
 
     Non-aerospace special alloys under development include products in the
Company's shape memory alloy product line. These products, such as Nitinol,
utilize precise alloy chemistries and thermomechanical processing and are being
designed for use in medical, dental and consumer products. Other non-aerospace
products under development include proprietary dental alloys, such as a recently
patented restoration alloy system that offers a unique combination of properties
and handling characteristics during application.
 
                                       42
The Company spent $1.1 million, $1.3 million, $1.3 million and $1.2 million
during 1993, 1994, 1995 and the nine months ended September 30, 1996 for
research and development activities.
 
ENVIRONMENTAL MATTERS
 
     The Company's facilities are engaged in activities regulated by extensive
federal, state, local and foreign environmental and worker safety and health
laws and regulations, including those relating to air emissions, wastewater

discharges, the handling and disposal of solid and hazardous wastes and the
remediation of contamination caused by the release of hazardous substances in
the past. In the U.S., such laws include the Federal Clean Air Act, the Clean
Water Act, the Resource Conservation and Recovery Act ('RCRA'), the
Comprehensive Environmental Response, Compensation and Liability Act ('CERCLA')
and analogous state laws. The Company uses substantial quantities of substances
that are considered hazardous or toxic under federal, state and/or local
environmental, worker safety and health laws and regulations. The Company's
operations pose a continuing risk of accidental releases of, and worker exposure
to, hazardous or toxic substances. There is also a risk that government
environmental requirements, or enforcement thereof, may become more stringent in
the future and that the Company may be subject to legal proceedings brought by
private parties or governmental agencies with respect to environmental
matters. Although the Company believes that it is in substantial compliance
with applicable requirements of environmental laws, there can be no assurance
that some, or all, of the risks discussed under this heading will not result in
liabilities that are material to the Company's business, results of operations,
financial condition or cash flows.
 
     The Company's facilities have been used for industrial purposes for a
substantial period and, over such time, these facilities have used substances or
generated and disposed of wastes which are hazardous. For example, the Company
used substantial quantities of polychlorinated biphenyls ('PCBs') at its New
Hartford facility through the 1970s. Sites at which the Company's wastes have
been released or otherwise come to be located, and for which the Company
currently faces potentially material environmental remediation liabilities, are
described below. At September 30, 1996, the Company had total reserves of
approximately $3.5 million to cover future costs arising from known
environmental liabilities for remediation and operation and maintenance of
remediation systems, including costs relating to its own properties and certain
sites at which the Company's wastes have been identified. The Company's actual
future expenditures, however, for remediation of environmental conditions
existing at its properties and at these other locations cannot be conclusively
determined at this time. Furthermore, additional locations at which wastes
generated by the Company may have been released or disposed, and of which the
Company is currently unaware, may in the future become the subject of
remediation for which the Company may be liable, in whole or in part.
Accordingly, it is possible that the Company could become subject to
environmental liabilities in the future that could result in a material adverse
effect on the Company's business, results of operations, financial condition or
cash flows.
 
     The Company's policy is to continually strive to improve environmental
performance. From time to time, the Company may be subject to environmental
regulatory enforcement under various statutes, resolution of which typically
involves the establishment of compliance programs and may involve the payment of
penalties, but to date no material penalties have been incurred. The Company
incurred average annual expenditures for environmental protection and compliance
of less than $220,000 for 1994, 1995 and 1996 and its capital budget provides
for less than $150,000 for such expenditures in 1997. However, the imposition of
more strict standards or requirements under environmental laws and the
possibility of increased enforcement could result in expenditures in excess of
amounts estimated to be required for such matters.
 

     The Company is currently involved in the following potentially material
environmental matters or proceedings:
 
     Clayville, New York.  The State of New York identified the Company as a
potentially responsible party ('PRP') under CERCLA for the release or threatened
release of hazardous substances at Ludlow Landfill, Clayville, New York, due to
the Company's generation of certain industrial wastes, including PCB wastes,
believed to have been disposed at the landfill (the 'Site'). CERCLA imposes
strict, joint and several liability for investigatory and clean-up costs. The
State of New York brought a federal action against Ludlow Sand and Gravel
Company, Ludlow Sanitary Landfill, Inc., James Ludlow and Kevin Ludlow
(collectively, 'Ludlow') under CERCLA, common law nuisance and state statutory
law, seeking the recovery of its response costs,
 
                                       43
damages to natural resources, closure of the landfill and penalties. Ludlow, in
turn, brought a third-party action for indemnification and/or contribution
against the Company and four other generators of wastes allegedly sent to the
Site.
 
     A consent judgment was entered, resolving the litigation with respect to
the Company. Under the terms of the consent judgment, claims against Ludlow, the
Company and Chesebrough Pond's (the 'Settling Defendants') are settled and the
Site is required to be closed and remediated pursuant to an approved remedial
plan (the 'ARP') as defined in the consent judgment. The Company is obligated
under the consent judgment to pay all remediation costs required to implement
the ARP in excess of the funds in a trust account established by the Consent
Judgment. The trust account has received monies paid by the Settling Defendants
as well as a specified percentage of the settlement funds obtained to date from
a contribution action brought by the Company and Chesebrough-Pond's against
non-settling users of the landfill. The trust account currently has
approximately $100,000. Further recovery in the contribution action against the
non-settling users is not anticipated to be more than $75,000.
 
     The Company has completed the ARP with respect to the main body of the
Site. However, completion of the remedy in one area (the 'North Gravel Pit') was
delayed because of PCB contamination discovered in the course of excavation in
that area. A work plan designed to determine the extent of contamination in the
North Gravel Pit and select an appropriate remedial alternative has been
approved by the New York State Department of Environmental Conservation ('DEC')
but not yet completed by the Company's environmental engineers. In the interim,
the Company has assumed its responsibility for onsite treatment of the leachate
generated at the project site and subsurface discharge of the treated leachate.
 
     The cost of the investigative and remedial work which will ultimately be
required in the North Gravel Pit cannot be estimated until the investigation
specified in the work plan is complete and a remedial alternative is determined.
Therefore, it is possible that liabilities in respect of this site could have a
material adverse effect on the Company's business, results of operations,
financial condition and cash flow. Based upon preliminary information, the
Company estimates that the cost will be at least $1.0 million and the Company

has provided for this amount in its financial statements.
 
     The Company will be responsible for the cost of post-closure operation and
maintenance ('O&M') at the Site for a period of thirty (30) years, and part of
the required O&M activities will include groundwater monitoring. These costs are
estimated for the main body of the site to be approximately $150,000 per year in
years one and two and approximately $90,000 per year in years three through 30
for a total of $2.8 million. The Company has established a reserve of $1.8
million in respect of these expenses based upon the present value of these
expenses using a discount rate of 4%. In addition, there are contingent
post-closure activities. It cannot be determined which, if any, of the
contingent activities the Company will need to perform.
 
     Universal Waste Site.  In the mid 1980s, the owners/operators of Universal
Waste in Utica, New York (the 'Universal Waste Site') were cited by the DEC in a
formal enforcement proceeding for cleanup of the site which was allegedly
contaminated with PCBs and trichloroethylene. The owner of the Universal Wastes
Site requested by motion that the Company be named as an indispensable party to
that proceeding. The DEC, however, took the position that the Company should not
be named as an indispensable party. The Company believes that at least four
other potentially responsible parties have been identified with respect to the
contamination at the site. A consent order has been executed obligating the site
operator to conduct a preliminary site assessment on a portion of the property.
The preliminary site assessment is underway. The DEC is also conducting a
separate preliminary site assessment. The Company is presently not involved in
investigating the alleged contamination.
 
     Based upon the limited information available to its environmental
engineers, the Company has established a reserve of $575,000. However, because
of the preliminary nature of the investigation, it is not possible, at this
time, to provide a reasonable estimate as to the ultimate cost of any
investigative or remedial work which will be required, or the Company's share,
if any, of such costs. Therefore, it is possible that liabilities could arise in
respect of this site that could have a material adverse effect on the Company's
business, results of operations, financial condition and cash flows.
 
                                       44
Quanta Resources Site.  In August 1990, the Company received notification
from the United States Environmental Protection Agency (the 'EPA') that it is
considered a potentially responsible party under CERCLA at a site in Syracuse,
New York (the 'Quanta Resources Site'). The Company, together with approximately
20 other potentially responsible parties, formalized an agreement by which it
paid the sum of $27,500 towards contribution for removal costs of the EPA
associated with waste material at the site. The total sum collected
(approximately $1 million) was paid directly to the EPA. In September 1996, the
Company received notification from the EPA asking the Company to attend another
meeting with respect to the site. The EPA requested approximately $200,000 to
investigate further removal and cleanup actions. The Company, together with
approximately 60 other potentially responsible parties, formalized an agreement
by which it paid the sum of $5,000 towards the investigation. The investigation
is to be managed by the potentially responsible parties. The extent of

additional regulatory action which may be required at the site is unclear. It is
not possible, at this time, to provide a reasonable estimate as to the cost of
any further investigative or remedial work which will be required or the
Company's share, if any, of such costs. Therefore, it is possible that
liabilities could arise in respect of this site that could have a material
effect on the Company's business, results of operations, financial condition and
cash flows.
 
     Al-Tech Site.  Al-Tech Specialty Steel Corporation ('Al-Tech') occupies a
parcel of realty adjacent to the Company's Dunkirk, New York, facility. In 1988,
Al-Tech advised the Company that a cooling pond located on its property was
contaminated with PCBs. At the time, the Company utilized the pond as a source
of non-contact cooling water. The Company conducted a PCB investigation
(including sampling) of its facilities. The Company's investigation did not
indicate any connection between contamination in the pond and the Company's
operations. A recent edition of an Al-Tech newsletter indicated that Al-Tech has
retained a consultant to conduct a RCRA Facility Investigation ('RFI') at its
facility in Dunkirk, New York to determine whether or not chemical constituents,
from past and present activities at the site, have impacted the environment. The
Company has no other information on which to estimate reasonably the cost of
further investigative or remedial work at the Al-Tech site, or the Company's
share, if any, of such costs. Depending on the development of any information
connecting the Company to this site, it is possible that liabilities could arise
in respect of this site that could have a material adverse effect on the
Company's business, results of operations, financial condition and cash flows.
 
     New Hartford Site.  In 1986, the DEC approved the Company's plan for the
closure of a waste impoundment containing spent acid waste at its New Hartford
facility. The impoundment is now maintained pursuant to the RCRA Corrective
Action Program. In September 1993 the Company submitted a Voluntary RCRA
Facility Investigation Report to the DEC to monitor ground water for metals in
the area of the Company's waste impoundment. Based on test results from the
spring of 1994 to the spring of 1996, it appears that further remediation may
not be necessary, and the Company does not believe that it will incur any
material liability in connection with this matter. The Company will continue to
perform groundwater monitoring at the site pursuant to the RCRA Corrective
Action Program. Depending on the results, it is possible that further
investigative or remedial activity could be required in respect of this matter
and that the liabilities in respect thereof could have a material effect on the
Company's business, results of operations, financial condition and cash flows.
 
     New Hartford SPDES Permit Issue.  One outfall out of five permitted under
the Company's State Pollution Discharge Elimination System permit at its New
Hartford facility has been out of compliance from time to time with respect to
PCB limits. The current limit for PCBs in the Company's permit is .5 parts per
billion. The Company had certain sections of its sewers jet-cleaned during the
summer of 1996 to reduce or eliminate further incidences of noncompliance. The
DEC has notified the Company that it plans to modify the Company's permit limit
for PCBs to .3 parts per billion. The Company met the .3 parts per billion
limit six out of twelve months in 1995 and eight out of the first ten months in
1996. The Company has obtained a preliminary estimate of $120,000 to install
additional storm water treatment equipment designed to consistently meet the
proposed DEC .3 parts per billion limit. Although the Company cannot at this
time provide a reasonable estimate of any additional costs that may be required,

the Company does not believe it will incur any material liability in connection
with this matter.
 
     Ann Arbor EPCRA Violation Complaint.  In early December, 1996, the Company
received a Notice of Intent to File Civil Administrative Complaint from the EPA.
In the notice, EPA stated its intent to commence an administrative proceeding
against the Company under the Emergency Planning and Community Right to Know Act
based upon the alleged failure of the Company's Ann Arbor, Michigan facility to
timely file with EPA
 
                                       45
certain forms disclosing the amount and type of silver used at the facility for
the years 1991 and 1992. EPA invited the Company to provide EPA with information
relating to the alleged offense. The Company intends to avail itself of this
opportunity. The Company has not yet been informed of the amount of the civil
penalty or the nature of the corrective work which EPA intends to seek in this
matter but the Company does not expect the penalty or the cost of the corrective
work to be a material amount.
 
     Other Matters.  The Company is on notice of, and involved in, certain other
environmental matters which have been settled or are at various stages of
discussion, negotiation or settlement which the Company does not believe to be
material.
 
PATENTS AND TRADEMARKS
 
     The Company continually seeks patent protection with respect to its
technical developments. The Company currently holds 19 U.S. and numerous foreign
patents. Several of the alloys produced by the Company's dental division are
covered by one or more of these patents. The manufacturing technology presently
used by the Company does not benefit from patent protection. The Company
recently received a patent on a superalloy process that has the potential of
reducing the cost of powder superalloys and enhancing mechanical processing. The
Company has registered the trademark UDIMET, which refers to superalloys
produced by the Company in the United States and other countries. The Company
believes that it has taken commercially reasonable steps to protect its material
patents, trademarks and proprietary processes.
 
EMPLOYEES
 
     As of September 30, 1996, the Company employed approximately 570 persons.
Of these, approximately 390 (or 68%) work under four collective bargaining
agreements. The Company's agreement with the local branch of the IAM
representing approximately 55 hourly workers at its Princeton, Kentucky facility
expires in August 1997. The Company's agreement with the the local branch of the
IAM, representing approximately 290 hourly workers at its New Hartford facility
expires in August 1998. The remaining labor agreements expire in 1999. In 1992,
a two-week strike by the IAM occurred at the Company's New Hartford facility.
While the Company considers its employee relations to be good, there can be no
assurance that satisfactory new collective bargaining agreements will be
negotiated when the applicable collective bargaining agreements expire or that

future work stoppages would not have a material adverse effect on the business,
financial condition, results of operations or cash flows of the Company. See
'Risk Factors--Labor Matters.'
 
LEGAL PROCEEDINGS
 
     From time to time, the Company is involved in litigation relating to a
claim arising out of its operations in the normal course of business. Except as
described in '--Environmental Matters,' the Company does not believe that it is
a party to any litigation at the present time that could have a material adverse
effect on the business, financial condition, results of operations or cash flows
of the Company.
 
                                       46
MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
     The following table sets forth certain information with respect to the
executive officers and directors of the Company:
NAME                                               AGE   POSITIONS
------------------------------------------------   ---   ------------------------------------------------
Donald R. Muzyka................................   58    President, Chief Executive Officer and Director
Donald C. Darling...............................   44    Vice President--Administration, Chief Financial
                                                           Officer and Director
Robert F. Dropkin...............................   55    Vice President, Secretary, Chief Legal Counsel
                                                           and Director
Gernant E. Maurer...............................   47    Vice President--Technology
Thomas E. MacDonald.............................   53    Vice President--Sales/Marketing and Product
                                                           Management
James D. Page...................................   54    Vice President--Operations
Robert D. Halverstadt...........................   77    Chairman of the Board of Directors
Raymond F. Decker...............................   66    Director
Edouard Duval...................................   52    Director
Antoine G. Treuille.............................   48    Director
Prior to the date of the Offering, the Company's Board of Directors will be
classified into three classes which consist of, as nearly as practicable, an
equal number of directors. The members of each class will serve staggered
three-year terms. Messrs. Darling, Dropkin and Decker will be Class I directors,
Messrs. Halverstadt and Treuille will be Class II directors and Messrs. Duval
and Muzyka will be Class III directors. Nominees for director will be divided
among the three classes upon their election or appointment. The terms of Class
I, Class II and Class III directors expire at the annual meeting of stockholders
to be held in 1998, 1999 and 2000, respectively. See 'Description of Capital
Stock--Certain Provisions of the Company's Certificate of Incorporation and
By-Laws--Classified Board of Directors.'
 
     Dr. Muzyka has been President and a director of Special Metals since
joining the Company in 1990. He was appointed Chief Executive Officer in October
1996. Before joining the Company, Dr. Muzyka held several executive positions
serving the aerospace industries. He has 36 years of metals-related experience,
including service with Cabot Corporation, Carpenter Technology Corporation
('Cartech'), and Pratt & Whitney. Dr. Muzyka holds several degrees, including a
Ph.D. in Material Science from the Thayer School of Engineering-Dartmouth
College. Dr. Muzyka is also a director of Aviall, Inc., an aircraft parts
distributor and CSM Industries, a metals company.
 
     Mr. Darling has been Vice President--Administration and Chief Financial
Officer since September, 1993 and served as Vice President and Chief Financial
Officer since 1989. He joined Specials Metals in 1980, serving in supervisory,

financial planning, and strategic management positions. He has 20 years of
metals-related experience and holds degrees in Business Management, including a
Masters in Accounting, from the School of Management-SUNY/Binghamton. Mr.
Darling has been a director of the Company since 1991.
 
     Mr. Dropkin has been Vice President and Chief Legal Counsel since 1985 and
Secretary since 1987. He joined Special Metals in 1984. Prior to that he held
various legal positions with Cabot Corporation and Allegheny Ludlum Industries
and has 28 years of metals-related experience. Mr. Dropkin holds a metallurgical
engineering degree, and a J.D. degree from George Washington University. Mr.
Dropkin has been a director of the Company since 1987.
 
     Mr. MacDonald has been Vice President--Sales/Marketing and Product
Management since joining the Company in 1991. Prior to that he was Vice
President of Market Development with Slater Steel Corporation and held positions
with Cartech and LTV Steel Company, Inc., a subsidiary of the LTV Corporation.
He has 30 years of metals-related experience and holds a degree in Metallurgical
Engineering, with a Masters in Business Administration, from the University of
Michigan.
 
                                       47
Dr. Maurer has been Vice President--Technology since 1987 and has served in
several management positions, including Director of Technology, since joining
Special Metals in 1976. He has 25 years of metals-related experience and holds
several degrees, including a Ph.D. in Materials Engineering from Rensselaer
Polytechnic Institute.
 
     Mr. Page has been Vice President--Operations since joining the Company in
August 1993. Prior to that he was Vice President of Operations with the RMI
Titanium Company from July 1990 to August 1993 and held positions with Titanium
Metals Corporation, Howmet Corporation, and NF&M Corporations. He has 28 years
of metals-related experience, and holds a degree in Engineering, Physics and a
Masters in Aeronautical Engineering from Cornell University.
 
     Mr. Halverstadt has been Chairman of the Board since 1987 and was President
of the Company from 1974 to 1982. Prior to that, he was Group Vice President of
the Product and Process Group at Booz Allen and Hamilton with responsibility for
its contract research and engineering businesses, including Foster D. Snell,
Inc., the biological and chemical company, Design and Development, Inc., the
electro-mechanical engineering company, and the Environmental Resources Group.
Earlier he was Manager of the Thomson Engineering Laboratory at General Electric
in Lynn, Massachusetts, responsible for materials development and application in
the General Electric line of small gas turbine engines. He holds a degree from
Case Institute of Technology and is a director of Carus Corporation, a
manufacturer of manganese-based chemicals.
 
     Dr. Decker has been a director of the Company since 1990. He is founder of
USP Holdings, Inc. and Thixomat, Inc., companies that commercialize materials
technology, and has been the Chairman of the Board of such companies since 1989.
Dr. Decker was Vice President for Research of Michigan Technological University
from 1982 to 1986 and Vice President for Corporate Technology of Inco, Ltd. from

1978 to 1982. He was President of ASM International, the largest technical
society for metals, in 1987. Dr. Decker holds a Ph.D. from the University of
Michigan and has specialized in superalloys for 46 years. Dr. Decker is a
director of Lindberg Corporation, a heat treating and die casting company,
Packer Group, a foundry products and failure analysis firm, and Wavemat, Inc., a
microwave equipment manufacturer.
 
     Mr. Duval has been a director of the Company since 1987. He is Directeur
General of Aubert & Duval, a French steel and alloy producer, and SIMA, a 
holding company which controls Aubert & Duval and other industrial firms. Mr.
Duval has more than 20 years experience at Aubert & Duval and SIMA in the
marketing, sale and management of superalloy and special metallurgical products
for both aerospace and industrial applications.
 
     Mr. Treuille has been a director of the Company since 1987. He is currently
President of Charter Pacific Corporation, a financial services company. From May
1993 to March 1996, he was a Senior Vice President of Desai Capital Management,
Inc., an investment management company, and, from August 1985 to April 1993, he
was an Executive Vice President at Entrecanales Inc., a private investment
company. He currently serves as a director of Eye Care Center of America, Inc.
and BIC Corp., a private company.
 
DIRECTOR COMPENSATION AND COMMITTEES
 
     Currently, non-employee and non-affiliate directors receive an annual fee
of $6,000 plus $600 for each meeting of the Board of Directors or committee of
the Board of Directors that they attend. Commencing after the Offering,
non-employee directors will receive a $14,000 annual fee plus $1,000 for each
meeting of the Board of Directors or committee of the Board of Directors that
they attend.
 
     The Board of Directors has established, effective upon the completion of
the Offering, a Compensation Committee and an Audit Committee. The Compensation
Committee, composed of Mr. Halverstadt and Mr. Duval, will establish salaries,
incentives and other forms of compensation for the Company's directors and
officers and will recommend policies relating to the Company's benefit plans.
The Audit Committee, composed of Dr. Decker and Mr. Treuille, will oversee the
engagement of the Company's independent auditors and, together with the
Company's independent auditors, will review the Company's accounting practices,
internal accounting controls and financial results.
 
EXECUTIVE COMPENSATION
 
     The following table sets forth information with respect to the compensation
of the Company's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company (collectively, the 'Named
Executive Officers') for the fiscal year ended December 31, 1995. The principal
components of such individuals' current cash compensation are the annual base
salary and annual bonus included
 
                                       48
in the Summary Compensation Table. Also described below is the estimated future
compensation such individuals can receive under the Company's retirement plans.
 
                           SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
                                                                                     --------------------------------
                                                                                                       ALL OTHER
NAME AND PRINCIPAL POSITION                                              SALARY($)   BONUS($)(1)   COMPENSATION($)(2)
-----------------------------------------------------------------------  ---------   -----------   ------------------
Donald R. Muzyka
  President and Chief Executive Officer................................  $ 185,558    $  53,288         $  5,820
James D. Page
  Vice President--Operations...........................................    112,958       30,269            4,959
Robert F. Dropkin
  Vice President, Secretary and Chief Legal Counsel....................    112,899       33,766            4,975
Thomas E. MacDonald
  Vice President--Sales & Marketing and Product Management.............    112,488       30,139            4,588
Gernant E. Maurer
  Vice President--Technology...........................................    108,010       30,056            4,588
------------------
(1) Includes discretionary bonuses earned by the Named Executive Officers and
    amounts earned pursuant to the Company's 1995 Profit Sharing Plan. All
    salaried employees were eligible to participate in the Company's 1995 Profit
    Sharing Plan. The plan provided for a profit sharing pool equal to 10% of
    the Company's year-end after tax profit. The profit sharing pool was divided
    among participants based on the midpoint of their salary grade. The 
    Company has adopted a similar plan for 1996.
 
(2) Includes the Company match under the Special Metals Corporation 401(k) Plan
    (Salaried Employees), a defined contribution plan established under section
    401(k) of the Internal Revenue Code of 1986, as amended (the 'Code') and the
    value of premiums paid for group term life policies in excess of $50,000.
 
     Prior to the completion of the Offering, it is anticipated that the Company
will review all existing and potential compensation arrangements for the
executive officers of the Company. Depending upon the outcome of its review, one
or more of the Company's compensation arrangements with its executive officers
may be amended or terminated or new compensation arrangements may be adopted.
 
SALARIED EMPLOYEE RETIREMENT PLAN
 
     The Amended and Restated Pension Plan for Salaried Employees of Special
Metals Corporation (the 'Salaried Retirement Plan') covers full-time and
part-time salaried employees of Special Metals and is intended to meet the
requirements of section 401(a) of the Code. Generally, under the Salaried
Retirement Plan participants with five years of service become entitled to
receive a basic retirement benefit upon retirement at age 65. Benefits under the
Salaried Retirement Plan are calculated using a career average benefit formula

which has been updated, from time to time, to make adjustments for final average
earnings. For participants who retire or terminate their employment after
December 31, 1994, the retirement benefit equals the sum of: (i) 1.25% of final
average earnings as of December 31, 1994 multiplied by years of service as of
December 31, 1994 to the extent total years of service do not exceed 35; (ii)
0.50% of final average earnings as of December 31, 1994 multiplied by years of
service as of December 31, 1994 in excess of 35; (iii) 1.25% of average monthly
earnings commencing January 1, 1995 multiplied by years of service after
December 31, 1994 to the extent total years of service do not exceed 35; and
(iv) .50% of average monthly earnings commencing January 1, 1995 multiplied by
years of service after December 31, 1994 in excess of 35. In calculating
benefits, 'final average earnings' is the average of the highest five
consecutive years of earnings out of the last ten years, as of December 31,
1994. Earnings taken into account for calculating benefits under the plan
include base salary, bonuses, profit sharing, overtime, commissions and
deferrals made under certain plans maintained by the Company, including any Code
section 401(k) savings plan or Code section 125 cafeteria plan, and are subject
to limits imposed by the Code, including Code section 401(a)(17) (generally,
limiting compensation to $150,000 per year, as indexed). Payments are made in
the form of a joint and survivor annuity (for married employees) or single life
annuity (for single employees), unless another form of benefit is elected by the
participant in accordance with the terms of the plan. The plan contains
provisions for early retirement benefits and supplements, special retirement
benefits and
 
                                       49
supplements for termination due to a plant or department reorganization or
closing, payments upon disability and spousal death benefits. The estimated
annual benefit payable under the Salaried Retirement Plan at age 65 is $29,773,
$29,042, $36,616, $33,429 and $62,897 for each of Dr. Muzyka, Messrs. Page,
Dropkin and MacDonald and Dr. Maurer, respectively, assuming annual salary
increases of 5.0% and 3.0% annual increases in the compensation limit under Code
Section 401(a)(17).
 
EQUITY RIGHTS PLAN
 
     The Special Metals Corporation Equity Appreciation Rights Plan (the 'Equity
Rights Plan') provides for the grant of rights to receive cash payments based on
the appreciation of the book value of the Company ('Rights'). Each Right is
based on the total book value of the Company, divided by 10,000,000. Rights are
generally exercisable from the fifth anniversary of the date of grant until the
tenth anniversary of the date of grant, or earlier in the event of a 'change of
control' of the Company, termination without cause, retirement at age 65, death
or disability. Rights are forfeited in the event the holder is terminated by the
Company for 'cause.' Dr. Muzyka is the only current participant in the Equity
Rights Plan. He has received 50,000 Rights, none of which were granted in the
fiscal year ended December 31, 1995. As of December 31, 1995, 10,000 of such
Rights were exercisable until 2000. The remaining 40,000 Rights will become
exercisable in 10,000 Right increments in 1996 through 1999 and will be
exercisable for five years after becoming exercisable.
 

     The following table summarizes the value of Dr. Muzyka's Rights under the
Equity Rights Plan as of December 31, 1995.
NUMBER OF UNITS        VALUE OF UNEXERCISED
                                                          UNDERLYING UNEXERCISED        IN-THE-MONEY
                                                             OPTIONS/SARS AT           OPTIONS/SARS AT
                                                          DECEMBER 31, 1995 (#)     DECEMBER 31, 1995 ($)
EXERCISABLE/             EXERCISABLE/
NAME                                                          UNEXERCISABLE             UNEXERCISABLE
-------------------------------------------------------   ----------------------    ---------------------
Donald R. Muzyka                                               10,000/40,000               -- / --
SUPPLEMENTAL RETIREMENT INCOME PLAN
 
     The Company has adopted the Special Metals Corporation Supplemental
Retirement Income Plan (the 'SRIP') which covers only Dr. Muzyka. The SRIP is
intended to grant Dr. Muzyka supplemental retirement benefits equal to the
difference between (i) the benefits that Dr. Muzyka would have received under
his prior employer's pension plan had he remained at his prior employer until he
was age 65, based on his 'average compensation' (as defined in the SRIP) at
Special Metals and (ii) his vested accrued benefits under the prior employer's
pension plan and the Salaried Retirement Plan. Compensation for purposes of the
SRIP includes bonus and profit sharing payments and amounts of income deferred
under deferred compensation plans of the Company. Benefits under the SRIP will
ratably vest over a 10-year period subject to immediate vesting upon a 'change
of control' of the Company (as defined in the SRIP) and special and accelerated
vesting provisions in the event of death, disability or other termination of
employment. Based on Dr. Muzyka's compensation and years of service, he would be
entitled to estimated annual benefits of $39,479 under the SRIP at normal
retirement age (65).
 
STOCK OPTION PLAN
 
     In December 1996, the Board of Directors of the Company adopted, and the
Company's stockholders approved, the Special Metals Corporation 1997 Long-Term
Stock Incentive Plan. The Stock Option Plan will be administered either by the 
Board of Directors of the Company or by a committee comprised of Directors who
are 'Non-Employee directors' (within the meaning of Rule 16b-3 Exchange Act of
1934) and 'outside directors' (within the meaning of section 162(m) of the
Code.) The Board of Directors or such committee is referred to as the 'Stock
Plan Committee.' Approximately          employees including any officer or other
key employee or consultant to the Company or any of its subsidiaries shall be
eligible to be designated as a participant under the Stock Option Plan. The
Stock Plan Committee has the sole and complete authority to determine the
participants to whom awards shall be granted under the Stock Option Plan.
 
                                       50
Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the Stock Option Plan authorizes the grant of awards to
participants with respect to a maximum of        shares of the Company's Common
Stock ('Shares'), which awards may be made in the form of (i) nonqualified stock
options; (ii) stock options intended to qualify as incentive stock options under
section 422 of the Code; (iii) stock appreciation rights; (iv) restricted stock
and/or restricted stock units; (v) performance awards and (vi) other stock based
awards; provided that the maximum number of shares that may be awarded to any
employee in any calendar year in the form of stock options and stock
appreciation rights may not exceed          . If, after the effective date of
the Stock Option Plan, any Shares covered by an award granted under the Stock
Option Plan, or to which such an award relates, are forfeited, or if an award
has expired, terminated or been canceled for any reason whatsoever (other than
by reason of exercise or vesting), then the Shares covered by such award shall
again be, or shall become, Shares with respect to which awards may be granted
under the Stock Option Plan.
 
     Awards of options, stock appreciation rights, restricted stock units,
performance awards and other stock based awards granted under the Stock Option
Plan shall be subject to such terms, including exercise price, circumstances of
forfeiture and conditions and timing of exercise (if applicable), as may be
determined by the Stock Plan Committee. Stock options that are intended to
qualify as incentive stock options will be subject to terms and conditions that
comply with such rules as may be prescribed by section 422 of the Code. Payment
in respect of the exercise of an option granted under the Stock Option Plan may
be made in cash, or its equivalent, or (i) by exchanging Shares owned by the
optionee which are not the subject of any pledge or other security interest and
which have been owned by such optionee for at least six months) or (ii) through
delivery of irrevocable instructions to a broker to deliver promptly to the
Company an amount equal to the aggregate exercise price, or by a combination of
the foregoing, provided that the combined value of all cash and cash equivalents
and the fair market value of such Shares so tendered to the Company as of the
date of such tender is at least equal to the aggregate exercise price of the
option.
 
     The Board of Directors of the Company may amend, alter, suspend,
discontinue, or terminate the Stock Option Plan or any portion thereof at any
time; provided that no such amendment, alteration, suspension, discontinuation
or termination shall be made without stockholder approval if such approval is
necessary to comply with any tax or regulatory requirement and provided further
that no such amendment may materially and adversely affect any participant in
the Stock Option Plan without such participant's consent.
 
     Anticipated Awards.  Prior to the date of the Offering, it is expected that
grants of stock options under the Stock Option Plan will be made to certain
officers of the Company (including all of the Company's executive officers).
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     During the fiscal year ended December 31, 1995, the Company had no
Compensation Committee. Decisions regarding compensation for 1995 were made by
the Company's senior management with the advice of Mr. Duval. Following

completion of the Offering, compensation decisions will be made by the
Compensation Committee and the Stock Plan Committee.
 
                                       51
CERTAIN TRANSACTIONS
 
TRANSACTIONS WITH PRINCIPAL STOCKHOLDERS.
 
     Prior to the Offering, the Principal Stockholders owned all of the
Company's outstanding Common Stock. Upon the completion of the Offering, the
Principal Stockholders will beneficially own approximately    % of the Company's
outstanding Common Stock (approximately    % if the Underwriters' over-allotment
option is exercised in full). By virtue of the Stockholders Agreement, SIMA will
be able to control the business, policies and affairs of the Company, including
the election of directors and major corporate transactions. SIMA is beneficially
owned by members of the Duval family and certain related parties. Edouard Duval,
a director of the Company, is a Directeur General of SIMA and has a minority
equity interest in SIMA. See 'Principal and Selling Stockholders.'
 
     The Company and the Principal Stockholders have from time to time entered
into various business transactions and agreements, and the Company and the
Principal Stockholders may from time to time enter into additional transactions
and agreements in the future. See Note 10 in the Financial Statements of the
Company included elsewhere in this Prospectus. It is possible that conflicts of
interest could arise in the future. The following is a summary of the material
agreements and transactions between the Company and the Principal Stockholders.
 
  Technology Exchange Agreement
 
     Upon completion of the Offering, the Company and SIMA will enter into a
technology exchange agreement (the 'Technology Exchange Agreement'). During the
term of the Technology Exchange Agreement, subject to certain exceptions, SIMA
and the Company are required, to the best of their ability and subject to
government controls and other limitations imposed by pre-existing agreements
with third parties, to furnish all technical information pertaining to the
manufacture of high temperature alloys and other alloys and materials, as may be
needed and requested by the other to further develop and diversify its
respective business. Under the agreement, SIMA and the Company will periodically
provide technical and manufacturing persons to consult and advise each other.
The Technology Exchange Agreement may be terminated by either party upon 30
days' advance written notice to the other party.
 
     In 1996, the Company paid $300,000 to SIMA pursuant to a previously
terminated technology assistance agreement.
 
  Managerial Assistance Agreement
 
     Upon completion of the Offering, the Company and SIMA will also enter into
a managerial assistance agreement (the 'Managerial Assistance Agreement'). The
Managerial Assistance Agreement provides that SIMA will provide the Company with

information and advice regarding the management of its existing business and the
expansion of the Company's business into new products and markets. The Company
will (i) compensate SIMA for managerial assistance at a rate of $2,500 per work
day for executive level management persons, a rate of $1,300 per work day for
senior management persons and at a rate of $1,000 per working day for middle
management persons and (ii) reimburse SIMA for telecommunication charges, travel
costs and subsistence while traveling, to the extent that such expenses are
reasonable and for the benefit of the Company. The Managerial Assistance
Agreement may be terminated by either party upon 30 days' advance written notice
to the other party.
 
  Registration Rights
 
     Under a registration rights agreement (the 'Registration Rights Agreement')
among the Company and the Principal Stockholders, the Company has granted the
Principal Stockholders the right to require, subject to the terms and conditions
set forth therein, the Company to register shares of Common Stock held by the
Principal Stockholders (the 'Registrable Securities') for sale in accordance
with their intended method of disposition thereof (a 'demand registration'). The
holders of a majority of the Registrable Securities may request one demand
registration per year. In addition, so long as any Principal Stockholder
continues to hold at least 5% of the outstanding Common Stock, such Principal
Stockholder shall also have the right to request one demand registration. The
Principal Stockholders may not require more than one demand registration each
year.
 
                                       52
Additionally, the Company has granted to each Principal Stockholder the right,
subject to certain exceptions, to participate in registrations of Common Stock
initiated by the Company on its own behalf or on behalf of its stockholders (a
'piggy-back registration'). The Company is required to pay expenses (other than
underwriting discounts and commissions) incurred by the Principal Stockholders
in connection with the demand and piggy-back registrations. Subject to certain
limitations specified in the Registration Rights Agreement, the Principal
Stockholders' registration rights are assignable to third parties. The
Registration Rights Agreement contains indemnification and contribution
provisions by the Company for the benefit of the Principal Stockholders and
their respective permitted assigns and their related persons. Each Principal
Stockholder's rights under the Registration Rights Agreement will terminate if
such Principal Stockholder ceases to own at least 5% of the outstanding Common
Stock. The Registration Statement of which this Prospectus is a part constitutes
a piggy-back registration for purposes of the Registration Rights Agreement and
AMI and LWH have requested that        shares of Common Stock be included in the
Offering. As a result, the Company expects to incur approximately $       of
expenses in connection with the Offering and will indemnify the Selling
Stockholders for certain liabilities, including liabilities under the Securities
Act.
 
  Subordinated Notes
 
     In 1992 and 1993, the Company borrowed funds from SIMA and LWH under the

Subordinated Notes. The outstanding amount of the Subordinated Notes was $8.5
million at each of December 31, 1993, 1994 and 1995. The Subordinated Notes
mature on demand and bear interest at a rate equal to LIBOR plus 1.5%. The
Subordinated Notes are subordinate to the Company's obligations under the Credit
Agreement. Accrued interest on the Subordinated Notes totaled approximately
$472,000, $937,000 and $1.59 million at December 31, 1993, 1994 and 1995,
respectively. The weighted average interest rate on the Subordinated Notes at
December 31, 1995 was 7.47%. The Subordinated Notes are expected to be fully
repaid prior to the consummation of the Offering.
 
  Lines of Credit
 
     From December 1994 to October 1996, SIMA provided the Company with a $6
million line of credit. During 1995 and 1996, the Company borrowed and repaid
various amounts under the line of credit. The maximum amounts outstanding were
$2.0 million and $2.5 million in 1995 and 1996, respectively. Interest was paid
at a rate of LIBOR plus 2.25%. In 1995 and 1996, the Company paid $37,418 and
$76,932 in interest under the line of credit. The line of credit terminated upon
establishment of the Cash Flow Support Agreement described below and all
outstanding amounts under the line of credit were repaid in October 1996.
 
     Under the Cash Flow Support Agreement, dated as of October 18, 1996,
between SIMA and the Company in favor of Credit Lyonnais, New York branch (the
'Cash Flow Support Agreement'), SIMA agreed to make loans of up to $6 million to
the Company in the event of certain financial and payment defaults under the
Credit Agreement. Amounts borrowed under the agreement bear interest at a rate
set by SIMA based on market rates and are payable upon demand. Amounts borrowed
under the Cash Flow Support Agreement are subordinated to the Company's
obligations under the Credit Agreement. No amounts are currently outstanding
under the Cash Flow Support Agreement. The Company and SIMA intend to negotiate
termination of the Cash Flow Support Agreement upon completion of the Offering.
 
  Affiliate Sales
 
     During 1993, 1994 and 1995, the Company sold superalloy and special alloy
products to affiliates of SIMA. The net revenues from such sales were $7.9
million, $9.3 million and $15.0 million in 1993, 1994 and 1995, respectively.
Management believes that the terms of such sales are no less favorable to the
Company than the terms that it would have obtained in transactions with
unaffiliated third parties. The Company may sell superalloy and special alloy
products to affiliates of SIMA in the future.
 
                                       53
Raw materials
 
     In the past, from time to time, the Company and affiliates of SIMA have
sold raw materials to each other. Management believes that the terms of such
sales are no less favorable to the Company than the terms that it would have
obtained in transactions with unaffiliated third parties. The Company and SIMA
expect that such sales may occur in the future.
 

  Insurance
 
     The Company and Aubert & Duval share common insurance coverage for
aircraft/space liabilities, contingent liabilities and excess liabilities
greater than $10 million but less than $50 million. The Company is charged a pro
rata premium based on the net sales of the covered parties. The Company was
charged $162,000, $160,000 and $206,000 for such premiums in 1993, 1994 and
1995, respectively. The Company believes that the insurance coverage provided to
it is more favorable than the insurance coverage that it could obtain as a
stand-alone entity. The Company intends to continue this common insurance
coverage following completion of the Offering.
 
CONSULTING ARRANGEMENTS
 
     The Company has regularly engaged Robert D. Halverstadt, Chairman of the
Board of Directors, and Applied Innovative Management Engineering ('AIME'), a
sole proprietorship of Mr. Halverstadt, as consultants. In 1993, 1994 and 1995,
Mr. Halverstadt and AIME received approximately $145,000, $143,000 and $174,000,
respectively, in fees and expense reimbursements. The Company intends to
continue to employ Mr. Halverstadt and AIME as consultants in the future.
 
     The Company also has consulting agreements with Mr. Treuille for financial
services advice and Mr. Decker for technical advice. During 1993, 1994 and 1995,
the fees paid and expenses reimbursed under each of these consulting agreements
did not exceed $60,000.
 
FUTURE TRANSACTIONS
 
     Following completion of the Offering, it will be the policy of the Company
to engage in transactions with affiliated parties on terms which, when taken
together with all transactions between the Company and such affiliate, are, in
the opinion of the Company, no less favorable to the Company than those that
could be obtained from unaffiliated third parties.
 
                                       54
PRINCIPAL AND SELLING STOCKHOLDERS
 
     The following table sets forth certain information with respect to the
beneficial ownership of shares of Common Stock by (i) all persons known by the
Company to own beneficially more than 5% of the Common Stock, (ii) each of the
Company's directors, (iii) each of the Named Executive Officers and (iv) by all
directors and executive officers as a group. Unless otherwise noted, the address
of each person listed is in care of the Company, 4317 Middlesettlement Road, New
Hartford, New York 13413.
SHARES OF COMMON STOCK
                                                          BENEFICIALLY OWNED
                                                          PRIOR TO OFFERING
                                           ------------------------------------------------         NUMBER
NAME AND ADDRESS OF                                NUMBER                  PERCENTAGE             OF SHARES

BENEFICIAL OWNER                                 OF SHARES                  OF CLASS           BEING OFFERED(1)
----------------------------------------   ----------------------    ----------------------    ----------------
Societe Industrielle de Materiaux
  Avances(2)(3).........................          5,952,000                   48.0%                 --
LWH Holding S.A.(3)(4)..................          3,968,000                   32.0%
Advanced Materials Investments Holding,
  S.A.(3)(5)............................          2,480,000                   20.0%
Donald R. Muzyka........................          --                      --                        --
Robert F. Dropkin.......................          --                      --                        --
Gernant E. Maurer.......................          --                      --                        --
Thomas E. MacDonald.....................          --                      --                        --
James D. Page...........................          --                      --                        --
Robert D. Halverstadt...................          --                      --                        --
Edouard Duval(2)........................          --                      --                        --
Antoine Treuille........................          --                      --                        --
Raymond F. Decker.......................          --                      --                        --
Donald C. Darling.......................          --                      --                        --
All Directors and Executive Officers as
  a group (10 persons)..................          --                      --                        --
SHARES OF COMMON STOCK
                                                         BENEFICIALLY OWNED
                                                           AFTER OFFERING
                                          ------------------------------------------------
NAME AND ADDRESS OF                               NUMBER                  PERCENTAGE
BENEFICIAL OWNER                                OF SHARES                  OF CLASS
----------------------------------------  ----------------------    ----------------------
Societe Industrielle de Materiaux
  Avances(2)(3).........................         5,952,000
LWH Holding S.A.(3)(4)..................
Advanced Materials Investments Holding,
  S.A.(3)(5)............................
Donald R. Muzyka........................         --                      --
Robert F. Dropkin.......................         --                      --
Gernant E. Maurer.......................         --                      --
Thomas E. MacDonald.....................         --                      --
James D. Page...........................         --                      --
Robert D. Halverstadt...................         --                      --
Edouard Duval(2)........................         --                      --
Antoine Treuille........................         --                      --
Raymond F. Decker.......................         --                      --
Donald C. Darling.......................         --                      --
All Directors and Executive Officers as
  a group (10 persons)..................         --                      --
------------------
(1) Without giving effect to the Underwriters' over-allotment option. The
    Selling Stockholders have granted the Underwriters an option, exercisable
    within 30 days of the date of this Prospectus, to purchase up to an
    aggregate of          additional shares of Common Stock for the purpose of

    covering over-allotments, if any, as follows:          ,          shares and
             ,          shares.
 
(2) SIMA's address is 41, Rue de Villiers, BP120, 92202 Neuilly Sur Seine,
    Cedex, France. Mr. Duval's address is in care of SIMA. The common equity of
    SIMA is beneficially owned by members of the Duval family and certain
    related parties. Edouard Duval, a director of the Company, is a Directeur
    General of SIMA and has a minority equity interest in SIMA.
 
(3) The Company, SIMA, AMI and LWH have entered into the Stockholders Agreement,
    which provides for certain voting rights, nominating rights and transfer
    restrictions. See '--Stockholders Agreement.'
 
(4) LWH's address is Boulevard Royal 3, L-2449 Luxembourg. Carlos Luis Landin
    beneficially owns 100% of the capital stock of LWH and may be deemed to
    beneficially own the shares of Common Stock owned of record by LWH after the
    Offering. Mr. Landin's address is in care of LWH.
 
(5) AMI's address is 3A Rue Guillaume Kroll, L-1882 Luxembourg. Jean Chauveau
    beneficially owns 100% of the capital stock of AMI and may be deemed to
    beneficially own the shares of Common Stock owned of record by AMI after the
    Offering. Mr. Chauveau's address is in care of AMI.
 
STOCKHOLDERS AGREEMENT
 
     Upon completion of the Offering, the Principal Stockholders will
beneficially own approximately   % of the outstanding Common Stock (  % of the
Underwriters' over-allotment option is exercised in full). Under the
Stockholders Agreement, the Principal Stockholders have agreed to vote all
shares of Common Stock beneficially owned by them (the 'Principal Shareholder
Shares') unanimously as a group in accordance with the instructions
 
                                       55
of the holders of a majority of the Principal Stockholder Shares. In addition,
as indicated in the table below, the Company has agreed to nominate a number of
persons for election as directors who are designated by the holders of a
majority of the Principal Stockholders Shares (based on the aggregate Common
Stock ownership percentage of the Principal Stockholders).
PERCENTAGE OF DIRECTOR
      NOMINEES DESIGNATED BY             OUTSTANDING COMMON STOCK
    PRINCIPAL STOCKHOLDERS(1)         HELD BY PRINCIPAL STOCKHOLDERS
----------------------------------  ----------------------------------
56%                            35% or more
                42%                   27% or more but less than 35%
                28%                   19% or more but less than 27%
                14%                   10% or more but less than 19%
                 0%                           Less than 10%
------------------
(1) Percentage rounded up to the nearest whole number.
 
Based on the present board size of seven, the Principal Stockholders will be
able to designate at least four nominees for election to the Board of Directors
of the Company upon completion of the Offering. The Company has agreed to use
its best efforts to cause the election of such nominees. If a director who is
designated by the Principal Stockholders resigns, is removed or dies, the
Company has agreed to elect another director designated by the Principal
Stockholders to the extent that the Principal Stockholders are entitled to
designate such director under the formula described above. The Stockholders
Agreement also contains transfer restrictions relating to the Principal
Stockholder Shares. A Principal Stockholder may not sell its shares of Common
Stock unless it first offers such shares to one or both of the other Principal
Stockholders at a price equal to the lower of (i) the proposed sale price and
(ii) the average sales price of the Common Stock on the Nasdaq National Market
over the 20 trading day period prior to the exercise date of the right of first
refusal. Under the Stockholders Agreement, each of the Principal Stockholders
and the Company has agreed not to hire any employee of any other party to the
Stockholder's Agreement without the prior consent of such other party. The
Stockholders Agreement will terminate when the Principal Stockholders
beneficially own, in the aggregate, less than 10% of the outstanding Common
Stock of the Company.
 
                                       56
DESCRIPTION OF CAPITAL STOCK
 
     The following summary information is qualified in its entirety by the
provisions of the Company's Certificate of Incorporation and By-laws, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. See 'Available Information.'
 
     Upon completion of the Offering, the authorized capital stock of the
Company will consist of 35,000,000 shares of Common Stock, par value $.01 per
share, and 10,000,000 shares of preferred stock, par value $.01 per share
('Preferred Stock'). Currently there are 12,400,000 shares of Common Stock
outstanding held by three persons and there are no shares of Preferred Stock
outstanding.
 
     Prior to the Offering, there has been no public market for the Common
Stock. See 'Risk Factors--Absence of Prior Public Market.'
 
COMMON STOCK
 
     Voting Rights.  The Company's Certificate of Incorporation provides that
holders of Common Stock are entitled to one vote per share held of record on all
matters submitted to a vote of stockholders. The stockholders are not entitled
to vote cumulatively for the election of directors. The Company and the
Principal Stockholders have entered into the Stockholders Agreement which

governs the voting of the Common Stock held by the Principal Stockholders. See
'Principal and Selling Stockholders--Stockholders Agreement.'
 
     Dividends.  Subject to the rights of any Preferred Stock which may be
outstanding, each holder of Common Stock on the applicable record date is
entitled to receive dividends if, as and when declared by the Board of
Directors. Under Delaware law, a corporation may declare and pay dividends out
of surplus, or if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or the preceding year. No dividends may be
declared, however, if the capital of the corporation has been diminished by
depreciation in the value of its property, losses or otherwise to an amount less
than the aggregate amount of capital represented by any issued and outstanding
stock having a preference on the distribution of assets. See 'Dividend Policy.'
 
     Other Rights.  Stockholders of the Company have no preemptive or other
rights to subscribe for additional shares. Subject to any rights of the holders
of any Preferred Stock that may be issued subsequent to the Offering, all
holders of Common Stock are entitled to share equally on a share-for-share basis
in any assets available for distribution to stockholders on liquidation,
dissolution or winding up of the Company. No shares of Common Stock are subject
to conversion, redemption or a sinking fund. All outstanding shares of Common
Stock are, and the Common Stock to be outstanding upon completion of the
Offering will be, fully paid and nonassessable.
 
     Transfer Agent and Registrar.  The Transfer Agent and Registrar for the
Common Stock is American Stock Transfer & Trust Company.
 
PREFERRED STOCK
 
     The Company's Board of Directors (or a committee thereof) is authorized to
issue, without further authorization from stockholders, up to 10,000,000 shares
of Preferred Stock in one or more series and to determine, at the time of
creating each series, the distinctive designation of, and the number of shares
in, the series, its dividend rate, the number of votes, if any, for each share
of such series, the price and terms on which such shares may be redeemed, the
terms of any applicable sinking fund, the amount payable upon liquidation,
dissolution or winding up, the conversion rights, if any, and such other rights,
preferences and priorities of such series as the Board of Directors (or a
committee thereof) may be permitted to fix under the laws of the State of
Delaware as in effect at the time such series is created. The issuance of
Preferred Stock could adversely affect the voting power of the holders of Common
Stock and could have the effect of delaying, deferring or preventing a change in
control of the Company. The Company has no present plan to issue any shares of
Preferred Stock.
 
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
 
     Certain provisions of the Certificate of Incorporation and By-laws of the
Company summarized below may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider in its best interest, including an attempt that might result in
the receipt of a premium over the market price for the shares held by
stockholders.
 

     Classified Board of Directors.  The Certificate of Incorporation and the
By-laws provide for the Board of Directors to be divided into three classes of
directors serving staggered three-year terms. Notwithstanding the foregoing, the
term of any director who is also an officer of the Company shall automatically
end if he or she ceases to be an employee of the Company. As a result,
approximately one-third of the Board of Directors will be
 
                                       57
elected each year. Moreover, under DGCL, in the case of a corporation having a
classified board, stockholders may remove a director only for cause. This
provision, when coupled with the provision of the By-laws authorizing only the
Board of Directors to fill vacant directorships, will preclude a stockholder
from removing incumbent directors without cause and simultaneously gaining
control of the Board of Directors by filling the vacancies created by such
removal with its own nominees.
 
     Special Meeting of Stockholders.  The Certificate of Incorporation and the
By-laws provide that special meetings of stockholders of the Company may be
called only by the Board of Directors, the Chairman of the Board of Directors or
the President. This provision will make it more difficult for stockholders to
take actions opposed by the Board of Directors.
 
     Stockholder Action by Written Consent.  The Certificate of Incorporation
and the By-laws provide that no action required or permitted to be taken at any
annual or special meeting of the stockholders of the Company may be taken
without a meeting, and the power of stockholders of the Company to consent in
writing, without a meeting, to the taking of any action is specifically denied.
 
     Advance Notice Requirements for Stockholder Proposals and Director
Nominations.  The By-laws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual or special meeting of stockholders, must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Company not less than 30 days nor more than 60 days' prior to the meeting;
provided, however, that in the event that less than 40 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be received no later than the close
of business on the tenth day following the day on which such notice of the date
of the meeting was mailed or such public discourse was made. The By-laws also
specify certain requirements for a stockholder's notice to be in proper written
form. These provisions may preclude some stockholders from bringing matters
before the stockholders at an annual or special meeting or from making
nominations for directors at an annual or special meeting.
 
LIMITATION ON DIRECTORS' LIABILITY
 
     The Company has included in its Certificate of Incorporation provisions to
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages from a
director resulting from breaches of fiduciary duty (including breaches resulting

from grossly negligent behavior). This provision does not eliminate liability
for breaches of the duty of loyalty, acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, violations
under Section 174 of the DGCL concerning the unlawful payment of dividends or
stock redemptions or repurchases or for any transaction from which the director
derived an improper personal benefit. However, these provisions will not limit
the liability of the Company's Directors under Federal securities laws. The
Company believes that these provisions are necessary to attract and retain
qualified persons as directors and officers.
 
SECTION 203 OF THE DELAWARE LAW
 
     Section 203 of the DGCL prohibits publicly held Delaware corporations from
engaging in a 'business combination' with an 'interested stockholder' for a
period of three years following the date of the transaction in which the person
or entity became an interested stockholder, unless (i) prior to such date,
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder is approved by the Board of
Directors of the corporation, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the outstanding voting stock of the
corporation (excluding for this purpose certain shares owned by persons who are
directors and also officers of the corporation and by certain employee benefit
plans) or (iii) on or after such date the business combination is approved by
the Board of Directors of the corporation and by the affirmative vote (and not
by written consent) of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. For the purposes of Section 203, a
'business combination' is broadly defined to include mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. An 'interested stockholder' is a person who, together with
affiliates and associates, owns (or within the immediately preceding three years
did own) 15% or more of the corporation's voting stock.
 
                                       58
SHARES ELIGIBLE FOR FUTURE SALE
 
     Upon completion of the Offering, the Company will have outstanding
shares of Common Stock. Of these shares, the shares sold in the Offering will be
freely tradeable without restriction or further registration under the
Securities Act, except for any shares purchased or acquired by an 'affiliate' of
the Company (as that term is defined under the rules and regulations of the
Securities Act), which shares will be subject to the resale limitations of Rule
144. The remaining            outstanding shares of Common Stock were issued to
the Principal Stockholders in connection with the Merger and are 'restricted
securities' as that term is defined in Rule 144 that may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including the exemptions contained under Rule 144.
 
     In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted securities for at least two years,
including a person who may be deemed to be an affiliate of the Company, is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock of
the Company (       shares immediately after the Offering) or (ii) the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which a notice of sale is filed with the Commission. A
person (or persons whose shares are aggregated) who is not at any time during
the 90 days preceding a sale an 'affiliate' is entitled to sell such shares
under Rule 144, commencing three years after the date such shares were acquired
from the Company or an affiliate of the Company, without regard to the volume
limitations described above. Sales under Rule 144 are subject to certain other
restrictions relating to the manner of sale, notice and the availability of
current public information about the Company.
 
     Subject to the lockup arrangements described below,            shares of
Common Stock owned by the Principal Stockholders will be eligible for sale in
the public market subject to the volume and other limitations described above
because the Principal Stockholders will be deemed to have held such shares for
more than two years. Each of the Company and the Principal Stockholders has
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated, it will not (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock (provided that such shares
or securities are either currently owned by such person or are thereafter
acquired from the Company) or (ii) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences of ownership of
such shares of Common Stock, whether any such transaction described in clause
(i) or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise, for a period of 180 days after the date hereof
subject to certain exceptions. See 'Underwriters.'
 
     Pursuant to the Registration Rights Agreement, the Company will grant the
Principal Stockholders, subject to certain exceptions, demand and piggy-back

registration rights. See 'Certain Transactions--Transactions with Principal
Stockholders--Registration Rights.'
 
     In addition to the outstanding shares of Common Stock described above, an
aggregate of        shares of Common Stock have been reserved for issuance to
employees, officers and Directors upon exercise of stock options, of which stock
options for        shares of Common Stock will be granted effective on the date
of the Offering. The Company anticipates filing a registration statement on Form
S-8 under the Securities Act to register all of the shares of Common Stock
issuable or reserved for future issuance under the Stock Option Plan. Thus,
shares purchased upon exercise of options granted pursuant to the Stock Option
Plan generally will be available for resale in the public market to the extent
the lock-up arrangements with Morgan Stanley & Co. Incorporated have expired,
except that any such shares issued to affiliates are subject to the volume
limitations and certain other restrictions of Rule 144. See 'Management--Stock
Option Plan.'
 
     Prior to the Offering, there has been no public market for the Common Stock
of the Company and no prediction can be made as to the effect, if any, that the
sale or availability for sale of shares of Common Stock will have on the market
price of the Common Stock. Nevertheless, sales of significant amounts of such
shares in the public market, or the perception that such sales may occur, could
adversely affect the market price of Common Stock and could impair the Company's
future ability to raise capital through an offering of its equity securities.
 
                                       59
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
                  TO NON-UNITED STATES HOLDERS OF COMMON STOCK
 
     The following is a general discussion of certain U.S. Federal income and
estate tax consequences of the ownership and disposition of Common Stock by a
'Non-United States Holder.' A 'Non-United States Holder' is a person or entity
that, for U.S. Federal income tax purposes, is (i) a non-resident alien
individual, (ii) a foreign corporation or partnership, or (iii) a non-resident
fiduciary of a foreign estate or trust.
 
     This discussion is based on the Internal Revenue Code of 1986, as amended
(the 'Code'), and administrative interpretations as of the date hereof, all of
which may be changed either retroactively or prospectively. This discussion does
not address all aspects of U.S. Federal income and estate taxation that may be
relevant to Non-United States Holders in light of their particular circumstances
and does not address any tax consequences arising under the laws of any state,
local or foreign taxing jurisdiction.
 
     Prospective holders should consult their tax advisors with respect to the
United States Federal, state, local and Non-United States income and other tax
consequences to them of holding and disposing of Common Stock.
 
DIVIDENDS
 
     Subject to the discussion below, dividends paid to a Non-United States

Holder of Common Stock generally will be subject to withholding tax at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty
unless the dividend is effectively connected with the conduct of a trade or
business within the United States, or, if an income tax treaty applies, is
attributable to a United States permanent establishment of the Non-United States
Holder and the Non-United States Holder provides the payor with proper
documentation (Form 4224). In order to claim the benefit of an applicable tax
treaty rate, a Non-United States Holder may have to file with the Company or its
dividend paying agent an exemption or reduced treaty rate certificate or letter
in accordance with the terms of such treaty. Under current United States
Treasury regulations, for purposes of determining whether tax is to be withheld
at a 30% rate or at a reduced rate as specified by an income tax treaty, the
Company ordinarily will presume that dividends paid to the address in a foreign
country are paid to a resident of such country absent knowledge that such
presumption is not warranted. However, under proposed United States Treasury
regulations which have not yet been put into effect, additional certification
requirements would apply after December 1, 1997. See '--Information Reporting
Requirements and Backup Withholding.'
 
     In the case of dividends that are effectively connected with the Non-United
States Holder's conduct of a trade or business within the United States or, if
an income tax treaty applies, is attributable to a United States permanent
establishment of the Non-United States Holder, the Non-United States Holder will
generally be subject to regular U.S. income tax in the same manner as if the
Non-United States Holder were a United States resident. A Non-United States
corporation receiving effectively connected dividends also may be subject to an
additional branch profits tax which is imposed, under certain circumstances, at
a rate of 30% (or such lower rate as may be specified by an applicable treaty)
of the Non-United States corporation's 'effectively connected earnings and
profits,' subject to certain adjustments.
 
GAIN ON DISPOSITION OF COMMON STOCK
 
     A Non-United States Holder generally will not be subject to U.S. Federal
income tax with respect to gain realized on a sale or other disposition of
Common Stock unless (i) the gain is effectively connected with a trade or
business of such Non-United States Holder in the U.S., (ii) in the case of
certain Non-United States Holders who are non-resident alien individuals and
hold the Common Stock as a capital asset, such individuals are present in the
U.S. for 183 or more days in the taxable year of the disposition and either (a)
such individuals have a 'tax home' (as defined for United States Federal income
tax purposes) in the U.S., or (b) the gain is attributable to an office or other
fixed place of business maintained by such individuals in the U.S., (iii) the
Non-United States Holder is subject to tax, pursuant to the provisions of U.S.
tax law applicable to certain U.S. expatriates whose loss of U.S. citizenship
had as one of its principal purposes the avoidance of U.S. taxes, or (iv) the
Company is or has been a 'United States real property holding corporation'
within the meaning of section 897(c)(2) of the Code and, assuming that the
Common Stock is regularly traded on an established securities market for tax
purposes, the Non-United States Holder held, directly or indirectly, at any time
within the five-year period
 
                                       60
preceding such disposition more than 5% of the outstanding Common Stock. The
Company is not, and does not anticipate becoming, a United States real property
holding corporation.
 
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
 
     Under United States Treasury regulations, the Company must report annually
to the Internal Revenue Service and to each Non-United States Holder the amount
of dividends paid to such holder and the tax withheld with respect to such
dividends. These information reporting requirements apply even if withholding
was not required because the dividends were effectively connected with a trade
or business in the United States of the Non-United States Holder or withholding
was reduced or eliminated by an applicable income tax treaty. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-United States
Holder is a resident under the provisions of an applicable income tax treaty or
agreement.
 
     United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements)
generally will not apply to (i) dividends paid to Non-United States Holders that
are subject to the 30% withholding discussed above (or that are not so subject
because a tax treaty applies that reduces or eliminates such 30% withholding) or
(ii) under current law, dividends paid to a Non-United States Holder at an
address outside of the United States. However, under proposed United States
Treasury regulations, in the case of dividends paid after December 31, 1997
(December 31, 1999 in the case of dividends paid to accounts in existence on or
before the date that is 60 days after the propsed United States Treasury
regulations are published as final regulations), a Non-United States Holder
generally would be subject to backup withholding at a 31% rate, unless certain
certification procedures (or, in the case of payments made outside the United
States with respect to an offshore account, certain documentary evidence
procedures) are complied with, directly or through an intermediary.
 
     Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of Common Stock
to beneficial owners that are not 'exempt recipients' and that fail to provide
in the manner required certain indentifying information.
 
     The payment of the proceeds of the disposition of Common Stock to or
through the U.S. office of a broker is subject to information reporting unless
the disposing holder, under penalty of perjury, certifies its Non-United States
status or otherwise establishes an exemption. Generally, U.S. information
reporting and backup withholding will not apply to a payment of disposition
proceeds if the payment is made outside the U.S. through a Non-United States
office of a non-United States broker. However, information reporting
requirements (but not backup withholding) will apply to a payment of disposition
proceeds outside the U.S. if (A) the payment is made through an office outside
the U.S. of a broker that is either (i) a U.S. person, (ii) a foreign person
which derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the U.S. or (iii) a 'controlled foreign

corporation' for U.S. Federal income tax purposes and (B) the broker fails to
maintain documentary evidence that the holder is a Non-United States Holder and
that certain conditions are met, or that the holder otherwise is entitled to an
exemption.
 
     Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
 
FEDERAL ESTATE TAX
 
     An individual Non-United States Holder who is treated as the owner of or
has made certain lifetime transfers of an interest in the Common Stock will be
required to include the value thereof in his gross estate for U.S. Federal
estate tax purposes, and may be subject to U.S. Federal estate tax unless an
applicable estate tax treaty provides otherwise. Estates of non-resident aliens
are generally allowed a statutory credit which generally has the effect of
offsetting the U.S. Federal estate tax imposed on the first $60,000 of the
taxable estate.
 
                                       61
UNDERWRITERS
 
     Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the 'Underwriting Agreement'), the Company and the
Selling Stockholders have agreed to sell        and        shares, respectively,
of the Company's Common Stock, and the Underwriters named below, for whom Morgan
Stanley & Co. Incorporated and Salomon Brothers Inc are serving as
Representatives, have severally agreed to purchase the respective number of
shares of Common Stock set forth opposite the names of such Underwriters below:
NUMBER OF
          NAME                                                                                  SHARES
--------------------------------------------------------------------------------------------   ---------
Morgan Stanley & Co. Incorporated...........................................................
Salomon Brothers Inc .......................................................................
 
                                                                                               ---------
       Total................................................................................
                                                                                               ---------
                                                                                               ---------
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their

counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the Underwriters' over-allotment option described below) if any such
shares are taken.
 
     The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the Price to Public set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $          per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $          per share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Underwriters.
 
     Application will be made for quotation of the Common Stock on the Nasdaq
National Market under the symbol 'SMCX.'
 
     At the request of the Company, the Underwriters have reserved up to
shares of Common Stock for sale at the initial public offering price to
non-executive employees and other individuals having relationships with the
Company. The number of shares available for sale to the general public will be
reduced to the extent such individuals purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the Underwriters
to the general public on the same basis as the other shares offered hereby.
Reserved shares purchased by such individuals will, except as restricted by
applicable securities laws, be available for resale following the Offering.
 
     Pursuant to the Underwriting Agreement, the Company and the Selling
Stockholders have granted to the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to        additional shares of
Common Stock at the public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The Underwriters may exercise such
option to purchase solely for the purpose of covering over-allotments, if any,
made in connection with the offering of the shares of Common Stock offered
hereby. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Common Stock as the
 
                                       62
number set forth next to such Underwriter's name in the preceding table bears to
the total number of shares of Common Stock offered by the Underwriters hereby.
 
     The Company and each of the Principal Stockholders have agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated, it will
not (i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock (provided that such shares or
securities are either currently owned by such person or are thereafter acquired
from the Company) or (ii) enter into any swap or other agreement that transfers,

in whole or in part, any of the economic consequences of ownership of such
shares of Common Stock, whether any such transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise, for a period of 180 days after the date
hereof, other than (x) the sale to the Underwriters of the shares of Common
Stock offered hereby or (y) the issuance by the Company of shares of Common
Stock upon the exercise of any options granted or shares of Common Stock issued
pursuant to existing benefit plans of the Company.
 
     Each of the Underwriters has represented and, during the period of six
months after the date hereof, agreed that (a) it has not offered or sold and
will not offer or sell any shares of Common Stock in the United Kingdom except
to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purpose of
their business or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations (1995) (the 'Regulations'); (b) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the Regulations with respect to anything done by it in
relation to the shares of Common Stock offered hereby in, from or otherwise
involving the United Kingdom; and (c) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of the shares of Common Stock if that person
is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996, or is a person to whom such
document may otherwise lawfully be issued or passed on.
 
     It is possible that more than 10% of the proceeds of the Offering, not
including underwriting compensation, will be received by entities who are
National Association of Securities Dealers, Inc. (the 'NASD') members or who are
affiliated with NASD members who are participating in the Offering. Therefore,
the Offering is being conducted in accordance with NASD Conduct Rule 2710 ('Rule
2710').
 
     In compliance with Rule 2710, the initial public offering price can be no
higher than that recommended by a 'qualified independent underwriter.' Morgan
Stanley & Co. Incorporated is assuming the responsibilities of acting as
qualified independent underwriter and the initial offering price of the shares
of Common Stock offered hereby will not be higher than the initial public
offering price recommended by Morgan Stanley & Co. Incorporated. In connection
with the Offering, Morgan Stanley & Co. Incorporated in its role as 'qualified
independent underwriter' has performed due diligence investigations and reviewed
and participated in the preparation of the Registration Statement of which this
Prospectus is a part. In addition, the Underwriters may not confirm sales to any
discretionary account without the prior written approval of the customer.
 
     The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
 
PRICING OF OFFERING
 
     Prior to the Offering, there has been no public market for the shares of
Common Stock of the Company. Consequently, the initial public offering price for

the Common Stock will be determined by negotiation among the Company, the
Selling Stockholders, and the Underwriters. Among the factors to be considered
in determining the initial public offering price will be the Company's record of
operations, the Company's current financial condition and future prospects, the
experience of its management, the economics of its industry in general, the
general condition of the equity securities market and the market prices of
similar securities of companies considered comparable to the Company and such
other factors as may be deemed relevant. There can be no assurance that a
regular trading market for the shares of Common Stock will develop after the
Offering or, if developed, that a public trading market can be sustained. There
can also be no assurance that the prices at which
 
                                       63
the Common Stock will sell in the public market after the Offering will not be
lower than the price at which it is issued by the Underwriters in the Offering.
 
                                 LEGAL MATTERS
 
     The validity of the Common Stock offered hereby will be passed upon for the
Company by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York. Certain
legal matters will be passed upon for the Underwriters by Shearman & Sterling,
New York, New York.
 
                                    EXPERTS
 
     The financial statements of the Company at December 31, 1995 and December
31, 1994 and for each of the three years in the period ended December 31, 1995,
appearing elsewhere in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
herein and in the Registration Statement, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
 
                                       64
INDEX TO FINANCIAL STATEMENTS
PAGE
                                                                                                             ----
FINANCIAL STATEMENTS
Report of Independent Auditors............................................................................    F-2
Balance Sheets as of December 31, 1994 and 1995...........................................................    F-3
Statements of Operations and Retained Earnings (Accumulated Deficit) for the
  years ended December 31, 1993, 1994, and 1995...........................................................    F-4
Statements of Cash Flows for the years ended December 31, 1993, 1994, and 1995............................    F-5
Notes to Financial Statements.............................................................................    F-6
 
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets as of September 30, 1995 and 1996 (unaudited)..............................................   F-21
Statements of Operations and Retained Earnings (Accumulated Deficit) for the
  nine months ended September 30, 1995 and 1996 (unaudited)...............................................   F-22
Statements of Cash Flows for the nine months ended September 30, 1995
  and 1996 (unaudited)....................................................................................   F-23
Notes to Interim Financial Statements (unaudited).........................................................   F-24
F-1
REPORT OF INDEPENDENT AUDITORS
 
Board of Directors
Special Metals Corporation
 
We have audited the accompanying balance sheets of Special Metals Corporation as
of December 31, 1994 and 1995, and the related statements of operations and
retained earnings (accumulated deficit) and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Special Metals Corporation at
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
 
                                          /s/ ERNST & YOUNG LLP
 
Buffalo, New York
February 14, 1996,
except for Note 19, as to which the date is
December 18, 1996
 
                                      F-2
SPECIAL METALS CORPORATION
                                 BALANCE SHEETS
DECEMBER 31,
                                                                                    ----------------------------
                                                                                        1994            1995
                                                                                    ------------    ------------
ASSETS
Current assets:
  Cash...........................................................................   $  1,929,258    $  2,612,797
  Accounts receivable, less allowance for doubtful accounts of $75,000 for 1994
     and $100,000 for 1995.......................................................     18,341,619      26,869,181
  Inventories....................................................................     29,101,594      39,056,340
  Prepaid expenses...............................................................        268,422         260,097
  Deferred taxes.................................................................        202,275         202,275
                                                                                    ------------    ------------
Total current assets.............................................................     49,843,168      69,000,690
 
Property, plant and equipment....................................................     35,903,364      33,559,461
Other assets.....................................................................      6,154,513       4,384,777
                                                                                    ------------    ------------
Total assets.....................................................................   $ 91,901,045    $106,944,928
                                                                                    ------------    ------------
                                                                                    ------------    ------------
 
                      LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
  Accounts payable...............................................................   $  7,031,269    $ 14,828,183
  Accrued payroll and employee benefits..........................................      6,397,866       7,671,415
  Accrued other liabilities......................................................      2,799,091       5,002,399
  Income taxes payable...........................................................         94,414         449,262
  Current portion of long-term debt..............................................      4,010,000       5,000,000
  Current obligation under capital leases........................................        223,497         270,263
                                                                                    ------------    ------------
Total current liabilities........................................................     20,556,137      33,221,522
 
Long-term debt...................................................................     45,500,000      40,810,000
Long-term obligation under capital leases........................................        965,330         776,942
Subordinated notes payable.......................................................      8,500,000       8,500,000
Other long-term liabilities......................................................      7,392,420       7,970,299
                                                                                    ------------    ------------
Total liabilities................................................................     82,913,887      91,278,763
 
Commitments and contingencies
 
Shareholder's equity:
  Common stock, $0.01 par value, 35,000,000 shares authorized, 12,400,000 shares
     issued and outstanding......................................................        124,000         124,000
  Paid-in surplus................................................................     25,876,000      25,876,000
  Pension adjustment.............................................................       (198,572)       (724,884)

  Accumulated deficit............................................................    (16,814,270)     (9,608,951)
                                                                                    ------------    ------------
Total shareholder's equity.......................................................      8,987,158      15,666,165
                                                                                    ------------    ------------
Total liabilities and shareholder's equity.......................................   $ 91,901,045    $106,944,928
                                                                                    ------------    ------------
                                                                                    ------------    ------------
See accompanying notes.
 
                                      F-3
SPECIAL METALS CORPORATION
      STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
YEAR ENDED DECEMBER 31,
                                                                    ------------------------------------------------
                                                                             1993                      1994
                                                                    ----------------------    ----------------------
Net sales........................................................        $      80,412,286         $      95,509,977
Cost of goods sold...............................................               84,304,390                93,625,339
                                                                    ----------------------    ----------------------
                                                                                (3,892,104)                1,884,638
 
Selling, general and administrative expenses.....................                4,140,806                 4,313,101
                                                                    ----------------------    ----------------------
Operating income (loss)..........................................               (8,032,910)               (2,428,463)
 
Interest expense.................................................                3,911,856                 4,361,058
                                                                    ----------------------    ----------------------
 
Income (loss) before income taxes................................              (11,944,766)               (6,789,521)
 
Income tax expense...............................................                  196,740                    99,177
                                                                    ----------------------    ----------------------
Net income (loss)................................................              (12,141,506)               (6,888,698)
 
Retained earnings (accumulated deficit)..........................
  Beginning of year..............................................                2,215,934                (9,925,572)
                                                                    ----------------------    ----------------------
  End of year....................................................        $      (9,925,572)        $     (16,814,270)
                                                                    ----------------------    ----------------------
                                                                    ----------------------    ----------------------
 
Net income (loss) per share......................................        $           (0.98)        $           (0.56)
                                                                    ----------------------    ----------------------
                                                                    ----------------------    ----------------------
 
Weighted average shares outstanding..............................               12,400,000                12,400,000
                                                                    ----------------------    ----------------------
                                                                    ----------------------    ----------------------
1995
                                                                   ----------------------
Net sales........................................................       $     132,244,734
Cost of goods sold...............................................             114,751,837
                                                                   ----------------------
                                                                               17,492,897
Selling, general and administrative expenses.....................               5,207,191
                                                                   ----------------------
Operating income (loss)..........................................              12,285,706
Interest expense.................................................               4,726,797
                                                                   ----------------------
Income (loss) before income taxes................................               7,558,909
Income tax expense...............................................                 353,590
                                                                   ----------------------
Net income (loss)................................................               7,205,319
Retained earnings (accumulated deficit)..........................
  Beginning of year..............................................             (16,814,270)
                                                                   ----------------------
  End of year....................................................       $      (9,608,951)
                                                                   ----------------------
                                                                   ----------------------
Net income (loss) per share......................................       $            0.58
                                                                   ----------------------
                                                                   ----------------------
Weighted average shares outstanding..............................              12,400,000
                                                                   ----------------------
                                                                   ----------------------
See accompanying notes.
 
                                      F-4
SPECIAL METALS CORPORATION
                            STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
                                                                       ------------------------------------------
                                                                           1993           1994           1995
                                                                       ------------    -----------    -----------
OPERATING ACTIVITIES
Net income (loss)...................................................   $(12,141,506)   $(6,888,698)   $ 7,205,319
Adjustments to reconcile net income (loss) to net cash provided by
  operating activities:
  Depreciation and amortization.....................................      6,560,922      7,199,934      6,281,165
  Provision for doubtful accounts...................................         75,000       (125,000)        25,000
  Loss on sale of fixed assets......................................             --         17,684          5,336
  Provision for deferred income taxes...............................      1,254,157             --             --
  Change in assets and liabilities:
     Accounts receivable............................................      2,748,919     (5,345,300)    (8,552,562)
     Inventories....................................................      5,299,075      3,084,324     (9,954,746)
     Prepaid expenses...............................................        (14,818)        31,033          8,325
     Income taxes...................................................       (540,590)     1,261,326        354,848
     Accounts payable...............................................     (2,428,569)       288,535      7,796,914
     Accrued payroll and employee benefits..........................       (522,446)       866,627      1,433,266
     Accrued other liabilities......................................       (378,184)      (182,193)     2,203,308
     Other long-term liabilities....................................        283,289      1,095,600         51,567
                                                                       ------------    -----------    -----------
Net cash provided by operating activities...........................        195,249      1,303,872      6,857,740
 
INVESTING ACTIVITIES
Capital expenditures................................................       (792,660)      (975,389)    (1,963,297)
Proceeds from sale of fixed assets..................................             --          6,296          2,500
                                                                       ------------    -----------    -----------
Net cash used in investing activities...............................       (792,660)      (969,093)    (1,960,797)
 
FINANCING ACTIVITIES
Net proceeds from (repayment of) revolving credit facilities........     (2,000,000)     1,500,000        300,000
Proceeds from subordinated notes payable............................      6,500,000             --             --
Net repayments of term loans........................................             --     (2,500,000)    (4,000,000)
Financing and other deferred costs..................................        (36,706)    (1,316,831)      (273,667)
Payments on capital lease obligations...............................       (168,382)      (205,470)      (239,737)
                                                                       ------------    -----------    -----------
Net cash provided by (used in) financing activities.................      4,294,912     (2,522,301)    (4,213,404)
                                                                       ------------    -----------    -----------
Net increase (decrease) in cash.....................................      3,697,501     (2,187,522)       683,539
Cash at beginning of year...........................................        419,279      4,116,780      1,929,258
                                                                       ------------    -----------    -----------
Cash at end of year.................................................   $  4,116,780    $ 1,929,258    $ 2,612,797
                                                                       ------------    -----------    -----------
                                                                       ------------    -----------    -----------
See accompanying notes.
 
                                      F-5
SPECIAL METALS CORPORATION
                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1993, 1994 AND 1995
 
1. ACCOUNTING POLICIES
 
  Description of Business
 
     Special Metals Corporation (the 'Company'), a manufacturer of superalloys,
is a wholly-owned subsidiary of Special Metals and Technologies Corporation
('SMTC'), a holding company established for that sole purpose. SMTC has no other
operations other than its investment in the Company.
 
     The Company sells its products world-wide, with a substantial portion being
sold to customers in the aerospace industry. The Company performs periodic
credit evaluations of its customers' financial condition and generally does not
require collateral. An allowance for doubtful accounts is maintained at a level
which management believes is sufficient to cover potential credit losses.
 
  Revenue Recognition
 
     The Company recognizes revenue at the time of shipment to the customer.
 
  Inventories
 
     Inventories are valued at the lower of cost or market. Cost is determined
on the FIFO (first-in, first-out) method of accounting.
 
  Property, Plant and Equipment
 
     Property, plant and equipment are stated at cost and depreciated on the
straight-line method based on the estimated useful lives of the assets. The cost
of property, plant and equipment held under capital leases is equal to the lower
of the net present value of the minimum lease payments, using interest rates
appropriate at the inception of the lease, or the fair value of the leased
property, plant and equipment at the inception of the lease. Depreciation
expense includes the amortization of property, plant and equipment recorded
under capital leases.
 
  Patents
 
     Patents are stated at cost and are being amortized on the straight-line
method over their expected useful lives which average 8.5 years.
 
  Excess of Purchase Price Over Net Assets Acquired
 
     The excess of purchase price over net assets acquired is being amortized on
the straight-line method over 40 years. The Company periodically reviews this
asset to assess recoverability. Impairments would be recognized in operating
results if a permanent reduction in value were to occur.

 
  Impairment of Long-Lived Assets
 
     In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, 'Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of' ('SFAS 121').
Under the provisions of this accounting standard, asset carrying amounts are
required to be reviewed whenever events or circumstances indicate that such
carrying amounts may not be recoverable. When considered impaired, the
accounting standard requires that the carrying amount of the asset be reduced,
by a charge to income, to its current fair value. With regards to assets to be
disposed of, the accounting standard requires such assets to be reported at the
lower of carrying amount or fair value less cost to sell. The Company adopted
SFAS 121 effective January 1, 1996. The adoption of the accounting standard had
no impact on the Company's results of operations or financial position.
 
                                      F-6
SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
1. ACCOUNTING POLICIES--(CONTINUED)
  Taxes on Income
 
     Effective January 1, 1993, the Company adopted Statement of Accounting
Standards No. 109, 'Accounting for Income Taxes,' which requires a change from
the deferred method of accounting for income taxes to the asset and liability
method. The effect of this change was not significant to the 1993 results of
operations. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of temporary differences by applying enacted
statutory rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.
The effect of a change in tax rates is recognized in the period that includes
the enactment date.
 
  Post-Retirement Benefits
 
     Certain employees may be eligible for post-retirement health care and life
insurance benefits upon retirement from the Company. As more fully disclosed in
Note 9, effective January 1, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 106, 'Employer's Accounting for
Postretirement Benefits Other Than Pensions.'
 
  Environmental Liabilities
 
     Environmental expenditures that relate to current or future revenues are
expensed or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations and that are not allocable to current or
future earnings are expensed. Liabilities for environmental costs are recognized
when environmental assessments or clean-ups are probable and the associated
costs can be reasonably estimated.
 

  Research and Development Costs
 
     Product research and development costs are charged to expense as incurred.
Research and development expense for the years ended December 31, 1993, 1994 and
1995 was $1,118,000, $1,288,000 and $1,313,000, respectively.
 
  Purchase Contracts
 
     The Company periodically uses commodity swap agreements to hedge against
price fluctuations of raw materials, principally nickel, used in the
manufacturing process. The swap agreements are intended to hedge long-term sales
agreements of the Company. Under the swap agreements, the Company receives or
makes payments based on the difference between a specified price and the market
price of the material. Unrealized gains and losses on the swap agreements are
deferred and are recognized in income, in conjunction with the transaction being
hedged.
 
  Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
                                      F-7
SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
2. INVENTORIES
 
     Inventories consist of the following:
DECEMBER 31,
                                                        --------------------------
                                                           1994           1995
                                                        -----------    -----------
Raw materials and supplies...........................   $ 6,505,769    $10,511,647
Work-in-process......................................    22,595,825     28,544,693
                                                        -----------    -----------
                                                        $29,101,594    $39,056,340
                                                        -----------    -----------
                                                        -----------    -----------
3. PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment consist of the following:
DECEMBER 31,
                                                        --------------------------
                                                           1994           1995
                                                        -----------    -----------
Land.................................................   $ 1,271,716    $ 1,271,716
Buildings and improvements...........................    17,791,251     17,848,497
Machinery and equipment..............................    45,428,197     47,353,650
Furniture and fixtures...............................       356,562        356,562
Construction-in-progress.............................       642,964        699,527
                                                        -----------    -----------
                                                         65,490,690     67,529,952
Less accumulated depreciation........................    29,587,326     33,970,491
                                                        -----------    -----------
                                                        $35,903,364    $33,559,461
                                                        -----------    -----------
                                                        -----------    -----------
Depreciation expense for the years ended December 31, 1993, 1994 and 1995
was $4,913,000, $5,649,000 and $4,397,000, respectively.
 
                                      F-8
SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
4. OTHER ASSETS
 
     Other long-term assets consist of the following:
DECEMBER 31,
                                                        --------------------------
                                                           1994           1995
                                                        -----------    -----------
Patents..............................................   $ 8,472,000    $ 8,472,000
Excess of purchase price over net assets acquired....     3,911,950      3,911,950
Agreement not to compete.............................        64,250         64,250
Deferred financing costs.............................     1,372,847      1,289,976
Deferred lease costs.................................        75,843         75,843
                                                        -----------    -----------
                                                         13,896,890     13,814,019
Less accumulated amortization........................     7,995,888      9,523,036
                                                        -----------    -----------
                                                          5,901,002      4,290,983
Intangible pension asset.............................       196,280         36,563
Other................................................        57,231         57,231
                                                        -----------    -----------
                                                        $ 6,154,513    $ 4,384,777
                                                        -----------    -----------
                                                        -----------    -----------
5. LONG-TERM DEBT
 
     Long-term debt outstanding was as follows:
DECEMBER 31,
                                                        --------------------------
                                                           1994           1995
                                                        -----------    -----------
Credit Agreement:
  Term loans.........................................   $22,000,000    $18,000,000
  Revolving line of credit...........................    27,500,000     27,800,000
Other................................................        10,000         10,000
                                                        -----------    -----------
                                                         49,510,000     45,810,000
Current portion......................................     4,010,000      5,000,000
                                                        -----------    -----------

                                                        $45,500,000    $40,810,000
                                                        -----------    -----------
                                                        -----------    -----------
The Company has entered into an Amended and Restated Credit Agreement dated
December 15, 1994 which provides for the following credit facility:
 
          o Class A term loan of $19,000,000 (less $7,000,000 subsequently
            repaid), payable in increasing quarterly installments ranging from
            $1,250,000 to $1,750,000 through 1998 on the dates specified in the
            agreement;
 
          o Class B aggregate term loans of $6,000,000, payable January 2, 1998;
 
          o Revolving credit facility of up to $30,000,000, subject to a
            borrowing base computation which is described below, payable January
            2, 1998.
 
     All advances under the Credit Agreement bear interest at either a base
rate, as defined, plus a margin of 3/4%, or a rate equal to the eurodollar rate,
which equates to the New York interbank offered rate, plus a margin of 2 1/4%.
Interest is payable periodically in arrears. An annual commitment fee of 1/4% on
the unused available working capital commitment is due quarterly.
 
     The weighted-average interest rate on the obligations outstanding at
December 31, 1995 was 8.07%.
 
                                      F-9
SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
5. LONG-TERM DEBT--(CONTINUED)
     Under the revolving credit facility, the Company may borrow, repay, and
re-borrow from time to time, the lesser of (a) $30,000,000 or (b) the Company's
borrowing base. The Credit Agreement defines the Company's borrowing base as the
sum of 85% of eligible accounts receivable and 60% of eligible inventory. The
amount the Company may borrow against the revolving credit facility is reduced
by the aggregate amount of any letters of credit issued for the account of the
Company.
 
     Mandatory prepayments are required in the amount of the net proceeds from
certain transactions not in the ordinary course of business (including the sale
of significant operating assets, the sale or issuance of capital stock, or
employer reversions from employee benefit plan terminations). These mandatory
prepayments will be applied first to the Class A term loans, then to the Class B
term loans, and finally as a permanent reduction of the revolving credit
facility commitment. The Company may also make additional prepayments at its
option.
 
     In connection with the Company's obligations under the Credit Agreement,

the Company has granted mortgages or other security interests in substantially
all of the Company's assets now owned or hereafter acquired. The Company is also
subject to certain affirmative and negative covenants.
 
     The aggregate maturities of long-term debt are as follows:
TERM LOANS     LINE OF CREDIT     OTHER        TOTAL
                                        -----------    --------------    -------    -----------
1996.................................   $ 5,000,000     $         --     $    --    $ 5,000,000
1997.................................     5,250,000               --          --      5,250,000
1998.................................     7,750,000       27,800,000          --     35,550,000
2000.................................            --               --      10,000         10,000
                                        -----------    --------------    -------    -----------
                                        $18,000,000     $ 27,800,000     $10,000    $45,810,000
                                        -----------    --------------    -------    -----------
                                        -----------    --------------    -------    -----------
6. CAPITAL LEASE OBLIGATIONS
 
     The Company entered into non-cancelable leases for certain equipment. The
leases expire in 1997 through 2000 and contain bargain purchase options. The
property held under capital leases is included in the balance sheet as follows:
DECEMBER 31,
                                                           ------------------------
                                                              1994          1995
                                                           ----------    ----------
Equipment...............................................   $1,725,645    $1,823,760
Less: accumulated amortization..........................      413,614       577,361
                                                           ----------    ----------
                                                           $1,312,031    $1,246,399
                                                           ----------    ----------
                                                           ----------    ----------
F-10
SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
6. CAPITAL LEASE OBLIGATIONS--(CONTINUED)
     Future minimum lease payments for equipment under capital leases at
December 31, 1995 is as follows:
1996........................................................  $    349,916
1997........................................................       335,414
1998........................................................       328,753
1999........................................................       190,966
2000........................................................         3,962
                                                              ------------
                                                                 1,209,011
Less: amount representing interest..........................       161,806
                                                              ------------
Present value of net minimum lease payments (including
  long-term obligations of $776,942)........................  $  1,047,205
                                                              ------------
                                                              ------------
7. OPERATING LEASES
 
     The Company leases certain equipment under operating leases which contain
renewal options and escalation clauses in some cases. Rental expense under these
leases amounted to approximately $556,000, $525,000 and $500,000 for the years
ended December 31, 1993, 1994 and 1995, respectively. The following amounts
represent future minimum payments under operating leases with initial or
remaining noncancelable terms extending beyond one year:
1996..........................................................  $  267,868
1997..........................................................     137,510
1998..........................................................     111,414
1999..........................................................      44,256
2000..........................................................      44,256
8. RETIREMENT PLANS
 
     The Company has several noncontributory defined benefit pension plans
covering substantially all employees of the Company. Benefits for salaried
employees are based on a percentage of career average earnings multiplied by
years of benefit service. Benefits for certain hourly employees under the plans
are based on a percentage of final average earnings multiplied by years of
benefit service. Benefits for remaining hourly employees under the plans are
based on years of service multiplied by pre-established benefit rates. The
Company's funding policy is to contribute annually at least the minimum amount
required by the Employee Retirement Income Security Act of 1974, as amended
('ERISA'). Unrecognized differences between actual experience and that assumed
and prior service costs are amortized on a straight-line basis over a period
approximating the average remaining service period for active employees.
 
                                      F-11
SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
8. RETIREMENT PLANS--(CONTINUED)
     Net pension cost included the following:
YEAR ENDED DECEMBER 31,
                                                              -----------------------------------------
                                                                 1993           1994           1995
                                                              -----------    -----------    -----------
Service cost--benefits earned during the period............   $   792,857    $   813,781    $   724,144
Interest cost on projected benefit obligation..............     2,125,898      2,288,129      2,416,313
Actual return on plan assets...............................    (2,549,375)        (6,501)    (4,636,283)
Net amortization and deferral..............................     1,014,398     (1,666,588)     2,996,976
                                                              -----------    -----------    -----------
Net periodic pension cost..................................   $ 1,383,778    $ 1,428,821    $ 1,501,150
                                                              -----------    -----------    -----------
                                                              -----------    -----------    -----------
The following table sets forth the Plans' funded status:
DECEMBER 31,
                                                                  --------------------------
                                                                     1994           1995
                                                                  -----------    -----------
Actuarial present value of accumulated benefit obligation,
  including vested benefit obligations of $25,847,000 and
  $30,022,000, respectively....................................   $26,981,600    $31,211,000
                                                                  -----------    -----------
                                                                  -----------    -----------
Projected benefit obligation...................................   $29,384,300    $31,650,000
Plan assets at fair value......................................    22,937,800     26,830,100
                                                                  -----------    -----------
Projected benefit obligation in excess of plan assets..........    (6,446,500)    (4,819,900)
Unrecognized net loss..........................................     2,033,100      2,959,400
Prior service cost (credit)....................................       644,800     (2,225,500)
Adjustment to recognize minimum pension liability..............      (394,900)      (761,000)
                                                                  -----------    -----------
Pension liability recorded in financial statements.............   $(4,163,500)   $(4,847,000)
                                                                  -----------    -----------
                                                                  -----------    -----------
The pension liability is recorded in the balance sheet as follows:
DECEMBER 31,
                                                                     ------------------------
                                                                        1994          1995
                                                                     ----------    ----------
Accrued payroll and employee benefits.............................   $1,643,630    $1,800,900
Other long-term liabilities.......................................    2,519,870     3,046,100
                                                                     ----------    ----------
                                                                     $4,163,500    $4,847,000
                                                                     ----------    ----------
                                                                     ----------    ----------
The projected benefit obligation is based on a weighted-average assumed
discount rate of 8.5% at December 31, 1994 and 7.5% at December 31, 1995, and an
assumed rate of compensation increase of 4%-5% at both December 31, 1994 and
1995. The decrease in the discount rate from 8.5% to 7.5% increased the vested
benefit obligation, accumulated benefit obligation, and projected benefit
obligation by $3,100,000, $3,194,000, and $3,268,000, respectively. The
weighted-average expected long-term rate of return on plan assets used to
determine the expected return on plan assets in net periodic pension cost 
was 9%.
 
     During 1995, the benefit formula for certain hourly employees was amended.
This amendment reduced the projected benefit obligation, with a corresponding
adjustment to unrecognized prior service cost, by approximately $2,500,000.
 
     Assets of the plans are commingled in a Master Trust which invests in a
variety of investment vehicles.
 
                                      F-12
SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
8. RETIREMENT PLANS--(CONTINUED)
     The Company also sponsors a defined contribution plan covering all salaried
employees. Participants may elect to contribute basic contributions between 1%
and 15% of base compensation. Basic contributions consist solely of elective
deferrals which may be excluded from the participant's gross income for Federal
tax purposes pursuant to Section 401(k) of the Code. A participant may also
elect to contribute additional after-tax contributions of up to 10% for each
plan year up to the annual limit on elective deferrals under the Internal
Revenue Code of 1986. The Company may, at the sole discretion of its Board of
Directors, contribute, as a matching contribution, an amount not to exceed 50%
of the participants' basic contributions up to a maximum of 4%. In addition, the
Company may, at its sole discretion, make discretionary contributions which are
allocated to participants in accordance with the Plan provisions. The Company
recorded a charge for such contributions of approximately $0, $100,000 and

$200,000 in 1993, 1994 and 1995, respectively.
 
     During 1994 the Company implemented a defined contribution plan covering
all employees covered by the collective bargaining agreement between the Company
and I.A.M.--Local Lodge #2310. Participants may elect to contribute basic
contributions between 1% and 15% of compensation. Basic contributions consist
solely of elective deferrals which may be excluded from the participant's gross
income for Federal tax purposes pursuant to Section 401(k) of the Code. A
participant may also elect to contribute additional after-tax contributions of
up to 10%. The Company may, at its sole discretion, make discretionary
contributions which are allocated to participants in accordance with the Plan
provisions. There were no Company contributions made to the plan in 1994 or
1995.
 
9. POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE BENEFITS
 
     The Company provides certain healthcare and life insurance benefits to
eligible retired employees and their spouses. Participants generally become
eligible for these benefits after achieving certain age and years of service
requirements. Employees at certain of the Company's facilities are not eligible
for postretirement healthcare and life insurance benefits. For certain hourly
employees retiring after August 1, 1989, healthcare coverage ceases after the
retiree reaches age 65. Health and life insurance benefits are provided through
insurance contracts. The health insurance plans are contributory and contain
other cost-sharing features such as deductibles, coinsurance, and lifetime
maximums. Life insurance benefits are generally a factor of final compensation
for salaried employees and are pre-defined for eligible hourly employees. The
Company's current policy is to fund these benefits on a pay-as-you-go basis.
 
     Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, 'Employers' Accounting for Postretirement Benefits
Other Than Pensions,' which requires that the estimated cost of postretirement
benefits be accrued over the period earned. Prior to 1993, the Company
recognized the costs of these benefits on the pay-as-you-go basis. The
accumulated postretirement benefit obligation at adoption was $4,681,000 and
will be recognized over 20 years.
 
                                      F-13
SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
9. POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE BENEFITS--(CONTINUED)
     The amounts recognized in the Company's balance sheets, in other long-term
liabilities, were as follows:
HEALTH         LIFE
                                                                    CARE       INSURANCE       TOTAL
                                                                 ----------    ----------    ----------
DECEMBER 31, 1995:
  Accumulated postretirement benefits obligation:
     Retirees.................................................   $1,450,400    $  979,400    $2,429,800
     Fully eligible active participants.......................      263,500       288,900       552,400
     Other active participants................................    1,841,200       419,400     2,260,600
                                                                 ----------    ----------    ----------
  Total accumulated postretirement benefits obligation........    3,555,100     1,687,700     5,242,800
  Unrecognized transition obligation..........................    2,787,200     1,190,800     3,978,000
  Unrecognized net (gain) loss................................      (77,300)        4,700       (72,600)
                                                                 ----------    ----------    ----------
  Accrued postretirement obligation...........................   $  845,200    $  492,200    $1,337,400
                                                                 ----------    ----------    ----------
                                                                 ----------    ----------    ----------
DECEMBER 31, 1994:
  Accumulated postretirement benefits obligation:
     Retirees.................................................   $2,116,100    $  860,300    $2,976,400
     Fully eligible active participants.......................      154,700       240,000       394,700
     Other active participants................................    1,181,900       294,500     1,476,400
                                                                 ----------    ----------    ----------
  Total accumulated postretirement benefits obligation........    3,452,700     1,394,800     4,847,500
  Unrecognized transition obligation..........................    2,951,200     1,261,000     4,212,200
  Unrecognized net (gain) loss................................      (41,300)     (261,800)     (303,100)
                                                                 ----------    ----------    ----------
  Accrued postretirement obligation...........................   $  542,800    $  395,600    $  938,400
                                                                 ----------    ----------    ----------
                                                                 ----------    ----------    ----------
F-14
SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
9. POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE BENEFITS--(CONTINUED)
     Net periodic postretirement benefit costs included the following:
HEALTH       LIFE
                                                                        CARE      INSURANCE     TOTAL
                                                                      --------    ---------    --------
1995:
  Service cost--benefits earned during the period..................   $ 51,400    $  14,200    $ 65,600
  Interest cost....................................................    264,300      121,200     385,500
  Amortization.....................................................    150,800       58,200     209,000
                                                                      --------    ---------    --------
  Net periodic postretirement benefit cost.........................   $466,500    $ 193,600    $660,100
                                                                      --------    ---------    --------
                                                                      --------    ---------    --------
1994:
  Service cost--benefits earned during the period..................   $ 60,500    $  25,700    $ 86,200
  Interest cost....................................................    259,800      106,400     366,200
  Amortization.....................................................    164,000       61,800     225,800
                                                                      --------    ---------    --------
  Net periodic postretirement benefit cost.........................   $484,300    $ 193,900    $678,200
                                                                      --------    ---------    --------
                                                                      --------    ---------    --------
1993:
  Service cost--benefits earned during the period..................   $ 54,800    $  22,400    $ 77,200
  Interest cost....................................................    252,200      112,100     364,300
  Amortization.....................................................    164,000       70,200     234,200
                                                                      --------    ---------    --------
  Net periodic postretirement benefit cost.........................   $471,000    $ 204,700    $675,700
                                                                      --------    ---------    --------
                                                                      --------    ---------    --------
For measuring the postretirement benefit obligation, an 11% annual rate of
increase in the net medical claims cost was assumed. The rate was assumed to
decrease gradually to 5.5% in 2005 and remain at that level thereafter. Retiree
contributions were assumed to increase at the same rates as the annual rate of
increase in the net medical claims cost. In addition, it was assumed that the
retirees would continue to pay for all Medicare Part B premiums. Increasing the
annual rate of increase in the net medical claims cost by one percentage point
in each year would increase the accumulated postretirement benefit obligation by
$194,000 and would increase the service cost and interest cost components of net
periodic postretirement benefit cost by $4,000 and $14,000, respectively. The
discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% in 1995 and 8.5% in 1994. The change in the discount rate
increased the accumulated postretirement benefit obligation at December 31, 1995

by approximately $417,000.
 
     The unrecognized transition obligation is being amortized on a
straight-line basis over 20 years. Unrecognized gains and losses are amortized
on a straight-line basis over the average remaining service period of active
participants.
 
10. RELATED PARTY TRANSACTIONS
 
     The Company has received advances from two of its parent company's
shareholders. The amount outstanding at December 31, 1994 and 1995 was
$8,500,000. This debt is supported by notes and is subordinate to the Company's
obligations under its Credit Agreement. In addition, the Company's senior
lenders have placed restrictions on the repayment of these amounts. As a result
of these restrictions, amounts owing to shareholders under the subordinate notes
payable have been classified as long-term. Accrued interest on these obligations
totaled $937,000 and $1,587,000 at December 31, 1994 and 1995, respectively.
These amounts are included in accrued other liabilities. The weighted average
interest rate is 5% at December 31, 1994 and 7.47% at December 31, 1995.
 
                                      F-15
SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
10. RELATED PARTY TRANSACTIONS--(CONTINUED)
     The Company also has a $6,000,000 line of credit available from one of its
parent company's shareholders. No amounts were outstanding on this line at
December 31, 1995 and 1994.
 
     During the years ended December 31, 1993, 1994 and 1995, the Company made
sales to affiliated companies totalling $7,850,000, $9,332,000 and $15,028,000,
respectively.
 
     The Company and an affiliate have shared common insurance coverage for
aircraft and space liabilities, contingent liabilities and excess liabilities
greater than $10 million but less than $50 million. The Company is charged a pro
rata premium based on the net sales of the covered parties. The Company was
charged $162,000, $160,000, and $206,000 for the years ended December 31, 1993,
1994 and 1995.
 
11. INCOME TAXES
 
     As discussed in Note 1, in 1993 the Company adopted Statement of Accounting
Standards No. 109, 'Accounting for Income Taxes,' which requires a change from
the deferred method of accounting for income taxes to the asset and liability
method. The effect of this change was not significant to the 1993 results of
operations. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of temporary differences by applying enacted
statutory rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
The effect of a change in tax rates is recognized in the period that includes

the enactment date.
 
     Income tax expense (benefit) consists of the following:
YEAR ENDED DECEMBER 31,
                                                              -----------------------------------------
                                                                 1993           1994           1995
                                                              -----------    -----------    -----------
Current:
  Federal..................................................   $(1,150,000)   $        --    $   250,000
  State....................................................        92,583         99,177        103,590
                                                              -----------    -----------    -----------
                                                               (1,057,417)        99,177        353,590
Deferred...................................................     1,254,157             --             --
                                                              -----------    -----------    -----------
                                                              $   196,740    $    99,177    $   353,590
                                                              -----------    -----------    -----------
                                                              -----------    -----------    -----------
Income tax expense (benefit) differs from the amount computed by applying
the statutory income tax rate as follows:
YEAR ENDED DECEMBER 31,
                                                              -----------------------------------------
                                                                 1993           1994           1995
                                                              -----------    -----------    -----------
Income before income taxes at 34%..........................   $(4,128,100)   $(2,342,200)   $ 2,570,000
Permanent income tax disallowances.........................         7,100         23,800         23,000
State taxes, net of federal benefit........................        61,100         65,500         68,400
Net losses with no tax benefit and other changes in
  valuation allowance......................................     4,314,600      2,318,300             --
Benefit of net operating loss carryforwards................            --             --     (2,307,800)
Other......................................................       (57,960)        33,777            (10)
                                                              -----------    -----------    -----------
                                                              $   196,740    $    99,177    $   353,590
                                                              -----------    -----------    -----------
                                                              -----------    -----------    -----------
F-16
SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
11. INCOME TAXES--(CONTINUED)

     The Company has approximately $3,000,000 of net operating loss
carryforwards available to offset future federal regular taxable income and
approximately $150,000 of net operating loss carryforwards available to offset
future federal alternative minimum taxable income. These carryforwards will
expire in 2008-2009.
 
     The Company was subject to the provisions of the corporate alternative
minimum tax ('AMT') in certain prior years. The AMT is imposed at a fixed
statutory rate of 20% on the Company's alternative minimum taxable income which
is determined by making statutory adjustments to the Company's regular taxable
income. The Company has AMT credit carryforwards of approximately $2,100,000
which will be available, indefinitely, to reduce future regular federal income
taxes payable in the event that regular taxes exceed the AMT.
 
     General business credits, including investment credits and research and
development credits, are accounted for using the flow-through method. The
Company has research and development credit carryforwards of approximately
$247,000 available to reduce future federal income taxes. These credits will
expire in 2002 through 2005.
 
     Deferred tax liabilities and assets are recorded in the Company's balance
sheets as follows:
DECEMBER 31,
                                                        ---------------------------
                                                            1994           1995
                                                        ------------    -----------
Deferred tax liabilities
  Property, plant and equipment......................   $ (1,848,000)   $(1,190,300)
  Other long-term assets.............................       (130,800)       (26,000)
                                                        ------------    -----------
Gross deferred tax liabilities.......................     (1,978,800)    (1,216,300)
 
Deferred tax assets:
  AMT credit carryforward............................      1,894,900      2,055,600
  Federal net operating loss carryforward............      3,906,400      1,021,400
  New York State net operating loss carryforward.....        840,000        480,000
  New York State investment tax credit
     carryforward....................................      1,500,000      1,600,000
  Accrued liabilities................................      3,010,500      2,649,600
  Employee retirement plans..........................      1,683,000      1,785,600
  Inventory..........................................        376,500        256,900
  Other..............................................        302,275        317,375
                                                        ------------    -----------
                                                          13,513,575     10,166,475
  Valuation allowance................................    (11,332,500)    (8,747,900)
                                                        ------------    -----------
Net deferred tax assets..............................      2,181,075      1,418,575
                                                        ------------    -----------
Net deferred taxes...................................   $    202,275    $   202,275
                                                        ------------    -----------

                                                        ------------    -----------
The valuation allowance at December 31, 1993 was $8,674,500.
 
                                      F-17
SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
12. OTHER LONG-TERM LIABILITIES
 
     Other long-term liabilities consist of the following:
DECEMBER 31,
                                                        ---------------------------
                                                            1994           1995
                                                        ------------    -----------
Pension obligation...................................   $  2,519,870    $ 3,046,100
Post retirement benefits obligation..................        938,400      1,337,400
Environmental reserves...............................      2,817,437      2,965,625
Contract loss reserve................................        480,000             --
Other................................................        636,713        621,174
                                                        ------------    -----------
                                                        $  7,392,420    $ 7,970,299
                                                        ------------    -----------
                                                        ------------    -----------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  Commodity Swap Agreement
 
     The Company periodically uses commodity swap agreements to hedge against
price fluctuations of raw materials, principally nickel, used in the
manufacturing process. At December 31, 1995, the Company had open swap
agreements with a notional principal value of approximately $6,400,000. The fair
value of the material covered by these contracts, based on the December 31, 1995
price quoted on the London Metal Exchange, was approximately $7,000,000. At
December 31, 1995, the Company had entered into sales agreements which will
require amounts of material in excess of the amount covered by the swap
agreements.
 
  Fair Value Disclosure
 
     The carrying amounts reported in the Company's balance sheets for cash
approximate fair value. The carrying amounts reported in the Company's balance
sheets for long-term debt, including current portion, and subordinated notes
payable approximate fair value, as the underlying long-term debt instrument is

comprised of notes that are repriced on a short-term basis, and the subordinated
notes carry a variable-rate interest which is adjusted on a short-term basis.
 
14. BUSINESS SEGMENT INFORMATION
 
     The Company considers its operations to be one industry segment, specialty
metals. All significant operations are in the United States. Total export sales,
by geographic area, were as follows:
YEAR ENDED DECEMBER 31,
                                                   -----------------------------------------
                                                      1993           1994           1995
                                                   -----------    -----------    -----------
Europe..........................................   $18,337,200    $20,079,400    $37,105,400
Middle East.....................................     2,902,800      2,977,500      7,082,700
Other...........................................     1,257,800        952,500      2,442,100
                                                   -----------    -----------    -----------
                                                   $22,497,800    $24,009,400    $46,630,200
                                                   -----------    -----------    -----------
                                                   -----------    -----------    -----------
15. STATEMENT OF CASH FLOW--SUPPLEMENTAL DISCLOSURES
 
     The Company's actual cash payments (receipts) for interest (net of amounts
capitalized) and income taxes were $3,023,000 and ($533,000), respectively, for
the year ended December 31, 1993, $4,435,000 and $(1,171,000), respectively, for
the year ended December 31, 1994 and $4,090,000 and ($2,000), respectively, for
the year ended December 31, 1995.
 
                                      F-18
SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
15. STATEMENT OF CASH FLOW--SUPPLEMENTAL DISCLOSURES--(CONTINUED)
     Non-cash activities:
1994         1995
                                                   ---------    ---------
Intangible pension asset........................   $(967,709)   $(159,717)
Accumulated pension adjustment..................     198,572      526,312
                                                   ---------    ---------
Accrued pension liability.......................   $(769,137)   $ 366,595
                                                   ---------    ---------
                                                   ---------    ---------
During 1996, the Company acquired $98,000 of fixed assets which were
directly offset by capital lease liabilities.
 
16. COMMITMENTS AND CONTINGENCIES
 
  Environmental
 
     The Company is subject to loss contingencies pursuant to various federal,
state and local environmental laws, and is currently involved in several actions
regarding the clean-up of disposal sites alleged to contain hazardous and/or
toxic wastes generated over a number of years including the following.
 
     The Company, with contribution from other parties, performed remedial
actions at a site in Clayville, New York (the 'Ludlow Landfill'), except for
adjoining property known as the 'North Gravel Pit.' The New York State
Department of Environmental Conservation ('DEC') has advised the Company that
all work performed to date is acceptable. Notwithstanding the fact that the
remediation work has been completed (except for the North Gravel Pit) the DEC
may seek a post-excavation claim for biota monitoring, which is an environmental
assessment procedure. This claim is not anticipated to be material. The Company
is also responsible for operation and maintenance costs for a period of 30
years. The costs for this are estimated to be approximately $150,000 per year in
years one and two, and approximately $90,000 in the remaining years. The total
estimated costs of approximately $2.8 million have been discounted at an annual
rate of 4% in the accompanying financial statements.The Company may also be
required to perform contingent post-closure activities. It is not possible to
determine which, if any, of the contingent activities the Company will need to
perform. Contamination has also been discovered at the North Gravel Pit site,
and a study is currently underway to determine the extent of the contamination
and to select an appropriate remedial alternative. This study is expected to be
completed in the second half of 1997. It is not possible to provide a reasonable
estimate as to the cost of any remedial work which will be required in the North
Gravel Pit until the study is complete and a remedial alternative is determined.
Based upon preliminary information, the Company estimates the cost will be at
least $500,000 and the Company has established a reserve in this amount. The 
Company has reserved a total of approximately $2.3 million with respect to the
Ludlow Landfill and North Gravel Pit.
 
     The Company is also involved in a site in Utica, New York which is 
alleged to be contaminated. In the mid 1980s, the owners/operators of Universal
Waste in Utica, New York (the 'Universal Waste Site') were cited by the DEC in a
formal enforcement proceeding for cleanup of the site which was allegedly
contaminated. The owner of the Universal Waste Site requested by motion that the
Company be named as an indispensable party to that proceeding. The DEC, however,
took the position that the Company should not be named as an indispensable
party. The Company believes that at least four other potentially responsible
parties have been identified with respect to the contamination at the site. A
consent order has been executed obligating the site operator to conduct a
preliminary site assessment on a portion of the property.

The preliminary site assessment is underway. The DEC is also conducting a
separate preliminary site assessment. The Company is presently not involved in
investigating the alleged contamination. Based upon the limited information
available to its environmental engineers, the Company has established a reserve
of $575,000.
 
                                      F-19
SPECIAL METALS CORPORATION
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
                        DECEMBER 31, 1993, 1994 AND 1995
 
16. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
However, because of the preliminary nature of the investigation, it is not
possible, at this time, to provide a reasonable estimate as to the ultimate cost
of any investigative or remedial work which will be required, or the Company's
share, if any, of such costs.
 
     The Company is on notice of, and involved in, certain other environmental 
matters which have been settled or are at various stages of discussion,
negotiation or settlement which the Company does not believe to be material.

     Although the Company believes that it is in substantial compliance with
applicable requirements of environmental laws, there can be no assurance that
some, or all, of the risks noted previously will not result in liabilities that
are material to the Company's business, results of operations, financial
positions, or cash flows.
 
  Other
 
     From time to time, the Company is involved in legal proceedings relating to
claims arising out of its operations in the normal course of business. The
Company does not believe that it is a party to any proceedings at the present
time that could have a material adverse effect on the business, financial
condition, results of operations or cash flows of the Company.
 
17. MAJOR CUSTOMERS
 
     For the year ended December 31, 1993, sales made to the Company's two
largest customers represented approximately 12% each, of the Company's total
sales. For the year ended December 31, 1994, sales made to the Company's two
largest customers represented approximately 22% and 13%, respectively, of the
Company's total sales. For the year ended December 31, 1995, sales made to the
Company's three largest customers represented approximately 17%, 11% and 10%,
respectively, of the Company's total sales. No other customers, in any year,
represented over 10% of the Company's total sales.
 
     At December 31, 1994, accounts receivable from two customers represented
approximately 39% of total accounts receivable. At December 31, 1995, accounts
receivable from three customers represented approximately 43% of total accounts
receivable. No other customers accounted for over 10% of the Company's total
accounts receivable at December 31, 1994 and 1995.
 
18. EQUITY APPRECIATION RIGHTS PLAN
 
     The Company has an Equity Appreciation Rights Plan ('Rights Plan') which
provides for the grant of rights to receive cash payments based on the

appreciation of the book value of the Company, as defined ('Rights'). Rights may
generally be exercised from the fifth anniversary of the date of grant through
the tenth anniversary of the date of grant, or earlier in the event of a change
in control, termination without cause, retirement, death or disability. Rights
are forfeited in the event the holder is terminated by the Company for cause, as
defined. Each Right is based on the total book value of the Company, divided by
10,000,000. At December 31, 1994 and 1995, 50,000 Rights were outstanding, of
which 10,000 were currently exercisable. As of December 31, 1995, no material
amounts had accrued under the Rights Plan.
 
19. SUBSEQUENT EVENTS
 
     On December 18, 1996, the Company's Board of Directors authorized a merger
of SMTC and the Company, with the Company being the surviving corporation (the
'Merger'). In the Merger, each holder of common stock of SMTC will receive
12,400 shares of the Company's common stock for each share of SMTC common stock
and all shares of the Company's common stock outstanding prior to the Merger
will be cancelled. The Board's authorization was made in anticipation of, and
is subject to, an initial public offering of the Company's common stock, which
is anticipated to take place in the first quarter of 1997.
 
     All share and per-share amounts in the accompanying financial statements
have been retroactively adjusted to reflect the Merger.
 
                                      F-20
SPECIAL METALS CORPORATION
                                 BALANCE SHEETS
                                  (UNAUDITED)
SEPTEMBER 30,
                                                                                    ----------------------------
                                                                                        1995            1996
                                                                                    ------------    ------------
ASSETS
Current assets:
  Cash...........................................................................   $  1,242,538    $  1,067,728
  Accounts receivable, less allowance for doubtful accounts of $61,000
     for 1995 and $50,000 for 1996...............................................     21,702,238      29,019,445
  Inventories....................................................................     42,767,200      46,474,297
  Prepaid expenses...............................................................        457,444         460,331
  Deferred taxes.................................................................        202,275       3,700,000
                                                                                    ------------    ------------
Total current assets.............................................................     66,371,695      80,721,801
Property, plant and equipment....................................................     33,932,250      32,925,432
Deferred taxes...................................................................             --       2,546,000
Other assets.....................................................................      5,072,214       3,783,147
                                                                                    ------------    ------------
Total assets.....................................................................   $105,376,159    $119,976,380
                                                                                    ------------    ------------
                                                                                    ------------    ------------
 
                      LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
  Accounts payable...............................................................   $ 15,166,326    $ 12,908,555
  Accrued payroll and employee benefits..........................................      7,604,003       8,118,532
  Accrued other liabilities......................................................      5,591,571       4,752,010
  Income taxes payable...........................................................        339,984       1,074,659
  Current portion of long-term debt..............................................      4,760,000       6,500,000
  Current obligation under capital leases........................................        257,750         272,484
                                                                                    ------------    ------------
Total current liabilities........................................................     33,719,634      33,626,240
Long-term debt...................................................................     41,050,000      35,560,000
Long-term obligation under capital leases........................................        813,596         592,779
Subordinated notes payable.......................................................      8,500,000       9,500,000
Other long-term liabilities......................................................      7,311,420       8,895,549
                                                                                    ------------    ------------
Total liabilities................................................................     91,394,650      88,174,568
Commitments and contingencies
Shareholder's equity:
  Common stock, $0.01 par value, 35,000,000 shares authorized, 12,400,000 shares
     issued and outstanding......................................................        124,000         124,000
  Paid-in surplus................................................................     25,876,000      25,876,000
  Pension adjustment.............................................................       (198,573)       (478,885)
  Retained earnings (accumulated deficit)........................................    (11,819,918)      6,280,697
                                                                                    ------------    ------------

Total shareholder's equity.......................................................     13,981,509      31,801,812
                                                                                    ------------    ------------
Total liabilities and shareholder's equity.......................................   $105,376,159    $119,976,380
                                                                                    ------------    ------------
                                                                                    ------------    ------------
See accompanying notes.
 
                                      F-21
SPECIAL METALS CORPORATION
      STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
                                  (UNAUDITED)
NINE MONTHS ENDED
                                                                                           SEPTEMBER 30,
                                                                                    ----------------------------
                                                                                        1995            1996
                                                                                    ------------    ------------
Net sales........................................................................   $ 92,565,989    $120,540,377
Cost of goods sold...............................................................     80,369,758      99,733,176
                                                                                    ------------    ------------
                                                                                      12,196,231      20,807,201
Selling, general and administrative expenses.....................................      3,384,259       3,722,578
                                                                                    ------------    ------------
Operating income.................................................................      8,811,972      17,084,623
Interest expense.................................................................      3,572,408       3,096,210
                                                                                    ------------    ------------
Income before income taxes.......................................................      5,239,564      13,988,413
Income tax expense (benefit).....................................................        245,212      (1,901,235)
                                                                                    ------------    ------------
Net income.......................................................................      4,994,352      15,889,648
Retained earnings (accumulated deficit)
  Beginning of period............................................................    (16,814,270)     (9,608,951)
                                                                                    ------------    ------------
  End of period..................................................................   $(11,819,918)   $  6,280,697
                                                                                    ------------    ------------
                                                                                    ------------    ------------
Net income per share.............................................................   $       0.40    $       1.28
                                                                                    ------------    ------------
                                                                                    ------------    ------------
Weighted average shares outstanding..............................................     12,400,000      12,400,000
                                                                                    ------------    ------------
                                                                                    ------------    ------------
See accompanying notes.
 
                                      F-22
SPECIAL METALS CORPORATION
                            STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
NINE MONTHS ENDED
                                                                                          SEPTEMBER 30,
                                                                                  ------------------------------
                                                                                      1995              1996
                                                                                  ------------      ------------
OPERATING ACTIVITIES
Net income.....................................................................   $  4,994,352      $ 15,889,648
Adjustments to reconcile net income to net cash provided by operating
  activities:
  Depreciation and amortization................................................      4,594,456         3,212,338
  Provision for doubtful accounts..............................................        (13,961)          (49,555)
  Loss on sale of fixed assets.................................................          5,336                --
  Provision for deferred income taxes..........................................             --        (5,797,725)
  Change in assets and liabilities:
     Accounts receivable.......................................................     (3,346,658)       (2,100,709)
     Inventories...............................................................    (13,665,606)       (7,417,957)
     Prepaid expenses..........................................................       (189,022)         (200,234)
     Income taxes..............................................................        245,570           625,397
     Accounts payable..........................................................      8,135,057        (1,919,628)
     Accrued payroll and employee benefits.....................................      1,206,137           447,117
     Accrued other liabilities.................................................      2,792,480          (250,389)
     Other long-term liabilities...............................................        (81,000)          925,250
                                                                                  ------------      ------------
Net cash provided by operating activities......................................      4,677,141         3,363,553
 
INVESTING ACTIVITIES
Capital expenditures...........................................................     (1,228,126)       (1,877,311)
Proceeds from sale of fixed assets.............................................          2,500                --
                                                                                  ------------      ------------
Net cash used in investing activities..........................................     (1,225,626)       (1,877,311)
 
FINANCING ACTIVITIES
Net repayment of revolving credit facilities...................................       (700,000)               --
Proceeds from subordinated notes payable.......................................             --         1,000,000
Net repayments of term loans...................................................     (3,000,000)       (3,750,000)
Financing and other deferred costs.............................................       (222,639)          (50,540)
Payments on capital lease obligations..........................................       (215,596)         (230,771)
                                                                                  ------------      ------------
Net cash provided by financing activities......................................     (4,138,235)       (3,031,311)
                                                                                  ------------      ------------
Net decrease in cash...........................................................       (686,720)       (1,545,069)
Cash at beginning of year......................................................      1,929,258         2,612,797
                                                                                  ------------      ------------
Cash at end of year............................................................   $  1,242,538      $  1,067,728
                                                                                  ------------      ------------
                                                                                  ------------      ------------
See accompanying notes.
 
                                      F-23
SPECIAL METALS CORPORATION
                     NOTES TO INTERIM FINANCIAL STATEMENTS
                                  (UNAUDITED)
                          SEPTEMBER 30, 1995 AND 1996
 
NOTE 1.
 
     The unaudited financial information furnished herein reflects all
adjustments, which in the opinion of management are of a normal recurring
nature, to fairly state the Company's financial position and results from
operations for the periods presented. This information should be read in
conjunction with the Company's audited financial statements for the year ended
December 31, 1995.
 
     The results of operations for the nine-month period ended September 30,
1996 are not necessarily indicative of the results to be expected for the entire
year ended December 31, 1996.
 
NOTE 2.
 
     Inventories consist of the following:
SEPTEMBER 30,
                                                                  ----------------------------
                                                                      1995            1996
                                                                  ------------    ------------
Raw materials and supplies.....................................   $ 10,261,677    $ 13,216,466
Work-in-process................................................     32,505,523      33,257,831
                                                                  ------------    ------------
                                                                  $ 42,767,200    $ 46,474,297
                                                                  ------------    ------------
                                                                  ------------    ------------
NOTE 3.
 
Environmental
 
     The Company is subject to loss contingencies pursuant to various federal,
state and local environmental laws, and is currently involved in several actions
regarding the clean-up of disposal sites alleged to contain hazardous and/or
toxic wastes generated over a number of years including the following.
 
     The Company, with contributions from other parties, performed remedial
actions at a site in Clayville, New York (the 'Ludlow Landfill'), except for

adjoining property known as the 'North Gravel Pit.' The New York State
Department of Environmental Conservation ('DEC') has advised the Company that
all work performed to date is acceptable. Notwithstanding the fact that the
remediation work has been completed (except for the North Gravel Pit) the DEC
may seek a post-excavation claim for biota monitoring, which is an environmental
assesment procedure. This claim is not anticipated to be material. The Company
is also responsible for operation and maintenance costs for a period of 30
years. The costs for this are estimated to be approximately $150,000 per year in
years one and two, and approximately $90,000 in the remaining years. The total
estimated costs of approximately $2.8 million have been discounted at an annual
rate of 4% in the accompanying financial statements. The Company may also be
required to perform contingent post-closure activities. It is not possible to
determine which, if any, of the contingent activities the Company will need to
perform. Contamination has also been discovered at the North Gravel Pit site,
and a study is currently underway to determine the extent of the contamination
and to select an appropriate remedial alternative. This study is expected to be
completed in the second half of 1997. It is not possible to provide a reasonable
estimate as to the cost of any remedial work which will be required in the North
Gravel Pit until the study is complete and a remedial alternative is determined.
Based upon preliminary information, the Company estimates the cost will be at
least $1.0 million and the Company has established a reserve in this amount. 
The Company has reserved a total of approximately $2.8 million with respect to
the Ludlow Landfill and North Gravel Pit.
 
                                      F-24
The Company is also involved in a site in Utica, New York (the 'Universal
Waste Site') which is alleged to be contaminated. In the mid 1980s, the
owners/operators of Universal Waste in Utica, New York were cited by the DEC in
a formal enforcement proceeding for cleanup of the site which was allegedly
contaminated. The owner of the Universal Waste Site requested by motion that the
Company be named as an indispensable party to that proceeding. The DEC, however,
took the position that the Company should not be named as an indispensable
party. The Company believes that at least four other potentially responsible
parties have been identified with respect to the contamination at the site. A
consent order has been executed obligating the site operator to conduct a
preliminary site assessment on a portion of the property. The preliminary site
assessment is underway. The DEC is also conducting a separate preliminary site
assessment. The Company is presently not involved in investigating the alleged
contamination. Based upon the limited information available to its environmental
engineers, the Company has established a reserve of $575,000. However, because
of the preliminary nature of the investigation, it is not possible, at this
time, to provide a reasonable estimate as to the ultimate cost of any
investigative or remedial work which will be required, or the Company's share,
if any, of such costs.
 
     The Company is on notice of, and involved in, certain other
environmental matters which have been settled or are at various stages of
discussion, negotiation or settlement which the Company does not believe to be
material.

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

 
Other
 
     From time to time, the Company is involved in legal proceedings relating to
claims arising out of its operations in the normal course of business. The
Company does not believe that it is a party to any proceedings at the present
time that could have a material adverse effect on the business, financial
condition, results of operations or cash flows of the Company.
 
NOTE 4.
 
     Income tax expense for the nine months ended September 30, 1995 differs
from the amount which would be expected by applying the combined statutory
income tax rates due to utilization of previously unrecognized net operating
loss and other tax carryforwards. Income tax expense for the nine months ended
September 30, 1996 differs from the amount which would be expected by applying
the combined statutory income tax rates due to utilization of previously
unrecognized net operating loss and other tax carryforwards, and due to the
recognition of previously unrecognized deferred income tax assets of $5,800,000.
 
NOTE 5.
 
     On October 18, 1996, the Company entered into a Credit Agreement (the
'Credit Agreement') and refinanced all amounts owing under the Amended and
Restated Credit Agreement dated December 15, 1994. The Credit Agreement provides
for the following credit facility:
 
          o Term loan of $20,000,000, payable in annual installments of
            $4,000,000 beginning October 17, 1997;
 
          o Revolving credit facility of up to $40,000,000, subject to a
            borrowing base computation which is described below, payable October
            17, 2001.
 
     All advances under the Credit Agreement bear interest at a base rate, as
defined, or a rate equal to the eurodollar rate, which equates to the New York
interbank offered rate, plus a margin of 1.25%, or a rate equal to the London
interbank offered rate, plus a margin of 1.25%. Interest is payable periodically
in arrears. An annual commitment fee of 0.25% on the unused available revolving
credit commitment is due quarterly.
 
     Under the revolving credit facility, the Company may borrow, repay, and
re-borrow from time to time, the lesser of (a) $40,000,000 or (b) the Company's
borrowing base. The Credit Agreement defines the Company's borrowing base as the
sum of 85% of eligible accounts receivable and 60% of eligible inventory. The
amount the Company may borrow against the working capital loans is reduced by
the aggregate amount of any letters of credit issued for the account of the
Company.
 
     The Company may prepay amounts owing under the Credit Agreement at its
option at any time.
 
                                      F-25
In connection with the Company's obligations under the Credit Agreement,
the Company has granted security interests in the Company's accounts receivable,
inventory and general intangibles now owned or hereafter acquired. The Company
is also subject to certain affirmative and negative covenants.
 
NOTE 6.
 
     On December 18, 1996, the Company's Board of Directors authorized a merger
of SMTC and the Company, with the Company being the surviving corporation (the
'Merger'). In the Merger, each holder of common stock of SMTC will receive
12,400 shares of the Company's common stock for each share of SMTC common stock
and all shares of the Company's common stock outstanding prior to the Merger
will be cancelled. The Board's authorization was made in anticipation of, and
is subject to, an initial public offering of the Company's common stock, which
is anticipated to take place in the first quarter of 1997.
 
     All share and per-share amounts in the accompanying financial statements
have been retroactively adjusted to reflect the Merger.
 
                                      F-26
SPECIAL METALS CORPORATION
PART II
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
     The following table sets forth the various expenses payable in connection
with the offering of the shares being registered hereby, other than underwriting
discounts and commissions. All the amounts shown are estimates, except the
Securities and Exchange Commission registration fee and the NASD filing fee. All
of such expenses are being borne by the Company.
SEC registration fee........................................................................   $ 18,788
NASD filing fee.............................................................................      6,700
NASDAQ listing fee..........................................................................      *
Accounting fees and expenses................................................................      *
Legal fees and expenses.....................................................................      *
Printing and engraving expenses.............................................................      *
Registrar and transfer agent's fees.........................................................      *
Miscellaneous fees and expenses.............................................................      *
                                                                                               --------
       Total................................................................................   $  *
                                                                                               --------
                                                                                               --------
------------------
*To be filed by amendment
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Section 102(b)(7) of the DGCL permits a provision in the certificate of
incorporation of each corporation organized thereunder, eliminating or limiting,
with certain exceptions, the personal liability of a director to the corporation
or its stockholders for monetary damages for certain breaches of fiduciary duty
as a director. The Certificate of Incorporation of the Company eliminates the
personal liability of directors to the fullest extent permitted by Delaware law.
 
     Section 145 of the DGCL ('Section 145'), in summary, empowers a Delaware
corporation, within certain limitations, to indemnify its officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement, actually and reasonably incurred by them
in connection with any suit or proceeding other than by or on behalf of the
corporation, if they acted in good faith and in a manner reasonably believed to
be in or not opposed to the best interest of the corporation, and, with respect
to a criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful.
 
     With respect to actions by or on behalf of the corporation, Section 145
permits a corporation to indemnify its officers, directors, employees and agents
against expenses (including attorneys' fees) actually and reasonably incurred in
connection with the defense or settlement of such action or suit, provided such

person meets the standard of conduct described in the preceding paragraph,
except that no indemnification is permitted in respect of any claim where such
person has been found liable to the corporation, unless the Court of Chancery or
the court in which such action or suit was brought approves such indemnification
and determines that such person is fairly and reasonably entitled to be
indemnified.
 
     Article Eight of the Certificate of Incorporation of the Company provides
for the indemnification of officers and directors and certain other parties (the
'Indemnitees') of the Company to the fullest extent permitted by law.
 
     The Underwriting Agreement provides for indemnification by the Underwriters
of the Company, its directors and officers, and persons who control the Company
within the meaning of Section 15 of the Securities Act for certain liabilities.
 
     The Registration Rights Agreement provides for indemnification of the
Company, its directors and officers, and persons who control the Company within
the meaning of Section 15 of the Securities Act for certain liabilities,
including liabilities arising thereunder.
 
                                      II-1
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
     Prior to the date of the Offering, 12,400,000 shares of Common Stock were
issued to the Principal Stockholders in connection with the Merger. These
securities will be issued in reliance on the exemption from registration
contained in Section 4(2) of the Securities Act.
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
  (a) Exhibits
EXHIBIT
NUMBER   DESCRIPTION OF DOCUMENT
------   --------------------------------------------------------------------------------------------------------
1.1*    Form of Underwriting Agreement among the Company, the Selling Stockholders and the Underwriters.
 3.1*    Amended and Restated Certificate of Incorporation of the Company.
 3.2*    Amended and Restated By-laws of the Company.
 4.1     Credit Agreement, dated as of October 18, 1996, among the Company, Credit Lyonnais New York Branch
           ('Credit Lyonnais') and the financial institutions from time to time party thereto.
 4.2*    Amendment No. 1 to the Credit Agreement among the Company, Credit Lyonnais New York Branch and the
           financial institutions named therein.
 4.3*    Letter from the Company to the Securities and Exchange Commission agreeing to file certain debt
           instruments.
 5.1*    Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
10.1*    Form of Registration Rights Agreement among the Company, SIMA, LWH and AMI.
10.2*    Form of Amended and Restated Stockholders Agreement among the Company, SIMA, LWH and AMI.
10.3*    Form of Technology Exchange Agreement between the Company and SIMA.
10.4*    Form of Managerial Assistance Agreement between the Company and SIMA.

10.5     Cash Flow Support Agreement, dated as of October 18, 1996, between the Company and SIMA in favor of
           Credit Lyonnais New York Branch.
10.6     Subordinated Note in favor of LWH, dated October 1, 1994.
10.7     Subordinated Note in favor of SIMA, dated October 1, 1994.
10.8     Subordination Agreement, dated as of October 18, 1996 among the Company, SIMA and Credit Lyonnais.
10.09    Lease Agreement, dated as of February 1, 1994 between the Oneida County Development Agency and the Company.
10.10    Payment In Lieu of Taxes Agreement, dated as of February 1, 1994, by and between the Oneida County
           Industrial Development Agency and the Company.
10.11    Lease, dated as of November 1, 1990 between the County of Chautauqua Industrial Development Agency and the
           Company.
10.12    Payment In Lieu of Taxes Agreement, dated as of November 1, 1990 by and between the Company and the County
           of Chautauqua Industrial Development Agency.
10.13    Amended and Restated Lease, dated as of September 1, 1990 between the City of Princeton, Kentucky and the 
           Company.
10.14    Special Metals Corporation Equity Appreciation Rights Plan
10.15    Special Metals Corporation Supplemental Retirement Income Plan
10.16*   Form of Special Metals Corporation 1997 Long-Term Stock Incentive Plan, together with Form of Stock
           Option Award Agreement.
21.1     Subsidiaries of the Company.
II-2
EXHIBIT
NUMBER   DESCRIPTION OF DOCUMENT
------   --------------------------------------------------------------------------------------------------------
23.1     Consent of Ernst & Young LLP.
23.2*    Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).
24.1     Power of Attorney (see signature pages).
27.1     Financial Data Schedule
------------------
* To be filed by amendment.
 
  (b) Financial Statement Schedules
 
     The following financial statement schedules are included herein;
 
     Schedule II--Valuation and qualifying accounts
 
     All other schedules are omitted because they are either not required, not
applicable or the required information is included in the financial statements
or notes thereto.
 
ITEM 17. UNDERTAKINGS
 
     The Company hereby undertakes to provide to the underwriters at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
 

     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to its Certificate of Incorporation, By-laws, the Underwriting
Agreement or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
 
     The Company hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities Act
     of 1933, the information omitted from the form of prospectus filed as part
     of this Registration Statement in reliance upon Rule 430A and contained in
     a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
     or 497(h) under the Securities Act shall be deemed to be a part of this
     Registration Statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
     Act of 1933, each post-effective amendment that contains a form of
     prospectus shall be deemed to be a new Registration Statement relating to
     the securities offered therein, and the offering of such securities at that
     time shall be deemed to be the initial bona fide offering thereof.
 
                                      II-3
SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New Hartford, State of
New York, on the 20th day of December, 1996.
 
                                          SPECIAL METALS CORPORATION

                                          By:        /s/ DONALD R. MUZYKA
                                              ----------------------------------
                                              Name: Donald R. Muzyka
                                              Title: President and Chief 
                                                       Executive Officer
 
                               POWER OF ATTORNEY
 
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Donald R. Muzyka, Robert F. Dropkin and
Donald C. Darling and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities (until revoked in writing), to
sign any and all amendments, including post-effective amendments, to this
Registration Statement, and any registration statement relating to the same
offering as this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) and the Securities Act of 1933, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or his or their
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
 
                                      II-4
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
NAME                                        TITLE                             DATE
------------------------------------------  -------------------------------------------   ------------------
/s/ ROBERT D. HALVERSTADT           Chairman of the Board of Directors             December 20, 1996
------------------------------------------
          Robert D. Halverstadt
 
           /s/ DONALD R. MUZYKA             President, Chief Executive Officer             December 20, 1996
------------------------------------------  and Director (Principal Executive Officer)
             Donald R. Muzyka
 
          /s/ DONALD C. DARLING             Chief Financial Officer (Principal             December 20, 1996
------------------------------------------  Financial and Accounting Officer)
            Donald C. Darling               and Director
 
          /s/ ROBERT F. DROPKIN             Director                                       December 20, 1996
------------------------------------------
            Robert F. Dropkin
 
            /s/ EDOUARD DUVAL               Director                                       December 20, 1996
------------------------------------------
              Edouard Duval
 
         /s/ ANTOINE G. TREUILLE            Director                                       December 20, 1996
------------------------------------------
           Antoine G. Treuille
 
          /s/ RAYMOND F. DECKER             Director                                       December 20, 1996
------------------------------------------
            Raymond F. Decker
II-5
INDEX TO FINANCIAL
                              STATEMENT SCHEDULES
PAGE
                                                                                                              ----
Report of Independent Auditors.............................................................................   S-2
Schedule II--Valuation and Qualifying Accounts.............................................................   S-3
S-1
REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors
Special Metals Corporation
 
We have audited the balance sheets of Special Metals Corporation as of December
31, 1994 and 1995, and the related statements of operations and retained
earnings (accumulated deficit) and cash flows for each of the three years in the
period ended December 31, 1995, and have issued our report thereon dated
February 14, 1996 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 16(b) of
this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
 
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
 
                                          /s/ ERNST & YOUNG LLP
 
Buffalo, New York
February 14, 1996
 
                                      S-2
SCHEDULE II
 
                       VALUATION AND QUALIFYING ACCOUNTS
                           SPECIAL METALS CORPORATION
                                 (IN THOUSANDS)
ADDITIONS
                                                                   ---------------------------
                                                     BALANCE AT                     CHARGED TO                  BALANCE AT
                                                     BEGINNING      CHARGED TO        OTHER                       END OF
DESCRIPTION                                          OF PERIOD        EXPENSE        ACCOUNTS     DEDUCTIONS      PERIOD
--------------------------------------------------   ----------    -------------    ----------    ----------    ----------
Year ended December 31, 1995:
  Deducted from asset accounts:
     Allowance for doubtful accounts..............     $   75          $  41           $             $ 16(a)      $  100
     Allowance for obsolescence...................      1,377            143                          551(b)         969
                                                     ----------       ------        ----------    ----------    ----------
       Total......................................     $1,452          $ 184           $  0          $567         $1,069
                                                     ----------       ------        ----------    ----------    ----------
                                                     ----------       ------        ----------    ----------    ----------
 
Year ended December 31, 1994:
  Deducted from asset accounts:
     Allowance for doubtful accounts..............     $  200          $ (61)          $             $ 64(a)      $   75
     Allowance for obsolescence...................      1,620            282                          525(b)       1,377
                                                     ----------       ------        ----------    ----------    ----------
       Total......................................     $1,820          $ 221           $  0          $589         $1,452
                                                     ----------       ------        ----------    ----------    ----------
                                                     ----------       ------        ----------    ----------    ----------
 
Year ended December 31, 1993:
  Deducted from asset accounts:
     Allowance for doubtful accounts..............     $  125          $  82           $             $  7(a)      $  200
     Allowance for obsolescence...................      1,382            561                          323(b)       1,620
                                                     ----------       ------        ----------    ----------    ----------
       Total......................................     $1,507          $ 643           $  0          $330         $1,820
                                                     ----------       ------        ----------    ----------    ----------
                                                     ----------       ------        ----------    ----------    ----------
------------------
(a) Uncollectible accounts written off, net of recoveries.
 
(b) Obsolete inventory disposals, physical inventory adjustments, and
    adjustments for material reclaimed or ultimately sold.
 
                                      S-3
REGISTRATION NO. 333-
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                    EXHIBITS
                                   FILED WITH
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
 
                            ------------------------
 
                           SPECIAL METALS CORPORATION
                            ------------------------
 
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EXHIBIT INDEX
EXHIBIT                                                                                                    SEQUENTIAL
NUMBER   DESCRIPTION                                                                                        PAGE NO.
------   -----------------------------------------------------------------------------------------------   -----------
1.1*     --   Form of Underwriting Agreement among the Company, the Selling Stockholders and the
               Underwriters.
 3.1*     --   Amended and Restated Certificate of Incorporation of the Company.
 3.2*     --   Amended and Restated By-laws of the Company.
 4.1      --   Credit Agreement, dated as of October 18, 1996, among the Company, Credit Lyonnais New
               York Branch ('Credit Lyonnais') and the financial institutions from time to time party
               thereto.
 4.2*     --   Amendment No. 1 to the Credit Agreement among the Company, Credit Lyonnais New York
               Branch and the financial institutions named therein.
 4.3*     --   Letter from the Company to the Securities and Exchange Commission agreeing to file
               certain debt instruments.
 5.1*     --   Opinion of Paul, Weiss, Rifkind, Wharton & Garrison.
10.1*     --   Form of Registration Rights Agreement among the Company, SIMA, LWH and AMI.
10.2*     --   Form of Amended and Restated Stockholders Agreement among the Company, SIMA, LWH and AMI.
10.3*     --   Form of Technology Exchange Agreement between the Company and SIMA.
10.4*     --   Form of Managerial Assistance Agreement between the Company and SIMA.
10.5      --   Cash Flow Support Agreement, dated as of October 18, 1996, between the Company and SIMA
               in favor of Credit Lyonnais New York Branch.
10.6      --   Subordinated Note in favor of LWH, dated October 1, 1994.
10.7      --   Subordinated Note in favor of SIMA, dated October 1, 1994.
10.8      --   Subordination Agreement, dated as of October 18, 1996 among the Company, SIMA and Credit
               Lyonnais.
10.09     --   Lease Agreement, dated as of February 1, 1994 between the Oneida County Development Agency
               and the Company.
10.10     --   Payment In Lieu of Taxes Agreement, dated as of February 1, 1994, by and between the
               Oneida County Industrial Development Agency and the Company.
10.11     --   Lease, dated as of November 1, 1990 between the County of Chautauqua Industrial Development
               Agency and the Company.
10.12     --   Payment In Lieu of Taxes Agreement, dated as of November 1, 1990 by and between the Company
               and the County of Chautauqua Industrial Development Agency.
10.13     --   Amended and Restated Lease, dated as of September 1, 1990 between the City of Princeton,
               Kentucky and the Company.
10.14     --   Special Metals Corporation Equity Appreciation Rights Plan
10.15     --   Special Metals Corporation Supplemental Retirement Income Plan
10.16*    --   Form of Special Metals Corporation 1997 Long-Term Stock Incentive Plan, together with
               Form of Stock Option Award Agreement.
21.1      --   Subsidiaries of the Company.
23.1      --   Consent of Ernst & Young LLP.
23.2*     --   Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).
24.1      --   Power of Attorney (see signature pages).
27.1      --   Financial Data Schedule
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* To be filed by amendment.