<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ----------------------

                                   FORM 10-K/A
                                (Amendment No. 2)

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1997
                         Commission file number 0-25998

                        WASTE SYSTEMS INTERNATIONAL, INC.
             (Exact name of registrant as specified in its charter)


              Delaware                                   95-4203626
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

 420 Bedford Street, Suite 300
 Lexington, Massachusetts                                   02173
(Address of principal executive offices)                 (zip code)


                              (781) 862-3000 Phone
                               (781) 862-2929 Fax
              (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, $.01 par value per share
                                Series F Warrants
                            Placement Agent Warrants
                      ------------------------------------

         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/A or any
amendment to this Form 10-K/A

         As of March 24,  1998,  the  market  value of the  voting  stock of the
Registrant held by non-affiliates of the Registrant was $66,854,700

         The number of shares of the Registrant's  common stock, par value $.01 
per share,  outstanding as of March 24, 1998 was 3,911,181.




<PAGE>
                                TABLE OF CONTENTS

Explanatory note: this is  amendment  number 2 to the  Form  10-K  filed  with 
                  the  Securities  and  Exchange Commission on March 27, 1998.


                                                                            PAGE

PART I
         Item 1.  Business                                                     1
         Item 2.  Unchanged
         Item 3.  Legal Proceedings                                            8
         Item 4.  Unchanged

PART II
         Item 5.  Unchanged
         Item 6.  Selected Financial Data                                     10
         Item 7.  Management's Discussion and Analysis
                  of Financial Condition and Results of Operations            12
         Item 8.  Financial Statements and Supplementary Data                 20
         Item 9.  Unchanged

PART III

         Item 10.  Unchanged
         Item 11.  Unchanged
         Item 12.  Unchanged
         Item 13.  Unchanged

PART IV
         Item 14.  Unchanged

Signatures                                                                    47

<PAGE>
Note Regarding Forward Looking Statements:

This Annual Report on Form 10-K/A contains forward-looking statements concerning
among other things,  the Company's  expected  future  revenues,  operations  and
expenditures and estimates of the potential markets for the Company's  services.
Such  statements  made by the Company  fall within the meaning of Section 27A of
the  Securities  Act of 1933,  as amended,  and  Section  21E of the  Securities
Exchange  Act of 1934,  as  amended.  All such  forward-looking  statements  are
necessarily  only estimates of future results and the actual results achieved by
the  Company may differ  materially  from these  projections  due to a number of
factors as  discussed  in the  section  entitled  "Management's  Discussion  and
Analysis  of  Financial  Condition  and Results of  Operations--Certain  Factors
Affecting Future Operating Results" of this Form 10-K/A.

                                     PART I

Item 1.  Business

The Company

         Waste Systems International,  Inc. (referred to herein as the "Company"
or "WSI") is a regional integrated  non-hazardous solid waste management company
that provides solid waste collection,  recycling, transfer and disposal services
to commercial and residential customers.

         The  Company  currently  owns and  operates a solid  waste  landfill in
Moretown,  Vermont,  three  transfer  stations and collection  operations  which
operate as an integrated  solid waste  operation,  serving over 4,400 commercial
and  residential  customers in the  Burlington,  St. Albans,  St.  Johnsbury and
Barre-Montpelier, Vermont areas.

         The Company currently has two additional landfill projects at different
stages of  development.  In November 1997, WSI signed a definitive  agreement to
acquire a  700-acre,  3 million  cubic  yard  permitted  municipal  solid  waste
landfill in Hopewell, Pennsylvania. This transaction is expected to close by the
end of May, 1998.  Additionally,  the Company entered into a contract to operate
and  remodel  an  existing   30-acre   municipal   landfill  in  South   Hadley,
Massachusetts.  On March 16,  1998 the  Company  filed  its draft  environmental
impact  report with the  Massachusetts  Department of  Environmental  Protection
("MDEP") and  anticipates  receiving all of its required MDEP permits during the
second or third quarter of 1998,  which would allow WSI to begin accepting solid
waste at the first 6-acre lined cell by the first or second quarter of 1999. The
South Hadley  landfill  project is currently  expected to have  approximately  2
million cubic yards of new capacity for future disposal.

         On March 23, 1998, the Company signed a definitive agreement to acquire
Horvath  Sanitation,  Inc.,  d/b/a  Eagle  Waste  ("Eagle"),  which  is based in
Altoona, Pennsylvania.  This transaction is also expected to close by the end of
May 1998.  Eagle has  approximately  $8 million in annual  revenue and  collects
approximately  200 tons  per day of  solid  waste.  Eagle's  operations  will be
integrated with the Hopewell, Pennsylvania landfill acquisition discussed above.
Ultimately,  WSI intends to create integrated solid waste management  operations
in the geographical areas surrounding each of its landfills.

         WSI's  objective  is to  expand  the  current  geographic  scope of its
operations  and to become one of the leading  providers of  non-hazardous  solid
waste management  services in each market that it serves.  The Company's primary
growth strategy is to acquire landfills in or near urban metropolitan areas, and
to  secure  dedicated  waste  streams  for  such  landfills  by  acquisition  or
development of collection operations and transfer stations.  The internalization
of waste  streams is a major  component of the Company's  strategy.  The Company
believes that significant  opportunities  exist to expand its operations in each
of its current and targeted markets.

Industry Overview

         Based on published  industry  information,  the solid waste  management
industry  generated  approximately  $36  billion in revenue  during  1997 and is

                                       1
<PAGE>

expected  to  grow  to $40  billion  by the  year  2000.  Of  the  $36  billion,
approximately  43% is controlled by public  companies  with the remaining  split
almost equally between 6,000 small private operators and municipal governments.

         The  solid  waste   management   industry  is  generally   experiencing
significant  consolidation  and  integration.  The  Company  believes  that  the
consolidation  and  integration  is a result  of the  following  factors,  among
others: (i) increasingly stringent environmental regulations which have resulted
in an increased need for substantial  capital  requirements to remain  compliant
with such  regulations;  (ii) the inability of many smaller operators to achieve
the  economies of scale  necessary to compete with larger  providers;  (iii) the
competitive and economic benefits of providing integrated collection, recycling,
transfer and disposal services; and (iv) the privatization of solid waste assets
and services by municipalities.  Although  significant  consolidation within the
solid waste management industry has occurred,  the Company believes the industry
remains highly fragmented and that a substantial number of potential acquisition
opportunities remain.


Strategy and Acquisition Program

         WSI is pursuing an  acquisition  strategy to achieve its  objective  of
becoming a leading  provider of integrated  solid waste  management  services in
each of the  markets  it serves.  The key  elements  of its  strategy  are:  (i)
identify  landfills  near  urban  metropolitan  centers  that  are  economically
feasible for  acquisition;  (ii) develop an  integrated  solid waste  management
operation which provides collection,  recycling,  transfer and disposal services
to increase and control waste streams to its landfills;  (iii)  consolidate  and
expand  its  operations   around  each  of  its  landfills   through   "tuck-in"
acquisitions;   (iv)   improve   existing  and   acquired   operations   through
internalization of the waste stream, thus increasing operating  efficiencies and
improving capacity utilization; and (v) internal growth.

         The following  table sets forth  acquisitions  completed by the Company
through February 1998:
<TABLE>
<CAPTION>
<C>                         <C>                  <C>                           <C>                 <C>              
Acquisition                 Month Acquired       Principal Business            Location            Market Area            

Moretown Landfill             July 1995           Landfill                     Moretown, VT        Vermont

The Hartigan Company          January 1997        Solid waste collection       Stowe, VT           Central Vermont

CSWD Transfer Station         October 1997        Transfer Station             Burlington, VT      N.W. Vermont
VT.

Doyle Disposal                January 1998        Solid waste collection       Barre, VT           Central Vermont

Perkins Disposal              January 1998        Solid waste collection       St. Johnsbury, VT   N. E. Vermont

Rapid Rubbish                                     Solid waste collection/
       Removal , Inc.         February 1998       Transfer Station             St. Johnsbury, VT   N. E. Vermont

Greenia Trucking              February 1998       Solid waste collection       St. Albans, VT      N. W. Vermont

</TABLE>

In addition,  the Company has signed certain  agreements for the  acquisition or
operation of landfills and  collection  companies  described  under  "Integrated
Solid Waste Management Operations - Hopewell, Pennsylvania" and "--South Hadley,
Massachusetts."  There can be no assurance  that the Company will continue to be
successful in executing its acquisition  strategy.  See Management's  Discussion
and Analysis of Financial  Condition and Results of Operations - Certain Factors
Affecting Future Operating Results - "Ability to Identify, Acquire and Integrate
Acquisition Targets").

Integrated Solid Waste Management Operations

         The Company believes that it can successfully  create  integrated solid
waste  management  operations by acquiring or developing  disposal  capacity and
subsequently  integrating them with strategically  located collection operations
and transfer  stations.  The Company's  strategy,  if successful  would ensure a
steady and  growing  long-term  waste  stream to its  landfills.  The  Company's
current integrated solid waste management operations are as follows:


                                       2
<PAGE>
                                       
         Moretown,  Vermont.  The Company established its first integrated solid
waste management operations in the geographical area surrounding its landfill in
Moretown, Vermont. In addition to the landfill in Moretown, Vermont, the Company
currently owns and/or operates three transfer stations and collection operations
serving over 4,400 commercial and residential  customers in the Burlington,  St.
Albans, St. Johnsbury and Barre-Montpelier, Vermont areas. The first cell ("Cell
1") at the Company's  landfill is currently  operating at approximately  300-350
tons per day ("TPD") with remaining  estimated permitted capacity as of December
31, 1997 of  approximately  215,000 cubic yards. A permit  application was filed
with the Vermont  Agency of Natural  Resources for the  development  of a second
cell ("Cell 2") on April 3, 1997.  On March 11,  1998,  WSI  received  its draft
certification  for Cell 2 from the  Vermont  Agency of  Natural  Resources.  The
Company expects to receive all of the permits  required for Cell 2 by the end of
the second quarter of 1998 although no assurances can be given that all required
permits will be issued in accordance with the Company's expected schedule.  When
all of the permits are granted,  the Company will begin  construction on Cell 2,
which will increase the permitted  landfill capacity by an estimated 1.3 million
cubic yards.  For the year ended  December 31,  1997,  approximately  24% of the
waste received at its Moretown,  Vermont landfill was collected by the Company's
hauling operations or received at the Company's transfer stations. Also, 100% of
the waste  collected  by the Company was  disposed of at its  Moretown,  Vermont
landfill.

         Hopewell,  Pennsylvania.  In  November  1997,  WSI signed a  definitive
agreement to acquire the  700-acre,  3 million  cubic yard  permitted  municipal
solid  waste  landfill  in  Hopewell,   Pennsylvania.   The  purchase  price  of
approximately  $6.0 million will be paid  primarily by the assumption of debt on
the facility.  The existing  landfill  consists of five permitted  cells, one of
which is currently  operating.  The Hopewell project represents a new market for
the  Company,  in which it intends to build a network  of  adjoining  collection
operations and transfer  stations within the central  Pennsylvania  region.  The
Company has also identified additional room for expansion at the landfill.  This
transaction is expected to close by the end of May, 1998.

         On March 23, 1998, the Company signed a definitive agreement to acquire
Horvath  Sanitation,  Inc.,  d/b/a  Eagle  Waste  ("Eagle"),  which  is based in
Altoona, Pennsylvania.  Eagle has approximately $8 million in annual revenue and
collects  approximately 200 tons per day of solid waste. Eagle's operations will
be integrated with the Hopewell,  Pennsylvania  landfill as discussed above. The
Company has also identified  additional tuck-in opportunities for acquisition of
collection  companies and transfer stations in the area, which would help ensure
WSI a stable, long-term waste stream to the landfill.

         South  Hadley,  Massachusetts.  WSI  and  the  Town  of  South  Hadley,
Massachusetts  have entered  into a contract as of August 22, 1995,  whereby the
Company will operate and remodel (see  "Landfill  Remodeling"  below) the town's
30-acre  municipal  solid waste  landfill.  The Town of South Hadley will retain
full  ownership  of the  landfill  while the Company  operates  and remodels the
facility.  In March 1997,the Company received a landfill  disruption permit from
the MDEP which enabled WSI to begin engineering work and feasibility  studies at
the  South  Hadley  landfill.  On March  16,  1998 the  Company  filed its draft
environmental  impact report with the MDEP and anticipates  receiving all of its
operating and  construction  permits during the second or third quarter of 1998,
which would allow WSI to begin  accepting  solid waste at the first 6-acre lined
cell  during the first or second  quarter  of 1999.  The South  Hadley  landfill
project is currently expected to have approximately 2 million cubic yards of new
capacity for future disposal.

Landfill Remodeling

         Municipal waste at landfills  typically  contains a large amount of low
density, bulky material. The Company believes that by processing and recycling a
percentage of this material, it is possible to recapture approximately 40-80% of
the landfill's  original  permitted  disposal  capacity.  The remodeling process
begins with the  excavation  of the landfill and  processing  of existing  solid
waste.  The  landfill is then lined in  accordance  with  current  environmental
standards,  and the remaining processed solid waste is returned to the new lined
landfill.  At this point,  the site is  considered  operational  and is ready to
receive additional solid waste from outside sources.

         The benefits of landfill remodeling are: (a) the entire landfill can be
brought into compliance with current applicable environmental  regulations;  (b)
the  useful  life of the  landfill  can be  extended  as a result of the  volume
reduction of the existing waste creating substantial new waste capacity; and (c)
the  high  cost  of  closing  down  a  landfill  in   compliance   with  current
environmental  regulations  can be deferred and the future  closure costs can be
financed through the utilization of the new waste capacity.

                                       3
<PAGE>

Medical Waste Technology

         WSI  currently  maintains  ownership  of an  infectious  medical  waste
disposal technology,  known as the continuous flow auger ("CFA") process,  which
is  the  subject  of a U.S.  patent  and a  pending  European  Community  patent
application.  This process is fully  developed  and requires no further  capital
funding. The Company's activities in this area have been limited to licensing of
the  technology  and related  engineering  consulting  services to licensees.  A
previous world-wide  licensing  arrangement with BioMedical Waste Systems,  Inc.
("BioMed")  was  terminated  as to most  jurisdictions  as a result of  BioMed's
failure to make contractual minimum payments. In February 1996, WSI entered into
an  exclusive  licensing  arrangement  for the United  Kingdom and Ireland  with
ScotSafe  Limited  ("ScotSafe"),  which was  expanded  to cover all of Europe in
November  1996.  This  arrangement  was  terminated  in late 1997 as a result of
ScotSafe's failure to pay royalties due. Subsequent to the termination, ScotSafe
was  placed  into  receivership  and  its  assets  were  purchased  by  Eurocare
Environmental   Services,  Ltd.  ("Eurocare")  in  December  1997.  Eurocare  is
currently  operating the three  facilities the Company  constructed for ScotSafe
without a licensing  agreement.  The Company  petitioned  Scottish Courts for an
interim interdict,  which would have required Eurocare to cease operations until
proper  licensing  of the CFA  process  was  obtained  from WSI.  The  Company's
petition  to the Court was denied  since the Company  currently  does not hold a
European  patent on the CFA  process.  However,  since the  Company  does have a
European  patent  application  pending,  the Scottish  courts have required that
Eurocare  track all waste  processed  at the  plants  and to remove  some of the
recommended  modifications to the standard CFA process which were recommended by
WSI while under  agreement with  ScotSafe.  Although no assurances can be given,
the Company  expects to be granted its European  patents  during 1998,  at which
time,  the  Company  will  act  vigorously  to  protect  its  rights  to the CFA
technology against Eurocare and seek substantial damages. Otherwise, the Company
has no licenses or other  revenue-paying  arrangements  with  respect to the CFA
technology, and is reassessing its business plans in this respect.

Competition

         The solid  waste  management  industry is highly  competitive  and very
fragmented and requires  substantial  labor and capital  resources.  Competition
exists for collection, recycling, transfer and disposal services. The markets in
which the Company  competes or is likely to compete in are usually served by one
or more of the large  national,  regional or local solid waste companies who may
have greater  financial,  marketing or technical  resources  than WSI and may be
able to achieve greater economies of scale than the Company.

         The Company also competes with counties,  municipalities  and operators
of alternative  disposal  facilities that operate their own waste collection and
disposal facilities.  The availability of user fees, charges or tax revenues and
the availability of tax-exempt financing may provide a competitive  advantage to
the  public  sector.  Additionally,  alternative  disposal  facilities  such  as
recycling and incineration may reduce the demand for the disposal of solid waste
in landfills.

         The Company competes for waste collection and disposal  business on the
basis of quality of operation,  price and  geographical  location.  From time to
time,  competitors may reduce the price of their services in an effort to expand
or maintain market share or to win competitively bid contracts.

         Competition  also exists  within the industry for  acquisition  targets
where the Company will usually  compete with publicly owned national or regional
solid waste management companies.

Government Regulation

         The Company and its  customers  are subject to  extensive  and evolving
environmental  laws and  regulations  that  have been  enacted  in  response  to
technological  advances and increased concern over environmental  issues.  These
regulations are  administered  by the U.S. EPA and various other federal,  state
and local  environmental,  transportation  and health and safety  agencies.  The
Company believes that such laws and regulations have the effect of enhancing the
potential  market in which the Company operates by allowing the Company to offer
economical  solutions for regulatory  problems to its customers and  acquisition
candidates.  On the other hand, such laws and regulations  represent a potential
constraint on the  Company's  operation of projects for its customers or for its
own account.

         In order to develop and operate a landfill project, the Company must go
through several governmental review processes and obtain one or more permits and


                                       4
<PAGE>

often zoning or other land use  approvals.  These permits and zoning or land use
approvals  are  difficult  and time  consuming  to obtain  and may be opposed by
various local authorities and ad hoc citizens' groups. Once obtained,  operating
permits  generally must be periodically  renewed and are subject to modification
and revocation by the issuing agency.

         The Company's landfill  operations  subject it to certain  operational,
monitoring, site maintenance,  closure and post-closure, and financial assurance
obligations  which  change  from  time to time  and  which  could  give  rise to
increased  capital  expenditures  and operating  costs.  In connection  with the
Company's preliminary  development of landfill projects, the Company will expend
considerable  time,  effort and  resources  in complying  with the  governmental
review and permitting  process  necessary to develop or increase the capacity of
these landfills.  Governmental  authorities have the power to enforce compliance
with these laws and  regulations  and to obtain  injunctions  or impose civil or
criminal penalties in the case of violations. Failure to correct the problems to
the satisfaction of the authorities  could lead to curtailed  operations or even
closure of a landfill.

         The  principal  federal,  state,  and local  statutes  and  regulations
applicable to the Company's operations are as follows:

         The Resource  Conservation and Recovery Act of 1976. RCRA regulates the
generation,  treatment, storage, handling,  transportation and disposal of solid
waste and  requires  states to develop  programs to ensure the safe  disposal of
solid  waste.   RCRA  divides  solid  waste  into  two  groups,   hazardous  and
non-hazardous.  Wastes are generally  classified as hazardous wastes if they (i)
either  (a) are  specifically  included  on a list of  hazardous  wastes  or (b)
exhibit  certain  hazardous   characteristics  and  (ii)  are  not  specifically
designated  as  non-hazardous.  Wastes  classified  as hazardous  under RCRA are
subject to much stricter regulation than wastes classified as non-hazardous, and
businesses that deal with hazardous waste are subject to regulatory  obligations
in addition to those imposed on handlers of non-hazardous waste.

         Among the wastes  that are  specifically  designated  as  non-hazardous
waste are household waste and "special" waste, including items such as petroleum
contaminated   soils,   asbestos,   foundry  sand,   shredder   fluff  and  most
non-hazardous industrial waste products.

         The  EPA  regulations   issued  under  Subtitle  C  of  RCRA  impose  a
comprehensive   "cradle  to  grave"   system  for   tracking   the   generation,
transportation,  treatment,  storage  and  disposal  of  hazardous  wastes.  The
Subtitle C  Regulations  impose  obligations  on  generators,  transporters  and
disposers of hazardous  waste, and require permits that are costly to obtain and
maintain for sites where such material is treated, stored or disposed.  Subtitle
C requirements  include detailed operating,  inspection,  training and emergency
preparedness  and response  standards,  as well as requirements for manifesting,
record keeping and reporting,  corrective action, facility closure, post-closure
and financial  responsibility.  Most states have promulgated regulations modeled
on some or all of the  Subtitle  C  provisions  issued  by the EPA.  Some  state
regulations impose different, additional obligations.

         The  Company  is  not  involved  with  transportation  or  disposal  of
hazardous  substances (as defined in CERCLA) in  concentrations  or volumes that
would classify those materials as hazardous wastes.

         In October  1991,  the U.S.  EPA  adopted new  regulations  pursuant to
Subtitle D of RCRA (the "Subtitle D Regulations").  These new regulations became
generally  effective in October 1993 (except for certain MSW landfills accepting
less than 100 TPD,  as to which the  effective  date was April 9, 1994,  and new
financial  assurance  requirements,  which became  effective  April 9, 1997) and
include location  restrictions,  facility design standards,  operating criteria,
closure  and  post-closure   requirements,   financial  assurance  requirements,
groundwater  monitoring  requirements,  groundwater  remediation  standards  and
corrective action requirements.  In addition, these regulations require that new
landfills meet more stringent liner design criteria  (typically,  composite soil
and synthetic liners or two or more synthetic  liners) designed to keep leachate
out of groundwater and have extensive collection systems to control leachate for
treatment  prior to  disposal.  Groundwater  wells  must  also be  installed  at
virtually all landfills to monitor  groundwater  quality.  The regulations  also
require,  where threshold test levels are present, that methane gas generated at
landfills  be  controlled  in a  manner  that  protects  human  health  and  the
environment.  Each state is required to revise its landfill  regulations to meet
these requirements or such requirements,  will be automatically  imposed upon it
by the U.S.  EPA.  Each state is also  required to adopt and  implement a permit
program or other  appropriate  system to ensure that landfills  within the state
comply  with  the  Subtitle  D  criteria.   Many  states  have  already  adopted
regulations  or programs as stringent as or more  stringent  than the Subtitle D
Regulations, which were first proposed in August 1988.

                                       5
<PAGE>

         The Federal  Water  Pollution  Control  Act of 1972 (the  "Clean  Water
Act").  The Clean  Water Act  establishes  rules  regulating  the  discharge  of
pollutants from a variety of sources, including solid waste disposal sites, into
waters of the United States. If runoff or collected  leachate from the Company's
landfills and transfer  stations are  discharged  into streams,  rivers or other
surface  waters of the United  States,  the Clean  Water Act would  require  the
Company  to apply  for and  obtain a  discharge  permit,  conduct  sampling  and
monitoring and, under certain  circumstances,  reduce the quantity of pollutants
in such discharge. Also, virtually all landfills are required to comply with the
new federal  storm water  regulations,  which are  designed to prevent  possibly
contaminated  storm  water from  flowing  into  surface  waters.  The Company is
working with the appropriate  regulatory  agencies to ensure that its facilities
are in compliance with Clean Water Act requirements,  particularly as they apply
to treatment and discharge of leachate and storm water.  The Company has secured
or has applied for the required  discharge  permits under the Clean Water Act or
comparable  state-delegated  programs. To ensure compliance with the Clean Water
Act  pretreatment and discharge  requirements,  the Company has either installed
wastewater  treatment  systems  at its  facilities  to  treat  its  effluent  to
acceptable  levels before discharge or has arranged to discharge its effluent to
municipal  wastewater  treatment  facilities.  The  Company  believes  that  its
facilities  are in  compliance  in all  material  respects  with Clean Water Act
requirements.

         The Comprehensive Environmental Response,  Compensation,  and Liability
Act of 1980  ("Superfund"  or "CERCLA").  CERCLA  established  a regulatory  and
remedial  program  intended  to provide  for the  investigation  and  cleanup of
facilities  from  which  there  has been,  or is  threatened,  a release  of any
hazardous  substance  into  the  environment.  CERCLA's  primary  mechanism  for
remedying  such  problems is to impose  strict joint and several  liability  for
cleanup of facilities on current owners and operators of the site, former owners
and  operators  of  the  site  at the  time  of the  disposal  of the  hazardous
substances,  as well  as the  generators  of the  hazardous  substances  and the
transporters  who  arranged  for  disposal or  transportation  of the  hazardous
substances.   The  costs  of  CERCLA  investigation  and  cleanup  can  be  very
substantial.  Liability  under  CERCLA  does not depend  upon the  existence  or
disposal of "hazardous waste" but can also be founded upon the existence of even
very small  amounts of the numerous  "hazardous  substances"  listed by the EPA,
many of which can be found in household  waste.  If the Company were to be found
to be a responsible  party for a CERCLA cleanup,  either at one of the Company's
owned or  operated  facilities,  the  enforcing  agency  could hold the  Company
completely  responsible for all  investigative and remedial costs even if others
may also be liable.  CERCLA also authorized the imposition of a lien in favor of
the United  States upon all real  property  subject to or affected by a remedial
action  for all costs for which a party is  liable.  The  Company's  ability  to
obtain  reimbursement  from others for their allocable share of such costs would
be limited by the Company's ability to find other responsible  parties and prove
the extent of their  responsibility and by the financial resources of such other
parties.  In the past,  legislation has been introduced in Congress to limit the
liability  of   municipalities   and  others  under  CERCLA  as  generators  and
transporters  of municipal solid waste.  Although such  legislation has not been
enacted,  if it were to pass it would limit the  Company's  ability to seek full
contribution from  municipalities for CERCLA cleanup costs even if the hazardous
substances  that were  released  and caused  the need for  cleanup at one of the
Company's  facilities  were  generated  by or  transported  to the facility by a
municipality.

         The Clean Air Act. The Clean Air Act provides for  regulation,  through
state implementation of federal requirements,  of the emission of air pollutants
from  certain  landfills  based upon the date of the landfill  construction  and
volume per year of  emissions  of  regulated  pollutants.  The EPA has  recently
promulgated new source performance standards regulating air emissions of certain
regulated  pollutants (methane and non-methane organic compounds) from municipal
solid  waste  landfills.  The EPA may also  issue  regulations  controlling  the
emissions of particular  regulated air  pollutants  from  municipal  solid waste
landfills. Landfills located in areas with air pollution problems may be subject
to even more  extensive  air  pollution  controls and emission  limitations.  In
addition,  the EPA has issued  standards  regulating  the removal,  handling and
disposal of asbestos-containing materials.

         Each  of the  federal  statutes  described  above  contains  provisions
authorizing,  under certain  circumstances,  the bringing of lawsuits by private
citizens to enforce the provisions of the statutes.

         The  Hazardous  Materials  Transportation  Act. The  transportation  of
hazardous waste is regulated both by the EPA pursuant to RCRA and by the federal
Department  of  Transportation  ("DOT")  pursuant  to  the  Hazardous  Materials
Transportation Act ("HMTA").  Pursuant to the HMTA, DOT has enacted  regulations
governing the transport of hazardous  waste.  These  regulations  govern,  among
other things,  packaging of the hazardous waste during  transport,  labeling and
marking requirements, and reporting of and response to spills of hazardous waste
during  transport.  In addition,  under both the HMTA and RCRA,  transporters of


                                       6
<PAGE>

hazardous waste must comply with manifest and record keeping requirements, which
are designed to ensure that a shipment of hazardous waste is properly identified
and can be  tracked  from its  point of  generation  to point of  disposal  at a
permitted hazardous waste treatment, storage or disposal facility.

         The  Occupational  Safety  and  Health  Act  of  1970  ("OSHA").   OSHA
authorizes  the  Occupational  Safety and Health  Administration  to  promulgate
occupational   safety  and  health  standards.   Various  of  those  promulgated
standards, including standards for notices of hazards, safety in excavation, and
the handling of asbestos, may apply to certain of the Company's operations. OSHA
regulations set forth  requirements for the training of employees  handling,  or
who may be exposed in the workplace to,  concentrations  of  asbestos-containing
materials that exceed  specified  action levels.  The OSHA  regulations also set
standards for employee protection,  including medical  surveillance,  the use of
respirators,  protective  clothing and  decontamination  units,  during asbestos
demolition, removal or encapsulation as well as its storage,  transportation and
disposal.  In addition,  OSHA specifies a maximum permissible exposure level for
airborne  asbestos in the  workplace.  The company has no direct  involvement in
asbestos removal or abatement projects.

         State  and  Local  Regulation.  Each  state in which  the  Company  now
operates or may  operate in the future has laws and  regulations  governing  the
generation,  storage, treatment, handling,  transportation and disposal of solid
and hazardous  waste,  water and air pollution  and, in most cases,  the citing,
design,  operation,   maintenance,   closure  and  post-closure  maintenance  of
landfills  and  transfer  stations.  In  addition,   many  states  have  adopted
"Superfund"  statutes  comparable  to, and in some cases  more  stringent  than,
CERCLA.  These statutes impose  requirements  for  investigation  and cleanup of
contaminated  sites and  liability  for costs and damages  associated  with such
sites,  and some  provide  for the  imposition  of liens  on  property  owned by
responsible  parties.  Furthermore,  many  municipalities  also have ordinances,
local laws and regulations  affecting Company  operations.  These include zoning
and health  measures that limit solid waste  management  activities to specified
sites or activities,  flow control  provisions that direct the delivery of solid
wastes to specific facilities, laws that grant the right to establish franchises
for  collection  services  and  then put out for bid for the  right  to  provide
collection  services,  and bans or other  restrictions  on the movement of solid
wastes into a municipality.

         Certain  permits and approvals may limit the types of waste that may be
accepted  at a  landfill  or the  quantity  of waste that may be  accepted  at a
landfill during a given time period. In addition, certain permits and approvals,
as well as  certain  state  and  local  regulations,  may  limit a  landfill  to
accepting  waste that  originates  from  specified  geographic  areas or seek to
restrict the importation of out-of-state waste or otherwise discriminate against
out-of-state waste.  Generally,  restrictions on the importation of out-of-state
waste  have  not  withstood  judicial  challenge.   However,   proposed  federal
legislation   would  allow  individual   states  to  prohibit  the  disposal  of
out-of-state  waste or to limit the amount of  out-of-state  waste that could be
imported for disposal and would require states, under certain circumstances,  to
reduce  the  amounts  of waste  exported  to other  states.  If this or  similar
legislation is enacted, states in which the Company operates landfills could act
to limit or prohibit the importation of out-of-state  waste.  Such state actions
could adversely  affect landfills within those states that receive a significant
portion of waste originating from out-of-state.

         In addition,  certain  states and  localities may for economic or other
reasons  restrict the  exportation of waste from their  jurisdiction  or require
that a  specified  amount of waste be  disposed of at  facilities  within  their
jurisdiction.  In 1994, the United States  Supreme Court held  unconstitutional,
and therefore  invalid, a local ordinance that sought to impose flow controls on
taking waste out of the locality. However, certain state and local jurisdictions
continue to seek to enforce such restrictions and, in certain cases, the Company
may elect not to challenge such restrictions based upon various  considerations.
In addition, the aforementioned  proposed federal legislation would allow states
and localities to impose certain flow control  restrictions.  These restrictions
could result in the volume of waste going to landfills  being reduced in certain
areas, which may adversely affect the Company's ability to operate its landfills
at their full capacity and/or affect the prices that can be charged for landfill
disposal services.

         There  has been an  increasing  trend at the  federal,  state and local
level to mandate and encourage waste reduction at the source and waste recycling
and to prohibit  the  disposal of certain  types of solid  wastes,  such as yard
wastes, in landfills. The enactment of regulations reducing the volume and types
of wastes  available for transport to and disposal in landfills could affect the
Company's ability to operate its facilities at their full capacity.

         The Company  believes that it is in compliance with federal,  state and
local regulations  based on the Company's  internal review process which has not
identified  any non  compliance  and the Company has not  received any verbal or
written notification from any governmental agency to the contrary.

                                       7
<PAGE>


Environmental Impairment Liability Insurance

           The Company has a $5.0  million  environmental  impairment  liability
insurance  policy covering  claims for sudden or gradual onset of  environmental
damage.  If the Company were to incur a liability  for  environmental  damage in
excess of its  insurance  limits,  its  financial  condition  could be adversely
affected. The Company carries a comprehensive general liability insurance policy
which  management  considers  adequate  at this time to  protect  its assets and
operations from other risks.


Employees of the Registrant

         As of December 31, 1997, WSI had 35 full time employees. As a result of
the acquisitions  executed subsequent to year-end,  the Company had 60 full time
employees  as of March 24,  1998 and,  based on  acquisitions  under  definitive
agreements  as of March 23,  1998,  the Company  expects the number of full time
employees to grow to approximately 175 by June 30, 1998. WSI believes its future
success  will  depend in part on its  continued  ability to  recruit  and retain
highly qualified technical and managerial personnel.

         WSI's employees are not subject to any collective bargaining agreement.
WSI considers its relations with its employees to be good.

Item 3.  Legal Proceedings

         Richard  Rosen.  In  July  1996,  the  Company  commenced   arbitration
proceedings  against Richard Rosen ("Rosen"),  former Chairman,  Chief Executive
Officer and  President of the  Company,  seeking to recover  amounts,  excluding
interest and litigation costs,  which the Company believes it was owed by Rosen.
This action was undertaken at the direction of the Board of Directors  following
its  receipt  of a report  by a special  committee  of the  Board  appointed  to
investigate  Rosen's financial  dealings with the Company,  in consultation with
independent  counsel  retained  in  connection  with  its  investigation.  Rosen
resigned from all offices with the Company on March 27, 1996.  Amounts which the
Company sought to recover included  unreimbursed  advances and amounts which the
Company believed  constituted  improper expense  reimbursements  and payments of
Company funds for personal benefit.

         An arbitration hearing was completed on October 25, 1996. On January 2,
1997, the  arbitrator  issued the Award of  Arbitrator,  directing  Rosen to pay
$780,160,  excluding interest and litigation costs, for breaches by Rosen of his
employment agreement with the Company "in failing to discharge in good faith the
duties of his  positions  and failing to act under the direction of the Board of
Directors' of the Company.  On February 25, 1997 the Middlesex Superior Court in
Cambridge,  Massachusetts  confirmed the arbitration  award and entered judgment
against  Rosen,  which is now  non-appealable,  in an  amount  of  approximately
$833,000. The Company is currently pursuing discovery against Rosen through this
forum  to  identify  assets  that  Rosen  may  have  available  to  satisfy  the
outstanding  judgment.  In August of 1996,  the  Company  secured a  preliminary
injunction in Middlesex  Superior  Court with respect to any future sales of the
Company's  stock by Rosen.  The Company has filed a Motion in such action asking
the Court to issue a  broader  form of  permanent  injunction  in the  case.  On
September  8, 1997 the  Company  commenced  a  supplementary  process  action in
Cambridge  District  Court  to  collect  on  such  judgment,  including  seeking
foreclosure  on all shares of the  Company's  stock owned by Rosen.  On March 5,
1998 the judge granted the Company's motion and the Company is in the process of
obtaining  all the  shares  held by Rosen.  No  assurance  can be given that the
Company  will be able to collect the entire  balance of any  amounts  awarded in
arbitration  including interest and litigation costs. The Company is carrying on
its  December  31, 1997  balance  sheet an amount of  $300,000  in  unreimbursed
advances due from Rosen, but the Company's other claims and additional  advances
have not been reflected on the balance sheet at this time.  The Company  expects
to have received in the aggregate a minimum of approximately $300,000 from Rosen
in cash or stock by March 31, 1998.

         On March 27, 1997,  Rosen  commenced  an action  against the Company in
Middlesex  County  (Massachusetts)  Superior Court,  seeking an award of damages
resulting  from the Company's  alleged  breach of a Memorandum of  Understanding
entered into between the Company and Rosen in connection with the termination of
Rosen's  employment with the Company,  in which Rosen had been granted an option
to purchase certain assets of the Company not related to its core business.  The
Company  believes this claim to be frivolous and is  vigorously  defending  this
action.

                                       8
<PAGE>

         Marguerite Piret. In October 1997 in the Middlesex  Superior Court, the
Company  commenced an action against  Marguerite A. Piret, a former  director of
the  Company  and the wife of  Rosen,  seeking  damages  against  Ms.  Piret for
breaches of her fiduciary duty as a former director of the Company.  The case is
in the  discovery  stage  and no trial  date has been  set.  If the  Company  is
successful  in its claims,  the Company  may  recover  direct and  consequential
damages from Ms. Piret.

         Other Proceedings.  As of the beginning of fiscal 1997, the Company had
pending  against it four complaints with the  Massachusetts  Commission  Against
Discrimination  ("MCAD").  Currently,  the Company  has  pending  against it two
ongoing complaints with the Massachusetts Commission Against Discrimination. The
Company is not in a position to evaluate  the  likelihood  that damages or other
relief will be awarded, or that the amount of damages awarded could be material.
With  respect  to the two other MCAD  complaints,  one has been  settled  for an
amount not  material  to the Company  and the other has been  dismissed  by MCAD
(with  leave to file a claim in  Massachusetts  Superior  Court  expiring  as of
September 21, 1998).

                                       9
<PAGE>


                                     PART II

Item 6.  Selected Consolidated Financial and Operating Data

Over the past two years, the Company has changed its focus from an environmental
technologies  company to an  integrated  solid  waste  management  company.  The
Company  has  restructured  its  operations,  commenced  operations  in Vermont,
operated the Fairhaven landfill,  which has been terminated,  and (including the
cessation of operations  at its  environmental  technology  center) made several
acquisitions.  These  acquisitions,  dispositions and  restructuring  activities
affect the comparability of the financial information herein.

<TABLE>
               Waste Systems International, Inc. and Subsidiaries
                             Selected Financial Data
     (in thousands except for outstanding shares and earnings per share data)


                                                                    Fiscal Year Ended
                                              --------------------------------------------------------------
                                              Dec. 31,      Dec. 31,    Dec. 31,       Dec. 31,    Dec. 31,
                                                1997          1996          1995         1994        1993
                                              --------------------------------------------------------------
<S>                                           <C>            <C>          <C>              <C>        <C>
Statement of Operations Data:
    Revenues                                  $3,458         $1,496       $1,344           $0          $0
                                              -------        -------      ------         ------      -------
    Cost of operations:
      Operating expenses                       1,719            921          766
                                                                                            -           -
      Depreciation and amortization              692            370           72
                                                                                            -           -
      Write-off of landfill  
        development costs                      1,495          6,652           -             -           -
                                              -------        -------      ------         ------     -------   
                                                           
         Total cost of operations              3,906          7,943          838            -           -
                                              -------        -------      ------         ------     -------
                                                                                           
            Gross profit (loss)                 (448)        (6,447)         506            -           -
                                                                                           
    Selling, general and                       
     administrative expenses                   2,138          2,443        3,286          1,485         936
  
    Amortization of prepaid 
     consulting fees                             -              834          501            -           -
                                                                   
   Restructuring                                 596          1,741           -             -           -
                                              -------        -------      ------         ------     --------
            Loss from operations              (3,182)       (11,465)     (3,281)         (1,485)       (936)
                                              -------        -------      ------         ------     -------
    Other income (expense):
         Royalty and other income              
         (expense), net                         (521)           923          865          1,850       1,300
   
         Interest income                         172            178          289             14          27
         Interest expense and              
              financing costs                 (1,355)        (1,182)       (471)           (166)       (125)
   
         Equity in loss of affiliate              -             (96)          -              -           -
                                                                          
         Gain on sale of assets                   -              -            -             223          -
                                                                          
         Write-off of accounts and                                      
           notes receivable                     (568)            -       (2,975)             -           -
         Loss on investment in                                             
           marketable securities                   -             -          (91)            (9)          -
         Write-off of assets                       -            (22)           -             -           -
                                                  
            Total other income                -------        -------      ------         ------     -------
                 (expense)                    (2,272)          (199)     (2,383)          1,912       1,202
                                              -------        -------      ------         ------     -------
                              
            Income (loss) before income
              taxes, minority
              interest, discontinued
              operations and
              extraordinary item              (5,454)       (11,664)     (5,664)           427         266

    Federal and state income tax 
       expense (benefit)                           6           (23)        (110)           185         103
                                              -------        -------      ------         ------     -------

            Income (loss) before
              minority interest
              discontinued
              operations and
              extraordinary item              (5,460)       (11,641)     (5,554)           242         163

    Minority interest                              5           (12)           13
                                              -------        -------      ------         ------     -------                         
              continuing operations           (5,455)       (11,629)     (5,567)           242         163
   

    Discontinued operations                       -          (2,261)     (2,303)
                                              -------        -------      ------         ------     ------- 
              extraordinary item              (5,455)       (13,890)     (7,870)           242         163
             

    Extraordinary item - loss on               
      extinguishment of debt                    (134)             -           -             -           -
                                              -------        -------      ------         ------     -------         

            Net income (loss)                 (5,589)       (13,890)     (7,870)           242         163

    Preferred stock dividend (not declared)      395              -           10           108
                                                                                                      -
            Net income (loss)
               available for                  -------        -------      ------          ------      ------
               common shareholders           ($5,984)      ($13,890)    ($7,880)          $134        $163
                                              =======        =======     =======          ======      ======        
    Earnings (loss) per share:
            Income (loss) from                ($1.51)        ($4.10)     ($2.88)          $0.27       $0.22
              continuing operations
              Discontinued operations           0.00          (0.80)      (1.19)           0.00        0.00
              Extraordinary item               (0.04)          0.00        0.00            0.00        0.00
              Preferred stock dividend
                 (not declared)                (0.11)          0.00       (0.01)          (0.12)       0.00       
                                              -------        -------      ------          ------      ------
              Earnings (loss) per share       ($1.66)        ($4.90)     ($4.08)          $0.15       $0.22
                                              =======        =======      ======          ======      ======
    Weighted average number of shares
    used in computation of earnings 
    (loss) per share                        3,612,623      2,834,841   1,932,809         899,727     729,181
                                             

                                       10
<PAGE>
                                                                      

Item 6. Selected Consolidated Financial and Operating Data -
(Continued)

               Waste Systems International, Inc. and Subsidiaries
                             Selected Financial Data
      (in thousands except for outstanding shares and earnings per share data)


                                                                 Fiscal Year Ended
                                            -------------------------------------------------------------
                                            Dec. 31,      Dec. 31,      Dec. 31,     Dec. 31,    Dec. 31,
                                             1997          1996          1995         1994        1993
                                            -------------------------------------------------------------
    EBIDTA  (1)                              ($2,469)      ($9,909)    ($2,592)     ($1,476)      ($903)
    One-time charges
      Write-off of landfill development
      costs                                    1,495         6,652           -            -           -
      Restructuring                              596         1,741           -            -           -
                                             -------       --------    --------     --------     -------
      Adjusted EBITDA                          ($378)      ($1,516)    ($2,592)     ($1,476)      ($903)
                                             =======       ========    ========     ========     =======

    Capital expenditures                        $998        $6,599      $9,749         $807        $138
    Cash flow from operating activities      ($4,581)      ($3,912)    ($3,083)       ($209)      ($567)
    Cash flow from investing activities         $706       ($7,641)   ($10,267)     ($1,588)      ($138)
    Cash flow from financing activities       $6,575        $6,581     $18,416       $1,965        $639

Balance Sheet Data (at period end):
    Cash and cash equivalents                 $2,964          $265      $5,237         $171          $3
    Working capital                            1,532        (4,508)      2,393          659         (88)
    Total assets                              18,560        16,858      23,508        4,369       1,289
    Long-term debt, less current               7,201         9,450      12,266        1,263         505
    maturities
    Total stockholder's equity                 5,972        (1,849)      3,292          597        (403)
    (deficit)
</TABLE>


(1) EBITDA is defined as operating income from continuing operations excluding 
    one-time charges for write-off of landfill development costs and 
    restructuring charges, plus depreciation and amortization, which includes  
    depreciation and amortization included in selling, general and 
    administrative expenses. EBITDA does not represent, and
    should not be considered as an  alternative to net income or cash flows from
    operating  activities,  each as  determined  in  accordance  with  generally
    accepted  accounting   principles  ("GAAP").   Moreover,   EBITDA  does  not
    necessarily  indicate whether cash flow will be sufficient for such items as
    working  capital  or  capital  expenditures,  or to react to  changes in the
    Company's  industry or to the economy in general.  The Company believes that
    EBITDA is a measure  commonly  used by  lenders  and  certain  investors  to
    evaluate a company's  performance in the solid waste  industry.  The Company
    also  believes  that  EBITDA  data  may  help to  understand  the  Company's
    performance  because such data may reflect the Company's ability to generate
    cash  flows,  which is an  indicator  of its  ability  to  satisfy  its debt
    service,  capital  expenditures  and working capital  requirements.  
    However, functional or legal requirements may require the conservation of 
    funds for uses other than those previously described.  Because
    EBITDA is not calculated by all companies and analysts in the same fashion,
    the EBITDA  measures  presented by the Company may not be  comparable to the
    similarly-titled  measures  reported  by  other  companies.   Therefore,  in
    evaluating EBITDA data, investors should consider,  among other factors: the
    non-GAAP  nature of EBITDA;  actual cash flows;  the actual  availability of
    funds for debt service,  capital  expenditures and working capital;  and the
    comparability  of the  Company's  EBITDA data to  similarly-titled  measures
    reported by other companies.
                                   

                                       11
<PAGE>
 
Item 7.    Management's Discussion and Analysis of Financial Condition and 
           Results of Operations

Note Regarding Forward Looking Statements:

This Annual Report on Form 10-K/A contains forward-looking statements concerning
among other things,  the Company's  expected  future  revenues,  operations  and
expenditures and estimates of the potential markets for the Company's  services.
Such  statements  made by the Company  fall within the meaning of Section 27A of
the  Securities  Act of 1933,  as amended,  and  Section  21E of the  Securities
Exchange  Act of 1934,  as  amended.  All such  forward-looking  statements  are
necessarily  only estimates of future results and the actual results achieved by
the  Company may differ  materially  from these  projections  due to a number of
factors as  discussed  in the  section  entitled  "Management's  Discussion  and
Analysis  of  Financial  Condition  and Results of  Operations--Certain  Factors
Affecting Future Operating Results" of this Form 10-K/A.

Introduction

         Waste Systems International,  Inc. (referred to herein as the "Company"
or "WSI") is a regional integrated  non-hazardous solid waste management company
that provides solid waste collection,  recycling, transfer and disposal services
to commercial and residential customers.

         The  Company  currently  owns and  operates a solid  waste  landfill in
Moretown,  Vermont,  three  transfer  stations and collection  operations  which
currently  operate as an integrated  solid waste  operation,  serving over 4,400
commercial  and  residential  customers  in  the  Burlington,  St.  Albans,  St.
Johnsbury and Barre-Montpelier, Vermont areas.

         The Company currently has two additional landfill projects at different
stages of  development.  In November 1997, WSI signed a definitive  agreement to
acquire a  700-acre,  3 million  cubic  yard  permitted  municipal  solid  waste
landfill in Hopewell, Pennsylvania. This transaction is expected to close by the
end of May, 1998.  Additionally,  the Company entered into a contract to operate
and  remodel  an  existing   30-acre   municipal   landfill  in  South   Hadley,
Massachusetts.  On March 16,  1998 the  Company  filed  its draft  environmental
impact report with the MDEP and  anticipates  receiving all of its required MDEP
permits  during the first or second  quarter of 1998,  which  would allow WSI to
begin  accepting solid waste at the first 6-acre lined cell during the second or
third quarter of 1999. The South Hadley landfill  project is currently  expected
to have approximately 2 million cubic yards of new capacity for future disposal.

         On March 23, 1998, the Company signed a definitive agreement to acquire
Horvath  Sanitation,  Inc.,  D/B/A  Eagle  Waste  ("Eagle"),  which  is based in
Altoona, Pennsylvania.  This transaction is also expected to close by the end of
May 1998.  Eagle has  approximately  $8 million in annual  revenue and  collects
approximately  200 tons  per day of  solid  waste.  Eagle's  operations  will be
integrated with the Hopewell, Pennsylvania landfill acquisition discussed above.
Ultimately,  WSI intends to create integrated solid waste management  operations
in the geographical areas surrounding each of its landfills.

         WSI's  objective  is to  expand  the  current  geographic  scope of its
operations  and to become one of the leading  providers of  non-hazardous  solid
waste management  services in each market that it serves.  The Company's primary
growth strategy is to acquire landfills in or near urban metropolitan areas, and
to  secure  dedicated  waste  streams  for  such  landfills  by  acquisition  or
development of collection operations and transfer stations.  The internalization
of waste  streams is a major  component of the Company's  strategy.  The Company
believes that significant  opportunities  exist to expand its operations in each
of its current and targeted markets.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Over the past two years, the Company has changed its focus from an environmental
technologies  company to an  integrated  solid  waste  management  company.  The
Company  has  restructured  its  operations,  commenced  operations  in Vermont,
operated the  Fairhaven  landfill,  which has been  terminated,  and  (including
cessation of operations  at its  environmental  technology  center) made several
acquisitions.  These  acquisitions,  dispositions and  restructuring  activities
affect the comparability of the financial information herein.


                                       12
<PAGE>

Results of Operations

         Revenues.  Revenues  for the year ended  December  31,  1997  increased
$1,962,000 to $3,458,000  from  $1,496,000 in 1996. The increase of 131% was due
primarily to increased waste volume accepted at the Company's Moretown,  Vermont
landfill,  in its first full year of operation,  the  acquisition  on October 6,
1997 of the CSWD transfer  station  located in  Burlington,  VT and the internal
growth of the Company's collection operations.  All 1997 revenues were generated
from the Company's  Vermont  operation as compared to 1996, where  approximately
$1,157,000 or 77% was generated  from the Company's  operations at the Fairhaven
landfill.  See Note 6 to the Consolidated Financial Statements presented in Item
8.

         Operating  expenses.  Operating  expenses  for 1997 were  approximately
$1,718,000  as compared  to  $921,000  for 1996.  The  increase of $797,000  was
primarily due to the growth of the Company's  Vermont  operations.  During 1997,
the Company's Vermont operations  expanded as a result of the Company's purchase
of a collection  company and the CSWD transfer  station.  (See Item 1 Business -
"Integrated Solid Waste Management Operations")

         Depreciation and  amortization.  Depreciation and amortization  expense
was $692,000 and $370,000 for the years-ended 1997 and 1996,  respectively.  The
increase  of 87%  was  due  primarily  to the  growth  in the  operation  at the
Company's   Vermont  landfill  which  resulted  in  increased   amortization  of
capitalized  landfill costs and to a substantial  increase in capital  equipment
used in the Company's other Vermont operations.

         Write-off of  landfill  development  projects.  Write-off  of landfill
development  costs were $1,495,000 and $6,652,000 for the  years-ended  1997 and
1996,  respectively.  The write-off of landfill development costs are related to
the  Fairhaven  landfill  project.  See  Note  6 to the  Consolidated  Financial
Statements presented in Item 8. On February 24, 1998, the Company entered into a
termination  agreement  with the Town of Fairhaven  that required the Company to
perform a certain amount of construction  and closure work at the landfill.  The
estimated  costs to terminate this project have been reserved for by the Company
as of December 31, 1997 and are included in accrued expenses on the December 31,
1997 balance sheet. See Notes 6 and 8 to the Consolidated  Financial  Statements
presented in Item 8.

         Gross margins,  excluding the write-off of landfill  development  costs
and restructuring charges for 1997 and 1996 were 30.3% and 13.7%,  respectively.
The  increase  was  primarily  due to increased  efficiencies  at the  Company's
Vermont operations as discussed above.

         Selling,  general and  administrative  expenses.  Selling,  general and
administrative  expenses for 1997 were approximately  $2,138,000,  a decrease of
12.5% from 1996. The decrease was due to the  restructuring  undertaken in March
of 1996 and to the  cessation  of  operations  at the  Fairhaven  landfill.  The
decrease  was   partially   offset  by   increases   in  selling,   general  and
administrative   expenses  at  the  Company's  Vermont  operations  and  general
corporate  expenses due the building of an  infrastructure  necessary to support
increases in acquisition, operating and administrative activities.

         Restructuring.  Restructuring  charges for 1997 and 1996 were  $596,000
and  $1,742,000,  respectively,  which  consisted of costs incurred for employee
severance,  non-cancelable  lease commitments,  professional fees and litigation
costs.  The  restructuring  has resulted in annual savings of  approximately  $4
million.  See Note 4 to the Consolidated  Financial Statements presented in Item
8.

         Royalty and other income (expense).  Royalty and other income (expense)
decreased approximately  $1,444,000 in 1997 to ($521,000) from $923,000 in 1996.
Royalty income for 1997 and 1996 was $0 and $907,131, respectively. The decrease
in 1997 was due primarily to the Company not recognizing royalty income in 1997.
See Note 3 to the Consolidated Financial Statements presented in Item 8.

         Interest expense.   Interest  expense  for  1997  was   approximately
$1,355,000 (net of capitalized interest of $24,000) as compared to approximately
$1,182,000  (net of  capitalized  interest of $42,000)  for 1996.  The  increase
resulted  primarily from  additional  indebtedness  incurred in connection  with
acquisitions and capital expenditures at the Company's Vermont operations.

                                       13
<PAGE>

         Write-off of accounts and notes receivable.  In December 1997, ScotSafe
began operating  under  bankruptcy  protection,  and as a  result  of  this
development  the Company  terminated its licensing  agreements with ScotSafe and
wrote off the receivable due from ScotSafe of approximately $570,000. See Note 3
to the Consolidated Financial Statements presented in Item 8.

Financial Position

         WSI had  approximately  $3.0  million in cash as of December  31, 1997.
This  represented  an increase of  approximately  $2.7 million from December 31,
1996. Working capital as of December 31, 1997, was approximately  $1,532,000, an
increase of approximately $6.0 million over December 31, 1996. This increase was
primarily  due to the  proceeds  from the January  1997  Regulation  "D" private
placement of common  stock,  the  proceeds  from the March 1997 Howard Bank term
loan, the increased level of operations at the Company's Vermont operations, and
the proceeds from the June 1997  Regulation  "D" private  placement of preferred
stock.  See  Notes  6, 7,  12 and 13 to the  Consolidated  Financial  Statements
presented in Item 8.

         At December 31,  1997,  the Company had  approximately  $945,000 in net
trade accounts  receivable  related to waste collection and disposal services as
compared to  approximately  $331,000  at  December  31,  1996.  The  increase is
primarily  due  to  increased  levels  of  operation  at the  Company's  Vermont
operation.  Approximately  94% or $888,000  of such  receivables  is  considered
current or within 90 days due.  The  Company  has  estimated  an  allowance  for
doubtful accounts of approximately  $46,000,  which is considered  sufficient to
cover estimated future bad debts.

         During  the  year  ended  December  31,  1997,   the  Company   devoted
substantial  resources to various project  development  and related  activities.
Additions to property  and  equipment  of  $3,283,359  were made during the year
ended December 31, 1997, which primarily consisted of property and equipment for
the Company's Vermont operations.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Results of Operations

         Revenues.  Revenues for the year ended  December 31, 1996 and 1995 were
approximately  $1,496,000  and  $1,344,000.  Revenues for 1996 were derived from
operations  at the  Fairhaven  landfill,  and from the Moretown  landfill  which
commenced  operations  on October 6, 1996.  Revenues for 1995 were entirely from
operations at the Fairhaven landfill.

         Operating  Expenses.  Operating  expenses  for 1996  were  $921,000  as
compared to $766,000 in 1995.  The increase of $155,000  primarily  consisted of
operating costs  associated with the Moretown,  Vermont landfill which commenced
operations on October 6, 1996.

         Depreciation and  amortization.  Depreciation and amortization  expense
was  $370,000  and  $72,000  for 1997 and 1996,  respectively.  The  increase of
$299,000 is primarily due to the additional  property and equipment acquired for
use at the Fairhaven and Vermont landfills.

         Write-off of landfill  costs.  In 1996,  the Company  wrote-off  its 
capital  investment  in the Fairhaven landfill project of approximately $6.7 
million due to the uncertain  economic  viability of the project.  See Notes
6 and 8 to the Consolidated Financial Statements presented in Item 8.

         Selling,    general   and   administrative.    Selling,   general   and
administrative expenses consist of project development activities, marketing and
sales costs, salaries and benefits, and legal, accounting and other professional
fees, and other  administrative  costs.  These costs totaled  $2,443,000 for the
year ended  December  31,  1996,  as compared to  $3,287,000  for the year ended
December 31, 1995. This represented a decrease of $844,000,  which was primarily
the result of the restructuring  undertaken on March 27, 1996. See Note 4 to the
Consolidated Financial Statements included in Item 8.

         Amortization of prepaid  consulting fees On March 29, 1995, the Company
entered into a two-year agreement with Liviakis Financial  Communications,  Inc.
("Liviakis"), whereby Liviakis would provide ongoing assistance and consultation
to the  Company  on  matters  concerning  mergers  and  acquisitions,  corporate


                                       14
<PAGE>

finance,  investor relations and financial public relations. As compensation for
services to be rendered by Liviakis,  the Company issued  890,000  unregistered,
restricted  shares of Common Stock. As a result,  on March 29, 1995, the Company
recorded a prepaid asset of $1,335,000.  The Company was amortizing this expense
over the two years of the  Agreement,  at a rate of $167,000 per  quarter,  or a
total of $501,000 for the year ended December 31, 1996. On December 18, 1996 the
Company  terminated its consulting  agreement  with Liviakis.  As a result,  the
Company  expensed  the  remaining  prepaid  consulting  fees  in the  amount  of
$333,750.

         Restructuring.  On March 27, 1996, the Company  announced its intention
to take meaningful  action to conserve cash and working  capital,  including the
restructuring of the Company's  operations to focus its resources and activities
on developing an integrated solid waste management operation.  See Note 4 to the
Consolidated Financial Statements presented in Item 8. As a result , the Company
recorded  restructuring  charges of  $1,742,000,  which  included  accruals  for
employee  severance,  non-cancelable  lease  commitments,  professional fees and
litigation costs.

         Royalty and other income  (expense),  net. Through the first quarter of
1995,  substantially  all of WSI's revenue had been attributable to the sale and
licensing of WSI's  medical waste  treatment  technologies  to BioMedical  Waste
Systems,  Inc.  ("BioMed").  On August 31,  1995,  the  Company  terminated  its
agreement  with BioMed in most  territories  as a result of BioMed's  failure to
make required payments to the Company as required by the licensing agreement.

         In February  1996,  the Company  entered into a licensing  and services
agreement with ScotSafe Limited  ("ScotSafe"),  a Glasgow,  Scotland company for
the exclusive  rights to use the Company's  continuous  feed auger medical waste
processing  technology  in the British  Isles and  Ireland.  The Company  earned
royalties and consulting fees of approximately  $1,000,000 during the year ended
December  31,  1996  from  the  completion  of  three  medical  waste  treatment
facilities  by  ScotSafe  during  this  period.  See Note 3 to the  Consolidated
Financial Statements presented in Item 8.

         Interest  expense.  The  increase of  $710,000  in interest  expense to
$1,182,000  in 1996  from  $472,000  in 1995 was  primarily  the  result  of the
Company's  November 1995  Regulation S offering of $11.2 million in subordinated
convertible  debt,  which bears interest at 10%. See Note 7 to the  Consolidated
Financial Statements presented in Item 8.

Liquidity and Capital Resources

         The Company's  business is capital  intensive.  The  Company's  capital
requirements,  which  are  substantial,   include  acquisitions,   property  and
equipment  purchases and capital  expenditures  for landfill cell  construction,
landfill  development and landfill closure activities.  Principally due to these
factors,  the Company may incur working capital  deficits.  The Company plans to
meet its capital needs through various financing sources,  including  internally
generated funds and debt, including bank financing, and equity securities.

         WSI  expects  to  grow  primarily  through  acquisition.   The  Company
maintains an acquisitions department that is responsible for the identification,
due diligence,  negotiation and closure of acquisitions.  As the Company expands
into additional geographic regions, the number of acquisitions  completed by the
Company is also expected to dramatically increase. The Company's believes that a
combination of internally  generated  funds,  the proceeds from the Notes and an
anticipated  expanded bank facility will provide  adequate  funds to support the
Company's cost structure,  acquisition strategy and working capital requirements
for the foreseeable future.

         In connection with its growth strategy, the Company currently is and at
any given time will be involved in  potential  acquisitions  that are in various
stages of negotiation and consummation  (ranging from initial discussions to the
execution  of  definitive  agreements),  some of which may be  material.  If the
Company is  successful in executing its  acquisition  strategy,  the Company may
incur substantial costs in the form of cash or issuance of stock. However, there
can be no  assurance  that the  Company  will be  successful  in  executing  its
acquisition strategy.

         Through March 31, 1998 the Company acquired 5 collection  companies and
a  transfer  station  in the  State  of  Vermont.  The  aggregate  cost of these
acquisitions was  approximately  $5.0 million  consisting of approximately  $4.4
million in cash and approximately  $600,000 in assumed liabilities.  Acquisition
integration  costs related to the 5 acquisitions  in Vermont were  approximately
$320,000.

                                       15
<PAGE>

         To date, WSI has financed its activities primarily through the issuance
of debt and equity securities,  including  convertible  subordinated  notes. See
Notes 7, 12 and 13 to the  Consolidated  Financial  Statements.  The Company has
raised,  from inception  through  December 31, 1997,  cumulative net proceeds of
approximately  $34.3 million through private placements of equity securities and
the  issuance  of  long-term  debt.  If the  Company  is  successful  in raising
additional capital, WSI intends to aggressively pursue and develop an integrated
solid waste management  company.  There can be no assurance that additional debt
or equity  financing will be available,  or available on terms acceptable to the
Company.  Failure of the Company to obtain required  financing in the short term
could have a material  adverse effect on the Company's  financial  condition and
operation.

         Net  cash  used by  operating  activities  for  1997  and 1996 was $4.6
million  and  $3.9  million,  respectively.  The  use of  $4.6  million  in 1997
consisted  of the  substantial  completion  of  the  restructuring  and  related
liabilities, the termination of the Fairhaven landfill project and the growth of
the  Company's  Vermont  operations.  See  Notes 4, 6 and 8 to the  Consolidated
Financial Statements presented in Item 8.

         Net cash provided (used) by investing  activities for 1997 and 1996 was
$706,000 and ($7.7)  million,  respectively.  The net cash provided by investing
activities  in 1997 of $706,000 was primarily due to the reduction in collateral
requirements on the Vermont landfill  closure and post-closure  performance bond
of approximately  $1.0 million,  and the proceeds from the sale of the Fairhaven
equipment for approximately $800,000,  offset by additional capital expenditures
for the Company's Vermont operations.  The net cash used by investing activities
in 1996 was primarily  the result of the  Company's  investment in the Moretown,
Vermont and Fairhaven, Massachusetts landfills.

         The Company's  capital  expenditures and capital needs for acquisitions
have  increased   significantly,   reflecting  the  Company's  rapid  growth  by
acquisition  and  development  of revenue  producing  assets,  and will increase
further as the Company continues to complete acquisitions.  Capital expenditures
for 1998 are currently  expected to be  approximately $6 million with respect to
the  businesses  that the Company owned at December 31, 1997,  compared to total
capital  expenditures  of $1.0  million  in  1997  and  $6.6  million  in  1996.
Additionally,  total capital  expenditures  are expected to further  increase in
1998  due to  acquisitions.  The  decrease  of  $5.6  million  in  1997  capital
expenditures from 1996 capital expenditures  relating to businesses owned by the
Company  as of  December  31,  1997  is  primarily  due  to  the  completion  of
construction of Cell 1 at the Moretown  landfill and  construction  costs at the
Fairhaven, Massachusetts landfill.

         Net  cash  provided  by  financing  activities  for  1997  and 1996 was
approximately  $6.6 million and $6.6  million,  respectively.  The 1997 proceeds
were  primarily  due to the  Company's  June  of  1997  Regulation  "D"  private
placement of Series A Convertible  Preferred  Stock which raised net proceeds of
approximately  $7.6  million.  The  1996  proceeds  were  primarily  due  to the
Company's  June of 1996  Regulation  S offering  of common  stock  which  raised
approximately $6.6 million.

         At December 31,  1997,  the Company had  approximately  $5.4 million of
long-term  and  short-term  debt,  $2.7 million in capital  leases and equipment
notes  payable.  In  addition,  on February 12,  1998,  the Company  closed a $5
million bridge loan with BIII Capital Partners, L.P. and Roton & Co. See Note 15
to the Consolidated Financial Statements presented in Item 8.

Certain Factors Affecting Future Operating Results

         History of Losses.  During the fiscal years  ending  December 31, 1997,
1996 and 1995, the Company suffered net losses (including non-recurring charges)
of approximately ($5,589,000),  ($13,890,000) and ($7,880,000) respectively,  on
revenues of $3,458,000,  $1,496,000, and $1,344,000 respectively.  Prospects for
future  profitability  are heavily  dependent  upon the success of the Company's
acquisition  strategy and in its ability to continue to build  integrated  solid
waste  management  operations.  There can be no assurance that WSI will generate
sufficient revenue to be profitable or, if profitable, to maintain profitability
in future years

         The  Independent  Auditors'  Report of KPMG Peat  Marwick  LLP 
for the fiscal  year ended  December  31, 1997,  states that "the Company must 
raise  substantial  additional  capital and must  achieve  a level of  revenues
adequate  to  support  the  Company's  cost structure,  which raises substantial
doubt about its ability to continue as a going concern." On May 13, 1998, 
the Company closed an offering of $60.0 million in Subordinated Notes 
(the "Notes"),  which resulted in net proceeds to the Company


                                       16
<PAGE>

of  approximately  $58.3  million  and during the  fourth  quarter of 1997,  the
Company began generating positive cash flows,  excluding  non-recurring charges,
and expects to continue generating positive cash flows, excluding  non-recurring
charges, in 1998. The Company used the proceeds from the Notes to repay existing
debt, complete several  acquisitions and to increase working capital for general
corporate  purposes.  The Company  believes  that a  combination  of  internally
generated  funds,  the proceeds from the Notes and an anticipated  expanded bank
facility will provide  adequate  funds to support the Company's  cost  structure
(including repayment of the Notes if that is required), acquisition strategy and
working capital  requirements for the foreseeable  future.  The Company does not
believe that going concern  uncertainty  has materially  affected its ability to
finance and conduct its business operations.

         Uncertain  Ability to Finance  the  Company's  Growth.  The Company has
limited  liquidity  in  relation  to  its  short-term  capital  commitments  and
operating cash requirements. Additionally, WSI will require substantial funds to
complete  and  bring  to  commercial  viability  all  of its  currently  planned
projects.  The Company also  anticipates  that any future business  acquisitions
will be  financed  through  cash  from  operations,  proceeds  from  the  Notes,
borrowings  under its bank line of credit,  the issuance of the Company's common
stock or seller financing,  or additional equity or debt financings.  Therefore,
WSI's ability to satisfy its capital commitments and operating  requirements are
dependent on a number of pending or future financing  activities,  none of which
are assured successful completion.

         Dependence  on  Management.  The  Company's  future  success  is highly
dependent  upon the services of its  executive  officers,  particularly,  Philip
Strauss,  Chairman,  Chief Executive  Officer and President of the Company,  and
Robert Rivkin, Vice President,  Chief Financial Officer, Treasurer and Secretary
of the Company. The loss of the services of Mr. Strauss or Mr. Rivkin could have
a material  adverse effect on the Company's  business,  financial  condition and
results of operations.  WSI does not currently maintain key man insurance on any
of its personnel.

         The  Company's  future  success  is  also  highly  dependent  upon  its
continuing  ability to  identify,  hire,  train and  motivate  highly  qualified
personnel. WSI faces competition for hiring such personnel from other companies,
government entities and other organizations. There can be no assurances that WSI
will be successful in attracting and retaining  qualified  personnel as required
for its  projected  operations.  The  inability to attract and retain  qualified
personnel  could have a material  adverse  effect upon the  Company's  business,
financial condition and results of operations.

         Ability to Manage Growth. The Company's objective is to contiue to grow
by expanding its services in markets where it can be one of the largest and most
profitable fully-integrated solid waste management companies.  Accordingly,  the
Company may experience  periods of significant rapid growth.  Such growth, if it
were to occur, could place a significant strain on the Company's  management and
its  operational,  financial  and other  resources.  Any  failure  to expand its
operational,  and  financial  systems  and  controls  or to recruit  appropriate
personnel in an  efficient  manner at a pace  consistent  with such growth could
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

         Ability to Identify,  Acquire and Integrate  Acquisition  Targets.  The
future success of the Company is highly  dependent upon the Company's  continued
ability to successfully  identify,  acquire and integrate additional solid waste
collection,  recycling,  transfer and disposal  businesses.  As competition  for
acquisition candidates increases within the solid waste management industry, the
availability of suitable candidates at terms favorable to the Company decreases.
The Company  competes for acquisition  candidates with larger,  more established
companies  that may have  significantly  greater  capital  resources,  which can
further decrease the availability of suitable acquisition candidates.  There can
be no assurance that the Company will be able to identify  suitable  acquisition
candidates and if available,  will be able to obtain  necessary  financings at a
price or on terms and conditions  favorable to the Company,  or to  successfully
integrate the acquisitions with current operations.

         The  Company  believes  that a  significant  factor in its  ability  to
consumate  acquisitions will be the attractiveness of the Company's common stock
as consideration for potential  acquisition targets. This attractiveness may, in
large part, be dependent upon the relative market price and capital appreciation
prospects of the Company's equity securities as compared to its competitors.  If
the market price of the  Company's  common stock were to decline,  the Company's
acquistion program could be materially adversely affected.

         Competition. The solid waste management industry is highly competitive,
very  fragmented  and  requires   substantial   labor  and  capital   resources.
Competition  exists for collection,  recycling,  transfer and disposal services,
and  acquisition  targets.  The  markets  the  Company  competes or is likely to


                                       17
<PAGE>

compete in are usually served by one or more of the large national,  regional or
local solid waste companies who may have accumulated substantial goodwill and or
have greater financial,  marketing or technical  resources than WSI. The Company
also  competes  with  counties,  municipalities  and  operators  of  alternative
disposal  facilities  that  operate  their own  waste  collection  and  disposal
facilities.  The  availability  of user fees,  charges or tax  revenues  and the
availability of tax-exempt financing may provide a competitive  advantage to the
public sector.  Additionally,  alternative disposal facilities such as recycling
and  incineration  may  reduce the demand  for the  disposal  of solid  waste in
landfills.  Competition for waste  collection and disposal  business is based on
the quality of operation,  price and geographical  location.  From time to time,
competitors  may  reduce the price of their  services  in an effort to expand or
maintain  market share or to win  competitively  bid contracts.  There can be no
assurance  that the Company will be able to  successfully  bid such contracts or
compete with the larger and better capitalized companies.

         Limitations  on  Landfill  Permitting  and  Expansion.   The  Company's
operations depend on its ability to expand the landfills it owns or operates and
develop new landfill sites.  There can be no assurances that the Company will be
successful in obtaining new landfill  sites or expanding the permitted  capacity
of its  landfill.  The process of obtaining  required  permits and  approvals to
operate and expand  landfills  and  transfer  stations  has become  increasingly
difficult  and  expensive.  The  process  can take  several  years and  involves
hearings and compliance with zoning, environmental and other requirements. There
can be no  assurance  that the  Company  will be  successful  in  obtaining  and
maintaining  required  permits.  Even when granted,  final permits to expand are
often not approved until the remaining  capacity of the landfill is very low. In
the event the Company  exhausts  its  permitted  capcaity at its  landfill,  the
Company's  ability to expand  internally will be limited and the Company will be
required to cap and close the landfill. In addition, the Company could be forced
to dispose of its waste at landfills operated by its competitors. The additional
costs could have a material adverse effect on the Company's business.

         Geographic  Concentration  of  Operations.  The Company  has  initially
established  integrated  solid waste  management  operations in Vermont,  and is
developing  integrated solid waste management operations in Central Pennsylvania
and  Western  Massachusetts.  Since  the  Company's  current  primary  source of
revenues  will be  concentrated  in these  geographic  locations,  the Company's
business,  financial  condition  and  results of  operations  can be  materially
effected  by, but not  limited to, the  following:  (i)  downturns  in the local
economy,  (ii) severely harsh weather  conditions,  and (iii) state regulations.
Additionally,  the  growing  competition  within the local  economies  for waste
streams may make it increasingly difficult to expand within these regions. There
can be no  assurance  that the Company  will be able to continue to increase the
waste stream to its landfills,  or be able to expand its  geographic  markets to
lessen the effects of adverse events that may occur in these regions.

         Seasonality.  The Company's  revenues and results of operations tend to
vary  seasonally.  The winter  months of the fourth  and first  quarters  of the
calendar year tend to yield lower revenues than those  experienced in the warmer
months of the second and third quarters.  The primary reasons for lower revenues
in the winter months  include,  but are not limited to: (i) harsh winter weather
conditions  which  can  interfere  with  collection  and  transportation;   (ii)
construction  and  demolition  activities  which  generate  landfill  waste  are
primarily performed in the warmer seasons;  and (iii) the volume of waste in the
region is generally  lower in comparison to that which occurs in warmer  months.
The Company  believes that the seasonality of the revenue stream will not have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations on an annualized basis.

         Environmental and Government Regulations. The Company and its customers
operate in a highly regulated environment, and in general the Company's landfill
projects will be required to have federal, state and/or local government permits
and approvals (see "Business-Government  Regulation.").  Any of these permits or
approvals  may be subject to denial,  revocation or  modification  under various
circumstances.  In addition, if new environmental legislation or regulations are
enacted or existing legislation or regulations are amended or are interpreted or
enforced differently,  WSI or its customers may be required to obtain additional
operating permits or approvals. There can be no assurance that WSI will meet all
of the  applicable  regulatory  requirements.  Any delay in  obtaining  required
permits  or  approvals  will tend to cause  delays in the  Company's  ability to
obtain bond or other project financing,  resulting in increases in the Company's
needs to invest  working  capital in projects  prior to obtaining more permanent
financing, and will also tend to reduce project returns by deferring the receipt
of project  revenues.  In the event that the  Company is  required to cancel any
planned project as a result of the inability to obtain required permits or other
regulatory  impediments,  the Company may lose any investment it has made in the
project up to that point,  and the  cancellation of any landfill  projects,  may
have a  materially  adverse  effect on the  Company's  financial  condition  and
results of operations.

                                       18
<PAGE>

         Potential  Environmental  Liability and Adverse Effect of Environmental
Regulation. WSI's business exposes it to the risk that it will be held liable if
harmful  substances escape into the environment and cause damages or injuries as
a result  of its  operating  activities.  Moreover,  federal,  state  and  local
environmental  legislation and regulations require substantial  expenditures and
impose  significant  liabilities for  noncompliance.  See  "Business--Government
Regulation" in Item 1.

         Potential  Adverse  Community  Relations.   The  potential  exists  for
unexpected delays,  costs and litigation resulting from community resistance and
concerns relating to specific projects in various communities.

         Performance  or Surety Bonds and Letters of Credit.  The Company may be
required to post a  performance  or surety  bond,  or letter of credit to ensure
proper closure and post-closure  monitoring and maintenance at its landfills and
transfer stations.  Failure to obtain performance or surety bonds, or letters of
credit in sufficient  amounts or at acceptable rates may have a material adverse
impact on the Company's business, financial condition and results of operations.

         Environmental  Impairment Liability  Insurance.  The Company has a $5.0
million environmental  impairment liability insurance policy covering claims for
sudden or gradual onset of environmental  damage. If the Company were to incur a
liability  for  environmental  damage  in excess of its  insurance  limits,  its
financial  condition  could  be  adversely  affected.   The  Company  carries  a
comprehensive  general  liability  insurance policy which  management  considers
adequate at this time to protect its assets and operations from other risks.

         Adequacy of Accruals for Closure and  Post-Closure  Costs.  The Company
has material financial obligations relating to closure and post-closure costs of
its  existing  landfills  and any  landfill  it may  purchase  or operate in the
future.  The Company estimates and accrues closure and post-closure  costs based
on  engineering  estimates of airspace  usage and remaining  airspace  capacity.
There can be no assurances that the Company's financial  obligations for closure
and  post-closure  costs will not exceed the amount  accrued,  and that this may
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

         Capital  Expenditures.  The Company  capitalizes,  in  accordance  with
generally  accepted  accounting  principles,  certain  expenditures and advances
relating to  acquisitions,  pending  acquisitions  and  landfill  projects.  The
Company's  policy is to expense in the current period,  all unamortized  capital
expenditures  and advances  relating to any operation that is  permanently  shut
down or any acquisition  that will not be consummated  and any landfill  project
that is terminated.  Thus, the Company may be required to incur a charge against
earnings  in future  periods  that could have a material  adverse  effect on the
Company's business, financial conditions and results of operations.

Inflation

         WSI does not believe its operations  have been  materially  affected by
inflation.


                                       19
<PAGE>

Item 8.  Financial Statements and Supplementary Data


               WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES

                   Index to Consolidated Financial Statements


                                                                        Page No.

Report of Independent Accountants                                             21

Consolidated Balance Sheets 
  at December 31, 1997 and 1996                                            22-23

Consolidated  Statements of Operations  
  for the years ended December 31, 1997, 1996 and 1995                        24

Consolidated  Statements  of Cash  Flows 
  for the years ended December 31, 1997, 1996 and 1995                     25-26

Consolidated Statements of Stockholders'Equity (Deficit) 
  for the years ended December 31, 1997, 1996 and 1995                     27-30

Notes to Consolidated Financial Statements                                 31-46


                                       20
<PAGE>


                        Report of Independent Accountants



The Board of Directors
Waste Systems International, Inc.:

We have audited the  accompanying  consolidated  balance sheets of Waste Systems
International, Inc. (a Delaware Corporation) and subsidiaries as of December 31,
1997  and  1996,  and  the  related   consolidated   statements  of  operations,
stockholders'  equity  (deficit),  and cash  flows  for each of the years in the
three-year  period  ended  December  31,  1997.  These  consolidated   financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  consolidated  financial  position of Waste Systems
International,  Inc. and  subsidiaries as of December 31, 1997 and 1996, and the
consolidated  results of their  operations  and their cash flows for each of the
years in the  three-year  period ended  December 31, 1997,  in  conformity  with
generally accepted accounting principles.

The  consolidated  financial  statements have been prepared  assuming that Waste
Systems  International,  Inc. will continue as a going concern.  As discussed in
Note  1 to  the  consolidated  financial  statements,  the  Company  must  raise
substantial  additional capital and must achieve a level of revenues adequate to
support the Company's cost structure,  which raises  substantial doubt about its
ability to continue as a going concern.  The financial statements do not include
adjustments that might result from the outcome of this uncertainty.


                                                           KPMG Peat Marwick LLP


Boston, Massachusetts
March 26, 1998


                                       21
<PAGE>
               WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets




                                                December 31,       December 31,
         Assets                                     1997               1996
         ------                                 ------------       ------------

Current assets:
   Cash and cash equivalents                  $    2,964,274      $     264,776
   Accounts and notes receivable, net (Note 3)       944,793          1,158,677
   Assets held for sale (Notes 4 and 6)              125,000            275,000
   Prepaid expenses 
    and other current assets (Note 5)              1,241,092            499,000
                                                ------------       ------------
      Total current assets                         5,275,159         2,197,453

Accounts and notes receivable (Note 3)                     -            451,169
Restricted cash and securities                       254,000          1,210,017
Property and equipment, net (Note 6)              12,487,183         11,705,712
Deferred financing costs, net                        362,174            664,105
Other assets (Note 5)                                181,738            629,634
                                                ------------       ------------
      Total assets                            $   18,560,254      $  16,858,090
                                                ============       ============


  See accompanying notes to consolidated financial statements.


                                       22
<PAGE>
                                  

               WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets



                                                December 31,       December 31,
Liabilities and Stockholders' Equity (Deficit)      1997               1996
----------------------------------------------  ------------      -------------

Current liabilities:
   Current portion of long-term debt
      and notes payable (Note 7)              $      843,831      $   2,165,378
   Accounts payable                                  353,937          1,529,076
   Accrued expenses (Notes 6, 8 and 11)            1,766,386          1,225,715
   Restructuring and current liabilities
      related to discontinued operations (Note 4)    778,609          1,785,097
                                                ------------      -------------
      Total current liabilities                    3,742,763          6,705,266


Long-term debt and notes payable (Note 7)          7,201,262          9,450,373
Landfill closure and post-closure
   costs (Notes 10 and 11)                         1,644,000          1,520,000
                                                ------------      -------------
 Total liabilities                                12,588,025         17,675,639
                                                ------------      -------------
Commitments and Contingencies (Note 11)

Minority interest (Notes 12 and 13)                        -          1,031,456
                                                ------------      -------------

Stockholders' equity (deficit): (Notes 12, 13, 14 and 15)
   Common stock, $.01 par value.  Authorized
      30,000,000 shares;  3,893,415 and 3,360,514
      shares issued and outstanding at
      December 31, 1997 and 1996, respectively        38,934             33,605
   Preferred stock, $.001 par value.  Authorized
      1,000,000 shares:
      Series A Convertible Preferred Stock;
       200,000 designated, 92,580 and 0 issued
       and outstanding at December 31, 1997
       and 1996, resepctively                      9,257,807                  -
      Series B Convertible Preferred Stock;
       100,000 designated, 40,488 and 0 issued
       and outstanding at December 31, 1997
       and 1996, respectively                      4,048,750                  -
   Additional paid-in capital                     21,432,437         21,334,447
   Accumulated deficit                           (28,805,699)       (23,217,087)
                                                ------------      -------------
      Total stockholders' equity (deficit)         5,972,229         (1,849,005)
                                                ------------      -------------
      Total liabilities and stockholders'
         equity (deficit)                     $   18,560,254      $  16,858,090
                                                ============       ============



 See accompanying notes to consolidated financial statements.


                                       23
<PAGE>

               WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
                      Consolidated Statements of Operations

                                                   Years ended December 31,
                                       -----------------------------------------
                                             1997          1996          1995
                                             ----          ----          ----
Revenues
                                         3,457,692     1,495,606     1,344,397
                                       ------------  ------------  ------------
Cost of operations:
   Operating expenses                    1,718,214       920,553       766,012
   Depreciation and amortization           692,224       369,785        71,649
   Write-off of landfill development
      costs (Note 6)                     1,495,388     6,652,075             -
                                       ------------  ------------  ------------
      Total cost of operations           3,905,826     7,942,413       837,661
                                       ------------  ------------  ------------
      Gross profit (loss)                 (448,134)   (6,446,807)      506,736

Selling, general and administrative
   expenses                              2,138,180     2,442,816     3,286,680
Amortization of prepaid consulting fees          -       834,375       500,625
Restructuring (Note 4)                     596,426     1,741,729             -
                                       ------------  ------------  ------------
      Loss from operations              (3,182,740)  (11,465,727)   (3,280,569)
                                       ------------  ------------  ------------
Other income (expense):
   Royalty and other income
      (expense), net (Note 3)             (520,846)      922,703       865,220
   Interest income                         172,363       178,224       289,145
   Interest expense and financing
      costs                             (1,354,614)   (1,182,118)     (471,763)
   Equity in loss of affiliate                   -       (96,144)            -
   Write-off of accounts and notes
      receivable (Note 3)                 (568,217)            -    (2,975,001)
   Loss on investment in marketable
      securities                                 -             -       (90,625)
   Write-off of assets                           -       (21,858)            -
                                       ------------  ------------  ------------
      Total other income (expense)      (2,271,314)     (199,193)   (2,383,024)
                                       ------------  ------------  ------------
      Loss before income taxes,
         minority interest,
         discontinued operations
         and extraordinary item         (5,454,054)  (11,664,920)   (5,663,593)

Federal and state income
   tax expense (benefit) (Note 9)            5,622       (23,456)     (109,465)
                                       ------------  ------------  ------------
      Loss before minority interest,
         discontinued operations
         and extraordinary item         (5,459,676)  (11,641,464)   (5,554,128)

Minority interest (Note 12)                  4,971       (12,655)       13,016
                                       ------------  ------------  ------------
      Loss from continuing
         operations                     (5,454,705)  (11,628,809)   (5,567,144)

Discontinued operations (Note 4)                 -    (2,260,963)   (2,303,835)
                                       ------------  ------------  ------------
      Loss before extraordinary
         item                           (5,454,705)  (13,889,772)   (7,870,979)

Extraordinary item - Loss on
   extinguishment of debt                 (133,907)            -             -
                                       ------------  ------------  ------------
      Net loss                          (5,588,612)   (13,889,772)  (7,870,979)

Preferred stock dividends
  (Not declared - Note 12)                 395,235             -         9,500
                                       ------------  ------------  ------------
      Net loss available for
         common shareholders            (5,983,847)  (13,889,772)   (7,880,479)
                                       ============  ============  ============
Net loss per share:
    Income (loss) from
       continuing operations                 (1.51)        (4.10)        (2.88)
    Discontinued operations                      -         (0.80)        (1.19) 
    Extraordinary item                       (0.04)            -             -
    Preferred stock dividends                (0.11)            -         (0.01)
                                       ------------  ------------  ------------
    Net loss per share                       (1.66)        (4.90)        (4.08)
                                       ============  ============  ============

Weighted average number of shares
   used in computation of net
   income (loss) per share                3,612,623     2,834,841     1,932,809

  See accompanying notes to consolidated financial statements.

                                       24
<PAGE>
<TABLE>

                          WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
                                 Consolidated Statements of Cash Flows
<CAPTION>
                                                                         Year ended December 31,
                                                                    1997          1996           1995
                                                                -----------------------------------------         
<S>                                                           <C>           <C>             <C>
Cash flows from operating activities:
    Net loss                                                  $ (5,588,612) $ (13,889,772)  $ (7,870,979)
    Adjustments to reconcile net loss to
      net cash used by operating activities:
      Depreciation and amortization                                900,549      1,556,380        689,186
      Write-off of landfill development costs                    1,495,388      6,652,075              -
      Equity on loss in affiliate                                        -         96,144              -
      Write-off of accounts and notes receivable                   568,217              -      2,975,001
      Loss on investment in marketable securities                        -              -         90,625
      Write-off of assets                                                -         21,858              -
      Minority interest                                              4,971        (12,655)        13,016
      Discontinued operations                                            -      2,260,963      2,303,835
      Extraordinary item - loss on extinguishment of debt          133,907              -              -
      Deferred income taxes                                              -              -       (185,000)
      Allowance for doubtful accounts - non -trade                       -              -        219,645
      Allowance for doubtful accounts - trade                       23,333         10,000         12,500
      Issuance of common stock for services                         44,854         17,157        303,300
      Changes in assets and liabilities:
         Accounts and notes receivable                              73,503        375,519     (1,695,436)
         Prepaid expenses and other current assets                (242,092)        16,558       (512,653)
         Accounts payable                                       (1,175,139)    (1,253,507)     2,157,252
         Accrued expenses                                           62,463        853,051        129,163
         Accrued landfill closure & post-closure costs             124,000         20,000              -
         Income and franchise taxes payable                              -        (75,535)       (22,470)
                                                                -----------   ------------   ------------          
      Net cash used by continuing operations                    (3,574,658)    (3,351,764)    (1,393,015)
      Net cash used by discontinued operations                  (1,006,448)      (560,377)    (1,689,906)
                                                                -----------   ------------   ------------          
         Net cash used by operating activities                  (4,581,146)    (3,912,141)    (3,082,921)

Cash flows from investing activities:
    Assets held for sale                                                 -        127,500       (287,219)
    Restricted cash and securities                                 956,017     (1,022,517)      (187,500)
    Investment in affiliate                                              -        (86,115)       (10,029)
    Landfills                                                     (307,552)    (5,199,493)    (8,699,803)
    Landfill development projects                                 (263,868)      (467,855)      (324,752)
    Machinery and equipment                                       (114,330)      (914,600)      (724,822)
    Rolling stock                                                 (122,905)             -              -
    Containers                                                    (189,109)       (16,716)             -
    Proceeds on the sale of equipment                              800,000              -              -
    Patents                                                              -        (35,261)       (20,795)
    Other assets                                                   (52,127)       (26,162)       (12,316)
                                                                -----------   ------------   ------------          
         Net cash provided (used) by investing activities          706,126     (7,641,219)   (10,267,236)
                                                                -----------   ------------   ------------          
Cash flows from financing activities:
    Deferred financing and registration costs                      (56,098)       (86,074)    (1,216,480)
    Net borrowings and advances  
      from stockholders and related parties                              -       (114,575)      (662,072)
    Repayments of notes payable and long-term debt              (2,445,476)      (426,734)    (1,000,984)
    Borrowings from notes payable and long-term debt             1,143,861      1,117,982        568,271
    Issuance of subordinated notes payable                               -              -     11,225,000
    Repayments of subordinated notes payable                             -              -       (490,000)
    Minority interest                                               (4,971)             -      1,031,095
    Proceeds from issuance of common stock                         686,724      6,090,473      8,970,998
    Proceeds from issuance of Series A preferred stock           7,250,478              -              -
    Proceeds from issuance of Series B preferred stock                   -              -              -
    Preferred stock dividends                                            -              -         (9,500)
                                                                -----------   ------------   ------------          
         Net cash provided by financing activities               6,574,518      6,581,072     18,416,328
                                                                -----------   ------------   ------------          
Increase (decrease) in cash                                      2,699,498     (4,972,288)     5,066,171
Cash, beginning of period                                          264,776      5,237,064        170,893
                                                                -----------   ------------   ------------          
Cash, end of period                                           $  2,964,274  $     264,776   $  5,237,064
                                                                ===========   ============   ============ 
See accompanying notes to consolidated financial statements.
</TABLE>
                                       25
<PAGE>
                                         
Supplemental disclosures of cash flow information:


     During the years ended December 31, 1997, 1996 and 1995,  cash paid for 
     interest was  $1,493,221,  $1,201,864, and $221,458, respectively.

Supplemental disclosures of noncash activities:

     In June  1997,  the  Company  issued  Series A  Preferred  Stock  valued at
     $850,000  in  exchange  for the  remaining  20%  minority  interest  in the
     Moretown, Vermont landfill.

     In June 1997, the Company issued Series A Preferred Stock valued at $44,854
     in exchange for consulting services.

     In June  1997,  the  Company  wrote  down  assets  with a net book value of
     approximately   $1,752,000  by  $915,000  to  a  net  realizable  value  of
     approximately $837,000 related to the Fairhaven landfill project.

     In June 1997,  the Company  issued  Series A Preferred  Stock at a value of
     $700,000  and  retired the FDIC loan of  $511,093  and accrued  interest of
     $55,000. The pay off resulted in a realized loss on the early retirement of
     debt of $133,907.

     In October 1997, the Company  converted 4,800 shares valued at $480,000, of
     its Series A Preferred Stock into 341,334 shares of its Common Stock.

     In December 1997, the Company converted $3,950,000,  plus accrued interest,
     of its 10% Convertible,  Redeemable, Subordinated Notes due October 6, 2000
     for 44,488 shares of its Series B Convertible Preferred Stock.

     In 1997,  1996 and 1995, the Company  acquired  assets of $2,190,050,  
     $683,777 and  $1,148,516,  respectively under capital lease obligations.

     In 1996, the Company exchanged $2,850,000 of convertible  subordinated debt
     and $27,425 of accrued interest for 313,992shares of common stock.

See accompanying notes to consolidated financial statements.

                                       26
<PAGE>


               WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES

            Consolidated Statements of Stockholders' Equity (Deficit)

                                                                                
<TABLE>                                                                        
<CAPTION>


                                Preferred Stock       Preferred Stock                          Additional              Stockholders'
                                    Series A              Series B            Common Stock      paid-in   Accumulated    equity
                               Shares     Amount     Shares     Amount     Shares     Amount    capital      deficit    (deficit)
                             ---------- ---------- ---------- ----------  --------- ---------- ---------- ------------ ------------

<S>                          <C>        <C>        <C>        <C>         <C>       <C>        <C>        <C>          <C>
Balance, December 31, 1994           -    475,000      4,750    475,000    538,535      5,385  1,541,861   (1,424,806)     597,440

Issuance of common stock
    through March 29, 1995           -          -          -          -     16,540        165    321,335            -      321,500

Preferred stock dividends            -          -          -          -          -          -     (9,500)           -       (9,500)
 
Issuance of common stock due
    to 1.75-to-1 Stock Split         -          -          -          -    416,308      4,163     (4,163)           -            -

Issuance of common stock at
    $10.00 per share, for
    conversion of preferred
    stock on March 29, 1995          -   (475,000)    (4,750)  (475,000)    47,500        475    474,525            -            -

Issuance of common stock at
    $10.00 per share, in exchange
    for debt and accrued interest
    on March 29, 1995                -          -          -          -    111,716      1,117  1,116,039            -     1,117,156

Issuance of common stock at
    $10.00 per share, through
    Private Placement on
    March 29,1995                    -          -          -          -    400,000      4,000  3,996,000            -     4,000,000

Capitalization of BioSafe
    International, Inc.              -          -          -          -     60,000        600     30,930      (31,530)            -

Issuance of common stock at
    $10.00 per share, for
    investment banking services      -          -          -          -     40,000        400       (400)           -             -

Issuance of common stock at
    $10.00 per share, net of 25%
    discount due to restrictions
    on sale or transfer of stock, 
    for prepaid consulting services  -          -          -          -    178,000      1,780  1,342,120            -     1,343,900

Issuance of common stock at
    $10.00 per share, through
    private placement in
    April, 1995                      -          -          -          -    502,000      5,020  5,017,490            -     5,022,510

Expenses incurred in
    connection with the
    issuance of common stock
    and merger in March and
    April, 1995                      -          -          -          -          -          - (1,295,047)           -    (1,295,047)

Issuance of 110,000
    Series C Warrants to
    purchase stock at
    $10.00 per share                 -          -          -          -          -          -          -            -             -

Issuance of 561,000 Series D
    Warrants to purchase common
    stock at $23.75 per share        -          -          -          -          -          -          -            -             -

Issuance of 100,000 Series E
    Warrants to purchase common
    stock at $17.50 per share        -          -          -          -          -          -          -            -             -

Issuance of 144,000 merger-related
    Placement Agent Warrants to
    purchase common stock at
    $11.50 per share                 -          -          -          -          -          -          -            -             -

Issuance of 22,925 Warrants to
    purchase common stock at
    $11.45 per share                 -          -          -          -          -          -          -            -             -

Issuance of 10,000 Warrants to
    purchase common stock at
    $17.50 per share                 -          -          -          -          -          -          -            -             -

                                       27
<PAGE>

Exercise of Series A Warrants
    to purchase 21,919 shares of
    common stock at $12.15 per
    share                            -          -          -          -     21,919        219    265,937            -       266,156

Exercise of Series D Warrants
    to purchase 1,125 shares of
    common stock at $23.75 per
    share                            -          -          -          -      1,125         11     26,708            -        26,719

Exercise of Series E Warrants
    to purchase 225 shares of
    common stock at $17.50 per
    share                            -          -          -          -        225          2      3,939            -         3,941

Exercise of Warrants to purchase
    400 shares of common stock
    at $11.45 per share              -          -          -          -        400          4      4,576            -         4,580

Exercise of merger-related
    Placement Agent Warrants to
    purchase 3,000 shares of
    common stock at
    $11.50 per share                 -          -          -          -      3,000         30     34,470            -        34,500

Issuance of 2,000 shares
    and 2,000 shares of common
    stock at $40.00 and $21.25 per
    share, respectively, for
    consulting services              -          -          -          -      4,000         40    122,460            -       122,500

Expenses incurred in connection
    with the securities
    registration statement 
    on Form S-1                      -          -          -          -          -          -   (393,775)           -      (393,775)

Issuance of 25,000 Warrants
    to purchase common stock
    at $14.45 per share              -          -          -          -          -          -          -            -             -

Issuance of Series F Warrants
    to purchase a number of
    shares of common stock
    equal to the number of
    shares of common stock
    issuable upon conversion
    of the convertible debentures
    (or, in the case of the first
    200 units, 150% of such number
    of shares), at the lesser of a
    price equal to 75% of the 20-day 
    average bid price of the common 
    stock immediately prior to the 
    date nine months following the 
    issuance of the convertible 
    debentures or $45.00 per share   -          -          -          -          -          -          -            -             -

Issuance of 140,313 convertible
   debenture-related Placement
   Agent Warrants to purchase
   common stock at $50.00
   per share                         -          -          -          -          -          -          -            -             -

Net loss for the year ended                                                       
   December 31, 1995                 -          -          -          -          -          -          -   (7,870,979)   (7,870,979)
                             ---------- ---------- ---------- ----------  --------- ---------- ---------- ------------ ------------
   Balance, December 31, 1995        -          -          -          -  2,341,268     23,413 12,595,503   (9,327,315)    3,291,601
     
Exercise of Warrants to purchase
    1,728 shares of common stock
    at $11.45 per share              -          -          -          -      1,728         17     19,769            -        19,786

Exercise of merger-related
    Placement Agent Warrants to
    purchase 1,755 shares of
    common stock at                 
    $11.50 per share                 -          -          -          -      1,755         18     20,165            -        20,183

                                       28
<PAGE>

Exercise of merger-related
    Placement Agent Warrants to
    purchase 6,444 shares of
    common stock at
    $11.50 per share                 -          -          -          -      6,444         64     74,042            -        74,106
                                                                                                              
Exercise of Options to purchase
    656 shares of common stock
    at $10.00 per share              -          -          -          -        656          7      6,555            -         6,562

Issuance of common stock at
   $9.70 per share, through
   private placement in
   June, 1996                        -          -          -          -    660,949      6,609  6,404,591            -     6,411,200

Expenses incurred in
   connection with the
   private placement in
   June, 1996                        -          -          -          -          -          -   (651,926)           -      (651,926)

Issuance of 70,000 warrents to
   purchase common stock at $17.50
   per share in exchange for cancellation
   of 140,313 convertible debenture
   -related placement agent warrents
   issued in 1995 to purchase common
   stock at $50.00 per share         -          -          -          -          -          -          -            -             -

Exercise of Options to purchase
    656 shares of common stock
    at $10.00 per share              -          -          -          -        656          7      6,555            -         6,562

Issuance of common stock at
    $11.25 per share, net of 50%
    discount due to restrictions on                 
    sale, for director's fee         -          -          -          -      2,000         20     11,230            -        11,250

Conversion of convertible
   debentures, plus
   accrued interest at a  
   conversion price of $9.16         -          -          -          -     313,992      3,140 2,874,285            -     2,877,425

Reclassification of deferred
financing
   costs related to convertible
   debentures converted to
   common stock                      -          -          -          -          -          -   (235,888)           -      (235,888)

Exercise of Series C Warrants
   to purchase 400 shares of
   common stock at $10.00 per
   share                             -          -          -          -        400          4      3,996            -         4,000

Issuance of common stock at
    $7.50 per share, net of 50%
    discount due to restrictions on
    sale, for director's fee        -           -          -          -      1,575         16      5,890            -         5,906

Issuance of common stock at
    $6.85 per share, in exchange
   for debt in November 1996        -           -          -          -     29,091        291    199,709            -       200,000

Net loss for the year ended
   December 31, 1996                -           -          -          -          -          -          -  (13,889,772)  (13,889,772)
                             ---------- ---------- ---------- ----------  --------- ---------- ---------- ------------ ------------
Balance, December 31, 1996          -           -          -          -  3,360,514     33,605 21,334,477  (23,217,087)   (1,849,005)
                                       
Issuance of common stock at $2.50
   per share, in connection with a
   private placement, January 1997   -          -          -          -    172,000      1,720    428,280             -      430,000

Issuance of Series A Convertible
   Preferred Stock, 8% cumulative 
   annual dividend, convertible 
   into common stock at a price 
   of $1.406 per share, 
   June 1997                    97,380  9,737,807          -          -          -          -   (892,475)           -     8,845,332

                                       29
<PAGE>

Issuance of common stock at $3.75
   per share, in connection with
   the purchase of minority 
   interest in the Company's 
   collection operations in 
   Vermont, September 1997           -          -          -          -     18,667        187     69,813            -        70,000

Exercise of Series E Warrants to
   purchase 901 shares of common
   stock at $17.50 per share, 
   November 1997                     -          -         -            -       901          9     15,755            -        15,764

Conversion of Series A Convertible
   Preferred Stock for common 
   stock at $1.406 per share, 
   September and October 1997   (4,800)  (480,000)         -          -    341,334      3,413    476,587            -             -

Issuance of Series B Convertible
   Preferred Stock, 6% cumulative
   annual dividend, convertible
   into common stock at a price 
   of $6.26 per share, 
   December 30, 1997                 -          -     40,488  4,048,750          -          -          -            -     4,048,750

Net loss for the year ended
   December 31, 1997                 -          -          -          -          -          -          -   (5,588,612)   (5,588,612)
                             ---------- ---------- ---------- ----------  --------- ---------- ---------- ------------ ------------
Balance, December 31, 1997      92,580  9,257,807     40,488  4,048,750  3,893,415     38,934 21,432,437  (28,805,699)    5,972,229

</TABLE>
                             


See accompanying notes to the consolidated financial statements



                                       30
<PAGE>



               WASTE SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                                       

Note  1.  Business and Nature of Operations

         Waste  Systems  International,  Inc.  (the  "Company"  or  "WSI")  is a
regional  integrated  non-hazardous solid waste management company that provides
collection,   recycling,  transfer  and  disposal  services  to  commercial  and
residential  customers.  WSI was a Development  Stage Company for the year ended
December 31, 1996.  The Company is now carrying out active  business  operations
and generating landfill and other sites, and is no longer in the development 
stage.

         Prior to March 27,  1996,  the  Company  had been  actively  developing
environmental  technologies  with potential  application in a number of business
areas. On March 27, 1996, the Company announced its intention to take meaningful
actions to  conserve  cash and  working  capital,  including  restructuring  the
Company's  operations  to focus its  resources  and  activities on developing an
integrated  solid  waste  management  operation.  See Note 4 for  discussion  of
non-recurring charges related to the restructuring and discontinued operations.

         Since  inception,  the  Company has devoted  substantial  resources  to
various  development  projects  and  related  activities.  The Company has under
definitive   agreement  certain  acquisitions  (See  Notes  6  and  15)  and  is
undertaking negotiations with a number of additional  acquisitions,  which would
increase the  Company's  capital  requirements  accordingly.  In  addition,  the
Company  requires cash to fund its corporate staff and other overhead  expenses,
which may grow significantly as the Company expands the scope of its operations.
Although  the  Company is  producing  revenue  and cash  flows from its  Vermont
operations,  additional  financing  will be  necessary  to satisfy  existing and
pending commitments.

         The  Independent  Auditors'  Report of KPMG Peat  Marwick  LLP
for the fiscal  year ended  December  31, 1997,  states that "the Company must 
raise  substantial  additional  capital and must  achieve  a level of  revenues 
adequate  to  support  the  Company's  cost structure,  which raises substantia
doubt about its ability to continue as a going concern." On May 13, 1998, 
the Company closed an offering of $60.0 million in Subordinated Notes 
(the "Notes"),  which resulted in net proceeds to the Company of  approximately 
$58.3  million  and during the  fourth  quarter of 1997,  the Company began 
generating positive cash flows,  excluding  non-recurring charges, and expects 
to continue generating positive cash flows, excluding  non-recurring charges, 
in 1998. The Company used the proceeds from the Notes to repay existing
debt, complete several  acquisitions and to increase working capital for general
corporate  purposes.  The Company  believes  that a  combination  of  internally
generated  funds,  the proceeds from the Notes and an anticipated  expanded bank
facility will provide  adequate  funds to support the Company's  cost  structure
(including repayment of the Notes if that is required), acquisition strategy and
working capital  requirements for the foreseeable  future.  The Company does not
believe that the going concern  uncertainty has materially  affected its ability
to finance and conduct its business operations.

Note  2.  Summary of Significant Accounting Policies

         Basis  for  Presentation:   The  accompanying   consolidated  financial
statements  include  the  accounts  of the  Company  and its  subsidiaries.  All
significant  intercompany  accounts and  transactions  have been  eliminated  in
consolidation.

         Minority interest  represents 20% of WSI's Vermont  operations  through
June  30,  1997.  On June 30,  1997,  the  Company  purchased  the 20%  minority
interest. See Note 12.

         Use of Estimates: The preparation of financial statements in conformity
with  generally  accepted  accounting  principles  requires  management  to make
estimates and assumptions that affect reported amounts of assets and liabilities
and  disclosures  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.

         Cash and Cash  Equivalents:  All short-term  investments  which have an
original  maturity  of 90 days or less,  and are  valued  at cost  plus  accrued
interest which approximates market, are considered to be cash equivalents.

                                       31
<PAGE>

         Restricted Cash and Securities:  Restricted cash and securites  consist
principally  of funds or  securities  deposited  in  connection  with the future
financial  obligation of landfill or transfer station closure and  post-closure.
Amounts are principally invested in fixed income securities of U.S. governmental
and financial institutions.  The Company considers its investments to be held to
maturity.  Substantially  all of these  investments  mature within one year. The
investments are valued at cost plus accrued interest, which approximates market.

         Fair Value of Financial Instruments:  Statement of Financial Accounting
Standards No. 107, "Disclosures About the Fair Value of Financial  Instruments",
requires  disclosure of informaition  about the fair value of certain  financial
instruments for which it is practicable to estimate that value.  For purposes of
the following  disclosure the fair value of a financial instrument is the amount
at which the  instrument  could be  exchanged in a current  transaction  between
willing  parties  other than in a forced  sale or  liquidation.  Management  has
determined  that the  carrying  value of its  financial  assets and  liabilities
approximates fair value at December 31, 1997.

         Property and Equipment:  Property and equipment are stated at cost. The
cost of all  maintenance  and  repairs are charged to  operations  as  incurred.
Depreciation   for   financial   reporting   purposes  is  provided   using  the
straight-line method over the estimated useful lives of the assets as follows:

             Buildings, facilities and improvements                  10-30 years
             Machinery and equipment                                  3-10 years
             Rolling stock                                            3-10 years
             Containers                                               5-10 years

         Capitalization of landfill  development costs begins upon determination
by the  Company of the  economic  feasibility  or  extended  useful life of each
landfill  acquired as a result of  comprehensive  engineering and  profitability
studies and with the signing of landfill  management  contracts  for  facilities
operated by the Company that are not owned.  Capital costs include  acquisition,
engineering,  legal,  and other direct costs  associated with the permitting and
development  of new  landfills,  expansions  at  existing  landfills,  and  cell
development. These costs are capitalized and not amortized until all permits are
obtained and operations have commenced.

         Interest  is  capitalized  on  landfill  development  costs  related to
permitting,  site preparation,  and facility construction during the period that
these  assets  are  undergoing  activities  necessary  for their  intended  use.
Interest costs of  approximately  $24,000,  $42,000 and $82,000 were capitalized
during 1997, 1996 and 1995, respectively.

         Landfill  development costs are amortized using the  unit-of-production
method,  which is calculated using the total units of airspace filled during the
year  in  relation  to  total  estimated   permitted  airspace   capacity.   The
determination of airspace usage and remaining  airspace capacity is an essential
component in the  amortization  calculation.  The  determination is performed by
conducting annual  topography  surveys of the Company's  landfill  facilities to
determine remaining airspace capacity in each landfill. The surveys are reviewed
by the Company's  consulting  engineers,  the Company's  internal  operating and
engineering  staff,  and its financial and accounting  staff.  Current  year-end
remaining  airspace capacity is compared with prior year-end  remaining airspace
capacity to determine the amount of airspace  used during the current year.  The
result is compared  against the  airspace  consumption  figures  used during the
current  year  for  accounting  purposes  to  ensure  proper  recording  of  the
amortization  provision.  The  reevaluation  process did not  materially  impact
results of operations for any years presented.

         The   Company   performs   assessments   for  each   landfill   of  the
recoverability  of  capitalized  costs which requires  considerable  judgment by
management with respect to certain external factors,  including, but not limited
to,  anticipated  future  revenues,  estimated  economic  life  and  changes  in
environmental  regulation. It is the Company's policy to periodically review and
evaluate  that the  benefits  associated  with these  costs are  expected  to be
realized and therefore capitalization and amortization is justified. Capitalized
costs related to landfill  development for which no future  economic  benefit is
determined by the Company are expensed in the period in which such determination
is made.

         Landfill  Closure and  Post-Closure  Costs:  The Company has a material
financial  obligation  relating  to  closure  and  post-closure  activities  for
landfills it owns or operates.  Accordingly,  the Company  estimates and accrues
closure  and  post-closure  costs  on  a  unit-of-production   basis  over  each
landfill's estimated remaining permitted airspace capacity. The accrual is based
on final capping of the site, site inspection,  leachate management, methane gas


                                       32
<PAGE>

control and recovery,  groundwater  monitoring,  and  operation and  maintenance
costs to be incurred during the period after the facility closes.  The estimated
costs are expressed in current  dollars and are not discounted to reflect timing
of future expenditures.  The Company has accrued  approximately $1.6 million and
$1.5 million for closure and  post-closure  costs at December 31, 1997 and 1996,
respectively.  The engineering and accounting staff of the Company  periodically
review its future obligation for closure and post-closure costs. If estimates of
the  permitted  air  space  capacity  or the  estimated  costs  of  closure  and
post-closure have changed, the Company revises the rates at which it accrues the
future costs.

         The Company  records  reserves  for landfill  closure and  post-closure
costs,  as  necessary,  as a  component  of the  purchase  price  of  facilities
acquired,  in  acquisitions  accounted for under the purchase  method,  when the
acquisition is consummated.

         Deferred  Financing Costs:  Deferred financing costs are amortized on a
straight-line basis over the life of the related notes payable or debt. There is
not a  material  difference  between  using  the  straight-line  method  and the
effective interest method.

         Income Taxes:  The Company uses the asset and liability method of 
accounting for deferred income taxes.

         Revenue  Recognition:  The  Company's  revenues  are derived  primarily
from its  collection,  recycling, transfer and disposal services.  The Company 
records revenues when the services are performed.

         The  Company   recognizes   royalty  revenue  from  its  medical  waste
technology  business  based  on the  terms  of the  license  agreement  and  for
consulting services when rendered.

         Cost of Operations:  Cost of operations  includes  direct labor,  fuel,
equipment maintenance, insurance, depreciation and amortization of equipment and
landfill  development  costs,  accruals  for ongoing  closure  and  post-closure
regulatory  compliance (for landfills owned), and other routine  maintenance and
operating costs directly related to landfill  operations.  Also included in cost
of revenues are payments  made to the towns in which each landfill is located in
the form of "Host Town Fees" and "Closure  Fees" (for  landfills  operated under
management  contracts),  which are negotiated on a rate per ton basis as part of
the  contract  with the  Town.  In Towns  where  landfills  are  operated  under
management  contracts,  the Town is responsible for the closure and post-closure
costs related to the landfill.

         Earnings Per Share: In 1997, the Financial  Accounting  Standards Board
issued Statement of Financial  Accounting  Standards No. 128, Earnings Per Share
(SFAS 128).  SFAS 128  replaced  the  calculation  of primary and fully  diluted
earnings  per share with basic and diluted  earnings per share.  Unlike  primary
earnings per share,  basic earnings per share  excludes any dilutive  effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously  reported fully diluted  earnings per share.  Earnings
per share  amounts for all periods have been  presented  and where  appropriate,
restated to conform to the SFAS 128  requirements.  Weighted  average  number of
common and common  equivalent  shares  outstanding  and  earnings per common and
common  equivalent  shares have been  restated to give effect to a  one-for-five
reverse stock split effective Februray 13, 1998.

         Impairment of Long-Lived  Assets and  Long-Lived  Assets to be Disposed
Of: The Company  adopted the  provisions  of SFAS No. 121,  "Accounting  for the
impairment  of Long-Lived  Assets to Be Disposed  Of", on January 1, 1996.  This
Statement requires that long-lived assets and certain  identifiable  intangibles
be reviewed for impairment whenever events or changes in circumstances  indicate
that the carrying amount of an asset may not be recoverable.  Recoverability  of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are  considered  to be  impaired,  the  impairment  to be  recognized  is
measured  by the amount by which the  carrying  amount of the assets  exceed the
fair value of the assets.  Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Adoption of this Statement
did not have a material impact on the Company's financial  position,  results of
operations, or liquidity in 1997.

         Reclassifications:  Certain amounts in prior year financial  statements
have been  reclassified to conform to their 1997 presentation.

                                       33
<PAGE>

Note  3.  Accounts and Notes Receivable

         Accounts and notes receivable consist of the following:
                                                         
                                                        December 31,
                                                    1997           1996
                                               -------------   -----------
              Trade                           $     990,626   $    353,862
              ScotSafe Limited                            -        719,703
              Other                                       -        558,781
                                               -------------   ------------
                                                    990,626      1,632,346
              Allowance for doubtful accounts       (45,833)       (22,500)
                                               -------------   ------------
                                                    944,793      1,609,846
              Less current portion                 (944,793)    (1,158,677)
                                               -------------   ------------
              Long-term portion               $           -   $    451,169
                                               =============   ============

         Trade:  Trade  accounts  receivable  consists  primarily  of fees due 
from third  parties for  collection, recycling, transfer and disposal services.

         ScotSafe  Limited:  On February 9, 1996,  the  Company  entered  into a
licensing and royalty  agreement with ScotSafe  Limited  (ScotSafe),  a Glasgow,
Scotland based company,  for the exclusive rights to use WSI's CFA medical waste
processing  technology in the British Isles and Ireland. On November 6, 1996 the
Company and ScotSafe expanded their licensing  agreement  throughout Europe. The
initial licensing  agreement  contemplated that ScotSafe would establish as many
as nine CFA plants,  each of which would result in additional  licensing fees to
WSI. In accordance  with the  agreement,  the Company  would  provide  technical
assistance  in  connection  with these  facilities  including  facility  design,
installation,  testing and  training.  In addition to royalty  payments for each
plant,  ScotSafe agreed to pay WSI for consulting and other services,  and would
reimburse  the Company  for its  out-of-pocket  expenses  and  disbursements  in
connection  with these services.  In December of 1997,  ScotSafe began operating
under  bankruptcy  protection,  and as a result of this  development the Company
terminated  its licensing  agreement  with ScotSafe and wrote off the receivable
due from ScotSafe of  approximately  $570,000.  Subsequent to ScotSafe  entering
bankruptcy  the assets of ScotSafe  were  purchased  by  Eurocare  Environmental
Services,   Ltd.  ("Eurocare").   Eurocare  is  currently  operating  the  three
facilities the Company  constructed for ScotSafe without a licensing  agreement.
The Company  petitioned  Scottish Courts for an interim  interdict,  which would
have required  Eurocare to cease  operations  until proper  licensing of the CFA
process was obtained  from WSI. The  Company's  petition to the Court was denied
since the Company  currently does not hold a European patent on the CFA process.
However,  since the Company does have a European patent application pending, the
Scottish  courts have required that  Eurocare  track all waste  processed at the
plants and to remove some of the recommended  modifications  to the standard CFA
process which were  recommended by WSI while under agreement with ScotSafe.  The
Company  expects to be granted its European  patents during 1998, at which time,
the Company  will act  vigorously  to protect  its rights to the CFA  technology
against  Eurocare  and seek  substantial  damages.  As of December  31, 1997 the
Company has set up a reserve for these litigation costs of $300,000. See Note 8.


Note  4.  Restructuring of Operations, Discontinued Operations and Assets Held 
          for Sale

         On  March  27,  1996,  the  Company  announced  its  intention  to take
meaningful   action  to  conserve  cash  and  working  capital,   including  the
restructuring of the Company's  operations to focus its resources and activities
on developing a fully integrated solid waste  management  company.  Also on that
date,  Richard H. Rosen  ("Rosen")  resigned from the offices of Chairman of the
Board of Directors,  President,  Chief Executive  Officer,  and Treasurer of the
Company  and  all of its  subsidiaries  and  affiliates  (See  Note 5 -  Prepaid
expenses and other current assets). The Board of Directors named Philip Strauss,
Chief Operating Officer, to the additional positions of Chief Executive Officer,
and President of the Company, and on June 24, 1996 the Company also named Philip
Strauss, Chairman of the Board of Directors.

         Restructuring  of Operations:  During the years ended December 31, 1997
and 1996, the Company recorded restructuring charges of $596,426 and $1,741,729,
respectively,  for  costs  associated  with  management's  plan to  focus on the
development  of an  integrated  solid  waste  management  company.  These  costs
included  accruals for employee  severance,  non-cancelable  lease  commitments,


                                       34
<PAGE>

professional fees and litigation  costs. The restructuring  plan has resulted in
annual savings of approximately $4.0 million. At December 31, 1997 and 1996, the
Company had reserves and liabilities associated with restructuring activities of
$778,609 and $1,414,625, respectively.

         Discontinued  Operations:  On March 27, 1996,  as part of the announced
restructuring, the Company ceased operations at its technology center in Woburn,
Massachusetts,  and discharged all employees and consultants  previously engaged
in developing  technologies with potential  application in activities  including
the  manufacture of useful  materials  from tires and other recycled  materials,
contaminated  soil  cleanup and  recycling,  industrial  sludge  disposal,  size
reduction equipment design and manufacture (the "Ancillary  Technologies"),  and
Major Sports Fantasies,  Inc. ("MSF"), a business unrelated to the environmental
industry.  No  substantial  revenues were received  from the  technology  center
operations or MSF activities.

         The expenses  associated with operating the Ancillary  Technologies and
MSF for all periods  presented  are  reported in the  accompanying  consolidated
statements  of  operations  and cash flows under  discontinued  operations.  The
charge for discontinued  operations  relates primarily to losses from operations
and the costs associated with the termination of these operations. There were no
material  asset sales from these  operations  and no  interest  costs or general
corporate overhead costs have been allocated to the discontinued operations.  At
December 31, 1997 and 1996, the Company has reserves and  liabilites  associated
with discontinued operations of $0 and $370,472, respectively.

         Assets Held for Sale:  During the fourth  quarter of 1995,  the Company
recorded a non-recurring charge to 1995 earnings of $2,303,835 primarily related
to the  write-down  of  the  assets  of the  discontinued  operations  to  their
estimated net realizable  value.  During 1996 the Company recorded an additional
charge of  $2,260,963  to reduce the  carrying  value of the assets to their net
realizable   value  and  to  complete  the   discontinuance   of  the  Anciliary
Technologies and MSF operations. No income tax expense or benefit was recognized
due to the Company's net operating loss  carryforwards.  The Company disposed of
the remaining assets held for sale from the discontinued operations during 1997.
As of December 31, 1997 the remaining  asset held for sale  represents  property
owned in the area of the Fairhaven landfill project which the Company expects to
dispose of during 1998. See Note 6.

Note  5.  Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

                                                      December 31,
                                                  1997           1996
                                             ------------    ------------
           Prepaid permits                   $    502,974               -
           Due from former employee               300,000               -
           Prepaid other                          438,119    $    499,000
                                             ------------   -------------
             Total prepaid expenses
                 and other current assets  $    1,241,093    $    499,000
                                             ============    ============

         Prepaid permits represent  operating permits to commence  operations at
the transfer station in Burlington, Vermont and a permit application fee related
to Cell 2 at the Company's  landfill in Moretown Vermont which will be offset by
a per ton state waste tax.

         In July 1996, the Company commenced arbitration proceedings against Dr.
Richard Rosen (Rosen), former Chairman, Chief Executive Officer and Treasurer of
the Company,  seeking to recover  amounts,  excluding  interest  and  litigation
costs,  which  the  Company  believes  it was owed by  Rosen.  This  action  was
undertaken at the direction of the Board of Directors following its receipt of a
report by a special  committee  of the Board  appointed to  investigate  Rosen's
financial  dealings with the Company,  in consultation with independent  counsel
retained in connection with its  investigation.  Rosen resigned from all offices
with the Company on March 27, 1996.  Amounts which the Company sought to recover
included   unreimbursed   advances  and  amounts  which  the  Company   believed
constituted  improper expense  reimbursements  and payments of Company funds for
personal benefit.

         An arbitration hearing was completed on October 25, 1996. On January 2,
1997, the  arbitrator  issued the Award of  Arbitrator,  directing  Rosen to pay
$780,160,  excluding interest and litigation costs, for breaches by Rosen of his


                                       35
<PAGE>

employment agreement with the Company "in failing to discharge in good faith the
duties of his  positions  and failing to act under the direction of the Board of
Directors" of the Company.  On February 25, 1997 the Middlesex Superior Court in
Cambridge,  Massachusetts  confirmed  the  arbitration  award  and  entered  the
judgment  against  Rosen,  which  is  now   non-appealable,   in  an  amount  of
approximately  $830,000.  The Company is currently  pursuing  discovery  against
Rosen  through  this forum to  identify  all of the  assets  that Rosen may have
available to satisfy the  outstanding  judgment.  In August of 1996, the Company
secured a preliminary injunction in Middlesex Superior Court with respect to any
future sales of the Company's stock by Rosen.  The Company has filed a Motion in
such action asking the Court to issue a broader form of permanent  injunction in
the case.  Finally,  on September 8, 1997 the Company  commenced a supplementary
process  action  in  Cambridge  District  Court  to  collect  on such  judgment,
including  seeking  foreclosure  of all shares of the  Company's  stock owned by
Rosen.  On March 5, 1998, the judge granted the Company's  supplementary  action
and the Company is in the process of obtaining all the shares held by Rosen.  No
assurance  can be given  that the  Company  will be able to  collect  the entire
balance of any amounts awarded in arbitration  including interest and legal fees
which  continue to accrue.  The Company is  carrying  on its  December  31, 1997
balance sheet an amount of approximately  $300,000 in unreimbursed  advances due
from Rosen, but the Company's other claims and additional advances have not been
reflected on the balance sheet at this time. The Company anticipates receiving a
minimum of $300,000  from Rosen in cash or stock by March 31,  1998.  The amount
due from Rosen is classified in prepaid  expenses and other current  assets.  At
December  31,  1996,  the  receivable  from Rosen  amounted to $500,000  and was
classified as other assets.

Note  6.  Property and Equipment

         Property and equipment are stated at cost and consist of the following;
                                                   
                                                            December 31,
                                                       1997           1996
                                                   -----------    -----------
             Landfills                              $8,412,010     $8,015,606
             Landfill development projects             691,225        427,357
             Buildings, facilities and improvements  1,823,981      1,123,001
             Machinery and equipment                 1,513,720      2,656,789
             Rolling stock                             662,595              -
             Containers                                401,941         16,716
                                                   -----------    -----------
                                                    13,505,472     12,239,469
             Less accumulated depreciation and 
               amortization                         (1,018,289)      (533,757)
                                                   -----------    -----------
             Property and equipment, net           $12,487,183    $11,705,712
                                                   ===========    ===========
 
         Moretown,  Vermont.  The Company established its first integrated solid
waste management operations in the geographical area surrounding its landfill in
Moretown, Vermont. In addition to the landfill in Moretown, Vermont, the Company
currently owns and/or operates three transfer stations and collection operations
serving over 4,400 commercial and residential  customers in the Burlington,  St.
Albans, St. Johnsbury and Barre-Montpelier, Vermont areas. The first cell ("Cell
1") at the Company's  landfill is currently  operating at approximately  300-350
tons per day ("TPD") with remaining  estimated permitted capacity as of December
31, 1997 of  approximately  215,000 cubic yards. A permit  application was filed
with the Vermont  Agency of Natural  Resources for the  development  of a second
cell  ("Cell  2") on April 3, 1997.  On March 11,  1998 WSI  received  its draft
certification  for Cell 2 from the  Vermont  Agency of  Natural  Resources.  The
Company expects to receive all of the permits  required for Cell 2 by the end of
the second  quarter of 1998.  When all of the permits are  granted,  the Company
will begin  construction  on Cell 2 which will increase the  permitted  landfill
capacity by an estimated additional 1.3 million cubic yards.

         Hopewell,  Pennsylvania.  In  November  1997,  WSI signed a  definitive
agreement to acquire the  700-acre,  3 million  cubic yard  permitted  municipal
solid  waste  landfill  in  Hopewell,   Pennsylvania.   The  purchase  price  of
approximately  $6.0 million will be paid  primarily by the assumption of debt on
the facility.  The existing  landfill  consists of five permitted  cells, one of
which is currently  operating.  The Hopewell project represents a new market for
the  Company,  in which it intends to build a network  of  adjoining  collection
companies and transfer  stations within the central  Pennsylvania  region.  This
transaction is expected to close by the end of May 1998.

         South  Hadley,  Massachusetts.  WSI  and  the  Town  of  South  Hadley,
Massachusetts  have entered into a contract whereby the Company will operate and
remodel the Town's 30-acre  municipal  solid waste  landfill.  The Town of South
Hadley will retain full ownership of the landfill while the Company operates and


                                       36
<PAGE>

remodels the facility.  The Company received a landfill  disruption  permit from
the MDEP which enabled WSI to begin engineering work and feasibility  studies at
the  South  Hadley  landfill.  On March  16,  1998 the  Company  filed its draft
environmental  impact report with the MDEP and anticipates  receiving all of its
operating and  construction  permits during the second or third quarter of 1998,
which would allow WSI to begin  accepting  solid waste at the first 6-acre lined
cell  during the first or second  quarter  of 1999.  The South  Hadley  landfill
project is currently  expected to have in excess of 2 million cubic yards of new
capacity for future disposal.

         Fairhaven, Massachusetts. On July 24, 1994, WSI entered into a contract
with the Town of  Fairhaven,  Massachusetts  to operate  and  remodel the Town's
existing  26-acre  landfill.  The Company  began  operating the landfill in June
1995, and commenced the operations after obtaining necessary  remodeling permits
in October  1995.  On November 8, 1995,  an action was brought  against  various
parties  including the Company relating to the remodeling  permits issued at the
Fairhaven  landfill,  seeking among other things, to appeal the permits that had
been issued.  On June 2, 1997, the judge ruled in the Company's favor.  However,
based on the extensive delays associated with the litigation and the engineering
impacts of the delays  associated  with the  litigation,  which  resulted in the
uncertainty  of the  long-term  economic  viability of the project,  the Company
terminated  the Fairhaven  landfill  project.  On February 24, 1998, the Company
entered into a termination  agreement  with the Town of Fairhaven  that required
the Company to perform a certain amount of construction  and closure work at the
landfill.  The estimated  costs to terminate this project have been reserved for
and are included in accrued expenses at December 31,1997. See Note 8.

         Write-off of landfill development costs in 1997 primarily represent the
Company's  cost to  liquidate  the  equipment  which  was used at the  Fairhaven
landfill  and the costs to  physically  close the landfill  under the  Company's
Termination  Agreement  with the Town of  Fairhaven.  The Company  wrote-off its
capital investment in the project at December 31, 1996.


Note  7.  Long-term Debt and Notes Payable

         Long-term debt and notes payable consists of:
                                                              December 31,
                                                         1997            1996
                                                     -----------    ------------
          Convertible subordinated debentures       $  4,425,000   $   8,525,000
          Capital leases and equipment notes payable   2,626,700       1,589,989
          Howard Bank Term Loan                          748,000               -
          Mortgages                                      189,350         195,372
          FDIC and Boston Private Bank                         -         661,826
          Other notes payable                             56,043         643,564
                                                     -----------   -------------
                                                       8,045,093      11,615,751
           Less current portion                          843,831       2,165,378
                                                     -----------   -------------
           Long-term portion                        $  7,201,262   $   9,450,373
                                                    ============   =============

                                       37
<PAGE>

         Scheduled  maturities of long-term  debt and notes  payable,  excluding
capital leases are as follows:

             Payments due in the year ending December 31,
                 1998                                        $       398,679
                 1999                                                343,309
                 2000                                              4,509,052
                 2001                                                  8,870
                 2002                                                  9,772
                 Thereafter:                                         148,711
                                                             ---------------
                                                             $     5,418,393
                                                             ===============

         Convertible  Subordinated  Debt:  On October 6 and 12, and  November 7,
1995, the Company closed a "Regulation S" offering of $11,225,000 in Convertible
Subordinated  Notes and Warrants to overseas  investors,  which  resulted in net
proceeds to the Company of  $10,085,587.  The  offering  consisted of 449 units.
Each unit sold for $25,000,  and consisted of one Convertible  Subordinated Note
("Note") along with Series F Warrants  ("Warrants") to purchase shares of Common
Stock at a price of $12.20.  The Notes  mature on September  30, 2000,  and bear
interest at 10%, payable quarterly.  The Notes are convertible into Common Stock
at $9.20 per share.  The Notes are  callable at the option of the Company at any
time after  October 6, 1996,  if the closing  sale price of the Common Stock has
exceeded  $50.00 per share for a period of 20 consecutive  trading days prior to
redemption  notice.  The Warrants  expire on September  30, 1998.  The Notes and
Warrants have not been  registered  under the Securities Act and may not be sold
in the United States without such  registration or an applicable  exemption from
the requirement of registration. Under most circumstances,  resale in the United
States of Notes and shares of Common Stock  acquired on  conversion  of Notes or
exercise   of   Warrants   is  exempt   from   registration   under   prevailing
interpretations  of Regulation S. In connection  with the offering,  the Company
issued to the  Placement  Agent  warrants to  purchase  up to 140,313  shares of
Common Stock at $50 per share.  These warrants were subsequently  exchanged into
70,000  warrants at $17.50 as part of a subsequent  financing in June 1996,  see
Note 13 - Common Stock.

         As of December  31, 1996,  $2,850,000  of notes plus $27,425 of accrued
interest had been converted into 313,992 shares of common stock. On December 31,
1997, the Company converted  $3,950,000 of Convertible  Subordinated  Debentures
and  $110,625 of accrued  interest  into 40,488  shares of Series B  Convertible
Preferred Stock. See Note 12.

         Capital Leases and Equipment Notes Payable:  The Company leases certain
facilities,  equipment,  and vehicles under  agreements  which are classified as
capital leases.

        Leased capital assets included in property and equipment are as follows:
                                                             
                                                            Dececember 31,
                                                         1997            1996
                                                    -------------  -------------

             Land and Buildings                     $   1,634,078   $    56,250
             Machinery and equipment                    1,881,630     2,378,560
                                                    -------------  -------------
                                                        3,515,708     2,434,810
             Accumulated depreciation                    (207,053)     (202,714)
                                                    -------------  -------------
                                                    $   3,308,655  $  2,232,096
                                                    =============  =============

                                       38
<PAGE>

             Future minimum lease payments, by year and in the aggregate,  under
non-cancelable  capital  leases and  operating  leases with initial or remaining
terms of one year or more at December 31, 1997 are as follows:

                                                        Capital       Operating
                                                         Leases        Leases
                                                     ------------  -------------
         Payments due in the year ending December 31,
             1998                                     $  672,030     $  197,058
             1999                                        669,420        255,163
             2000                                        643,051        276,879
             2001                                        389,618        298,595
             2002                                        200,040        304,024
             Thereafter                                1,225,229         76,006
                                                    -------------   ------------
         Minimum lease payments                        3,799,388    $ 1,407,725
                                                                    ============
         Less:  interest                               1,172,688
                                                    -------------
         Present value of net minimum lease payments   2,626,700
         Less current portion                            445,153
                                                   -------------
         Long-term portion                         $   2,181,547
                                                   =============

         The  Company's  rental  expense for  operating  leases was $81,757,  
$293,766,  and $292,492 for the years ended December 31, 1997, 1996 and 1995, 
respectively.

         Howard Bank Term Loan:  On March 31,  1997,  the Company  closed a $1.0
million term loan with The Howard Bank of Burlington,  Vermont.  The term of the
loan is payable  in 36 equal  monthly  payments  and bears  interest  at 12% per
annum. The proceeds from the loan were used for the initial costs of development
of Cell 2 at the Moretown  landfill (See Note 6) and for general working capital
purposes at its operations in Vermont.

         Mortgages:  Mortgage notes are secured by the respective  assets,  and 
are due in various  amounts through 2015.

Note  8.  Accrued Expenses

         Accrued expenses consisted of the following:
                                                             December 31,
                                                         1997           1996
                                                    ------------   -------------
              Interest                             $     103,578  $     242,185
              Professional and consulting fees           265,024        237,399
              Fairhaven landfill (See Note 6)            756,000        500,000
              ScotSafe litigation (See Note 3)           300,000              -
              Other                                      341,784        246,131
                                                    ------------   -------------

                                                   $   1,766,386  $   1,225,715
                                                   =============   =============


                                       39
<PAGE>

Note  9.  Income Taxes
<TABLE>
<CAPTION>

         Income tax expense (benefit) consists of:              
                                                                     Current        Deferred          Total
                                                                <C>             <C>            <C>             
              Year ended December 31, 1997:   
                 Federal                                        $           -   $           -  $           -
                 State                                                  5,622               -          5,622
                                                                -------------   -------------  -------------
                                                                $       5,622    $          -  $       5,622
                                                                =============   =============  =============

              Year ended December 31, 1996:
                 Federal                                        $           -   $           -  $           -
                 State                                               (23,456)               -        (23,456)
                                                                -------------   -------------  --------------
                                                                $    (23,456)    $          -  $     (23,456)
                                                                =============   =============  ==============

              Year ended December 31, 1995:
                 Federal                                        $           -   $   (141,358)  $    (141,358)
                 State                                                 75,535        (43,642)         31,893
                                                                -------------   -------------  --------------
                                                                $      75,535   $   (185,000)  $    (109,465)
                                                                =============   =============  ==============

         A  reconciliation  between federal income tax expense  (benefit) at the
statutory rate and the Company's federal tax expense (benefit) is as follows for
the year ended December 31:

                                                                     1997            1996            1995
                                                                     ----            ----            ----

              Statutory Federal income tax (benefit)             $ (1,898,217)  $ (4,717,894)  $(2,708,925)
              State taxes, net of Federal income tax benefit         (530,947)    (1,210,466)     (704,604)
              Valuation allowance                                   2,432,087      5,898,245     3,294,764
              Other                                                     2,699          6,659         9,300
                                                                 -------------  -------------  ------------

                                                                 $      5,622   $    (23,456)  $  (109,465)
                                                                 =============  =============  ============

</TABLE>
         The tax effects of temporary  differences  between financial  statement
and tax accounting  that gave rise to significant  portions of the Company's net
deferred tax assets and deferred tax  liabilities  at December 31, 1997 and 1996
are presented below.

                                                               1997       1996
                                                               ----       ----

              Deferred tax assets:
                  Accounts receivable                    $   11,528  $    9,788
                  Property and equipment                    194,942     236,323
                  Other accrued liabilities               4,371,736   4,320,664
                  Operating loss and credit carryforwards 4,543,738   4,626,234
                                                         ----------  -----------
                  Gross deferred tax assets               9,121,944   9,193,009
                  Less: valuation allowance              (9,121,944) (9,193,009)
                                                         ----------  -----------
                   Net deferred tax assets                      -           -
                                                         ----------  -----------
              Deferred tax liabilities:
                  Total deferred tax liabilities                -           -
                                                         ----------  -----------

                  Net deferred tax liability             $      -    $      -
                                                         ==========  ===========

                                       
         At December 31, 1997 the Company had net operating  loss  carryforwards
for Federal income tax purposes of approximately $10 million which generally are
available to offset  future  Federal  taxable  income,  if any, and which expire
during the years ending December 31, 2009 through 2012. The Company underwent an
ownership  change as defined in Internal  Revenue  Code  Section 382 on June 30,
1997 and as a result will be restricted in its ability to use net operating loss
carryforwards  generated prior to the ownership to offset future taxable income.
The Company's future use of net operating loss carryforwards  generated prior to



                                       40
<PAGE>
                                      
the ownership change will be subject to an annual limitation  generally equal to
the  product of the  long-term  tax  exempt  rate for June 1997 of 5.64% and the
value of the  Company  as of June 30,  1997.  As a result of this  limitation  a
portion of its Federal and state net  operating  loss  carryforwards  may expire
unused.

 Note  10.  Landfill Closure and Post-Closure Costs

         Landfills are typically  developed in a series of cells,  each of which
is  constructed,  filled,  and capped in sequence over the operating life of the
landfill.  When the cell is filled and the  operating  life of the  landfill  is
over,  the final  cell  must be  capped,  the  entire  site  must be closed  and
post-closure  care and  monitoring  activities  begin.  The  Company  will  have
material  financial  obligations  relating to the final closure and post-closure
costs of each landfill the Company owns.

         The Company has estimated as of December 31, 1997, that the total costs
for final closure and  post-closure  of Cells I and II at the Moretown,  Vermont
landfill,  including  capping costs,  cap maintenance,  groundwater  monitoring,
methane gas monitoring,  and leachate  treatment and disposal for up to 30 years
after closure, is approximately $4.2 million. Based upon the capacity of Cells I
and II, approximately $1.6 million has been accrued for at December 31, 1997.

         The Company bases its estimates for these accruals on respective  State
regulatory  requirements,   including  input  from  its  internal  and  external
consulting  engineers and  interpretations of current  requirements and proposed
regulatory  changes.  The closure and post-closure  requirements are established
under the standards of the U.S.  Environmental  Protection  Agency's  Subtitle D
regulations as implemented and applied on a state-by-state basis.

         The determination of airspace usage and remaining  airspace capacity is
an essential component in the calculation of closure and post-closure  accruals.
See Note 2 - Summary of Significant  Accounting  Policies  Landfill  Closure and
Post-Closure Costs.

Note  11.  Commitments and Contingencies

         Landfill related activities.  In the normal course of its business, and
as a  result  of  the  extensive  governmental  regulation  of the  solid  waste
industry,  the Company  periodically  may become subject to various judicial and
administrative proceedings involving federal, state, or local agencies. In these
proceedings,  the agency may seek to impose fines on the Company or to revoke or
deny renewal of an operating permit held by the Company.  From time to time, the
Company  also may be  subjected  to  actions  brought  by  citizens'  groups  in
connection  with the  permitting  of its  landfills  or  transfer  stations,  or
alleging  violations  of the permits  pursuant  to which the  Company  operates.
Certain  federal and state  environmental  laws impose  strict  liability on the
Company for such  matters as  contamination  of water  supplies or the  improper
disposal of waste. The Company's  operation of landfills  subjects it to certain
operational,  monitoring, site maintenance, closure and post-closure obligations
which could give rise to increased costs for monitoring and corrective measures.
See Note 10 Landfill Closure and Post Closure Costs.

         The  Company  has a $5.0  million  environmental  impairment  liability
insurance  policy covering  claims for sudden or gradual onset of  environmental
damage.  If the Company  were to incur  liability  for  environmental  damage in
excess of its  insurance  limits,  its  financial  condition  could be adversely
affected. The Company carries a comprehensive general liability insurance policy
which  management  considers  adequate  at this time to  protect  its assets and
operations from other risks.

         None of the  Company's  landfills  are  currently  connected  with  the
Superfund National Priorities List or potentially responsible party issues.

         Employment   Contracts.   The  Company  has  entered  into   employment
agreements  with its two senior  executives  which  expire on June 10,  1999 and
subsequently  provide for employment  until terminated by either party at annual
salaries of $175,000.

         Legal Matters.  The Company is party to pending legal  proceedings  and
claims. Although the outcome of such proceedings and claims cannot be determined
with certainty, the Company's management,  after consultation with outside legal
counsel,  is of the opinion that the expected  final  outcome  should not have a



                                       41
<PAGE>
                                       

material  adverse  effect  on  the  Company's  financial  position,  results  of
operations or liquidity.

         Richard  Rosen.  In  July  1996,  the  Company  commenced   arbitration
proceedings  against Richard Rosen ("Rosen"),  former Chairman,  Chief Executive
Officer and  President of the  Company,  seeking to recover  amounts,  excluding
interest and litigation costs,  which the Company believes it was owed by Rosen.
This action was undertaken at the direction of the Board of Directors  following
its  receipt  of a report  by a special  committee  of the  Board  appointed  to
investigate  Rosen's financial  dealings with the Company,  in consultation with
independent  counsel  retained  in  connection  with  its  investigation.  Rosen
resigned from all offices with the Company on March 27, 1996.  Amounts which the
Company sought to recover included  unreimbursed  advances and amounts which the
Company believed  constituted  improper expense  reimbursements  and payments of
Company funds for personal benefit.

         An arbitration hearing was completed on October 25, 1996. On January 2,
1997, the  arbitrator  issued the Award of  Arbitrator,  directing  Rosen to pay
$780,160,  excluding interest and litigation costs, for breaches by Rosen of his
employment agreement with the Company "in failing to discharge in good faith the
duties of his  positions  and failing to act under the direction of the Board of
Directors of the Company.  On February 25, 1997 the Middlesex  Superior Court in
Cambridge,  Massachusetts  confirmed  the  arbitration  award  and  entered  the
judgment against Rosen, which is now  non-appealable,  in an amount in excess of
$833,000. The Company is currently pursuing discovery against Rosen through this
forum  to  identify  assets  that  Rosen  may  have  available  to  satisfy  the
outstanding  judgment.  In August of 1996,  the  Company  secured a  preliminary
injunction in Middlesex  Superior  Court with respect to any future sales of the
Company's  stock by Rosen.  The Company has filed a Motion in such action asking
the Court to issue a  broader  form of  permanent  injunction  in the  case.  On
September  8, 1997 the  Company  commenced  a  supplementary  process  action in
Cambridge  District  Court  to  collect  on  such  judgment,  including  seeking
foreclosure  on all shares of the  Company's  stock owned by Rosen.  On March 5,
1998 the judge granted the Company's motion and the Company is in the process of
obtaining  all the  shares  held by Rosen.  No  assurance  can be given that the
Company  will be able to collect the entire  balance of any  amounts  awarded in
arbitration  including interest and litigation costs. The Company is carrying on
its  December  31, 1997  balance  sheet an amount of  $300,000  in  unreimbursed
advances due from Rosen, but the Company's other claims and additional  advances
have  not  been  reflected  on the  balance  sheet  at this  time.  The  Company
anticipates receiving a minimum of approximately  $300,000 from Rosen in cash or
stock by March 31, 1998.

         On March 27, 1997,  Rosen  commenced  an action  against the Company in
Middlesex  County  (Massachusetts)  Superior Court,  seeking an award of damages
resulting  from the Company's  alleged  breach of a Memorandum of  Understanding
entered into between the Company and Rosen in connection with the termination of
Rosen's  employment with the Company,  in which Rosen had been granted an option
to purchase certain assets of the Company not related to its core business.  The
Company  believes this claim to be frivolous and is  vigorously  defending  this
action.

         Marguerite Piret. In October 1997 in the Middlesex  Superior Court, the
Company  commenced an action against  Marguerite A. Piret, a former  director of
the Company and the wife of Rosen,  seeking  damages  against Ms.  Piret for her
independent  breaches of fiduciary duty as a former director of the Company. The
case is in the  discovery  stage  and no trial  date has yet  been  set.  If the
Company  is  successful  in its  claims,  the  Company  may  recover  direct and
consequential damages from Ms. Piret.

         Other Proceedings.  As of the beginning of fiscal 1997, the Company had
pending  against it four complaints with the  Massachusetts  Commission  Against
Discrimination  ("MCAD").  Currently,  the Company  has  pending  against it two
ongoing complaints with the Massachusetts Commission Against Discrimination. The
Company is not in a position to evaluate  the  likelihood  that damages or other
relief will be awarded, or that the amount of damages awarded could be material.
With  respect  to the two other MCAD  complaints,  one has been  settled  for an
amount not  material  to the Company  and the other has been  dismissed  by MCAD
(with  leave to file a claim in  Massachusetts  Superior  Court  expiring  as of
September 21, 1998).

Note  12.  Preferred Stock

         On June 30, 1997, the Company closed a Regulation "D" private placement
of  Series A  Convertible  Preferred  Stock,  which  raised  gross  proceeds  of
approximately  $9.7  milion.  As  part of the  private  placement,  the  Company


                                       42
<PAGE>

converted  approximately $570,000 in bank debt into preferred stock and acquired
the minority interest in its Vermont operations for $850,000 in preferred stock.

         During the six months ended  December 31, 1997,  holders of $480,000 in
face amount of Series A Preferred Stock  converted  their preferred  shares into
341,334 shares of common stock.

         The Series A Preferred Stock bears an 8.0% annual cumulative  dividend,
and is convertible  into common stock at a conversion  price of $1.406 per share
of common stock, which conversion price may be reset to a lower conversion price
upon the  occurrence  of certain  events.  The dividend is payable in cash or in
additional  shares of preferred stock at the Company's  option and is subject to
adjustment after 3 years. The Series A Preferred Stock is also  redeemable(a) at
the Company's  option for Common Stock, if the Company's  average closing Common
Stock price for any 20 consecutive  trading days  occurring  after June 26, 1998
equals or exceeds $2.8125 and (b) at the Company's  option for cash equal to the
redemption  price as set forth in the Certificate of Designation of the Series A
Preferred  Stock,  if any Series A Preferred  Stock is  outstanding  on June 26,
2002,  in each  case ,  subject  to  certain  trading  requirements.  Cumulative
dividends  on the Series A Preferred  Stock,  as of December 31, 1997 which have
not been  declared or paid are  approximately  $395,000.  The  purchasers of the
Series  A  Preferred  Stock  were  granted   registration  rights  covering  the
underlying  Common Stock into which such preferred stock is  convertible,  and a
registration  statement  for the resale of such common stock has been filed with
the Securities and Exchange Commission but is not yet effective.

         On December 31,  1997,  WSI retired  approximately  $4.0 million of its
outstanding  10%  Convertible  Debentures in exchange for the issuance of a like
amount  of  40,488  shares  of  Series  B  Preferred  Stock.  See  Note 7 to the
Consolidated Financial Statements presented in Item 8.

         The Series B Preferred Stock bears a 6.0% annual  cumulative  dividend,
and is convertible into common stock at a conversion price of $6.25 per share of
common stock. The dividend is payable in cash or in additional  shares of Series
B Preferred Stock at the Company's  option if the Company's  closing stock price
for 20  consecutive  days  equals or  exceeds  $6.25  per  share.  The  Series B
Preferred Stock is also redeemable (a) at the Company's  option for Common Stock
if the Company's  average closing Common Stock price for 20 consecutive  trading
days equals or exceeds $6.25 and (b) at the  Company's  option for cash equal to
the  redemption  price as set forth in the  Certificate  of  Designation  of the
Series B Preferred  Stock,  if any Series B Preferred  Stock is  outstanding  on
October 6, 2000.  Cumulative  dividends on the Series B Preferred  Stock,  as of
December 31, 1997 which have not been declared or paid are approximately $1,000.
The purchasers of the Series B Preferred Stock were granted  registration rights
covering  the  underlying  Common  Stock  into  which  such  preferred  stock is
convertible.

Note  13.  Common Stock

         On January  21,  1997,  the  Company  closed a  Regulation  "D" private
placement  of  172,000  shares of common  stock at $2.50  per share  with  gross
proceeds of $430,000. These shares have not been registered under the Securities
Act and may not be sold in the United  States  without such  registration  or an
applicable exemption form the requirement of registration.

         In September  1997, the Company issued 18,667 shares of common stock in
conection  with the purchase of the minority  interest in the Company's  Vermont
hauling business for $70,000.

         On October 7, 1997,  the Company  filed an S-3  Registration  Statement
with the Securities and Exchange Commission to register approximately  7,100,000
shares of common stock primarily consisting of shares which are reserved for the
issuance  to  holders  of Series A  Preferred  Stock  upon  conversion  of their
preferred  shares to common  stock and the  shares  issued in the  January  1997
private placement.

         In December 1997, the Company's  Board of Directors  approved a one for
five reverse  stock split of the Company's  Common Stock.  On February 13, 1998,
the  stockholders  of the Company  approved the reverse stock split at a special
stockholders'  meeting.  No fractional  shares will be issued in connection with
the reverse stock split, and  stockholders  will receive cash in payment for any
fractional shares otherwise issuable.  The Company's  financial  statements have
been restated to reflect the one-for -five reverse split.

                                       43
<PAGE>

Note  14.  Stock Options

         Employee Stock Option Plan. Pursuant to the Company's 1995 Stock Option
and Incentive Plan as amended (the "Plan"),  options to purchase up to 1,700,000
shares of Common Stock were reserved for issuance to employees  and  consultants
of the Company.  Options  granted under the Plan may be either  Incentive  Stock
Options or  Non-Qualified  Stock Options for purposes of federal income tax law.
Options are  generally  subject to vesting  over a period of four years from the
date of grant and are  exercisable  only to the extent vested from time to time,
although  certain  options have provided for earlier  vesting.  The selection of
individuals to receive awards of options under the Plan and the amount and terms
of such awards may be  determined by the Board of Directors of the Company or an
Administering Committee appointed by the Board of Directors.

         As of December 31, 1997, options to purchase 1,327,417 shares of Common
Stock had been  granted  and options to  purchase  up to an  additional  372,583
shares remained  available for grant.  The per share weighted average fair value
of stock  options  granted  during  1997 and 1996 was  approximately  $4.08  and
$15.34,  respectively,  using  the Black  Scholes  option-price  model  with the
following  weighted average  assumptions:  volatility,  30%;  expected  dividend
yield, 0%; risk free interest rate, 5.5%; and expected life, 5 years.

         The Company  applies APB Opinion No. 25 in accounting for stock options
and,  accordingly,  no  compensation  cost has been  recorded  in the  financial
statements.  If the Company had determined  compensation costs based on the fair
value of its stock options at their grant date under SFAS No. 123, the Company's
net losses in 1997 and 1996 would have increased to the amounts shown below.

                                                     1997             1996
                                                --------------   --------------

                      Net loss

                        - as reported          $   (5,983,847)   $  (13,889,772)

                        - pro forma                (6,401,550)      (14,334,772)

                      Net loss per share

                        - as reported          $        (1.66)   $        (4.90)
                        - pro forma                     (1.77)            (5.06)

         Pro forma net income  reflects  only the effects of options  granted in
1997 and 1996. Therefore, it does not reflect the full effect of calculating the
cost of stock  options  under SFAS No. 123  because  the cost of options  issued
prior  to  January  1,  1995  are not  considered.  As a  result,  it may not be
representative  of the pro  forma  effects  on  operating  results  that will be
disclosed in future years.

                                       44
<PAGE>

         Changes  in  options  and  option  shares  under  the plan  during  the
respective years were as follows:
<TABLE>
<CAPTION>

                                                1997                    1996                     1995
                                      ----------------------   ----------------------  ------------------------
                                    <C>            <C>         <C>          <C>        <C>            <C>
                                    Weighted ave.              Weighted ave.           Weighted ave.
                                    exercise price  Number     exercise price  Number  exercise price   Number
                                       per share   of shares     per share   of shares    per share   of shares
                                       ---------   ---------     ---------   ---------    ---------   ---------  
     Options outstanding,
         beginning of year              $2.23        806,000       $6.19      619,125        $2.00     555,625
     Options granted                     0.47      7,984,505        2.25      741,250         5.50     287,500
     Options exercised                      -              -        2.00       (6,562)           -           -
     Options canceled                    0.50     (7,463,088)       3.83     (547,813)        2.00    (224,000)
                                                  ----------                 ---------               ---------
     Options outstanding,
         end of year                    $1.42      1,327,417       $2.23      806,000        $6.19     619,125
     Shares reserved for future grants               372,583                  694,000                  880,875
                                                  ----------               ----------                ---------
     Total options in the plan                     1,700,000                1,500,000                1,500,000
                                                  ==========                =========                =========
     Options exercisable,
         end of year                    $1.41        114,900       $2.23      511,125        $2.00     147,656
                                                  ==========                =========                =========
</TABLE>
         Effective  June 30, 1997,  the Board of Directors  offered all employee
participants in the Stock Option Plan the opportunity to reprice to $0.28125 per
share any currently  outstanding stock options with exercise prices in excess of
$0.28125  per  share.   Each  repriced  option  retained  the  vesting  schedule
associated  with the original  grant.  Additionally,  on February 13, 1998,  the
stockholders  of the Company  approved a one for five  reverse  stock split at a
special meeting effective December 31, 1997.

The total exercise  proceeds for employee stock options  outstanding at December
31, 1997 is $1,896,168.
<TABLE>
<CAPTION>

<C>                <C>           <C>                <C>               <C>            <C>
                                                                                  Exercisable
                                 Weighted average         Weighted    -------------------------------           
       Range of         Number          remaining          average        Number     Weighted average
exercise prices    outstanding   contractual life   exercise price    of options       exercise price
-----------------------------------------------------------------------------------------------------       
$ 1.41 -   1.41      1,298,417               9.37          $  1.41       114,900           $     1.41
  1.88 -   1.88         22,000               9.74             1.88             -                    -
  2.19 -   2.19          1,000               9.58             2.19             -                    -
  3.13 -   3.13          1,000               9.92             3.13             -                    -
  3.75 -   3.75          5,000               9.75             3.75             -                    -
-----------------------------------------------------------------------------------------------------
$ 1.41 -   3.75      1,327,417               9.37          $  1.42       114,900          $      1.41
=====================================================================================================
</TABLE>

         Non-Employee  Directors  Stock Option Plan.  Pursuant to the  Company's
1995 Stock Option Plan for Non-Employee  Directors as amended,  each Director is
entitled to receive a grant of a Non Qualified  Stock Options to purchase  2,000
shares of the  Company's  Common  Stock for each  calendar  year of service as a
director of the Company  commencing January 1, 1996. Each such option is subject
to  vesting  at a rate of 400  shares  for each year that the  holder  remains a
Director of the  Company.  In  addition,  the plan  provides for the issuance of
4,000 fully vested  options upon the election of each new member of the Board of
Directors initially elected after December 24, 1997,  excluding employees of the
Company.


                                       45
<PAGE>

Changes in options and option shares under the plan during the respective  years
were as follows:
<TABLE>
<CAPTION>

                                             1997                     1996                             1995
                                    -----------------------  ----------------------------  --------------------------
                                    <C>            <C>         <C>            <C>          <C>              <C>      
                                    Weighted ave.              Weighted ave.               Weighted ave.
                                    exercise price   Number    exercise price    Number    exercise price   Number
                                      per share     of shares    per share      of shares    per share      of shares
                                      ---------     ---------   ---------       ---------  -------------    ---------               
     Options outstanding,
         beginning of year                 $2.86      97,084       $2.00         43,750          $2.00         43,750
     Options granted                        0.60     224,880        3.56         53,334             -             -
     Options canceled                       1.45    (294,484)          -              -             -             -
                                                   ---------                  ----------                    ---------    
     Options outstanding,
         end of year                       $1.41      27,480       $2.86         97,084          $2.00         43,750
                                                   =========                  ==========                    =========

     Options exercisable,
              end of year                  $1.41      21,500       $2.59         35,208          $2.00         10,937
                                                   =========                  ==========                    =========


</TABLE>

The total exercise proceeds for non-employee  director stock options outstanding
at December 31, 1997 is $49,261.
<TABLE>
<CAPTION>

<C>                <C>           <C>                <C>               <C>                 <C>
                                                                                   Exercisable
                                 Weighted average         Weighted    ------------------------------------
       Range of         Number          remaining          average        Number          Weighted average
exercise prices    outstanding   contractual life   exercise price    of options            exercise price
----------------------------------------------------------------------------------------------------------
$1.41 -    1.41         14,000               9.21          $  1.41        13,500                $     1.41
 2.19 -    2.19         13,480               9.67             2.19         8,000                      2.19
----------------------------------------------------------------------------------------------------------
$1.41 -    2.19         27,480               9.37          $  1.79        21,500                $     1.73
==========================================================================================================
</TABLE>

Note  15.  Subsequent Events

         In January 1998,  the Company  entered into an  additional  credit
facility  with  The  Howard  Bank in  Vermont  for  $2.25  million  to fund  the
development and expansion of its integrated solid waste management operations in
Vermont and for general working capital purposes.

         On  February  12,  1998,  the  Company  closed a $5 million bridge
loan for use in closing  certain acquisitions.

         On February 13, 1998, the  stockholders  of the Company  approved a one
for five reverse stock split at a special  stockholders'  meeting. No fractional
shares were issued in connection with the reverse stock split,  and stockholders
received cash in payment for any fractional shares otherwise issuable.  See Note
13.

         As of February 16, 1998,  WSI had closed 3  acquisitions  of collection
companies and a transfer station, and signed definitive  agreements to acquire 2
additional  collection  companies in the State of Vermont. The acquisitions have
combined  annual  revenues  of  approximately   $5  million.   The  remaining  2
acquisitions  are  expected to close by March 31,  1998.  The  Company  plans to
integrate  these  acquisitions  with its  current  operations  in  Vermont.  The
acquisitions will be accounted for using the purchase method of accounting.

         On March 24, 1998, the Company signed a definitive agreement to acquire
Horvath  Sanitation,  Inc.,  D/B/A  Eagle  Waste  ("Eagle"),  which  is based in
Altoona,  PA. Eagle has  approximately $8 million in annual revenue and collects
approximately 200 tons per day of solid waste.

                                       46
<PAGE>

SIGNATURES

         Pursuant to the  requirements of Section 13 of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned thereunto duly authorized.

                      WASTE SYSTEMS INTERNATIONAL, INC.


                  Date: June 29, 1998          By:/s/ Philip Strauss
                       ---------------------      ------------------
                                                  Philip Strauss
                                                  Chairman, Chief Executive 
                                                  Officer and President
                                                  (Principal Executive Officer)

                  Date: June 29, 1998          By:/s/ Robert Rivkin
                       ---------------------      -----------------
                                                  Robert Rivkin
                                                  Vice President, Chief 
                                                  Financial Officer, Treasurer 
                                                  and Secretary (Principal 
                                                  Financial and Accounting
                                                  Officer)



                                       47
<PAGE>