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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the Fiscal Year Ended December 31, 2003

Commission File No. 1-7170

IMCO Recycling Inc.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

75-2008280

(I.R.S. Employer Identification No.)

5215 North O’Connor Blvd., Suite 1500

Central Tower at Williams Square

Irving, Texas 75039

(Address of principal executive offices) (Zip code)

(972) 401-7200

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

As of June 30, 2003, the aggregate market value of the registrant’s outstanding common stock held by non-affiliates of the registrant was $82,822,413, based on the closing market price of $6.64 per share on June 30, 2003.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of March 1, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement relating to its 2004 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.

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PART I

Introductory Note: This Annual Report on Form 10-K contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements should be read in conjunction with the cautionary statements and other important factors included in this Form 10-K. See ITEM 7 -“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - RISK FACTORS,” for a description of important factors which could cause actual results to differ materially from those contained in the forward-looking statements. Forward-looking statements include statements about plans, objectives, goals, strategies, future events or performance, and assumptions underlying those statements. These forward-looking statements may be identified by words such as “anticipates,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” and similar expressions. Our expectations, beliefs and projections are expressed in good faith and we believe we have a reasonable basis to make these statements, through our management’s examination of historical operating trends, data contained in our records and other data available from third parties, but there can be no assurance that our management’s expectations, beliefs or projections will result or be achieved.

The financial statements contained in this Form 10-K include the accounts of IMCO Recycling Inc. and all of its majority owned subsidiaries (which collectively, except where context otherwise requires, are referred to herein as “we,” “us,” or “our”). The term “VAW-IMCO” refers to our German subsidiary, VAW-IMCO Guss und Recycling GmbH. In March 2003, we reached an agreement to acquire effective full ownership of VAW-IMCO. This resulted in the consolidation of the financial condition and results of operations of VAW-IMCO with ours effective March 1, 2003. In this Form 10-K, when we refer to production data calculated on a “pro forma” basis, we are giving pro forma effect to this consolidation as if it had occurred on January 1, 2003, and are including VAW-IMCO’s production with ours for all of fiscal 2003.

Information in this Form 10-K concerning processing volumes, production capacity, rankings and other industry and market information, including our general expectations concerning the aluminum and zinc recycling industries, are based on estimates prepared by us based on certain assumptions and our knowledge of these industries as well as data from third party sources. These data include, but are not limited to, data from The Aluminum Association and U.S. Geological Surveys. The sources of this information generally state that the information contained therein is believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. We have not independently verified any of the data from third party sources, nor have we ascertained the underlying economic assumptions relied upon therein.

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COMPANY OVERVIEW

We are the largest recycler of aluminum and zinc in the United States and believe we are the largest aluminum recycler in the world, with total processing capacity of approximately 4.1 billion pounds as of December 31, 2003. Our manufacturing and distribution network consists of 26 production plants; 21 are located in the United States, two in Germany, and one each in Brazil, Mexico and Wales. Our aluminum production network includes a domestic recycling division, a domestic specialty alloys division and an international division that represent 48%, 21% and 23%, respectively, of our overall capacity. Our zinc division, which represents 8% of our overall capacity, includes facilities dedicated to the production of zinc oxide, zinc dust and zinc metal.

For the year ended December 31, 2003, we processed 3.0 billion pounds of aluminum and zinc and we generated revenues of $892,015,000 and EBITDA of $53,375,000. Pro forma, including VAW-IMCO for all of 2003, we processed 3.1 billion pounds of aluminum and zinc and generated revenues of $944,186,000 for the year ended December 31, 2003.

Aluminum materials we process include:

We convert scrap and dross into molten metal in furnaces at our facilities and deliver the recycled aluminum to our customers in molten or ingot form. We provide these services under either tolling arrangements or through product sales.

Most of our domestic aluminum recycling division’s processing capacity is utilized for tolling arrangements, by which we recycle customer-owned scrap and dross and return the recycled metal to our customers in molten or ingot form, for a fee. For the year ended December 31, 2003, approximately 55% of our total pounds processed across all divisions involved tolling.

Most of our domestic specialty alloys division’s processing capacity is utilized for product sales, by which we process and melt scrap that is purchased from customers and on the open market. Our specialty alloys division is also included within our domestic aluminum segment. To produce specialty alloys, we combine molten aluminum and certain other metals that provide specific desirable qualities such as increased strength, formability and wear resistance. We then sell the specialty alloys to customers in molten or ingot form.

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Our international division includes both aluminum recycling and specialty alloys operations. Our facilities in Brazil, Mexico and Wales are dedicated to aluminum recycling. Our German facilities have capacity to serve both aluminum recycling and specialty alloys markets.

Our aluminum customers include some of the world’s major aluminum producers and aluminum fabricators, diecasters, extruders, automotive companies and other processors. Most of the aluminum metal processed by us is used to produce products for the transportation, packaging and construction industries. Due to the increasing use of aluminum in automotive components, much of our recent growth has been directed toward serving the transportation sector. Our principal aluminum customers include General Motors Corporation (GM), The BMW Group (BMW), DaimlerChrysler Corporation, Alcoa Inc. (Alcoa), Contech (a unit of SPX Corporation), Ford Motor Company, Hydro Aluminium Deutschland GmbH (Hydro), Arco Aluminum, and Commonwealth Aluminum Corporation (Commonwealth).

Our zinc division operates seven U.S. production facilities that use furnaces to convert primary zinc, zinc scrap and dross into various value-added zinc products, such as:

Our zinc customers include some of the world’s major tire and rubber producers and galvanizers, steel companies and other processors, including Michelin Tire, Bridgestone Firestone, Cooper Tire, and Dow AgroSciences LLC.

INTERNET ADDRESS AND SEC FILINGS

Our Internet website address is http://www.imcorecycling.com. We make available on our Internet website for no charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after the materials are electronically filed with or furnished to the Securities and Exchange Commission (SEC). The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including our company.

ALUMINUM RECYCLING

Aluminum has several characteristics that make it a highly valuable commodity. Compared to several substitute metals, it is light-weight, has a high strength-to-weight ratio and residual value and is resistant to corrosion.

Aluminum’s greatest advantage is its sustained recyclability; it can be processed again and again without any material decline in performance or quality. About two-thirds of all aluminum ever produced — 440 million tons of a total of 680 million tons manufactured since 1886 — is still in use. Recycling of aluminum provides energy savings of 95% compared to the production of the primary metal, and it lowers capital equipment costs by about 90%. In addition, solid wastes associated with the primary production process (like bauxite residue and spent potlinings) are avoided. Because of these two benefits, U.S. production of recycled aluminum has increased substantially over the past two decades, and similar increases have occurred in the world’s major industrial regions.

World growth in aluminum use has exceeded that of competing metals. Since 1950, aluminum use has increased by a factor of 18 while uses of copper and steel have risen by factors of 13 and 3, respectively. Aluminum is the world’s second most widely used metal.

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Over the last two decades, annual U.S. aluminum supply (which includes primary, recycled and imported aluminum) increased 65%, from 5,762 thousand metric tonnes in 1982 to 9,500 thousand metric tonnes in 2002. During this same period, the economic and environmental advantages of recycled aluminum have caused annual production of recycled aluminum to increase by 75%, from 1,666 thousand metric tonnes to 2,920 thousand metric tonnes. U.S. primary aluminum production has declined significantly over the past two decades because of increases in energy, environmental and labor costs. As a result of this decline, primary aluminum’s role in total U.S. aluminum supply has decreased while those of recycled aluminum and imports have expanded. In 2002, the primary industry accounted for 29% of total domestic aluminum supply while recycled metal provided 30% and imports provided 41% of aluminum supply.

Transportation, containers & packaging and building & construction are the three largest end-use markets for aluminum. In 2002, these industries accounted for about 68% of total industry shipments. Because of greater use of aluminum in vehicles, shipments to the transportation sector have risen in recent years, and it is now the largest and fastest-growing aluminum market in the United States. In 2002, the last year for which statistics are available, transportation consumed about 32% of total shipments while containers & packaging, mainly the production of beverage cans, utilized some 21% of annual shipments and building & construction accounted for 15%. Exports, consumer durables, electrical, machinery & equipment are other important markets for aluminum.

COMPETITIVE FACTORS

Market positions. We are the largest recycler of aluminum and zinc in the United States and believe we are the largest aluminum recycler in the world. We are also one of the world’s largest zinc recyclers. The global aluminum recycling market is highly fragmented and characterized by smaller, regional operators. The zinc recycling market in the U.S. is concentrated among a small number of competitors. We attribute our market strength to our ability to meet our customers’ needs for high rates of metal recovery and timely delivery of products that satisfy required technical specifications in an environmentally responsible manner.

Long-term contractual arrangements with our customers. We have long-term contractual arrangements for our aluminum recycling services with a number of our largest customers at many of our plant locations. These customers include Commonwealth, GM, Alcoa, Alcan Inc., Aluminium Norf GmbH, Tomra Latasa, and NEMAK, S.A. For the year ended December 31, 2003 on a pro forma basis, we processed 880 million pounds of aluminum pursuant to long-term contractual arrangements, which represented approximately 28% of our total processing volume. We plan to seek similar dedicated long-term arrangements in the future.

Plant locations. Our competitive position is strengthened by the location of many of our facilities near our major customers’ plants. These locations are strategically important because the industry traditionally has been regionally constrained due to freight costs that limit the distance to which recycled materials can be shipped economically. The close proximity of many of our plants to customers’ facilities allows us to specialize in just-in-time delivery of recycled aluminum in molten form by customized trucks. This delivery method lowers our customers’ energy and capital expenses as well as metal melt loss, thus increasing their productivity. As of December 31, 2003, about 85% of our annual aluminum recycling capacity could be delivered in molten form. In addition, in conjunction with our enterprise resource information technology system, our production network enables us to reallocate processing work among our various facilities, thereby maximizing capacity utilization and balancing demand.

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Customer relationships and customer service. We are dedicated to developing new methods and processes to better serve our customers. We believe we create substantial value for our customers through:

We also conduct tests with our customers to improve recycling processes and enhance metal recovery, quality and chemistry. We believe these factors allow us to maintain and develop strong relationships and loyalty with our customers.

Reduced commodity risk and working capital. For the year ended December 31, 2003, on a pro forma basis, tolling arrangements accounted for approximately 55% of our total pounds processed across all divisions. Tolling requires minimal working capital commitments and does not expose us to aluminum price fluctuations. In addition, when purchasing scrap on the open market for our aluminum and zinc operations, management attempts to reduce price risk by aligning metal purchases with metal sales, hedging open metal positions to protect margins and minimizing inventory levels consistent with the need to allow for continuous operation of production facilities.

Technology. Our plants use advanced metal preparation equipment and furnace recycling technologies. We have developed instrumentation and statistical process control calibration programs at many of our facilities to assure reliable chemical analysis of our customers’ metal. A number of our plants have earned ISO (International Organization for Standardization) certifications that their production, management and environmental systems satisfy guidelines that enable us to consistently deliver products meeting customer specifications. We have added more efficient fuel-burning technologies to our melting furnaces within the past three years, resulting in lower natural gas usage and more efficient operating processes. In addition, we have installed new or additional pollution control equipment at some of our facilities and have implemented procedures throughout our production network that we believe will help assure that materials are handled in an environmentally responsible manner. The improvements in our metal preparation techniques and increased automation at our plants have been key drivers of our cost reduction programs in recent years.

Management team. Our senior executive officers and our key employees have on average more than 21 years experience in the aluminum or zinc industries.

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OUR BUSINESS STRATEGY

Increase capacity utilization at our aluminum and zinc recycling plants. We emphasize maximizing capacity utilization rates at our plants as a means of increasing profitability. We manage our capacity utilization by seeking long-term contractual arrangements with many of our largest customers and aggressively pursuing additional recycling opportunities. In addition, our production network enables us to reallocate processing work among our various facilities, thereby maximizing utilization and balancing demand. Furthermore, when market conditions warrant, we are able to temporarily suspend operations at certain of our plants to reduce costs and maintain higher levels of capacity utilization at our other plants.

Continue to pursue a disciplined growth strategy. We have a successful track record of growing our aluminum business by constructing new facilities or acquiring existing facilities in conjunction with long-term contractual arrangements with customers. These contractual arrangements typically provide for a predetermined minimum processing volume at a new facility and reduce the risk of bringing on new processing capacity. In recent years, we have executed this growth strategy through our pursuit of the following opportunities:

We intend to seek out additional opportunities to expand our aluminum business through acquisitions of existing facilities, construction of new facilities and expansion of existing facilities. However, the terms of our debt facilities currently impose certain restrictions on our ability to fund our growth. See ITEM 7 - “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CREDIT FACILITIES AND REFINANCING.”

Leverage existing customer relationships to drive international expansion. Over the past decade, our long-term relationships with certain major U.S. customers have allowed us to increase our processing capacity. With demand for aluminum recycling services and products growing in many regions throughout the world, we intend to continue to leverage these existing relationships by serving the foreign operations of these same customers. The consolidation of VAW-IMCO in March 2003 is an important step in the ongoing expansion of our international operations, because its two aluminum recycling and specialty alloys facilities provide a platform for further growth in Europe. We plan to continue seeking foreign locations for our processing facilities where market conditions warrant.

Capitalize on increasing use of aluminum in the transportation market. The transportation sector has become the largest and fastest-growing market for aluminum in recent years because of significantly greater use of the metal in all types of vehicles. The average amount of aluminum per vehicle has increased from 183 pounds in 1992 to 274 pounds in 2003, and is expected to reach at least 350 pounds by 2010. We intend to capitalize on this growth by providing aluminum recycling services and specification alloy products to automotive vehicle manufacturers and their component producers.

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Increase productivity and reduce costs. We are focused on increasing productivity and lowering operating costs at our plants as a means of improving our profitability. Over the past several years, we have emphasized raising overall productivity through the implementation of more technically advanced processes and equipment. During 2002, we conducted a furnace operation benchmarking program that included all of our U.S. facilities as well as those in Europe and Brazil in order to identify the best practices at each plant and test the performance of each newly modified furnace system to verify that the capital expenditures involved accomplished their objectives. We have also implemented enterprise resource planning software, which allows us to align our information technology system with our business strategy. Through this centralized system, we are better able to manage several aspects of our business, including the purchasing and selling of metals, the deployment of our working capital and risk management techniques related to commodity exposure.

Continue to minimize commodity price risks. We use a variety of hedging methods to mitigate uncertainty and volatility and to cover underlying exposures to minimize the risks associated with aluminum, zinc and natural gas prices. Our policies prohibit us from engaging in speculative derivatives transactions. As part of the risk management program, we have recently centralized our aluminum metal management function to effectively align our metal purchasing, selling, hedging and inventory functions.

Maintain environmental efficiencies. We continue our emphasis on environmental compliance, which promotes good relationships with our customers and our plant communities. Our customers benefit from the enhanced environmental facilities we employ, such as the lined landfill at our Morgantown, Kentucky facility, which is built to hazardous waste standards. We also seek to provide efficiencies at our plants through our environmental compliance efforts. For example, we continue our efforts to develop a “closed loop” production system in which virtually all materials used in the recycling process are reclaimed or consumed, thus reducing the need for and expense of landfilling. Our Kentucky salt cake processing plant and our patented wet-milling process employed to recycle salt cake at our Arizona facility are our initial steps in the development of these types of systems.

INCREASE IN PROCESSING CAPACITY

Since our formation in 1988, we have increased our number of facilities and capacity through acquisitions, construction of new facilities and expansion of existing facilities. Implementation of this growth strategy was accelerated during the mid-1990s.

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The following table shows our growth since 1993:

During 2003 and 2002, we expanded our international operations:

We are regularly in the process of evaluating the acquisition of assets or operations that complement our existing businesses. We cannot estimate what impact, if any, any such acquisition may have on our businesses.

PRODUCTS AND SERVICES

Aluminum. We recycle aluminum scrap and dross and deliver the recycled metal to customers as molten aluminum or ingots. Our aluminum customers include some of the world’s primary aluminum producers and aluminum fabricators, diecasters, extruders, automotive companies and other processors. We also manufacture specification aluminum alloy products at five dedicated U.S. facilities for automotive equipment manufacturers and their suppliers. In addition, two of our aluminum recycling plants manufacture a variety of aluminum products that are ultimately used as metallurgical additions in the steel making process, such as slag conditioners, deoxidizers, steel desulfurizers and hot topping compounds. The major force behind increased demand for recycled aluminum in recent years has been aluminum’s increased use in auto and truck components, including body structures.

Zinc. Zinc is used in diecastings, in brass-making as an alloying metal with copper and in chemical compounds to produce rubber, ceramics, paints and fertilizer. Its most unique quality is its natural ability to metallurgically bond with iron and steel and protect these metals from corrosion. We manufacture three value-added zinc products:

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SALES AND LONG-TERM CONTRACTUAL ARRANGEMENTS

Aluminum. Our principal aluminum customers use recycled aluminum to produce can sheet, building, automotive and other aluminum products. No customer accounted for more than 10% of revenues in 2003. GM accounted for approximately 11% of our consolidated revenues during fiscal 2002.

Customarily, agreements with customers in the aluminum recycling industry have been short-term. These usually result from a bidding process where aluminum producers and metal traders offer to sell materials or to have materials tolled. Consequently, we historically have maintained no significant backlog of orders.

Long-term aluminum contractual arrangements. We have long-term contractual arrangements for our aluminum recycling services with a number of our largest customers at many of our plant locations. The remaining terms of these arrangements as of December 31, 2003 ranged from one year to nine years, although many of them provide for extensions. Amounts processed under long-term contractual arrangements represented approximately 35% of our total aluminum volume for 2002, and 28% for the year ended December 31, 2003 on a pro forma basis. The majority of our pounds processed under long-term contractual arrangements are subject to price escalators directly related to production costs such as labor, natural gas and supplies. In addition, many of these contractual arrangements contain provisions obligating us to indemnify the customer for certain environmental liabilities that it may incur.

We plan to seek similar dedicated long-term arrangements with customers in the future. Increased emphasis on dedicated facilities and dedicated arrangements with customers carries the inherent risk of increased dependence on a single or few customers with respect to a particular facility of ours. In such cases, the loss of such a customer, or the reduction of that customer’s business with one or more of our facilities, could have a material adverse effect on our financial condition and results of operations, and any timely replacement of volumes could prove difficult.

Zinc. Most of our zinc products are sold directly to end-users. No single zinc customer accounted for more than 10% of our consolidated revenues in 2003. Most of our agreements with zinc customers are for a term of one year or less. We historically have maintained no significant backlog of orders for zinc products.

THE RECYCLING/MANUFACTURING PROCESS

Aluminum. We use two types of furnace technology: rotary and reverberatory. Rotary (or barrel-like) furnaces are able to pour a batch of melted aluminum recovered from scrap and immediately switch to

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other types of material and then switch back again. Reverberatory furnaces are stationary and use both radiation and convection heating to melt the material being processed. Each of these furnace technologies has advantages over the other, depending on the type of material processed.

The recovered metal is poured directly into an ingot mold or hot metal crucible for delivery to customers. Many of our plants deliver molten aluminum in crucibles directly to their customers’ manufacturing facilities. As of December 31, 2003, we had the capacity to provide approximately 85% of our processed aluminum in molten form. The molten aluminum is poured from the crucible into the customer’s furnace, saving the customer the time and expense of re-melting aluminum ingots. We normally charge an additional fee for transportation and handling of molten aluminum.

Alloying. At our metal alloying facilities in Coldwater and Saginaw, Michigan and Shelbyville, Tennessee, additional materials are blended with molten aluminum to produce a metal alloy. The alloyed aluminum is shipped in either molten or ingot form to our customers. These alloying facilities generate dross, which is then recycled at one of our other aluminum recycling facilities.

By-products. A by-product of processing aluminum materials in reverbatory furnaces is aluminum dross, which is sent to our rotary furnaces for processing. The recycling process from our rotary furnaces produces a by-product called “salt cake,” which is formed from the coatings and other miscellaneous materials on aluminum scrap and dross, and the salts added during the aluminum recycling process. Salt cake is composed of salts, metallic aluminum, aluminum oxide and small amounts of other materials.

We dispose of our salt cake and certain airborne contaminants (or baghouse dust) in landfills that we use exclusively or that are permitted specifically to handle the types of waste materials we generate. Salt cake is not listed as a “hazardous waste” under the Resource Conservation and Recovery Act of 1976 (RCRA) or as a “hazardous substance” under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA). We own and operate a lined landfill at our Morgantown, Kentucky facility. Its design exceeds current requirements for salt cake disposal and meets RCRA Subchapter “C” hazardous waste standards.

We also own and operate a facility adjacent to our Morgantown, Kentucky plant to further process salt cake through the use of a materials separation process, which involves crushing the salt cake and separating aluminum out of the salt cake. The residual non-metallic product is then landfilled in our Morgantown, Kentucky landfill.

Certain of our other facilities also process salt cake and other by-products from the aluminum recycling process into aluminum concentrates, aluminum oxide and salt brine.

Zinc. Zinc oxide is produced by melting top dross, a low iron-content zinc by-product of continuous galvanizing, and re-melt die cast, a high zinc-content alloy, in a sweat or pre-melt furnace. Zinc dust with extra low lead content is preferred by the domestic industrial paint industry. It is produced by converting primary zinc into a molten form using an electro-thermal furnace. Regular zinc dust is produced by processing bottom dross, an iron-bearing zinc residue created during the galvanizing process, and re-melt die cast in a pot or ladle. Zinc metal is produced by placing pieces of oxidized zinc-bearing metals into a ball mill where we separate out the oxidic zinc. The zinc oxide is then sold as fertilizer additives. After the ball mill process, the metallic zinc-bearing material is melted, refined, poured into molds and shipped to galvanizers.

The recycling process at our Coldwater, Michigan zinc plant involves melting continuous galvanizers’ top dross in an electric induction furnace which is then transferred to a reactor which removes the impurities

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(iron and zinc oxide, which are sold as by-products). The remaining molten zinc is poured into a reverberatory holding furnace from which it is blended and cast into ingots, which are either sold or returned to the customer.

OPERATIONS

Aluminum. In our aluminum tolling operations, we accept scrap owned by our customers and process this material for a tolling charge per pound of incoming weight. In order to retain control of their metal supplies, customers have often desired to toll, rather than sell, their scrap materials. Tolling requires no metal inventory to be purchased or held by us. In addition, tolling does not expose us to fluctuating metal prices because we do not own the material processed. For the year ended December 31, 2003, on a pro forma basis, approximately 55% of our total pounds of aluminum processed involved tolling. Compared to product sales transactions, tolling decreases our exposure to the risk of fluctuating metal prices and working capital requirements.

We also enter into metal brokerage transactions under which we buy metal from primary and other producers and then sell the metal to end-users. These transactions involve buying and selling metal without processing it. Additionally, in order to facilitate acquiring metal for our production process, we occasionally enter into “swap” transactions whereby we agree to exchange our recycled finished goods for scrap raw materials.

When purchasing metals in the open market for our product sales business, we attempt to reduce the risk of fluctuating metal prices by hedging anticipated sales of aluminum and zinc and by avoiding large inventories, except to the extent judged necessary to allow our plants to operate without interruption.

Throughout 2002 and for most of 2003, we provisionally suspended operations at our Wendover, Utah aluminum facility due to adverse market conditions. During the fourth quarter of 2003, we permanently closed this plant. In August 2003, we provisionally suspended operations at our Rockwood, Tennessee plant due to reduced demand for aluminum recycling services there. We intend to keep the Rockwood plant idle until market conditions improve.

Zinc. Our zinc operations primarily consist of product sales business. Product sales from our zinc operations represent approximately 97% of our total zinc production; the remainder is from tolling transactions.

Through programs conducted by the International Organization for Standardization (ISO), many of our company’s facilities have earned certifications that their production management and environmental systems meet guidelines that assure delivery of consistent and reliable products.

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Recognized Safety Performance. The leadership provided by the safety committees at our Coldwater, Michigan and Sapulpa, Oklahoma aluminum recycling facilities has earned major safety awards for their plants.

The Coldwater facility became the first industrial plant in Michigan to receive the state’s Safety and Health Achievement Recognition Program (SHARP) award. The state established this program to recognize employers who have achieved especially notable safety and health excellence.

After two years in which its total case incident rate was well below the Bureau of Labor Statistics national average for facilities of this type, our Sapulpa plant achieved SHARP status with the Occupational Safety and Health Administration (OSHA). The receipt of SHARP status means that OSHA has recognized that the Sapulpa facility anticipates safety problems and has put procedures into place to ensure that hazards are identified and corrected quickly and effectively. Plants with SHARP status are exempt from programmed OSHA inspections for each year the certificate is maintained.

COMPETITION

General. The domestic aluminum and zinc recycling industries are highly competitive. We believe that our position as the largest U.S. recycler of aluminum and zinc is a positive competitive factor.

The international recycling business is highly fragmented and very competitive. However, we believe we will be able to compete effectively in certain international areas because of our processing technology. We intend to expand internationally in connection with long-term processing arrangements from our customers. The expansions into Brazil and Mexico are examples of this strategy.

We also compete both with other secondary recyclers and our customers when purchasing and processing scrap for our product sales business.

Aluminum. The principal factors of competition in our aluminum segments are price, metal recovery rates, proximity to customers, molten metal delivery capability, environmental and safety regulatory compliance and types of services (for example, the ability to deliver molten aluminum). Freight costs also limit the geographic areas in which we can compete effectively. Our largest domestic aluminum competitor is Wabash Alloys, a secondary aluminum processor, followed by several smaller competitors.

Zinc. The principal factors of competition in the zinc segment are price, customer service and high product quality. Competition is regionally focused due to high freight costs. The zinc recycling market in the U.S. is concentrated among a small number of competitors.

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For zinc oxide, our major competitors are Zinc Corporation of America, a subsidiary of Horsehead Industries, Inc., and Zochem, a subsidiary of Hudson Bay Mining & Smelting, Ltd. For zinc dust, our major competitors are Purity Zinc Metals Company, Ltd. and Meadowbrook Company, a subsidiary of T.L. Diamond Company, Inc. For zinc metal, we consider both primary and secondary zinc producers to be competitors.

OUTSOURCING OF RECYCLING BY PRIMARY ALUMINUM PRODUCERS

The amount of our aluminum tolling business can vary depending upon the extent that the primary aluminum producers internally process their own scrap. The primary aluminum producers, some of which are our largest customers, have generally elected in recent years to outsource the processing of their scrap and dross under tolling arrangements and focus their resources on other aspects of aluminum production. However, these producers are capable of processing their own scrap and vary the amount of their internal recycling depending upon furnace availability, inventory levels, the price of aluminum, their own internal demand for metal and other factors. In particular, the primary producers have historically decreased their outsourcing in times of lower overall demand for aluminum. In addition, in some instances some of these producers have expanded their aluminum recycling capacity. Decreased outsourcing or increases in internal recycling by primary producers could reduce demand for our recycling services and have a material adverse effect on our financial condition and results of operations. For instance, we have recently experienced decreased utilization rates at some of our operations and have provisionally suspended some of our operations due to an increase in internal recycling capacity by a primary producer of aluminum.

SOURCE AND AVAILABILITY OF RAW MATERIALS AND ENERGY

Metallics. Metallics (aluminum and zinc scrap and dross) represent the largest component of our cost of sales. The availability and price of scrap and dross depend on a number of factors outside our control, including general economic conditions, foreign demand for metallics and internal recycling activities by primary aluminum producers. Increased domestic and worldwide demand for aluminum and zinc scrap have had and will continue to have the effect of increasing the prices that we pay for these raw materials, thereby increasing our cost of sales.

The primary sources of aluminum scrap and dross for our recycling and alloying activities include automotive component manufacturers, can stock producers, used beverage cans and aluminum smelters. Many of our aluminum suppliers are also our customers. We also buy aluminum scrap from metal scrap traders on the open market.

A significant portion of our zinc products is produced from zinc dross and other secondary materials provided by the galvanizing and scrap metals industries. These industries have operated at lower levels during the past three years, reducing the availability of profitable processing opportunities. We also purchase primary zinc to produce high-grade zinc and for metals brokerage purposes.

We purchase our zinc raw materials from numerous suppliers. Many “hot dip” galvanizers, which supply us with zinc raw materials, are also our customers.

Our zinc brokerage unit also procures raw materials for use in our zinc manufacturing operations. The availability of zinc dross is dependent upon the demand for galvanized steel, which has historically paralleled fluctuations in customer demand in the automotive, appliance and construction industries.

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Energy. Our operations are fueled by natural gas, which represents the third largest component of our cost of sales, after metal and labor costs. We purchase the majority of our natural gas on a spot-market basis. However, in an effort to acquire the most favorable natural gas costs, we have secured some of our natural gas at fixed price commitments. Most of our pounds processed under long-term contractual arrangements with our customers are subject to price escalators directly related to natural gas costs. While we have the ability to pass on to customers some of our increases in natural gas costs based on our long-term arrangements with them, and while we have hedged some of our natural gas costs, in many instances we are not able to mitigate the effect of higher natural gas costs on our cost of sales. We believe that we will continue to have access to adequate energy supplies to meet our needs for the foreseeable future.

SEASONALITY

Aluminum. Our used beverage can collections have historically been highest in the summer months and lowest in the winter months. Our automotive industry customers have typically experienced a decline in molten metal deliveries during periods when their production facilities cease production to perform new model changeovers and during the holidays in December. Our European operations also experience some slowdowns in the month of August, which is a peak holiday time in Europe.

Zinc. Historically, demand for our zinc products used by paint manufacturers and those used in fertilizers has been somewhat higher in the summer months.

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TRANSPORTATION

We receive incoming metal by rail and truck. Most of our plants own their own rail siding or have access to rail lines nearby. We own and lease various trucks and trailers to support our business. Customarily, the transportation costs of scrap materials to be tolled are paid by our customers, while the transportation costs of metal we purchase and sell may be paid by either our customers or us. We contract with third-party transportation firms for hauling some of our solid waste for disposal.

INTERNATIONAL OPERATIONS

VAW-IMCO. VAW-IMCO, our German subsidiary, supplies specialty alloys to the European automobile industry and serves other European aluminum markets. VAW-IMCO owns and operates two aluminum recycling foundry alloy facilities in Grevenbroich and Töging, Germany, that together have an annual processing capacity in excess of 700 million pounds. Approximately 57% of VAW-IMCO’s annual processing volume involves aluminum product sales; the remainder is represented by aluminum tolling. VAW-IMCO has long-standing relationships with several of its customers, including BMW, Ford, Hydro and Daimler Chrysler. VAW-IMCO competes with certain of its customers that have in-house recycling capacity.

Other. We own a facility in Swansea, Wales, which supplies aluminum to a variety of customers. This facility has an annual processing capacity of approximately 100 million pounds of aluminum.

We own a facility in Pindamonhangaba, Brazil, which supplies Brazil’s only can sheet rolling mill and recycles used beverage cans and production scrap for a facility owned by South America’s largest manufacturer of aluminum cans. This facility has an annual processing capacity of approximately 100 million pounds of aluminum.

We own a facility in Monterrey, Mexico, which recycles aluminum dross and scrap under a long-term contract with a large manufacturer of cylinder heads and engine blocks. This facility has an annual processing capacity of approximately 100 million pounds of aluminum.

POLITICAL AND REGULATORY ENVIRONMENT

General political and economic conditions in foreign countries may affect our business prospects and results of operations. Our foreign operations are generally subject to risks, including foreign currency exchange rate fluctuations, changes in U.S. and foreign governmental regulations, trade restrictions and laws (including tax laws and regulations), tariffs and other trade barriers, the potential for nationalization of enterprises, interest rate fluctuations, inflation, currency restrictions and limitations on repatriation of profits, divergent environmental laws and regulations and political, economic and social instability.

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Each of our foreign plants is subject to the environmental requirements established by the country and locale in which the plant is located. These requirements differ from country to country, but as in the United States, activities that could harm the environment, such as air emissions of hazardous materials or the management and disposal of waste materials, are subject to regulation. We are also required to obtain and comply with permits or other authorizations for some of the operations at our foreign plants. The environmental regulations in foreign countries are evolving, and it is expected that such requirements will become more stringent in the future. We have been, and will continue to be, required to make expenditures to comply with the environmental requirements applicable to our foreign plants, but, to date, such expenditures have not had a material effect on our results of operations.

In member states of the European Union, some principles of the regulatory environment applicable to VAW-IMCO’s operations are set forth by European directives and regulations. These European provisions are implemented into national law or are directly applicable in the individual states. In particular, these rules determine thresholds for certain air emissions, such as sulphur dioxide, nitrogen dioxide, nitrogen oxide, carbon monoxide and suspended dust, and regulate the use of waste as secondary fuel.

According to a decision of the Council of Ministers for the Environment of the European Union, a European Union-wide trade in carbon dioxide emissions is supposed to commence in 2005. The proposal for a directive of the European Parliament and the Council on a system for trading greenhouse gas emissions rights in the European Community has not yet been passed and also would have to be implemented in the member states. Nevertheless, it is expected that the participation in such trading will be mandatory for all industries with high energy consumption levels by 2008. As a consequence, a cap with respect to the amount of carbon dioxide emissions will be determined for each individual company. If the carbon dioxide emissions of a company exceed such individual cap, the company will have to purchase the necessary carbon dioxide emission quantity from another company that has not exhausted its full quota.

SEGMENT REPORTING

Giving effect to the March 2003 consolidation of the results and operations of VAW-IMCO, we now have three business segments that meet the reporting requirements of Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.” See ITEM 7— “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—SEGMENT INFORMATION” and NOTE M—“SEGMENT INFORMATION” of Notes to Consolidated Financial Statements. Previously, VAW-IMCO’s financial results had been reported under the equity method of accounting which only recorded our 50% share of VAW-IMCO’s after tax earnings. Reportable segments are defined as components of an enterprise about which separate, discrete financial information is available for evaluation.

Our domestic aluminum segment represents all of our aluminum melting, processing, alloying, trading and salt cake recovery activities, including investments in joint ventures, within the United States. Our international aluminum segment represents all of our aluminum melting, processing, alloying, and trading activities outside of the United States. Our zinc segment represents all of our zinc melting, processing and trading activities. Prior period results have been reclassified to reflect the international aluminum segment.

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EMPLOYEES

As of December 31, 2003, we had total of 1,788 employees, consisting of 472 employees engaged in administrative and supervisory activities and 1,316 employees engaged in production and maintenance. Labor relations with employees have been satisfactory. Employees at five of our production facilities are represented by collective bargaining groups as set forth below:

ENVIRONMENTAL MATTERS

General. Our operations are subject to environmental laws, regulations and ordinances in our plants’ locales of operation. While we believe that current environmental control measures at our facilities comply in all material respects with current legal requirements, additional measures at some of our facilities may be required. Our operations generate discharges and emissions, including in some cases off-site dust and odors, which are subject to environmental laws, including, in the United States, the Federal Clean Air Act. From time to time, our operations have resulted, or may result, in non-compliance with applicable requirements under environmental laws. We may also incur liabilities for off-site disposals of salt cake and other materials. In addition, historical or current operations at, or in the vicinity of, our facilities, may have resulted in soil or groundwater contamination.

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Due to relatively high costs and limited coverage, we do not carry environmental impairment liability insurance. Domestically, we made capital expenditures for environmental control facilities of $2,009,000 in 2003, most of which was related to air pollution control equipment for our Clarksville, Tennessee, and Coldwater, Michigan facilities. Domestic environmental expenditures for 2004 and 2005, which primarily relate to our landfills and air pollution control equipment, are currently estimated to be approximately $5,300,000 and $3,000,000, respectively. We expect to spend in 2004 and 2005 a total of approximately $4,800,000 for expansion of our landfill at Morgantown, Kentucky.

Aluminum. The processing of scrap generates solid waste in the form of salt cake and baghouse dust. This material is disposed of at off-site landfills or at our permitted disposal sites at two of our facilities. If salt cake were ever classified as a hazardous waste or substance under RCRA or CERCLA, we would have to modify our handling and disposal practices.

Based on current annual processing volumes, planned utilization rates and remaining landfill capacity, the estimated remaining life of our landfill at our Sapulpa, Oklahoma plant is three years. We estimate that phase two of our Morgantown, Kentucky landfill cell has a remaining useful life of approximately one year. Remaining landfill life at Morgantown is estimated by using independent aerial photography and engineering calculations based on that photography. When the current Morgantown landfill was originally permitted, it was anticipated that there would be three phases to this landfill site. We are currently operating in the second phase. A planned expansion at this landfill in 2004 (which will be the third phase) is anticipated to provide an additional six years of useful life.

The amounts recognized for landfill asset retirement obligations, as of January 1, 2003, were $4,177,000 for our Morgantown, Kentucky landfill and $1,018,000 for our Sapulpa, Oklahoma landfill. The related asset retirement cost for each facility was capitalized as a long-lived asset (asset retirement cost) which is to be amortized over the remaining useful life of the landfills. See NOTE K—“IMPACT OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS” of Notes to Consolidated Financial Statements.

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Zinc. Several of our zinc manufacturing processes create various by-products which are either sold to downstream processors or re-used internally. There are virtually no by-products requiring disposal.

Our aluminum facilities are located in:

These facilities recycle aluminum, manufacture specification aluminum alloy products and manufacture other aluminum products.

Our zinc facilities are located in:

Substantially all of our assets and properties at our domestic facilities are mortgaged to secure indebtedness under our senior secured notes and our senior secured revolving credit facility. See ITEM 7— “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—CREDIT FACILITIES AND REFINANCING.”

The average operating rates for all of our wholly-owned facilities for 2003, 2002 and 2001 were 73%, 79% and 81% of stated capacity. Our Bedford, Indiana facility has ceased melting operations and substantially all of its assets have been transferred to our other facilities. During 2002, we provisionally

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suspended operations at our Wendover facility, and we determined to permanently close it in the fourth quarter of 2003. In August 2003, we also provisionally suspended operations at our Rockwood plant. We anticipate that the Rockwood facility will remain idle until market conditions improve.

We believe that our facilities are suitable and adequate for our operations.

Under a long-term supply agreement, Commonwealth has an option to purchase our Uhrichsville, Ohio facility that is first exercisable in 2008. However, in the event we experience a “change of control” (as that term is defined in the supply agreement), the exercise date of this option would be accelerated to the date of the change of control event. The exercise price is based on varying multiples of earnings before interest, taxes, depreciation and amortization (EBITDA) for the facility (and is five times EBITDA in the case of a non-change of control event exercise). In addition, we have granted Commonwealth a right of first refusal in the event we desire to sell the facility in a non-change of control situation. In the event of a change of control of Commonwealth, then Commonwealth’s option and right of first refusal would automatically terminate. The potential purchase price for Commonwealth’s exercise of these rights may be above or below the fair value of our Uhrichsville plant. Should Commonwealth exercise these rights, there can be no assurance that the production or earnings attributable to the Uhrichsville facility could be replaced, and our cash flows and net earnings could be adversely affected.

In addition, GM has an option to acquire our Saginaw, Michigan facility under our long-term supply agreement with GM. This option is exercisable under certain conditions beginning in 2006. If our supply agreement with GM were terminated, the agreement provides that GM would then have an option to acquire ownership of the Saginaw facility.

In Irving, Texas, we lease approximately 40,000 square feet of office space for our principal executive, financial and management functions. This lease expires in June 2007. In Houston, Texas, we own approximately 30,000 square feet of office space for financial and management functions for our zinc operations. We also have three zinc brokerage and sales offices that we lease, located in Los Angeles, California, Chicago, Illinois and Pittsburgh, Pennsylvania.

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Environmental proceedings. In 1997, the Illinois Environmental Protection Agency (IEPA) notified us that two of our zinc subsidiaries were potentially responsible parties (PRP) pursuant to the Illinois Environmental Protection Act for the cleanup of contamination at a site in Marion County, Illinois to which these subsidiaries, among others, in the past had sent zinc oxide for processing and resale. The site has not been fully investigated and final estimated cleanup costs have not yet been determined. We have been informed by IEPA that the agency is preparing a revised list of companies that may have sent materials to the site and the volume of materials sent by each company. After receiving this information, our subsidiaries presently plan to seek, possibly in connection with other PRPs, an agreed resolution of the IEPA’s claims.

On February 15, 2001, the State of Michigan filed a lawsuit against us in the State Circuit Court for the 30^th District, Ingham County, Michigan. The lawsuit arose out of disputes with Michigan environmental authorities concerning air emission control permits at our aluminum specialty alloy facilities in Coldwater, Michigan. The state claimed injunctive relief and penalties for alleged noncompliance with and violations of federal and state environmental laws. The suit sought compliance by us as well as potentially substantial monetary penalties. On January 13, 2004, the parties settled the lawsuit by entering a Consent Judgment with the State Circuit Court. The Consent Judgment requires that we (i) operate our Coldwater aluminum facilities in compliance with a permit compliance program, (ii) adhere to certain recordkeeping, notification and testing guidelines, (iii) install a baghouse and associated equipment at our Alchem facility in Coldwater; and (iv) pay a civil fine in the amount of $300,000 to the State of Michigan.

On April 27, 2001, the U.S. Environmental Protection Agency, Region V, issued to us a Notice of Violation (NOV) alleging violations of the federal Clean Air Act, primarily for violations of the Michigan State Implementation Plan at our Coldwater facilities. The NOV addressed the same instances of alleged noncompliance raised in the State of Michigan lawsuit, alleging that we purportedly failed to obtain appropriate preconstruction air quality permits prior to conducting modifications to the Coldwater facilities, and exceeded permitted emission levels. All issues raised in the NOV have been addressed through the State of Michigan lawsuit and the Consent Judgment.

We are a named co-defendant in a lawsuit filed on February 26, 2004 in the U.S. District Court for the Central District of California. The listed claimants are the current owners of a Corona, California property formerly owned by one of our subsidiaries. The petition seeks declaratory relief and damages in an unspecified amount in connection with an alleged release of hazardous substances on the property. As of March 12, 2004, we had not yet been served in this lawsuit. We believe that we have meritorious defenses to the claims contained in the petition. We plan a vigorous defense against these claims.

There is the possibility that expenditures could be required at our other facilities from time to time, because of new or revised regulations that could require that additional expenditures be made for compliance purposes. These expenditures could materially affect our results of operations in future periods.

Other legal proceedings. In 1998 an employee filed a personal injury claim against us (Bland v. IMCO Recycling Inc.) in Missouri state court. In August 2002 the Missouri Court of Appeals entered a final judgment against us for $4,000,000. We are also involved in litigation with the surety for the appeal bond that was levied to secure the judgment in the Bland case (IMCO Recycling Inc v. American Guarantee & Liability Insurance Company), currently pending in the Missouri Circuit Court of Appeals. To date, we have not paid any portion of the Bland judgment or reimbursed the surety. In a lawsuit between us and our umbrella coverage insurer to resolve a dispute as to coverage in the Bland case (Twin City Fire Insurance Company v. IMCO Recycling Inc.), a federal district court in Missouri entered a judgment in our favor in July 2003. We have filed post-trial motions seeking the award of our attorneys fees and to clarify the terms of the judgment. When judgment is entered, to clarify these points, an appeal may be filed by one or both parties. We have not established any reserves for the Bland case. We currently believe that there is insurance coverage for the Bland claim and that we will be indemnified for any payments that we must make.

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We are also a party from time to time to what we believe are routine litigation and proceedings considered part of the ordinary course of our business. We believe that the outcome of such existing proceedings would not have a material adverse effect on our financial position or results of operations.

No matters were submitted to a vote of our security holders during the quarter ended December 31, 2003.

The following table sets forth information regarding our executive officers:

DON V. INGRAM

Don V. Ingram has served as a director since 1988. He was elected as our Chief Executive Officer in February 1997 and has served as our Chairman of the Board since 1994. Mr. Ingram played a major role in our formation in 1986. Mr. Ingram has been owner and President since 1984 of Summit Partners Management Co., a private investment management company in Dallas. Mr. Ingram is also a director of GRT Corporation.

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RICHARD L. KERR

Richard L. Kerr joined International Metal Co., one of our predecessors, in April 1984. He was named our Chief Operating Officer in 1991. In 1994, he became President of our Metals Division. In 1997 he became our President, and in May 2000, he assumed the role of Executive Vice President and President of the Specialty Alloys Division; in March 2001, he was named Executive Vice President and President, Aluminum Operations.

PAUL V. DUFOUR

Paul V. Dufour has served as our Vice President and Chief Financial Officer since March 1987. He was promoted to Senior Vice President in 1988 and to Executive Vice President and Chief Financial Officer in 1994. Mr. Dufour served as our Corporate Secretary from March 1987 until April 2003, and was reappointed as Corporate Secretary in March 2004.

J. TOMAS BARRETT

J. Tomas Barrett has served as our Senior Vice President and Assistant Chief Financial Officer since September 2002. Mr. Barrett served as President of Chemical Lime Company — Latin America and Chief Financial Officer of Chemical Lime Company, a subsidiary of Lhoist Group, the largest lime and dolime company in the world, from 1997 through 2001. Previously, he served as General Manager of Neste Trifinery, an asphalt refinery in Texas, and was President of Cemex U.S.A. (the U.S. operations of CEMEX, S.A. de C.V., a leading global producer of cement and ready-mix products).

ROBERT R. HOLIAN

Robert R. Holian has served as our Senior Vice President and Chief Accounting Officer since September 1999. He joined us in 1990 and was named our Controller in 1992. He was promoted to Vice President and Controller in 1994.

BARRY K. HAMILTON

Barry K. Hamilton was appointed Senior Vice President and President of our U.S. Zinc Corporation subsidiary in January 2002. Mr. Hamilton served as President of Midwest Zinc Corporation, a subsidiary of U.S. Zinc, from 1997 to 2001.

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PART II

Our Common Stock trades on the New York Stock Exchange (trading symbol: IMR). The following table sets forth, for the fiscal quarters indicated, the high and low sales prices for our Common Stock, as reported on the New York Stock Exchange composite tape transactions from January 1, 2002 through December 31, 2003. No dividends were declared or paid for those periods.

Cash dividends and repurchases of Common Stock are currently restricted under the terms of our senior credit facilities. See ITEM 7 – “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – LIQUIDITY AND CAPITAL RESOURCES.”

On March 1, 2004, our outstanding shares of Common Stock were held of record by 335 stockholders.

During the fourth quarter of 2003, we made no unregistered sales of our equity securities and did not repurchase any shares of our Common Stock.

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(In thousands, except per share data)

Our financial position and results of operations have been affected by acquisitions of facilities and companies during certain periods presented. For information, see NOTE B - “ACQUISITIONS / JOINT VENTURE FORMATION” and NOTE G -“LONG TERM DEBT” of Notes to Consolidated Financial Statements. See NOTE P – “GOODWILL” of Notes to Consolidated Financial Statements regarding the goodwill impairment charge recorded as a cumulative effect of an accounting change.

The following is a discussion of our financial condition and results of operations for the periods presented. This discussion should be read in conjunction with the financial statements and notes and other financial information appearing elsewhere or incorporated by reference in this Form 10-K. Our discussion of our financial condition and results of operations includes various forward-looking statements about our markets, the demand for our products and services and our projected results. These statements are based on certain assumptions that we consider reasonable. For information about these assumptions and other risks relating to our businesses and our company, you should refer to our section entitled “—RISK FACTORS.”

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OVERVIEW

Certain of the statements in this Section contain projections and estimates based on current expectations. These statements are forward-looking in nature and actual results may differ materially due to a number of reasons, as more fully described below under “—RISK FACTORS.” These statements do not reflect the potential impact of any acquisitions, investments or divestitures that may be completed, or unforeseen events that may occur after the date of this Form 10-K.

During the year December 31, 2003, factors that affected our financial condition and results of operations included:

We expect many of these industry conditions to persist into 2004.

During the fourth quarter of 2003, we experienced strengthening in prevailing market prices for aluminum and zinc and increased demand for our products and processing services. These factors are expected to continue into 2004, and should have a positive effect on our results of operations and cash flows from operations for 2004, compared to 2003’s results.

Offsetting these positive factors will be the increased interest charges that we will incur in 2004 under our new senior credit facility that we entered into on October 6, 2003 and our new fixed-rate senior secured notes that we issued on that date. These debt facilities replaced our previous variable rate credit facilities – specifically, our former senior revolving credit facility and receivables sale facility – which were scheduled to expire by their terms during the fourth quarter of 2003.

As a result of our debt refinancing, we now have some additional availability in terms of long-term sources of capital for our planned growth and capital expenditure needs. However, the terms of our new senior secured notes and our new senior credit facility contain a number of provisions that impose limitations on our ability to grow and expand our businesses. In this regard, for the foreseeable future, we will plan on a selective basis to seek expansion and acquisition opportunities, rationalize our capacity and seek additional long-term supply agreements with our customers.

Despite improving market price scenarios for aluminum ingot in late 2003, we continued to experience reduced margins for our domestic aluminum segment due to the demand for aluminum scrap by primary producers and foreign buyers. While we believe that our aluminum specialty alloys business will experience the same level of processing volumes in 2004 as in 2003, the overall profitability of this business is expected to be adversely affected by the continuation of tight margins for our specialty alloys products due to higher scrap metal costs.

Internationally, we are planning to continue our growth in a measured manner. During 2003, we completed the process of consolidating VAW-IMCO’s operations in Germany with ours, and we realized a $5,400,000 gain on the early extinguishment of VAW-IMCO’s share redemption liability owed to our former joint venture partner with regards to these operations. Also, in late 2003, we acquired the remaining minority interest in our Monterrey, Mexico facility.

The procurement and processing of aluminum and zinc in our industry involves many risks. Some of these risks include changes in metal and fuel prices, changes in foreign currency rates, and, to a lesser degree, changes in interest rates. In the U.S. domestic market, we have in recent years been challenged in terms of obtaining suitable scrap raw materials at favorable prices. We attempt to manage these risks by the use of financial instruments and long-term contracts; however, these items do not eliminate these risks.

In 2003, we determined that the book value of some of our U.S. facilities and other assets were impaired. These were non-cash charges and did not affect our liquidity. In addition, we have redeployed certain of our U.S. assets in more productive plant locales.

Our zinc segment’s performance in 2003 represented an improvement over 2002’s performance. This improvement resulted principally from higher zinc market prices, which came after several years of depressed activity in the zinc metals industry.

We continue to seek ways to reduce our operational costs through our expense reduction and capacity reallocation programs, as well as other means of asset rationalization. In August 2003, due to decreased demand from one of our can sheet customers, we provisionally suspended operations at our Rockwood, Tennessee aluminum processing facility. In the last quarter of 2003, we permanently closed our aluminum processing plant in Wendover, Utah. Processing work formerly performed at those plants has been allocated to our other plants.

The deterioration in the U.S. aluminum can recycling rate, a lack of growth in aluminum can production and reduced demand for our aluminum recycling services have caused our percentage of tolling activities relative to our total volumes processed to decline in recent periods. As this trend continues, we will be exposed to increased working capital requirements that are required for increased levels of product sales. Additionally, we may experience more volatility in earnings and cash flows since we will experience additional market and commodity risk through our ownership of the metal units to be sold.

Any substantial improvement in our results of operations for fiscal 2004 will depend in large part upon a recovery in U.S. industrial production, a widening in the margins we are currently experiencing, the rate of production in the U.S. automotive sector, and our ability to successfully integrate and grow our foreign operations. For any significant improvement in our domestic aluminum segment operating results to occur, higher plant operating rates and increased demand and prices for our products and services over those currently prevailing will be required.

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GENERAL

For the year ended December 31, 2003, approximately 55% of our total processing volumes consisted of aluminum tolled for our customers. Tolling revenues reflect only the processing cost and our profit margin. Our activities also involve processing, recovery and specialty alloying of aluminum and zinc metal and the production of value-added zinc products for sale by us. The revenues from these sales transactions include the cost of the metal, as well as the processing cost and our profit margin. Accordingly, tolling business produces lower revenues and costs of sales than product sales business. Variations in the mix between tolling and product sales business could cause revenue amounts to change significantly from period to period while not significantly affecting gross profit. As a result, we consider processing volume to be a more important determinant of performance than revenues.

In 2003, we continued to experience a decrease in the percentage of metals tolled, compared to 2002 and 2001. This was mostly due to the consolidation of VAW-IMCO. The majority of VAW-IMCO’s sales are product sales.

Over the past four years, we have taken aggressive steps to counter the reduced demand we have experienced at our U.S. operations. We have closed three aluminum recycling facilities, one zinc recycling facility, provisionally suspended operations at one aluminum recycling facility and have selectively reduced the number of furnaces we operate at other domestic facilities. We have strategically redeployed some of these assets to our operations in Monterrey, Mexico.

The following table shows information concerning total pounds processed, tolling percentage, total revenues and total gross profits (in thousands, except percentages):

In addition to our product sales business, we also enter into metal brokerage transactions under which we buy metal from primary and other producers and then sell the metal to end-users. These transactions involve buying and selling metal without processing it. Also, in order to facilitate acquiring metal for our production processing, we occasionally enter into metal “swap” transactions where we agree to exchange our recycled finished goods for scrap raw materials. As with the product sales business, the brokerage business increases our working capital requirements and subjects us to greater price risk associated with fluctuations in the metals commodities markets. See ITEM 7A—“QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK” and NOTE A – “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” of Notes to Consolidated Financial Statements.

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EFFECTS OF CONSOLIDATION WITH VAW-IMCO

In March 2003, we entered into an agreement with Hydro and VAW-IMCO, finalizing the terms and conditions by which VAW-IMCO would redeem its shares owned by Hydro.

As a result of this agreement, we acquired voting control of VAW-IMCO, and, effective March 1, 2003, the financial condition and results of operations of VAW-IMCO were consolidated with ours. Prior to March 1, 2003, the results of operations of VAW-IMCO are reflected in our consolidated financial statements under the equity method of accounting.

VAW-IMCO owns and operates two aluminum recycling foundry alloy facilities in Grevenbroich and Töging, Germany, that together have an annual processing capacity in excess of 700 million pounds. VAW-IMCO supplies specialty alloys to the European automobile industry and serves other European aluminum markets.

In November 2003, we funded from the proceeds of our October refinancing transactions, VAW-IMCO’s prepayment to Hydro of this redemption liability. VAW-IMCO paid Hydro a total of approximately $28,300,000 in exchange for the payment in full of the remaining share redemption liability, plus an aluminum recycling furnace, related assets, and real estate located on and adjacent to a VAW-IMCO facility. As a result of the prepayment of this share redemption liability, we recognized a consolidated ordinary gain of $5,432,000.

SEGMENT INFORMATION

Giving effect to the March 2003 consolidation of the results of operations of VAW-IMCO, we now have three business segments that meet the reporting requirements of Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information.” See NOTE M—“SEGMENT INFORMATION” of Notes to Consolidated Financial Statements. Previously, VAW-IMCO’s financial results had been reported under the equity method of accounting, which only recorded our 50% share of VAW-IMCO’s after tax earnings. Reportable segments are defined as components of an enterprise about which separate, discrete financial information is available for evaluation.

Our domestic aluminum segment represents all of our aluminum melting, processing, alloying, trading and salt cake recovery activities, including investments in joint ventures, within the United States. Our international aluminum segment represents all of our aluminum melting, processing, alloying, and trading activities outside of the United States. Our zinc segment represents all of our zinc melting, processing and trading activities. Prior period results have been reclassified to reflect the international aluminum segment.

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The following table sets forth, for the periods indicated, domestic aluminum, international aluminum and zinc segment information for pounds processed, tolling percentage, revenues, income and assets (in thousands, except percentages):

The accounting policies of the reportable segments are the same as those described in NOTE A —“SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” of Notes to Consolidated Financial

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Statements. We evaluate performance based on gross profit or loss from operations, net of selling expenses. Provision for income taxes, interest, fees on receivables sale, corporate general and administrative costs, including depreciation of corporate assets and amortization of capitalized debt costs, are not allocated to the reportable segments. Inter-segment sales and transfers are typically recorded at market value. Net profits on inter-segment sales and transfers were immaterial for the periods presented. Consolidated cash, net capitalized debt costs, net current deferred tax assets and assets located at our corporate headquarters in Irving, Texas are not allocated to the reportable segments. Also, see NOTE M-“SEGMENT INFORMATION” of Notes to Consolidated Financial Statements for additional segment disclosures.

ACQUISITIONS

We are regularly in the process of evaluating and may, from time to time in the future, evaluate the acquisition of assets or operations that complement our existing businesses. We cannot estimate what impact, if any, any such acquisition may have on our businesses. There can be no assurances that any such transaction will take place, and if so, the definitive terms and conditions of any such acquisition.

Any acquisition we make may result in the assumption or incurrence of debt and contingent liabilities and recognition of expenses related to goodwill and other intangible assets. In addition, any such acquisition could involve numerous risks, including difficulties in the assimilation of the operations, lines of business, services and products of the acquired companies; the diversion of management’s attention from other business concerns; and the potential loss of key employees.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles requires our management to make estimates and assumptions that affect the amounts reported. The policies discussed below are considered by management to be critical to an understanding of our financial statements because their application places the most significant demands on our management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Our management uses historical experience and all available information to make these estimates and judgments, and different results could be reported using different assumptions and estimates.

Inventories

Inventories are stated at the lower of cost or market. We review our inventory values on a regular basis. Cost is determined using either a specific identification method or a weighted average cost per product sold, and includes an allocation of average manufacturing labor and overhead costs to finished goods. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements and compare that with the current or committed inventory levels. It is possible that changes in demand requirements could lead to depressed market conditions, and we would then be required to record the appropriate adjustment to inventory levels.

Property and Equipment

Property and equipment are stated at cost. Major renewals and improvements are capitalized, while maintenance and repairs are expensed when incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets.

Landfill closure costs are currently estimated and are being accrued as space in the landfills is used. We use aerial photography and engineering calculations based on that photography to determine the space used. The construction costs of the landfills are depreciated as space in the landfills is used. The estimation of the closure costs is determined by an engineering study conducted by an independent third party contracted by us. The estimation is based on various factors, including historical utilization of the landfill. In the event that the current utilization rate changes drastically from historical rates, we would be required to record an adjustment to the accrual.

Landfill closure costs are expensed as a component of the cost of sales. In addition, we have recognized asset retirement obligations associated with these landfills. These asset retirement obligations recognize the current fair value of these obligations in our financial statements. Changes to our asset retirement obligations are recognized as accretion expense in our cost of sales over the anticipated lives of the landfills. See NOTE K–“IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS” of Notes to Consolidated Financial Statements.

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We currently have some assets classified as available for sale. These assets are recorded at the lower of cost or fair value. Assets held in this category are actively marketed, and our policy is to sell those assets not intended for future use in income producing activities. We review our property and equipment for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset, less disposal costs.

As required by generally accepted accounting principles, we record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of these items. Our cash flow estimates are based on our best estimate of future, realistic market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions. The recoverability of these assets greatly depends upon the realization of certain underlying assumptions, such as future product prices and costs.

During the 2003 fourth quarter, our management, based on our best estimates of future activity, concluded that unfavorable market trends necessitated an evaluation of recoverability of assets at some of our production facilities and of some of our assets held for sale. As required by SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we recognized a non-cash charge of $3,940,000 principally for the obsolescence of our Wendover production facility. We further recognized a non-cash impairment charge of $1,965,000 for certain of our assets held for sale. Our management concluded, with the aid of outside appraisers, that future market conditions would not justify the former carrying value of these assets. We have permanently closed our Wendover facility, and we also intend to market and sell our assets held for sale.

Long-lived assets that have been impaired are recorded at their fair values. Impairment charges are not reversible and are recognized as a component of continuing operations.

Goodwill and Other Intangible Assets

Intangible assets are stated at cost, net of amortization. We annually perform an impairment review to estimate the fair value of our reporting units. The valuation entails a discounted cash flow model to determine the fair value of our reporting units, utilizing a discount rate based on a risk-adjusted weighted average cost of capital for each unit. When estimating future cash flows, we use internal projections and budgets. These projections include assumptions about aluminum and zinc prices, as well as natural gas and other operating costs. Due to the inherit volatility of commodity prices, actual results may vary from these projections, and could require an adjustment to be recorded.

In the event that a reporting unit’s valuation was determined to be lower than the net book value of such reporting unit, we would be required to perform a purchase price allocation of the reporting unit’s fair value and liabilities to the estimated fair value of its assets. Any goodwill recorded in excess of the resulting goodwill from the purchase price allocation is deemed impaired.

Credit Risk

The majority of our accounts receivable are due from companies in the aluminum, zinc and automotive industries. Credit is extended based on evaluation of our customers’ financial condition and, generally, collateral is not required. We are required to estimate the collectibility of our trade receivables. A considerable amount of judgment is required in assessing the ultimate realization of these receivables,

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including the current credit-worthiness of each customer. Significant charges in required reserves have been recorded in recent periods and may occur in the future if our evaluation of a client’s ability to pay is incorrect.

Environmental Liabilities

The accounting policy with respect to contingent environmental liabilities is to record our environmental liabilities when and if environmental assessment and/or remediation costs are probable and can be reasonably estimated. Our estimate of these liabilities is based on various assumptions and judgments. We often cannot predict with certainty the total costs, liability with respect to these total costs, or the timing of the ultimate disposition of these matters. Due to these uncertainties, the precision of the estimated liabilities may be subject to significant changes.

Income Taxes

We record deferred income taxes to reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are regularly reviewed for recoverability. A valuation allowance is provided to reduce certain deferred tax assets to amounts that, in our estimate, are more likely than not to be realized.

In assessing the need for a valuation allowance, we estimate future taxable income and future tax rates. In the event that our future income is more or less than estimated, our future tax expense could increase or decrease to reflect the change in these estimated valuation allowances.

Market Risk Management Using Financial Instruments

General: Our purpose in using financial instruments is to minimize our exposure to price uncertainty. Metal prices, energy prices and interest rates can be volatile. We use certain financial instruments to reduce our exposure to price volatility; however, these financial instruments do not eliminate our exposure to these risks. It is our policy not to use financial instruments for speculation.

Our deferred gains and losses accumulate on our balance sheet (in Other Comprehensive Income) until the maturity of our respective hedging agreements. Due to the sometimes volatile nature of aluminum, zinc and natural gas prices, it would be impractical to estimate the amount we expect to be realized as earnings or loss on our income statement at any given time, or when these gains or losses will be realized. Actual amounts realized will inevitably differ from our estimates.

Natural Gas: In order to manage our price exposure for natural gas purchases, we have fixed the future price of a portion of our natural gas requirements by entering into financial hedge agreements. Under these agreements, payments are made or received based on the differential between the monthly closing price on the New York Mercantile Exchange (NYMEX) and the actual hedge price. These contracts are accounted for as cash flow hedges, with all gains and losses recognized in cost of sales when the gas is consumed. In addition, we have cost escalators included in many of our long-term supply contracts with our customers, which limit our exposure to natural gas price risk. At December 31, 2003, we had outstanding swap agreements to hedge our anticipated domestic natural gas requirements on approximately 2,910,000 Mmbtus of natural gas, which represents approximately 41% and 13% of our expected 2004 and 2005 fuel needs, respectively. In 2003, 2002 and 2001, natural gas hedging activities increased (decreased) cost of goods sold by the following respective amounts: ($3,401,000), $3,105,000 and $2,173,000 respectively.

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Metals: We also enter into futures contracts and a series of put and call option contracts with metal brokers to cover the future selling prices on a portion of the aluminum generated by our salt cake processing facility in Morgantown, Kentucky, as well as some of the aluminum generated from the processing of other scrap metal. In addition, we enter into futures contracts with metal brokers to cover the future selling prices of zinc recycled for certain zinc customers under fixed-price contracts. These contracts are accounted for as cash flow hedges, and are settled in the month of the corresponding production and/or shipment, with all gains and losses recognized in revenues. In 2003, 2002 and 2001, our aluminum revenue was lower by $185,000, $421,000 and $923,000, respectively, for settled metal hedging contracts. In 2003, 2002 and 2001, our zinc revenue was lower by $343,000, $2,117,000, and $3,785,000, respectively, due to settled zinc metal hedging contracts.

The counter-parties to the financial hedge agreements and futures contracts discussed above expose us to losses in the event of non-performance; however, our management currently does not anticipate any non-performance by existing counter-parties. The counter-parties are evaluated for creditworthiness and risk assessment prior to initiating trading activities with the brokers. Typically, we do not require collateral to support broker transactions.

As discussed above, we enter into production derivatives to hedge the cost of energy and the sales price of certain aluminum and zinc products, and evaluate and document each hedge item when entered into. It is our policy not to speculate in hedging activities.

We use what we believe are reasonable assumptions and where applicable, established valuation techniques in making our estimates.

VAW-IMCO, for much of 2003, had its own hedging program in operation that was functionally independent from ours. Unlike the derivative contracts utilized throughout the rest of our hedging operations, the unrealized gains and losses on VAW-IMCO’s derivative contracts did not qualify for deferred treatment under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” VAW-IMCO, to manage its metal-price risk, hedges forward sales and purchase contracts of aluminum. It is the policy of VAW-IMCO not to speculate in hedging activities. During the period of March 1, 2003 to December 31, 2003, VAW-IMCO had net metal hedging losses of approximately $1,479,000 recognized in our consolidated cost of goods sold.

Interest rates: From time to time we may enter into interest rate swaps with the intention of managing our exposure to interest rate risk on a portion of our long-term borrowings. The differential to be received or paid is accrued, as interest rates change, and recognized currently in the consolidated statement of operations.

Interest rate swaps are contractual agreements between two parties for the exchange of interest payments on a notional principal amount and agreed upon fixed or floating interest rates, for defined time periods. Generally, interest rate swaps convert fixed rate interest payments into floating rate, or variable payments, or vice versa. The type of swaps we may use in the future are known as “plain vanilla” or “fixed for floating” swaps.

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RESULTS OF OPERATIONS

Fiscal Year 2003 vs. Fiscal Year 2002 vs. Fiscal Year 2001

PRODUCTION. During 2003, we melted 2.96 billion pounds, an increase of 17% from 2.54 billion pounds in 2002. Our amount of material melted in 2002 was roughly equal to that of 2001.

Our amount of tolling metal melted, as a percentage of our total metals’ melted, has declined since 2001. This reflects a shift in our domestic aluminum segment to more buy/sell processing, and also reflects the consolidation of VAW-IMCO into our international aluminum segment.

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The following table shows the total pounds processed, the percentage change from the prior period and the percentage tolled for the aluminum and zinc segments (in thousands, except percentages):

DOMESTIC ALUMINUM PRODUCTION. Our domestic aluminum production has declined since 2001. During most of this time, our domestic aluminum segment has been negatively affected by the prolonged low level of U.S. industrial activity. As U.S. manufacturing sector economic conditions improved in late 2003, our operations were also impacted by the scarcity and high cost of suitable scrap materials.

We have sought to reduce our costs in response to these changing market conditions, and have redeployed assets where practicable to maximize their value to us. Within this segment, particularly in the case of our aluminum recycling facilities, our volume of material processed has declined since 2001. Due to these adverse market conditions, we provisionally suspended our Rockwood, Tennessee aluminum recycling facility in 2003, and permanently closed our Wendover, Utah aluminum recycling facility (which had been temporarily closed) in the fourth quarter of 2003. Materials that normally would be processed at these facilities have instead been shipped to our other facilities for processing.

The total volumes processed at our specialty alloy facilities in this segment have increased since 2001. We continue to experience high demand for specialty alloys from the auto manufacturing industry, which is served principally by our specialty alloy plants.

INTERNATIONAL ALUMINUM PRODUCTION. Metal processed at our foreign facilities has increased sharply since 2001, reflecting our recent acquisitions of operations in Monterrey, Mexico, Pindamonhangaba, Brazil, and VAW-IMCO in Germany.

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ZINC PRODUCTION. Zinc production has increased modestly since 2001. This increase reflects slightly greater demand from customers for our zinc oxide and zinc dust products. The 2002 addition of our Spokane, Washington facility has also increased production in this segment. As is the case with of our other segments, we have also installed a number of new furnaces in these operations to increase productivity and efficiency.

REVENUES. The following table shows the total revenue for our three operating segments since 2001 and the percentage change from the prior period (in thousands, except percentages):

Our total consolidated revenue has increased by 30% since 2001. This increase is more than the percentage increase in our metal processed due to our processing more material we own, or buy/sell material, as opposed to tolling material. Sales of our buy/sell material produces higher revenues, but this material also reflects higher costs due to our ownership of the materials. In the case of tolling materials, our customers retain ownership of the material processed, and we charge a tolling fee for our recycling services.

DOMESTIC ALUMINUM REVENUES. From 2001 to 2002, our domestic aluminum revenues increased. This mostly reflected stronger volumes processed at our specialty alloy facilities and, to a lesser degree, increases in our deoxidizer (deox) processing.

For 2002 to 2003, our domestic aluminum revenues decreased compared to 2002. This reflected a decline in volumes processed among our aluminum recycling plants; however, volumes at our specialty alloy facilities, for 2003, were roughly the same as in 2002. Also, our deox processing was lower in 2003 than in 2002.

The principal reasons for this decline include a decrease in the collection and recycling of aluminum beverage cans and the prolonged low level of U.S. industrial activity for most of this time. The closure of customer facilities in the Pacific Northwest has also affected our revenues. Further, the closure of our Wendover facility, for the preceding reasons, also reduced revenue in this segment.

The shift in our business to more buy/sell materials, has supplanted some of these lost revenues, but has also imposed more material costs on us. In general, aluminum prices and scrap costs both moved higher towards the end of 2003. On average, the overall London Metal Exchange (LME) price of aluminum alloy increased by approximately 21% from December 2002 to December 2003.

INTERNATIONAL ALUMINUM REVENUES. Our international aluminum revenues have increased strongly since 2001, reflecting our foreign acquisitions and increased volumes. Most of this growth is due to the acquisition of VAW-IMCO, and, to a lesser degree, reflects our increasing operations in Mexico, as well as our operations in Brazil. With the consolidation of VAW-IMCO, the majority of our revenues in this segment represent product sales of buy/sell materials as opposed to tolling fees. VAW-IMCO’s revenues are closely tied to the European auto industry, since approximately 60% of its annual output is provided to that industry.

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ZINC REVENUES. Since 2001, our zinc segment revenues have declined. This mostly reflects lower consolidated revenues from our zinc brokerages since 2001. Revenues from our zinc manufacturing facilities have actually increased, mostly due to increased volumes processed by our zinc recycling facilities. Towards the end of 2003, overall supply and demand conditions for zinc had improved, which was reflected in our revenues during this time.

GROSS PROFITS. Since 2001, our gross profits have increased. Overall, since 2001, our international aluminum and zinc segments have more than offset a decrease in our domestic aluminum segment.

The following table shows the total income for our Company’s segments, and the percentage change from the prior period and a reconciliation of segment income to our consolidated gross profits (in thousands, except percentages):

DOMESTIC ALUMINUM INCOME. Since 2001, our domestic aluminum segment income, after adjusting for our international aluminum segment, has experienced wide variations. In 2002, we benefited from increased margins for our specialty alloys, and we also had a full year of production from our new Saginaw, Michigan facility. This facility is almost exclusively dedicated to toll processing for the automotive industry. In addition, average aluminum alloy prices were modestly higher in 2002 compared to 2001.

Our fuel costs, principally natural gas, have fluctuated over the last two years. In 2002, we benefited from a reduction in fuel costs. On a per unit basis, after accounting for our natural gas hedging activities, our fuel costs decreased by approximately 15% in 2002 compared to 2001. Our natural gas hedging activities have reduced the impact of changes in natural gas prices, but they do not eliminate the adverse effects of fuel price increases.

Offsetting some of these positive factors in 2002, we were negatively affected by the continued shutdown of primary smelter capacity in the Pacific Northwest. We have reduced operations in that area accordingly, and have redeployed assets where practicable.

In 2003, our operations in this segment were challenged by four unfavorable items. First, our margins for our specialty alloys compressed, as we found it harder to obtain suitable scrap metal as raw materials at

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favorable prices. At this time, we do not foresee an easing of this problem; however, we are working to expand our sources for scrap metal and to continue to improve our metal recoveries. In addition, selling prices for aluminum products have recently begun to increase.

Second, during 2003 we continued to be affected by the continued shutdown of primary smelter capacity in the Pacific Northwest. This was a significant factor in our decision to permanently close our Wendover, Utah facility. Additionally, certain other assets held for sale in this segment were deemed impaired in the fourth quarter of 2003. The total non-cash charges for these impairments were $5,905,000. See NOTE E—“PROPERTY AND EQUIPMENT” of Notes to Consolidated Financial Statements. Of our total impairment charges $1,965,000 of this amount was included in Other Income in our results of operation. The remaining balance of these charges, $3,940,000, was included in cost of goods sold. All of these charges have been included in domestic aluminum segment income for 2003.

Third, due to reduced demand for our recycling services in the southeast, in 2003 we provisionally suspended operations at our Rockwood, Tennessee facility. In addition, at the end of 2003, we also wrote down the carrying amounts of some of our other assets in this segment. These non-cash charges have also been included in calculating our segment income.

Fourth, contributing to the performance of this segment was the increase in natural gas prices in 2003. On a per unit basis, after accounting for our natural gas hedging activities, our fuel costs increased by approximately 13% for 2003 compared to 2002. Our natural gas hedging activities do not completely eliminate the adverse effects of fuel price increases.

At the end of 2003, we experienced an increase in customer demand among our domestic aluminum recycling facilities.

INTERNATIONAL ALUMINUM INCOME. Since 2001, our international aluminum income has increased. Most recently, the majority of this increase is due to the consolidation of VAW-IMCO. VAW-IMCO has sufficient capacity and operating efficiency to profitably produce significant amounts of the specialty alloys demanded by our customers in the European automotive industry. We anticipate further expansion of VAW-IMCO’s operations in the near term.

In 2002, prior to the consolidation of VAW-IMCO, our income in this segment declined due to the initial operations of our then new facilities in Mexico and Brazil. We have since made operational changes to both of these facilities. Income from our Mexico facility has increased due to our expansion of this operation in 2002 and the installation of our furnace technology, which has increased metal recoveries.

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ZINC INCOME. Our zinc segment income has increased since 2001. The overall supply/demand situation for zinc improved in 2003. Our overall margins for our zinc products have steadily improved. Since 2001, we have reduced operations at some of our zinc trading businesses and improved the output of certain of our zinc furnaces.

OTHER EXPENSES AND INCOME ITEMS.

(in thousands, except percentages):

SG&A EXPENSE. Selling, general and administrative expense has increased since 2001. In 2002 this increase was primarily due to higher employee costs. In 2003, these costs increased largely as a result of the consolidation of VAW-IMCO and higher professional fees. Professional fees were approximately 67% higher in 2003 than in 2002.

AMORTIZATION EXPENSE. During 2002, we had no charge from amortization of goodwill compared to a $4,299,000 amortization charge incurred in 2001. The discontinuation of this expense resulted from our adoption of SFAS No. 142 in 2002. See “Earnings Before Cumulative Effect of Accounting Change” below.

FEES ON RECEIVABLES SALES. Since 2001, our fees on receivable sales have decreased, mainly due to lower prevailing interest rates throughout this period and lower volumes of receivables sold. During the refinancing of our indebtedness that was concluded in the fourth quarter of 2003, our former receivable sales facility was terminated.

The financial condition and results of operations of our special purpose receivables subsidiary are included in our consolidated financial statements. See NOTE C—“SALE OF RECEIVABLES” of Notes to Consolidated Financial Statements.

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INTEREST EXPENSE. In 2003, interest expense was higher mostly due to the October refinancing of substantially all of our debt. Our existing credit facilities were scheduled to expire by their own terms at the end of 2003. The effective annual interest rate on our former revolving credit facility was approximately 7.7%. In connection with the October 2003 refinancing of substantially all of our debt, we replaced the former revolving credit facility with a new senior secured revolving credit facility and an issuance of senior secured notes. The annual interest rate on the notes is 10.375%. Additionally, as part of this refinancing, we were required to use some of the proceeds from the new senior secured revolving credit facility and the 10.375% notes to repurchase our previously sold receivables.

Interest expense in 2002 decreased compared to 2001. Additional debt and interest expense resulting from the Brazilian plant acquisition were offset in 2002 by a decrease in overall debt due to changes in management of working capital and lower prevailing interest rates.

We are currently exploring the use of financial instruments—principally interest rate swaps—to effectively reduce some of our fixed-rate obligations. No assurances can be given, however, that we will be successful in the establishment of these financial instruments, nor can any assurance be given of their effects on our net income going forward.

OTHER INCOME. Our other income in 2003 increased significantly compared to 2002. A portion of this increase was due to our net gain on the refinancing of our debt and the payment of the VAW-IMCO redemption liability during the fourth quarter of 2003 of $4,679,000. See NOTE G—“LONG TERM DEBT” of Notes to Consolidated Financial Statements. Offsetting this gain were our non-cash impairment charges of $1,965,000 relating to certain assets held for sale in our domestic aluminum segment, which was reflected within the calculation of the segment income for that segment. See NOTE E—“PROPERTY AND EQUIPMENT” of Notes to Consolidated Financial Statements.

For the fourth quarter of 2003, an unrealized foreign currency gain of $1,880,000 was recorded related to certain intercompany notes with foreign subsidiaries. The primary reason for this gain was the increase in the value of the Euro against the U.S. dollar in the fourth quarter of 2003. See NOTE R—“OTHER COMPREHENSIVE EARNINGS (LOSS)” of Notes to Consolidated Financial Statements.

EQUITY IN EARNINGS. Our equity in earnings decreased in 2003, mostly due to the consolidation of VAW-IMCO as of March 1, 2003. Prior to consolidation, the results of operations of VAW-IMCO were reported under the equity method of accounting. Under this method, we recorded our 50% share of the net income from VAW-IMCO as our equity in earnings.

EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE. Earnings before cumulative effect of accounting change decreased in 2003 compared to 2002. This decrease was the result of weakness in our domestic aluminum segment, and increases in our selling, general and administrative costs and interest costs, as discussed above.

In 2002, our earnings before the cumulative effect of accounting change increased compared to a loss in 2001. The increase was primarily the result of increased profit margins as discussed above, as well as the elimination of goodwill amortization under SFAS No. 142. See NOTE P—“GOODWILL” of Notes to Consolidated Financial Statements.

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INCOME TAXES. We recorded an overall consolidated net tax benefit for 2003. See NOTE F—“INCOME TAXES” of Notes to Consolidated Financial Statements. This reflected the results of operations which included the tax effects of the write-downs and impairments discussed above. Further, no tax was recorded for the non-cash gain we realized on extinguishment of the VAW-IMCO redemption liability.

In 2002, our effective tax rate, excluding the impact of equity income related to VAW-IMCO, increased to 38% in 2002 from a benefit of 31% in 2001. The primary reason for the difference is due to the amount of our domestic U.S. net loss recorded during 2001 compared to the level of expenses not deductible for tax purposes.

LIQUIDITY AND CAPITAL RESOURCES.

We have historically financed our operations and capital expenditures from internally generated cash and available credit facilities. We have traditionally financed our acquisitions and capacity expansions from a combination of funds from long-term borrowings and stock issuances. We believe that our cash on hand and our anticipated internally generated funds will be sufficient to fund our operational needs for at least the next twelve months.

Cash Flows from Operations. Cash flows from our operating activities are generally the result of net income, deferred taxes, depreciation and amortization, and changes in our working capital. Operations used $8,252,000 of cash during 2003 compared to $38,443,000 of cash provided from operations during 2002. Changes in operating assets and liabilities, principally the repurchase of our previously sold receivables in conjunction with our debt refinancing in October 2003, accounted for the majority of this difference. Changes in operating assets and liabilities resulted in a net use of cash of $42,559,000 for the year ended December 31, 2003, compared to net cash inflows from changes in operating assets and liabilities of $6,203,000 for the same period in 2002.

During the year ended December 31, 2003, changes in the amount of our receivables outstanding represented a cash source, providing $11,313,000 of cash. However, during that period, the repurchase of receivables eligible for sale under our former receivables sale facility represented a use of cash of approximately $61,300,000. Increases in our accounts payable and accrued liabilities functioned as a cash source of $19,341,000 during 2003. Increases in our inventories used $12,639,000 in cash in 2003, and changes in our other current assets provided $726,000 in cash during 2003.

During the year ended December 31, 2002, changes in accounts receivable represented a $2,118,000 source of cash. Also, during this same time period in 2002, increases in accounts payable and accrued liabilities functioned as a source of cash for us, providing $14,989,000. During 2002, changes in the amount of receivables sold under our former receivable sales facility represented a use of cash of $4,000,000. Increases in inventory and other current assets represented a use of cash of $3,514,000 and $3,390,000, respectively. Net income before the effect of accounting change was $4,971,000 for 2003, compared to $6,864,000 for the comparable 2002 period.

One of our key internal performance indicators is the number of our days sales outstanding. This calculation excludes our amounts from our former receivables sale facility. Over the past two years we have managed our receivables to reduce the number of days sales outstanding, effectively strengthening our cash receipts from customers. The following table shows the improvement in days sales outstanding:

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Our use of cash for inventories occurred mostly among our domestic facilities. Given the escalation of base metal prices at the end of 2003, we purchased more materials at year-end as we entered 2004. In view of the fact that supplies of suitable scrap and processing materials tightened in 2003, we increased our inventories of certain materials. This has affected both our domestic aluminum and zinc segments. Our domestic aluminum and international aluminum operations are more product sales oriented than in previous years. As discussed above, this requires us to purchase more inventories for our operations.

Cash Flows from Investing Activities. Cash flows from investing activities primarily reflect our capital expenditure strategy. Our capital expenditures principally relate to property, plant and equipment. During the year ended December 31, 2003, net cash used by investing activities was $30,068,000, compared to a use of cash of $16,344,000 for the same period in 2002. The difference between these two periods was primarily due to the acquisition of the remaining 50% of VAW-IMCO, as discussed above, and an increase in restricted cash. As of December 31, 2003, VAW-IMCO had $28,156,000 in cash. Our total payments for property, plant and equipment in 2003 increased to $20,807,000 compared to $19,313,000 spent in 2002. Our overall capital expenditures for property, plant and equipment in the U.S. and at our international locations in 2004 are expected to approximate $25,000,000.

The majority of this sum is planned to be used for expansion of certain specialty alloying facilities, the expansion of the Morgantown landfill and other maintenance capital items.

These capital expenditures are expected to be funded by cash flows generated from continuing operations, and proceeds to us from the repayment in full by VAW-IMCO in February 2004 of a $24,002,000 loan made by us to VAW-IMCO in connection with our October 2003 debt refinancing. See “—CREDIT FACILITIES AND REFINANCING.”

We have $24,846,000 in restricted cash. In October 2003, as part of the refinancing of virtually all of our outstanding debt, we transferred funds we received from the refinancing to VAW-IMCO to prepay the redemption liability for its shares owned by our former joint venture partner, and to pay off its then existing debt.

A portion of the funds advanced to VAW-IMCO was in the form of an intercompany loan, evidenced by a promissory note from VAW-IMCO in the original principal amount of $24,002,000. As required under the terms of the indenture for the senior secured notes, we pledged the intercompany note as part of the security for the repayment of the senior secured notes. In February 2004, VAW-IMCO paid all of the outstanding indebtedness under this intercompany note, resulting in a transfer by VAW-IMCO of $24,002,000 plus accrued interest to a collateral account held by the trustee under the indenture for the benefit of holders of the senior secured notes. Thus, these funds in the collateral account and interest earned on these funds are restricted.

As permitted under the indenture, subject to certain limitations, we will be able to use these funds in the collateral account for certain property and equipment expenditures until January 2005. The property and equipment that are the subject of these expenditures will also become collateral security for the senior secured notes. See NOTE G – “LONG-TERM DEBT” of Notes to Consolidated Financial Statements. We currently anticipate that we will use all of the funds from the collateral account for these purposes in 2004. However, to the extent that more than $5,000,000 in unused funds remain in the collateral account after January 2005, we are required to make an offer to repurchase outstanding senior unsecured notes up to the extent of the amount of the unused funds. If the amount of notes tendered to us in response to this offer is less than the amount of the unused funds, then we may use the excess funds for our general corporate purposes, free of liens under the indenture but subject to its other terms and conditions.

Cash Flows from Financing Activities. Cash flows from financing activities generally reflect changes in our borrowings and debt obligations. Net cash provided by financing activities was $45,557,000 for the year ended December 31, 2003, compared to a use of cash of $18,381,000 for 2002. In 2003 we refinanced almost all of our long term foreign and domestic debt obligations. The payments and proceeds through these transactions reflected these changes. As a result of our new financing arrangements, our interest expense is expected to increase. At this time, we estimate that our interest expense for 2004 will increase by approximately $7,000,000 over our reported amounts for 2003.

In 2002 we reduced the amount of borrowings outstanding under our financing arrangements through more aggressive use of our working capital as discussed above. As of December 31, 2003, we had $32,991,000 in indebtedness outstanding under our senior credit facility. In addition, standby letters of credit with several banks were outstanding under this facility, totaling $7,873,000. See NOTE G — “LONG-TERM DEBT” of Notes to Consolidated Financial Statements.

EBITDA. We report our financial results in accordance with generally accepted accounting principles (GAAP). However, our management believes that certain non-GAAP performance measures, which our management uses in managing the business, may provide investors with additional meaningful comparisons between current results and results in prior periods. EBITDA is an example of a non-GAAP financial measure that we believe provides investors and other users of our financial information with useful information.

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EBITDA represents net earnings (loss), before interest expense, provision for (benefit from) income taxes, depreciation and amortization and cumulative effect of accounting change, net of tax benefit. EBITDA is a non-GAAP financial measure which is presented because we believe that it is a useful indicator of our ability to incur and service debt. EBITDA is also used for internal analysis purposes and is a component of the fixed charge coverage financial covenants under our new senior credit facility and our new senior secured notes. EBITDA should not be construed as an alternative to net earnings (loss) as an indicator of our performance, or cash flows from our operating activities, investing activities or financing activities as a measure of liquidity, in each case as such measure is determined in accordance with accounting principles generally accepted in the United States (U.S. GAAP). EBITDA may not be comparable to similarly titled measures used by other entities. Historical EBITDA as presented below may be different than EBITDA as defined under our indenture for our new secured notes and the loan agreement for our new senior credit facility.

Our reconciliation of EBITDA to net earnings (loss) and net cash from operating activities is as follows (amounts in thousands):

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