<PAGE>


                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-K

(Mark One)

    [X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities
           Exchange Act of 1934
           (Fee Required)

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

                                      OR

    [ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
           Exchange Act of 1934
           (No Fee Required)

                   FOR THE TRANSITION PERIOD FROM        TO
                                                 --------  -------

                        COMMISSION FILE NUMBER 0-14881

                             WASTE RECOVERY, INC.
            (Exact Name of Registrant as Specified in its Charter)

             TEXAS                                     75-1833498
    (State or Other Jurisdiction of         (I.R.S. Employer Identification No.)
    Incorporation or Organization)

  309 S. PEARL EXPRESSWAY, DALLAS, TX                     75201
  (Address of Principal Executive Offices)              (Zip Code)

                                   (214) 741-3865
               (Registrant's Telephone Number, Including Area Code)



         Securities Registered Pursuant to Section 12 (b) of the Act:
                                     NONE

         Securities Registered Pursuant to Section 12 (g) of the Act:
                     COMMON STOCK (NO PAR VALUE PER SHARE)
                               (Title of Class)

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. [X]

Number of shares of Registrant's Common Stock, no par value per share,
outstanding as of March 31, 1997:  17,442,621

The approximate aggregate market value of voting stock held by non-affiliates of
the Registrant (based on average of the closing bid and asked price of March 24,
1997) was $21,827,915.  For purposes of this computation, all officers,
directors and 10% beneficial owners are deemed to be affiliates.  Such
determination should not be deemed an admission that such officers, directors or
10% beneficial owners are in fact affiliates of the registrant.

                      DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's Proxy Statement for 1997 Annual Meeting of
Shareholders, to be filed within 120 days of December 31, 1996, are incorporated
by reference in Part III, Items 10, 11, 12 and 13.

<PAGE>

                                    PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
-------------------------------------------------

Certain statements in this Form 10-K under "Item 1. Business", "Item 3. Legal
Proceedings", "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations", and elsewhere in this Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act").  Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance or achievements of Waste
Recovery, Inc. (the "Company" or "Registrant") to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements.  Such factors include, among others, the following: 
general economic and business conditions; competition; success of operating
initiatives; development and operating costs; adverse publicity; changes in
business strategy or development plans; quality of management; availability,
terms and deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs; changes
in, or failure to comply with, government regulations; and other factors
referenced in this Form 10-K.


ITEM 1.  BUSINESS

Special Note:  Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Reform Act.  See "Special
Note Regarding Forward-Looking Statements" for additional factors relating to
such statements.

GENERAL
-------

Waste Recovery, Inc. is a specialized service and process company operating in
the environmental services industry.  The Company is involved in all aspects of
scrap tire disposal and in conversion of scrap tires, through a proprietary
process, into a uniform, high quality, wire-free, tire-derived fuel (TDF).

The Company believes it is the largest firm in the United States specializing in
disposal and recycling of scrap tires into a high quality fuel supplement. 
Presently, the Company has TDF producing facilities operating in Portland,
Oregon; Houston, Texas; Atlanta, Georgia; Philadelphia, Pennsylvania;
Marseilles, Illinois; Dupo, Illinois; and Concord, North Carolina.

The Company was organized in 1982 to acquire the assets of two operations in
Portland, Oregon, one of which had been producing TDF since 1976.  The Houston
facility began producing TDF in 1986, and the Atlanta operation in 1988.  In
March 1995 the Company acquired Domino Salvage, Tire Division, Inc. ("Domino")
and after the addition of specific, proprietary processing equipment, Domino
began producing a quality TDF in late 1995.  The two Illinois facilities became
operational in late 1995 and were originally owned and operated by Waste
Recovery-Illinois (WR-Illinois), a general partnership of which the Company was
a partner.  In December of 1996, WR-Illinois became a wholly-owned subsidiary
upon the Company's acquisition of its partner's interest in the general



                                       2
<PAGE>

partnership (see Part II, Item 5, Purchase of Interest in WR-Illinois).  The
Concord facility was purchased by the Company in December of 1996 and conducts
business as U.S. Tire Recycling Partners, L.P.  The Concord facility operates a
scrap tire monofill and primarily markets processed material for civil
engineering purposes.

The Company has made investments in facilities and developed expertise in the 
areas of tire collection and disposal.  The system is flexible in order to 
serve as a disposal service for scrap tire sources ranging from current scrap 
tire generators, such as tire dealers, all the way to large, sometimes 
long-abandoned, scrap tire piles.  Scrap tire pick-up service must be regular 
and on a time schedule sufficiently predictable in order to minimize the 
storage requirements of the scrap tire generators and to provide continuity 
of supply to TDF users.

The Company uses its tire shredding equipment and handling systems for the
production of a high grade TDF.   In addition to improving systems and
equipment, the Company has worked to make TDF more acceptable as a fuel
supplement.  Generally, the permitting process required before a utility or
other industrial fuel user may start burning TDF depends on many factors, such
as location, fuel volumes and mix, the traditional fuels being supplemented,
types of burners, boilers and fuel handling systems.  The Company uses its
experience in the TDF supplement business to help customers obtain permits and
to equip their facilities to most efficiently use TDF as a fuel supplement.

Waste Recovery pursues an integrated approach to scrap tire disposal and
conversion of scrap tires into TDF and works to increase the total number of TDF
users in order to increase demand for the Company's TDF.  The Company has not
historically had a significant amount of backlog orders for TDF.

The Company's TDF competes against a different mix of traditional fuels and
electric power sources in various regions of the country.  In the Pacific
Northwest, industry is served by hydroelectric systems that provide electric
power at a low enough rate that fossil fuel burning co-generation power systems
are not justified at industrial plants.  Thus, the pulp and paper mills typical
of this region require fuel essentially for the production of heat and steam for
use in their manufacturing process.  Much of this fuel is provided from their
own "Hog Fuel," or wood waste from the logging, debarking and sawing operations.
TDF is a well-suited supplement to this internally generated fuel, especially
during the winter and spring months when waste wood fuel is wet.

In the Southwest, TDF competes primarily with natural gas as a supplemental fuel
in steam generation facilities.  Despite natural gas being relatively
inexpensive in recent years, the Company's business in this region has continued
to grow.  Due to the Baytown plant's location near marine transportation
alternatives and the Company's participation in the Texas Waste Tire Recycling
Program which provides reasonable disposal fees, the Company has been able to
develop TDF markets outside the State of Texas.


In December 1996, the Company concluded the acquisition of U.S. Tire Recycling
Partners, L.P. (U.S. Tire), a large collector and processor of scrap tires in
the Southeast, located in Concord, North Carolina (see Part II, Item 5, Purchase
of U.S. Tire Recycling Partners, L.P.).  U.S. Tire operates a scrap tire
monofill and also processes material for sale into recycled rubber markets. 
During 1997, the Company plans to upgrade this facility's technology and



                                       3
<PAGE>

marketing techniques which should allow it to obtain a larger share of the 
tire-derived product market in the Southeast.  The pulp and paper industries 
in the Southeast typically require a much greater proportion of on-site 
generated power because they generate much more of their own electric power.  
Since the bulk of this power is traditionally coal-based,  TDF is well-suited 
as a competitive energy source in the region, primarily due to the fact that 
TDF's handling and burning characteristics are the closest to coal.  The 
Company's Concord facility will give the Company the opportunity to further 
expand in this market as the facility's processing capabilities are increased 
and improved.

The two Illinois facilities are the first of the Company's plants that are
economically justified due solely to having traditional, coal burning electric
utilities as the primary recipients of the TDF plants' output.  Other industrial
boilers that utilize coal as a primary source of energy have also begun to
review and consider use of TDF as a supplemental fuel.

The Company completed its acquisition of the general partnership interest in 
WR-Illinois held by Riverside Caloric Company (RCC), a wholly-owned 
subsidiary of NIPSCO Industries, Inc., in December of 1996 (see Part II, Item 
5, Purchase of Interest in WR-Illinois).  WR-Illinois was a general 
partnership created to construct and operate two TDF producing facilities in 
Illinois.  The partnership was created after the Company obtained a contract 
to supply a large Illinois electric utility with 60,000 tons of TDF per year. 
WR-Illinois' operations were consolidated beginning December 1, 1996 (see 
notes 1, 2 and 9 of the financial statements of the Company).

OPERATIONS
----------


The Company's seven scrap tire processing plants charged tip fees for the
collection of more than 28 million scrap tires in 1996.  Approximately 60% of
the casings were obtained through the Company's own collection network, which
collects from retail stores or supplies collection trailers to major scrap tire
generators, and through arrangements with tire manufacturers for factory
rejects.  Many of these casings were delivered by independent operators.  The
Company is not dependent on any single supplier for scrap tires.  No one
independent collector or generator accounted for more than 5% of the casings
processed by the Company during 1996.

Scrap tires collected by the Company for a fee are processed into various forms
of tire-derived material, the bulk of which is sold as TDF.  In general, the TDF
production process consists of conveying whole tires to a primary shredder which
cuts them into thin strips.  These strips are processed into a chip form and
then passed through a magnetic separator to remove most of the bead wire and
steel belting.  The resulting product is a chip of rubber compound nominally
less than two inches in any dimension and 98% free of bead wire.  Most of the
processing equipment by which scrap tires are converted into TDF has been
designed or extensively modified by the Company's own technical personnel.  The
Company continually endeavors to improve its process economics and product
quality.  During 1996, the Company installed wire recycling systems at its
Baytown, Texas, Atlanta, Georgia, and Portland, Oregon facilities.  These
systems, designed and constructed by the Company, allow the facilities to
operate waste-free, i.e., there is no waste residue from the manufacturing
process, thus improving profit margins.  These systems were also included in
both of the Company's Illinois facilities when they were constructed in 1995.



                                       4
<PAGE>

Since 1982, the Company has been refining and improving its production process
and has improved tire shredding techniques, equipment durability, and the
process for removal of most of the steel wire in scrap tires.  The Company has
developed proprietary metering devices for use by TDF customers to control the
flow of TDF as a fuel supplement to maximize TDF utilization within each
customer's particular requirements and the framework of existing environmental
constraints.


  Approximate Annual Shredding Capacities (Based on 16 hrs./day, 252 days/yr.):

<TABLE>
<CAPTION>
                                                                         Approximate Utilization
                                                                           Percentage in 1996
                                                                           ------------------
<S>                                             <C>                              <C>
Portland TDF Plant                              6.0 Million PTE's                97%
Houston TDF Plant                               7.0 Million PTE's                34%
Atlanta TDF Plant                               7.0 Million PTE's                54%
Philadelphia TDF Plant                          4.0 Million PTE's                50%
Dupo TDF Plant                                  7.5 Million PTE's                36%
Marseilles TDF Plant                            7.5 Million PTE's                37%
Concord Plant                                   6.0 Million PTE's                94%
      PTE's are Passenger Tire Equivalents
</TABLE>


The Company's production capacity has increased to 45 million PTE's as of
December 31, 1996, from 25 million as of December 31, 1995 and 20 million as of
December 31, 1994.  This increase was obtained through the establishment of the
two new facilities in Illinois and the acquisition of the Philadelphia and
Concord facilities.  Although TDF sales represent a small portion of the
Company's revenues, they provide the primary outlet for the Company's processed
material that supports the Company's growth.  TDF sales accounted for 10%, 7%,
and 9% of total company revenues for 1996, 1995 and 1994, respectively, and wire
sales were 2% for 1996 and 0% for both 1995 and 1994, whereas tipping fees,
hauling and other services accounted for 88%, 93% and 91% of total Company
revenues for 1996, 1995 and 1994, respectively.


SEASONALITY
-----------

Historically, the Company's TDF sales volume has been seasonal in the Pacific
Northwest, with volumes diminishing between June and November of each year when
the major customers in that region, pulp and paper mills, need less fuel
supplementation than in the winter and spring months when their waste wood fuel
is wet.  However, as the Company has expanded with facilities throughout the
country, the impact of seasonal fluctuations in the Pacific Northwest region has
diminished considerably compared to previous years.

The Company believes WR-Illinois' contract with Illinois Power Company for the
sale of 60,000 tons per year of TDF which has a term through July 1, 1999, as
well as growing the Company's client base in the South and Southeast, will help
to dampen seasonal fluctuations over the foreseeable future.  The Company has
also began supplying TDF to additional utility and industrial customers in the
Midwest, further mitigating seasonal fluctuations of TDF sales.



                                       5
<PAGE>

SCRAP-TIRE MARKET
-----------------

The Rubber Manufacturing Association (RMA) estimates that approximately 350
million passenger tire equivalents (PTE's) (equivalent to approximately 255
million tire units) were scrapped in 1996.

As the result of establishing wire recycling systems, the average yield for the
Company in the TDF process increased in 1996 to one ton of product from
approximately 107 PTE's as opposed to 130 in 1995 without the wire systems. 
Thus, if all tires scrapped in a year were converted to TDF, the potential
output would be approximately 3.3 million tons - more than 30 times the
Company's 1996 tonnage sales of TDF.  Even after allowing for the 15% of tires
scrapped annually that are used in other applications, the scrap tire supply, in
general, should not have a limiting effect on the Company's ability to continue
its growth for the foreseeable future.   This calculation does not take into
account the additional "raw material" represented by abandoned tire piles which
further increases the potential TDF output.

Demand for TDF appears to be growing, especially in the utility industry 
based on the Company's experience with this type of customer over the last 
three years.  Certain of the benefits of TDF, such as high BTUs, low cost, 
and reduced sulfur emissions, have contributed to increased TDF utilization 
by electric power generating facilities.  Management believes there are 
continuing opportunities to increase demand for this fuel.  One example of 
this is the agreement with the Illinois Power Company.  Under the terms of 
the Company's contract, the Illinois Power Company will burn up to 7.5 
million reprocessed tires, or 60,000 tons of TDF, per year at its Baldwin 
Power Station (Baldwin).  This figure, which constitutes about 60% of the 
tires annually discarded in Illinois, equates to only 2% of the energy needs 
at the Baldwin plant.  WR-Illinois has recently entered into an agreement 
with Wisconsin Power and Light, further establishing itself in this growing 
market segment.  The agreement with Wisconsin Power & Light calls for the 
delivery of up to 24,000 tons of TDF over a thirteen month period beginning 
January 1997.

GOVERNMENT REGULATION
---------------------

The Company works within a network of government regulations and programs at
both the scrap tire supply side and the TDF supply side of the business.  Due to
the recognized fire and mosquito-borne health hazards associated with stockpiles
of scrap tires and the desire to curtail additional growth of stockpiles, more
restrictive regulation with respect to the disposal of current generation of
scrap tires has been implemented at all levels of jurisdiction with increasing
intensity in recent years.

In the past couple of years, legislation has had a significant effect on the
Company's Houston operation.  The State of Texas collects $2 for each new
passenger tire and $3.50 for each new truck tire sold.  The proceeds fund the
clean-up of abandoned tire piles, as well as the disposal of current scrap tire
generation, and are the source of the $.85 per weighed tire unit (18.7 lbs.)
paid to licensed and registered scrap tire processors.  The Company was one of
the first processors registered in 1992, and has been the only processor in the
state to recycle all of the scrap tires it has received under the program.  The
Company was under the State of Texas' allocation program until September 1995,
at which time the allocation system was eliminated and now allows qualified
processors to process tires on an unlimited basis.  However, the Company's
ability to increase tire flow into its facility was restrained since this
legislation allowed competitors to stockpile scrap tire material and continue to
receive compensation from the State. 



                                       6
<PAGE>

The result was the creation of large piles of shredded tires across the 
State.  In efforts to curtail the growth of these shred piles, this 
legislation was amended as of January 1, 1996 to require end-use markets 
such as TDF markets, for example, for scrap tires collected.  Although the 
effective date of the requirement for end-use markets was January 1, 1996, 
the State allowed a "grace period" for scrap tire processors to continue 
operating without end-use markets. This grace period ended December 31, 1996.

The burning of TDF is subject to regulation by federal, state and local
governmental agencies.  Generally, the Company and its customers must comply
with established mandatory disposal regulations and safety guidelines.  TDF
customers must comply with certain emissions and ash content standards, and with
the requirements of the U.S. Environmental Protection Agency and certain
portions of the Clean Air Act.  It is anticipated that initial permit
applications to burn TDF in new states will be thoroughly scrutinized by
regulatory bodies for emissions standards and ash content compliance.  The
Company has developed historical information from its current customer base, as
well as from the numerous trial burns it has been associated with, which
provides a potential advantage in working with customers in their contacts with
regulatory agencies.

COMPETITION

The scrap tire disposal and recycling industry is highly fragmented. 
Participants include the divisions of a few large companies and many small
operators who, for the most part, either stockpile tires or shred and landfill
them.  One of the largest collectors and processors of scrap tires into fuel on
the East Coast is Emanuel Tire Company in Baltimore, Maryland.  Archer Daniels
Midland Company of Decatur, Illinois, one of the largest scrap tire processors
in Illinois, processes tires it receives into supplemental fuel for its own use.

In the Southwest, the implementation of legislation in Texas in 1992 fostered
the establishment of approximately 20 new tire processors.  Many of these
processors are still active, but recently several laws have been implemented
that provide that (i) as of September 1, 1995, limitations are removed on the
number of PTE's that the Company can process and receive payment for on a
monthly basis and, (ii) as of January 1, 1996, only tire processors with an 
end-use market may qualify for reimbursement from the State of Texas.  
These laws place pressure on the Company's competitors to produce and 
market a better quality tire chip than is required by current State of 
Texas specifications.  The Company is the only processor in Texas to have 
marketed all material it has processed and believes that with the increased 
liability of the State of Texas from growing shred piles produced by other 
processors, the Company is well positioned and should ultimately benefit 
from increased market share of scrap tire disposal services. 

Browning Ferris Industries, Inc. ("BFI") entered the scrap tire processing
business through the acquisition of Maust Tire Recyclers of Savage, Minnesota in
1991.  BFI, headquartered in Houston, Texas, is one of the largest waste
disposers in the United States and operates tire processing facilities in the
states of Minnesota and Georgia.

The Company's primary competition for the acquisition of scrap tire casings
comes from the companies mentioned above, numerous individual collectors, and
Lakin General.  Lakin is a large collector of scrap tires on a national level. 
Lakin's primary business is the "culling" out of usable casings from the scrap
flow and selling them into secondary markets as used tires.  The Company, at 
some locations, is a recipient of scrap from Lakin.



                                       7

<PAGE>

The Company recognizes that its operations and expansions are and will be
subject to competition from other companies, some of whom have substantially
greater financial, marketing, research and development, and personnel resources
than the Company.  However, the Company believes that it can effectively compete
on the basis of its expertise in the logistics of tire disposal and TDF
production technology.  The Company's newly-constructed TDF plants will
incorporate process equipment design modifications that improve operating
efficiency as compared with the original Portland operation.  The Company
believes that its processing costs and reliability are better than those
achievable by competitors using commercially available tire processing
equipment.

PATENTS AND PROPRIETARY PROTECTION

The Company owns the United States patents set forth in the following table:

 Patent No.                 Title/Description                        Issue Date
 ----------                 -----------------                        -----------

 4,374,573    Apparatus for Shredding Rubber Tires and Other Waste      02/22/83
              Materials   

 4,519,550    Material Guide and Clearer for Commuting Apparatus        05/28/85

 4,560,112    Scrap Shredding Apparatus Having Clearing Rings and       12/24/85
              Method for Sharpening Same    

 4,561,467    Triple Gate Valve                                         12/31/85

 4,714,201    Tire Processing Apparatus and Method                      12/22/87

 4,750,437    Method for Disposal of Waste Materials by                 06/14/88
              Incineration

 4,804,031    Apparatus for Removing Tires From Wheels                  02/14/89

 4,806,056    Modular Fuel Metering Apparatus and Method                02/21/89


The Company owns the Canadian patents (and pending applications) set forth in
the following table:

 Patent No.                   Title/Description                       Issue Date
 ----------                   -----------------                       ----------
 1,220,461    Scrap Shredding Apparatus Having Clearing Rings           04/14/87
              and Method for Sharpening Same 

 1,279,051    Tire Processing Apparatus and Method                       Pending


The Company's service mark "Making Waste a Resource" was federally registered
with the U.S. Patent and Trademark Office on July 5, 1983.  The patents set
forth in the foregoing tables afford some protection in the areas in which the
Company intends to concentrate.  Management believes, however, that its know-how
and regular improvements to equipment and procedures are equally important in
the waste-to-energy business.

In 1988, pursuant to its industrial development bond financing for construction
of the Atlanta plant, the Company licensed its technology, including such
patents, to the indenture trustee.  In 1993, the Company licensed such
technology to the Illinois Partnership in connection with the construction of
the two facilities in Illinois.

EMPLOYEES

As of December 31, 1996, the Company had 314 full-time employees, of whom 279
were in operations and the balance in administration, sales, planning and
engineering.  None of the employees are covered by collective bargaining
agreements, and the Company believes its relations with its employees are
generally good.


                                       8


<PAGE>

EXECUTIVE OFFICERS OF THE COMPANY

All executives hereunder are elected annually in accordance with the by-laws and
serve until their successors are elected and qualified.  There are no family
relationships among any of the Company's executive officers.  For a more 
detailed description of the Company's executive officers, please see the 
information under the caption "Executive Officers of the Company" in the 
Company's Proxy Statement to be filed under Regulation 14A within 120 days 
after December 31, 1996.


        Name             Age         Position Held With Registrant
        ----             ---         -----------------------------

 MARTIN B. BERNSTEIN     63          Chairman of the Board of Directors
 THOMAS L. EARNSHAW      42          President and Chief Executive Officer
 ROBERT L. THELEN        58          Senior Vice President - Engineering
 MARK W. HOPE            43          Senior Vice President
 C. RON McNUTT           52          Senior Vice President
 DAVID G. GREENSTEIN     37          Senior Vice President

The positions and offices of the executive officers of the Registrant are as
follows:

MARTIN B. BERNSTEIN was elected Chairman of the Board of Directors of the
Company at the February 13, 1997 Board of Directors meeting.  Mr. Bernstein
joined the Board of the Company in December of 1996 in connection with the
Company's acquisition of U.S. Tire.

THOMAS L. EARNSHAW was elected President and Chief Executive Officer, as well as
a Director, of the Company at the March 1, 1990 Board of Directors meeting.  Mr.
Earnshaw joined the Company at its inception in 1982.  He was elected Vice
President-Operations in 1985 and Executive Vice President-Operations in 1987. 

ROBERT L. THELEN has been with the Company since 1982, and is one of the
Company's original founders.  He is responsible for the design and improvement
of plant equipment, plant construction, and technical assistance to customers. 
He was elected Vice President-Engineering in 1989, a Director in 1990, and
Executive Vice President-Engineering in May, 1991. 

MARK W. HOPE joined the Company at its inception in 1982.  He was Vice President
of the Company's Northwest Region prior to accepting his current position.

C. RON MCNUTT joined the Company on April 2, 1996 as Senior Vice President of
Operations.  He had been an operations officer in the waste paper industry prior
to joining the Company.

DAVID G. GREENSTEIN joined the Company in December of 1996 in connection with
the Company's acquisition of U.S. Tire.  He also serves as President of the
Company's U.S. Tire subsidiary.



                                  [End of Page]


                                       9

<PAGE>

ITEM 2.  PROPERTIES

The Company currently occupies the following properties:
<TABLE>
<CAPTION>

                                                  Sq. Footage of     Owned or Lease   Current Monthly
      Location and Description                        Building         Expiration         Rental
      ------------------------                        --------         ----------         ------
<S>                                                  <C>              <C>                <C>
PORTLAND, OREGON:
    25,000 sq. ft. paved property with metal            1,000            12/31/99          $872
       manufacturing building
    45,000 sq. ft. property with metal fabrication      4,800            12/31/99        $3,200
       and maintenance building
    20,000 sq. ft. graveled lot                            -              5/31/99          $800
    Office and shop on 1.2 acres                        8,000             7/31/99        $2,200
HOUSTON (HARRIS COUNTY), TEXAS:
    Production facility on 9 acres partially paved     13,800              Owned             -
       with metal building
ATLANTA, GEORGIA:
    Production facility on 3 acres partially paved      4,800            12/31/97        $2,785       with metal building     
PHILADELPHIA, PENNSYLVANIA
    4 acres of land holding processing facility         1,500             2/28/05        $3,200
DALLAS, TEXAS:
    Office space                                        4,500             2/28/00        $2,765
DUPO, ILLINOIS:
    Production facility on 10 acres partially          12,000            11/30/14        $1,000
      paved with metal building  
MARSEILLES, ILLINOIS:
    Production facility on 6.8 acres partially          9,600              Owned             -
      paved with two metal buildings 
CONCORD, NORTH CAROLINA:
    Production facility on 87 acres with office         5,600              Owned             -
       and shop  
</TABLE>

In Portland, Oregon the Company occupies a 1,500 square foot building and 400
square feet of office space on the second floor of the 4,800 square foot metal
fabrication building which serves as its administrative offices.  The
administrative offices of the Houston, Atlanta, Philadelphia, Dupo, Marseilles
and Concord facilities are in office trailers of approximately 600 square feet. 
The Company's executive offices occupy approximately 4,500 square feet in
Dallas, Texas.  The Company believes that its facilities are adequate for its
immediate needs, and that it has the capacity to accommodate significant
additional volume at its tire shredding plants.


ITEM 3.  LEGAL PROCEEDINGS

Special Note:  Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Reform Act.  See "Special
Note Regarding Forward-Looking Statements" for additional factors relating to
such statements.


The Company is involved in routine litigation arising in the ordinary course of
business.  In the opinion of management, such matters would not have a material
adverse effect on the financial condition or the results of operations of the
Company.


                                       10

<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of the Company shareholders during the fourth
quarter of 1996.


                                  [End of Page]



                                       11

<PAGE>

                                    PART  II

ITEM 5.  MARKET FOR REGISTRANT'S STOCK AND RELATED SECURITY HOLDER MATTERS

The Company's no par value Common Stock is presently being traded on the 
over-the-counter market.

Trading commenced on July 17, 1986 and the Registrant's common shares were
quoted on the NASDAQ system until February 20, 1990 at which time the Common
Stock was delisted as a result of the Company's failure to meet applicable
capital and surplus requirements.  The following table sets forth the range of
bid and ask prices for the Registrant's Common Stock during the periods
indicated:

                           High                 Low
                           ----                 ---
 Quarter Ended         Bid      Ask         Bid     Ask
 -------------         ---      ---         ---     ---
    03/31/95            1      1 1/2        1/2      1
    06/30/95          1 5/8    2 1/8        1/2     15/16
    09/30/95         1 11/16   2 1/8        7/8    1 5/16
    12/31/95          1 3/8    1 7/8        3/4    1 1/16
    03/31/96          1 3/8    1 9/16        1     1 5/32
    06/30/96         1 13/16     2           1     1 1/4
    09/30/96          1 1/2    1 9/16      1 1/16  1 1/4
    12/31/96          2 5/16   2 3/8        1 1/2  1 5/8

(a) The quotations set out above represent prices between dealers and do not 
    include retail mark-up, mark-down or commissions and may not represent 
    actual transactions.  Prior to termination by NASDAQ (February 20, 1990), 
    such quotations were received from NASDAQ.  Quotations after such time 
    are obtained from the National Quotation Bureau.

(b) The approximate number of record holders (not including participants in 
    securities position listings) of the Registrant's common shares as of 
    March 31, 1997 was 454.

(c) To date, the Registrant has not paid any dividends on its Common Stock. 
    Future dividends, if any, will be paid in compliance with the Company's 
    loan agreements.  The Company has outstanding 203,580 shares of its 7% 
    cumulative preferred stock.  Prior to payment of a dividend on its Common 
    Stock, all dividends accumulated on such preferred stock must be paid.  
    The Company does not anticipate paying dividends on its Common Stock in 
    the foreseeable future.

RIGHTS OFFERING


The Company distributed nontransferable subscription rights (the "Rights") to
subscribe for an aggregate of 3,238,857 shares of its Common Stock for an
offering price of $0.75 per share (the "Subscription Price") to the holders of
record of the Common Stock at the close of business on April 14, 1995 (the
"Record Date"), and to certain holders of the Company's convertible debentures,
provided that on or before June 7, 1995 (the "Conversion Date") such debenture
holders converted the debentures to Common Stock (collectively, the "Eligible


                                       12

<PAGE>

Shareholders").  The Eligible Shareholders received in this offering two 
Rights for each five shares of Common Stock held on the Record Date or the 
Conversion Date.  Each Right entitled the holder to subscribe for and 
purchase one share of Common Stock upon payment of the Subscription Price.  
Each Right also entitled the holder to subscribe for additional shares of 
Common Stock available in this offering that were not subscribed and paid for 
by other Eligible Stockholders under the basic subscription privilege.

At the conclusion of the Rights offering on June 26, 1995, the full amount of 
the subscription had been exercised;  3,238,857 shares of Common Stock were 
issued and $2.2 million in capital was raised for specific equipment 
improvements and working capital.  In conjunction with the offering, $265,000 
plus accrued interest of $17,951 of the convertible, subordinated debentures 
were converted at the rate of $0.875 per share into 323,373 shares of Common 
Stock.

PURCHASE OF U.S. TIRE RECYCLING PARTNERS, L.P.

The Company issued 3,242,997 shares of unregistered Common Stock, $1,850,000 
of convertible subordinated notes, and promissory notes in the aggregate 
amount of $605,035 as consideration for the purchase of U.S. Tire Recycling 
Partners, L.P. in December 1996.  The Company also issued 243,224 
unregistered shares of Common Stock to a third party as compensation for 
services rendered as financial advisor to the Company in connection with the 
acquisition of U.S. Tire.  The convertible subordinated notes are convertible 
at $2.50 per share and have an interest rate of 5% per annum in 1996 and 
1997, 6% in 1998 and 7% in 1999 and 2000.  Interest is paid quarterly with 
principal payments beginning on March 31, 1999 in the amount of $500,000, and 
$450,000 on September 30, 1999, March 31, 2000 and September 30, 2000.  
Principal amounts are subject to reduction if certain cash flow tests are not 
met by the Company's U.S. Tire subsidiary.  The Company has undertaken to 
register the shares of Common Stock received by the sellers of U.S. Tire in 
mid-1997 (see 1997 Registration Statement under this Item 5).

PURCHASE OF INTEREST IN WR-ILLINOIS

The Company issued 1,100,000 shares of unregistered Common Stock to acquire 
Riverside Caloric Company's (RCC) 55% interest in WR-Illinois in December of 
1996.  The Company formed the Partnership in 1993 with RCC (a wholly-owned 
subsidiary of NIPSCO Industries, Inc.) to build two production facilities in 
Illinois.  The Company owned 45% of the partnership prior to acquiring RCC's 
interest.  The Company has undertaken to register the shares of Common Stock 
received by NIPSCO Industries, Inc. in this transaction in mid-1997 (see 1997 
Registration Statement under this Item 5).

ISSUANCE OF COMMON STOCK AND WARRANTS

On December 24, 1996 and December 26, 1996, the Company sold 1,050,000 shares 
of unregistered Common Stock for $1.45 per share in a private placement.  In 
connection with issuing this stock, warrants to purchase a like amount were 
also sold for $0.05 per share.  This sale was made to qualifying individuals, 
of which one was Mr. 

                                      13
<PAGE>

Michael Dodge, a director of the Company.  Mr. Dodge purchased 300,000 shares 
of unregistered Common Stock for $1.45 per share and $0.05 per warrant.  The 
Company has undertaken to register the shares of Common Stock received by the 
investors in this private placement in mid-1997 (see 1997 Registration 
Statement under this Item 5).

1997 REGISTRATION STATEMENT

In the agreement to acquire U.S. Tire, the Company agreed to file a 
registration statement with the Securities and Exchange Commission to 
register shares issued to the sellers of U.S. Tire after its 1996 Form 10-K 
is filed.  The shares of Common Stock issued to NIPSCO and those sold in the 
December private placement were given the right to be included in this 
filing.  The Company anticipates that this filing will be completed on or 
about May of 1997.

                                 [End of Page]




















                                      14
<PAGE>

ITEM 6:  SELECTED CONSOLIDATED FINANCIAL DATA

The following selected financial data has been derived from the consolidated 
financial statements and should be read in conjunction with and are qualified 
by reference to "Management's Discussion and Analysis of Financial Condition 
and Results of Operations" included in Item 7 and the Consolidated Financial 
Statements and related Notes included in Item 8.

<TABLE>
<CAPTION>

                                                      For the Years Ended December 31,
                                                      --------------------------------
                                    1992           1993            1994            1995            1996
                                    ----           ----            ----            ----            ----
<S>                              <C>            <C>            <C>             <C>             <C>
OPERATING DATA
TDF sales                        $1,242,464     $1,114,975     $ 1,104,691     $ 1,080,172     $ 1,589,405
Wire sales                                -              -               -               -         397,701
Disposal and other revenues       6,820,392      7,625,518      11,320,714      13,059,751      14,687,426
                                 ----------     ----------     -----------     -----------     -----------
Total revenues                    8,062,856      8,740,493      12,425,405      14,139,923      16,674,532

Operating expenses and
  depreciation                    5,790,747      6,902,545       9,753,225      12,098,884      13,103,362
General and administrative
  expenses                        1,559,784      1,660,449       2,099,579       2,568,094       3,171,418
                                 ----------     ----------     -----------     -----------     -----------
Income from operations              712,325        177,499         572,601        (527,055)        399,752
Interest expense, net               353,396        352,835         378,761         457,202         375,093
Other (income) expense             (248,880)       (67,340)         10,567        (380,066)       (935,795)
Minority interest in income         360,766         87,617               -               -               -
Loss in equity of Partnership             -              -          20,260         322,630         668,504
                                 ----------     ----------     -----------     -----------     -----------
Income (loss) before income 
  taxes and extraordinary items     247,043       (195,613)        163,013        (926,821)        291,950
Income tax benefit (expense)       (100,000)             -         447,543               -          (8,850)
                                 ----------     ----------     -----------     -----------     -----------
Income (loss) before
  extraordinary item                147,043       (195,613)        610,556        (926,821)        283,100
Extraordinary item utilization of
  income tax carry forwards***      100,000              -               -               -               -
                                 ----------     ----------     -----------     -----------     -----------
Net income (loss)                $  247,043     $ (195,613)     $  610,556     $  (926,821)    $   283,100
                                 ----------     ----------     -----------     -----------     -----------
                                 ----------     ----------     -----------     -----------     -----------
Net income (loss) per share:
  Income (loss) before
    extraordinary item           $      .00     $     (.08)     $      .06     $      (.12)    $       .01
  Extraordinary item                    .02              -               -               -               -
                                 ----------     ----------     -----------     -----------     -----------
  Net income (loss)              $      .02**   $     (.08)**   $      .06**   $      (.12)**  $       .01
                                 ----------     ----------     -----------     -----------     -----------
                                 ----------     ----------     -----------     -----------     -----------**
Weighted average number of 
  common and dilutive common 
  equivalent shares outstanding   4,354,995      4,040,199       7,762,817       9,132,359      11,856,758
                                 ----------     ----------     -----------     -----------     -----------
                                 ----------     ----------     -----------     -----------     -----------
OTHER DATA
Earnings before interest, taxes,
  depreciation & amortization 
  (EBITDA+)                      $1,297,310     $  899,619      $1,236,758     $  486,089      $ 1,861,493
                                 ----------     ----------     -----------     -----------     -----------
                                 ----------     ----------     -----------     -----------     -----------
EBITDA as a percentage of 
  revenues                            16%            10%             10%             3%              11%
                                      ---            ---             ---             --              ---
                                      ---            ---             ---             --              ---
Tons of TDF sold during
  the period ended (unaudited)       59,494         62,156          62,564         72,961          102,929
                                 ----------     ----------     -----------     -----------     -----------
                                 ----------     ----------     -----------     -----------     -----------
 
BALANCE SHEET DATA
Total assets                     $5,394,772     $5,876,105     $ 8,745,077    $10,732,399      $28,391,800
Total long-term debt             $2,294,758*    $2,065,509*    $ 4,002,585    $ 4,409,249      $12,053,395
Total shareholders' equity 
  (deficit)                      $ (225,049)    $ (362,932)    $ 1,258,819    $ 2,899,006      $ 8,329,123

</TABLE>

                                      15
<PAGE>

    +The Company believes that EBITDA is a useful common yardstick for 
    measuring the capacity of companies to generate cash without reference to 
    how they are capitalized, how they account for significant non-cash charges 
    for depreciation and amortization associated with assets used in the 
    business, the bulk of which are long-lived assets, or what their tax 
    attributes may be. Additionally, since EBITDA is a basic source of funds 
    not only for growth but to service indebtedness, lenders in both the 
    private and public debt markets use EBITDA as a significant determinant of 
    borrowing capacity.
    *Includes long-term debt then classified as short-term debt as a result 
    of the Company's noncompliance during such period with certain financial 
    covenants in its debt agreement.
    **Undeclared dividends on cumulative preferred stock of $142,895, 
    $142,502, $142,502, $142,506, and $142,896 at December 31, 1992, 1993, 1994,
    1995, and 1996 respectively, have been added to net loss or subtracted from 
    net income for purposes of computing net income (loss) per common share.
    ***The Company adopted Statement of Financial Accounting Standard No. 109, 
    "Accounting for Income Taxes", January 1993.

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

Special Note:  Certain statements set forth below under this caption 
constitute "forward-looking statements" within the meaning of the Reform Act. 
 See "Special Note Regarding Forward-Looking Statements" for additional 
factors relating to such statements.

GENERAL COMMENTS

The Company owns and operates plants in Portland, Oregon, Houston, Texas, 
Atlanta, Georgia, Philadelphia, Pennsylvania, Dupo, Illinois, Marseilles, 
Illinois and Concord, North Carolina.  During 1993 and until January 1994, 
the Portland facility was owned by Waste Recovery Partners, Ltd., a limited 
partnership, of which the Company had a 65% ownership position and served as 
the managing partner.  Effective January 1, 1994, KCT converted its limited 
partnership interests in the partnership into 2.6 million unregistered shares 
of the Company's Common Stock which equated to approximately 35% of the fully 
diluted outstanding Common Stock at the time of conversion.  Late in 1994, 
construction began on the Dupo and Marseilles tire processing plants which 
began operations in late 1995.  These plants were originally owned by the 
Illinois Partnership, of which the Company owned a 45% interest and was the 
managing partner until December of 1996 when the Company acquired its 
partner's interest in the partnership.  See "Item 5 - Market for Registrant's 
Stock and Related Security Holder Matters -- Purchase of Interest in 
WR-Illinois."

Regional services are coordinated from the operating bases mentioned above. 
Operations encompass full-service scrap tire disposal and the recycling of 
tires into a supplemental fuel form.  The Company generates revenues from 
scrap tire disposal fees, hauling of scrap tires, sales of used tires in the 
used tire market, the sale of wire extracted from processed tires and from 
the sale of TDF.  At the plants, scrap tires are converted and refined into 
TDF, a high BTU supplemental fuel that is sold primarily to major domestic 
cement and paper manufacturers as well as electrical generating stations.  
The Concord facility operates a scrap tire monofill and primarily markets 
processed material for civil engineering purposes.

                                      16
<PAGE>

During the past three years, the effects of inflation on the Company's 
operations have been negligible.

In the last three years, the Company has experienced significant growth.  
1995 was a particularly important year with the acquisition of Domino and the 
Company's entry into the Illinois and surrounding Midwest scrap tire markets 
with the construction of the two Illinois plants.  The Company has grown from 
a scrap tire processing capacity of 20 million PTE's in 1994 to over 45 
million PTE's in 1996.  The Company grew considerably more with the 
acquisitions of the unowned 55% interest in WR-Illinois and U.S. Tire, both 
in December 1996.  See "Item 5 - Market for Registrant's Stock and Related 
Security Holder Matters --Purchase of Interest in WR-Illinois" and "-- 
Purchase of U.S. Tire Recycling Partners, L.P."  Operating results and cash 
flow in 1996 were an improvement over 1995 as the Company took action to 
manage this growth and increase efficiency and profitability.  It is the 
Company's goal to grow through the acquisition of small tire disposal 
businesses and consolidate the capability and resources of those businesses 
with the intent of providing a single-source tire disposal service to 
customers on a national basis.  Management is aware that to achieve this 
goal, the Company must have sufficient working capital, the ability to obtain 
new capital, a high-quality management team, and an availability of scrap 
tire disposal businesses to purchase.

The growth that began in 1995 proved to be a challenge for the Company as it 
went from three established plants to a total of six plants by December 31, 
1995.  Domino, which was acquired in March 1995, had to be restructured and 
rebuilt to enable it to produce a quality TDF product.  Upon completing these 
capital improvements, an unexpected soft demand for TDF in the Northeast 
resulted in poor TDF sales at Domino in 1995, a trend that continued into 
1996. The Company has, however, continued to supply TDF to a utility in New 
Jersey, and the TDF market in the Northeast appears to be improving.  If the 
TDF market improves as expected, the Domino plant should achieve the levels 
of productivity and sales originally anticipated by management.

During the fourth quarter of 1995, the Company began operations at the two 
new Illinois facilities constructed outside of Chicago and St. Louis.  The 
facilities were originally scheduled to open before the summer of 1995; 
however, due to a late start in 1994 as a result of bad weather and flooding 
in the Midwest region in early 1995, the plants were not completed and 
operational until September 1995.  The late entry into the scrap tire market 
and the following winter months severely hampered marketing efforts and tire 
flow.  The performance of the Illinois plants suffered during this startup 
phase as they established themselves in the region's scrap tire market.  By 
mid-1996 tire flow had increased significantly, and with changes in Illinois 
scrap tire legislation, tire flow increased even more by July 1996.  
Performance at the Illinois plants consistently improved during the rest of 
the year and by year-end, the facilities had increased their operations to a 
50% capacity utilization level.  The Company believes that the TDF market in 
the Midwest is strong, as evidenced by a new TDF supply contract with 
Wisconsin Power and Light, which will be supplied by the Marseilles plant.  
Continued growth in tire flow at the Illinois plants should provide these 
facilities with the ability to take advantage of the growing TDF market 
throughout 1997 and following years.  The Illinois operations took a positive 
turn towards profitability in 1996 and this trend is expected to continue 
through 1997 as tire flow and productivity levels steadily increase, allowing 
the Company to take further advantage of the growing TDF markets in the 
Midwest region.

                                      17
<PAGE>


Another significant event of 1996 was the acquisition of U.S. Tire.  This 
scrap tire processor located in Concord, North Carolina operates a scrap tire 
collection network throughout the state and surrounding Eastern corridor as 
well as a scrap tire monofill.  While the U.S. Tire facility landfills the 
majority of scrap tires collected, other revenues are generated through tire 
grading activities where collected tires are sold in used tire markets, and 
the sale of processed scrap tires as a tire-derived product for civil 
engineering purposes. With a tire flow of over 5 million PTE's annually and 
historically strong operating results, the U.S. Tire facility should 
significantly contribute to the positive trend towards consistent 
profitability the Company has taken in 1996.

The Company's Portland facility continues to maintain a strong position in 
the scrap tire market in the Northwest.  The fourth quarter marks a period of 
transition for this plant as management began restructuring the facility's 
collection network to increase efficiency and lower costs.  The facility also 
began a tire pile remediation project in the State of Washington in April 
1996 that is expected to be completed in November 1997.  This project 
involves the clean-up of approximately four million PTE's and 22 million  
pounds of shredded tires.  Installation of a wire recycling system, as 
previously noted, was completed at the Portland plant in December 1996.  
While the scrap steel market is softer than expected for the wire product 
generated in Portland, the elimination of disposal costs previously 
associated with the wire residue along with new revenues generated from wire 
sales should improve the operating results of this plant.

The Baytown facility showed strong improvement in TDF sales and disposal fees 
primarily as a result of the elimination of the State of Texas' scrap tire 
allocation program.  Within Texas, the Company is now allowed to collect as 
many scrap tires as can be processed and sold.  As the Baytown facility 
completed its third full quarter of wire production as of December 31, 1996, 
wire sales were strong as the response from the scrap steel industry for the 
Company's wire product has been very favorable in this region.  The Company 
maintains its position of being the only processor in the State of Texas to 
completely recycle all scrap tires received under the Texas program.  It 
appears that this facility is well positioned for the future as Texas 
legislation beginning in 1997 requires all scrap tire collectors to have 
end-use markets for the scrap tire material they generate.

In 1996, the Atlanta facility had increased TDF sales with the addition of a 
new customer and increased consumption by the facility's existing customer 
base. With the continued acceptance of TDF as a supplemental fuel by 
solid-fuel burning industries in the region, TDF sales are expected to remain 
consistent and should continue to strengthen in the future.  Like Portland 
and Baytown, a wire recycling system was installed in June of 1996.  Revenue 
received from scrap wire product in this region notably exceeds associated 
production costs. The Atlanta plant, however, experienced a setback in 
November 1996 when a portion of the plant was disabled by a mechanical fire.  
The section of the plant not damaged by the fire has allowed the facility to 
continue to receive an uninterrupted flow of scrap tires from its existing 
customer base while the plant is rebuilt.  The tires received are shredded 
and then landfilled, with most of the landfilling activity occurring at the 
Company's new U.S. Tire facility.  The landfilling alternative provided by 
the U.S. Tire facility has allowed the Company to hold costs down while the 
Atlanta plant is rebuilt.  As the facility was adequately insured and much of 
the damaged equipment already fully depreciated, a gain on involuntary 
conversion of assets was recognized in the fourth quarter.  Since the Company 

                                      18

<PAGE>

has been able to maintain an uninterrupted tire flow, the Atlanta facility is 
expected to resume complete operations in mid-April 1997 when rebuilding 
efforts are scheduled to be completed.

While 1995 was indicative of the Company's struggle with the tremendous 
growth that occurred since 1994, 1996 reflects the Company's move toward its 
goal of achieving positive operating results and improved cash flow.  
Management is highly aware of the need to carefully manage the recent growth 
of the Company and maintain a course towards the consistent profitability 
necessary to sustain continued growth and ensure the Company's ability to 
service its debt.

A recap of the Company's operating results before income taxes follows:

                                                 1996        1995        1994
                                                 ----        ----        ----
Operating income (loss)                       $ 399,752   $(527,055)  $ 572,601

Interest expense (net)                         (375,093)   (457,202)   (378,761)

Gains on sales of equipment and other income    311,576     380,066     175,675

Gain (loss) on involuntary conversion of
  assets                                        624,219           -    (186,242)

Equity in loss from Partnership operations     (668,504)   (322,630)    (20,260)
                                              ---------   ---------   ---------

Income (loss) before income taxes             $ 291,950   $(926,821)  $ 163,013
                                              ---------   ---------   ---------
                                              ---------   ---------   ---------



                                 [End of Page]


                                       19

<PAGE>

1996 VS. 1995 VS. 1994

The table below summarizes the activity of the Company as well as the basic 
revenue categories for the last three years:

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


TDF Tons Sold                                  102,929       72,961       62,564

Passenger Tire Equivalents Received (Tons)     162,926      132,793      108,165

TDF Sales                                  $ 1,589,405  $ 1,080,172  $ 1,104,691

Wire Sales                                 $   397,701            -            -

Disposal and Hauling Fees                  $14,687,426  $13,059,751  $11,320,714

TDF Inventory - Year End (Tons)                 15,402        8,194       14,477

The Company's total revenues of $16,674,532 for 1996 were 18% higher than the 
$14,139,923 received in 1995, and 34% higher than the $12,425,405 received in 
1994.  This increase is the result of a 47% and 44% increase in TDF sales, 
and a 13% and 30% increase in disposal fees, hauling, and other revenue over 
1995 and 1994, respectively, as well as sales of wire product for the first 
time in 1996 generated from the newly installed wire systems.  Tons of TDF 
sold were improved in 1996 for an increase of 41% over 1995 and 65% over 
1994.  The average TDF price of $15.44 per ton was an improvement in 1996 
over $14.80 for 1995 as the Company continued to develop new markets for its 
TDF.  Compared to 1994 at $17.64, however, the 1996 price per ton was still 
down.  Management believes the upward trend in TDF prices should continue 
based on a steady increase in the demand for TDF.  Tire flow also increased, 
showing an improvement of 23% from 1994 to 1995 and 23% from 1995 to 1996.  
The increases contributed to improved disposal and hauling fees in 1995 and 
1996.  TDF inventory increased as a result of higher production levels and 
the increase in PTE's received but is also reflective of a full year of 
operation at six facilities as opposed to three in 1994.  In addition to a 
healthier tire flow at the Company's plants, the acquisitions of Domino in 
1995 and WR-Illinois and U.S. Tire in December 1996 contributed to the 
increase in disposal, hauling and other revenues.

The table below compares cost elements as a percentage of revenues (Revs.) over
the last three years:

                                       % of               % of             % of
                             1996      Revs.    1995      Revs.    1994    Revs.
                             ----      -----    ----      -----    ----    -----
Total Variable
  Operating Expenses      $11,908,912   71%  $11,143,176   79%  $9,058,241  73%
Depreciation                1,194,450    7%      955,708    7%     694,984   6%
                          -----------   --   -----------   --   ----------  --
Total Operating Expenses  $13,103,362   78%  $12,098,884   86%  $9,753,225  79%
                          -----------   --   -----------   --   ----------  --
                          -----------   --   -----------   --   ----------  --

Operating expenses decreased significantly in 1996 as a percentage of revenues
compared to 1995.  The decrease is primarily the result of the wire reclamation
systems.  Higher tire flow and increased production efficiency, as well as the
elimination of wire disposal costs at the Baytown, Atlanta, and Portland plants,
also contributed to the improvement over 1995 and 1994.  Prior to installation
of the wire systems, the Company incurred costs to dispose of the wire waste
residue.  As a result of the wire systems installed in 1996, not only was this
cost eliminated, but a 


                                       20

<PAGE>

new source of revenue was generated through the sale of the wire product to 
the scrap steel industry.  This trend is expected to show continued 
improvement as 1997 will represent a full year of operations for the wire 
systems.

Depreciation expense increased in 1996 compared to 1995 primarily as a result 
of the new wire systems installed in the Atlanta, Baytown, and Portland 
plants throughout 1996.  The acquisition of WR-Illinois and U.S. Tire in 
December 1996 also contributed to this increase.  Depreciation expense as a 
percentage of revenues remained unchanged compared to 1995.

Depreciation charges increased significantly from 1994 to 1995 in dollar 
terms due to a 24% addition of property plant and equipment, 55% of which 
relates to the acquisition of Domino.  The percentage relationship of 
operating expense to revenues also was affected by the acquisition of Domino 
and the lack of revenues it generated during the period the facility was 
being rebuilt.  Costs to operate the Atlanta plant were relatively higher in 
1995 due to mechanical problems that affected its production efficiency.

General and administrative expense increased $603,324 in 1996 compared to 
1995, and increased $468,515 in 1995 compared to 1994.  The increases are due 
to the acquisitions of Domino in 1995, and WR-Illinois and U.S. Tire in 
December 1996, as well as increased staffing at the plant and corporate 
levels, higher salaries and health insurance costs, and other administrative 
costs from the overall increase in corporate activities as a result of the 
growth of the Company. Interest expense decreased in 1996 compared to 1995 
primarily due to the conversion of the subordinated convertible debentures on 
July 1, 1996 (see note 12 of the financial statements of the Company), and 
the capitalization of interest in connection with the construction and 
installation of the wire systems in the Atlanta, Baytown, and Portland plants 
in 1996.  Interest expense increased in 1995 due to additional debt from the 
acquisition of Domino and the interest accrued on the remaining convertible 
debentures.  Interest expense comprised 3% of  total revenues compared with 
4% in 1995 and 3% in 1994.

                                % of              % of              % of
                       1996     Revs.    1995     Revs.    1994     Revs.
                       ----     -----    ----     -----    ----     -----
General and
  Administrative    $3,171,418   19%  $2,568,094   18%  $2,099,579   17%
Interest Expense       447,176    3%     517,986    4%     400,314    3%
Interest Income        (72,083)   -      (60,784)   -      (21,553)   -
                    ----------   --   ----------   --   ----------   --
                    $3,546,511   22%  $3,025,296   22%  $2,478,340   20%
                    ----------   --   ----------   --   ----------   --
                    ----------   --   ----------   --   ----------   --

LIQUIDITY AND CAPITAL RESOURCES

Improved operations and corresponding net income for 1996, as well as the 
conversion of the subordinated debentures, the private placement sale of 
Common Stock in December 1996, and the acquisitions of WR-Illinois and U.S. 
Tire have all contributed to the Company's stronger equity position as of the 
end of 1996.

Management remains sensitive to the risks that the Company will not have the 
financial strength to take advantage of opportunities that are developing.  
It is anticipated that with operating results continuing their 1996 
improvement, the Company will be able to adequately fund its working capital 
requirements for at least the next twelve months.  Capital expenditures for 
1997 are expected to be lower than the past two years as all of the plants' 
machinery and 


                                       21

<PAGE>

equipment are in good working order, and the wire reclamation systems were 
fully installed in 1996.  These two factors should continue to reduce 
operating costs.  The Company will continue to explore ways to improve its 
financial position to capitalize in the growth that has developed over the 
past year.

Capital expenditures totaled approximately $1.7 million in 1996.  The 
increase in capital expenditures is primarily due to the wire systems 
installed in Atlanta, Baytown, and Portland, and the construction of a tire 
shredder for use in a major tire pile clean-up project.  The Company also 
purchased two pieces of heavy equipment for the Baytown and Domino plants.  
The Company's strategy for operations and growth continues to be based on 
continuous improvement in both process and logistical equipment, control of 
production costs, and increased marketing of TDF and reclaimed wire.

The Company's working capital balance at December 31, 1996 was a deficit of 
$27,018.  This deficit is primarily the result of current installments due on 
the Illinois bonds and related accrued interest which were included in the 
consolidated financial statements as a result of the WR-Illinois acquisition 
on December 1, 1996.  Current liabilities also includes deferred grant 
revenue (see note 15 of the financial statements of the Company) from 
WR-Illinois at December 31, 1996.

The Domino debt was modified to extend the first annual payment of $200,000, 
which was due March 21, 1996, to twelve equal monthly principal installments 
of $16,666 beginning September 21, 1996.  The second installment of $225,000 
has been extended to May 1997.

Effective June 30, 1996, the convertible subordinated debentures in the 
amount of $495,000 plus accrued interest of $46,564 were converted into 
618,930 shares of Common Stock.

In February 1996, the Company switched financial institutions and was able to 
secure a preferred interest rate of prime less .5% on its term note in the 
amount of $1.1 million, which remains guaranteed by the Goodyear Tire and 
Rubber Company.

These modified debt agreements should allow the Company to better manage its 
cash flow to match the revenue stream.

Management believes that 1996 results reflect the positive effects of an 
increased tire flow and stronger TDF market.  The acquisitions of WR-Illinois 
and U.S. Tire are expected to contribute to the continuation of this positive 
trend.  Debt service charges continue to increase annually as the Company 
experiences high growth.  However, management still believes that the 
Company's operating strategies are on the right track, and they continue to 
have confidence in the future potential for the Company.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this item begin at page F-1 hereof.


                                       22

<PAGE>

ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

         -None-



                                    PART III
                                           
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required in response to this item is incorporated herein by
reference to the Company's Proxy Statement to be filed under Regulation 14A
within 120 days after December 31, 1996.


ITEM 11.  EXECUTIVE COMPENSATION

The information required in response to this item is incorporated herein by 
reference to the Company's Proxy Statement to be filed under Regulation 14A 
within 120 days after December 31, 1996.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required in response to this item is incorporated herein by
reference to the Company's Proxy Statement to be filed under Regulation 14A
within 120 days after December 31, 1996.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required in response to this item is incorporated herein by
reference to the Company's Proxy Statement to be filed under Regulation 14A
within 120 days after December 31, 1996.


                                       23


<PAGE>

                                  PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

    (a)   1. Financial statements are listed in the "Index to Consolidated 
             Financial Statements for Waste Recovery, Inc." on page F-1 of 
             this Form 10-K.

    (a)   2. Exhibits are listed on page E-1 through E-4 of this Form 10-K.

             EXHIBIT
             NUMBER                          EXHIBIT
             -------                         -------

               3.1      Amended and Restated Articles of Incorporation filed 
                        July 5, 1988, with the Secretary of State of Texas, 
                        incorporated herein by reference to Exhibit 3.4 to the 
                        Company's Form 10-K filed March 24, 1989.

               3.2      Articles of Amendment to the Articles of Incorporation 
                        filed June 8, 1990, with the Secretary of State of 
                        Texas, incorporated herein by reference to Exhibit 3.5 
                        to the Company's Form 10-K filed March 27, 1991.

               3.3      By-Laws, amended and restated as of March 10, 1992, 
                        incorporated herein by reference to Exhibit 3.6 to the 
                        Company's Form 10-K filed March 26, 1992.


               4.1      Form of Common Stock Certificate of Registrant, 
                        incorporated herein by reference to the Company's 
                        Form S-1, as amended, filed July 15, 1986.

               4.2      Indenture of Trust dated April 1, 1988, between 
                        Development Authority of Fulton County and Citizens 
                        and Southern Trust Company (Georgia), National 
                        Association, as Trustee, incorporated herein by 
                        reference to Exhibit 4.2 to the Company's report on 
                        Form 8-K filed June 1, 1988.

               4.6      Form of 10% Convertible Subordinated Debenture due 
                        March 15, 1996, incorporated herein by reference to 
                        Exhibit 4.6 to the Company's report on Form 8-K filed 
                        October 5, 1994.

              10.6      Agreement dated May 9, 1986, between Registrant and 
                        The Goodyear Tire and Rubber Company, incorporated 
                        herein by reference to Exhibit 10.32 to the Company's 
                        Amendment No. 1 to Form S-1 filed July 1, 1986.

              10.7      Lease Agreement dated January 15, 1988, between 
                        Southern Metal Finishing Company, Inc. and the 
                        Registrant, incorporated herein by reference to 
                        Exhibit 10.37 to the Company's Form 10-K filed 
                        March 25, 1988.

              10.8      Indemnity Agreement dated January 29, 1988, by the 
                        Registrant and Southern Metal Finishing Company, Inc., 
                        incorporated herein by reference to Exhibit 10.38 to 
                        the Company's Form 10-K filed March 25, 1988.


                                       24

<PAGE>
             EXHIBIT
             NUMBER                          EXHIBIT
             -------                         -------

              10.10     Estoppel Deed, dated December 28, 1989, between the 
                        Registrant as Grantor, and Tex A. Perkins, et al., as 
                        Grantee, incorporated herein by reference to 
                        Exhibit 10.64 to the Company's Form 10-K filed 
                        March 26, 1990.

              10.11     Lease of Real Property, dated January 1, 1990, between 
                        the Registrant, as Lessee, and Tex A. Perkins, et al., 
                        as Lessor, incorporated herein by reference to 
                        Exhibit 10.65 to the Company's Form 10-K filed 
                        March 26, 1990.

              10.12     Warranty Deed, dated February 7, 1990, between Tex A. 
                        Perkins, et al., as Grantor, and Wayne Easley, as 
                        Grantee, incorporated herein by reference to 
                        Exhibit 10.66 to the Company's Form 10-K filed 
                        March 26, 1990.

              10.13     Assignment of Lease, dated February 7, 1990, from 
                        Tex A. Perkins, et al., as Assignor, and Wayne Easley, 
                        as Assignee, incorporated herein by reference to 
                        Exhibit 10.68 to the Company's Form 10-K filed 
                        March 26, 1990.

              10.14     The Registrant's 1989 Stock Plan for Employees, 
                        effective March 6, 1989, and approved by the 
                        Registrant's shareholders at the 1989 Annual Meeting, 
                        incorporated herein by reference to Exhibit 10.73 to 
                        the Company's Form 10-K filed March 26, 1990.

              10.15     Amendment No. 1 to the Registrant's 1989 Stock Plan 
                        for Employees, incorporated herein by reference to 
                        Exhibit 10.15 to the Company's Form 10-K filed 
                        March 28, 1996.

              10.16     Nonqualified Stock Option Agreement dated April 4, 
                        1990, granted by the Registrant to Allan Shivers, Jr. 
                        for 200,000 shares, incorporated herein by reference 
                        to Exhibit 10.77 to the Company's Form 10-K filed 
                        March 27, 1991.

              10.17     Form of Nonqualified Stock Option Agreement for grants 
                        to employees made January 7, 1991, incorporated herein 
                        by reference to Exhibit 10.89 to the Company's 
                        Form 10-K filed March 26, 1992.

              10.18     Form of Incentive Stock Option Agreement for grants to 
                        employees made October 1, 1991, incorporated herein by 
                        reference to Exhibit 10.90 to the Company's Form 10-K 
                        filed March 26, 1992.

              10.19     1992 Stock Plan for Non-Employee Directors, 
                        incorporated herein by reference to Exhibit 4.8 of the 
                        Company's Form S-8 filed May 8, 1992.

              10.20     Form of Nonqualified Stock Option Agreement for grants 
                        to non-employee directors made January 4, 1991, 
                        incorporated herein by reference to Exhibit 10.88 to 
                        the Company's Form 10-K filed March 26, 1992.


                                       25

<PAGE>
             EXHIBIT
             NUMBER                          EXHIBIT
             -------                         -------

              10.21     Indemnity and Security Agreement, dated June 1, 1990, 
                        between Registrant and The Goodyear Tire and Rubber 
                        Company, incorporated herein by reference to 
                        Exhibit 10.82 to the Company's Form 10-K filed 
                        March 27, 1991.

              10.22     Amendment to Lease of Real Property dated April 25, 
                        1991, between the Registrant, as Lessee, and George 
                        Glanz, as Lessor, incorporated herein by reference to 
                        Exhibit 10.86 to the Company's Form 10-K filed 
                        March 26, 1992.

              10.23     Agreement (for supply of TDF) between the Registrant 
                        and Illinois Power Company dated October 12, 1993, 
                        (paragraph 4 of Exhibit 10.007 is subject to a request 
                        for confidential treatment), incorporated herein by 
                        reference to Exhibit 10.007 to the Company's report on 
                        Amendment No. 1 to Form 8-K/A filed December 14, 1993.

              10.24     Leasehold Commercial Deed of Trust, Security 
                        Agreement, Fixture Filing, Financing Statement, and 
                        Assignment of Leases and Rents dated September 20, 
                        1994, executed by the Registrant as Grantor, for the 
                        benefit of NationsBank of Georgia N.A. as Trustee, 
                        incorporated herein by reference to Exhibit 10.021 to 
                        the Company's Form 10-K filed March 30, 1995.

              10.25     Stock Purchase Agreement for the purchase by the 
                        Registrant of the outstanding stock of Domino Salvage, 
                        Tire Division, Inc., dated March 21, 1995, 
                        incorporated herein by reference to Exhibit 10.024 to 
                        the Company's Form 10-K filed March 30, 1995.

              10.26     Loan Agreements dated April 1, 1988, between 
                        Development Authority of Fulton County and the 
                        Registrant, incorporated herein by reference to 
                        Exhibit 28.2 to the Company's report on Form 8-K filed 
                        June 1, 1988.

              10.27     Promissory Note dated April 1, 1988, from the 
                        Registrant to Development Authority of Fulton County, 
                        incorporated herein by reference to Exhibit 28.3 to 
                        the Company's report on Form 8-K filed June 1, 1988.

              10.28     Leasehold Deed to Secure Debt and Security Agreement 
                        dated April 1, 1988, between the Registrant and the 
                        Trustee, incorporated herein by reference to 
                        Exhibit 28.5 to the Company's report on Form 8-K filed 
                        June 1, 1988.

              10.29     First Amendment to Lease Agreement dated April 1, 
                        1988, between Southern Metal Finishing Company, Inc. 
                        and the Registrant, incorporated herein by reference 
                        to Exhibit 28.6 to the Company's report on Form 8-K 
                        filed June 1, 1988.

              10.30     Assignment of Contracts dated April 1, 1988, between 
                        the Registrant and Development Authority of Fulton 
                        County, incorporated herein by reference to 
                        Exhibit 28.7 to the Company's report on Form 8-K filed 
                        June 1, 1988.


                                       26

<PAGE>

             EXHIBIT
             NUMBER                          EXHIBIT
             -------                         -------

              10.31     Promissory Note dated February 29, 1996, executed by 
                        the Registrant as maker payable to Texas Commerce Bank 
                        National Association in principal amount of 
                        $1,119,309.01.(1)

              10.32     Note Purchase Agreement dated February 29, 1996, 
                        between The Goodyear Tire and Rubber Company and Texas 
                        Commerce Bank National Association.(1)

              10.33     Form of Convertible Subordinated Debenture Conversion 
                        Agreements effective July 1, 1996.(1)

              10.34     Form of Warrant to Purchase Common Stock of Waste 
                        Recovery, Inc. as of July 1, 1996, as Exhibit "A" to 
                        the Convertible Subordinated Debenture Conversion 
                        Agreements included herein in Exhibit 10.47.(1)

              10.35     Dodge Common Stock and Warrant Purchase Agreement 
                        dated December 24, 1996 between Waste Recovery, Inc. 
                        and Michael C. Dodge.(1)

              10.36     Common Stock and Warrant Purchase Agreement dated 
                        December 26, 1996 by and among Waste Recovery, Inc. 
                        and Bette Nagelberg, Ronald I. Heller, Rachel Heller, 
                        Ronald I. Heller as custodian for Evan Heller, 
                        Delaware Charter Guaranty & Trust Co. FBO, and 
                        R. Anthony Cioffari.(1)

              10.37     Agreement and Plan of Reorganization dated as of the 
                        30th day of September 1996 by and among Waste 
                        Recovery, Inc., New U.S. Tire Recycling Corp., 
                        U.S. Tire Recycling Partners, L.P., Bodner/Greenstein 
                        Capital Holdings, Inc., Tirus, Inc., Tirus Associates, 
                        L.L.C., Environmental Venture Fund, L.P., Argentum 
                        Capital, L.P., and Certain Shareholders, incorporated 
                        herein by reference to Exhibit 1.1 of the Company's 
                        current report on From 8-K filed December 20, 1996.

              10.38     Partnership Purchase Agreement dated as of 
                        December 16, 1996, between Riverside Caloric Company, 
                        Waste Recovery, Inc., and Waste Recovery-Illinois, 
                        L.L.C., incorporated herein by reference to 
                        Exhibit 1.2 of the company's current report on 
                        Form 8-K filed December 20, 1996.

              10.39     Deed of Trust and Security Agreement between New 
                        U.S. Tire Recycling Corp. (a wholly-owned subsidiary 
                        of the Registrant) as Grantor, and the former partners 
                        and shareholders of U.S. Tire Recycling Partners, L.P. 
                        as Beneficiary.(1)

              10.40     Letter Agreement between Waste Recovery, Inc. and 
                        Cameron & Associates relating to the retention of 
                        Cameron & Associates as financial advisor in 
                        connection with the acquisition of U.S. Tire.(1)

              11.1      Statement regarding computation of per share earnings - 
                        See page F-5 of this Form 10-K which is incorporated 
                        herein by reference.

              21.1      Subsidiaries of the Registrant.(1)


                                       27

<PAGE>

             EXHIBIT
             NUMBER                          EXHIBIT
             -------                         -------

              23        Consent of Independent Accountants.(1)

              27.1      Financial Data Schedule.(1)

              99.1      The Company's Proxy Statement for its 1997 Annual 
                        Meeting of Shareholders, incorporated herein by 
                        reference pursuant to Rule 12b-32 of the Securities 
                        Exchange Act of 1934.  Definitive copies of such Proxy 
                        Statement to be filed under Regulation 14A within 
                        120 days after December 31, 1996.

                        (1)Filed herewith

    (b)  (i)  On December 9, 1996, the Company filed a current report on 
              Form 8-K pursuant to Item 2 thereof, reporting the acquisitions 
              of U.S. Tire Recycling Partners, L.P. and Waste 
              Recovery-Illinois, general partnership.


                                    [End of Page]


                                       28

<PAGE>

                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, this report has been signed below on April 15, 1997, by 
the following duly authorized person on behalf of the Company.



                                  WASTE RECOVERY, INC.
                                      (Registrant)


Date:  April 15, 1997               By:    /s/ THOMAS L. EARNSHAW
                                           -------------------------------------
                                           Thomas L. Earnshaw
                                           President and Chief Executive Officer



                                  POWER OF ATTORNEY

KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature 
appears below constitutes and appoints Thomas L. Earnshaw and Donald R. 
Phillips, and each of them, such individual's true and lawful 
attorneys-in-fact and agents, with full power of substitution and 
resubstitution, for such individual and in his name, place and stead, in any 
and all capacities, to sign any and all amendments to this Form 10-K under 
the Securities Exchange Act of 1934, and to file the same, with all exhibits 
thereto, and all documents in connection therewith, with the Securities and 
Exchange Commission, granting unto said attorneys-in-fact and agents, and 
each of them, full power and authority to do and perform each and every act 
and thing requisite and necessary to be done in and about the premises as 
fully to all intents and purposes as he might or could do in person, hereby 
ratifying and confirming all that said attorneys-in-fact and agents, or any 
of them, or their substitute or substitutes, may lawfully do or cause to be 
done by virtue hereof.

Pursuant to the requirements to the Securities Exchange Act of 1934, this 
report has been signed below on April 15, 1997, by the following persons on 
behalf of the Registrant in the capacities indicated.



     /s/ THOMAS L. EARNSHAW                        /s/ ROGER W. COPE
     --------------------------------------        -----------------------------
By:  Thomas L. Earnshaw                       By:  Roger W. Cope, Director
     President and Chief Executive
     Officer (Principal Executive Officer),        /s/ MICHAEL C. DODGE
     Treasurer (Principal Financial and            -----------------------------
     Accounting Officer), and Director        By:  Michael C. Dodge, Director

                                                   /s/ JOHN C. KERR
                                                   -----------------------------
     /s/ MARTIN B. BERNSTEIN                  By:  John C. Kerr, Director
     --------------------------------------
By:  Martin B. Bernstein, Director                 /s/ STEVEN E. MACINTYRE
                                                   -----------------------------
                                              By:  Steven E. MacIntyre, Director

     /s/ ANDREW M. BODNER                          /s/ ROBERT L. THELEN
     --------------------------------------        -----------------------------
By:  Andrew M. Bodner, Director               By:  Robert L. Thelen, Director

                                                   /s/ W. DAVID WALLS
                                                   -----------------------------
     /s/ CRANDALL S. CONNORS                  By:  W. David Walls, Director
     --------------------------------------
By:  Crandall S. Connors, Director


                                       29


<PAGE>

<TABLE>
<CAPTION>
                                                                                         PAGE
                                                                                         ----
<S>                                                                                    <C>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR WASTE RECOVERY, INC.
-------------------------------------------------------------------
Reports of Independent Accountants                                                       F-1

Financial Statements:
    Consolidated Balance Sheets at December 31, 1996 and 1995                            F-3

    Consolidated Statements of Operations for the years ended
         December 31, 1996, 1995 and 1994                                                F-5

    Consolidated Statements of Stockholders' Equity (Deficit) for the years
         ended December 31, 1996, 1995 and 1994                                          F-6

    Consolidated Statements of Cash Flows for the years ended
         December 31, 1996, 1995 and 1994                                                F-7

    Notes to Consolidated Financial Statements                                           F-8

    Schedule II.  Valuation and Qualifying Accounts                                      S-1



All other schedules are omitted because they are not required, not 
applicable, or the required information is presented in the accompanying 
financial statements.



</TABLE>



<PAGE>



REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------

To the Board of Directors and
Stockholders of Waste Recovery, Inc.

In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Waste
Recovery, Inc. and its subsidiaries at December 31, 1996 and 1995, 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.  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 did not audit the financial
statements of U.S. Tire Recycling Partners, L.P., a wholly-owned subsidiary,
which statements reflect total assets of $4,466,037 at December 31, 1996, and
total revenues of $470,540 for the one month period ended December 31, 1996. 
Those statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for U.S. Tire Recycling Partners, L.P., is based solely on the
report of the other auditors.  We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for the opinion expressed above.





PRICE WATERHOUSE LLP

Dallas, Texas
March 31, 1997 





                                     F-1


<PAGE>


                          REPORT OF INDEPENDENT ACCOUNTANTS
                          ---------------------------------

To The Partners of U.S. Tire Recycling Partners, L.P.
Concord, North Carolina

We have audited the accompanying balance sheet of U.S. Tire Recycling Partners,
L.P. (a limited partnership) as at December 31, 1996, and the related statements
of income, partners' capital and cash flows for the month then ended. 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 audit.

We conducted our audit 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 audit provides 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 U.S. Tire Recycling Partners,
L.P. as at December 31,1996, and the results of its operations and its cash
flows for the month then ended.





COHEN & ROSEN, P.C.

New York, New York
January 24, 1997



                                      F-2

<PAGE>

                                 WASTE RECOVERY, INC.
                               CONSOLIDATED BALANCE SHEETS
                                                                
                                December 31, 1996 and 1995
                                                                
                                           ASSETS

<TABLE>
<CAPTION>                                                  
                                                                    1996                    1995
                                                                    ----                    ----
<S>                                                         <C>                   <C>
Current Assets:                                                                  
 Cash and cash equivalents                                      $  1,892,427           $    726,562
 Accounts receivable, less allowance for doubtful accounts                                         
  of $51,017 and $27,083, respectively (notes 13 and 24)           2,736,388              1,887,426
 Other receivables (notes 3 and 21)                                1,061,958                  5,758
 Inventories (notes 4 and 13)                                      1,239,483                645,651
 Other current assets (note 5)                                       355,958                149,912
                                                                ------------           ------------
   Total current assets                                            7,286,214              3,415,309
                                                                ------------           ------------
                                                                                                   
Property, plant and equipment (notes 6, 7, 10, 13 and 18)         24,226,392             11,700,255
 Less accumulated depreciation                                    (7,923,939)            (6,840,820)
                                                                ------------           ------------
   Net property, plant and equipment                              16,302,453              4,859,435
                                                                ------------           ------------
Restricted cash and cash equivalents (notes 8, 10 and 13)          1,914,795                998,035
Investment in Waste Recovery - Illinois (notes 2 and 9)                -                    258,539
Bond and debt issuance costs, less accumulated amortization                                     
 of $181,275 and $153,287, respectively                              147,059                175,046

Deferred income taxes (note 20)                                      447,543                447,543
Goodwill, less accumulated amortization of $102,787 and                                            
  $41,164, respectively                                            1,895,678                507,695

Other assets                                                         398,058                 70,797
                                                                ------------           ------------
                                                                 $28,391,800            $10,732,399
                                                                ------------           ------------
                                                                ------------           ------------


</TABLE>
See accompanying notes to consolidated financial statements.




 
                                                          F-3


<PAGE>


                                      WASTE RECOVERY, INC.
                                  CONSOLIDATED BALANCE SHEETS
                                                          
                                    December 31, 1996 and 1995

                                 LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                     1996                1995
                                                                  --------            ----------              
<S>                                                           <C>                     <C>
Current Liabilities:                                                                                  
 Current installments of bonds payable (note 10)                   $883,024               $-
 Notes payable (note 11)                                            632,003               28,945
 Convertible subordinated debentures (note 12)                        -                   40,000
 Current installments of long-term debt (note 13)                   998,719              427,552
 Current installments of capital lease obligations (note 7)         111,982               93,423
 Accounts payable (note 19)                                       3,269,300            1,996,857
 Bond interest payable                                              219,781                -
 Accrued wages and payroll taxes                                    247,576              174,753
 Other accrued liabilities                                          637,836              372,800
 Deferred grant revenue (notes 9 and 15)                            313,011               43,476
                                                                -----------           ----------
   Total current liabilities                                      7,313,232            3,177,806
                                                                -----------           ----------
                                                                                                
Bonds payable, noncurrent (note 10)                               7,567,795                -
Convertible subordinated debentures, noncurrent (note 12)             -                  495,000
Long-term debt, excluding current installments (note 13)          4,069,498            3,591,376
Obligations under capital leases, excluding current                                             
 installments (note 7)                                              104,017              178,797
Deferred grant revenue, noncurrent (notes 9 and 15)                 696,050              246,338
Notes payable (note 11)                                             312,085              144,076
                                                                -----------           ----------
   Total liabilities                                             20,062,677            7,833,393
                                                                -----------           ----------
                                                                                                
Stockholders' Equity (notes 12, 14, 16, 17, 18 and 19):                                               
 Cumulative preferred stock, $1.00 par value, 250,000                                                 
 shares authorized, 203,580 issued and outstanding in 1996 and                                              
 1995 (liquidating preference $14.61 per share, aggregating                                     
 $2,974,525, and $13.91 per share, aggregating $2,831,629,   
 in 1996 and 1995, respectively)                                   203,580              203,580
 Preferred stock, $1.00 par value, authorized and unissued                                            
  9,750,000 shares in 1996 and 1995                                  -                    -
 Common stock, no par value, authorized 30,000,000 shares,                                      
  17,322,121 and 10,830,170 shares issued and outstanding                                       
  in 1996 and 1995, respectively                                    407,800              407,800
 Additional paid-in capital                                      18,467,427           13,320,410
 Accumulated deficit                                            (10,675,804)         (10,958,904)
                                                                -----------           ----------
                                                                  8,403,003            2,972,886
 Treasury stock, at cost, 103,760 common shares                     (73,880)            (73,880)
                                                                -----------           ----------
   Total stockholders' equity                                     8,329,123            2,899,006
                                                                -----------           ----------
Commitments and contingencies (notes 7, 9, 14, 23 and 26)                                       
                                                                $28,391,800          $10,732,399
                                                                -----------           ----------
                                                                -----------           ----------



</TABLE>
See accompanying notes to consolidated financial statements.




                                                          F-4
<PAGE>

                                  WASTE RECOVERY, INC.
                             CONSOLIDATED STATEMENTS OF OPERATIONS
                                                                
                        Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
                                                                                                       
                                                              1996                   1995              1994
                                                              ----                   ----              ----
<S>                                                   <C>                     <C>                <C>
Revenues (note 24):                                                                                            
 Tire-derived fuel sales                                  $1,589,405               $1,080,172        $1,104,691
 Wire sales                                                  397,701                   -                 -
 Disposal fees, hauling and other revenue (note 19)       14,687,426               13,059,751        11,320,714
                                                       -------------            -------------      ------------
   Total revenues                                         16,674,532               14,139,923        12,425,405
                                                                                                               
Operating expenses                                        11,908,912               11,143,176         9,058,241
                                                       -------------            -------------      ------------
                                                           4,765,620                2,996,747         3,367,164
                                                                                                               
General and administrative expenses                        3,171,418                2,568,094         2,099,579
Depreciation and amortization                              1,194,450                  955,708           694,984
                                                       -------------            -------------      ------------
                                                             399,752                 (527,055)          572,601
                                                                                                               
Other income (expense):                                                                                        
 Interest income                                              72,083                   60,784            21,553
 Interest expense                                           (447,176)                (517,986)         (400,314)
 Other income (note 9)                                       302,306                  355,360             9,697
 Gains on sales of property and equipment                      9,270                   24,706           165,978
 Gain (loss) on involuntary conversion of assets                                                                
  (note 21)                                                  624,219                    -              (186,242)
 Equity in loss from partnership operations (note 9)        (668,504)                (322,630)          (20,260)
                                                       -------------            -------------      ------------
                                                            (107,802)                (399,766)         (409,588)
                                                                                                               
Income (loss) before income taxes                            291,950                 (926,821)          163,013
Income tax benefit (expense) (note 20)                        (8,850)                   -               447,543
                                                                                                  
   Net income (loss)                                         283,100                 (926,821)          610,556
                                                                                                               
Undeclared cumulative preferred stock dividends              142,896                  142,506           142,502
                                                       -------------            -------------      ------------
   Net income (loss) available to common                                                                       
     shareholders                                           $140,204              $(1,069,327)         $468,054
                                                       -------------            -------------      ------------
                                                       -------------            -------------      ------------
   Net income (loss) per share                                  $.01                  $(.12)               $.06
                                                       -------------            -------------      ------------
                                                       -------------            -------------      ------------
                                                                                                               
Weighted average number of common and dilutive                                                                 
 common equivalent shares outstanding                     11,856,758                9,132,359         7,762,817
                                                       -------------            -------------      ------------
                                                       -------------            -------------      ------------




</TABLE>
See accompanying notes to consolidated financial statements.






                                                           F-5

<PAGE>

                                   WASTE RECOVERY, INC.                    
                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                      Years ended December 31, 1996, 1995 and 1994       


<TABLE>
<CAPTION>                                                                                                   
                                             Cumulative                                                                   
                                           Preferred Stock                Common Stock            Additional     
                                           ---------------                ------------             Paid-In
                                       Shares        Par Value       Shares       Par Value        Capital
                                       ------        ---------       ------       ---------        -------
<S>                                  <C>           <C>            <C>           <C>             <C>
Balances at December 31, 1993          203,580       $203,580        4,143,959    $407,800        $9,749,707  
                                                                                                              
Conversion of Waste Recovery                                                                                  
   Partners, Ltd. interests               -             -            2,660,323       -               807,900  
Stock issued to Directors                 -             -                4,361       -                 6,000  
Options exercised under incentive                                                                             
   stock option plan                      -             -                3,500       -                 2,885  
Options exercised by financial                                                                                
   advisors                               -             -              325,000       -               186,910  
Reduction in note receivable                                                                                  
   charged                                -             -                -           -                 -      
Net income                                                                                                    
                                          -             -                -           -                 -      
                                    ----------    ----------        ----------  ----------        ----------  
Balances at December 31, 1994          203,580      $203,580         7,137,143    $407,800       $10,753,402  
                                                                                                              
Stock issued to Directors                 -             -               27,366       -                15,900  
Options exercised under stock                                                                                 
   option plan                            -             -               44,800       -                11,648  
Conversion of subordinated                                                                                    
   debentures                             -             -              382,004       -               334,252  
Rights offering to common                                                                                     
   shareholders                           -             -            3,238,857       -             2,205,208  
Net loss                                  -             -                -           -                 -      
                                    ----------    ----------        ----------  ----------        ----------  
                                                                                                              
Balances at December 31, 1995          203,580      $203,580        10,830,170    $407,800       $13,320,410  
Stock issued to Directors                 -             -               10,806       -                12,000  
Options exercised under incentive                                                                                  
   stock option plan                      -             -              178,000       -                71,477  
Stock issued in connection with                                                                                    
   U.S. Tire acquisition                  -             -            3,486,221       -             2,086,000  
Stock issued in connection with                                                                                    
   WR-Illinois acquisition                -             -            1,100,000       -               869,000  
Conversion of subordinated                                                                                    
   debentures                             -             -              666,924       -               583,559  
Warrants issued to subordinated                                                                               
   debenture holders upon                 -             -                -           -                10,000  
   conversion
Sale of common stock and warrants         -             -            1,050,000       -             1,514,981
Net income                                -             -                -           -                 -      
                                    ----------    ----------        ----------  ----------        ----------
                                                                                                             
Balances at December 31, 1996          203,580      $203,580        17,322,121    $407,800       $18,467,427 
                                    ----------    ----------        ----------  ----------        ----------  
                                    ----------    ----------        ----------  ----------        ----------   

<CAPTION>
                                                                          Note                Total    
                                        Accumulated      Treasury     Receivable for       Stockholders' 
                                          Deficit         Stock         Stock Sold       Equity/(Deficit)
                                          -------         -----         ----------       ---------------- 
<S>                                   <C>            <C>            <C>              <C>                 
Balances at December 31, 1993          $(10,642,639)     $(73,880)       $(7,500)           $(362,932)   
Conversion of Waste Recovery           
   Partners, Ltd. interests                   -             -               -                 807,900    
Stock issued to Directors                     -             -               -                   6,000    
Options exercised under incentive                                                                        
   stock option plan                          -             -               -                   2,885    
Options exercised by financial                                                                           
   advisors                                   -             -               -                 186,910    
Reduction in note receivable                                                                             
charged to compensation expense               -             -              7,500                7,500    
                                                                                 
Net income                                  610,556         -               -                 610,556    
                                       ------------       --------       --------          ----------
                                       $(10,032,083)     $(73,880)         $-              $1,258,819    
Balances at December 31, 1994                                                                            
                                              -             -               -                  15,900    
Stock issued to Directors                                                                                
Options exercised under stock                 -             -               -                  11,648    
   option plan                                                                                           
Conversion of subordinated                    -             -               -                 334,252    
   debentures                                                                                            
Rights offering to common                     -             -               -               2,205,208    
   shareholders                            (926,821)        -               -                (926,821)   
                                       ------------       --------       --------          ----------
                                       $(10,958,904)     $(73,880)         $-              $2,899,006
                                                                                                    
Balances at December 31, 1995                 -             -               -                  12,000   
                                                                                                 
Stock issued to Directors                     -             -               -                  71,477    
Options exercised under incentive                                                                
   stock option plan                          -             -               -               2,086,000     
Stock issued in connection with                                                                  
   U.S. Tire acquisition                      -             -               -                 869,000    
Stock issued in connection with                                                                  
   WR-Illinois acquisition                    -             -               -                 583,559    
Conversion of subordinated                                                                       
   debentures                                 -             -               -                  10,000    
Warrants issued to subordinated                                                                  
   debenture holders upon       
   conversion                                 -             -               -               1,514,981
Sale of common stock and warrants     
Net income                                  283,100         -               -                 283,100 
                                       ------------       --------       --------          ----------
Balances at December 31, 1996           (10,675,804)     $(73,880)         $-              $8,329,123   
                                       ------------       --------       --------          ----------
                                       ------------       --------       --------          ----------

</TABLE>
See accompanying notes to consolidated financial statements.




                                                                F-6
<PAGE>
                                  WASTE RECOVERY, INC.
                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                         Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
                                                             1996                  1995                   1994
                                                             ----                  ----                   ----
<S>                                                      <C>                    <C>                   <C>
Cash flows from operating activities:                                                                            
 Net income (loss)                                       $   283,100             $ (926,821)          $   610,556
 Adjustments to reconcile net income (loss) to net
  cash provided by operating activities:
   Charge-off of other receivables                                 -                 28,582                     -
   Depreciation and amortization                           1,132,827              1,515,759             1,149,878
   Gains on sales of property and equipment                   (9,270)               (24,706)             (165,978)
   Amortization of goodwill                                   61,623                 41,164                     -
   Deferred income taxes                                           -                      -              (447,543)
   Interest imputed on discounted note payable                18,009                 13,508                     -
   Equity in loss from partnership operations                668,504                322,630                20,260
   Stock issued to Directors                                  12,000                 12,000                     -
   Warrants issued to debenture holders                       10,000                      -                     -
 Changes in assets and liabilities:
   Accounts receivable                                        95,492                143,420            (1,002,815)
   Note and other receivables                             (1,049,211)                     -              (401,816)
   Inventories                                              (255,773)              (663,057)             (721,117)
   Other current assets                                     (183,616)               107,163               (11,591)
   Other assets                                              (11,333)                75,157               (31,736)
   Accounts payable                                          846,740               (387,772)            1,019,420
   Payable to/receivable from affiliate                   (1,058,266)               (25,846)               81,083
   Accrued liabilities                                        86,371                (45,920)              301,566
   Bond interest payable                                      43,956                      -                     -
   Deferred revenue                                         (147,644)               289,814                     -
   Other                                                     (19,604)                12,546                     -
                                                         -----------            -----------           -----------
     Net cash provided by operating activities               523,905                487,621               400,167
                                                         -----------            -----------           -----------
Cash flows from investing activities:                                                                            
 Proceeds received on note and other receivables                   -                490,320               100,000
 Proceeds from sales of property, plant and                                                                      
  equipment                                                    7,813                 78,000               205,737
 Purchases of property, plant and equipment               (1,625,475)            (1,681,169)             (804,790)
 Net cash received in connection with the purchase
  of WR-Illinois                                              64,744                      -                     -
 Net cash received in connection with the purchase
  of U.S. Tire                                               315,744                      -                     -
 Cash placed in restricted accounts                          (52,084)              (530,200)             (238,400)
 Cash payments out of restricted accounts                    516,931                 38,686                90,000
 Purchase of Domino Salvage, Tire Division, Inc.,
  net of cash received of $16,165                                  -               (170,019)                    -
 Investment in Waste Recovery - Illinois                           -
                                                         -----------            -----------           -----------
     Net cash used by investing activities                  (772,327)            (1,774,382)             (976,174)
                                                         -----------            -----------           -----------
Cash flows from financing activities:                                                                            
 Proceeds from issuance of notes payable                     298,405                 64,764               242,673
 Payment of notes payable                                   (150,382)              (206,734)             (223,091)
 Proceeds from issuance of convertible                                                                           
  subordinated debentures                                     85,000                      -                     -
 Payment upon maturity of convertible                                                                            
  subordinated debentures                                    (85,000)                     -                     -
 Proceeds from issuance of long-term debt                          -                 88,230                95,637
 Repayment of long-term debt                                (222,669)              (297,013)             (198,591)
 Repayment of capital lease obligations                      (97,525)              (117,798)             (175,262)
 Issuance of convertible subordinated debentures                   -                      -               800,000
 Proceeds from issuance of common stock and                                                                      
  warrants                                                 1,586,458              2,220,756               155,795
                                                         -----------            -----------           -----------
     Net cash provided by financing activities             1,414,287              1,752,205               697,161
                                                         -----------            -----------           -----------
Net increase in cash and cash equivalents                  1,165,865                465,444               121,154
Cash and cash equivalents at beginning of year               726,562                261,118               139,964
                                                         -----------            -----------           -----------
Cash and cash equivalents at end of year                 $ 1,892,427            $   726,562           $   261,118
                                                         -----------            -----------           -----------
                                                         -----------            -----------           -----------

See accompanying notes to consolidated financial statements.
</TABLE>
                                          F-7

<PAGE>

                                WASTE RECOVERY, INC.
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  December 31, 1996

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (a)  ORGANIZATION AND OPERATIONS.  Waste Recovery, Inc. (the Company or
             WRI) is a tire recovery company that specializes in processing 
             scrap tires into a refined fuel supplement more commonly 
             referred to as tire-derived fuel (TDF). The Company generates 
             income from the sale of TDF and wire, and from tipping fees 
             charged for the disposal of tires. 
             
             The Company is incorporated in the State of Texas and has its 
             headquarters in Dallas, Texas.  The operating plants are in 
             Portland, Oregon, Houston, Texas, Atlanta, Georgia, 
             Philadelphia, Pennsylvania, Dupo, Illinois, Marseilles, 
             Illinois and Concord, North Carolina.
             
             The Company entered into an agreement as of November 29, 1993, 
             to form a joint venture in a partnership, Waste Recovery - 
             Illinois, an Illinois general partnership (Illinois 
             partnership), in which it owned a 45% interest.  Riverside 
             Caloric Company (RCC), an Indiana corporation, owned 55% of 
             the Illinois partnership.  In December 1996, the Company 
             acquired RCC's 55% ownership interest in WR-Illinois (see note 2).
             
             In December 1996, the Company acquired U.S. Tire Recycling 
             Partners, L.P., a scrap tire collector which recycles tires 
             and operates a scrap tire monofill  (see note 2).
             
             On March 21, 1995, the Company acquired 100% of the 
             outstanding stock of Domino Salvage, Tire Division, Inc. 
             (Domino), a scrap tire recycling company located in 
             Conshohocken, Pennsylvania, a suburb of Philadelphia (see note 2).
             
        (b)  PRINCIPLES OF CONSOLIDATION.  For 1996, the consolidated financial
             statements include the financial statements of Waste 
             Recovery-Illinois, L.L.C. (WR-Illinois), a wholly-owned 
             subsidiary of the Company and its affiliates which was 
             purchased in December 1996 (see note 2), and the financial 
             statements of U.S. Tire Recycling Partners, L.P. (U.S. Tire), 
             a wholly-owned subsidiary of the Company and its affiliates 
             which was purchased in December 1996 (see note 2). The 1996 
             consolidated financial statements include the operations of 
             WR-Illinois and U.S. Tire for the period December 1, 1996 
             through December 31, 1996.

             For 1996 and 1995, the consolidated financial statements 
             include the financial statements of Domino Salvage, Tire 
             Division, Inc., a wholly-owned subsidiary of the Company, 
             which was purchased on March 21, 1995 (see note 2). The 1995 
             consolidated financial statements include the operations of 
             Domino for the period March 21, 1995 through December 31, 
             1995.



                                    F-8
<PAGE>

             Effective January 1, 1994, the limited partners of Waste 
             Recovery Partners, Ltd. converted their limited partnership 
             interests into 2.6 million unregistered shares of WRI Common 
             Stock.  Due to this conversion, the operations of Waste 
             Recovery Partners, Ltd. became wholly-owned by the Company.  
             The 1994 consolidated financial statements reflect the 
             operations of the combined entities.
             
             All significant intercompany balances and transactions have 
             been eliminated in consolidation.  The Company's investment in 
             and equity in earnings of WR-Illinois were accounted for by 
             the equity method until the December 1, 1996 acquisition date 
             (see notes 2 and 9).
             
             The preparation of financial statements in conformity with 
             generally accepted accounting principles requires management 
             to make estimates and assumptions that affect the reported 
             amounts of assets and liabilities and disclosure of contingent 
             assets and liabilities at the date of the financial statements 
             and the reported amounts of revenues and expenses during the 
             reporting period.  Actual results could differ from those 
             estimates.

        (c)  CASH AND CASH EQUIVALENTS.  The Company considers all unrestricted
             cash and highly liquid debt instruments with original 
             maturities of three months or less to be cash equivalents. 

        (d)  INVENTORIES.  Parts inventory represents primarily the cost of the
             grinder knives and machinery parts used in the TDF 
             manufacturing process.  These inventories are stated at cost 
             (first-in, first-out) and are depreciated over the useful 
             lives of these parts, generally six to eighteen months.  TDF 
             inventory is stated at the lower of cost or market.  Cost is 
             determined using a weighted average cost method. 

        (e)  PROPERTY, PLANT AND EQUIPMENT.  Property, plant and equipment are
             stated at cost.  Property, plant and equipment acquired in 
             connection with the purchase of WR-Illinois and U.S. Tire were 
             recorded at fair value.  Property and equipment under capital 
             leases are stated at the lower of the present value of minimum 
             lease payments or fair value of the asset at the inception of 
             the lease. 

             Depreciation of property, plant and equipment is calculated 
             using the straight-line method over the estimated useful lives 
             of the assets (generally three to ten years).  Property, plant 
             and equipment held under capital leases and leasehold 
             improvements are amortized using the straight-line method over 
             the shorter of the lease term or estimated useful life of the 
             asset. 
             
        (f)  BOND ISSUANCE COSTS.  Bond issuance costs are recorded at cost and
             amortized over the life of the associated debt using the 
             effective interest method.


                                     F-9
<PAGE>

        (g)  GOODWILL.  The Company assesses the recoverability of goodwill by
             determining whether the amortization of the asset balance over 
             its remaining life can be recovered through undiscounted 
             future operating cash flows of the acquired operation.  The 
             amount of impairment, if any, is measured based on the 
             estimated fair value of the operation.  Goodwill associated 
             with the purchase of Domino of $548,859 (see note 2) is being 
             amortized on a straight-line basis over ten years.  Goodwill 
             associated with the purchases of WR-Illinois of $947,712 and 
             U.S. Tire of $501,894 is being amortized over 20 and 15 years, 
             respectively.

        (h)  OTHER ASSETS.  Patents, which are included in other assets, are
             recorded at cost and amortized over a fifteen-year period 
             using the straight-line method.  Site license and permits in 
             connection with the U.S. Tire landfill operation were recorded 
             at their fair value as of the acquisition date of U.S. Tire, 
             and are being amortized using the straight-line method over 
             their estimated useful lives ranging from five to fifteen 
             years.
             
        (i)  DEFERRED GRANT REVENUE.  WR-Illinois has an agreement whereby it 
             has received $1,000,000 in grants from the State of Illinois 
             with the successful completion of certain pieces of equipment 
             at the Illinois plants.  As of December 31, 1995, WR-Illinois 
             had received $800,000 from these grants; the remaining 
             $200,000 was received in January 1996.  The grant award is 
             being amortized, beginning when the plants were placed in 
             operation, through the term of the grants, which expire July 
             31, 1999.
             
             In 1995, WR-Illinois also received $365,903 through a grant 
             awarded to Illinois Power Company for the construction and 
             installation of a metering unit at Illinois Power.  At 
             December 31, 1995, 20% of the total amount of the grant was 
             retained pending satisfaction of certain operational 
             requirements.  WR-Illinois received payment for the retainage 
             of approximately $91,000 in 1996. Ownership of the metering 
             unit reverts to Illinois Power at the end of the contract.

        (j)  INCOME TAXES.  Deferred taxes are recognized for the tax 
             consequences of temporary differences by applying enacted 
             statutory tax rates applicable to future years to differences 
             between the financial statement carrying amounts and the tax 
             bases of existing assets and liabilities.  The effect on 
             deferred taxes for a change in tax rates is recognized in 
             income in the period that includes the enactment date.  In 
             addition, future tax benefits are recognized to the extent 
             that realization of such benefits is more likely than not.  A 
             valuation allowance is provided for a portion or all of the 
             deferred tax assets when there is sufficient uncertainty 
             regarding the Company's ability to recognize the benefits of 
             the assets in future years.


                                      F-10
<PAGE>

        (k)  NET INCOME (LOSS) PER COMMON SHARE.  Net income per common share is
             computed based on the weighted average number of common and 
             equivalent shares outstanding during each period.  Common 
             stock equivalents include shares issuable upon exercise of the 
             Company's stock options.  For the years ended December 31, 
             1996, 1995 and 1994, the weighted average number of shares 
             considered to be outstanding were 11,856,758 and 9,132,359 and 
             7,762,817, respectively.  Fully diluted earnings per share is 
             not presented because the effect of considering any 
             potentially dilutive securities is immaterial.
             
             Net income or loss is adjusted by the effect of undeclared 
             dividends on preferred stock of $142,896, $142,506 and 
             $142,502 for the years ended December 31, 1996, 1995 and 1994, 
             respectively.  The effect was to: (1) reduce the net income 
             per common share by $0.01 in 1996, (2) increase the net loss
             per common share by $0.02 in 1995, and (3) reduce the net 
             income per common share by $0.02 in 1994.

        (l)  STATEMENTS OF CASH FLOWS.  The Company paid $425,964, $469,903 and
             $377,558 for interest in 1996, 1995 and 1994, respectively.  
             No income taxes were paid during 1996, 1995 or 1994.  See note 
             22 for further discussion of noncash transactions.
             
        (m)  RECENT ACCOUNTING PRONOUNCEMENTS.  In 1995, the Financial 
             Accounting Standards Board (FASB) issued Statement No. 121, 
             "Accounting for the Impairment of Long-Lived Assets and for 
             the Long-Lived Assets to be Disposed of" and Statement No. 
             123, "Accounting for Stock-Based Compensation."  Both 
             statements are required for adoption in 1996.
             
             Statement No. 121 requires the review of long-lived assets for
             impairment whenever events or changes in circumstances 
             indicate that the carrying amount of an asset may not be 
             recoverable.  An impairment loss will be recognized if the sum 
             of the expected future cash flows (undiscounted and without 
             interest charges) is less than the carrying amount of the 
             asset.  The amount of the impairment loss will be measured as 
             the difference between the carrying amount of the asset and 
             its estimated fair value.  Based on its most recent analysis, 
             the Company believes no impairment existed at December 31, 
             1996.

             Statement No. 123 establishes accounting and reporting standards 
             for various stock-based compensation plans.  Statement No. 123 
             encourages the adoption of a fair value based method of 
             accounting for employee stock options, but permits continued 
             application of the accounting method prescribed by Accounting 
             Principles Board Opinion No. 25 (Opinion 25), "Accounting for 
             Stock Issued to Employees."  Entities that continue to apply 
             the provisions of Opinion 25 must make pro forma disclosures 
             of net income and earnings per share as if the fair value 
             based method 


                                    F-11
<PAGE>

             of accounting had been applied.  In 1996, the Company adopted 
             this statement on a disclosure basis only.

             In February 1997, the FASB issued Statement No. 128, "Earnings Per
             Share."  This statement is required for adoption in 1997.  The 
             Company does not anticipate its adoption to be material to the 
             consolidated financial statements.
             
        (n)  RECLASSIFICATIONS.  Certain prior year amounts have been 
             reclassified to conform with the current year presentation.
             
NOTE 2. ACQUISITIONS
        In December 1996, WRI acquired from Riverside Caloric Company (RCC) its 
        55% interest in the Waste Recovery-Illinois general partnership, in 
        which the Company owned the remaining 45% interest (see note 9).
        
        Also in December 1996, WRI through its subsidiaries acquired all of the
        partnership interests in U.S. Tire Recycling Partners, L.P. (U.S. 
        Tire), which collects and processes scrap tires, and operates a scrap 
        tire monofill in Concord, North Carolina.
        
        On March 21, 1995, WRI acquired 100% of the outstanding stock of Domino
        Salvage, Tire Division, Inc., (Domino), a scrap tire recycling 
        company located in Conshohocken, Pennsylvania, a suburb of 
        Philadelphia.  WRI invested approximately $500,000 during 1995 into 
        Domino to bring Domino's scrap tire recycling capacity up to 5 
        million passenger tire equivalents (PTE's) per year. Reconstruction 
        of the plant was completed in late 1995, and the plant became fully 
        operational in early 1996.
        
        The acquisitions were accounted for as a purchase and, accordingly, the
        purchase price has been allocated to the assets acquired and 
        liabilities assumed based on estimated fair values at the date of 
        acquisition.  The results of operations of WR-Illinois, U.S. Tire, 
        and Domino have been included in the Company's consolidated 
        statements of operations from the date of acquisition through 
        December 31, 1996.

                                    [End of Page] 




                                       F-12
<PAGE>

                            WASTE RECOVERY, INC.

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

        A summary of the assets acquired and liabilities assumed follows:

                                        WR-Illinois      U.S. Tire       Domino
                                        -----------    -----------     ---------
        Current assets                 $   829,328    $   907,438     $ 134,996
        PP&E                             7,981,325      1,967,838       650,765
        Other assets                     1,462,517        195,960             -
        Debt and notes payable          (8,115,000)    (1,271,958)     (368,149)
        Deferred revenue                (1,025,225)             -             -
        Accounts payable and accrued
           liabilities                    (558,964)      (349,118)      (96,452)
                                       -----------    -----------     ---------
                                       $   573,981    $ 1,450,160     $ 321,160
                                       -----------    -----------     ---------
                                       -----------    -----------     ---------

        The following unaudited pro forma summary presents the consolidated 
        results of the Company's operations as if the acquisitions had 
        occurred at the beginning of the periods presented.  The information 
        does not purport to be indicative of the results that actually would 
        have been obtained if the operations were combined during the periods 
        presented and is not intended to be a projection of future results or 
        trends.

<TABLE>
<CAPTION>

                              For the year ended   For the year ended   For the year ended
                               December 31, 1996    December 31, 1995    December 31, 1994
                                   Unaudited            Unaudited           Unaudited
                                   ---------            ---------           ---------
        <S>                  <C>                 <C>                   <C>
        Revenues                 $24,583,814          $20,042,222         $13,244,316
                                 -----------          -----------         -----------
                                 -----------          -----------         -----------
        Net income (loss)        $  (749,435)         $  (961,502)        $   838,678
                                 -----------          -----------         -----------
                                 -----------          -----------         -----------
        Earnings (loss)                                          
          per share             $     (0.06)         $     (0.11)        $      0.11
                                -----------          -----------         -----------
                                -----------          -----------         -----------
</TABLE>

        The Company purchased RCC's interest in WR-Illinois in exchange for 
        1.1 million unregistered shares of Common Stock of the Company (see 
        note 17).

        The Company purchased U.S. Tire in exchange for 3,242,997 
        unregistered shares of Common Stock (see note 17), contingent 
        Convertible Subordinated Notes in the amount of $1,850,000 (see note 
        14), and notes payable (see note 11) in the amount of $605,035.  The 
        debt is secured by the assets of U.S. Tire. Additionally, the Company 
        issued 243,224 unregistered shares of Common Stock to a third party 
        as compensation for services rendered as financial advisor to the 
        Company in connection with the acquisition of U.S. Tire (see notes 17 
        and 19).

        The Company purchased Domino for approximately $867,000, including 
        legal costs, with an initial cash payment to the former shareholders 
        of $100,000. The Company is withholding an additional $50,000, 
        payment of which is contingent upon resolution of certain events.  
        The remaining payments will be made as follows:

                          1997            379,222
                          1998            275,000
                                         --------
                                         $654,222
                                         --------
                                         --------
 

                                   F-13

<PAGE>

                            WASTE RECOVERY, INC.

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Effective March 21, 1996, this note was modified to commence monthly 
         installment payments on September 21, 1996, in the amount of 
         $16,666 per month for twelve consecutive months.  Effective March 
         20, 1997, this note was modified to change the due date of the 
         second installment of $225,000 to May 21, 1997. The third 
         installment of $275,000 is to remain due on March 21, 1998.  This 
         note bears interest at the rate of 1% over prime and the note is 
         secured by the assets and the stock of Domino (included in note 
         13).  The new terms of the modified agreement are reflected in the 
         above remaining payments schedule.  The acquisition also includes a 
         five-year employment agreement with the former President and owner 
         of Domino. 

NOTE 3.  OTHER RECEIVABLES
         Included in other receivables at December 31, 1996 is a receivable for
         $985,000 from an insurance company for property damage and business 
         interruption insurance related to the Atlanta fire (see note 21).  
         The Company received $650,000 of this amount in January and 
         February 1997.  Final payment is expected to be received in the 
         second quarter of 1997.
         
NOTE 4.  INVENTORIES
         Inventory components at December 31, 1996 and 1995 are as follows:

                                                    1996                1995
                                                    ----                ----
         Manufactured fuel inventory            $  281,938            $228,303
         Manufactured wire inventory                27,761                   -
         Work in process                           293,070              12,324
         Parts inventory                           636,714             405,024
                                                ----------            --------
                                                $1,239,483            $645,651
                                                ----------            --------
                                                ----------            --------

NOTE 5.  OTHER CURRENT ASSETS
         Other current assets at December 31, 1996 and 1995 are as follows:

                                                    1996                1995
                                                    ----                ----
         Prepaid insurance                        $259,443            $ 94,395
         Other                                      96,515              55,517
                                                  --------            --------
                                                  $355,958            $149,912
                                                  --------            --------
                                                  --------            --------

NOTE 6.  PROPERTY, PLANT AND EQUIPMENT
         Property, plant and equipment at December 31, 1996 and 1995 are  
         summarized as follows:

                                                    1996                1995
                                                    ----                ----
         Land                                  $ 2,389,580         $   574,280
         Buildings                               2,912,415              50,145
         Tire processing equipment              14,346,593           7,049,520
         Hauling equipment                       1,435,781           1,047,327
         Metering units                            817,785             340,338
         Shop tools and yard equipment             209,177             341,981
         Furniture and fixtures                    313,294             207,661
         Leasehold improvements                  1,530,602           1,467,722
         Construction in progress                  271,165             621,281
                                               -----------         -----------
                                               $24,226,392         $11,700,255
                                               -----------         -----------
                                               -----------         -----------


                                        F-14

<PAGE>

                            WASTE RECOVERY, INC.

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Approximately $68,000 of capitalized interest is included in tire
         processing equipment in connection with the construction of the 
         wire systems in 1996.

NOTE 7.  LEASES
         The Company leases certain property and equipment under capital leases 
         and certain other property and equipment is leased under 
         noncancelable operating leases which expire over the next five 
         years.  Property and equipment include the following amounts for 
         capital leases at December 31, 1996 and 1995:
          
                                                         1996           1995
                                                         ----           ----
         Hauling equipment                             $210,829       $282,462
         Tire processing equipment                      107,574        107,574
         Furniture and fixtures                          57,533         66,204
                                                       --------       --------
                                                        375,936        456,240
         Less accumulated depreciation                 (145,474)      (130,040)
                                                       --------       --------
                                                       $230,462       $326,200
                                                       --------       --------
                                                       --------       --------

         A summary of the minimum rental commitments under noncancelable 
         operating leases and the present value of future minimum capital 
         lease payments as of December 31, 1996 is as follows: 

                                                       Capital       Operating
                                                        Leases         Leases
                                                       -------       ---------
         Year ending December 31:
         1997                                          $127,973     $  459,669
         1998                                            89,568        365,866
         1999                                            23,472        183,825
         2000                                             5,831        137,776
         2001                                                 -         48,331
         Thereafter                                           -         17,426
                                                       --------     ----------
                                                        246,844     $1,212,893
         Less: amount representing interest              30,845     ----------
                                                       --------     ----------
         Present value of minimum lease payments       $215,999     
                                                       --------     
                                                       --------     

         Total rent expense for operating leases for the years ended  
         December 31, 1996, 1995 and 1994 was $1,136,209, $813,397 and 
         $696,750, respectively.

NOTE 8.  RESTRICTED CASH
         Under terms of various debt agreements (see notes 10 and 13), the 
         Company is required to maintain cash balances which have certain 
         withdrawal restrictions.  Amounts on deposit at December 31, 1996 
         and 1995 consisted of certificates of deposit or money market 
         accounts as follows: 

                                       F-15
<PAGE>

                            WASTE RECOVERY, INC.

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                     Release
                                                                   1996      1995      Date
                                                                   ----      ----      ----
         <S>                                                   <C>         <C>       <C>
         Atlanta plant financing debt reserve                  $  390,000  $390,000    2007
         Illinois plant financing debt reserve (see note 10)    1,362,174         -    2004
         Secured operating permits                                 93,853    93,853     -
         Repair and maintenance fund                               49,275    14,182    2007
         Illinois financial assurance trust                        19,493         -     -
         Security for Illinois debt (see note 10)                       -   500,000     -
                                                               ----------  --------
                                                               $1,914,795  $998,035
                                                               ----------  --------
                                                               ----------  --------

</TABLE>

         Under terms of the bond agreements (see note 10), WR-Illinois is 
         required to maintain cash balances for the debt service reserve 
         funds which have certain withdrawal restrictions.  Interest earned 
         on this restricted cash may only be used for payment of current 
         debt service on the bonds.
         
         Pursuant to provisions in the loan agreement, funds were disbursed 
         from the repair and maintenance fund in 1996 and 1995.
         
         In connection with the guaranty by the Company of the bonds sold by 
         Waste Recovery - Illinois in September 1994, certain holders of 
         long-term debt of the Company required that an additional $195,000 
         of collateral be placed in the plant financing debt reserve.  The 
         Company utilized some of the funds obtained from the private 
         placement of its convertible subordinated debentures for this 
         purpose (see note 12).  The Company was also required to provide to 
         these debt holders an additional lien of $600,000 on its Portland 
         facility.

NOTE 9.  INVESTMENT IN WASTE RECOVERY - ILLINOIS
         Effective December 1, 1996, the Company acquired from Riverside Caloric
         Company (RCC) its 55% interest in the Waste Recovery-Illinois 
         general partnership, in which the Company owned the remaining 45% 
         interest (see note 2). Until the December 1, 1996 acquisition date, 
         the Company's investment in WR-Illinois was accounted for under the 
         equity method of accounting.
         
         Waste Recovery - Illinois was formed to jointly build and operate two 
         tire-derived fuel processing facilities in Dupo and Marseilles, 
         Illinois.  The facilities cost approximately $5 million each and 
         began operation in late 1995. Waste Recovery - Illinois has a five 
         year contract to supply Illinois Power Company with 60,000 tons of 
         TDF annually which represents 50% of the facilities' estimated 
         production capacity.



                                       F-16
<PAGE>

                            WASTE RECOVERY, INC.

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Waste Recovery - Illinois completed the sale of $8.875 million in solid
         waste disposal revenue bonds as of September 27, 1994.  The 
         proceeds of the bonds were used to finance the construction of the 
         two facilities.  The Company is guarantor on the bonds and, as 
         managing partner of the Illinois partnership until the December 1, 
         1996 acquisition date, was subject to receive administrative fees 
         of $4,000 per month plus a management fee based on net income, as 
         defined.  During 1996 and 1995, the Company collected management 
         fees of $36,000 and $12,000, respectively.

         Under the equity method of accounting, the Company recognized $668,504,
         $322,630 and $20,260 as losses from partnership operations for the 
         years ended December 31, 1996, 1995 and 1994, respectively.

         At December 31, 1995, the Company's investment in the Illinois 
         partnership includes $258,680 in inventories which were transferred 
         to the Partnership at cost.

         RCC contributed $2 million and the Company contributed a license of its
         technology and assigned the Illinois partnership all of its right, 
         title and interest in the five-year contract with Illinois Power 
         Company.  In 1995, the Company received $750,000 upon reaching 
         certain performance objectives for the construction of equipment 
         used by the Illinois partnership upon the startup of the 
         facilities.  Until the December 1, 1996 acquisition date, 55% of 
         this fee, representing the percentage of the Illinois partnership 
         not owned by the Company, was recognized in other income for the 
         eleven months ending November 30, 1996 and the year ended December 
         31, 1995.  The remaining 45% had been recorded as deferred revenue 
         to be recognized such that it would offset the Company's interest 
         in the excess depreciation expense recorded by WR-Illinois related 
         to this portion of the cost of the plants.  The remaining 
         unrecognized portion of deferred revenue at December 1, 1996 was 
         included in the purchase price for WR-Illinois and allocated to the 
         assets and liabilities acquired on December 1, 1996.

NOTE 10. BONDS PAYABLE
         To provide funding for the construction of the Dupo and Marseilles 
         plants, WR-Illinois entered into two loan agreements:  1) $4,845,000 
         with the Southwestern Illinois Development Authority (SWIDA) and 
         2) $4,030,000 with the Upper Illinois River Valley Development 
         Authority (UIRVDA) (together, the Bonds), respectively. The Bonds 
         were issued through the Solid Waste Disposal Revenue Bonds, Series 
         1994 (Waste Recovery - Illinois Project) dated September 1, 1994, 
         under an Indenture of Trust.  The proceeds to the Partnership were 
         to fund a debt service reserve fund, to pay the costs of issuing 
         the Bonds, to pay interest during construction, and to finance the 
         cost of the construction of buildings and related improvements and 
         the acquisition and installation of machinery, equipment and 
         related property, all constituting industrial, commercial and solid 
         waste disposal facilities located at Dupo and Marseilles, Illinois.

                                  F-17
<PAGE>

                             WASTE RECOVERY, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

        The notes bear interest at 6.5% per annum with interest payable  
        February 1 and August 1 each year, beginning February 1, 1995.  
        Principal payments are due annually on February 1 beginning in 1996
        through 2004. 


        The notes are collateralized by the property, plant and equipment of 
        WR-Illinois, $1,362,174 in restricted cash (see note 8), and are 
        guaranteed by Waste Recovery, Inc.  Future minimum payments as of 
        February 1 each year are as follows: 

              YEAR              SWIDA             UIRVDA             TOTAL
              ----              -----             ------             -----
              1997           $  440,000         $  365,000        $  805,000
              1998              470,000            390,000           860,000
              1999              500,000            415,000           915,000
              2000              530,000            440,000           970,000
              2001              565,000            470,000         1,035,000
            Thereafter        1,925,000          1,605,000         3,530,000
                             ----------         ----------        ----------
              Total          $4,430,000         $3,685,000        $8,115,000
          Bond Premium          183,233            152,586           335,819
                             ----------         ----------        ----------
        Total Bonds Payable  $4,613,233         $3,837,586        $8,450,819
                             ----------         ----------        ----------
                             ----------         ----------        ----------

         Bond premium represents the purchase adjustment recorded to reflect 
         the bonds at market on December 1, 1996 when the Company acquired 
         WR-Illinois (see note 2).  Amortization of $7,153 was recorded for the
         year ended December 31, 1996.


NOTE 11. NOTES PAYABLE

         In connection with the purchase of U.S. Tire (see note 2), the Company
         issued promissory notes payable to the sellers in the aggregate amount
         of $605,035.  The note is non-interest bearing and payable in two
         installments with the first installment of $455,035 due February 1,
         1997, and the final installment of $150,000 due March 31, 1998.  The
         final installment is subject to adjustment based on certain performance
         criteria of the U.S. Tire subsidiary.

         The Company finances insurance premiums under note agreements providing
         for fixed monthly principal and interest payments due over terms not to
         exceed nine months.  Balances outstanding under such note agreements
         aggregated $176,968 and $28,945 at December 31, 1996 and 1995,
         respectively.

         With the acquisition of Domino (see note 2), the Company assumed debt
         to an affiliate of Domino in the original amount of $180,095.  The
         terms of this note provide for interest and principal to be deferred
         until January 1, 1998, at which time monthly principal and interest
         payments are to be made at prime over a two-year term.  Consequently,
         this note has been recorded as of March 21, 1995 (acquisition date) at
         its present value of $130,569, discounted at a rate of ten percent.
         The present value at December 31, 1995 was $144,076. 



                                     F-18
<PAGE>

                             WASTE RECOVERY, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

NOTE 12. CONVERTIBLE SUBORDINATED DEBENTURES
         Effective September 30, 1994, the Company privately placed with
         accredited investors and certain shareholders $800,000 of 10%
         convertible subordinated debentures due March 15, 1996.  The debentures
         were convertible at the option of the registered holders in minimum
         amounts of $10,000 at any time prior to maturity at the rate of one
         share of Common Stock for each $.875 in debenture principal and accrued
         interest amount.  The indebtedness evidenced by the debentures is
         subordinate to all senior indebtedness of the Company and is unsecured.
         As of December 31, 1994, none of these debentures had been converted.

         In conjunction with the Rights Offering (see note 19) in June 1995,
         $265,000 of the subordinated convertible debentures, plus accrued
         interest  of $17,951, were converted at the rate of $.875 per share
         into 323,373 shares of Common Stock.  At the first interest payment
         date, September 15, 1995, the remaining debenture holders elected to
         convert interest due on the debentures in the amount of $51,301 to
         58,631 shares of Common Stock.

         As of the original maturity date, March 15, 1996, $40,000 of the
         convertible subordinated debentures plus interest of $1,995 were
         converted at the rate of $.875 per share into 47,994 shares of Common
         Stock.  The remaining $495,000 in debentures were exchanged for similar
         debentures which carried an interest rate of 18% and a maturity date of
         January 31, 1997.  Other terms and conversion privileges were the same
         as in the original debentures.  On July 1, 1996, the outstanding
         $495,000 in debentures plus accrued interest of $46,564 were converted
         at the rate of $.875 per share into 618,930 shares of Common Stock. 
         Upon conversion, the debenture holders also received warrants to
         purchase an additional 304,425 shares of Common Stock with an exercise
         price equal to market at the date of conversion.  The warrants expire
         July 1, 1998.



                                 [End of Page]



                                     F-19
<PAGE>

                             WASTE RECOVERY, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

NOTE 13. LONG-TERM DEBT
         Long-term debt at December 31, 1996 and 1995 consisted of the
         following:

<TABLE>
<CAPTION>
                                                                                1996           1995
                                                                                ----           ----
         <S>                                                                 <C>            <C>
         10.5% note payable to corporation; due on various dates through
           December 2007; interest payable semi-annually*                    $1,560,000     $1,635,000
         Prime plus .5% note payable to bank; due December 2004,
           guaranteed by The Goodyear Tire & Rubber Company;
           principal and interest payable monthly**                           1,019,309      1,128,329
         Mortgage payable to corporation, interest at prime rate; due July
           2003; principal and interest payable monthly                         940,476              -
         Notes payable to banks with interest rates ranging from 8% to
           10.5%; expiring through November 2000; principal and
           interest payable monthly                                             321,755              -
         7.6% note payable to Small Business Administration; due May
           2001; principal and interest payable monthly                         210,065        248,554
         Prime plus 1% note payable to former Domino shareholders;
           payments due beginning September 1996 (see note 2); due
           March 1998                                                           654,222        700,000
         Prime plus 1% note payable to bank; due July 1998; principal of
           $5,917 plus interest due monthly                                     112,417        183,418
         7.9% note payable to financial institution; due April 28, 2001;
           principal and interest payable monthly                                85,166              -
         7.9% note payable to financial institution; due April 28, 2001;
           principal and interest payable monthly                                82,541              -
         13.25% notes payable to financial institution; due September
           1997; principal and interest payable monthly                          31,137         66,103
         7.9% note payable to financial institution; due November 1997;
           principal and interest payable monthly                                22,726         45,749
         9% note payable to bank; due May 10, 2000; principal and
           interest payable monthly                                              18,456              -
         Notes payable to finance companies with interest rates from
           8.95% to 12%, expiring through June 1997; principal and
           interest payable monthly                                               4,994              -
         10.5% note payable to financial institution; due August 1997;
           principal and interest payable monthly                                 4,953         11,775
                                                                             ----------     ----------
                                                                              5,068,217      4,018,928
         Less:
           Current installments of long-term debt                               998,719        427,552
                                                                             ----------     ----------
         Long-term debt                                                      $4,069,498     $3,591,376
                                                                             ----------     ----------
                                                                             ----------     ----------
</TABLE>


         *The Loan Agreement contains various restrictions, including a
         prohibition against the payment of dividends when such payment would
         cause an event of default, as defined, and financial ratio maintenance
         requirements, which includes minimum working capital and net worth
         requirements.  As of December 31, 1996 the Company was in compliance
         with all required covenants.

         **As of February 29, 1996, this note was transferred to another bank;
         principal of $10,000 plus interest is payable monthly; the term and
         guarantor remain unchanged.  The interest rate with the original bank
         was prime plus 1%.



                                     F-20
<PAGE>

                             WASTE RECOVERY, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

         Debt is secured by substantially all of the Company's accounts
         receivable, inventories and property, plant and equipment and $390,000
         of the restricted cash accounts (see note 8).

         The aggregate maturities of long-term debt at December 31, 1996 are as
         follows: 



                   Year ending December 31:
                             1997                         $  998,719
                             1998                            837,455
                             1999                            620,806
                             2000                            485,134
                             2001                            425,601
                           Thereafter                      1,700,502
                                                          ----------
                                                          $5,068,217
                                                          ----------
                                                          ----------

NOTE 14. CONVERTIBLE SUBORDINATED NOTES
         In connection with the purchase of U.S. Tire (see note 2), the Company
         issued convertible subordinated notes in the aggregate amount of
         $1,850,000 payable to the former partners and shareholders of U.S.
         Tire.  The notes bear interest at an annual rate of 5% for the first
         twelve months, 6% for the second twelve months and 7% until maturity.
         Principal payments are due in the amounts of $500,000 on March 31,
         1999, $450,000 on September 30, 1999, $450,000 on March 31, 2000 and
         $450,000 on September 30, 2000.

         The holders of the notes have the right at their option, at any time
         after September 30, 1997, to convert all but not less than all of the
         principal amount of the notes then outstanding into Common Stock of the
         Company at the price of $2.50 per share, provided that such election to
         convert shall be agreed upon unanimously by the holders of the notes
         then outstanding.

         The convertible subordinated note agreements provide for adjustments as
         reductions to the principal amount of the notes based on certain
         minimum future cash flow of U.S. Tire, as defined.  In accordance with
         APB Opinion No. 16, the convertible subordinated notes are treated as
         "contingent consideration", and accordingly, have not been recorded as
         a liability as of December 31, 1996, and will remain unrecorded until
         such time as the contingency is resolved or the contingency period
         expires.  Interest payments on the convertible subordinated notes
         during the contingency period are recorded as a deferred charge.  If
         the contingency is resolved in favor of the note holders, the
         contingent consideration and deferred interest will be recorded as an
         additional cost of the assets acquired (goodwill) and amortized
         prospectively over its remaining life. 



                                     F-21
<PAGE>

                             WASTE RECOVERY, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

NOTE 15. DEFERRED GRANT REVENUE
         WR-Illinois (Grantee) entered into two grant agreements with the
         Illinois Department of Commerce and Community Affairs (Department)
         (formerly, the Illinois Department of Energy and Natural Resources) as
         of June 1, 1994.  The Department administers the Used Tire Recovery
         Program which offers financial incentives for projects which reuse,
         recycle or recover energy from Illinois used or scrap tires.

         WR-Illinois requested funding assistance to build its TDF processing
         plants in Dupo and Marseilles, Illinois.  The Department agreed to
         provide grants towards WR-Illinois' "projects", as defined. The Grantee
         agreed that at least 30% of the scrap tires it processes will come from
         Illinois sources, and that a minimum of one million Illinois PTE's
         (passenger tire equivalents), as defined, will be collected and
         processed annually at each plant.  The Department awarded the Grantee
         $1,000,000 towards specified equipment ($500,000 at each plant).  As of
         December 31, 1996, the full amount of the grants has been received.

         The grant agreements require WR-Illinois to maintain the equipment for
         the purpose as originally set forth in the agreement, to provide the
         Department with semi-annual reports, and to meet certain other listed
         criteria.

         WR-Illinois received additional funding through a grant of
         approximately $450,000 awarded by the Department to Illinois Power
         Company for the construction of a TDF metering unit at its Baldwin
         Power Plant.  This award is being amortized over the remainder of the
         contract with Illinois Power Company, which expires July 1999.

         As of December 31, 1996, $1,009,061 of the total grant money received
         is recorded as deferred grant revenue in the accompanying balance sheet
         and is being amortized to income through July 31, 1999, at
         approximately $32,000 per month.

NOTE 16. STOCK OPTIONS AND WARRANTS
         1989 INCENTIVE STOCK OPTION PLAN

         In 1989, the Company adopted the 1989 Incentive Stock Option Plan for
         employees (the Incentive Plan).  The purpose of the Incentive Plan is
         to provide certain key employees of the Company with a proprietary
         interest in the Company through the granting of options, restricted
         stock or other stock rights.  The Company has reserved 1,550,000 shares
         of Common Stock for issuance upon exercise of such options and rights
         issued pursuant to this Plan. 

         The terms and amounts of options are determined by the Board of
         Directors. The Incentive Plan provides that option prices will be no
         less than 50% (or 100% depending on the type of option) of the



                                     F-22
<PAGE>

                             WASTE RECOVERY, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

        fair market value per share at the grant date.  The aggregate fair
        market value of Common Stock underlying an incentive stock option
        determined at the date of the grant shall not exceed $100,000 in the
        year in which the options are first exercisable. All options issued to
        date have terms of ten years and vest either immediately or over a five
        year period.

        Shares of Common Stock issued under the Incentive Plan as restricted
        stock are determined by the Board of Directors.  Restrictions, including
        forfeiture provisions and consideration for issuance of such shares, are
        determined by the Board of Directors.  The consideration to be received
        by the Company for issuance of such restricted stock shall be no more
        than 50% of the fair market value at the date of the grant. 

        The Incentive Plan also provides that the Board of Directors may grant
        stock appreciation rights (SARs) entitling the grantee, upon exercise of
        such rights, to receive cash from the Company equal to the increase of
        the fair market value of the Common Stock of the Company times the
        number of units of SARs exercised subsequent to the date of grant.  As
        of December 31, 1996, no restricted stock or SARs had been granted. 

        The terms of the grants, including the grantees, are administered by a
        Stock Option Committee which was formed by the Board of Directors.

        The stock options discussed herein were granted at the market price at
        the date of grant, thus no compensation expense has been recorded.


        NONQUALIFIED STOCK OPTIONS TO NON-EMPLOYEE DIRECTORS

        During 1988 and 1991, the Company granted nonqualified stock options to
        non-employee directors (the Nonqualified Issuances) for continued
        service to the Company.  Such options were exercisable through December
        1993 and January 1996, respectively.

        In 1990, the Company entered into an agreement with the Chairman of the
        Company's Board of Directors granting him options to purchase 200,000
        shares of Common Stock at $.41 per share for a seven-year period ending
        April 3, 1997. Such options may only be exercised once the Company has
        achieved twelve months of profitability or in the event of a change in
        control.  These options became exercisable in 1992 as the Company
        achieved twelve months of profitability.  As of December 31, 1996,
        100,000 of the aforementioned options had been exercised. 


        1992 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS

        At the 1992 Annual Meeting, the shareholders approved the 1992 Stock
        Plan for Non-Employee Directors (the Directors Plan).  Pursuant to such
        plan, non-employee directors of the Company receive 

                                     F-23
<PAGE>

                             WASTE RECOVERY, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         annually (1) after the annual meeting, a stock option to purchase 2,500
         shares of Common Stock so long as the Company's net income for the
         fiscal year just ended improved over the prior year, and (2) in
         January, a Common Stock grant valued at $2,000 for service as a
         director if attendance criteria are met.  Such plan terminates
         January 31, 2000 and 250,000 shares were reserved by the Company for
         grants thereunder.  Under this plan, 10,806, 12,366 and 4,361 shares
         were issued for the years ended December 31, 1996, 1995 and 1994,
         respectively. The option terms are ten years and vest immediately.

         WARRANT ISSUANCES

         In 1995, 100,000 warrants were issued to an investment company.  These
         warrants are exercisable in 1996 at $0.86 per share.  The warrants
         expire July 1, 1998.

         See note 17 for warrant issuances in 1996.

         Pro forma information regarding net income and earnings per share is
         required by SFAS No. 123, and has been determined as if the Company had
         accounted for its employee stock options under the fair value method of
         that statement.  The fair value of each option grant is estimated on
         the date of grant using  the Black-Scholes option pricing model with
         the following weighted-average assumptions used for grants in 1996 and
         1995, respectively; no dividend yield, expected volatility of 73.2% 
         and 74.3%, risk free interest rates of 6.7% and 6.1% and expected lives
         of 8.4 years each.

         For purposes of pro forma disclosures, the estimated fair value of the
         options is amortized to expense over the options' vesting period.  The
         Company's pro forma information:

<TABLE>
<CAPTION>

                                                                        1996                           1995
                                                                        ----                           ----
                                                            As Reported      Pro forma      As Reported     Pro forma
                                                            -----------      ---------      -----------    -----------
               <S>                                          <C>              <C>            <C>            <C>         
               Income (loss) applicable to common share        $140,204       $(32,893)     $(1,069,327)   $(1,123,281)
               Income (loss) per common share                     $0.01          $0.00           $(0.12)        $(0.12)
                                                                                                                    
</TABLE>

         The effects of applying SFAS No. 123 in this pro forma 
         disclosure are not indicative of future amounts as SFAS No. 
         123 does not apply to awards prior to 1995 and additional 
         awards are anticipated in future years.



                                   [End of Page]

                                       F-24
<PAGE>


                             WASTE RECOVERY, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         A summary of stock option transactions under the Incentive 
         Plan and Directors Plan, as well as Nonqualified Issuances, is 
         as follows:

<TABLE>
<CAPTION>
                                                                 1996                    1995                   1994
                                                                 ----                    ----                   ----
                                                                     Weighted-               Weighted-              Weighted- 
                                                                      Average                 Average                Average  
                                                                     Excercise               Excercise              Excercise 
                                                          Shares       Price      Shares       Price      Shares      Price   
                                                        --------     ---------  --------     ---------  --------    --------- 
               <S>                                      <C>          <C>        <C>          <C>        <C>         <C>     
               Outstanding at beginning of year......... 761,100       $0.83     565,900       $0.69     572,400      $0.69   
                    Granted............................. 214,900        1.30     275,000        1.01           -          -   
                    Exercised.......................... (178,000)       0.40     (59,800)       0.26      (3,500)      0.90   
                    Forfeited........................... (58,100)       1.12     (20,000)       0.73      (3,000)      1.19   
                                                        --------                --------                --------              
               Outstanding at end of year............... 739,900       $1.05     761,100       $0.83     565,900      $0.69   
               Exercisable at end of year............... 559,900       $1.07     516,100       $0.76     565,900      $0.69   
               Weighted-average fair value of
                    options granted during the year....... $0.96                   $1.12
</TABLE>

         The following table summarizes information about the fixed 
         price stock options outstanding at December 31, 1996:

<TABLE>
<CAPTION>
                                                  Options Outstanding                            Options Exercisable      
                                   ----------------------------------------------------   -------------------------------
                                     Shares        Weighted-Average                          Shares
                   Range of        Outstanding         Remaining       Weighted-Average    Exercisable    Weighted-Average
               Exercise Prices     at 12/31/96     Contractual Life     Exercise Price     at 12/31/96     Exercise Price 
               ---------------     -----------     ----------------    ----------------    -----------    ----------------
               <S>                 <C>             <C>                 <C>                 <C>            <C>             
                       $0.41         100,000           0.3 years             $0.41           100,000            $0.41     
                       $0.75          87,500           6.1 years             $0.75            87,500            $0.75     
                 $0.98-$1.11         245,000           8.5 years              0.99            65,000             1.01     
                       $1.19          25,000           9.3 years              1.19            25,000             1.19     
                 $1.31-$1.41         192,400           9.4 years              1.32           192,400             1.32     
                       $1.57          90,000           6.4 years              1.57            90,000             1.57     
                                   -----------                                             -----------                    
                 $0.41-$1.57         739,900          7.13 years             $1.05           559,900            $1.07     
                                   -----------                                             -----------                    
                                   -----------                                             -----------                    
</TABLE>

         At December 31, 1996, 833,800 shares were available for grant 
         as options or incentive grants under the Incentive Plan and 
         225,000 shares were available for grant as options under the 
         Directors Plan.

NOTE 17. STOCKHOLDERS' EQUITY
         On December 26, 1996, the Company sold 750,000 shares of unregistered
         Common Stock and 750,000 warrants to purchase Common Stock at a price
         of $1.45 per share and $0.05 per warrant.  The exercise price of the
         warrants is $2.06, which equals the quoted market price for the
         Company's Common Stock on December 26, 1996.  The warrants expire
         December 26, 2000.

                                       F-25
<PAGE>


                             WASTE RECOVERY, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         On December 24, 1996, the Company sold 300,000 shares of unregistered
         Common Stock and 300,000 warrants to purchase Common Stock at a price
         of $1.45 per share and $0.05 per warrant (see note 20).  The exercise
         price of the warrants is $2.06, which equals the quoted market price
         for the Company's Common Stock on December 24, 1996.  The warrants
         expire December 24, 2000.

         In December 1996, the Company issued 1.1 million shares of unregistered
         Common Stock in connection with the acquisition of WR-Illinois (see
         note 2).

         In December 1996, the Company issued 3,486,221 shares of unregistered
         Common Stock in connection with the acquisition of U.S. Tire (see notes
         2 and 19).  Included in the 3,486,221 shares issued are 243,224 shares
         issued to a third party as compensation for services rendered as
         financial advisor to the Company in connection with the acquisition of
         U.S. Tire.

         As a condition of the acquisition of U.S. Tire, the Company has
         committed to file a registration statement with the Securities and
         Exchange Commission to register shares issued to the sellers of U.S.
         Tire.  The shares of Common Stock issued to NIPSCO and those sold in
         the December private placement were given the right to be included in
         this filing.  The Company anticipates this filing will be completed in
         May 1997.

         In 1990, the Company issued 203,580 shares of 7% cumulative preferred
         stock redeemable at the Company's option for $10 per share.  No
         dividends were declared or paid on such preferred stock in 1996, 1995
         or 1994.  Accordingly, undeclared dividends on cumulative preferred
         stock aggregated $938,725 at December 31, 1996 which represents $4.61
         per share of such stock outstanding. Dividends on cumulative preferred
         stock have been added to net loss or deducted from net income for
         purposes of computing per common share amounts. 

NOTE 18. RIGHTS OFFERING
         The Company completed a rights offering on June 26, 1995, 
         which distributed nontransferable subscription rights to 
         eligible stockholders, as defined, to subscribe to the 
         Company's Common Stock at an offering price of $.75.  This 
         "Rights Offering" raised approximately $2.2 million in 
         capital, which is being utilized for specific equipment 
         improvements at each of the Company's facilities, including 
         Domino.  The Company issued 3,238,857 shares of Common Stock 
         with this rights offering.

NOTE 19. RELATED PARTY TRANSACTIONS
         In 1996, the Company incurred a consulting fee of $20,000 to a 
         director in connection with the private placement sale of 
         unregistered Common Stock of the Company (see note 17).

                                       F-26
<PAGE>

                             WASTE RECOVERY, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         In connection with the acquisition of U.S. Tire (see note 2), 
         the Company paid a third party, which is a shareholder of the 
         Company and the Company's public relations firm, 243,224 
         shares of Common Stock of the Company for its assistance as a 
         financial advisor in arranging and facilitating the 
         acquisition of U.S. Tire.  A director of the Company, as an 
         employee of the Company's financial advisor, received $175,000 
         in connection with his assistance to the Company's financial 
         advisor in closing the U.S. Tire transaction.

         In 1996, the Company loaned $40,000 to an officer of the 
         Company.  The loan is non-interest bearing and is expected to 
         be repaid within twelve months.

         In 1996, the Company sold to a director 300,000 shares of 
         unregistered Common Stock and warrants to purchase an 
         additional 300,000 shares of Common Stock at a purchase price 
         of $1.45 per share and $0.05 per warrant, respectively.  The 
         exercise price of the warrants equals the quoted market price 
         of the Company's Common Stock on the date the warrants were 
         purchased.

         The Company received fees of $535,000 in 1995 and $556,000 in 
         1994 for accepting and hauling scrap tires from a significant 
         stockholder.  In 1996, the customer was no longer a 
         significant stockholder.

         In 1994, in lieu of directors' fees, 4,361 shares of the 
         Company's Common Stock were issued to the outside directors.  
         In 1995, the outside directors received $36,000 ($6,000 each) 
         as compensation for services, $6,000 ($1,000 each) for 
         attendance at Board of Directors meetings, and a total of 
         12,366 shares of Common Stock as described in note 16.  In 
         1996, for attendance at Board of Directors meetings, a total 
         of 10,806 shares of Common Stock were issued to the outside 
         directors.

         The Company incurred $60,000 in consulting fees to certain 
         directors for assistance with the sale of the Waste Recovery - 
         Illinois bonds, which was recorded in 1994 and paid in 1995.

         Included in accounts payable at December 31, 1995 is $55,237 due to
         Waste Recovery - Illinois.  During 1995, the Company disposed of
         approximately 7,514 tons of tires at the Partnership's Dupo, 
         Illinois plant and incurred disposal fees to the partnership in
         the amount of $336,382.

NOTE 20. INCOME TAXES
         For the year ended December 31, 1994, the Company adjusted its 
         gross deferred tax asset, including a reduction in the 
         valuation allowance of $508,761, which reflected the expected 
         utilization of the net operating loss carry forwards that were 
         previously expected to expire unutilized.  The net operating 
         loss carry forwards were expected to be utilized based on 
         projected positive results from operations.  The net

                                       F-27
<PAGE>

                             WASTE RECOVERY, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         change in the deferred tax asset of $447,543 represented a tax 
         benefit for the year ended December 31, 1994.

         The provision (benefit) for income taxes consists of the 
         following components for the year ended December 31:

<TABLE>
<CAPTION>

                                             1996       1995         1994
                                             ----       ----         ----
          <S>                             <C>         <C>       <C>
          Current:
          Federal                            $    -     $    -       $    -
          State                               8,850          -            -
                                           --------   --------     --------
               Total current                  8,850          -            -
                                           --------   --------     --------
         Deferred:
          Deferred taxes                   (119,278)   284,862       61,218
          Deferred tax asset valuation 
            allowance                       119,278   (284,862)    (508,761)
                                           --------   --------     --------
               Total deferred                     -          -     (447,543)
                                           --------   --------     --------
                                           $  8,850   $      -     $(447,543)
                                           --------   --------     --------
                                           --------   --------     --------
</TABLE>

         Total income tax expense (benefit) differs from the amount computed by
         applying the U.S. federal income tax rate of 34% to income before 
         income taxes for the following reasons:


<TABLE>
<CAPTION>

                                             1996       1995         1994
                                             ----       ----         ----
          <S>                             <C>        <C>           <C>
          U.S. federal income tax, 
            at statutory rates           $  96,254   $(315,119)    $ 55,424
          Penalties                            220      20,216       13,418
          Amortization of goodwill          20,115      13,996
          Change in valuation allowance   (119,278)    284,862     (508,761)
          State income tax                   8,850           -            -
          Other                              2,689      (3,955)      (7,624)
                                        ----------   ----------   ---------
                                         $   8,850   $        -   $(447,543)
                                        ----------   ----------   ---------
                                        ----------   ----------   ---------
</TABLE>


               The deferred tax assets (liabilities) are comprised of the 
           following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>

                                                       1996         1995
                                                       ----         ----
          <S>                                      <C>            <C> 

          Deferred tax assets:
            Net operating loss carry forwards        2,622,220    $2,451,107
            Depreciation                               312,269       361,297
            Deferred grant revenues                     91,587       106,188
              Accruals for financial reporting 
                 purposes currently not deductible 
                 for tax                                32,104        48,527

              Capitalization of general and
                 administrative costs for tax           62,098        16,505
              Carrying differences for investment 
                 in Illinois                           269,386       114,814
              Other                                     13,080         9,924
                                                    ----------    ----------
            Gross deferred tax asset                 3,402,744     3,108,362
            Valuation allowance                     (2,686,877)   (2,660,819)
                                                    ----------    ----------
                                                       715,867       447,543
                                                    ----------    ----------
            Deferred tax liabilities:
               Book/tax basis in fixed assets and
                 deferred gain                        (268,324)            -
                                                    ----------    ----------
            Gross deferred tax liabilities            (268,324)            -
                                                    ----------    ----------
            Net deferred tax asset                  $  447,543     $ 447,543
                                                    ----------    ----------
                                                    ----------    ----------
</TABLE>
                                     F-28

<PAGE>

                             WASTE RECOVERY, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         As of December 31, 1996, the Company has approximately $7.156 
         million in net operating loss carry forwards which expire between
         the years 2002 and 2011. The deferred tax asset recorded at 
         December 31, 1995 and 1996, is based on the expected utilization
         of net operating loss carry forwards based on projected
         positive results.  Due to changes in ownership which occurred in
         1996, there will be an annual limitation of approximately $1 
         million on the amount of net operating losses available to offset
         future taxable income.

         As a result of the December 1996 acquisitions discussed in Note 2, a
         deferred tax asset of $145,336 was set up in the opening balance  
         sheet.  A valuation allowance for the full amount of the deferred
         tax asset was also set up in the opening balance sheet.

NOTE 21. INVOLUNTARY CONVERSION OF ASSETS
         On November 26, 1996, the Atlanta plant sustained damage due to a
         mechanical fire.  As a result, TDF and wire production ceased for
         the remainder of the year.  The shredding machinery and equipment
         was not damaged, thus allowing the plant to continue accepting
         scrap tires for disposal which were then shredded and disposed of.
         As of December 31, 1996, the plant was in the process of being 
         rebuilt.  Completion of the rebuild is expected by mid-April 1997,
         at which time the plant will be fully operational.  This 
         involuntary conversion of assets has been recognized in the 
         year ending December 31, 1996, as follows:

<TABLE>
<CAPTION>

            <S>                                                      <C>
            Estimated insurance proceeds to be received on property  $ 901,815
              Net book value of property destroyed                    (151,844)
                                                                      ---------
              Gain on involuntary conversion of property               749,971
              Estimated insurance proceeds from business
                interruption insurance                                  83,333
              Costs incurred in clean-up                              (209,085)
                                                                      ---------
            Net gain on involuntary conversion                       $ 624,219
                                                                      ---------
                                                                      ---------
</TABLE>


         The estimated insurance proceeds are included in other receivables 
         (see note 3) at December 31, 1996, of which $650,000 was received 
         in January and February 1997.

                                    [End of Page]

                                     F-29
<PAGE>

        On August 7, 1994, the Baytown (outside Houston, Texas) plant 
        sustained substantial damage due to a fire.  Consequently, the 
        plant's operations were shut down from that time until the last week 
        of December 1994.  During this period, the plant incurred a major 
        renovation and clean-up.   This involuntary conversion of assets has 
        been recognized in the year ending December 31, 1994, as follows:

        Net insurance proceeds received on property   $  372,137
        Net book value of property destroyed              (8,750)
                                                      ----------
        Gain on involuntary conversion of property       363,387
        Estimated insurance proceeds from business
          interruption insurance                         120,000
        Cost incurred in clean-up and remediation       (669,629)
                                                      ----------
        Net loss on involuntary conversion of 
          assets                                      $ (186,242)
                                                      ----------
                                                      ----------

        The renovation of the Baytown plant was completed in late December 
        1994. The cost of the renovation is included in plant, property and 
        equipment in the amount of $263,035 at December 31, 1994.

        The Company applied for business interruption insurance to cover the 
        loss of operating revenues during the time the plant was shut down. 
        The claim was not processed until the fall of 1995; of the $120,000 
        recorded as receivable in the accompanying 1994 financial statements, 
        only $91,418 was received and the difference of $28,582 was recorded 
        as an expense during 1995.

NOTE 22.  NONCASH TRANSACTIONS

        During 1996, the Company had the following noncash transactions 
        which have been excluded from the statements of cash flows:

<TABLE>
<CAPTION>

                                                                  Increase
                                                                 (Decrease)
                                                                 -----------
        <S>                                                      <C>
         Additions of equipment under capital lease               $  (41,304)
         New capital lease obligations                                41,304
         Convertible, subordinated debentures converted 
           to common stock                                          535,000
         Interest on debentures converted to common stock            48,559
         Decrease in debentures payable                            (535,000)
         Decrease in interest payable on debentures                 (48,559)
                                                                 -----------
                                                                 $        --
                                                                 -----------
                                                                 -----------
</TABLE>

        In addition to the above noncash transactions during 1996, see note 
        2 regarding the assets and liabilities acquired and the additional 
        debt incurred with the acquisition of WR-Illinois, U.S. Tire and 
        Domino. 

                                      F-30
<PAGE>

NOTE 23. SIGNIFICANT CONTRACTS
         WR-Illinois entered into a contract with Illinois Power Company on 
         October 12, 1993, to supply it with 60,000 tons of TDF per year for a 
         period of five years.  If WR-Illinois is unable to fulfill this 
         requirement, the Company will sell TDF produced at its other 
         facilities to Illinois Power.  Sales to Illinois Power of TDF 
         produced at the Dupo facility began in September 1995.

NOTE 24. BUSINESS AND CREDIT CONCENTRATIONS
         The Company's customers are located throughout the United States.  
         Five customers accounted for significant Company sales for the years 
         ended December 31:

                                 1996           1995           1994
                              ----------     ----------     ----------
         Customer one         $2,940,000     $2,221,000     $1,506,000
         Customer two          1,840,000      1,604,000      1,566,000
         Customer three          364,000      2,999,000      3,041,000
         Customer four           566,000        535,000        556,000
         Customer five           257,000        832,000        750,000
                              ----------     ----------     ----------
         Total                $5,967,000     $8,191,000     $7,419,000
                              ----------     ----------     ----------
                              ----------     ----------     ----------

         In addition to these customers, which are all significant entities, 
         the Company does business with a variety of companies with diverse 
         credit risk.  The Company does not generally require collateral or 
         other security from its customers and has historically encountered 
         very little loss on its receivables. 

NOTE 25. PROFIT SHARING PLAN
         Effective January 1, 1995, the Company adopted the Waste Recovery, 
         Inc. 401(k) Plan (the Plan), a defined contribution plan.  Employees 
         who have completed six months of service and have attained the age 
         of twenty-one are eligible to become participants in the Plan.  
         Participants may contribute up to 15% of their compensation, as 
         defined, annually.  Company contributions to the Plan are determined 
         at the discretion of the Board of Directors.  No contributions were 
         made during the years ended December 31, 1996 and 1995.

NOTE 26. LITIGATION AND CONTINGENCIES
         The Company is a party to certain lawsuits which are generally 
         incidental to its business.  Management does not believe the 
         ultimate resolution of such matters will have a significant effect 
         on the Company's financial position and, therefore, no liabilities 
         have been recorded in the accompanying consolidated financial 
         statements.

         Like other waste management companies, the Company's operations are 
         subject to extensive and changing federal and state environmental 
         regulations governing emissions into the atmosphere,

                                      F-31
<PAGE>

         wastewater discharges, solid and hazardous waste management 
         activities and site restoration and abandonment activities.  As of 
         December 31, 1996, no such costs had been accrued and management 
         does not believe the effects of the aforementioned activities will 
         have a material effect on the Company's financial statements.

NOTE 27. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
         The fair value of the Company's current assets, restricted cash and 
         accounts payable approximates the recorded amounts because of the 
         liquidity and short maturity of these instruments.

         It is not practicable to estimate the fair value of the Company's 
         long-term debt and notes payable as they are unique as debt 
         instruments for which there is no public market.

                                    [End of Page]

                                      F-32
<PAGE>

                                                                  SCHEDULE II


                                 WASTE RECOVERY, INC.
                          VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                           Additions
                                                           ---------
                                       Balance at   Charged to  Charged to              Balance at
                                      Beginning of  Costs and     Other                   End of
         Description                      Year       Expenses    Accounts   Deductions    Year(1)
         -----------                      ----       --------    --------   ----------    -------
<S>                                     <C>          <C>          <C>        <C>          <C>
Year ended December 1994:
     Allowance for doubtful accounts    $30,318      $36,063      $  -       $41,381      $25,000
                                        -------      -------      ----       -------      -------
                                        -------      -------      ----       -------      -------
Year ended December 1995:
     Allowance for doubtful accounts    $25,000      $38,917      $  -       $36,834      $27,083
                                        -------      -------      ----       -------      -------
                                        -------      -------      ----       -------      -------
Year ended December 1996:
     Allowance for doubtful accounts    $27,083      $63,554      $  -       $39,620      $51,017
                                        -------      -------      ----       -------      -------
                                        -------      -------      ----       -------      -------
</TABLE>

(1) Amount represents the allowance for doubtful accounts, a contra account 
to trade accounts receivable.

                                      S-1
<PAGE>

                                  INDEX TO EXHIBITS
                                  -----------------
Exhibit
Number                              Exhibit
-------                             -------

  3.1    Amended and Restated Articles of Incorporation filed July 5, 1988, 
         with the Secretary of State of Texas, incorporated herein by reference
         to Exhibit 3.4 to the Company's Form 10-K filed March 24, 1989.

  3.2    Articles of Amendment to the Articles of Incorporation filed June 8, 
         1990, with the Secretary of State of Texas, incorporated herein by 
         reference to Exhibit 3.5 to the Company's Form 10-K filed March 27, 
         1991.

  3.3    By-Laws, amended and restated as of March 10, 1992, incorporated 
         herein by reference to Exhibit 3.6 to the Company's Form 10-K filed 
         March 26, 1992.

  4.1    Form of Common Stock Certificate of Registrant, incorporated herein 
         by reference to the Company's Form S-1, as amended, filed July 15, 
         1986.

  4.2    Indenture of Trust dated April 1, 1988, between Development Authority 
         of Fulton County and Citizens and Southern Trust Company (Georgia), 
         National Association, as Trustee, incorporated herein by reference 
         to Exhibit 4.2 to the Company's report on Form 8-K filed June 1,
         1988.

  4.6    Form of 10% Convertible Subordinated Debenture due March 15, 1996, 
         incorporated herein by reference to Exhibit 4.6 to the Company's 
         report on Form 8-K filed October 5, 1994.

 10.6    Agreement dated May 9, 1986, between Registrant and The Goodyear Tire 
         and Rubber Company, incorporated herein by reference to Exhibit 10.32 
         to the Company's Amendment No. 1 to Form S-1 filed July 1, 1986.

 10.7    Lease Agreement dated January 15, 1988, between Southern Metal 
         Finishing Company, Inc. and the Registrant, incorporated herein by 
         reference to Exhibit 10.37 to the Company's Form 10-K filed March 25, 
         1988.

 10.8    Indemnity Agreement dated January 29, 1988, by the Registrant and 
         Southern Metal Finishing Company, Inc., incorporated herein by 
         reference to Exhibit 10.38 to the Company's Form 10-K filed March 25, 
         1988.

 10.10   Estoppel Deed, dated December 28, 1989, between the Registrant as 
         Grantor, and Tex A. Perkins, et al., as Grantee, incorporated herein 
         by reference to Exhibit 10.64 to the Company's Form 10-K filed 
         March 26, 1990.

 10.11   Lease of Real Property, dated January 1, 1990, between the Registrant,
         as Lessee, and Tex A. Perkins, et al., as Lessor, incorporated herein 
         by reference to Exhibit 10.65 to the Company's Form 10-K filed 
         March 26, 1990.

 10.12   Warranty Deed, dated February 7, 1990, between Tex A. Perkins, et al.,
         as Grantor, and Wayne Easley, as Grantee, incorporated herein by 
         reference to Exhibit 10.66 to the Company's Form 10-K filed March 26,
         1990.

 10.13   Assignment of Lease, dated February 7, 1990, from Tex A. 
         Perkins, et al., as Assignor, and Wayne Easley, as Assignee, 
         incorporated herein by reference to Exhibit 10.68 to the 
         Company's Form 10-K filed March 26, 1990.


                                       E-1
<PAGE>

Exhibit
Number                              Exhibit
-------                             -------

 10.14   The Registrant's 1989 Stock Plan for Employees, effective March 6, 
         1989, and approved by the Registrant's shareholders at the 1989 Annual
         Meeting, incorporated herein by reference to Exhibit 10.73 to the
         Company's Form 10-K filed March 26, 1990.

 10.15   Amendment No. 1 to the Registrant's 1989 Stock Plan for Employees, 
         incorporated herein by reference to Exhibit 10.15 to the Company's 
         Form 10-K filed March 28, 1996.

 10.16   Nonqualified Stock Option Agreement dated April 4, 1990, granted by 
         the Registrant to Allan Shivers, Jr. for 200,000 shares, incorporated 
         herein by reference to Exhibit 10.77 to the Company's Form 10-K 
         filed March 27, 1991.

 10.17   Form of Nonqualified Stock Option Agreement for grants to employees 
         made January 7, 1991, incorporated herein by reference to Exhibit 
         10.89 to the Company's Form 10-K filed March 26, 1992.

 10.18   Form of Incentive Stock Option Agreement for grants to employees 
         made October 1, 1991, incorporated herein by reference to Exhibit 
         10.90 to the Company's Form 10-K filed March 26, 1992.

 10.19   1992 Stock Plan for Non-Employee Directors, incorporated herein by 
         reference to Exhibit 4.8 of the Company's Form S-8 filed May 8, 1992.

 10.20   Form of Nonqualified Stock Option Agreement for grants to 
         non-employee directors made January 4, 1991, incorporated herein by 
         reference to Exhibit 10.88 to the Company's Form 10-K filed March 26,
         1992.

 10.21   Indemnity and Security Agreement, dated June 1, 1990, between 
         Registrant and The Goodyear Tire and Rubber Company, incorporated 
         herein by reference to Exhibit 10.82 to the Company's Form 10-K 
         filed March 27, 1991.

 10.22   Amendment to Lease of Real Property dated April 25, 1991, between 
         the Registrant, as Lessee, and George Glanz, as Lessor, incorporated 
         herein by reference to Exhibit 10.86 to the Company's Form 10-K 
         filed March 26, 1992.

 10.23   Agreement (for supply of TDF) between the Registrant and Illinois 
         Power Company dated October 12, 1993, (paragraph 4 of Exhibit 10.007 
         is subject to a request for confidential treatment), incorporated 
         herein by reference to Exhibit 10.007 to the Company's report on
         Amendment No. 1 to Form 8-K/A filed December 14, 1993.

 10.24   Leasehold Commercial Deed of Trust, Security Agreement, Fixture 
         Filing, Financing Statement, and Assignment of Leases and Rents 
         dated September 20, 1994, executed by the Registrant as Grantor, for 
         the benefit of NationsBank of Georgia N.A. as Trustee, incorporated
         herein by reference to Exhibit 10.021 to the Company's
         Form 10-K filed March 30, 1995.

 10.25   Stock Purchase Agreement for the purchase by the Registrant of the 
         outstanding stock of Domino Salvage, Tire Division, Inc., dated 
         March 21, 1995, incorporated herein by reference to Exhibit 10.024 
         to the Company's Form 10-K filed March 30, 1995.

 10.26   Loan Agreements dated April 1, 1988, between Development Authority of
         Fulton County and the Registrant, incorporated herein by reference 
         to Exhibit 28.2 to the Company's report on Form 8-K filed June 1, 
         1988.

                                       E-2
<PAGE>

Exhibit
Number                              Exhibit
-------                             -------

 10.27   Promissory Note dated April 1, 1988, from the Registrant to 
         Development Authority of Fulton County, incorporated herein by 
         reference to Exhibit 28.3 to the Company's report on Form 8-K filed 
         June 1, 1988.

 10.28   Leasehold Deed to Secure Debt and Security Agreement dated April 1, 
         1988, between the Registrant and the Trustee, incorporated herein by 
         reference to Exhibit 28.5 to the Company's report on Form 8-K filed 
         June 1, 1988.

 10.29   First Amendment to Lease Agreement dated April 1, 1988, between 
         Southern Metal Finishing Company, Inc. and the Registrant, 
         incorporated herein by reference to Exhibit 28.6 to the Company's 
         report on Form 8-K filed June 1, 1988.

 10.30   Assignment of Contracts dated April 1, 1988, between the Registrant 
         and Development Authority of Fulton County, incorporated herein by 
         reference to Exhibit 28.7 to the Company's report on Form 8-K filed 
         June 1, 1988.

 10.31   Promissory Note dated February 29, 1996, executed by the Registrant 
         as maker payable to Texas Commerce Bank National Association in 
         principal amount of $1,119,309.01.(1)

 10.32   Note Purchase Agreement dated February 29, 1996, between The Goodyear
         Tire and Rubber Company and Texas Commerce Bank National 
         Association.(1)

 10.33   Form of Convertible Subordinated Debenture Conversion Agreements 
         effective July 1, 1996.(1)

 10.34   Form of Warrant to Purchase Common Stock of Waste Recovery, Inc. as 
         of July 1, 1996, as Exhibit "A" to the Convertible Subordinated 
         Debenture Conversion Agreements included herein in Exhibit 10.47.(1)

 10.35   Dodge Common Stock and Warrant Purchase Agreement dated December 24, 
         1996 between Waste Recovery, Inc. and Michael C. Dodge.(1)

 10.36   Common Stock and Warrant Purchase Agreement dated December 26, 1996 
         by and among Waste Recovery, Inc. and Bette Nagelberg, Ronald I. 
         Heller, Rachel Heller, Ronald I. Heller as custodian for Evan Heller,
         Delaware Charter Guaranty & Trust Co. FBO, and R. Anthony Cioffari.(1)

 10.37   Agreement and Plan of Reorganization dated as of the 30th day of 
         September 1996 by and among Waste Recovery, Inc., New U.S. Tire 
         Recycling Corp., U.S. Tire Recycling Partners, L.P., Bodner/Greenstein
         Capital Holdings, Inc., Tirus, Inc., Tirus Associates, L.L.C.,
         Environmental Venture Fund, L.P., Argentum Capital, L.P., and 
         Certain Shareholders, incorporated herein by reference to Exhibit 1.1
         of the Company's current report on From 8-K filed December 20, 1996.

 10.38   Partnership Purchase Agreement dated as of December 16, 1996, 
         between Riverside Caloric Company, Waste Recovery, Inc., and 
         Waste Recovery-Illinois, L.L.C., incorporated herein by reference 
         to Exhibit 1.2 of the company's current report on Form 8-K filed 
         December 20, 1996.

 10.39   Deed of Trust and Security Agreement between New U.S. Tire Recycling 
         Corp. (a wholly-owned subsidiary of the Registrant) as Grantor, and 
         the former partners and shareholders of U.S. Tire Recycling 
         Partners, L.P. as Beneficiary.(1)

 10.40   Letter Agreement between Waste Recovery, Inc. and Cameron & Associates
         relating to the retention of Cameron & Associates as financial advisor
         in connection with the acquisition of U.S. Tire.(1)

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<PAGE>

Exhibit
Number                              Exhibit
-------                             -------

 11.1    Statement regarding computation of per share earnings - See page F-5 
         of this Form 10-K which is incorporated herein by reference.

 21.1    Subsidiaries of the Registrant.(1)

 23      Consent of Independent Accountants.(1)

 27.1    Financial Data Schedule.(1)

 99.1    The Company's Proxy Statement for its 1997 Annual Meeting of 
         Shareholders, incorporated herein by reference pursuant to 
         Rule 12b-32 of the Securities Exchange Act of 1934.  Definitive 
         copies of such Proxy Statement to be filed under Regulan 14A 
         within 120 days after December 31, 1996.

-----------------
(1)  Filed herewith.

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