<PAGE>





                        SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, D.C.  20549

                                     FORM 10-K
   (Mark One)
   (   ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [FEE REQUIRED]

         For the transition period from June 1, 1996 to December 31, 1996

   OR

   ( X ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                           Commission File Number 0-2000

                               METALCLAD CORPORATION
              (Exact name of registrant as specified in its charter)

                Delaware                             95-2368719
   (State or other jurisdiction of           (I.R.S. Employer ID No.)
    incorporation or organization)

         3737 Birch Street, Suite 300
           Newport Beach, California                    92660 
   (Address of Principal Executive Office)            (Zip Code)

         Registrant's telephone number, including area code (714) 476-2772

            Securities registered pursuant to Section 12(b) of the Act:

   Name of each exchange                         Title of each class
                                                 on which registered:
            None                                         None

            Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock -- $.10 Par Value
                                 (Title of Class)

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

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

        The aggregate market value of the Common Stock held by non-affiliates
   of the registrant on March 20, 1997 was approximately $43,684,858, based
<PAGE>




   upon the average of the bid and asked prices of the Common Stock, as
   reported on the Nasdaq Small Cap Market.

        The number of shares of the Common Stock of the registrant outstanding
   as of March 20, 1997 was 29,123,239. 

        Documents incorporated by reference:

        Portions of the Company's Proxy Statement to be filed with the
   Securities and Exchange Commission in connection with the Company's 1997
   Annual Meeting of Stockholders are incorporated by reference into Part III
   hereof.
<PAGE>








                                      PART I

        All statements, other than statements of historical fact, included in
   this Form 10-K, including without limitation the statements under
    Management s Discussion and Analysis of Financial Condition and Results of
   Operations  and  Business , are, or may be deemed to be,  forward-looking
   statements  within the meaning of Section 27A of the Securities Act of 1933,
   as amended (the  Securities Act ), and Section 21E of the Securities
   Exchange Act of 1934 (the  Exchange Act ).  Such forward-looking statements
   involve assumptions, known and unknown risks, uncertainties, and other
   factors which may cause the actual results, performance or achievements of
   Metalclad Corporation (the  Company ) to be materially different from any
   future results, performance or potential risks and uncertainties include,
   without limitation, the ability to commence operations at the Company s
   hazardous waste treatment sites under development, competitive pricing and
   other pressures from other businesses in the Company s markets availability
   of capital, cost of labor, and other risk factors detailed herein and in
   other of the Company s filings with the Securities and Exchange Commission. 
   The forward-looking statements are made as of the date of this Form 10-K and
   the Company assumes no obligation to update the forward-looking statements
   or to update the reasons actual results could differ from those projected in
   such forward-looking statements.  Therefore, readers are cautioned not to
   place undue reliance on these forward-looking statements.

   ITEM 1.  BUSINESS

   (a)   General Development of Business

        Mexican Hazardous Waste Treatment Business.  Since November 1991, the
   Company has been actively involved in the development of integrated
   hazardous waste treatment and disposal facilities in various states in the
   Republic of Mexico.  The business is comprised of two major parts: 
   operation and development.

        All operating activities associated with waste collection, transport,
   and disposal are conducted by BFI-Omega, S.A. de C.V. ( BFI-OMEGA ), the
   Company s joint venture with Browning-Ferris Industries de Mexico, S.A. de
   C.V. ( BFI-Mexico ), a subsidiary of BFI International, Inc., which in turn
   is a subsidiary of Browning-Ferris Industries, Inc.  (NYSE:  BFI) ( BFI ). 
   All developmental activities are conducted by the Company s subsidiary,
   Ecosistemas Nacionales, S.A. de C.V. ( ECONSA ).  BFI-OMEGA s business is
   comprised of waste collection, transportation, and treatment, through
   branches located in Guadalajara, Irapuato, Veracruz, Aguascalientes, San
   Luis Potosi, Mexico City, Tampico and Puebla.  In addition, it operates a
   blending and recycling plant in Tenango and has its headquarters in Mexico
   City.

        In January, 1997, the Company s subsidiary, Quimica Omega, S.A. de C.V.
   ( QUIMICA OMEGA )and BFI-Mexico reached a tentative agreement for QUIMICA
   OMEGA to acquire BFI s 50% interest in the joint venture.  As part of this
   proposed transaction, BFI agreed to contribute certain waste transportation
   equipment to QUIMICA OMEGA.  In addition, BFI will also provide certain
   technical and landfill management services to the Company, including the
   continuing services of the general manager of the joint venture.



                                        1
<PAGE>




        ECONSA s primary business has been the development of a landfill and
   treatment facility located in the State of San Luis Potosi.  Its other
   development activities include an additional hazardous waste landfill in
   another state, a facility for non-hazardous industrial waste in yet another
   state, the location of a hazardous waste incinerator, and the development of
   an aqueous waste treatment facility.  ECONSA is also engaged in the
   exportation for the destruction of polychlorinated biphenyls ( PCBs ).

        Insulation Contracting.  The Company has historically been engaged in
   insulation contracting services, including asbestos abatement services and
   insulation material sales, to customers primarily in California.  Insulation
   services include the installation of high and low temperature insulation on
   pipe, ducts, furnaces, boilers, and other types of industrial equipment for
   a variety of facilities.  The Company sells insulation accessories incident
   to its service business to its customers as well as other insulation
   contractors.  The Company's customers consist primarily of industrial
   facilities, such as public utilities, oil refineries, and manufacturing
   plants.

        Corporate Structure.  The Company, incorporated originally in 1947 as
   an Arizona corporation, was reincorporated in Delaware on November 24, 1993. 
   The Company's wholly-owned United States subsidiaries include Eco-Metalclad,
   Inc. ("ECO-MTLC"), a Utah corporation, Metalclad Insulation Corporation
   ("MIC"), a California corporation, and Metalclad Environmental Contractors
   ("MEC"), a California corporation.  

        The Company's Mexican subsidiaries include Ecosistemas Nacionales, S.A.
   de C.V. ("ECONSA"), Ecosistemas del Potosi, S.A. de C.V., formerly known as
   Eco Administracion, S.A. de C.V. ("ECOPSA"), Quimica Omega, S.A. de C.V.
   ("QUIMICA OMEGA"), Consultoria Ambiental Total, S.A. de C.V. ("CATSA"),
   Confinamiento Tecnico de Residues Industriales, S.A. de C.V. ("COTERIN") and
   Seguridad Electrica Mexicana, S.A. ( SEM ).  Each of the Mexican
   subsidiaries is a corporation of variable capital (sociedad anonima de
   capital variable). The Company is continuing the process of restructuring
   the ownership of its Mexican subsidiaries so that ECONSA will hold the
   capital stock of all Mexican subsidiaries.  

        Unless otherwise indicated, the term "Company" refers to Metalclad
   Corporation, its United States and Mexican subsidiaries, and its
   predecessors.  

        The Company's principal executive offices are located at 3737 Birch
   Street, Suite 300, Newport Beach, California  92660, United States, and its
   telephone number is (714) 476-2772.  MIC and MEC serve their insulation
   contracting customers from their headquarters in Anaheim, California.  ECO-
   MTLC's offices are in Newport Beach, California, and the Company's Mexican
   subsidiaries' offices are located in Mexico City and the City of San Luis
   Potosi.

   (b)   Significant Events

        On April 9, 1996, the Company and BFI, through wholly-owned Mexican
   subsidiaries, formed BFI-OMEGA as a 50%-50% owned joint venture corporation
   to provide a full range of industrial waste collection, transportation,
   recycling, treatment, and disposal services in Mexico.

        In January, 1997, Metalclad s subsidiary, Quimica Omega, and BFI de
   Mexico, S.A. de C.V. reached a tentative agreement for Quimica Omega to
   acquire BFI s 50% interest in the joint venture.  As part of this proposed


                                        2
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   sale BFI would contribute certain waste transportation equipment to Quimica
   Omega.  In addition, BFI will also provide certain technical and landfill
   management services to the Company and ECOPSA, including continuing the
   services of the current general manager, who will remain in Mexico to manage
   the day-to-day affairs of the Company.  This sale comes as a result of BFI s
   decision to concentrate on their core businesses such as municipal and non-
   hazardous solid waste collection.

        In July 1996, the Company, through its Curtom-Metalclad partnership,
   received a purchase order for an estimated $10,000,000 from Southern
   California Edison ( SCE ), a long-term client of the Company, for the
   furnishing of asbestos abatement and re-insulation services at various SCE
   locations.  The term of the purchase order is for five years.  The purchase
   order is part of SCE s alliance program for strategic partnering with
   selected contractors and other service providers.  The value of the order is
   an estimate by the Company and separate releases of work scope are required
   to perform services under the agreement; however, the Company believes the
   value of work ultimately performed may exceed the initial purchase order
   amount during the term.

   (c)   Financial Information About Industry Segments

        The Company, through MIC and MEC, is engaged in insulation services,
   asbestos abatement services, and insulation material sales, such activities
   constituting one industry segment.  The development and operation of the
   industrial waste treatment business, commenced in November 1991 through ECO-
   MTLC and is now conducted by the Company s Mexican subsidiaries, has been
   reported as a separate industry segment for 1994, 1995 and 1996.  Financial
   information concerning the Company's business segments is included and
   incorporated by reference in Part II and Part IV of this Form 10-K.  

   (d)   Forward Looking Statements

         Statements in this report that are not strictly historical are
    forward-looking  statements which should be considered as subject to the
   many uncertainties that exist in the Company s operations and business
   environment. These uncertainties, which include economic and currency
   conditions, market demand and pricing, competitive and cost factors, and the
   like, are included in this  Form 10-K report and filed with the Securities
   and Exchange Commission.

   (e)   Narrative Description of Business

   INTRODUCTION

        Business in Mexico. Since November 1991, the Company has been actively
   involved in doing business in Mexico.  The Company s initial focus was the
   development of facilities for the treatment, storage and disposal of
   industrial hazardous waste.

        In May 1994, the Company acquired QUIMICA OMEGA, a ten-year old Mexican
   company engaged in the business of industrial waste collection, recycling,
   blending, the production of fuel by-products for sale to cement kilns and
   disposal at licensed facilities.

        In April 1996, the Company formed a joint venture in Mexico with BFI-
   Mexico.  The joint venture, which became effective for accounting purposes
   on March 10, 1996, expanded operations in Mexico to eight branches, all of
   which include collection, transportation, treatment, and disposal of


                                        3
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   industrial wastes.  Excluded from the joint venture are development
   activities, ownership of disposal facilities, and international brokerage of
   PCBs.  Also excluded was any municipal solid waste business. 

        In January 1997, QUIMICA OMEGA and BFI-Mexico reached a tentative
   agreement for QUIMICA OMEGA to acquire BFI-Mexico s 50% interest in the
   joint venture.

        With the acquisiton of BFI-OMEGA, the Company will own and control all
   of its operations in Mexico, which are split into two primary divisions: (i)
   the business conducted by ECONSA which involves development, ownership and
   operation of landfill and treatment facilities; and (ii) the operating
   activities of BFI-OMEGA which include primarily the collection,
   transportation and treatment of certain hazardous and industrial waste.  The
   Company anticipates changing the name BFI-OMEGA to one more appropriate for
   long-term operation.

        Business in the United States.  For over 50 years, the Company has been
   engaged in insulation contracting, services, including asbestos abatement
   and insulation material sales to customers primarily in California. 
   Insulation services include the installation of high and low temperature
   insulation on pipe, ducts, furnaces, boilers, and other types of industrial
   equipment for a variety of industrial facilities.  The Company sells
   insulation accessories to its service customers as well as other insulation
   contractors.  The Company's customers consist primarily of industrial
   facilities, such as public utilities, oil refineries, and manufacturing
   plants.  

   MEXICAN BUSINESS

        ECONSA.  ECONSA s role for the Company in Mexico is to develop
   facilities for the treatment, storage, and disposal of industrial waste. 
   ECONSA, through subsidiaries, will own these facilities after development,
   but anticipates that all management and operation will be performed by BFI-
   OMEGA under the terms of operating agreements which will be negotiated for
   each facility.

        ECONSA, through a subsidiary, owns a completed hazardous waste landfill
   and treatment facility in the State of San Luis Potosi.  The landfill is
   located in the remote area of La Pedrera, Guadalcazar and is known by its
   trade name,  El Confin .  It comprises 2,200 acres of land, has a permitted
   capacity of 360,000 tons of waste per year and is designed presently to
   handle approximately 160,000 tons per year when fully operational.

        El Confin is presently not in operation because of political opposition
   to its opening.  The Company has not been able to overcome this opposition
   despite repeated promises of support from the highest levels of the Mexican
   government.  Consequently, on October 2, 1996, the Company filed a Notice of
   Intent to File Claim Under the North American Free Trade Agreement
   ( NAFTA ).

        Following the procedure outlined by the NAFTA, the Company filed its
   Notice of Claim on January 2, 1997.  The Claim was filed with the
   International Centre for Settlement of Investment Disputes ( ICSIP ) in
   Washington, D.C.  On January 13, 1997, the Secretary General of ICSIP
   registered the Company s claim and notified both the United States and
   Mexican governments of the registration.  The rules governing these kinds of
   claims allow each party to choose one arbitrator with those two to choose a
   third.  Once impaneled, the tribunal sets rules for discovery, time periods


                                        4
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   for submissions, and generally controls the pace of the arbitration itself.

        The Company s claim is one under the category of  Likened to
   Expropriation  wherein the Company, having been denied the right to operate
   its constructed and permitted facility, claims it sproperty has therefore
   been, as a practical matter, expropriated, entitling the Company to the fair
   market value of the facility as damages.  Of course, no assurance can be
   given that the efforts of the Company will be fruitful and there is always
   the possibility of a negotiated settlement, which is possible according to
   the wishes of the parties at any time during the arbitration process.

        ECONSA is active in developing additional projects in Mexico, including
   the following:

        1.  An additional hazardous waste landfill and treatment facility near
   the heart of industrial Mexico.  Because of the Company s experience in
   developing these facilities and the base of support developed at the state
   and community level in which the project is planned, it is believed this
   project can proceed more rapidly than prior projects provided no substantial
   unanticipated obstacles arise.  Substantial development activity can be
   undertaken on this project.  Although there can be no assurances, the
   Company believes this project is financable and has had several productive
   meetings with Mexican and international lenders.  This project will be
   similar in size and capability to El Confin and will include an area for
   treating and disposing of non-hazardous industrial waste.

        2.  An industrial waste treatment and disposal facility.  The Company
   has responded to an invitation from a major industrialized state in Mexico
   to develop and install a facility for the treatment and disposal for non-
   hazardous industrial waste.  A site for the project meeting technical,
   political, and social requirements has been selected.  The Company is
   finalizing a development plan with the state and believes this project can
   be underway during 1997.  This project is also considered financeable.

        3.  Incineration.  The Company continues to believe that Mexico has a
   strong need for a commercial incinerator.  The Company will continue to seek
   commercial contracts for incineration with the hope of developing that
   market to the point that a fuol-scale commercial incinerator is justified.

        4.  An aqueous waste treatment facility.  The Company believes there is
   a significant market for a facility that can treat wastes with high water
   content.  The Company is presently using certain technologies to eliminate
   water in various wastes at its Tenango plant and believes that a full-scale
   treatment facility will be justified in the future.

        5.  PCB Exporting.  The Company has in the past exported poly
   chlorinated biphenyls ( PCBs ) from Mexico to Great Britain for thermal
   destruction.  Since the United States, in March 1996, began allowing the
   importation of PCBs for destruction, the Company has been shipping these
   materials to the United States under an exclusive agreement with Rollins
   Environmental of Deerpark, Texas, whereby Rollins takes responsibility for
   the ultimate destruction of the materials delivered.  In addition, the
   Company acquired Seguridad Electrica Mexicana, SA. De C.V. ( SEM ), a
   Mexican company exclusively engaged in the business of marketing PCBs for
   export and destruction.  The Company believes this will be a significant
   market in the future.

        BFI-OMEGA.  In 1996, the Company undertood significant expansion of the
   BFI-OMEGA operations in Mexico.  Branches now exist in Puebla, Irapuato,


                                        5
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   Guadalajara, Aguascalientes, Tampico, San Luis Potosi, the State of Mexico
   and Veracruz.  It is intended that these eight branches be expanded
   eventually to 20 and will serve as collection and transportation facilities
   as well as the marketing arm for any treatment and disposal facilities open
   by the Company.

        The goal of the Company is to expand the existing business of BFI-OMEGA
   to include an integrated service which will be able to satisfy all of the
   requirements of industrial waste producers.  

        By following this business plan, BFI-OMEGA intends to capture a
   significant share of the newly developing market for environmental services
   in the industrial heart of Mexico.  This past year, the Company has
   developed a new technology for the disposing of industrial solid hazardous
   waste.  The material has been successfully used as an alternate fuel at two
   cement plants.  Steps are being taken to expand relationships at both the
   Cruz Azul Cement Company and the Apasco Cement Company so that additional
   liquid and solid fuel can be sent to their facilities.

        Mexican Governmental Regulations and Permits.  The Company's proposed
   business in Mexico is highly regulated and is subject to Mexican
   environmental law.  Development of each proposed hazardous waste treatment
   facility cannot be commenced until the Company receives a separate
   unconditional permit to construct (a "Construction Permit") from the
   applicable local, state, and federal agencies of the Mexican government.  A
   completed facility cannot be opened until the Company has received a permit
   to operate (an "Operating Permit") the facility from such agencies. 
   Although the federal Construction and Operating Permits take precedence over
   state and local authorizations under Mexican law, the Company's objective is
   to obtain state and local authorizations and public support before
   commencing construction and operation of a facility.   

        The Secretariat of Environment, National Resources and Fishing,
   ( SEMARNAP ) is the Mexican federal government agency charged with
   environmental policy formulation and enforcement of such policy under the
   General Law of Ecological Equilibrium and Environmental Protection which was
   enacted in 1988 (the "General Ecology Law").  Under the General Ecology Law,
   regulations have been adopted which require, among other things, the permit
   for construction and operation of facilities which treat, store, or dispose
   of hazardous wastes.  SEMARNAP has divided its environmental functions
   between two autonomous agencies:  Instituto Nacional de Ecologia (the
   National Institute of Ecology or "INE"), which is responsible for regulation
   and permitting, and Procuraduria Federal de Proteccion al Ambiente (the
   Office of the Federal Attorney for the Protection of the Environment or
   "PROFEPA"), which is responsible for inspection, compliance, and
   enforcement.  A Construction Permit from INE cannot be obtained until the
   site for the facility has acquired zoning and land use permits from local
   and state agencies and INE approves feasibility studies, risk analysis, and
   environmental impact studies.  The commencement of operations of each
   facility is contingent upon receipt of an Operating Permit from INE. 
   Operation of each facility and compliance with the regulations of INE will
   be monitored by PROFEPA on a continuous basis.   

        Insurance.  The Company's Mexican operations are covered by a general
   liability insurance policy, which provides base coverage of $1,000,000 per
   occurrence and in the aggregate.  The Company believes that its current
   insurance arrangements are adequate for the Company s current needs and that
   coverage will be available at reasonable prices for anticipated future
   needs.


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        Market.  The Company has made a substantial investment in creating a
   comprehensive evaluation of the industrial waste market in Mexico.  Various
   organizations participated in specific aspects of the evaluation and the
   study included numerous direct interviews with waste generators.  The study
   identifies the  distribution of waste types by industry segment, estimates
   the quantity of hazardous wastes generated in Mexico, identifies specific
   pricing structure for current waste handling activities, and identifies
   existing and possible future competitors.  As a result of this study, the
   Company estimates that the total industrial waste generated annually is
   approximately 150 million tons, of which approximately 8 million tons are
   hazardous and likely to be processed at commercial facilities.  The
   remaining waste will most likely be processed in-house by industry.  The
   Company's conclusions are consistent with reports from SEMARNAP and the
   United States Department of Commerce.

        Each of the Company's proposed landfill facilities, with an design
   capacity of 160,000 tons per year, will be able to process approximately 2%
   of the estimated 8 million tons of hazardous waste generated in Mexico
   annually.
    
        Competition.   The Company believes it will build and operate the first
   fully-integrated waste treatment facility in Mexico operating to
   international standards.  Existing facilities do not typically offer either
   a high level of technology or a high degree of integration with regard to
   the processing of waste.  As an integrated hazardous waste management
   facility, the Company has no known, commercially active competitors.  The
   Company believes that it will encounter limited competition from small
   companies operating in various niches of the waste treatment industry;
   however, companies with substantially greater financial, technical,
   marketing, and other resources than the Company may enter the market and
   compete with the Company's anticipated business. 

        The only substantial hazardous waste disposal operation currently
   operating in Mexico is a landfill located near Monterrey which is 60%-owned
   by Waste Management.  This landfill receives wastes from plants throughout
   Mexico and has had significant growth during the last few years as a result
   of the increased enforcement activities of PROFEPA.  Although this landfill
   will be a competitor, the Company believes that in many cases the
   technologies offered at the Company's proposed facilities will be both
   preferred because of the design and treatment strategies incorporated into
   the Company s landfill and competitively priced as a result of
   transportation cost savings.  See  Transportation. 

        Although the Company believes the hazardous waste treatment market in
   Mexico is substantial and growing, to the extent potential competitors
   establish facilities in Mexico and offer comparable services at lower prices
   or more cost-effective waste disposal alternatives, the Company's ability to
   compete effectively could be adversely affected.   No such competition is
   yet evident in Mexico and the impact of devaluation has slowed entry of
   other U.S. firms evaluating Mexico.

        Transportation.  The Company believes that its single most competitive
   short and long-term advantage in the Mexican marketplace is due to the
   location of El Confin and other BFI-OMEGA facilities.  The El Confin site is
   centrally located in Mexico and situated near the intersection of the major
   north/south transportation route (Highway 57) and the major east/west
   transportation route (Highway 70), both of which are well-maintained and
   conveniently traveled.  The central location of the site will minimize the
   freight element of waste-handling costs to industries located in many of the


                                        7
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   major Mexican industrial zones.  The distances from major cities in Mexico
   to El Confin are approximately as follows:

   <TABLE>
   <S>  <C>               <C>                        <C>             <C>
        San Luis Potosi   100 km  (65 miles)         Durango           481 km (300 miles)
        Aguascalientes    203 km (125 miles)         Monterrey         537 km (335 miles)
        Guadalajara       348 km (215 miles)         Veracruz          758 km (470 miles)
        Mexico City       413 km (260 miles)         Oaxaca            950 km (590 miles)
        Tampico           418 km (260 miles)         Chihuahua       1,050 km (650 miles)
   </TABLE>

        Employees.  As of December 31, 1996, the Company had a full-time staff
   of approximately 20 employees working in its Mexican operations, including
   three executive personnel, and 17 clerical workers.  Additionally, 177 are
   employed by BFI-OMEGA in various capacities.

   Insulation Contracting Services 

        Background.  The Company's insulation contracting services include the
   installation of high and low temperature insulation on pipe, ducts,
   furnaces, boilers, and various other types of equipment.  Insulation
   services are provided for new construction and maintenance of existing
   facilities.  The Company is a licensed general contractor and typically
   provides project management, labor, tools, equipment and materials necessary
   to complete the installation.

        The Company usually performs substantially all of the work required to
   complete its contracts, generally subcontracting to others the scaffolding
   and painting.  In a typical insulation contract, the Company obtains plans
   and specifications prepared by the owner of a facility or its agent.  In
   projects where the customer is the owner of the facility, the Company acts
   as the general contractor.  The Company also works as a subcontractor for
   other general contractors.  Insulation contracts for new construction may
   require one or more years to complete.  Maintenance contracts typically
   extend over a period of one or more years.

        The Company's insulation contracting business has historically
   included, among other things, maintenance, removal, repair, and re-
   installation of insulation on existing facilities and equipment.  These
   activities included asbestos removal services in most cases in which the
   insulation at such facilities has included asbestos-containing material
   ("ACM").

        The Company removes all forms of ACM after first treating the asbestos
   with water and a wetting agent to minimize fiber release.  Dry removal is
   conducted in special cases where wetting is not feasible, provided
   Environmental Protection Agency ("EPA") approval is obtained.  The Company's
   workers also remove pipe insulation by cutting the wrapping into sections in
   an enclosed containment area or utilizing special "glovebags" which provide
   containment around the section of pipe insulation being removed.  In some
   instances, the Company performs asbestos removal and provides related re-
   insulation contracting services, including insulation material sales; in
   other cases, the Company performs only asbestos removal services.  The
   Company believes that the removal of ACM provides the best and most cost-
   effective solution for most asbestos abatement projects.

        Insulation Contracts.  The Company obtains contracts, which ordinarily
   fall within one of the types set forth below, on the basis of either


                                        8
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   competitive bids or direct negotiations: 

        Cost-plus.  These contracts, sometimes referred to as "time and
   materials" contracts, generally provide for reimbursement of costs incurred
   by the Company and the payment of a fee equal to a percentage of the cost of
   construction.  They generally provide for monthly payments covering both
   reimbursement for costs incurred to date and a portion of the fee based upon
   the amount of work performed and are customarily not subject to retention of
   fees or costs.

        Fixed-price.  These contracts generally require the Company to perform
   all work for an agreed upon price, often by a specified date.  Such
   contracts usually provide for increases in the contract price if the
   Company's construction costs increase due to changes in or delays of the
   project initiated or caused by the customer or owner or by escalating
   project labor rates.  However, absent causes resulting in increases in
   contract prices, the Company takes certain risks associated with its fixed
   prices.  Under these types of contracts the Company receives periodic
   payments based on the work performed to date, less certain retentions.  The
   amounts retained are held by the customer pending either satisfactory
   completion of the Company's work or in some cases, satisfactory completion
   of the entire project.

        In accordance with industry practice, most of the Company's contracts
   are subject to termination or modification by the customer, with provision
   for the recovery of costs incurred and the payment to the Company of a
   proportionate part of its fees, in the case of a cost-plus contract, and
   overhead and profit, in the case of a fixed price contract.  At various
   times, contracts which the Company has with its customers have been
   terminated or modified.  However, such termination or modification occurs in
   the regular course of the Company's business due to changes in the work to
   be performed as determined by the customer.  No single termination or
   modification has had or is expected to have a material adverse impact on the
   Company's business.

        Operations and Employee Safety.  All contract work is performed by
   trained Company personnel and supervised by project managers trained and
   experienced in construction and asbestos abatement.  Each employee involved
   in asbestos abatement must complete a general training and safety program
   conducted by the Company.  Training topics include approved work procedures,
   instruction on protective equipment and personal safety, dangers of
   asbestos, methods for controlling friable asbestos and asbestos
   transportation and handling procedures.  In addition, all full-time
   employees engaged in asbestos abatement activities are required to attend a
   minimum four-day course approved by EPA and the Occupational Safety and
   Health Administration ("OSHA") and all supervisors of abatement projects are
   required to attend a nine-hour first aid/CPR/safety course and an eight-hour
   EPA/AHERA refresher course annually.  Six of the Company's full-time
   employees and 43 hourly employees have been trained and certified as
   "competent individuals" under EPA regulations relating to the training of
   asbestos abatement workers.  All employees are issued detailed training
   materials and the Company typically conducts a job safety analysis in the
   job bidding stage.

        The Company requires the use of protective equipment and sponsors
   periodic medical examination of all field employees.  During removal
   procedures, ACM is generally wetted to minimize fiber release and filtration
   devices are used to reduce contamination levels.  Air monitoring to
   determine asbestos fiber contamination levels is conducted on all abatement


                                        9
<PAGE>




   projects involving the removal of friable asbestos.  The Company has a
   comprehensive policy and procedure manual which covers all activities of an
   asbestos abatement project and the specific responsibilities and
   implementation of Company procedures and policies to be followed on each
   project.  The manual is reviewed periodically by management and updated to
   insure compliance with federal, state, and local regulations, to include
   information from in-house project reviews findings, and to include updated
   information regarding industry practices.  To separate its responsibilities
   and to limit liability, the Company utilizes third party, unaffiliated
   laboratories for asbestos sampling analysis and licensed independent waste
   haulers for the transportation and disposal of asbestos waste from its
   projects.

        Materials and Supplies.  The Company purchases most of its insulating
   materials and accessories from Roxul, Pabco, Fibrex, R.P.R. and C.W.C.I.
   Although the Company purchases most of its supplies from national
   manufacturers, there are many suppliers of the same materials and the
   Company is not dependent on any one source for the materials and accessories
   used in its insulation services, asbestos abatement and insulation material
   sales business.

        Marketing and Sales

        Insulation Contracting Services.  The Company currently obtains most of
   its insulation contracting business from existing customers  and referrals
   by customers, engineers, architects, and construction firms.  Additional
   business is obtained by referrals obtained through labor, industry, and
   trade association affiliations.  

        Projects are also awarded through competitive bidding although major
   companies frequently rely on selected bidders chosen by them based on a
   variety of criteria such as adequate capitalization, bonding capability,
   insurance carried, and experience.  The Company is frequently invited in
   this manner to bid on projects and obtains a significant amount of its
   contracts through the competitive bidding process.  The Company believes
   that its bids are competitively priced and anticipates that in the future
   its bids will continue to be competitively priced with bids submitted by
   others.

        The Company's marketing and sales effort emphasizes its experience,
   reputation for timely performance, and knowledge of the insulation and
   asbestos abatement industry.  The Company is a member of the Western
   Insulation Contractors Association, the National Insulation Contractors
   Association, and various local business associations. 

        Curtom-Metalclad Joint Venture.  In 1989, the Company entered into a
   joint venture with a minority service firm which qualifies for preferential
   contract bidding because of minority status.  The joint venture, known as
   "Curtom-Metalclad," submits bids for insulation and asbestos abatement
   services.  When contracts are obtained by the joint venture, the Company
   performs the work specified in the contract as a subcontractor to the joint
   venture.  The Company also receives an interest in 49% of the profits or
   losses of the joint venture.

        Insulation Material Sales.  The Company concentrates its insulation
   material sales efforts on large industrial companies, such as oil refineries
   and power plants, which perform their own insulation maintenance activities. 
   The Company also markets to power generating companies which are involved in
   co-generation projects.  The Company contacts directly its customers and


                                        10
<PAGE>




   potential customers involved in insulation maintenance and new construction
   in an effort to have the Company specified as their supplier.

        Customers.  The Company's insulation customers are predominantly public
   utilities, oil refiners, food processors, paper processors, manufacturers,
   and engineering and construction companies.  Contracts with Curtom-Metalclad
   accounted for more than 60% of the Company's insulation contracting revenues
   during the 7 months ended December 31, 1996 which includes work performed
   for Southern California Edison.  The Company anticipates that work performed
   for Southern California Edison, through Curtom-Metalclad, will continue to
   account for more than 25% of the Company s insulation contracting revenues.

        Competition.  Competition in the insulation contracting services
   business is intense and is expected to remain intense in the foreseeable
   future.  Competition includes a few national and regional companies which
   provide integrated services and many regional and local companies which
   provide insulation and asbestos abatement specialty contracting services. 
   Most of the national and regional competitors providing integrated services
   are well established and have substantially greater marketing, financial,
   and technological resources than the Company.  The regional and local
   specialty contracting companies which compete with the Company either
   provide one service or they provide integrated services by subcontracting
   part of their services to other companies.  The Company believes that the
   primary competitive factors in these areas are price, technical performance,
   and reliability.  The Company obtains a significant number of its insulation
   service contracts through the competitive bidding process.  The Company
   believes that its bids are competitively priced and anticipates that in the
   future its bids will continue to be competitively priced with bids submitted
   by others.

        Insurance and Bonding.  The Company's asbestos and general liability
   insurance policy, which provides base coverage of $1,000,000 per occurrence
   and excess liability coverage of $10,000,000.  Although the Company has
   secured bonding capacity of $5,000,000, the Company's current insulation and
   asbestos abatement services customers do not generally require performance
   bonds.  The Company believes that its current bonding arrangements are
   adequate for the Company's anticipated future needs.

        Government Regulation

        Insulation Services and Material Sales Regulation.  The Company, as a
   general contractor and insulation specialty contractor, is subject to
   regulation requiring it to obtain licenses from several state and municipal
   agencies.  Other than licensing, the Company's industrial insulation
   services and material sales business is not subject to material or
   significant regulation.

        Asbestos Abatement Regulation.  Asbestos abatement operations are
   subject to regulation by federal, state, and local governmental authorities,
   including OSHA and the EPA.  In general, OSHA regulations set maximum
   asbestos fiber exposure levels applicable to employees and the EPA
   regulations provide asbestos fiber emission control standards.  The EPA
   requires use of accredited persons for both inspection and abatement.  In
   addition, a number of states have promulgated regulations setting forth such
   requirements as registration or licensing of asbestos abatement contractors,
   training courses for workers, notification of intent to undertake abatement
   projects and various types of approvals from designated entities. 
   Transportation and disposal activities are also regulated.  The Company
   believes that similar legislation may be adopted in other states and in


                                        11
<PAGE>




   local building codes.

        OSHA has promulgated regulations specifying airborne asbestos fiber
   exposure standards for asbestos workers, engineering and administrative
   controls, workplace practices, and medical surveillance and worker
   protection requirements.  OSHA's construction standards require companies
   removing asbestos on construction sites to utilize specified control methods
   to limit employee exposure to airborne asbestos fibers, to conduct air
   monitoring, to provide decontamination units and to appropriately supervise
   operations.  EPA regulations restrict the use of spray applied ACM and
   asbestos insulation, establish procedures for handling ACM during demolition
   and renovations, and prohibit visible emissions during removal,
   transportation and disposal of ACM.

        The Company believes that it is substantially in compliance with all
   regulations relating to its asbestos abatement operations, and currently has
   all material government permits, licenses, qualifications and approvals
   required for its operations.

        Backlog.  The Company's backlog for insulation services at December 31,
   1996, and May 31, 1996 was $4,050,000 and $4,800,000, respectively.  Backlog
   is calculated in terms of estimated revenues on fixed-price and cost-plus
   projects in progress or for which contracts have been executed.  The Company
   believes that backlog as of any date is not necessarily indicative of future
   revenues.  The Company estimates that its entire backlog as of December 31,
   1996 will be completed during the next twelve months.  The majority of the
   Company's present business is on cost-plus contracts for which backlog is
   estimated.  The Company fulfills product and supply orders promptly, and
   there is no backlog in the material sales business.

        Employees.  As of December 31, 1996, the Company had a full-time staff
   of 13 salaried employees working in insulation contracting services,
   including three executive officers, one division manager, three insulation
   services contract administrators, and six clerical workers.  None of these
   employees is represented by a labor union. 

        As of December 31, 1996, the Company employed approximately 185 hourly
   employees for insulation contracting services, nearly all of whom are
   members of the International Association of Heat and Frost Insulators and
   Asbestos Workers ("AFL-CIO").  The Company is a party to agreements with
   various local chapters of various trade unions.  The number of hourly
   employees employed by the Company fluctuates depending upon the number and
   size of projects which the Company has under construction at any particular
   time.  It has been the Company's experience that hourly employees are
   generally available for its projects, and the Company has continuously
   employed a number of them on various projects over an extended period of
   time.  The Company considers its relations with its hourly employees and the
   unions representing them to be good and has experienced no major work
   stoppages due to strikes by such employees.

   Directors and Executive Officers of the Company

        The names, ages, and positions of the Company's directors and executive
   officers (including certain significant executive officers of the Company's
   principal subsidiaries) are listed below:



                                Director


                                        12
<PAGE>




                                or Officer
   Name                    Age    Since    Current Position with the Company
   --------------------------------------------------------------------------
   Grant S. Kesler          53    1991      President, Chief Executive 
                                              Officer, Director
   Javier Guerra Cisneros   50    1994      Director, Vice President-Mexican
                                              Operations,
   Gordon M. Liddle         55    1991      Director
   Douglas S. Land          39    1994      Director
   Anthony C. Dabbene       45    1996      Chief Financial Officer
   Bruce H. Haglund         45    1983      Secretary-General Counsel
   Glenn W. Meyer           44    1990      President, MIC/MEC
   Wayne M. May             49    1989      Vice President-Power Division, MIC
   David Duclett            46    1989      Vice President-Marketing & Sales,
                                              MIC/MEC


        Grant S. Kesler has served as a Director of the Company since February
   1991 and has been Chief Executive Officer since May 1991.  From 1982 to May
   1991, he was employed by Paradigm Securities, Inc., a company he formed in
   1982.  In 1975, he was General Counsel to Development Associates, a real
   estate development firm.  Earlier, he was engaged in the private practice of
   law, served as an assistant attorney general for the State of Utah, and
   served as an intern to the chief justice of the Utah Supreme Court.  Mr.
   Kesler is a graduate  of the University of Utah College of Law  and a member
   of the Utah State Bar Association.

        Javier Guerra Cisneros has been a director of the Company since May
   1994 and the Director General of QUIMICA OMEGA since its formation in 1981. 
   He also founded and was the President of the Institute on Industrial
   Hazardous Waste, a non-profit organization that promotes public awareness of
   the Mexican environmental regulations through its publication DIP.  Since
   1990, Mr. Guerra, through QUIMICA OMEGA, has been one of the pioneers in the
   implementation in Mexico of the program to use hazardous wastes as
   supplemental fuel in cement kilns.  He has more than 10 years of experience
   on environmental regulations and handling of hazardous wastes in Mexico and
   the United States as well as in the compliance of Mexican environmental
   legislation.  He has participated in multiple conferences on ecological
   matters, including seminars sponsored by the EPA and SEDESOL.  Mr. Guerra is
   a business administration graduate from the Universidad Iberoamericana in
   Mexico City, with studies in international marketing at the St. Gallen
   University in Switzerland.  He has also made specialized engineering studies
   in the areas of combustion equipment and chemicals.  

        Gordon M. Liddle has been a Director of the Company since July 1991. 
   He has been the owner and Chief Executive Officer of Winder Dairy Inc. since
   1983.  From 1982 to 1983, Mr. Liddle was Senior Vice President of
   Christensen Inc.  From 1980 to 1982, Mr. Liddle was a Director and Chief
   Operating Officer of the contracting and mining division of Christensen Inc. 
   From 1970 to 1980, Mr. Liddle was Chief Financial Officer of Christensen
   Inc.  From 1967 to 1970, Mr. Liddle was a Director and Chief Executive
   Officer of Transportation Safety Systems.  Mr. Liddle presently serves a
   member of the Board of Directors of Trustco, Inc. and QSI Corporation.  Mr.
   Liddle received a B.S. from Utah State University in 1966 and an M.B.A.
   degree from the University of Utah in 1967.

        Douglas S. Land has been a Director of the Company since November 1994.
   He has been the President of Economic Analysis Group, Ltd. ( EAG ), a
   Washington D.C.-based economic consulting firm since its formation in 1983.


                                        13
<PAGE>




   Mr. Land manages EAG s New York office. He is also a founder of Chesapeake
   Group, Inc., an affiliate of EAG formed in 1988, which provides merchant
   banking services to new ventures and middle-market companies with specific
   emphasis on environmental projects. Mr. Land specializes in developing and
   implementing financing strategies for new and intermediate-stage projects.
   He received an M.B.A. degree from the Wharton Graduate School and an M.A. in
   International Relations from the University of Pennsylvania.

        Anthony C. Dabbene has been the Chief Financial Officer for the Company
   since January 1996.  Prior to his employment with the Company, Mr. Dabbene
   was employed by LG & E Energy Corp. for 10 years, including service as Vice
   President and Controller to the Energy Services Group.  From 1973 to 1985,
   he was employed by EBASCO Services Incorporated, where he was Manager -
   Finance and Administration for the Western region from 1981 to 1985.  He
   received a B.B.A. degree in Accounting from St. Francis College and an
   M.B.A. degree from Long Island University, New York.

        Bruce H. Haglund has served as Secretary-General Counsel of the Company
   since 1983 and served as a Director of the Company from 1983 to July 1991. 
   Since April 1994, Mr. Haglund has been a principal in the law firm of
   Gibson, Haglund & Johnson.  From February 1991 to April 1994, Mr. Haglund
   was a principal in the law firm of Phillips, Haglund, Haddan & Jeffers. 
   From 1984 to February 1991, he was a partner in the law firm of Gibson &
   Haglund.  Mr. Haglund is also the Secretary and a member of the Board of
   Directors of GB Foods Corporation and Aviation Distributors, Inc. and the
   Secretary of Renaissance Golf Products, Inc., companies whose stock is
   publicly traded.  He is a graduate of the University of Utah College of Law. 


        Glenn W. Meyer has been employed by the Company since October 1983 and
   has been the President of Metalclad Insulation Corporation since June 1990. 
   He was Vice President of Metalclad Insulation Corporation from 1981 to June
   1990.  From 1976 to 1981, he was employed as a Contract Administrator by
   Metalclad Products Corporation.  Mr. Meyer received a B.S. degree in
   maritime engineering from California Maritime Academy.

        Wayne M. May has been the Vice President - Power Division of Metalclad
   Insulation Corporation since November 1989.  He has been employed by the
   Company in various capacities since 1968, including Contract Administrator,
   Estimator, Material Sales Manager, and Warehouse Supervisor.  He is
   experienced in all phases of construction, with particular emphasis on
   utility plants.  Mr. May s background includes a 25-year association with
   various utilities in Southern California.

        David Duclett has been employed by the Company since 1977 and has been
   Vice President of Marketing and Sales of Metalclad Insulation and Metalclad
   Environmental since 1989.  Mr. Duclett s main responsibilities are to
   implement and achieve the marketing strategies and objectives of the Company
   while establishing and building long-term client relationships.  He has
   negotiated and managed contracts for both industrial and commercial work,
   with concentration on refinery and utility maintenance work and hi-rise
   commercial buildings.  Mr. Duclett received a B.A. degree in communications
   from California State University, Fullerton.

   ITEM 2.  PROPERTIES

        The Company leases space for its offices and warehouse facilities under
   leases of varying terms at rentals aggregating approximately $15,500 per
   month.  The Company's executive offices are located in Newport Beach,


                                        14
<PAGE>




   California which consists of approximately 3,800 square feet leased at a
   current rate of $5,162 per month.  The Newport Beach lease expires in July
   1997.  Facilities in Anaheim, California house the Southern California
   industrial insulation services and the insulation material sales operations. 
   The Anaheim facility consists of 26,000 square feet of office and warehouse
   space which is leased at the current rate of $8,000 per month.  The Anaheim
   lease expires in April, 1999.  The Sacramento facility consists of
   approximately 10,000 square feet which is leased on a month-to-month basis
   for a monthly rental of $1,500.

        The Company owns approximately 145 acres of unimproved land located in
   Tulare County, California which is not related to the business of the
   Company and is being held for sale.

        ECOPSA owns an approximately 92-hectare parcel (approximately 227
   acres) of land in Santa Maria del Rio near San Luis Potosi, Mexico.

        COTERIN owns approximately 2,200 acres of land near La Pedrera in the
   Mexican state of San Luis Potosi on which El Confin is located.

        QUIMICA OMEGA rents space, on a month-to-month basis, for its
   administrative offices in Mexico City for $135 per month.

   ITEM 3.  LEGAL PROCEEDINGS 

        The Company has contested an assessment by the State Compensation
   Insurance Fund ("SCIF"), which provides the Company's workers compensation
   insurance, of an additional $400,000 of workers compensation insurance
   premium for the 1990 policy year.  The Company believes that SCIF has
   overcharged the Company by approximately $500,000 as a result of over-
   reserves for pending claims and inadequate claim investigation.  In
   December, 1996, the Company received an unfavorable court ruling on its
   position relative to certain rights of defense against the claims of the
   insurer.  The Company is in the process of appealing this ruling.  Although
   the Company and its counsel feel strongly about its position on appeal, no
   assurances can be made that the outcome will be favorable to the Company.

        Given the Company s long history in the insulation business and in the
   sale of insulation materials, it is subject to various claims related to
   prior asbestos related business as well as its current business.  The number
   of these claims is over 100, the Company believes it has adequate insurance
   in place and had adequate insurance in prior years and is vigorously
   defending all claims.  The Company does not believe that these claims,
   individually or in the aggregate, will have a material adverse effect on its
   financial condition.

   ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.



                                      PART II

   ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
            MATTERS

        The Company's Common Stock is traded on the Nasdaq Small Cap Market
   under the symbol "MTLC."  The following table sets forth, for the fiscal


                                        15
<PAGE>




   periods indicated, the high and low sales prices for the Common Stock as
   reported by Nasdaq:

                                                           Sales Price
                                                         High       Low
                                                        ------     ------ 
        Fiscal Year Ended May 31, 1995
        1st Fiscal Quarter Ended August 31, 1994       4  1/8     2  1/2
        2nd Fiscal Quarter Ended November 30, 1994     4          2  1/2
        3rd Fiscal Quarter Ended February 29, 1995     3  3/4     2
        4th Fiscal Quarter Ended May 31, 1995          2  1/2     1  1/8

        Fiscal Year Ended May 31, 1996
        1st Fiscal Quarter Ended August 31, 1995       3  5/16     2  15/16
        2nd Fiscal Quarter Ended November 30, 1995     3  13/16    3  1/8
        3rd Fiscal Quarter Ended February 28, 1996     5  5/85     5  1/4
        4th Fiscal Quarter Ended May 31, 1996          3  1/4      3  1/32

        Seven Months Ended December 31, 1996
        1st Fiscal Quarter Ended August 31, 1996       3  3/8      2  5/8
        2nd Fiscal Quarter Ended November 30, 1996     3  1/4      1  1/2
        One month period ended December 31, 1996       1  15/16    1  3/8

        The Company has not paid any cash dividends on its Common Stock since
   its incorporation and anticipates that, for the foreseeable future,
   earnings, if any, will continue to be retained for use in its business.  As
   of March 20, 1996, the approximate number of record holders of the Company's
   Common Stock was 1800.

   ITEM 6.  SELECTED FINANCIAL DATA

        The following selected financial data is derived from the consolidated
   financial statements of the Company and should be read in conjunction with
   the consolidated financial statements, related notes and other financial
   information included herein.  


   <TABLE><S>                                <C>       <C>       <C>       <C>      <C>       <C>
                                              7 Months  Year      Year      Year     5 Months  Year
                                              Ended     Ended     Ended     Ended    Ended     Ended
                                              Dec 31,   May 31,   May 31,   May 31,  May 31,   Dec 31,
                                              1996      1996      1995      1994     1993      1992
                                          (in thousands, except per share amounts)
    Statement of Operations Data

    Revenues                                  $ 6,150   $14,902   $18,952   $16,453   $7,294   $16,316
    Operating profit (loss) - Insulation          (21)     (854)      257       327     (552)      211
    Operating loss - Waste Management (1)      (1,282)     (560)   (9,112)   (3,443)  (2,816)   (4,064)
    Operating loss                             (3,243)   (5,091)  (13,628)   (4,049)  (3,368)   (3,853)
    Loss from continuing operations            (3,280)   (6,780)  (15,399)   (4,892)  (3,643)   (4,405)
    Loss from discontinued operation                -         -         -         -        -      (126)
    Net income loss                            (3,280)   (6,780)  (15,399)   (4,892)  (3,643)   (4,531)

    Earnings per share:
      Net income loss per common share           (.11)     (.30)    (1.13)     (.56)    (.46)     (.68)

    Balance Sheet Data

    Total assets                               14,931    17,702    10,710    18,311    5,469     7,467


                                                                    16
<PAGE>




    Long-term debt (2)                              -         -     2,050     2,662       19       233
    Convertible subordinated debentures (2)       229       239     8,636     8,755    4,733     4,563

    (1)  Includes $6,378,000 write off in May 1995 of the goodwill associated with the May 1994 purchase of QUIMICA OMEGA.  See Item
    7,  Management s Discussion and Analysis of Financial Conditions and Results of Operations  

    (2)  During the year ended May 31, 1996 a substantial portion of the convertible subordinated debentures were converted into
    shares of common stock.  Additionally, $2,100,000 of the Company s long term debt was converted into equity.  See Item 7,
     Management s Discussion and Analysis of Financial Conditions and Results of Operations .
    </TABLE>

         No dividends were paid or declared during the seven months ended
   December 31, 1996, or the years ended May 31, 1996, 1995 or 1994, the
   transition period from January 1, 1993 to May 31, 1993, or for the year
   ended December 31, 1992.


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

        This discussion and analysis contains forward-looking statements within
   the meaning of Section 27A of the Securities Act and Section 21E of the
   Exchange Act, which are subject to the  safe harbor  created by those
   sections.  The Company s actual future results could differ materially from
   those projected in the forward-looking statements.  The Company assumes no
   obligation to update the forward-looking statements or such factors.

   Presentation of Financial Statements

        In December 1994, the Mexican government adopted a free market policy
   toward the valuation of the Mexican peso.  During the month of December
   1994, the value of the peso declined approximately 44%, falling from 3.4
   Mexican pesos to the U.S. dollar in November 1994 to 4.9 Mexican pesos to
   the U.S. dollar at December 31, 1994.  The value of the Mexican peso
   continued to decline throughout 1995.  At the close of business on May 31,
   1995, May 31, 1996 and December 31, 1996, the value of the peso was 6.15,
   7.4 and 7.8, respectively.  The adverse impact on the economy of Mexico as a
   result of the decline in the relative value of its currency has been
   dramatic.  The Company had a foreign currency translation adjustment of
   $(2,158,916) at December 31, 1996, reflected in the equity section of the
   balance sheet.

        In May 1994, the Company acquired QUIMICA OMEGA for a purchase price of
   $6,300,000.  The purchase price was based on management's estimate of the
   fair value of the Company's common stock issued to the QUIMICA OMEGA
   stockholders.  The purchase resulted in costs in excess of net assets
   acquired of approximately $7,300,000. The recession and economic uncertainty
   in Mexico resulting from the devaluation and other political changes caused
   the Company to reevaluate its business plan and strategy for QUIMICA OMEGA. 
   As a result, the Company determined in May 1995 to write off the balance of
   the capitalized goodwill of $6,378,000 in accordance with generally accepted
   accounting principles.

        In April 1996, QUIMICA OMEGA entered into the agreement with BFI Mexico
   to form BFI-OMEGA, a 50%-50% owned joint venture corporation, for the
   purpose of providing a full range of industrial waste collection,
   transportation, treatment and disposal services (excluding ownership of
   hazardous waste landfills) within the Republic of Mexico.  The Company s
   investment in this joint venture is accounted for under the equity method. 


                                        17
<PAGE>




   (See Note D.)

   Results of Operations

        General.  The Company s revenues were generated primarily by (i)
   revenues in the United States from insulation services and sales of
   insulation products and related materials; and (ii) revenues in Mexico from
   the collection of waste oils and solvents for recycling, rental of parts
   washing machines, brokering the disposal of waste and remediation services.  

        Since November 1991, the Company has pursued the development of
   integrated waste treatment and disposal facilities in several Mexican
   states.  The Company has completed construction of a hazardous waste
   landfill in San Luis Potosi which is not yet open; all other contemplated
   projects are in the early stages of development.  The Company s results of
   operations include the costs of development of all such waste treatment
   facilities in Mexico. 

        Seven Months Ended December 31, 1996 Compared to Seven Months Ended
   December 31, 1995

        Insulation Business.  Total revenues for the seven months ended
   December 31, 1996 was $5,519,000 compared to $6,910,000 for the same period
   in 1995, a decrease of 20%.  This decrease is attributable to a decline in
   the overall volume of work performed under the Company s various maintenance
   agreements as well as a decline in the demand for asbestos abatement
   services.  Income from the Curtom-Metalclad joint venture was $45,000
   compared to $0 for the same period in 1995 due to the increase in Edison
   work contracted through the joint venture. 

        Operating costs and expenses were $4,816,000 compared to $5,685,000 for
   the same period in 1995, a decrease of 15% associated with the decline in
   revenues.  Selling, general and administrative expenses were $769,000
   compared to $1,226,000 representing a decrease of 37% attributed to the
   Company s efforts to control overhead costs.

        Waste Management.  Total revenues for the seven months ended December
   31, 1996 were $632,000 versus $1,450,000 for the same period in fiscal 1996. 
   The revenue decline is due to the transition of continuing revenues to BFI-
   OMEGA which is accounted for under the equity method.  If revenues of the
   joint venture were included and reflected on a peso basis, revenues for the
   seven months would have been 12,823,000 pesos versus 9,255,000 pesos, an
   increase of 39% over the same period in fiscal 1996.

        Operating costs and expenses were $1,115,000 as compared to $1,575,000
   for the same period in fiscal 1996.  This reduction is also attributed to
   the transition of operations to BFI-OMEGA.  Landfill costs were $256,000 for
   the seven months compared to $117,000 for the same period in fiscal 1996. 
   This increase reflects the costs associated with the Company s on-going
   development activities in Mexico.

        Equity in Earnings (Losses) of BFI-OMEGA was ($542,000) for the seven
   months, with no comparison period.  This loss is attributed to the initial
   costs associated with the development of infrastructure and the start up of
   new districts and sub-districts.

        Corporate Expense.  Corporate expense for the seven months ended
   December 31, 1996 was $1,940,000 as compared to $1,790,000, an increase of
   8%.  This increase is attributed to (a) the initial costs of pursuing the


                                        18
<PAGE>




   Company s claim under NAFTA and (b) a reserve established by the Company for
   certain ongoing litigation.

        Interest Expense.  Interest expense, net, was $(37,000) for the seven
   months ended December 31, 1996 compared to $(834,000) for the same period in
   fiscal 1996.  This reduction is due to the conversions of both the Company s
   debt and convertible subordinated debentures to shares of common stock.

        Other Expense.  Other expense was $0 as compared to $729,000 for the
   same period in fiscal 1996.

        Consolidated Results.  The net loss for the seven months ended December
   31, 1996 was ($3,280,000) as compared to ($3,277,000), representing no
   change.  This comparable performance was achieved despite the start-up costs
   of BFI-OMEGA, NAFTA litigation costs and litigation reserves included in the
   current seven months  net loss, while the seven months ended December 31,
   1995 contained a one-time gain of $317,000 for donated equipment.

        Fiscal Year Ended May 31, 1996 Compared to Fiscal Year Ended May 31,
   1995

        Insulation Business.  Total revenues and joint venture income from the
   insulation business for the year ended May 31, 1996 were $11,536,000 as
   compared to $15,804,000 for the same period in 1995, a decrease of 27%.  The
   portion attributable almost entirely to a decline in contract revenues for
   the period. Income from the Curtom-Metalclad joint venture increased 14% to
   $91,000 from $80,000 for the same period in 1995.  The decrease in contract
   revenues can be primarily attributed to an overall decline in the volume of
   work performed under the Company s various maintenance contracts with
   industrial and utility plant clients.

        Operating costs and expenses for the year declined to $12,390,000 from
   $15,547,000 for fiscal year 1995, a decrease of 20%.  Operating margins,
   before selling, general and administrative expenses, decreased to $1,202,000
   from $2,454,000 for 1995, a decline of 51%.  This decline can be attributed
   to (a) a decrease in revenues which affects operating costs, (b) cost
   overruns on three fixed-price contracts, and (c) lower margins in the
   marketplace due to the competitive nature of the business.  Selling, general
   and administrative expenses were $2,055,000 as compared to $2,198,000 for
   fiscal 1995, a decrease of 7%.

        Mexican Business.  Waste management revenues, primarily from the
   operations of QUIMICA OMEGA, for the fiscal year ended May 31, 1996, were
   $3,457,000 as compared to $2,228,000 for the same period in 1995, an
   increase of 55%.  The increase in revenues reflects the continued expansion
   of operations as well as increased revenues from existing branches.  Loss
   from joint venture operations, representing QUIMICA OMEGA s 50% ownership in
   BFI-OMEGA, was $(143,000) with no comparison period for this new venture. 
   The joint venture loss represents the period from March 10, 1996 through May
   31, 1996 and incorporates the expenses relating to the commencement of, the
   transition to, and expansion of BFI-OMEGA s operations.

        Waste collection costs for the fiscal year ended May 31, 1996 were
   $3,719,000 as compared to $4,286,000 for the same period in 1995, a decrease
   of 13%.  The cost reductions are attributed to a streamlining of operations
   and efficiencies inherent in higher volumes and additional experience in the
   market.

        The landfill costs were $154,000 in fiscal 1996 as compared to $676,000


                                        19
<PAGE>




   for fiscal 1995, a decrease of 90%.  Landfill costs are those costs
   associated with the development and general and maintenance of facilities in
   Mexico, including the opening of the landfill in San Luis Potosi.

        Corporate Expense.  Corporate expenses for fiscal 1996 were $3,677,000
   compared to $4,773,000, a decrease of 23%.
    
        Interest Expense.  Interest expense for fiscal 1996 was $960,000 as
   compared to $1,771,000 in fiscal 1995.  The decline is attributed to (a) the
   conversion of a substantial amount of the 8% and 9% debentures in August
   1995, and (b) the conversion of all remaining debt in February 1996.

        Other Expense.  Other expense for fiscal 1996 was $728,644 representing
   the value of the inducement provided to debenture holders to convert into
   common stock.  There are no comparative numbers for prior periods.

        Consolidated Results.  The Company experienced a net loss of $6,780,000
   for the year ended May 31, 1996 compared to a net loss of $15,399,000 in
   fiscal 1995, a decrease of 56%.  The fiscal 1995 loss included $6,377,000
   associated with the write-off of goodwill related to the acquisition of
   QUIMICA OMEGA.  Comparing the results, excluding the write-off of goodwill,
   the Company s net loss for fiscal 1996 decreased from fiscal 1995 by 25%,
   attributed to a reduction in interest costs as well as a reduction in
   general and administrative costs associated with the landfill and other
   development activities for its Mexican business.

        Fiscal Year Ended May 31, 1995 Compared to Fiscal Year Ended May 31,
   1994

        Insulation Business.  Total revenues and joint venture income from the
   insulation business for the year ended May 31, 1995 were $15,804,000 as
   compared to $16,310,000 for the same period in 1994, a decrease of 3.1%. 
   The portion attributable to contract revenues decreased 1% to $15,405,000 in
   fiscal 1995 from $15,565,000 for fiscal 1994.  Material sales decreased 4.9%
   from $287,000 for the year ended May 31, 1994 to $273,000 for the
   corresponding period in 1995 due to lower sales to public utility customers. 
   Income from the Curtom-Metalclad joint venture (see Note D of Item 8,
    Financial Statements and Supplementary Data ), increased 33% during the
   current fiscal year to $80,000 from $60,000 in the prior year due to reduced
   overhead.  Other revenues decreased 88% to $46,000 during fiscal 1995 from
   $397,000 in the prior fiscal year primarily attributable to a workers 
   compensation insurance dividend received of approximately $301,000 in fiscal
   1994.

        Operating costs and expenses for the insulation business decreased 2.7%
   during fiscal 1995 to $15,547,000 from $15,983,000 for fiscal 1994. 
   Contracting costs and expenses decreased 3.4% during the 12 months ended May
   31, 1995 to $13,148,000  from $13,606,000 for the comparable period in 1994. 
   The Company's gross profit on contract revenues increased 15.2% to
   $2,257,000 for the year ended May 31, 1995 from $1,959,000 for the
   corresponding period in 1994 primarily due to improved material prices. 
   Cost of material sales decreased 8.6% to $201,000 during the 12 months ended
   May 31, 1995 from $220,000 for the same period in 1994 correlating with the
   decrease in material sales revenue.  Selling, general, and administrative
   costs for the insulation business increased 1.9% to $2,198,000 during the 12
   months ended May 31, 1995 from $2,157,000 during the corresponding period in
   1994. 

        Mexican Business.  Waste management revenues of $2,228,000 resulted


                                        20
<PAGE>




   from the operations of QUIMICA OMEGA for the 12 months ended May 31, 1995. 
   Waste collection costs, also associated with QUIMICA OMEGA, were $4,286,000
   for the same period.  Collection costs exceeded revenue for the year due to
   incurring expenses in anticipation of growth and expansion which did not
   occur because of the impact of the Mexican peso devaluation on the business
   of QUIMICA OMEGA.

        The write-off of costs in excess of net assets acquired relates to the
   QUIMICA OMEGA goodwill which was previously discussed.  Due to the recession
   and other economic difficulties caused by the peso devaluation, the Company
   changed the business plan for QUIMICA OMEGA in the fourth quarter and wrote
   off the QUIMICA OMEGA goodwill at the end of the fiscal year.

        The landfill costs were $676,000 in fiscal year 1995 compared to
   $2,900,000 in the prior year.  Landfill costs are those development incurred
   by Company at its corporate offices in Mexico related to its objectives in
   Mexico, including the opening of the landfill in San Luis Potosi.

        Corporate Expense.  Corporate expenses for fiscal 1995 were $4,773,000
   as compared to $933,000.  This increase parallels the Company s increased
   development activities and construction activities in Mexico.

        Interest Expense.  Interest expense for the year ended May 31, 1995 was
   $1,771,000 compared to $844,000 in the comparable period in 1994, an
   increase of 110%.  The increase resulted from additional borrowings during
   the year as well as the high interest rates being paid by QUIMICA OMEGA
   during the year on its borrowings in Mexico. 

        Consolidated Results.  The Company experienced a net loss of
   $15,399,000 for the year ended May 31, 1995 compared to a loss of $4,892,000
   in fiscal 1994, an increase in loss of 216%.  The increase  in the loss is
   attributable to (a) the write-off of goodwill associated with the QUIMICA
   OMEGA acquisition, (b) losses within the QUIMICA OMEGA operation, (c)
   general and administrative costs incurred related to constructing the
   landfill and achieving the Company s other objectives for its Mexican
   business, and (d) increased interest on debt.

   Liquidity and Capital Resources

        In November 1991, the Company completed the acquisition of Eco-
   Metalclad, Inc. ("ECO-MTLC"), commenced the development of the hazardous
   waste treatment business in Mexico and began advancing cash to its Mexican
   subsidiaries for use in the Mexican business.  Funding the development of
   the Company's Mexican business has required and will continue to require
   substantial capital.  To obtain capital for the continued development of the
   business of the Company in Mexico, the Company has made private placements
   of its common stock and convertible subordinated debentures and has obtained
   loans from financial institutions.

        In February 1996, the Company completed a private placement of
   1,650,000 shares of its common stock at a price of $4.00 per share, along
   with 2,600,000 warrants to purchase common stock at $5.00 per share.  The
   Company realized net proceeds from its placement of common stock of
   $5,875,000.

        The totals for the fiscal year ended May 31, 1996, inclusive of the
   private placement in February 1996, include the issuance of approximately
   2,400,000 shares at prices ranging from $1.05 to $4.00 with net proceeds of
   approximately $8,800,000.  Shares totaling 4,000,000 were issued upon the


                                        21
<PAGE>




   exercise of options and warrants at prices ranging from $1.375 to $2.25,
   generating net proceeds of approximately $6,800,000 including $2,000,000
   from the Kesler, Neveau, and Guerra option exercise.  Shares totaling
   3,500,000 were issued in exchange for approximately $8,600,000 in
   outstanding 8% and 9% debentures.

        In September 1993, the Company obtained a loan in the amount of
   $2,500,000 from a financial institution pursuant to the terms of a
   promissory note due in September 1995.  Interest on the loan accrued at the
   prime rate of interest plus 7% and was secured by substantially all of the
   assets of the Company.  In connection with this financing, the Company
   issued the financial institution a five-year warrant to purchase 375,000
   shares of common stock at an exercise price of $4.50 per share.  In
   September 1994, the Company obtained a loan for an additional $525,000 from
   the lender, bearing interest at the prime rate plus 7%, payable in November
   1994 and was also secured by all of the assets of the Company.  In
   connection with this loan, the Company granted the lender a five-year
   warrant to purchase 75,000 shares of common stock at an exercise price of
   $2.625 per share. 

        In May 1995, the Company entered into a loan modification agreement
   with the lender and extended the maturity of the debt, including principal
   and interest of approximately $2,800,000 to June 30, 1996.  In connection
   with the extension, the Company issued the lender 87,578 shares of common
   stock, reduced the exercise price of previously granted warrants to $1.59,
   extended the expiration date of the warrants to May 31, 2000, and granted
   the lender an additional five-year warrant to purchase 600,000 shares of
   common stock at an exercise price of $1.908 per share.  The agreement with
   the lender further provided the lender the right to convert the debt into
   shares of common stock at the rate of $1.59 per share.  The Company also
   agreed to pay the lender an additional $100,000 if the loan was not repaid
   in full by October 13, 1995.

        In February 1996, the lender exercised its option to convert 100% of
   the outstanding loan balance of $1,924,797 into 1,210,564 shares of the
   Company s common stock at the conversion rate of $1.59 per share.

        The issuances of common stock have been utilized for working capital,
   equipment, and fixed asset purchases in connection with QUIMICA OMEGA, the
   expansion capital required for the newly formed BFI-OMEGA joint venture, and
   for the continued development activities of the Company; however, the
   Company will require additional capital to develop, construct and
   subsequently open  the additional facilities it intends to pursue as well as
   to continue its strategy with BFI-OMEGA.

        Working capital at December 31, 1996 was $2,719,000 compared to
   $6,787,000  at May 31, 1996.  The Company had cash and cash equivalents at
   December 31, 1996 of $3,074,000 and $7,344,000 at May 31, 1996. 
   Additionally, the Company had restricted cash deposits of $770,000 at
   December 31, 1996 and $8,000 at May 31, 1996.  Cash used in operations for
   the seven months ended December 31, 1996 was ($2,801,000) compared to
   ($5,823,000) for the fiscal year ended May 31, 1996.  Cash used in
   operations in the seven months ended December 31, 1996 was funded primarily
   by cash and cash equivalents on hand at the beginning of the fiscal year.

        The Company believes that the insulation business will generate
   adequate cash flows from operations to meet its future obligations and
   expenses relating to such operations; however, until resolution of the
   Company s appeal of certain ongoing litigation is achieved, $770,000 of its


                                        22
<PAGE>




   cash resources will remain restricted to the Company.   The Company will
   require substantial additional financing to construct and operate additional
   waste treatment facilities in Mexico as well as to support the continuing
   expansion of BFI-OMEGA s operations.  Furthermore, to the extent that the
   Company is required to expend additional efforts to open its existing
   landfill or pursue its NAFTA claim, additional general and administrative
   expenses without revenues to offset such expenses are anticipated until the
   landfill is opened.  The Company is aware of its ongoing cash requirements
   and has implemented a cash flow plan, including continued reduction in its
   general and administrative expenses.  Additionally, the Company has
   developed an overall strategy and financing options to meet its ongoing
   needs through December 31, 1997.

   Impact of Inflation

        The Company reflects price escalations in its quotations to its
   insulation customers and in its estimation of costs for materials and labor. 
   For construction contracts based on a cost-plus or time-and-materials basis,
   the effect of inflation on the Company is negligible.  For projects on a
   fixed-price basis, the effect of inflation may result in reduced profit
   margin or a loss as a result of higher costs to the Company as the contracts
   are completed; however, the majority of the Company's contracts are
   completed within 12 months of their commencement and the Company believes
   that the impact of inflation on such contracts is insignificant.

   Impact of Recently Issued Accounting Standards

        Effective June 1, 1996, the Company adopted the disclosure provisions
   of SFAS No. 123,  Accounting for Stock-Based Compensation .  SFAS No. 123
   requires the Company to disclose pro forma net income and earnings per share
   as if the fair value based accounting method of SFAS No. 123 had been used
   to account for stock based compensation. These disclosures are included in
   Note J.

        In February 1997, the FASB issued SFAS No. 128  Earnings Per Share .
   This statement will require that primary earnings per share (EPS) be
   replaced by basic EPS. The primary difference between the two methods is
   that Common Stock equivalents are not included on the basic earnings per
   share calculation thereby reducing the denominator in the calculation. The
   Company will be required to adopt this pronouncement in fiscal 1998.

        Although inflation has been a significant factor in the Mexican economy
   in general since the devaluation, the Company does not anticipate that it
   will have a material impact on its current or proposed operations.

   Impact of Recently Issued Accounting Standards


   ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The consolidated financial statements and schedules listed in the
   accompanying Index to Consolidated Financial Statements are attached hereto
   and filed as a part of this Report under Item 14.


   ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE

        None.


                                        23
<PAGE>





                                     PART III

   ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

       The information required by Item 401 of Regulation S-K is set forth in
   the Company's 1997 Annual Meeting Proxy Statement which will be filed with
   the Securities and Exchange Commission not later than 120 days after
   December 31, 1996.  The Company's 1997 Annual Meeting Proxy Statement,
   exclusive of the information set forth under the captions "Report of the
   Compensation Committee" and "Company Performance," are incorporated herein
   by this reference.  


   ITEM 11.  EXECUTIVE COMPENSATION

    The information required by Item 402 of Regulation S-K is set forth in the
   Company's 1997 Annual Meeting Proxy Statement which will be filed with the
   Securities and Exchange Commission not later than 120 days after December
   31, 1996.  The Company's 1997 Annual Meeting Proxy Statement, exclusive of
   the information set forth under the captions "Report of the Compensation
   Committee" and "Company Performance," are incorporated herein by this
   reference.  


   ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       The information required by Item 403 of Regulation S-K is set forth in
   the Company's 1997 Annual Meeting Proxy Statement which will be filed with
   the Securities and Exchange Commission not later than 120 days after
   December 31, 1996.  The Company's 1997 Annual Meeting Proxy Statement,
   exclusive of the information set forth under the captions "Report of the
   Compensation Committee" and "Company Performance," are incorporated herein
   by this reference.  


   ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        In October 1994, in consideration of extraordinary contributions to the
   Company, including but not limited to the pledge of 755,000 shares of common
   stock of the Company owned by them to facilitate necessary financings for
   the Company, the Board of Directors approved a loan of $370,000 to each of
   Mr. Kesler and Mr. Neveau.  Such borrowings are due 30 days after demand and
   bear Annual interest at the prime rate of interest plus 7%.  The borrowings
   are secured by a pledge of 300,000 shares of common stock from each
   borrower.    In February 1996 Messrs. Kesler and Neveau each repaid $150,000
   to the Company.  In March 1996, the notes were amended to modify the loan
   principal between Messrs. Kesler and Neveau as well as to adjust the
   interest rates, effective March 1, 1996 to a variable rate based upon the
   Company s quarterly investment rate.  The amendment also stipulates that the
   notes must be re-paid by May 31, 1997.

        In June 1996, Mr. Neveau, Chairman of the Board of Directors, Senior
   Vice President, and a Director of the Company, resigned his position
   effective the next shareholders  meeting.  As a result, the Company and Mr.
   Neveau renegotiated the terms of his employment agreement relative to
   compensation, benefits and stock options.

        During the year ended May 31, 1996, the Company agreed to pay


                                        24
<PAGE>




   consulting fees of $51,000 to Mr. Liddle, a director of the Company.  These
   fees are for services in connection with management oversight and consulting
   to the insulation business.  Additionally, the Company has entered into a
   19-month consulting agreement with Mr. Liddle for on-going consulting
   services at a rate of $5,000 per month.

        During the fiscal year ended May 31, 1996, the Company entered into an
   agreement with The Chesapeake Group, whose Managing Director is Douglas S.
   Land, a director of the Company.  The agreement engages Chesapeake as a
   financial consultant to the Company in matters pertaining to its Mexican
   waste operations.  Additionally, the Company agreed to certain transaction
   fees associated with new business ventures, mergers or acquisitions in
   Mexico.  During the period ended May 31, 1996, the Company agreed to pay to
   Chesapeake $100,000 for consulting services rendered during calendar year
   1995 and $8,000 per month for on-going consulting services.  In addition,
   the Company agreed to pay a transaction fee for the successful closing of
   the BFI-OMEGA joint venture of $325,000 and granted 250,000 options for the
   purchase of common stock of the Company exercisable at $3.00 per share.

        During the seven months ended December 31, 1996, the Company paid legal
   fees of $54,000 to the law firm of Gibson, Haglund & Johnson, of which Bruce
   H. Haglund, general counsel and Secretary of the Company, is a principal.

        During December, 1996, the Company loaned $150,000 to Mr. Javier Guerra
   Cisneros, a Director and Vice President of Mexico operations.  This loan is
   evidenced by a promissory note bearing interest at 10% and secured by a
   pledge of future salary and 300,000 shares of common stock in the Company. 
   In February, 1997, Mr. Guerra repaid $120,000 of this loan.

































                                        25
<PAGE>




                                      PART IV

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

   (a)  The following documents are filed as part of this report on Form 10-K:

        1.  Financial Statements
            Report of Independent Public Accountants
            Consolidated Balance Sheets
            Consolidated Statements of Operations
            Consolidated Statements of Shareholders' Equity (Deficit)
            Consolidated Statements of Cash Flows
            Notes to Consolidated Financial Statements

        2.  Schedules to Financial Statements
            Schedule II - Valuation and Qualifying Accounts

        All schedules, other than those listed above, are omitted, as the
   information is not required, is not material or is otherwise furnished.

        3.  Exhibits

        The following exhibits are being filed with this Annual Report on Form
   10-K and/or are incorporated by reference therein in accordance with the
   designated footnote references:

            3.     Restated and Amended Certificate of Incorporation and Bylaws
   of the Company, and all amendments thereto

               3.1     Form of Certificate for Common Stock (3)

              10.1     Warrant to Purchase Common Stock dated November 30, 1991
   issued to F.N. Wolf & Co., Inc. (1)

              10.2     Warrant to Purchase Common Stock dated February 6, 1992
   issued to T. Marshall Swartwood (2)

              10.3     Warrant to Purchase Common Stock dated February 6, 1992
   issued to Glenn Cushman (2)

              10.4     Employment Agreement, as amended, between the Company
   and Grant S. Kesler dated March 7, 1995 (6)

              10.5     Employment Agreement, as amended, between the Company
   and T. Daniel Neveau dated March 7, 1995 (6)

              10.6     Modification Agreement, as amended, between the Company
   and T. Daniel Neveau dated July 15, 1996

              10.7     Employment Agreement between the Company and Anthony C.
   Dabbene dated July 10, 1996 (7)

              10.8     Non-Qualified Stock Option Agreement between the Company
   and Bruce H. Haglund dated October 17, 1991 (1)

              10.9    Non-Qualified Stock Option Agreement between the Company
   and T. Daniel Neveau dated October 17, 1991 (1)

              10.10    Non-Qualified Stock Option Agreement between the Company


                                        26
<PAGE>




   and Gordon M. Liddle dated October 17, 1991 (1)

              10.11    Nonstatutory Stock Option Agreement between the Company
   and Grant S. Kesler dated March 7, 1995 (6)

              10.12    Nonstatutory Stock Option Agreement between the Company
   and T. Daniel Neveau dated March 7, 1995 (6)

              10.13    Nonstatutory Stock Option Agreement between the Company
   and Javier Guerra Cisneros dated March 7, 1995 (6)

              10.14    Nonstatutory Stock Option Agreement between the Company
   and Bruce H. Haglund dated March 7, 1995 (6)

              10.15    Nonstatutory Stock Option Agreement between the Company
   and Douglas S. Land dated June 25, 1996.

              10.16    Lease dated June 17, 1992 pertaining to the Company s
   facilities at 3737 Birch Street, Suite 300, Newport Beach, California 92660
   (2)

              10.17    Lease dated June 4, 1987 pertaining to the Company s
   facilities at 2198 South Dupont Drive, Anaheim, California 92803 (3)

              10.18    Third Amendment to Lease dated May 12, 1994 pertaining
   to the Company s facilities at 2198 South Dupont Drive, Anaheim, California
   92803 (7)

              10.19    Form of 1993 Omnibus Stock Option and Incentive Plan (4)

              10.20    Agreement between Confinamiento Tecnico de Residuos
   Industriales, S.A. de C.V. and Eco-Metalclad, Inc. Dated April 23, 1993 and
   amendment dated September 9, 1993 (5)

              10.21    Consulting Agreement between Company and Chesapeake
   Group, Inc. Dated January 16, 1996

              10.22    Consulting Agreement between Company and Gordon M.
   Liddle Dated June 1, 1996

              22.      List of Subsidiaries of the Registrant

              23.      Consents of Experts and Counsel

   -------------------------------------------
       (1)    Filed with the Company s Annual Report on Form 10-K for the year
   ended December 31, 1991 and incorporated herein by this reference.
       (2)    Filed with the Company s Annual Report on Form 10-K for the year
   ended December 31, 1992 and incorporated herein by this reference.
       (3)    Filed with the Company s Registration Statement on Form S-1 dated
   December 15, 1987 and incorporated by reference.
       (4)    Filed with the Company s Transition Report on Form 10-K for the
   five months ended May 31, 1993 and incorporated herein by this reference.
       (5)    Filed with the Company s Annual Report on Form 10-K for the year
   ended May 31, 1994
       (6)    Filed with the Company s Annual Report on Form 10-K for the year
   ended May 31, 1995
       (7)    Filed with the Company s Annual Report on Form 10-K for the year
   ended May 31, 1996


                                        27
<PAGE>




   (b)  Reports on Form 8-K

        A current report on Form 8-K A/3 was filed on May 6, 1996 reporting the
   change in the Company s accountants.  See Item 9, "Changes in and
   Disagreements with Accountants on Accounting and Financial Disclosure. 

                             SUPPLEMENTAL INFORMATION

   An annual report and a proxy statement shall be furnished to the security
   holders of the Company subsequent to the filing of this Form 10-K.  The
   Company shall furnish copies of the annual report to security holders and
   the proxy statement to the Securities and Exchange Commission when it is
   sent to the security holder. 
















































                                        28
<PAGE>




                                    SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) 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.

                                         METALCLAD CORPORATION

                                        By: /s/Anthony C. Dabbene
                                            -------------------------------
                                            Anthony C. Dabbene
                                            Chief Financial Officer 
   Date:  March 31, 1997

        Pursuant to the requirements of the Securities Exchange Act of 1934,
   this report has been signed below by the following persons on behalf of the
   registrant and in the capacities and on the dates indicated.

   Signatures                              Title                Date


   /s/Grant S. Kesler           Chief Executive Officer    March 31, 1997
   --------------------------   and Director  
   Grant S. Kesler              (Principal Executive 
                                 Officer)


   /s/Javier Guerra Cisneros    Director                   March 31, 1997
   --------------------------
   Javier Guerra Cisneros
    

   /s/Gordon M. Liddle          Director                   March 31, 1997
   --------------------------
   Gordon M. Liddle


   /s/Douglas S. Land           Director                   March 31, 1997
   --------------------------
   Douglas S. Land


   /s/Anthony C. Dabbene        Chief Financial Officer    March 31, 1997
   --------------------------   (Principal Financial and
   Anthony C. Dabbene            Accounting Officer)
















                                        29
<PAGE>




   ITEM 14(A)(1) and (2)

                      METALCLAD CORPORATION AND SUBSIDIARIES

                    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   The following Consolidated Financial Statements of Metalclad Corporation and
   subsidiaries are included in Item 8:


   Reports of Independent Public Accountants on Consolidated Financial
   Statements:

      Report of Arthur Andersen  LLP .....................................F-1

      Report of Grant Thornton LLP........................................F-2


   Financial Statements:

      Consolidated Balance Sheets - December 31, 1996, 
      May 31, 1996 and 1995...............................................F-3

      Consolidated Statements of Operations - Seven Months Ended
      December 31, 1996 and the Years Ended May 31, 1996, 1995 
      and 1994............................................................F-5

      Consolidated Statements of Shareholders' Equity (Deficit) - 
      Seven Months Ended December 31, 1996, and the Years Ended 
      May 31, 1996, 1995 and 1994.........................................F-6

      Consolidated Statements of Cash Flows - Seven Months Ended
      December 31, 1996 and the Years Ended May 31, 1996, 1995 and 1994...F-8


   Notes to Consolidated Financial Statements............................F-10


   Supplementary Financial Statement Schedules:

      Schedule II - Valuation and Qualifying Accounts....................F-26




















                                        30
<PAGE>






                     REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


   The Board of Directors and Shareholders of 
   Metalclad Corporation:


   We have audited the accompanying consolidated balance sheets of Metalclad
   Corporation (a Delaware Corporation) and subsidiaries as of December 31,
   1996 and May 31, 1996, and the related consolidated statements of
   operations, shareholders  equity and cash flows for the seven months ended
   December 31, 1996 and the year ended May 31, 1996.  These financial
   statements are the responsibility of the Company s management.  Our
   responsibility is to express an opinion on these financial statements based
   on our audits.

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

   In our opinion, the financial statements referred to above present fairly,
   in all material respects, the financial position of Metalclad Corporation
   and subsidiaries as of December 31, 1996 and May 31, 1996, and the results
   of their operations and their cash flows for the seven months ended December
   31, 1996 and the year ended May 31, 1996 in conformity with generally
   accepted accounting principles.

   Our audits were made for the purpose of forming an opinion on the basic
   financial statements taken as a whole.  The schedule listed in the index of
   financial statements is presented for purposes of complying with the
   Securities and Exchange Commission s rules and is not part of the basic
   financial statements.  The December 31, 1996 and May 31, 1996 data have been
   subjected to the auditing procedures applied in the audits of the basic
   financial statements and, in our opinion, fairly states in all material
   respects the financial data required to be set forth therein in relation to
   the basic financial statements taken as a whole.

                                                    ARTHUR ANDERSEN LLP

   Orange County, California
   March 31, 1997












                                       F-1
<PAGE>






   REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

   The Board of Directors and Shareholders
   Metalclad Corporation:

   We have audited the accompanying consolidated balance sheet of Metalclad
   Corporation and Subsidiaries as of May 31, 1995, and the related
   consolidated statements of operations, shareholders  equity (deficit) and
   cash flows for the years ended May 31, 1995 and 1994.  These consolidated
   financial statements are the responsibility of the Company s management. 
   Our responsibility is to express an opinion on these financial statements
   based on our audits.

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

   In our opinion, the financial statements referred to above present fairly,
   in all material respects, the consolidated financial position of Metalclad
   Corporation and Subsidiaries as of May 31, 1995, and the consolidated
   results of their operations and their consolidated cash flows for the years
   ended May 31, 1995 and 1994, in conformity with generally accepted
   accounting principles.

   We have also audited Schedule II of Metalclad Corporation and Subsidiaries
   for the years ended May 31, 1995 and 1994.  In our opinion, this schedule
   presents fairly, in all material respects, the information required to be
   set forth therein.

                                                       GRANT THORNTON LLP

   Irvine, California
   March 31, 1997




















                                       F-2
<PAGE>






                              Metalclad Corporation and Subsidiaries

                                    CONSOLIDATED BALANCE SHEETS

   <TABLE> <S>                                                    <C>            <C>             <C>
                                                                  December 31,              May 31,
                                                               ------------------  ---------------------------
    ASSETS                                                            1996            1996           1995 
                                                                     ------          ------         ------
    Current assets:
      Cash and cash equivalents                                    $3,074,395     $7,344,357      $  381,406
      Accounts receivable, less allowance for doubtful accounts
        of $67,972 at December 1996, $66,566 at May 1996 
        and $44,480 at May, 1995                                    2,478,528      2,263.214       2,337,968
      Costs and estimated earnings in excess of billings 
        on uncompleted contracts                                      174,768         56,372         343,405
      Inventories                                                     314,157        325,795         374,029
      Prepaid expenses and other current assets,
        including restricted certificates of deposits of 
        $130,000 in 1995                                              253,059          53,371         681,696
      Receivables from related parties                                240,379         140,369         197,408
                                                                   ----------      ----------      ----------
               Total current assets                                 6,535,286      10,183,478       4,315,912

    Property, plant and equipment, net                              5,319,409       5,462,657       5,266,869
    Investment and capitalized costs in unconsolidated
      affiliates                                                    1,516,878       1,169,221          87,453
    Receivables from related parties, non-current                           -               -           6,261
    Deposits and other assets, including restricted certifi- 
      cates of deposit of $769,500 at December 31, 1996 and
      $7,730 in 1995                                                  837,516         108,842         138,946
    Goodwill, less accumulated amortization of $115,390 at 
      December 1996,  $59,917 at May 1996 and $17,469 at 
      May 1995                                                       697,363         752,835         143,783 
    Real estate held for sale                                          25,000          25,000         155,515
    Capitalized debenture costs, less accumulated amortization  
      of $456,819 in 1995                                                   -               -         595,478
                                                                   ----------      ----------      ----------
                                                                  $14,931,452     $17,702,033     $10,710,217
                                                                   ==========      ==========      ==========
    </TABLE>














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


                                       F-3
<PAGE>






                      Metalclad Corporation and Subsidiaries

                      CONSOLIDATED BALANCE SHEETS - CONTINUED

   <TABLE> <S>                                                    <C>               <C>            <C>
                                                                    December 31,              May 31,
                                                                 ------------------  --------------------------
                                                                        1996             1996          1995 
                                                                       ------           ------        ------
    LIABILITIES AND SHAREHOLDERS  EQUITY (DEFICIT)

    Current liabilities:
      Accounts payable                                             $ 1,665,475        $ 1,149,586   $2,751,540
      Accrued payroll, property and  other taxes                       493,751            359,807      596,657
      Accrued expenses                                               1,381,972          1,525,216    1,465,759
      Accrued waste disposal costs                                           -            255,623      150,474
      Billings in excess of costs and estimated earnings 
        on uncompleted contracts                                        45,468             69,757      113,817
      Current portion of long-term debt                                      -             36,721    1,118,947
      Current portion of convertible subordinated debentures            229,533                 -             -
                                                                    ----------         ----------   ----------
              Total current liabilities                              3,816,199          3,396,710    6,197,194
                                                                    ----------         ----------   ----------
    Long-term debt, less current portion                                     -                  -    2,050,237
                                                                    ----------         ----------   ----------
    Convertible subordinated debentures                                      -            239,533    8,636,109
                                                                    ----------         ----------   ----------
    Shareholders  equity (deficit):
      Preferred stock, par value $10; 1,500,000 shares 
        authorized; none issued                                              -                  -            -
      Common stock, par value $.10; 40,000,000 shares 
        authorized; 29,123,239, 28,733,229 and 15,885,628 
        issued and outstanding at December 1996, May 1996
        and May 1995, respectively                                  2,912,324          2,873,323    1,588,563
      Additional paid-in capital                                    55,582,063         54,990,952   29,044,185
      Accumulated deficit                                          (44,643,578)       (41,363,763) (34,583,991)
    Officers  receivable collateralized by stock                      (576,640)          (559,192)    (740,000)
    Cumulative foreign currency translation adjustment              (2,158,916)        (1,875,530)  (1,482,080)
                                                                    ----------         ----------   ----------
                                                                    11,115,253         14,065,790   (6,173,323)
                                                                    ----------         ----------   ----------
                                                                   $14,931,452        $17,702,033  $10,710,217
                                                                    ==========         ==========   ==========
    </TABLE>











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


                                       F-4
<PAGE>






                      Metalclad Corporation and Subsidiaries

                       CONSOLIDATED STATEMENTS OF OPERATIONS
   <TABLE><S>                                   <C>                 <C>            <C>           <C>
                                                 Seven Months Ended                  Year ended 
                                                     December 31,                      May 31,
                                                 -----------------    ----------------------------------------
                                                        1996              1996          1995          1994
                                                       ------            ------        ------        ------
    Revenues-Insulation
      Contract revenues                              $5,380,297       $11,208,360   $15,404,952   $15,565,110
      Material sales                                    138,309           230,336       272,627       286,565
      Other                                                   -             6,390        46,336       397,600
                                                     ----------        ----------    ----------    ----------
                                                      5,518,606        11,445,086    15,723,915    16,249,275
    Operating costs and expenses - Insulation
      Contract costs and expenses                     4,703,458        10,160,868    13,148,231    13,606,310
      Cost of material sales                            112,299           173,911       200,588       219,688
      Selling, general and administrative expenses      768,631         2,055,043     2,197,814     2,156,582
                                                     ----------        ----------    ----------    ----------
                                                      5,584,388        12,389,822    15,546,633    15,982,580
    Equity in earnings of unconsolidated 
       affiliate                                         44,915            90,817        80,013        60,360
                                                     ----------        ----------    ----------    ----------
      Operating income (loss) - Insulation              (20,867)         (853,919)      257,295       327,055
                                                     ----------        ----------    ----------    ----------
    Revenues - Waste Management
      Collection, recycling and destruction             631,884         3,456,680     1,910,863       203,332
      Landfill                                                -                 -             -             -
      Other                                                   -                 -       317,306             -
                                                     ----------        ----------    ----------    ----------
                                                        631,884         3,456,680     2,228,169       203,332
                                                     ----------        ----------    ----------    ----------
    Operating costs and expenses - Waste Management
      Collection, recycling and destruction           1,115,121         3,719,137     4,286,178       746,844
      Landfill                                          256,049           154,210       675,997     2,899,589
      Write-off of goodwill                                   -                 -     6,377,716             -
                                                     ----------        ----------    ----------    ----------
                                                      1,371,170         3,873,347    11,339,891     3,646,433
    Equity in earnings of unconsolidated affiliate     (542,461)         (143,415)            -             -
                                                     ----------        ----------    ----------    ----------
    Operating loss - Waste Management                (1,281,747)         (560,082)   (9,111,722)   (3,443,101)
                                                     ----------        ----------    ----------    ----------
    Corporate expense                                 1,940,147         3,676,907     4,773,292       932,705
                                                     ----------        ----------    ----------    ----------
    Operating loss                                   (3,242,761)       (5,090,908)  (13,627,719)   (4,048,751)
    Interest expense                                     37,054           960,220     1,771,394       843,653
    Other expense                                             -           728,644             -             -
                                                     ----------        ----------    ----------    ----------
            Net loss                                $(3,279,815)      $(6,779,772) $(15,399,113)  $(4,892,404)
                                                     ==========        ==========   ===========    ==========
    Weighted average number of common shares         28,910,449        22,770,516    13,682,800     8,690,676
                                                     ==========        ==========   ===========    ==========
    Loss per share of common stock                     $(.11)            $(.30)       $(1.13)        $(.56)
                                                        =====             =====        ======         =====
    </TABLE>
    The accompanying notes are an integral part of these consolidated
   statements.

                                       F-5
<PAGE>






                          Metalclad Corporation and Subsidiaries

             CONSOLIDATED STATEMENTS OF SHAREHOLDERS  EQUITY (DEFICIT)
                  Seven Months Ended December 31, 1996, and the 
                      Years Ended May 31, 1996, 1995 and 1994
   <TABLE><S>                         <C>           <C>         <C>          <C>            <C>          <C>         <C>
                                                                                                          Foreign        Total
                                                                 Additional                               Currency     Shareholders 
                                            Common Stock           Paid-in     Accumulated    Officers   Translation     Equity
                                        Shares        Amounts      Capital       Deficit     Receivable   Adjustment    (Deficit)
                                       ----------   ----------    ----------   -----------   -----------  ----------   ----------
    Balance at May 31, 1993             7,890,353    $789,036    $11,839,685  $(14,292,474)  $         -  $ (53,069)  $(1,716,822)
    Issuance of common stock 
      for Quimica Omega                 2,800,000     280,000      6,020,000             -             -          -     6,300,000
    Issuance of common stock              776,000      77,600      2,170,151             -             -          -     2,247,751
    Common stock issued under stock
      option plans and warrants           127,707      12,771        305,605             -             -          -       318,376
    Conversion of debentures to
      common stock                         97,312       9,731        308,309             -             -          -       318,040
    Translation adjustment                      -            -             -             -             -     34,678        34,678
    Net loss                                    -            -             -    (4,892,404)            -          -    (4,892,404)
                                       ----------   ----------    ----------   -----------   ----------- ----------   -----------
    Balance at May 31, 1994            11,691,372   1,169,138     20,643,750   (19,184,878)            -    (18,391)    2,609,919
    Issuance of common stock            4,119,216     411,921      8,118,061             -             -           -    8,529,982
    Common stock issued under stock
      option plans and warrants            30,000       3,000         62,313             -             -           -       65,313
    Conversion of debentures to
      common stock                         45,040       4,504        175,656             -             -           -      180,160
    Donated capital                             -            -        44,405             -             -           -       44,405
    Advances to officers, collateral-
      ized by stock                             -            -             -             -      (740,000)          -     (740,000)
    Translation adjustment                      -            -             -             -             -  (1,463,689)  (1,463,689)
    Net loss                                    -            -             -   (15,399,113)            -           -  (15,399,113)
                                       ----------   ----------    ----------   -----------   -----------  ----------   ----------
    Balance at May 31, 1995            15,885,628    1,588,563    29,044,185   (34,583,991)     (740,000) (1,482,080)  (6,173,323)
    Issuance of common stock            4,044,986      404,498     9,297,372             -             -           -    9,701,870
    Common stock issued under stock
      option plans and warrants         3,951,836      395,184     6,448,386             -             -           -    6,843,570
    Conversion of debentures to 
      common stock                      3,525,581      352,558     8,270,869             -             -           -    8,623,427
    Officers  loans; interest &
      repayments                                -            -             -             -       180,808           -      180,808
    Debt conversions                    1,325,198      132,520     1,974,545             -             -           -    2,107,065
    Donated capital                             -            -       (44,405)            -             -           -      (44,405)
    Translation adjustment                      -            -             -             -             -    (393,450)    (393,450)
    Net loss                                    -            -             -    (6,779,772)            -           -   (6,779,772)
                                       ----------   ----------    ----------   -----------    ----------  ----------   ----------
    Balance at May 31, 1996            28,733,229   28,873,323    54,990,952   (41,363,763)     (559,192) (1,875,530)  14,065,790











                                                                   F-6
<PAGE>






                                                  Metalclad Corporation and Subsidiaries

                                   CONSOLIDATED STATEMENTS OF SHAREHOLDERS  EQUITY (DEFICIT) - CONTINUED
                                               Seven Months Ended December 31, 1996 and the 
                                                  Years Ended May 31, 1996, 1995 and 1994

                                                                                                          Foreign        Total
                                                                 Additional                               Currency     Shareholders 
                                            Common Stock           Paid-in     Accumulated    Officers   Translation     Equity
                                        Shares        Amounts      Capital       Deficit     Receivable   Adjustment    (Deficit)
                                       ----------   ----------    ----------   -----------   -----------  ----------   ---------- 
    Balance at May 31, 1996            28,733,229    2,873,323    54,990,952   (41,363,763)     (559,192) (1,875,530)  14,065,790
    Issuance of common stock               15,010        1,501        52,874             -            -            -       54,375
    Common stock issued under stock
      option plans and warrants           371,000       37,100       528,637             -            -            -      565,737
    Conversion of debentures to
      common stock                          4,000          400         9,600             -            -            -       10,000
    Officers  loans; interest &
      repayments                                -            -             -             -      (17,448)           -      (17,448)
    Translation adjustment                      -            -             -             -            -     (283,386)    (283,386)
    Net loss                                    -            -             -    (3,279,815)           -            -   (3,279,815)
                                       ----------   ----------    ----------   -----------   ----------   ----------   ----------
    Balance at December 31, 1996       29,123,239  $ 2,912,324   $55,582,063  $(44,643,578) $  (576,640) $(2,158,916) $11,115,253
                                       ==========   ==========    ==========   ===========    ==========   ==========  ==========
    </TABLE>





























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



                                       F-7
<PAGE>






                      Metalclad Corporation and Subsidiaries

                       CONSOLIDATED STATEMENTS OF CASH FLOWS

   <TABLE>
    <S>                                           <C>                 <C>          <C>            <C>
                                                  Seven Months Ended                 Year ended 
                                                      December 31,                     May 31,
                                                  ------------------   ---------------------------------------
                                                         1996             1996          1995          1994
                                                       -------           ------        ------       -------
    Cash flows from operating activities:
    Net loss                                          $(3,279,815)   $(6,779,772)  $(15,399,113)  $(4,892,404)
      Adjustments to reconcile net loss to net
        cash used in operating activities:
          Depreciation and amortization                   282,568        359,642      1,255,116       365,842
          Write-off of goodwill                                 -              -      6,377,716             -
          Other                                                 -       (276,095)             -             -
          Provision for losses on accounts receivable       3,410         24,373              -        40,000
          Issuance of stock for services and interest
            on convertible subordinated debentures              -        399,608              -             -
          Issuance of debentures for services                   -         39,323              -             -
          Debenture conversion expense                          -        728,644              -             -
          Write down of real estate held 
            for sale                                            -        130,415              -             -
          Loss on sale of assets                                -              -         45,553        48,833
          (Earnings) losses from unconsolidated
            affiliates                                    497,546              -              -             -
          Earnings in excess of distributions from 
            Curtom-Metalclad                               88,530         27,412        (27,093)      (39,204)
          Changes in operating assets and liabilities:
            (Increase) decrease in accounts receivable   (249,632)       (82,641)        97,841       109,514
            (Increase) decrease in unbilled receivables  (118,396)       287,033         83,921      (362,976)
            (Increase) decrease in inventories             11,482         46,839         (9,442)       (2,640)
            (Increase) decrease in prepaid expenses 
              and other assets                           (170,123)       629,952        623,212      (737,232)
            (Increase) decrease in receivables from 
              related parties                            (117,458)        97,914         (7,704)       74,172
           (Decrease) increase in accounts payables 
              and accrued expenses                        274,797     (1,411,379)     1,127,241      (548,147)
           (Decrease) increase in billings over costs     (24,289)       (44,060)       101,097      (152,917)
                                                        ---------      ---------      ---------     ---------

    Net cash used in operating activities              (2,801,380)    (5,822,792)    (5,731,655)   (6,097,159)
                                                        ---------      ---------      ---------     ---------

    Cash flows from investing activities:
      Purchases of property, plant and equipment         (211,111)      (735,780)    (3,411,080)   (1,925,973)
      Investments and capitalized costs in
         unconsolidated affiliates                     (1,024,995)    (1,353,972)             -             -
      Restricted cash                                    (769,500)             -              -             -
                                                        ---------      ---------      ---------    ----------
    Net cash used in investing activities             $(2,005,606)   $(2,089,752)   $(3,411,080)  $(1,925,973)
                                                       ----------     ----------     ----------    ----------
    </TABLE>
    The accompanying notes are an integral part of these consolidated
   statements.


                                       F-8
<PAGE>






                      Metalclad Corporation and Subsidiaries
                 CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
   <TABLE><S>                                      <C>                   <C>         <C>         <C>
                                                    Seven Months Ended               Year ended 
                                                        December 31,                   May 31,
                                                    ------------------    ----------------------------------
                                                           1996              1996        1995        1994
                                                          ------            ------      ------      ------
    Cash flows from financing activities:
      Proceeds from revolving line of credit 
        and long-term borrowings                        $        -        $   11,154  $  797,297  $2,500,000
      Payments on revolving line of credit
        and long-term borrowings                                 -          (906,456)   (517,144)   (599,770)
      Payments on Officers  receivable
        collateralized by stock (net)                            -           180,808    (740,000)          -
      Sale of common stock                                       -         8,864,862   8,529,982   2,247,751
      Issuance of common stock under stock
        option  plans and warrants                         620,112         6,843,570      65,313     318,376
      Issuance of convertible subordinated
        debentures, net of offering costs                        -                 -      61,000   4,340,599
      Payments of convertible subordinated 
        debentures                                               -                 -     (38,368)          -
                                                        ----------        ----------   ---------   ---------
      Net cash provided by financing activities            620,112        14,993,938   8,158,080   8,806,956
                                                        ----------        ----------   ---------   ---------
      Effect of exchange rates on cash                     (83,088)         (118,443)    219,570      34,678
                                                        ----------        ----------   ---------   ---------
      Increase (decrease) in cash and cash 
        equivalents                                     (4,269,962)        6,962,951    (765,085)    818,502
                                                        ----------        ----------   ---------   ---------
    Cash and cash equivalents at beginning of
      period                                             7,344,357           381,406   1,146,491     327,989
                                                        ----------        ----------   ---------   ---------
    Cash and cash equivalents at end of period         $ 3,074,395       $ 7,344,357  $  381,406  $1,146,491
                                                        ==========        ==========   =========   =========
    Supplemental disclosures of cash flow information:
        Cash paid for interest                         $   211,537       $   951,968  $1,260,373  $  898,583
                                                        ==========         =========   =========   =========

         Effective May 5, 1994, the Company acquired the stock of QUIMICA OMEGA in exchange for 2.8 million shares of the Company s
    common stock, as follows:
        Common stock acquired                                                                    $ 6,300,000
        Net liabilities assumed                                                                    1,013,831
                                                                                                  ----------
        Cost in excess of net assets acquired                                                    $ 7,313,831
                                                                                                  ==========
         During fiscal year ended May 31, 1996, 125,000 shares of common stock were issued at $3.50 per share as additional
    consideration for the acquisition of COTERIN (see Note C).
         During fiscal year ended May 31, 1996, approximately $8.6 million in convertible subordinated debentures converted into
    common stock of the Company at the induced conversion rate of $2.50 per share.  Debenture conversion rate at the time of the
    offer by the Company was $2.82 per share.
         During fiscal year ended May 31, 1996, approximately $2.1 million in debt converted into common stock of the Company at the
    conversion rate of $1.59 per share. </TABLE>

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



                                       F-9
<PAGE>






                      Metalclad Corporation and Subsidiaries

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       Seven Months Ended December 31, 1996 
                    and Years Ended May 31, 1996, 1995 and 1994


   NOTE A - SIGNIFICANT ACCOUNTING POLICIES

   Description of Business

   Metalclad Corporation (the  Company ) is engaged in insulation services,
   including asbestos abatement services and insulation material sales, to
   customers primarily in California (the  Insulation Business ).  The Company
   is also engaged in the development of hazardous waste treatment facilities
   and the collection and recycling of hazardous waste for disposition to
   landfills or cement kilns in Mexico (the  Mexican Business ) (see Note C).

   Principles of Consolidation/Investments

   The consolidated financial statements include the accounts of the Company
   and its wholly-owned subsidiaries.  Investments in other companies and joint
   venture corporations which are 20-50% owned are reported on the equity
   method. Significant intercompany accounts and transactions have been
   eliminated in consolidation.  Costs incurred relating to the acquisition or
   formation of an equity method investment are considered part of the
   investment and are amortized over five years.

   Contracts in Process

   Fixed price insulation installation and asbestos abatement contracts are
   accounted for by the percentage-of-completion method wherein costs and
   estimated earnings are included in revenues as the work is performed.  If a
   loss on a fixed price contract is indicated, the entire amount of the
   estimated loss is accrued when known.  Time and material contracts are
   accounted for under a cost plus fee basis.  Retentions by customers under
   contract terms are due at contract completion.

   Waste Collection Revenue

   Revenues pertaining to the collection of industrial waste products are
   recognized when waste is collected.  Estimated costs of reprocessing and
   disposal are accrued when revenues are recognized.  Certain of the collected
   wastes are blended and subsequently sold as fuel to cement kilns.  Revenues
   from fuel sales are recognized upon delivery to the customers and revenues
   from PCB remediation contracts are recognized as earned; related processing
   and transportation costs are recognized when incurred.

   Inventories

   Inventories, which consist principally of insulation products and related
   materials, are stated at the lower of cost (determined on the first-in,
   first-out method) or market.

   Hazardous Waste Treatment Facility

   During fiscal 1994, the Company acquired COTERIN (see Note C), which owns a

                                       F-10
<PAGE>






   landfill site that had been operated as a waste transfer station prior to
   the acquisition.  Management of the Company is continuing its efforts to
   obtain public support from state and local government officials to assure
   safe and uninterrupted operations of an expanded modern landfill. 
   Capitalized costs consist of acquisition, development and construction
   costs, including engineering, consulting, environmental studies, permitting
   and legal costs associated with the landfill.  (See Note B)

   Landfill operating costs and expenses of the waste management business in
   Mexico consist of direct costs incurred in Mexico.

   Depreciation and Amortization

   Property, plant and equipment is stated at cost.  Depreciation is computed
   using the straight-line method over the estimated useful lives of related
   assets which range from between five to seven years for machinery, equipment
   and leasehold improvements to 25 years for hazardous waste treatment
   facilities.

   Goodwill

   Goodwill as of December 31, 1996 represents the cost of purchasing COTERIN
   (see Note C) over the fair value of its net assets.  The Company is
   amortizing its goodwill over 10 years.

   Cash Equivalents

   The Company considers all highly liquid investments with original maturities
   of three months or less to be cash equivalents.  The carrying amount
   approximates fair value because of the short maturity of those instruments.

   Restricted Cash

   Restricted cash as of December 31, 1996 in the amount of $769,500 represents
   funds held as collateral for an appeal bond posted by the Company associated
   with litigation.  All interest earned on these funds is distributed to the
   Company.  (See Note M.)

   Loss Per Share

   Loss per share has been computed based upon the weighted average number of
   common shares outstanding during the period.  Stock options and warrants are
   anti-dilutive and have been excluded from the computation.

   Loss Per Share

   In February 1997, the FASB issued SFAS No. 128  Earnings per Share . This
   statement will require that primary earnings per share (EPS) be replaced by
   basic EPS. The primary difference between the two methods is that common
   stock equivalents are not included in the basic earnings per share
   calculation thereby reducing the denominator in the calculation.  The
   Company will be required to adopt this pronouncement in fiscal 1998.

   Stock Based Compensation

   Effective January 1, 1996, the Company adopted the disclosure provisions of
   SFAS No. 123,  Accounting for Stock-Based Compensation . SFAS No. 123
   requires the Company to disclose proforma net income and earnings per share

                                       F-11
<PAGE>






   as if the fair value based accounting method of SFAS No. 123 had been used
   to account for stock based compensation. These disclosures are included in
   Note J.

   Liquidity

   The Company has experienced recurring losses as it develops operations and
   facilities in the emerging Mexican market. The Company believes that its
   working capital, in conjunction with its management and cash flow
   strategies, is sufficient to sustain operations for a reasonable time.
   Income Taxes

   The Company accounts for income taxes using the liability method as
   prescribed by Financial Accounting Standards No. 109,  Accounting for Income
   Taxes . 

   Foreign Currency Translation

   All assets and liabilities of the Mexican subsidiaries are translated at the
   current exchange rate as of the end of the accounting period.  Items in the
   statements of operations are translated at average currency exchange rates. 
   The value of the Mexican Peso relative to the U.S. Dollar declined from
   approximately 3.4 Mexican Pesos in June 1994 to approximately 7.8 Mexican
   Pesos to the U.S. Dollar at December 31, 1996.  The resulting translation
   adjustments are recorded as a separate component of shareholders  equity
   (deficit).

   Reclassifications

   Certain reclassifications have been made to prior period consolidated
   financial statements to conform with the current year presentation.

   Use of Estimates

   The preparation of financial statements in conformity with generally
   accepted accounting principles requires management to make estimates and
   assumptions that affect the reported amounts of assets and liabilities and
   disclosure of contingent assets and liabilities at the date of the financial
   statements and the reported amounts of revenues and expenses during the
   reporting period.  Actual results could differ from those estimates.


   NOTE B - REALIZATION OF ASSETS

   Effective June 1, 1996, the Company has implemented the Financial Accounting
   Standards Board (FASB) Statement No. 121  Accounting for the Impairment of
   Long Lived Assets and for Long-Lived Assets to Be Disposed of .  This
   statement requires that long-lived assets and certain identifiable
   intangibles to be held and used be reviewed for impairment whenever events
   or changes in circumstances indicate that the carrying value of an asset may
   not be recoverable.  The Company has conducted this review and believes that
   no impairment currently exists and no material adjustments are necessary to
   the valuation of its assets.

   Landfill

   Included in property, plant and equipment at December 31, 1996 is
   approximately $3,875,000 representing the Company s investment in its

                                       F-12
<PAGE>






   hazardous waste treatment facility in Mexico.  Additionally, the Company has
   recorded goodwill of approximately $697,000 associated with this facility.
   The Company has been granted all necessary federal governmental
   authorizations to open and operate the facility but, as yet, has not
   received the support of the state and local governments.  Consequently, on
   October 2, 1996, the Company filed a Notice of Intent to File Claim Under
   the North American Free Trade Agreement ( NAFTA ).  The Claim was filed with
   the International Centre for Settlement of Investment Disputes ( ICSID ) in
   Washington, D.C.  On January 13, 1997, the Secr3tary General of ICSID
   registered the Company s claim and notified both the United States and
   Mexican governments of the registration.  The Company s claim is one under
   the category of  Likened to Expropriation  wherein the Company claims,
   having been denied the right to operate its constructed and permitted
   facility, its property has therefore been, as a practical matter,
   expropriated, entitling the Company to the fair market value of the facility
   as damages.  No assurance can be given the efforts of the Company will be
   fruitful and there is always the possibility of a negotiated settlement,
   which is possible according to the wishes of the parties at any time during
   the arbitration process.


   NOTE C - WASTE MANAGEMENT BUSINESS

   During the year ended May 31, 1994, the Company formed a Mexican holding
   company, Ecosistemas Nacionales, S.A. de C.V. (ECONSA), to ultimately hold
   the common stock of Ecosistemas del Potosi, S.A. de C.V. (ECOPSA),
   Confinamiento Tecnico de Residuos Industriales, S.A. de C.V. (COTERIN),
   Consultoria Ambiental Total, S.A. de C.V. (CATSA), Quimica Omega, S.A. de
   C.V. (QUIMICA OMEGA) and Seguridad Electrica Mexicana, S.A. ( SEM ).

   COTERIN

   In September 1993, the Company entered into an agreement to acquire 94% of
   COTERIN which owns a permitted landfill which was operated as a waste
   transfer station prior to the acquisition.  In January, 1996 the original
   agreement was amended whereby the Company paid an additional $200,000 in
   cash plus 125,000 shares of common stock in the Company in exchange for a
   reduction in certain future contingent payments based on the landfill
   opening to $300,000 and a reduction in the royalty payment to 1% of gross
   revenues.  In addition, the Company acquired the remaining shares of COTERIN
   that it did not own, essentially vesting 100% of the ownership of the
   landfill to the Company.  The Company has the obligation to remediate the
   landfill due to its prior use as a transfer station, conditional upon the
   landfill opening.  The agreement with the sellers jointly obligates them to
   compensate COTERIN for the costs of remediation in excess of $500,000 in
   total or $100,000 annually.  This obligation can be offset by any moneys
   that may be due the sellers from the Company.

   QUIMICA OMEGA

   On May 5, 1994, the Company acquired all of the issued and outstanding
   common and preferred stock of QUIMICA OMEGA in exchange for 2,800,000
   restricted shares of the Company s common stock.  QUIMICA OMEGA specializes
   in the collection of hazardous waste for recycling and disposal at landfills
   or cement kilns, which supplement their fuel requirements with fuels
   reblended by QUIMICA OMEGA.  The transaction has been accounted for as a
   purchase.  The purchase price of $6,300,000 was based upon management s
   estimate of the fair value of the Company s common stock issued to the

                                       F-13
<PAGE>






   Quimica shareholders.  In May, 1995, the Company wrote off goodwill in the
   amount of $6,377,000 associated with this transaction.

   Under the terms of the agreement, the former shareholders of QUIMICA OMEGA
   agreed to vote their common shares in agreement with the chairman and
   president of the Company, except on matters affecting change in ownership,
   for a period of three years.

   On April 9, 1996, the Company and BFI-MEXICO, formed BFI-OMEGA as a 50%-50%
   owned joint venture corporation.  Effective with this agreement, BFI-OMEGA
   assumed management of QUIMICA OMEGA S operations and implemented a
   transition to BFI-OMEGA.  The joint venture commenced operations under the
   BFI-OMEGA name in July, 1996.  As of December 31, 1996, the Company had
   capitalized costs of $516,000 representing direct costs of forming the joint
   venture.  These costs are being amortized over five years commencing July,
   1996.

   In January 1997, QUIMICA OMEGA and BFI-MEXICO reached a tentative agreement
   for QUIMICA OMEGA to acquire BFI s 50% interest in the joint venture.  As
   part of this proposed transaction, BFI would contribute certain waste
   transportation equipment to QUIMICA OMEGA.  In addition, BFI will also
   provide certain technical and landfill management services to the Company
   and ECOPSA, including the continuing services of the general manager of the
   joint venture.


   NOTE D - INVESTMENTS IN UNCONSOLIDATED AFFILIATES

   BFI-OMEGA

   In April 1996, the Company, through its Mexican subsidiary QUIMICA OMEGA,
   formed a 50%-50% jointly owned company with BFI-Mexico to provide full range
   of industrial waste collection, transportation, recycling, treatment and
   disposal services in Mexico.  This Company, known as BFI-OMEGA is accounted
   for under the equity method.  As of May 31, 1996, BFI-OMEGA had not
   commenced revenue generating activities but was primarily involved in the
   management of QUIMICA OMEGA and the transition to BFI-OMEGA operations.  In
   July, 1996, the joint venture commenced operations as BFI-OMEGA.

   The following is unaudited summarized financial information for BFI-OMEGA,
   presented in U.S. dollars:

                                  Balance Sheets
                                    (Unaudited)

                                               Seven Months             Year
                                                   Ended                Ended
                                             December 31, 1996     May 31, 1996
                                             -----------------     ------------
   Cash                                         $  261,520          $1,662,946
   Accounts receivable                             639,113                   -
   Prepaid expenses                                 13,363              88,952
   Other assets                                    228,228              40,870
   Property, plant and equipment                   549,078              34,400
                                                ----------           ---------
   Total assets                                 $1,691,302          $1,827,168
                                                ==========           =========


                                       F-14
<PAGE>






   Accounts payable and accrued 
     expenses                                   $  682,843          $        -
   Common stock                                  2,332,085           2,065,872
   Accumulated deficit                          (1,323,626)           (238,704)
                                                ----------           ---------
   Total liabilities and equity                 $1,691,302          $1,827,168
                                                 =========           =========


                             Statements of Operations
                                    (Unaudited)

                                             December 31, 1996     May 31, 1996
                                             -----------------     ------------
   Revenues                                    $   872,427          $        -
   Cost of Sales                                  (872,674)                  -
   Expenses                                     (1,084,675)           (238,704)
                                                 ---------            --------
   Loss from operations                        $(1,084,922)         $ (238,704)
                                                ==========           =========

   Curtom-Metalclad

   In  1989,  the  Company entered into a joint venture with a minority service
   firm  (  Curtom-Metalclad  ) to perform industrial insulation and industrial
   asbestos abatement services similar to those performed by the Company.  When
   contracts  are  obtained by the joint venture, the Company performs the work
   specified in the contract as a subcontractor to the joint venture. 

   The following is unaudited summarized financial information for Curtom-
   Metalclad:




                                  Balance Sheets
                                    (Unaudited)

                                    December 31,               May 31,
                                    -----------      -------------------------
                                       1996             1996            1995
                                      ------           ------          ------
   Cash                             $    7,207      $  214,183       $ 215,349
   Accounts receivable                 717,648         219,058         370,952
                                     ---------       ---------        --------
   Total assets                     $  724,855      $  433,241       $ 586,301
                                     =========       =========        ========
   Accounts payable                 $  691,332      $  310,054       $ 407,826
   Curtom-equity                        17,097          63,146          91,022
   Metalclad-equity                     16,426          60,041          87,453
                                     ---------       ---------        --------
   Total liabilities and partners  
     capital                        $  724,855      $  433,241       $ 586,301
                                     =========       =========        ========





                                       F-15
<PAGE>







                             Statements of Operations
                                    (Unaudited)

                               Seven Months               Year
                                 Ended                    Ended
                               December 31,               May 31,
                               -----------   ---------------------------------
                                  1996          1996       1995        1994
                                 ------        ------     ------      ------
   Revenue                     $3,427,699   $1,417,601  $2,505,697  $3,219,203
   Costs of sales              (3,335,786)  (1,231,613) (2,341,019) (2,956,198)
   Expenses                          (904)        (646)     (1,386)    (17,997)
                               ----------   ----------  ----------  ----------
   Income from operations      $   91,099   $  185,342  $  163,292  $  245,008
                                =========    =========   =========   =========


   NOTE E - PROPERTY, PLANT AND EQUIPMENT

   Property, plant and equipment consists of the following:

                                    December 31,               May 31,
                                    -----------      -------------------------
                                       1996             1996            1995
                                      ------           ------          ------
   Buildings                        $   93,690      $   98,857      $  115,615
   Land                                239,955         273,172         337,880
   Machinery and equipment           1,524,616       1,702,036       1,541,634
   Automotive equipment                505,667         484,415         607,879
   Leasehold improvements                4,454          45,159          41,596
                                     ---------      ----------       ---------
                                     2,368,382       2,603,639       2,644,604
   Less accumulated depreciation 
     and amortization                 (924,614)       (901,304)       (702,004)
                                     ---------      ----------       ---------
                                     1,443,768       1,702,335       1,942,600
   Hazardous waste treatment 
     facilities                      3,875,641       3,760,322       3,324,269
                                     ---------      ----------       ---------
                                    $5,319,409     $ 5,462,657      $5,266,869
                                     =========      ==========       =========


   NOTE F - REAL ESTATE HELD FOR SALE

   Real estate held for sale was acquired in 1986 as settlement on amounts
   owing from an affiliate.  The real estate is carried at the lower of the
   cost or fair value less estimated costs to sell.  During fiscal 1996 the
   Company wrote down the value of this property.  This property was collateral
   on the Company s note payable to supplier (Note G).  During the year ended
   May 31, 1996, this note was paid in its entirety.


   NOTE G - DEBT

   Long-term debt consists of the following:


                                       F-16
<PAGE>






                                    December 31,              May 31,
                                    -----------     --------------------------
                                       1996             1996           1995
                                      ------           ------         ------
   Note payable to CVD Financial    $        -      $        -      $2,784,988
   Note payable to supplier,
     collateralized by real estate
     held for sale (Note F)                  -               -          91,667
   Equipment notes, payable
     monthly through various 
     dates in 1996                           -          36,721         292,529
                                     ---------      ----------       ---------
                                             -          36,721       3,169,184
   Less current portion                      -          36,721       1,118,947
                                     ---------      ----------       ---------
                                    $        -      $        -      $2,050,237
                                     =========       =========       =========

   In September 1993, the Company obtained a loan in the amount of $2,500,000
   from a financial institution pursuant to the terms of a promissory note due
   on September 1, 1995.  The note bore interest at the prime rate plus 7% and
   was collateralized by all of the assets of the Company, including its shares
   of certain subsidiaries.  In connection with this financing the Company
   issued the financial institution a five-year warrant to purchase 375,000
   shares of common stock at a price of $4.50.  

   In September 1994, the Company obtained a short-term loan in the amount of
   $525,000 from the same financial institution pursuant to the terms of a
   promissory note due on November 30, 1994.  The note accrued interest at the
   prime rate plus 7%.  In connection with this financing the Company issued
   the financial institution a five-year warrant to purchase 75,000 shares of
   common stock at a price of $2.625 per share.

   In May 1995, the Company re-negotiated the terms of this financing agreement
   and extended the maturity date of previous borrowings and accrued interest
   totaling approximately $2,800,000 to June 30, 1996.  In connection with this
   re-negotiation, the Company issued the institution 87,578 shares of common
   stock, issued the institution a five-year warrant to purchase 600,000 shares
   of common stock at a price of $1.908 per share, and lowered the exercise
   price on all previously issued warrants to $1.59 per share, which
   approximated or exceeded the fair market value of the Company s common stock
   as of the measurement date.  The agreement with the financial institution
   contained covenants which gave the lender the right to convert the debt into
   shares of common stock at the rate of $1.59 per share. The Company paid the
   institution an additional $100,000 for an extension of the payment date for
   the loan.

   In February 1996, the lender exercised its option to convert 100% of the
   outstanding loan balance of $1,924,797 into 1,210,564 shares of the
   Company s common stock at the conversion rate of $1.59 per share.


   NOTE H - CONVERTIBLE SUBORDINATED DEBENTURES

   In November 1993, the Company issued $3,840,000 of convertible subordinated
   debentures due in 60 months, bearing interest at 9% and convertible into
   shares of common stock at the rate of $5.50 per share subject to certain
   adjustments.  During the year ended May 31, 1994, the Company also issued an

                                       F-17
<PAGE>






   additional $732,359 principal amount of convertible subordinated debentures
   due in 60 months, bearing interest at 8%, and convertible into shares of
   common stock at the rates of $4.00 and $5.00 per share subject to certain
   adjustments.

   In August 1995,  the Company offered to convert all outstanding debentures
   into shares of common stock at a conversion price below the stated price on
   the debentures.  As of May 31, 1996, approximately $8,600,000 of these
   debentures converted at the rate of $2.50 per share and the Company
   recognized a charge of $729,000 due to the lower conversion price offer.  As
   of December 31, 1996 the remaining debentures outstanding, all bearing
   interest at 8% per annum, were $229,533. All such amounts are due in fiscal
   1997.

   The Company has reserved an aggregate of approximately 91,800 shares of the
   Company s common stock for issuance upon conversion of the remaining 8%
   debentures.


   NOTE I - INCOME TAXES

   There was no provision for income taxes for the periods presented due to
   losses incurred.  The major deferred tax asset (liability) items at December
   31, 1996,  May 31, 1996 and 1995 are as follows:


                                      December 31,             May 31,
                                      -----------    --------------------------
                                         1996            1996          1995
                                        ------          ------        ------

   Assets:
     Allowances established against 
       realization of certain assets  $   12,000    $   13,000     $    16,000
     Net operating loss carryforwards  7,331,000      6,606,000      4,357,000
     Accrued liabilities and other       259,000        183,000        179,000
                                       ---------      ---------      ---------
                                       7,602,000      6,802,000      4,552,000

     Valuation allowance              (7,602,000)    (6,802,000)    (4,552,000)
                                       ---------      ---------      ---------
                                      $        -    $         -    $         -
                                       =========      =========      =========

   The difference between the actual income tax benefit and the tax benefit
   computed by applying the statutory Federal income tax rate to the net loss
   before income taxes is attributable to the inability to recognize currently
   the future benefit of net operating loss carryforwards.

   At December 31, 1996, the Company has available for U.S. Federal and
   California income tax purposes net operating loss carryforwards of
   approximately $16,002,000 and $7,002,000, respectively. These carryforward
   amounts expire in the years 2000 through 2011 and 1997 through 2001,
   respectively.  At December 31, 1996, the Company has available investment
   credits of approximately $32,300 to offset future U.S. Federal income tax
   liability. The ultimate utilization of the net operating loss and investment
   credit carryforwards may be restricted in the future due to changes in the
   ownership of the Company.  The Company also has Mexican net operating loss

                                       F-18
<PAGE>






   carryforwards of approximately $2,913,000 which may be utilized to offset
   future taxable income.  These Mexican losses are subject to a ten year tax
   carryforward period and expire in the years 2001 through 2006.  

   The Company has recorded a valuation allowance for that portion of the
   deferred tax asset that the Company does not believe to be realizable.


   NOTE J - SHAREHOLDERS  EQUITY

   Stock Options

   In 1988, the Company adopted an incentive stock option plan (300,000 shares
   authorized).  Under the incentive stock option plan, options may be granted
   to employees at a price which is not less than 100% of the fair market value
   on the date of grant.  Options granted under the incentive stock option plan
   vest over a three-year period commencing six months from the date of grant
   and are exercisable for five years from the date of grant.  At December 31,
   1996, there were options outstanding under the incentive stock option plan
   for 10,000 shares (all of which are vested), and 90,500 options are
   available for grant.  The incentive stock option plan will expire 10 years
   from the date of adoption.

   On August 18, 1992, the Company adopted an omnibus stock option plan (the
    1992 Plan ) which authorized the issuance of 1,600,000 options to acquire
   the Company s common stock.   At December 31, 1996, there were options
   outstanding under the 1992 Plan for 707,000 shares (of which 390,000 were
   vested), and 121,000 options available for grant.  These options will expire
   10 years from the date of grant.

   On March 24, 1993, the Company adopted an omnibus stock option plan (the
    1993 Plan ) which authorized the issuance of 1,000,000 options to acquire
   the Company s common stock.  The terms of the 1993 Plan are the same as the
   1992 Plan.  At December 31, 1996, there were options outstanding under the
   1993 Plan for 619,000 shares (of which 468,500 shares were vested), and
   116,000 options available for grant.  These options expire 10 years from the
   date of the grant.

   During fiscal 1995, the Board of Directors approved the grant to various
   officers, directors, and employees of the Company of nonstatutory stock
   options to purchase an aggregate of 2,412,500 shares of common stock.  The
   options were granted at exercise prices equal to or exceeding the fair
   market value of the Company s common stock on the measurement date, expire
   10 years from the date of grant, and have various vesting schedules.

   During fiscal 1996, the Board of Directors approved the grant to various
   officers, directors and employees of the Company of non-statutory stock
   options to purchase an aggregate of 5,040,000 shares of common stock.  The
   options were granted at exercise prices equal to or exceeding the fair
   market value of the Company s common stock on the measurement date, expire
   10 years from the date of grant and have various vesting schedules.  In
   September, 1996, the Company rescinded its granting of 3,195,000 of these
   options and deferred issuance of 1,300,000 of these options pending
   shareholder approval.  During the seven months ended December 31, 1996, the
   Company granted options to purchase 300,000 shares of common stock,
   inclusive of options for 250,000 shares at $3.00 associated with the BFI-
   OMEGA transaction.  (See Note N.)


                                       F-19
<PAGE>






   The following is a summary of options granted:

   <TABLE>
    <S>                          <C>        <C>                     <C>           <C>                   <C>           <C>
                                  Seven months ended                                          Year ended
                                      December 31,                                              May 31,
                                ----------------------                 ----------------------------------------------------------
                                       1996                                  1996                                1995
                                      -----                                 -----                                -----
                                             Weighted                               Weighted                            Weighted
                                              Average                                Average                             Average
                                              Exercise                               Exercise                            Exercise
                                  Shares       Price                    Shares        Price                 Shares        Price
    Options outstanding
    at beginning of the 
    year                         7,904,250    $3.07                   4,487,500       $2.17               2,246,000       $2.08
      Granted                      300,000     3.00                   5,040,000        3.56               2,412,500        2.25
      Exercised                   (161,000)    1.38                  (1,547,000)       2.10                 (30,000)       1.87
      Canceled                  (3,195,000)    3.63                     (76,000)       2.25                (141,000)       2.25
                                ----------    -----                  ----------       -----              ----------       -----
    Options outstanding
    at end of the year           4,848,250    $2.75                   7,904,250       $3.07               4,487,500       $2.17

    Options Exercisable          2,982,000                            2,855,750                           2,247,334
    </TABLE>

    Of the 300,000 options granted during the seven months ended December 31,
   1996, 50,000 were issued at fair market value and 250,000 were issued below
   fair market value, with the Company recording a charge of $125,000
   representing the discount.

   The following significant assumptions were utilized to calculate the fair
   value information presented utilizing the Black-Scholes Multiple Option
   Approach:



                                           December, 1996        May, 1996
                                           --------------        ---------
   Risk free interest rate                     6.10%              6.10%
   Expected life                             1.2 years           4.7 years
   Expected volatility                         1.05                1.05
   Expected dividends                           -                   -
   Weighted average fair value of
      Options granted                          3.36                3.54



   <TABLE>
    <S>                   <C>                      <C>                 <C>                        <C>                     <C>
                                   Options Outstanding                                                   Options Exercisable
    ---------------------------------------------------------------------------                 -----------------------------------
                                                      Weighted
                                                      average           Weighted                                           Weighted
                              Number                 remaining          average                       Number               average
         Range of            outstanding            contractual         exercise                   exercisable             exercise
    exercise prices        as of 12/31/95          life in years          price                   as of 12/31/95             price
    ---------------       ---------------         --------------       ---------                  --------------           --------

                                                                  F-20
<PAGE>






    $2.250 - $2.250          2,778,250                 6.98             $2.2500                    2,212,000               $2.2500
    $2.500 - $2.500            200,000                 9.37             $2.5000                      200,000               $2.5000
    $3.000 - $3.000            430,000                 9.03             $3.0000                      430,000               $3.0000
    $3.625 - $3.625          1,350,000                 9.01             $3.6250                       50,000               $3.6250
    $4.500 - $4.500             90,000                 9.01             $4.5000                       90,000               $4.5000
    ---------------          ---------                 ----             -------                    ---------               -------
    $2.250 - $4.500          4,848,250                 7.86             $2.7515                    2,982,000               $2.4600
    ===============          =========                 ====             =======                    =========               =======
    </TABLE>
    As the Company has adopted the disclosure requirement of SFAS 123, the
   following table shows pro forma net loss and loss per share as if the fair
   value based accounting method had been used to account for stock based
   compensation cost.

                                      Seven Months           For the Year
                                         Ended                  Ended
                                    December 31, 1996        May 31, 1996
                                    -----------------        ------------

   Net Loss                           $(3,280,000)           $(6,780,000)
   Pro forma compensation expense        (355,000)            (1,023,000)
                                       ----------             ----------
   Pro forma net loss               $(3,635,000)           $(7,803,000)
                                       ==========             ==========

   Pro forma loss per share              $(.13)                 $(.34)
                                          =====                  =====

   The effects of applying FASB 123 in this pro forma disclosure are not
   indicative of future amounts.
   Stock Purchase Warrants

   In connection with various debt offerings, stock placements and services
   provided, the Company has issued various stock purchase warrants.  All such
   warrants were issued at prices which approximated or exceeded fair market
   value of the Company s common stock at the date of grant and are exercisable
   at dates varying from one to five years.

   Summarized information for stock purchase warrants follows:

                                                      Number         Price
                                                    of Warrants     Per Share
                                                    -----------    ----------
     Warrants outstanding at May 31, 1994            1,229,085     $1.51-2.25
       Issued                                        4,000,500      1.50-2.25
       Exercised                                             -              -
                                                    ----------    -----------
     Warrants outstanding at May 31, 1995            5,229,585      1.51-2.25
       Issued                                        4,690,636      1.91-5.00
       Exercised                                    (2,554,836)     1.51-2.25
                                                    ----------    -----------
     Warrants outstanding at May 31, 1996            7,365,385      1.59-5.00
       Issued                                                -              -
       Exercised                                      (210,000)     1.51-2.00
                                                    ----------    -----------
     Warrants outstanding at December 31, 1996       7,155,385     $1.51-5.00
                                                    ==========


                                       F-21
<PAGE>






   Common Stock

   During the fiscal year ended May 31, 1996, the Company issued 3,525,000
   shares in conversion of approximately $8,600,000 of its 8% and 9% debentures
   (see Note H).  In addition, the Company issued 1,500,000 shares as the
   result of the exercise of stock options, at prices ranging from $1.375 to
   $2.25 per share.  Shares totaling 4,044,000 were issued in private
   placements at prices ranging from $1.05 to $4.00 per share.  Approximately
   2,450,000 shares were issued as a result of the exercise of warrants, at
   prices ranging from $1.51 to $2.25.  Shares totaling 1,210,564 were issued
   in conversion of the CVD debt (see Note G) at a conversion price of $1.59
   per share.

   The Company realized net cash proceeds of $16,500,000 from the
   aforementioned year ended May 1996 transactions.  Additionally, debt
   totaling $10,700,000, representing debentures, was converted into equity.

   During the seven months ended December 31, 1996, the Company issued a total
   of 390,000 shares, with 161,000 being the result of option exercises,
   210,000 being the result of warrants being exercised, 4,000 from a debenture
   conversion and 15,000 from a previously accrued award.  The Company realized
   net proceeds of $620,000 from these transactions.


   NOTE K - EMPLOYEE BENEFIT PLANS

   Effective January 1, 1990, the Company established a contributory profit
   sharing and thrift plan for all salaried employees.  Discretionary matching
   contributions are made by the Company based upon participant contributions,
   within limits provided for in the plan.  No contributions were made in the
   seven months ended December 31, 1996 or the years ended May 31, 1996, 1995
   and 1994, respectively.

   Additionally, the Company participates in several multi-employer plans,
   which provide defined benefits to union employees of its participating
   companies.  The Company makes contributions determined in accordance with
   the provisions of negotiated labor contracts. The contributions were
   $127,000, $296,000, $320,000 and  $384,000 for the seven months ended
   December 31, 1996 and for the years ended May 31, 1996, 1995 and 1994,
   respectively.


   NOTE L - SIGNIFICANT CUSTOMERS

   Sales for the seven months ended December 31, 1996 to Curtom-Metalclad were
   approximately $3,445,000, including $3,345,000 performed at Edison plants
   under Edison s strategic alliance program.  The Company had trade accounts
   receivable of $1,602,000 from Curtom-Metalclad as of December 31, 1996.

   Sales to Southern California Edison and Curtom-Metalclad were approximately
   $2,417,000 and $1,267,000, respectively, in the year ended May 31, 1996. 
   The Company had trade accounts receivable from Edison and Curtom-Metalclad
   of approximately $104,000 and $271,000, respectively, as of May 31, 1996.

   Sales to Brown & Root and Curtom-Metalclad were approximately $3,894,000 and
   $2,296,000, respectively in the year ended May 31, 1995.  The Company had
   trade accounts receivable from Brown & Root and Curtom-Metalclad of
   approximately $194,000 and $408,000, respectively, as of May 31, 1995.

                                       F-22
<PAGE>






   Sales to Brown & Root, Curtom-Metalclad, Southern California Edison and
   Texaco were approximately $3,107,000, $2,855,000, $2,346,000 and $1,131,000,
   respectively, in 1994.


   NOTE M - COMMITMENTS AND CONTINGENT LIABILITIES

   The Company has employment agreements with its executive officers.  These
   agreements continue until terminated by the executive or the Company and
   provide for minimum salary levels, as adjusted for cost of living changes. 
   These agreements include incentive bonuses based upon specified management
   goals, and a covenant against competition with the Company extending for a
   period of time after termination for any reason.

   The Company leases its facilities under non-cancelable operating lease
   agreements which expire at various dates through 1999.  Total rent expense
   under operating leases was $168,722, $404,647, $373,371 and $343,350 for the
   seven months ended December 31, 1996 and for the years ended May 31, 1996,
   1995, and 1994, respectively.  Future minimum non-cancelable lease
   commitments are as follows:

               Year ending December 31, 1997      $188,817
                                        1998       116,493
                                        1999        45,147
                                                   -------
                                                  $350,457
                                                   =======

   In the ordinary course of its insulation business, certain parties have
   filed a substantial number of claims against the Company for actual and
   punitive damages.  Throughout its history, the Company has maintained
   insurance policies that typically respond to these claims.  Based on the
   opinion of counsel, it is management s opinion that these actions,
   individually and in the aggregate, will not have a significant adverse
   impact on the Company s financial position or results of operations.

   The Company has contested an assessment of approximately $400,000 from the
   California State Compensation Insurance Fund for the policy year ended
   September 30, 1990.  Management believes that the assessment is improperly
   computed and is based upon inappropriate modification rates.

   In December, 1996, the Company received an unfavorable court ruling on its
   position relative to certain rights of defense against the claims of the
   insurer.  In order to appeal the decisions of the court, the Company
   stipulated to a judgment of $513,000, representing principal and interest on
   claims, and has posted an appeal bond in the amount of $769,500 so as to
   continue its legal proceedings on appeal.  The bonding company has required
   collateral in the form of an escrow account in the amount of the bond, which
   the Company established in December, thereby restricting the Company s use
   of these funds.  Although the Company and its counsel feel strongly about
   its position on appeal, no assurances can be made that the outcome will be
   favorable to the Company.


   NOTE N - RELATED PARTY TRANSACTIONS 

   Receivables from related parties are comprised of the following:


                                       F-23
<PAGE>






                                          December 31,           May 31,
                                             1996            1996       1995
                                           --------        --------   --------
   Metalclad Pacific - note receivable     $      -        $ 16,680   $ 31,261
   Metalclad Pacific - other                 10,000          17,926     17,926
   Loans to executive officers, 
     directors and employees                230,379         105,763    154,482
                                           --------        --------   --------
                                           $240,379        $140,369   $203,669
                                            =======         =======    =======

   Loans to executive officers, directors and employees are represented by
   promissory notes, due on demand and bear interest at 6%.

   An officer of the Company is a partner in a law firm which has received
   payments for legal fees of approximately $54,000, $283,000, $280,000, and
   $216,000 for the seven months ended December 31, 1996 and years ended May
   31, 1996, 1995 and 1994, respectively.

   During fiscal 1995 the Company loaned $370,000 each to Grant S Kesler and T.
   Daniel Neveau, officers of the Company.  Each loan is collateralized by
   300,000 shares of Company stock.  The loans accrued interest at 7% over
   prime which was 9% at May 31, 1995.  In February 1996, Messrs. Kesler and
   Neveau each repaid $150,000 to the Company.  In March 1996, the notes were
   amended to modify the loan principal between Messrs. Kesler and Neveau as
   well as to adjust the interest rates, effective March 1, to a variable rate
   based upon the Company s quarterly investment rate.  The amendment also
   stipulates that the notes must be re-paid by May 31, 1997.

   In June 1996, Mr. Neveau, Chairman of the Board, Senior Vice President, and
   a Director of the Company, resigned his positions.  As a result, the Company
   and Mr. Neveau renegotiated the terms of his employment agreement relative
   to compensation, benefits and stock options.  As of May 31, 1996, the
   Company accrued $275,000, representing the Company s  remaining obligation
   to Mr. Neveau.  As of December 31, 1996, $175,000 remained accrued by the
   Company.

   During the fiscal year ended May 31, 1996, the Company agreed to pay
   consulting fees of $51,000 to Gordon M. Liddle, a director of the Company. 
   These fees are for services in connection with management oversight and
   other  consulting to the Company.  Additionally, the Company has entered
   into an 18-month consulting agreement with Mr. Liddle for on-going
   consulting services at a rate of $5,000 per month.

   During the fiscal year ended May 31, 1996, the Company entered into an
   agreement with The Chesapeake Group, whose Managing Director is Douglas S.
   Land, a director of the Company.  The agreement engages Chesapeake as a
   financial consultant to the Company in matters pertaining to its Mexican
   waste operations.  During the period ended May 31, 1996, the Company agreed
   to pay to Chesapeake $100,000 for consulting services rendered during
   calendar year 1995 and $8,000 per month for on-going consulting services. 
   In addition, the Company agreed to pay a transaction fee for the successful
   closing of the BFI-OMEGA joint venture, of $325,000 plus the granting of
   250,000 options for the purchase of common stock of the Company exercisable
   at $3.00 per share.

   In December, 1996, the Company loaned $150,000 to Mr. Javier Guerra
   Cisneros, a Director and Vice President of Mexico Operations.  The loan is

                                       F-24
<PAGE>






   collateralized by 300,000 shares of stock of the Company and is represented
   by a promissory note bearing interest at 10%.  In February, Mr. Guerra
   repaid $120,000 of this note.


   NOTE O - SEGMENT INFORMATION

   The following segment information is provided for the Company s two primary
   segments:  commercial insulation (located in the United States) and waste
   management (located in Mexico).

   Segments of Business by Industry
   <TABLE><S>                                <C>                  <C>         <C>            <C>
                                              Seven Months                           Year
                                                  Ended                              Ended
                                               December 31,                         May 31,
                                            -----------------      -----------------------------------------
                                                  1996                  1996          1995          1994
                                                 ------               ------         ------        ------
    Gross sales
      Insulation                              $ 5,518,606          $11,445,086    $ 15,723,915   $16,249,275
      Waste management                            631,884            3,456,680       2,228,169       203,332
                                                ---------           ---------      -----------     ---------
          Total                               $ 6,150,490          $14,901,766  $ 17,952,084   $16,452,607
                                               ==========           ==========     ===========    ==========
    Operating profit (loss)
      Insulation                              $   (20,867)         $  (853,919)   $    257,295   $   327,055
      Waste management                         (1,281,747)            (560,082)     (9,111,722)   (3,443,101)
      Corporate expense                       $(1,940,147)         $(3,676,907)   $ (4,773,292)  $  (932,705)
                                               ----------           ----------     -----------     ---------
          Total                               $(3,242,761)         $(5,090,908)   $(13,627,719)  $(4,048,751)
                                               ----------           ----------     -----------     ---------

    Interest expense, net                         (37,054)            (960,220)     (1,771,394)     (843,653)
    Other expense                                       -             (728,644)              -             -
                                               ----------           ----------     -----------    ----------
          Net Loss                            $(3,279,815)         $(6,779,772)   $(15,399,113)  $(4,892,404)
                                               ==========           ==========     ===========    ==========
    Identifiable assets
      Insulation                              $ 3,321,304          $ 3,264,649    $  4,572,010   $ 5,605,407
      Waste management                          6,899,214            6,962,264       4,808,400    10,464,032
      Corporate                                 4,710,934            7,475,120       1,329,807     2,241,161
                                               ----------           ----------     -----------    ----------
          Total                               $14,931,452          $17,702,033    $ 10,710,217   $18,310,600
                                               ==========           ==========     ===========    ==========
    Capital expenditures
      Insulation                              $    31,028          $    29,792    $    489,915   $    16,301
      Waste management                            180,083              705,988       2,921,165     1,909,672
                                               ----------           ----------      ----------    ----------
          Total                               $   211,111          $   735,780    $  3,411,080   $ 1,925,973
                                               ==========           ==========     ===========   ===========
    Depreciation and amortization
      Insulation                              $   132,026          $   154,555    $  1,032,011   $   159,076
      Waste management                            150,542              205,087         223,105       206,766
                                               ----------           ----------      ----------    ----------
          Total                               $   282,568          $   359,642    $  1,255,116   $   365,842
                                               ==========           ==========     ===========    ==========
    </TABLE>

                                                                  F-25
<PAGE>








   NOTE P - UNAUDITED INTERIM INFORMATION

   The following condensed financial information for the seven month period
   ended December 31, 1996 is unaudited and is being presented for comparative
   purposes.

   Seven Months Ended December 31,
                                                  1996           1995
                                                 ------         ------

   Revenues - Insulation Business              $5,518,606     $6,910,000
   Revenues - Waste Management                    631,884      1,450,860

   Operating Loss - Insulation Business           (20,867)        (1,269)
   Operating Loss - Waste Management           (1,281,747)        76,086

   Corporate Expense                            1,940,147      1,789,007
   Interest Expense                                37,054        834,149
   Other Expense                                        -        728,644

   Net Loss                                    (3,279,815)    (3,276,983)

   Net Loss Per Share                            $(.11)           $(.17)
                                                  =====            =====

































                                       F-26
<PAGE>






                      Metalclad Corporation and Subsidiaries

                  SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

   <TABLE>
   <S>                                 <C>            <C>          <C>           <C>           <C>        <C>
                                                                    Additions
                                        Balance at     Charged to   Charged to                             Balance at
                                        Beginning      Costs and      Other                                  End of
        Description                     of Period      Expenses      Accounts     Deductions      Other      Period

    Seven months ended December 31, 1996
     Deducted from asset accounts:
      Allowance for doubtful accounts     $66,566       $ 4,044       $     0      $       0   $ (2,638)(A)  $67,972
      Allowance for excess and 
       obsolete inventory                  25,000           289             0              0          0       25,289

    Year ended May 31, 1996:
     Deducted from asset accounts:
      Allowance for doubtful accounts     $44,480       $30,894       $     0      $   6,521   $ (2,287)(A)  $66,566
      Allowance for excess and 
       obsolete inventory                  25,000             0             0              0          0       25,000

    Year ended May 31, 1995:
     Deducted from asset accounts:
      Allowance for doubtful accounts     $72,983       $     0       $     0      $       0   $(28,503)(B)  $44,480
      Allowance for excess and 
        obsolete inventory                 25,000             0             0              0          0       25,000

    Year ended May 31, 1994:
     Deducted from asset accounts: 
      Allowance for doubtful accounts     $33,000       $14,777       $     0       $  4,777   $ 29,983 (C)  $72,983
      Allowance for excess and 
        obsolete inventory                 25,000             0             0              0          0       25,000

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

    (A) Exchange rate effect
    (B) Represents net change in valuation account
    (C) Represents the May 31, 1994 allowance for doubtful account balance for Quimica Omega
    </TABLE>