<PAGE>

Wheelabrator Technologies Inc. and Subsidaries 

Consolidated Balance Sheets
<TABLE>
<CAPTION>
 
--------------------------------------------------------------------------------------------------------
(000s omitted, except share amounts)
December 31,                                                                        1995         1996
--------------------------------------------------------------------------------------------------------
<S>                                                                              <C>          <C>
Assets
Current assets:
 Cash and cash equivalents                                                       $   54,003   $  306,072
 Receivables, net of allowance of $7,754 in 1995 and $5,094 in 1996                 120,819      123,164
 Costs and earnings in excess of billings                                            25,429       10,632
 Other current assets                                                                51,865       72,148
--------------------------------------------------------------------------------------------------------
  Total current assets                                                              252,116      512,016
--------------------------------------------------------------------------------------------------------
Property, plant, and equipment, net                                               1,566,754    1,561,925
Cost in excess of net assets of acquired businesses, net                             71,683       63,707
Investments in affiliates                                                           601,768      484,141
Net assets of discontinued operations                                               286,387       54,776
Other assets                                                                        291,199      374,854
--------------------------------------------------------------------------------------------------------
   Total assets                                                                  $3,069,907   $3,051,419
========================================================================================================
 
Liabilities and Stockholders' Equity
Current liabilities:
 Current maturities of long-term debt                                            $   31,999   $   35,832
 Accounts payable                                                                    38,636       37,084
 Accrued liabilities                                                                136,145      236,426
 Advance payments on contracts                                                       13,050       16,194
--------------------------------------------------------------------------------------------------------
  Total current liabilities                                                         219,830      325,536
--------------------------------------------------------------------------------------------------------
Long-term debt                                                                      703,855      800,153
Deferred income taxes                                                               400,889      445,582
Deferred income                                                                      77,513       67,678
Other long-term liabilities                                                         217,555      261,954
Commitments and contingencies
Stockholders' equity:
 Preferred stock, par value $1.00 per share; 50,000,000 authorized;
  none issued or outstanding                                                             --           --
 Common stock, par value $0.01 per share; 500,000,000 authorized;
  189,545,407 shares issued in 1995 and 1996                                          1,895        1,895
 Capital in excess of par value                                                     876,595      875,584
 Cumulative translation adjustment                                                   (9,986)      (4,721)
 Treasury stock at cost; 10,112,610 shares in 1995, 28,094,425 shares in 1996      (146,494)    (436,306)
 Retained earnings                                                                  728,255      714,064
--------------------------------------------------------------------------------------------------------
  Total stockholders' equity                                                      1,450,265    1,150,516
--------------------------------------------------------------------------------------------------------
   Total liabilities and stockholders' equity                                    $3,069,907   $3,051,419
========================================================================================================
</TABLE>

The accompanying notes are an integral part of these balance sheets.


12
<PAGE>

Wheelabrator Technologies Inc. and Subsidiaries
 
Consolidated Statements of Income
<TABLE>
<CAPTION>
 
(000s omitted, except per share amounts)
Years Ended December 31,                                              1994       1995        1996
---------------------------------------------------------------------------------------------------
<S>                                                                 <C>        <C>        <C>
Revenue                                                             $926,879   $956,088   $ 952,312
---------------------------------------------------------------------------------------------------
 Operating expenses                                                  608,911    619,403     618,779
 Selling and administrative expenses                                  49,917     55,794      43,949
 Interest expense                                                     51,839     59,916      57,514
 Interest income                                                     (13,456)    (9,761)     (6,054)
 Equity in (earnings) loss of affiliates
  (1995 and 1996 reduced by $25.6 million
  and $43.3 million, respectively, related to
  special charges recorded by WM International)                      (14,717)     8,916      27,803
 Other income, net                                                      (104)    (3,541)     (1,081)
---------------------------------------------------------------------------------------------------
  Income from continuing operations before income taxes              244,489    225,361     211,402
 Income tax provision                                                 93,765     91,078     101,948
---------------------------------------------------------------------------------------------------
Income from continuing operations                                    150,724    134,283     109,454
 Discontinued operations:
  Income from discontinued operations
   less applicable income taxes of $8.8 million in 1994,
   $10.2 million in 1995 and $9.2 million in 1996 (Note 3)            14,548     13,797       8,039
  Equity income from Rust discontinued operations (Note 3)            19,623     19,858       4,005
  Equity in provision for loss on disposal
   of Rust discontinued operations                                        --    (30,080)   (115,000)
---------------------------------------------------------------------------------------------------
Net income                                                          $184,895   $137,858   $   6,498
===================================================================================================
 
Weighted average common and common equivalent shares outstanding     189,900    185,000     169,400
===================================================================================================
Earnings (loss) per common and common equivalent share:
 Continuing operations                                              $   0.79   $   0.73   $    0.65
 Income from discontinued operations                                    0.08       0.08        0.05
 Equity income (loss) from Rust discontinued operations                 0.10      (0.06)      (0.66)
---------------------------------------------------------------------------------------------------
Net income                                                          $   0.97   $   0.75   $    0.04
===================================================================================================
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                                                              13
<PAGE>

Wheelabrator Technologies Inc. and Subsidiaries
 
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
 
(000s omitted)
Years Ended December 31,                                    1994        1995        1996
-----------------------------------------------------------------------------------------
<S>                                                      <C>         <C>         <C>
Operating Activities
Net income                                               $ 184,895   $ 137,858   $   6,498
Adjustments to reconcile net income to cash flows
  from operating activities:
 Depreciation and amortization                              95,254     107,814     103,537
 Deferred income taxes                                      48,909      59,295      60,713
 Undistributed (earnings) loss of affiliates               (14,717)      8,916      27,803
 Equity in discontinued operations of Rust                 (19,623)     10,222     110,995
 Deferred lease expense                                     (7,530)    (10,523)    (12,660)
 Changes in assets and liabilities, net of effects
  of acquisitions and dispositions:
   Receivables, net                                        (29,258)    (11,195)     (7,696)
   Costs and earnings in excess of billings                 (2,097)     (7,664)     14,592
   Other current assets                                    (12,343)     17,310      (2,903)
   Accounts payable                                         10,525        (542)     (7,263)
   Accrued liabilities                                     (19,400)       (933)     (5,132)
   Advance payments on contracts                            (2,594)    (27,637)     (4,067)
   Other long-term liabilities                             (46,534)    (36,713)    (13,952)
 Other, net                                                 (6,624)     (8,884)     (4,185)
------------------------------------------------------------------------------------------
 Net cash provided by operating activities                 178,863     237,324     266,280
------------------------------------------------------------------------------------------

Investing Activities
Capital expenditures                                      (105,459)    (37,805)    (70,602)
Proceeds from sale of investments                              583      12,821       1,587
Cash paid for investment                                        --          --     (15,415)
Proceeds from discontinued operations,
 net of cash relinquished                                       --          --     348,899
Sale of property, plant, and equipment                       8,374      12,498       1,954
Investments held by trustees                                 5,936      36,810     (62,425)
Cash paid for acquisitions, net of acquired cash           (25,754)    (12,571)    (35,983)
Other, net                                                 (21,257)     (6,928)     30,475
------------------------------------------------------------------------------------------
 Net cash provided by (used for) investing activities     (137,577)      4,825     198,490
------------------------------------------------------------------------------------------

Financing Activities
Additions to long-term debt                                112,985      29,388     130,495
Repayments of long-term debt                              (160,335)    (61,181)    (29,609)
Net borrowings from WMX Technologies, Inc.                  53,163     (53,163)         --
Proceeds from exercise of stock options                      5,739       3,665      13,444
Dividends paid                                             (18,954)    (20,301)    (20,689)
Stock repurchase program                                   (47,550)   (102,368)   (306,011)
Other, net                                                  (1,971)      3,154        (331)
------------------------------------------------------------------------------------------
 Net cash used for financing activities                    (56,923)   (200,806)   (212,701)
------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents           (15,637)     41,343     252,069
Cash and cash equivalents at beginning of period            28,297      12,660      54,003
------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period               $  12,660   $  54,003   $ 306,072
==========================================================================================
Supplemental disclosure:
 Interest paid, net of amounts capitalized               $  56,015   $  59,812   $  57,102
==========================================================================================
 Income taxes paid                                       $  73,790   $  44,099   $  44,495
==========================================================================================
Significant noncash investing activities:
 Common stock issued for acquisitions                    $   2,900   $      --   $      --
==========================================================================================
 Liabilities assumed in acquisitions                     $  74,938   $   8,232   $   4,211
==========================================================================================
</TABLE>

The accompanying notes are an integral part of these financial statements.

14
<PAGE>

Wheelabrator Technologies Inc. and Subsidiaries
 
Consolidated Statements of Changes in Stockholders' Equity

<TABLE>
<CAPTION>
 
---------------------------------------------------------------------------------------------------------------------
 
(000s omitted, except share amounts)
                                                         Capital in    Cumulative
                                                 Common   Excess of   Translation    Treasury   Retained
                                                 Stock    Par Value    Adjustment     Stock     Earnings      Total
---------------------------------------------------------------------------------------------------------------------
<S>                                              <C>     <C>          <C>           <C>         <C>        <C>
Balance, December 31, 1993                       $1,888    $874,580      $(33,670)  $    (717)  $444,757   $1,286,838
---------------------------------------------------------------------------------------------------------------------
 Net income                                          --          --            --          --    184,895      184,895
 Dividends declared ($0.10 per share)                --          --            --          --    (18,954)     (18,954)
 Foreign currency translation                        --          --        16,020          --         --       16,020
 Exercise of stock options                            5       4,457            --       1,277         --        5,739
 Tax benefit from stock options                      --       2,134            --          --         --        2,134
 Stock issued for acquisitions                        2       2,898            --          --         --        2,900
 Treasury shares from acquisition adjustments        --          --            --        (499)        --         (499)
 Stock repurchases (3,273,800 shares)                --          --            --     (47,550)        --      (47,550)
 Investment in Rust International Inc.               --      (6,641)           --          --         --       (6,641)
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994                        1,895     877,428       (17,650)    (47,489)   610,698    1,424,882
---------------------------------------------------------------------------------------------------------------------
 Net income                                          --          --            --          --    137,858      137,858
 Dividends declared ($0.11 per share)                --          --            --          --    (20,301)     (20,301)
 Foreign currency translation                        --          --         7,664          --         --        7,664
 Exercise of stock options                           --      (1,488)           --       5,153         --        3,665
 Tax benefit from stock options                      --         655            --          --         --          655
 Stock repurchases (7,194,600 shares)                --          --            --    (104,154)        --     (104,154)
 Treasury shares from acquisition adjustments        --          --            --          (4)        --           (4)
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995                        1,895     876,595        (9,986)   (146,494)   728,255    1,450,265
---------------------------------------------------------------------------------------------------------------------
 Net income                                          --          --            --          --      6,498        6,498
 Dividends declared ($0.12 per share)                --          --            --          --    (20,689)     (20,689)
 Foreign currency translation                        --          --         4,045          --         --        4,045
 Amount transferred to operations resulting
  from sale of Water Business                        --          --         1,220          --         --        1,220
 Exercise of stock options                           --      (2,849)           --      16,590         --       13,741
 Tax benefit from stock options                      --       1,838            --          --         --        1,838
 Common stock received in connection with
  exercise of stock options (18,623 shares)          --          --            --        (297)        --         (297)
 Stock repurchases (19,117,200 shares)               --          --            --    (306,011)        --     (306,011)
 Treasury shares from acquisition adjustments        --          --            --         (94)        --          (94)
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996                       $1,895    $875,584      $ (4,721)  $(436,306)  $714,064   $1,150,516
=====================================================================================================================
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                                                              15
<PAGE>
 

Wheelabrator Technologies Inc. and Subsidiaries

Notes to Consolidated Financial Statements (000s omitted in all tables except
per share amounts)
--------------------------------------------------------------------------------
NOTE 1    BUSINESS DESCRIPTION

Wheelabrator Technologies Inc. ("Wheelabrator" or the "Company") is primarily
engaged in the ownership and operation of trash-to-energy, waste-fuel powered
independent power, and biosolids pelletizer facilities as well as providing
biosolids land application services and air quality control equipment design and
installation services. Wheelabrator is a majority-owned subsidiary of WMX
Technologies, Inc. ("WMX") and holds minority interests in two other WMX-
controlled subsidiaries: Waste Management International plc ("WM International")
and Rust International Inc. ("Rust").

--------------------------------------------------------------------------------
NOTE 2    SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The Company's financial statements are prepared on a consolidated basis and
include the Company and its majority-owned subsidiaries. All significant
intercompany transactions and balances are eliminated. Investments in affiliates
the Company does not control are accounted for using the equity method after
elimination of material interaffiliate transactions.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets, liabilities, income, and expenses and
disclosures of contingencies. Future events could alter such estimates.

Concentrations

Wheelabrator's businesses offer a range of services to a diverse customer base.
As of December 31, 1996, the Company believes it has no significant customer,
supplier, product line, credit risk, geographic, or other concentrations that
could expose the Company to adverse, near-term severe financial impacts.

Revenue Recognition

The Company recognizes revenue from certain long-term engineering, equipment
supply, and construction contracts on the percentage-of-completion basis, with
estimated losses recognized in full when identified. All other revenue is
recognized when services are rendered or products are shipped.

Foreign Currency

Certain foreign subsidiaries' income statement accounts are translated at the
average exchange rates in effect during the period, while assets and liabilities
are translated at the rates of exchange at the balance sheet date. The resulting
balance sheet translation adjustments are charged or credited directly to
stockholders' equity. Foreign exchange transaction gains and losses realized
during 1994, 1995, and 1996 were not significant.

Consolidated Statements of Cash Flows

For purposes of the Consolidated Statements of Cash Flows, all highly liquid
instruments purchased with an original maturity of three months or less, and
investments with WMX, are considered to be cash equivalents.

  Wheelabrator and WMX are parties to a Master Intercorporate Agreement that
provides, among other things, for Wheelabrator to lend excess cash to WMX at
interest rates at least as favorable as those Wheelabrator could otherwise
obtain. This agreement automatically renews annually unless either party
provides 90-day notice of termination. Under the agreement's terms, in the event
Wheelabrator requires short-term cash for the conduct of its business and
operations, WMX will make available to Wheelabrator such amounts as Wheelabrator
requires, up to a total of $100.0 million in excess of amounts loaned by
Wheelabrator to WMX. In addition, a right of set-off exists for amounts owed by
either Wheelabrator or WMX. As such, net amounts invested with WMX pursuant to
this agreement are considered to be highly liquid cash equivalents and are
included in cash and cash equivalents on the Consolidated Balance Sheets. The
Company had investments with WMX of $37.3 million and $285.2 million as of
December 31, 1995, and 1996, respectively.

Derivative Financial Instruments

From time to time, the Company has used foreign currency derivatives to attempt
to mitigate the impact of currency fluctuations on its equity income from WM
International and on certain specifically identified transactions. Derivatives
used are confined to simple instruments that do not involve multipliers or
leverage. Wheelabrator's use of derivatives has not been and is not expected to
be material to the Company's financial statements.

Fair Value of Financial Instruments

The Company's financial instruments consist primarily of cash and cash
equivalents, receivables, investments held by trustees, accounts payable, and
debt instruments. The book values of cash and cash equivalents, receivables,
investments held by trustees, and accounts payable are considered to be
representative of their respective fair values. The aggregate fair market value
of Wheelabrator's long-term debt was approximately $880.8 million and $899.0
million on December 31, 1995 and 1996, respectively. The fair value of the
Company's long-term debt was determined by discounting future cash flows at the
quoted or estimated current rate applicable to each type of debt. See Note 6 for
the terms and carrying values of the Company's various debt instruments.

Property, Plant, and Equipment

Property, plant, and equipment (including major improvements) are capitalized
and stated at cost. Items of an ordinary maintenance or repair nature are
charged directly to operating expense. The cost less estimated salvage value of
property, plant, and equipment (except for land and unutilized land options) is
generally depreciated on a straight-line basis over estimated useful lives that
range from 3 to 35 years.

  Under a land option agreement with a WMX subsidiary, the Company has the
exclusive right to purchase or lease sites for trash-to-energy or other
facilities at existing or future landfills owned by the subsidiary. These land
options are classified as property, plant, and equipment. The option cost
attributable to each utilized site will be allocated to a facility and amortized
on a straight-line basis over the estimated useful life of the facility upon
commencement of operations. During 1994, amortization began on $29.6 million
worth of exercised land options as two facilities located on such sites
commenced operations.

  During 1995, the Company paid $15.0 million to WMX in conjunction with a land
option agreement amendment that included, among other things, a guarantee of
value for Wheelabrator and an extension through 2020.

Capitalized Interest

The Company capitalizes interest on significant projects under construction in
accordance with Statement of Financial Accounting Standards No. 34. Amounts
capitalized and netted against interest expense in the Consolidated Statements
of Income were $12.1 million in 1994, $0.1 million in 1995, and $1.5 million in
1996.

16
<PAGE>


--------------------------------------------------------------------------------
Cost in Excess of Net Assets of Acquired Businesses

The excess of cost over fair value of the net assets of acquired businesses
("goodwill") is amortized on a straight-line basis over a maximum of 40 years.
The accumulated amortization balances as of December 31, 1995 and 1996, were
$9.9 million and $11.4 million, respectively. On an ongoing basis, the Company
measures realizability of goodwill by the ability of the acquired businesses to
generate current and undiscounted expected future cash flow in excess of
unamortized goodwill. If such realizability is in doubt, an adjustment is made
to reduce the carrying value of the goodwill.

Restructuring

During the fourth quarter of 1996, the Company restructured its biosolids land
application business. Part of the restructuring plan involved exiting low-margin
projects and territories, which resulted in goodwill write-offs of approximately
$5.7 million and an immaterial amount of severance and other restructuring
accruals.

Disposal Credits

The Company classifies disposal credits as other assets until applied against
the cost of disposing of materials at WMX landfills. These materials include ash
residue from trash-to-energy facilities and biosolids. Disposal credits are
charged to expense as utilized. During 1995 and 1996, the Company utilized $3.0
million and $2.5 million of disposal credits, respectively. There were
approximately $28.7 million of disposal credits remaining at December 31, 1996.

Facility Maintenance Accrual

In order to match more consistently expenditures for major repair and overhaul
activities with revenue, the Company follows a policy of accruing for major
maintenance expenditures at its trash-to-energy and independent power
facilities. Such accruals are based upon planned maintenance expenditures and
are classified as current or noncurrent liabilities based on the expected timing
of the expenditures.

Income Taxes

Income taxes are provided based on earnings reported for financial statement
purposes. The provision for income taxes differs from the amounts currently
payable because of timing differences in the recognition of certain income and
expense items for financial reporting and tax reporting purposes. In accordance
with Statement of Financial Accounting Standards No. 109, the Company accounts
for income taxes using an asset and liability method. The asset and liability
method requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between tax bases and
financial reporting bases of assets and liabilities, measured using the enacted
tax rates and laws that will be in effect when the differences are expected to
reverse. Deferred income taxes are not provided on undistributed earnings of
affiliates because these earnings are considered to be permanently reinvested.
If the reinvested earnings were to be remitted, the U.S. income taxes due under
current tax law would not be material. Investment credits have been deferred and
are included in income as a reduction of income tax expense over the estimated
useful lives of the assets that gave rise to the credits. See Note 4.

Environmental Costs and Liabilities

Estimated closure and postclosure monitoring costs associated with ash residue
monofills for which the Company is responsible include items such as final cap
and cover on the site, leachate management, and groundwater monitoring. These
costs are recognized in proportion to use of the permitted capacity at such
disposal sites. Such costs are estimated based on the technical requirements of
the United States Environmental Protection Agency ("EPA") or applicable state
regulations, whichever are stricter. These accruals for closure and postclosure
costs relate to expenditures to be incurred after a monofill ceases to accept
ash residue. To the extent similar costs are incurred during the active life of
the site, they are expensed as incurred. Preparation costs associated with these
sites and their individual cells are capitalized and amortized over the
respective estimated life of the disposal site or individual cell.

  Wheelabrator has instituted procedures to periodically evaluate other
potential environmental exposures. When the Company concludes it is probable
that a liability has been incurred, provision is made in the financial
statements, based upon management's judgment and prior experience, for the
Company's best estimate of the liability. Such estimates are subsequently
revised as deemed necessary when additional information becomes available.

  While the Company does not anticipate that any such adjustment would be
material to its financial statements, it is reasonably possible that future
technological, regulatory or enforcement developments, results of environmental
studies, or other factors could alter this expectation and necessitate the
recording of additional liabilities, which could be material.

  The Company has recorded liabilities for closure and postclosure monitoring
and environmental remediation costs as follows: 

<TABLE>
<CAPTION>
December 31,                                                  1995          1996
--------------------------------------------------------------------------------
<S>                                                        <C>           <C>
Current portion, included in accrued liabilities           $11,357       $ 1,764
Noncurrent portion, included in other long-term 
  liabilities                                                6,677        30,766
                                                           -------       -------
Total environmental liabilities                            $18,034       $32,530
                                                           =======       =======
</TABLE>

  During the remaining life of the active sites, the Company anticipates
providing an additional $1.2 million of closure and postclosure costs.

Contracts in Process

Information with respect to contracts in process at December 31, 1995 and 1996,
is as follows:

<TABLE>
<CAPTION>
December 31,                                                  1995          1996
--------------------------------------------------------------------------------
<S>                                                      <C>           <C>
Costs and estimated earnings on uncompleted contracts    $ 284,748     $ 182,075
Less: billings on uncompleted contracts                   (272,369)     (187,637)
                                                         ---------     ---------
Total contracts in process                               $  12,379     $  (5,562)
                                                         =========     =========
</TABLE> 

  Contracts in process are included in the Consolidated Balance Sheets under the
following captions:

<TABLE> 
<CAPTION> 
December 31,                                                  1995          1996
--------------------------------------------------------------------------------
<S>                                                       <C>           <C>
Costs and earnings in excess of billings                  $ 25,429      $ 10,632
Advance payments on contracts                              (13,050)      (16,194)
                                                          --------      --------
Total contracts in process                                $ 12,379      $ (5,562)
                                                          ========      ========
</TABLE>

  All contracts in process are expected to be billed and collected within four
years. Accounts receivable includes retainage that has been billed but is not
due pursuant to contract provisions until completion. Such retainage at December
31, 1996, is $5.3 million, including $1.3 million that is expected to be
collected after one year. At December 31, 1995, retainage was $10.4 million.

                                                                              17
<PAGE>


Wheelabrator Technologies Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
--------------------------------------------------------------------------------
Earnings per Common and Common Equivalent Share

Earnings per common and common equivalent share is calculated by dividing net
income by the weighted average number of shares outstanding, including the
effect of common stock equivalents determined using the treasury stock method.
Common stock equivalents consist of unexercised stock options. The treasury
stock method assumes that options with an exercise price below the average
market price for the period are exercised at the beginning of the period and the
proceeds from the exercise of such options are used to repurchase common stock.

  The following table reconciles the number of common shares shown as
outstanding in the Consolidated Balance Sheets with the number of common shares
used in computing earnings per share:

<TABLE>
<CAPTION>
Years Ended December 31,                                       1995         1996
--------------------------------------------------------------------------------
<S>                                                         <C>          <C>
Common shares issued, net of treasury stock per
  Consolidated Balance Sheets                               179,433      161,451
Effect of shares issuable under stock options after 
  applying the "treasury stock" method                          643          522
Effect of using weighted average common shares
  outstanding during the year                                 4,924        7,427
                                                            -------      -------
Common shares used in computing earnings per share          185,000      169,400
                                                            =======      =======
</TABLE>

Accounting Pronouncements

Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." The adoption of FAS 121 did not
have a material impact on its financial statements since Wheelabrator's
accounting was substantially in compliance with the new standard.

  Also during 1996, FAS No. 123, "Accounting for Stock-Based Compensation,"
became effective. FAS 123 provides an optional new method of accounting for
employee stock options and expands required disclosure about stock options. If
the optional method of determining compensation cost is not adopted, disclosure
is to be made, if material, of pro forma net income and earnings per share as if
it were. The impact on net income and earnings per share of applying the
optional new method was immaterial, and the Company has elected not to adopt the
optional new accounting methodology.

  In October 1996, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
96-1, "Environmental Remediation Liabilities," which is effective beginning in
1997. The SOP provides that environmental remediation liabilities should be
accrued when the criteria of FAS No. 5, "Accounting for Contingencies," are met.
Included in the SOP are benchmarks to aid in the determination of when such
criteria are met and when environmental remediation liabilities should be
recognized. The SOP provides that an accrual for environmental liabilities
should include costs of compensation and benefits for employees expected to
devote a significant amount of time directly to the remediation effort.
Wheelabrator does not believe the adoption of SOP 96-1 will have a material
impact on its financial statements since its current accounting is in
substantial compliance with the new standard.

Reclassification

Certain prior period amounts have been reclassified to conform with the current
year presentation.

--------------------------------------------------------------------------------
NOTE 3    CAPITAL TRANSACTIONS, ACQUISITIONS, AND DIVESTITURES

WM International

Wheelabrator owns approximately 12 percent of WM International, a WMX subsidiary
that owns substantially all of WMX's waste management services operations
outside of North America. The investment is accounted for using the equity
method due to the significance, through WMX, of Wheelabrator's influence over WM
International. As of December 31, 1996, WM International was owned approximately
12 percent by Wheelabrator, 12 percent by Rust, 56 percent by WMX, and 20
percent by the public.

  During 1994, 1995, and 1996, respectively, Wheelabrator recorded equity in net
income (loss) of WM International of $15.2 million, $(5.1) million, and $(15.5)
million. The Company's equity income was reduced by $25.6 million during the
fourth quarter of 1995 for its share of a largely noncash special charge
recorded by WM International related to actions taken to sell or otherwise
dispose of noncore businesses and investments, as well as core businesses and
investments in low potential markets, to abandon certain hazardous waste
treatment and processing facilities, and to streamline its country management
organization. During the fourth quarter of 1996, as a further refinement of its
core business focus that began in 1995, WM International announced plans to sell
its investment in Wessex Water Plc and recognized a provision for loss on the
sale. In addition, WM International recorded a charge to revalue its investments
in several European countries. Wheelabrator's share of these charges, including
the Company's equity in the portion recognized by Rust, totaled $43.3 million.
In addition, the Company recorded a $4.6 million deferred tax liability related
to passive foreign income associated with the Wessex sale. Wheelabrator's
investment in WM International totaled approximately $228.7 million and $216.8
million as of December 31, 1995 and 1996, respectively. As of December 31, 1996,
the book value of the Company's WM International investment exceeded its market
value by approximately $40 million, which management believes is a temporary
situation.

  A summary of certain financial information for WM International follows:

<TABLE>
<CAPTION>
December 31,                                             1995              1996
-------------------------------------------------------------------------------
<S>                              <C>               <C>               <C>
Current assets                                     $  859,591        $  924,975
Noncurrent assets                                   3,375,998         3,200,235
Current liabilities                                 1,077,746         1,061,048
Noncurrent liabilities                                893,717           838,012
Minority interest                                     357,934           418,596
                                                                   
                                                                   
Years ended December 31,               1994              1995              1996
-------------------------------------------------------------------------------
Revenue                          $1,710,862        $1,865,081        $1,913,793
Gross profit                        466,265           260,206           272,248
Net income (loss)                   126,753           (42,112)         (128,771)
</TABLE>

18
<PAGE>


--------------------------------------------------------------------------------
Rust

Wheelabrator owns approximately 40 percent of Rust, a provider of environmental
and infrastructure consulting services and other on-site industrial services.
The remaining 60 percent of Rust is owned directly or indirectly by WMX. During
1994, 1995, and 1996, Wheelabrator recorded equity in loss from continuing
operations of Rust of $(0.5) million, $(3.9) million, and $(12.6) million,
respectively. Wheelabrator's investment in Rust totaled approximately $373.1
million and $252.0 million as of December 31, 1995 and 1996.

  A summary of certain financial information for Rust follows:

<TABLE>
<CAPTION>
December 31,                                              1995              1996
--------------------------------------------------------------------------------
<S>                                                 <C>                 <C>
Current assets                                      $   57,405          $249,487
Noncurrent assets/(1)/                               1,288,823           986,780
Current liabilities                                     41,167           262,659
Noncurrent liabilities                                 360,087           302,836
</TABLE>

(1) 1995 and 1996 noncurrent assets include approximately $400.0 million and
    $99.8 million, respectively, of net assets held for sale.


<TABLE>
<CAPTION>
Years Ended December 31,                1994             1995              1996
-------------------------------------------------------------------------------
<S>                                 <C>              <C>              <C>
Revenue                             $527,683         $378,069         $ 262,479
Gross profit                          75,489           61,179            32,856
Income (loss) from
  continuing operations                6,530           (9,658)          (31,500)
Net income (loss)                     55,587          (35,213)         (308,938)
</TABLE>

Discontinued Operations

During the fourth quarter of 1995, Rust announced that it would sell or
discontinue its process engineering, construction, specialty contracting and
similar lines of business. In 1996, Rust sold the engineering and construction
business, as well as its industrial scaffolding business, and announced that it
also planned to divest its remaining domestic and international environmental
and infrastructure engineering and consulting businesses. Accordingly,
Wheelabrator has reported its 40 percent equity interest in the historical
operating results of these businesses and the provisions for losses on their
disposal separately from continuing operations.

  The provision for loss on disposal of the businesses discontinued in the
fourth quarter of 1996 includes management's best estimates of the amounts
expected to be realized on the sale of these businesses. The amounts Rust will
ultimately realize could differ materially in the near-term from the amounts
estimated in arriving at the provision for loss.

  During 1996, Wheelabrator undertook a review of its strategic options for its
water businesses. The study concluded that, given the multiples being paid for
water companies in the marketplace, the best strategy was to sell the
businesses. Consequently, negotiations were begun that led to the November sale
of Wheelabrator's equipment manufacturing and process systems businesses,
including substantially all of the Company's foreign operations and also certain
air pollution control units, to United States Filter Corporation ("U.S. Filter")
for $369.6 million in cash. These negotiations also led to a definitive
agreement with U.S. Filter in early 1997 to sell the Company's water and
wastewater facility operations and privatization business for $77.4 million
worth of U.S. Filter common stock. The second and final stage of the Water
Business divestiture is expected to close in the second quarter of 1997. The
discontinued businesses have been segregated and the accompanying consolidated
balance sheets, statements of income and related footnote information have been
restated. Wheelabrator expects to realize a gain on the Water Business
divestiture that will be recognized upon its completion.

  In connection with these transactions, Wheelabrator has accrued $25.0 million
pursuant to a Business Development Agreement between Wheelabrator and U.S.
Filter. In accordance with the agreement, Wheelabrator will pay U.S. Filter $5.0
million each year through 2001. In return, U.S. Filter will promote municipal
biosolids, energy plant services and waste-to-energy development opportunities
for Wheelabrator at the facilities of U.S. Filter's customers and to U.S.
Filter's customer base.

  Revenues of the discontinued businesses were $397.7 million in 1994, $495.6
million in 1995, and $447.4 million in 1996. Following is a summary of the
assets and liabilities as of December 31, 1995 and 1996, which are reflected in
the Consolidated Balance Sheets as net assets of discontinued operations.

<TABLE>
<CAPTION>
December 31,                                             1995              1996
-------------------------------------------------------------------------------
<S>                                                 <C>                 <C>
Current assets                                      $ 206,143           $21,161
Noncurrent assets                                     230,530            40,176
Current liabilities                                  (140,264)           (6,367)
Noncurrent liabilities                                (10,022)             (194)
                                                    ---------           -------
Net assets of discontinued operations               $ 286,387           $54,776
                                                    =========           =======
</TABLE>

  At December 31, 1995, current assets consisted primarily of accounts
receivable, costs and earnings in excess of billings, and inventories.
Noncurrent assets consisted of property, plant, and equipment and goodwill.
Liabilities consisted primarily of accounts payable, accrued liabilities and
advance payments on contracts. At December 31, 1996, current assets consisted
primarily of accounts receivable. Noncurrent assets consisted primarily of
property, plant, and equipment. Liabilities consisted primarily of accounts
payable and accrued liabilities.

  The Company has reorganized and streamlined its operating structure in
conjunction with the Water Business divestiture. The biosolids pelletizer
facilities, which have long-term contractual obligations, operating
characteristics, customers, and capital requirements similar to trash-to-energy
facilities, have been integrated into the Company's energy plant operating
organization. In light of this reorganization and the sale of the Water
Business, the Company will now report its operating results in one industry
segment. Wheelabrator's biosolids land application and air pollution control
businesses, which are not significant, will also be included in this segment.
Results from prior years, during which the Company reported its results in two
industry segments, Clean Energy and Clean Water, have been restated to conform
to the current presentation.

Acquisitions

In 1994, in exchange for approximately 156 thousand shares of Wheelabrator
common stock and $25.8 million of cash, the Company acquired wastewater
treatment operating contracts and nine businesses engaged in providing air and
water quality-related environmental products and services and in manufacturing
surface finishing equipment. In 1995, Wheelabrator completed the privatization
of the Miami Conservancy District wastewater treatment plant located in
Franklin, Ohio, and also acquired a Taiwanese company engaged in the design and
engineering of water treatment equipment. The total cost of these 1995
acquisitions was $12.6 million, net of cash acquired. During 1996, Wheelabrator
acquired wastewater treatment operating contracts and two industrial
cogeneration facilities in California for approximately $36.0 million in cash
and the assumption of $2.5 million in debt. The Company utilizes the purchase
method of accounting,

                                                                              19
<PAGE>


Wheelabrator Technologies Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
--------------------------------------------------------------------------------
and the purchase price of the foregoing acquisitions has been allocated to their
respective net assets based upon estimated fair market values. The results of
operations of acquired entities have been included in Wheelabrator's financial
statements from their respective dates of acquisition. Also during 1996, the
Company acquired a 20 percent interest in Glegg Industries ("Glegg"), a
privately held ultrapure water company, for $15.4 million. In conjunction with
the Water Business divestiture, Glegg's majority owners acquired the right to
repurchase Wheelabrator's interest before March 31, 1999, at the Company's
original purchase price. Accordingly, this investment is now being accounted for
using the cost method of accounting. The pro forma effect of the acquisitions
made during 1994, 1995, and 1996 is not material.

--------------------------------------------------------------------------------
NOTE 4    INCOME TAXES

A summary of the Company's income tax provisions from continuing operations is
given below.

Income Tax Provision (Benefit)

<TABLE> 
<CAPTION> 
Years Ended December 31,                      1994          1995           1996
-------------------------------------------------------------------------------
<S>                                        <C>           <C>           <C> 
Current tax expense:                                                 
 U.S. Federal                              $35,448       $22,457       $ 17,785
 State and local                            13,168         9,254         13,574
                                           -------       -------       --------
 Total current                              48,616        31,711         31,359
                                           -------       -------       --------
Deferred tax expense:                                                
 U.S. Federal                               41,487        50,037         64,840
 State and local                             4,441        10,109          6,528
                                           -------       -------       --------
 Total deferred                             45,928        60,146         71,368
                                           -------       -------       --------
U.S. Federal benefit from amortization                               
 of deferred investment credit                (779)         (779)          (779)
                                           -------       -------       --------
Total provision                            $93,765       $91,078       $101,948
                                           =======       =======       ========
</TABLE>

  The principal items accounting for the difference in income taxes computed at
the U.S. statutory rates and as recorded are as follows:

<TABLE>
<CAPTION>
Years Ended December 31,                      1994          1995           1996
------------------------------------------------------------------------------- 
<S>                                           <C>           <C>            <C>
Statutory federal income tax rate             35.0%         35.0%          35.0%
State income taxes after federal income                                              
 tax benefit                                   4.7           5.6            6.2
Equity income                                 (2.1)          1.4            4.6
U.S. tax on foreign income                     0.9            --            2.2
Other, net                                    (0.1)         (1.6)           0.2
                                              -----         ----           ----
Effective tax rate                            38.4%         40.4%          48.2%
                                              =====         ====           ====
</TABLE> 

  The principal items that comprise the 1995 and 1996 deferred tax (assets) and
liabilities are as follows:

<TABLE> 
<CAPTION> 
December 31,                                                1995           1996
-------------------------------------------------------------------------------
<S>                                                    <C>            <C> 
Reserves not deductible until paid                     $ (91,984)     $ (91,074)
Deferred income                                          (22,859)       (14,907)
Basis difference in investments and capital loss                  
 carryforwards                                            (8,579)        (6,000)
Alternative minimum tax credit carryforwards             (24,581)            --
State net operating loss carryforwards                   (13,435)       (13,061)
Other                                                         --         (3,024)
Less: valuation allowance                                 10,952          7,584
                                                       ---------      ---------
 Subtotal                                               (150,486)      (120,482)
                                                       ---------      ---------
Property, plant, and equipment                           503,306        506,650
Deferred expenses                                         20,554         29,881
Nondeductible prepaid expenses                            11,817         10,305
Other                                                     15,698         19,228
                                                       ---------      ---------
 Subtotal                                                551,375        566,064
                                                       ---------      ---------
Net deferred tax liability                             $ 400,889      $ 445,582
                                                       =========      =========
</TABLE>

  During 1996, the Company recognized the benefit of all the alternative minimum
tax credit carryforwards available. The Company has capital loss carryforwards
of approximately $13.7 million with an expiration date of 1998. Also, various
subsidiaries have state operating loss carryforwards of approximately $316
million with expiration dates through the year 2011. Valuation allowances have
been established due to the uncertainty of ultimately realizing the tax benefit
of certain state net operating loss carryforwards and the tax benefits
attributed to basis differences in certain investments. While the Company
expects to realize the deferred tax assets in excess of the valuation
allowances, changes in estimates of future taxable income or tax laws could
alter this expectation. During 1995 and 1996, the valuation allowance decreased
$5.0 million and $3.4 million, respectively, due primarily to the realization of
capital loss carryforwards.

--------------------------------------------------------------------------------
NOTE 5    COMMON STOCK

As of December 31, 1996, 104.6 million shares of the Company's common stock were
held by WMX or its subsidiaries. Under certain circumstances, WMX has options to
purchase at fair market value newly issued shares of Wheelabrator common stock.
WMX also has certain registration rights until August 24, 1999, with respect to
certain of the Wheelabrator common stock it holds.

  During 1995 and 1996, the Company repurchased 7.2 million and 19.1 million
shares of its common stock for an aggregate cost of $104.2 million and $306.0
million, respectively. The Company is authorized to repurchase an additional
30.0 million shares of its common stock through mid-August, 1998 on the open
market or in privately negotiated or other transactions. The Company declared
and paid cash dividends totaling $0.10, $0.11, and $0.12 per common share during
1994, 1995, and 1996, respectively.

20
<PAGE>
 
--------------------------------------------------------------------------------
NOTE 6 Long-Term Debt and Lease Commitments

Long-term debt is as follows:
<TABLE> 
<CAPTION> 
December 31,                                       1995               1996
--------------------------------------------------------------------------------
<S>                                              <C>                <C>
Industrial development revenue bonds
 due 1997 to 2016 at rates of 3.95%-9.25%        $666,678           $775,146
Private placement bonds
 due 2008 at a rate of 10.64%                      20,000             20,000
Project financing from commercial
 bank due 1997 to 2000 at a rate of
 0.325% above LIBOR (an aggregate
 of 5.855% at December 31, 1996)                   28,641             23,347
Secured notes payable related to
 coal-handling facilities due 1997
 to 1999 at rates of 9.0%-9.875%                   20,327             15,247
Other nonproject debt due 1997
 to 2008 at rates of 9.5%-10.0%                       208              2,245
                                                 --------           --------
                                                  735,854            835,985
Less: current portion                              31,999             35,832
                                                 --------           --------
Total long-term debt                             $703,855           $800,153
                                                 ========           ========
</TABLE>
  At December 31, 1996, the Company's long-term project debt was collateralized
by property, plant, and equipment with a net book value of $766.7 million and
$108.0 million of investments held by trustees. Investments held by trustees
typically represent proceeds of long-term debt related to trash-to-energy and
independent power projects. These amounts generally consist of reserve funds
maintained pursuant to project financing agreement requirements. The
investments, which are included in other assets in the Consolidated Balance
Sheets, are held in trust and use by the Company is restricted. Also included
within other assets are deferred financing costs, which are amortized over the
term of the related debt using a straight-line method that approximates the
interest method.

  Financing for certain trash-to-energy facilities currently operated by the
Company has been provided through sale and leaseback transactions arranged in
previous years. The leases are classified as operating leases, with lease
expense recognized on a straight-line basis over the base and bargain renewal
periods of each agreement. Timing differences between lease payments and
financial statement lease expense are included in other assets in the
Consolidated Balance Sheets. Gains realized on the sale transactions are
included in deferred income in the Consolidated Balance Sheets and are amortized
on a straight-line basis over the terms of the respective leases.

  Principal payments on long-term debt and noncancelable operating lease
payments for operating and office facilities at December 31, 1996, are due as
follows:
<TABLE>
<CAPTION> 
                                                Long-term Debt  Operating Leases
--------------------------------------------------------------------------------
<S>                                               <C>               <C>
1997                                              $ 35,832          $ 86,618
1998                                                45,736            86,812
1999                                                45,902            89,437
2000                                                45,046            89,801
2001                                                46,466            85,362
Thereafter                                         617,003           561,120
                                                  --------          --------
Total                                             $835,985          $999,150
                                                  ========          ========
</TABLE>
  Total rent expense of continuing operations was $74.1 million, $72.0 million,
and $74.3 million for the years ended December 31, 1994, 1995 and 1996,
respectively.

  The Company has directly or indirectly guaranteed the payment of debt
obligations at certain of its leased or owned facilities (see Note 9). These
guarantees contain various covenants, the most restrictive of which require the
maintenance of specified levels of tangible net worth. The Company is in
compliance with these covenants as of December 31, 1996.

  Resco Holdings Inc. ("Resco"), a wholly-owned subsidiary of Wheelabrator, and
AlliedSignal Inc. ("AlliedSignal") are parties to an agreement that provides for
specific credit support by AlliedSignal for certain of Resco's trash-to-energy
project subsidiaries. Under the agreement, AlliedSignal may require Resco to
refinance, without AlliedSignal credit support, indebtedness of supported trash-
to-energy projects if it is economical (as defined in the agreement) to do so.
Resco and certain of its subsidiaries have agreed to reimburse AlliedSignal for
all amounts that may be paid by it under the agreement or various related credit
support obligations. No support payments have been made by AlliedSignal as of
December 31, 1996.

  Resco owns substantially all of the net operating assets of the Company except
certain net assets consisting principally of cash and investments, and is
required to maintain a minimum level of tangible net worth ($549.8 million as of
December 31, 1996). As of December 31, 1996, Resco was in compliance with this
provision. Resco has agreed not to declare or pay any cash dividends to the
Company at any time Resco's tangible net worth is less than the required amount.
The Company has the ability to pay cash dividends using assets other than those
restricted within Resco.

                                                                              21
<PAGE>

Wheelabrator Technologies Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)
--------------------------------------------------------------------------------
NOTE 7 Stock and Benefit Plans

Stock Option Plans
Wheelabrator's stock option plans provide for the grant to key employees of
nonqualified options to purchase shares of the Company's common stock at a price
equal to the fair market value at the time of grant. Outstanding options
generally have a term of seven years from the date of the grant and expire at
various dates through April 1, 2003. Stock options granted generally vest over a
three-year period in equal annual installments beginning one year after the
grant date. The Company applies APB Opinion 25 and related accounting
interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for its plans. However, when nonqualified options
are exercised, the Company receives a federal income tax deduction equal to the
market value of the shares at exercise less the exercise price. The associated
tax savings are credited to capital in excess of par value. Had compensation
cost for these plans been determined based on the fair value at the grant date
under the optional method prescribed by FAS 123, the impact on the Company's net
income and earnings per share would have been immaterial. Based on current and
anticipated use of stock options, it is expected that the impact of the pro
forma provisions of FAS 123 will be immaterial in future years.

  A summary of the status of the Company's stock option plans as of December 31,
1994, 1995, and 1996, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
                                                                      1994                     1995                     1996
                                                              --------------------      -------------------      ------------------
                                                                          Weighted                 Weighted                Weighted
                                                                           Average                  Average                 Average
                                                                          Exercise                 Exercise                Exercise
                                                              Shares         Price      Shares        Price       Shares      Price
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>          <C>          <C>         <C>          <C>         <C>
Outstanding at
 beginning of year                                             5,046        $12.43       5,147       $13.65        5,871      $13.67
Granted                                                          815         19.13       1,283        13.63        1,157       16.50
Exercised                                                       (593)         9.78        (341)       10.57       (1,156)      11.85
Canceled:                                                                                                         
 Predecessor plans                                               (23)        11.90          (6)       11.90          (16)      11.90
 Current plans                                                   (98)        16.52        (212)       18.34         (268)      16.64
                                                               -----                     -----                    ------            
Outstanding at end of year                                     5,147         13.65       5,871        13.67        5,588       14.48
                                                               =====                     =====                    ======            
Options exercisable at year-end                                3,474         11.27       3,915        12.65        3,784       13.72
                                                               =====                     =====                    ======            
Options available for future grant                             4,370                     3,299                     2,410
                                                               =====                     =====                    ======
</TABLE> 
  The following table summarizes information about stock options outstanding and
exercisable as of December 31, 1996:
<TABLE> 
<CAPTION> 
                                                                             Options Outstanding                 Options Exercisable
                                                                    ----------------------------------------     -------------------

                                                                                      Weighted
                                                                                       Average      Weighted                Weighted
Range of                                                                             Remaining       Average                 Average
Exercise                                                                           Contractual      Exercise                Exercise
Prices                                                              Shares     Life (in Years)         Price     Shares        Price
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                   <C>        <C>         <C>         <C>  
$ 3.87                                                                  31                 0.9        $ 3.87         31       $ 3.87
$ 6.58 - $ 9.24                                                      1,274                 2.8          8.30      1,274         8.29
$11.90 - $17.69                                                      3,079                 4.5         15.08      1,494        14.47
$18.33 - $20.65                                                      1,204                 3.9         19.76        985        19.91
                                                                     -----                                       -----             
$ 3.87 - $20.65                                                      5,588                 4.0         14.48      3,784        13.72
                                                                     =====                                       =====
</TABLE> 
Savings and Retirement Plan
Substantially all employees are participants in the Wheelabrator-Rust Savings
and Retirement Plan, which is a qualified defined contribution plan consisting
of a savings account component (the "Savings Account") and a retirement account
component (the "Retirement Account"). Under the terms of the Savings Account,
eligible employees of the Company may elect to contribute a portion of their
annual compensation not to exceed 16 percent. The Company is required to match a
minimum of 30 percent of the first six percent of eligible compensation
contributed by an employee. Under the terms of the Retirement Account, eligible
employees of the Company receive an annual contribution equal to a minimum of
three percent of their eligible earnings. Employees vest in Company
contributions and the associated earnings in the Savings Account at 20 percent
per year and in the Retirement Account after five years. Wheelabrator's
contributions to such plans during 1994, 1995, and 1996 amounted to
approximately $5.1 million, $5.3 million, and $5.6 million, respectively.

Postretirement Benefits Other Than Pensions
The Company provides certain postretirement benefits other than pensions, which
are primarily health care benefits offered to a limited number of former
employees of the manufacturing businesses sold to U.S. Filter. Pursuant to the
purchase and sale agreement, the Company retained the liability for these
benefits. The majority of the Company's active employees will not receive
postretirement benefits other than pensions. During the fourth quarter of 1995,
the Company settled litigation with a group of retirees regarding their level of
future benefits. As a result, the accumulated postretirement benefit obligation
for retiree health care plans was reduced by approximately $3.6 million.

22
<PAGE>

--------------------------------------------------------------------------------
  Details of the plans' expense recognized in the Consolidated Statements of
Income are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,                                1994     1995     1996
--------------------------------------------------------------------------------
<S>                                                    <C>      <C>      <C>
Service cost                                           $   59   $   64   $   83
Interest cost                                           2,590    3,155    2,777
Net amortization                                          (43)     (55)     (51)
                                                       ------   ------   ------
Total expense                                          $2,606   $3,164   $2,809
                                                       ======   ======   ======
</TABLE>
  The following sets forth the plans' funded status reconciled with amounts
reported in the Company's Consolidated Balance Sheets:
<TABLE>
<CAPTION>
December 31,                                                    1995     1996
--------------------------------------------------------------------------------
<S>                                                            <C>      <C>
Accumulated postretirement       
  benefit obligation (APBO):                                    
Retirees                                                       $36,794  $36,155
Fully eligible active plan participants                            467    1,224
Other active plan participants                                     432       --
                                                               -------  -------
Total APBO                                                      37,693   37,379
Unrecognized:                                                  
  Prior service cost                                               566      239
  Gain                                                           1,844    2,783
                                                               -------  -------
Accrued postretirement benefit liability                       $40,103  $40,401
                                                               =======  =======
</TABLE>

  For measurement purposes, a 7.5 percent annual rate of increase in the per
capita cost of covered health care claims was assumed for 1997, decreasing by
0.5 percent annually to 6.0 percent in 2000 and remaining at that level
thereafter. Increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1996, by approximately $3.4 million and
increase the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for 1996 by $0.3 million. The weighted
average discount rate used in determining the accumulated postretirement benefit
obligation was 7.75 percent in 1995 and 1996 based on expected payout patterns.
 
NOTE 8 ADDITIONAL FINANCIAL INFORMATION

Activity relating to the allowance for doubtful accounts follows:
<TABLE>
<CAPTION>
December 31,                                          1994      1995      1996
--------------------------------------------------------------------------------
<S>                                                 <C>       <C>       <C>
Balance at beginning of year                        $ 4,053   $ 5,682   $ 7,754
Provision                                             1,441     3,971     1,531
Less: write-offs                                     (1,078)     (350)   (3,973)
Other, net                                            1,266    (1,549)     (218)
                                                    -------   -------   -------
Balance at end of year                              $ 5,682   $ 7,754   $ 5,094
                                                    =======   =======   =======
</TABLE>
  Included in other current assets are spare parts and supplies of $29.9 million
and $31.0 million as of December 31, 1995 and 1996, respectively.
  The following is a summary of property, plant, and equipment:
<TABLE>
<CAPTION>
December 31,                                               1995         1996
--------------------------------------------------------------------------------
<S>                                                     <C>          <C>
Land                                                    $  116,629   $  116,784
Land options                                               261,703      261,703
Machinery and equipment                                  1,249,253    1,293,896
Buildings and improvements                                 278,958      282,158
Construction-in-progress                                     6,699       32,414
Less: accumulated depreciation                            (346,488)    (425,030)
                                                        ----------   ----------
Net property, plant,             
 and equipment                                          $1,566,754   $1,561,925
                                                        ==========   ==========
</TABLE>
  Depreciation of property, plant, and equipment included in continuing
operations for the years ended December 31, 1994, 1995, and 1996 was $76.4
million, $83.1 million, and $81.3 million, respectively.
  The following is a summary of accrued liabilities:
<TABLE>
<CAPTION>
December 31,                                                   1995      1996
--------------------------------------------------------------------------------
<S>                                                          <C>       <C>
Wages, salaries, and benefits                                $ 17,015  $ 23,465
Interest and lease expense                                     44,534    42,573
Warranties and contract reserves                                6,890    14,742
Income taxes payable/(1)/                                          --    73,030
Accrued property and               
 other taxes payable                                           10,112    18,089
Other                                                          57,594    64,527
                                                             --------  --------
Total accrued liabilities                                    $136,145  $236,426
                                                             ========  ========
</TABLE>
(1)  The increase in income taxes payable at December 31, 1996, is primarily
     attributable to the Water Business sale.

                                                                              23
<PAGE>

Wheelabrator Technologies Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
NOTE 9 COMMITMENTS AND CONTINGENCIES

The Company has issued or is a party to 290 bank letters of credit, performance
bonds, and other guarantees. Such financial instruments (averaging $2.1 million
each) are given in the ordinary course of business.

  In May 1994, the U.S. Supreme Court ruled that state and local governments may
not constitutionally restrict the free movement of trash in interstate commerce
through the use of flow control laws. Such laws typically involve a municipality
specifying the disposal site for all solid waste generated within its borders.
Since the ruling, several decisions of state or federal courts have invalidated
regulatory flow control schemes in a number of jurisdictions. Other judicial
decisions have upheld nonregulatory means by which municipalities may
effectively control the flow of municipal solid waste. The Company's Gloucester
County, New Jersey, facility relies on a disposal franchise for substantially
all of its supply of municipal solid waste. In July 1996, a Federal District
Court permanently enjoined the State of New Jersey from enforcing its solid
waste regulatory flow control system, which was held to be unconstitutional, but
stayed the injunction for as long as its ruling is on appeal plus an additional
period of two years to enable the State to devise an alternative
nondiscriminatory approach. The State has indicated that it will continue to
enforce flow control during the two-year transition period and has filed an
appeal of the Federal District Court's ruling. The New Jersey legislature is now
considering a bill to authorize counties and authorities, including the
Gloucester County Improvement Authority, to implement a constitutionally
permissible system of "economic flow control" designed to recover waste disposal
costs incurred in reliance on the State's franchise system. In addition,
plaintiffs have asked the Third Circuit Court of Appeals to shorten the stay
period. A decision by the appeals court is expected during the second quarter of
1997.

  The Supreme Court's 1994 ruling and subsequent court decisions have not to
date had a material adverse effect on any of the Company's trash-to-energy
operations. Federal legislation has been proposed, but not yet enacted, to
effectively grandfather existing flow control mandates. In the event that such
legislation is not adopted, the Company believes that affected municipalities
will endeavor to implement alternative lawful means to continue controlling the
flow of waste. In view of the uncertain state of the law at this time, however,
the Company is unable to predict whether such efforts would be successful or
what impact, if any, this matter might have on its trash-to-energy facilities.

  Within the next several years, the air pollution control systems at certain
trash-to-energy facilities owned or leased by Wheelabrator most likely will be
required to be modified to comply with more stringent air pollution control
standards (the "MACT Standards") adopted by the EPA in December 1995 for
Municipal Waste Combusters ("MWCs"). The compliance dates will vary by facility,
but subject to the final decision in the case of Davis County vs. EPA, all
affected facilities most likely will be required to be in compliance with the
new rules by the end of the year 2000. The Davis County vs. EPA case involves
the methodology the EPA used to set the MACT Standards, and its outcome could
delay implementation deadlines by an estimated six to eighteen months. Currently
available technologies will be adequate to meet the new standards. Although the
total expenditures required for such modifications are estimated to be in the
$190-$230 million range, they are not expected to have a material adverse effect
on the Company's liquidity or results of operations because provisions in the
impacted facilities' long-term waste supply agreements generally allow the
Company to recover from customers the majority of incremental capital and
operating costs.

  As the states and the U.S. Congress have accelerated their consideration of
ways in which economic efficiencies can be gained by deregulating the electric
generation industry, some have argued that over-market power sales agreements
entered into pursuant to the Public Utilities Regulatory Policies Act of 1978
("PURPA") should be voidable as "stranded assets." The Company's 25 power
production facilities are qualifying facilities under PURPA and depend on the
sanctity of their power sales agreements for their economic viability. Recent
state and federal agency and court decisions have unanimously upheld the
inviolate nature of these contracts. While the Company believes that federal law
offers strong protections to its PURPA contracts, there is a risk that future
court decisions and/or legislative initiatives in this area will have a material
and adverse effect on the business of the Company.

  There are various lawsuits and claims pending against Wheelabrator that have
arisen in the normal course of Wheelabrator's business and relate mainly to
matters of environmental and product liability, personal injury, and property
damage. The outcome of these matters is not presently determinable, but in the
opinion of management, based on the advice of counsel, the ultimate resolution
of these matters will not have a material adverse effect on the financial
condition or results of operations of the Company. It is reasonably possible,
however, that a change in the Company's estimate of its probable liability with
respect to these matters could occur in the near-term.

  The Company is self-insured for general liability claims up to $2.0 million
per occurrence. Liability insurance in effect during the last several years
provides coverage for environmental matters only to a limited extent.

24
<PAGE>

--------------------------------------------------------------------------------
NOTE 10 Selected Quarterly Financial Information (Unaudited)/(1)/
<TABLE> 
<CAPTION> 

                                                          First          Second          Third           Fourth          Full Year
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>            <C>             <C>                 <C>
1995
Revenue                                                $258,482        $238,021       $232,747        $ 226,838           $956,088
Operating expenses                                      174,271         153,544        147,987          143,601            619,403
Income from continuing operations/(2)/                   37,854          43,108         42,422           10,899            134,283
Net income (loss)                                        43,676          52,968         51,376          (10,162)           137,858
Weighted average common and                                                                                             
 common equivalent shares outstanding                   186,400         185,300        185,500          182,500            185,000
Earnings (loss) per common and                                                                                          
 common equivalent shares/(3)/:                                                                                           
  Income from continuing operations                    $   0.20        $   0.23       $   0.23        $    0.06           $   0.73
  Net income (loss)                                        0.23            0.29           0.28            (0.06)              0.75
Market price:                                                                                                           
 High                                                    17 1/2          15 3/4             17           16 3/4             17 1/2
 Low                                                     12 1/2          13 5/8         14 1/4               14             12 1/2
                                                                                                                        
1996                                                                                                                    
Revenue                                                $219,470        $244,436       $242,683        $ 245,723           $952,312
Operating expenses                                      141,469         157,426        155,745          164,139            618,779
Income (loss) from continuing operations/(2/)            36,750          45,809         44,807          (17,912)           109,454
Net income (loss)                                        40,570          49,801         48,075         (131,948)             6,498
Weighted average common and                                                                                             
 common equivalent shares outstanding                   179,600         172,400        162,000          162,000            169,400
Earnings (loss) per common and                                                                                          
 common equivalent shares/(3)/:                                                                                           
  Income (loss) from continuing operations             $   0.21        $   0.27       $   0.28        $   (0.11)          $   0.65
  Net income (loss)                                        0.23            0.29           0.30            (0.81)              0.04
Market price:                                                          
 High                                                    17 1/2          17 1/8         15 1/2           16 3/4             17 1/2
 Low                                                     14 3/4          14 3/4         13 7/8           14 3/4             13 7/8
</TABLE>
(1)  Previously reported numbers have been restated for the discontinued
     operations.
(2)  Fourth quarters of 1995 and 1996 reduced by $25.6 million and $43.3
     million, respectively, related to special charges recorded by WM
     International.
(3)  The sum of earnings per common and common equivalent share for the four
     quarters may not equal the full year number due to the impact of the
     weighted shares outstanding.

                                                                              25
<PAGE>
 
Report of Independent Public Accountants
--------------------------------------------------------------------------------
To the Stockholders of Wheelabrator Technologies Inc.:

We have audited the accompanying consolidated balance sheets of Wheelabrator
Technologies Inc. (a Delaware corporation) and subsidiaries as of December 31,
1995 and 1996, and the related consolidated statements of income, cash flows,
and changes in stockholders' equity for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

  In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wheelabrator Technologies Inc.
and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.


/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
New York, New York
January 31, 1997

26