SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

   (MARK ONE)
    [  X  ]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                          SECURITIES AND EXCHANGE ACT OF 1934
                             FOR THE FISCAL YEAR ENDED DECEMBER 31,1998
                                       OR
    [     ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                          SECURITIES AND EXCHANGE ACT OF 1934
                             FOR THE TRANSITION PERIOD FROM _______ TO_________.

                           COMMISSION FILE NO. 0-22533

                          MERCURY WASTE SOLUTIONS, INC.
             (Exact name of registrant as specified in its charter)

             MINNESOTA                                     41-1827776
    (State or other jurisdiction of                      (I.R.S. Employer
     incorporation or organization)                     Identification No.)
            302 NORTH RIVERFRONT DRIVE, SUITE 100A, MANKATO, MN 56001
                       (Address and zip code of principal
                               executive offices)
                                 (507) 345-0522
                           (Issuer's telephone number)

Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK, $.01
                                                             PAR VALUE
                                                             (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 of 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   [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best to the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ ]

State issuer's revenues for its most recent fiscal year:      $6,299,396

The aggregate market value of voting stock held by nonaffiliates of the
Registrant's Common Stock, as of March 10, 1999 was approximately $4,000,000.
(based on the last sale price of such stock as reported by NASDAQ Stock Market).

The number of shares outstanding of the Registrant's Common Stock as of March
10, 1999 was 3,480,097.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders are incorporated by reference into Part III as set forth therein.


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                                     PART I

ITEM 1.  BUSINESS

GENERAL

         Mercury Waste Solutions, Inc. ("the Company") provides mercury waste
remediation and recycling solutions to mercury waste generators of all sizes
including, but not limited to, public utilities, manufacturers that utilize
mercury in their business (e.g., measurement, control and electrical equipment
industries), building management companies and hazardous waste management
facilities. In addition to current federal and state regulations which provide
strict guidelines regarding the disposal of all mercury-containing products,
many county and local governments have begun to strictly regulate mercury wastes
due to the growing recognition of the serious health risks of mercury. The
Company believes that most businesses that generate mercury waste have now
recognized the large potential legal liability from the improper handling and
disposal of mercury-containing wastes and are motivated to reduce potential
hazardous waste liability. By offering disposal solutions for all types of
mercury-containing products, from mercury lamp recycling to mercury waste
retorting, the Company serves a broad scope of the mercury waste disposal
market.

         The Company currently operates a mercury waste retorting facility in
Union Grove, Wisconsin, (the "Union Grove Facility"), facilities for recycling
and storing fluorescent and other mercury-containing lamps in Roseville,
Minnesota and Union Grove, Wisconsin and mercury waste storage and collection
facilities in Kenosha, Wisconsin, Indianapolis, Indiana, Atlanta, Georgia and
Albany, New York.

         On January 4, 1996, the Company acquired substantially all of the
assets of U.S. Environmental, Incorporated, a Minnesota-based mercury recycling
company ("USE") founded in 1993 by Mark G. Edlund, the Company's President and
Union Grove Facility general manager. USE co-developed the Model 2000 lamp
recycler (the "Model 2000"), opened a mercury lamp recycling facility in
Roseville, Minnesota (the "Roseville Facility") to showcase the Model 2000 and
co-developed the mercury retorting equipment installed at the facility in Union
Grove, Wisconsin. Since the acquisition of USE, the Company improved the Model
2000 (hereinafter referred to as the "Model 2000B"), developed a new continuous
flow oven and stationary ovens utilized at the Union Grove Facility, acquired
the interests of the co-developer of the equipment located at the Union Grove
Facility and significantly expanded the processing and storage capacity at the
Union Grove Facility.

         In September, 1997, the Company acquired certain assets and liabilities
of Ballast & Lamp Recycling, Inc. ("BLR"). The primary business of BLR was the
collection and storage of mercury-containing lamps and lighting ballasts for
recycling. BLR has collection facilities in Indianapolis, Indiana and Atlanta,
Georgia. The acquisition of BLR increased the Company's customer base, placed
the Company in what the Company believes are two additional strategic and
growing markets and leveraged the Company's processing capacity.

         In May 1998 the Company completed the acquisition of certain assets and
liabilities relating to the mercury remediation, recycling and refining business
of Mercury Refining Company, Inc., ("MERECO"). MERECO, located in Albany, New
York, had been one of the nation's leading mercury recovery companies for over
40 years. The acquired assets include an 888 drum permitted storage facility,
MERECO's existing customer list and certain processing technology and equipment.
This acquisition significantly increased the Company's storage capacity and
expanded the Company's customer base.

INDUSTRY

         MERCURY AND ITS HAZARDS. Mercury has long been recognized as a valuable
metal because of its ability to expand and contract evenly through various
temperature ranges and its ability to be combined



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with other metals. The Company believes that mercury is presently utilized
principally in three applications in the United States:

         *     Electrical and Electronic Applications utilize mercury in
               batteries, fluorescent lamps, wiring devices and switches.

         *     Measurement and Control Instruments (thermometers and
               barometers), laboratories (testing) and Dentists (dental
               amalgams) utilize mercury in products, testing and dental
               fillings.

         *     The Chloralkali Industry utilizes mercury as the cathode in cells
               that produce chlorine and caustic soda through the electrolysis
               of brine.

     There are approximately 600 million mercury-containing lamps discarded
annually in the United States. The result is approximately 450 million pounds of
recyclable mercury-contaminated debris. Current lamp recycling efforts divert
only 12 percent (54 million pounds) of this waste for decontamination and reuse.
The remaining mercury-containing lamps are being disposed of in landfills with
other nonhazardous waste or are incinerated. Once mercury is in the environment,
combustion or biological process cannot remove it. Mercury may either seep into
the soil and then possibly into the water supply or vaporize into the atmosphere
and fall back to earth through rain. If mercury enters a lake or river through
rain or the water supply, a portion of the mercury is converted into methyl
mercury by bacteria and other chemical processes. Methyl mercury then
accumulates and concentrates as it moves up the food chain. Once in older and
larger fish, mercury measurements can be 200,000 times higher than measurements
in the same body of water. When humans and animals consume mercury-contaminated
fish, the methyl mercury is transferred to their tissues.

         In humans, mercury poisoning affects the brain, spinal cord, kidneys
and liver. Mercury affects the ability to see, taste and move and leaves a
tingling sensation in the fingers and toes. Long term exposure to mercury can
result in personality changes, stupor or a coma. Exposure of pregnant women to
mercury can affect development of the fetal brain and nervous system resulting
in children with lower intelligence, impaired hearing and poor coordination.

         The United States government has taken steps to alleviate the risks
from mercury poisoning including:

         *     Prohibitions on the sale of fish with certain levels of mercury;

         *     Publication of fish consumption advisories;

         *     Passage of the Clean Water Act requiring paper companies,
               smelters, sludge incinerators and chloralkali plants to limit the
               release of mercury into the water;

         *     Bans on uses of mercury connected with food production; and

         *     Development of draft strategy to further reduce risks to human
               health and the environment from existing and future exposure to
               priority persistent, bioaccumulative and toxic pollutants
               ("PBTs").

         The EPA enacted hazardous waste disposal regulations that require
businesses of certain size to test fluorescent and HID lamps for mercury content
prior to disposal. The regulations require that if the mercury content of lamps
exceeds a certain level, then the lamps must be treated as hazardous waste. Some
states, such as Florida, California, Wisconsin and Minnesota have enacted
regulations more rigorous than the EPA's. Recent research by the federal and
state regulatory agencies have established that almost without exception,
fluorescent and HID lamps exceed the EPA toxicity threshold. Nevertheless, these
regulations have not been stringently enforced by some state and local agencies
charged with enforcement of such regulations.

         The Company believes that federal and state governments have been
slower to react to the risks posed by fluorescent lamps and other
mercury-containing lamps because any individual lamp contains a



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relatively small amount of mercury relative to other mercury wastes and
governmental agencies have recognized the difficulty of gathering widely
dispersed fragile products such as fluorescent lamps.

         In July 1994, the EPA published a proposed rule addressing the
management of spent mercury-containing lamps. In the proposal, the EPA presented
two options for changing the regulations governing spent mercury-containing
lamps: (1) Add mercury-containing lamps to the universal waste regulations; or
(2) conditionally exempt mercury-containing lamps from regulation as hazardous
waste. The universal waste regulations allow a few high volume post consumer
hazardous wastes, such as batteries, to be managed under streamlined collection
and handling rules. In late 1998, the EPA drafted the final rule to add spent
mercury-containing lamps to the list of universal wastes, thereby reducing the
handling requirements for the lamps but not exempting them from the hazardous
waste provisions of the Resource Conservation and Recovery Act of 1976, as
amended. In December of 1998, the EPA sent the final rule to the White House
Office of Management & Budget (OMB) for review. On March 8, 1999, the OMB
finished its review and approved the rule proposed by the EPA. The new rule will
be published in the Federal Register and it is anticipated the rule will become
effective in 1999.

         The EPA's placement of fluorescent lamps under the universal waste
regulations will require generators to continue to handle lamps as a hazardous
waste. Generators will be required to either send lamps to a hazardous waste
landfill for disposal or send them for recycling. They will not be able to send
lamps to municipal landfills for disposal under the universal waste regulations.
If the EPA had excluded spent mercury-containing lamps from hazardous waste
regulations, it would have had the effect of decreasing the number of lamps sent
by generators for recycling, which in turn would have negatively impacted the
Company's lamp recycling operations.

         In addition to the disposal of fluorescent and HID lamps, the disposal
of other mercury-containing products/wastes is strictly regulated under the
Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), which is
discussed in more detail in the "Regulation" section. RCRA regulates the
generation, treatment, storage, handling, transportation and disposal of
hazardous wastes. Nearly all mercury-containing products/wastes are classified
as hazardous because they are specifically listed as a hazardous waste or
exhibit certain hazardous characteristics. State and local laws also regulate
mercury-containing products/wastes in a similar manner, with some state and
local laws being more strict then RCRA.

         The EPA's Office of Air Quality Planning and Standards and the Office
of Research and Development released the congressionally mandated study on
mercury in December 1997. The report provides an assessment of the magnitude of
U.S. mercury emissions by source, the health and environmental implications of
those emissions, and the availability and cost of control technologies. While it
is unclear what impact this study will have on future governmental legislation
and regulation, the content of the report reaffirms the Company's belief that
mercury is a danger to the environment if not recycled properly.

         The EPA in 1998 established the Persistent, Bioaccumulative Toxic
Pollutants (PBT) Project to focus further attention on reducing risks from
persistent, bioaccumulative toxic pollutants. PBTs are highly toxic, long
lasting substances that can build up in the food chain to levels harmful to
human and ecosystem health. PBTs include many familiar toxic substances such as
mercury and PCBs. There are many efforts ongoing and planned within the EPA. One
major objective of the PBT Project is to provide an organizing framework for
these actions. The Company believes the EPA is committed to using its full range
of tools and resources to address PBT issues. This will include enforcement of
laws that already target these types of pollution problems and could involve the
development of new or revised regulations.

SERVICES AND PRODUCTS

         The Company is in the business of providing mercury waste recycling
solutions to mercury waste generators of all sizes. The Company's recycling
service operations consist of the following:



<PAGE>

         MERCURY RETORTING. In 1998, approximately 55% of the Company's revenues
consisted of fees paid for retorting mercury waste to environmentally safe
levels. Retorting is the process by which mercury is separated from the
contaminated waste through the process of distilling. The Company has developed
proprietary processes that recover up to approximately 99.99% of available
mercury from the processed waste. The residual mercury levels in the processed
waste satisfy current federal and state environmental standards for mercury
waste and require no further treatment as hazardous waste.

         The Company's mercury retorting facility in Union Grove, Wisconsin
utilizes two primary processes to retort mercury waste. The Company utilizes a
high capacity "continuous flow" oven that is designed to retort calcium
phosphate powder and other granular material such as soil and other items up to
3 inches in diameter. The Company also utilizes three high capacity electrically
powered stationary ovens. Each stationary oven can retort up to 30 drums at a
time. While the Company's continuous flow oven works well with granular
compounds, the stationary oven is able to process certain larger
mercury-containing items such as switches, batteries, thermostats, and filters.
The electrically powered ovens heat the mercury bearing waste to a temperature
sufficient to release the mercury from the waste material and vaporize it.
Negative airflow pulls the vapors through a series of condensers where vaporized
mercury is returned to liquid form. The air flow proceeds through carbon filters
and a wet scrubber to remove any other potential impurities resulting from the
heating process. Mercury recovered in the retorting process is refined and sold
to laboratories, instrument manufacturers, dental supply companies and
mercury-containing lamp manufacturers.

         The Company has significantly increased its retorting capacity in 1998,
which the Company believes has positioned the Company for future growth. With
this large capacity, the Company can secure large remediation projects and
process customer waste in a timely manner. In particular, the Company's
continuous flow oven can process material in less than one hour, while
conventional retorting methods take approximately 24 hours.

         LAMP RECYCLING. The Company operates the Roseville Recycling Facility
located in Roseville, Minnesota, a St. Paul suburb, which utilizes a Model 2000B
to recycle fluorescent lamps.. In March 1998, the Company added lamp recycling
capability to its Union Grove Facility by developing and installing a Model 3000
lamp recycling machine, a second generation model of the 2000B. The lamp machine
was installed in Union Grove to increase lamp processing capacity to support
sales efforts in local markets and to reduce the costs of transporting lamps
from its Indianapolis and Atlanta facilities. To further reduce transportation
costs and due to growth in the southeast markets, the Company is in the process
of expanding the Atlanta facility to add lamp storage/processing and waste
storage capability as discussed above.

         Fluorescent lamps are transported to the Company's facilities using a
combination of Company-owned trucks and independent carriers that pick up
fluorescent lamps directly from the Company's customers. Fluorescent lamps
received at the Company's Indianapolis and Atlanta facilities are then
consolidated for shipment to either the Roseville or Union Grove Facilities on a
weekly basis. Fluorescent lamps received at the Roseville and Union Grove
Facilities are then staged for processing.

         Fluorescent lamps are manually placed onto a conveyor belt that feeds
the lamps into an enclosed machine. The Model 2000B and 3000 operate under
negative air flow to limit the escape of mercury vapors. The lamp recycling
machines break the lamps and separates the debris into three principal
components: the broken glass, the aluminum endcaps and the mercury-laced calcium
phosphate powder. Before the glass or aluminum endcaps remaining after
processing can leave the facility they must be independently tested for mercury
content and pass state regulatory standards. The mercury-laced calcium phosphate
powder is retorted at the Union Grove Facility. Any mercury that evaporates
within the machine during lamp processing is captured in hepa and carbon
filters. These filters are also retorted at the Union Grove Facility.

         In addition to the collection and recycling of fluorescent lamps, the
Company handles related types of waste including PCB and non-PCB ballasts.
Ballasts are an integral component of the fluorescent


<PAGE>

light fixture. Ballasts manufactured before 1979 contain PCB's. The Company
stores and processes both PCB and non-PCB lighting ballasts in a separate
building adjacent to the Union Grove facility.

         WASTE STORAGE FACILITIES. Because governmental regulations limit the
amount of mercury waste that can be present at a retorting facility at any given
time, many generators of mercury waste are required to store such waste in a
temporary hazardous waste storage facility prior to shipment to a retorting
facility or permanent hazardous waste disposal site.

         In 1997, the Company was unable to store mercury-containing waste at
the Union Grove Facility for more than a 24 hour period due to governmental
regulations which caused logistical problems for the Company regarding the
scheduling and delivery of mercury waste. To address this limitation, the
Company expanded the Union Grove Facility, which included an area to store
approximately 181 drums of hazardous mercury waste. In May 1997, the Company
applied for a hazardous waste storage permit for 181 drums of storage from the
Wisconsin Department of Natural Resources (WDNR). In September of 1998 the
Company submitted a new permit application which requested 829 drums of waste
storage. The new permit application is currently under review by the WDNR. In
March 1998, the WDNR granted the Company a variance that allows the Company to
store up to 181 drums of hazardous waste at the facility. The variance is to
remain in effect until the WDNR issues the final hazardous waste storage permit.

         In October 1997, the Company established a 10-day mercury waste
transfer and storage facility in Kenosha, Wisconsin (approximately 15 miles from
the Union Grove Facility) that has a storage capacity for approximately 250
drums of universal and hazardous waste. The acquisition of BLR also provided
10-day mercury waste transfer and universal waste collection facilities in
Indianapolis, Indiana and Atlanta, Georgia. In January 1999, the Company
submitted a hazardous waste storage permit application to the Georgia Department
of Natural Resources. The permit application requests storage for up to 360
drums of waste at the Company's Atlanta Facility.

         In May 1998, the Company added significant hazardous waste storage
capability in the northeast by acquiring MERECO's permitted hazardous waste
storage facility that has the capacity to store up to 888 drums of hazardous
waste.

         EQUIPMENT SALES AND LEASING. The Company is currently not actively
marketing the sale or lease of its lamp processing equipment. Development and
sales activity in this area will depend on future market demand and
opportunities that are largely driven by environmental regulation.

RESEARCH AND DEVELOPMENT

         Research and development expense was $12,908 for the year ended
December 31, 1998 compared to $137,137 for the year ended December 31, 1997. The
significant decrease in the Company's development activities in 1998 was due to
the completion of development of new lamp processing equipment, primarily the
Model 3000.

COMPETITION AND MARKET

         The mercury recycling industry is highly competitive. The demand for
mercury recycling services is highly dependent upon governmental regulations,
the federal and state enforcement of regulations and the perception by mercury
waste generators of the need for the Company's services.

         MERCURY RETORTING. The Company competes with several well established
mercury retorters, including Bethlehem Apparatus, a Pennsylvania-based company
that has been operating since 1955; Advanced Environmental Recycling
Corporation, located in Pennsylvania; Salesco, located in Arizona; and
Recyclights, a Minneapolis-based firm with retorting operations in Minnesota.

         The Company believes that the amount of mercury waste treated each year
has historically exceeded the retorting capacity, causing retorting prices to be
high relative to landfill and incineration alternatives. However, now with its
increased retorting capacity, the Company believes it can offer


<PAGE>

mercury waste generators a competitive pricing alternative when compared to
landfilling or incineration and a reduction in potential environmental
liability.

         LAMP RECYCLING. Approximately 600 million mercury-containing lamps are
sold annually in the United States. Industry experts estimate that approximately
12% of these lamps are recycled. There are several mercury lamp recyclers across
the country, none of which has yet established a national presence. These
include Advanced Environmental Recycling Corporation/Mercury Technologies
International which has facilities in California, Pennsylvania, New Jersey and
Florida; Lighting Resources, with operations in Arizona, California and Indiana;
Salesco, with operations in Arizona; Global Recycling Technologies, with
operations in Massachusetts and Recyclights, with operations in Minnesota,
Florida and Ohio.

MARKETING AND SALES

         MARKETING. Retort customers include public utilities, electrical
contractors, hazardous waste managers, mercury lamp recyclers, hazardous waste
management facilities (including both final disposal and transfer and storage
facilities), electrical manufacturers of lights, batteries and switches, amalgam
manufacturers and chemical manufacturers. Potential lamp recycling customers
include those listed above and any entity that has a high quantity of
fluorescent lamps, such as property management companies, large distributors,
hotel chains, hospitals etc. The Company informs potential customers that the
Company's mercury recycling services are designed to significantly eliminate
potential environmental financial liability associated with disposal of
mercury-bearing materials. The Company also initiates mercury waste collection
programs with hospitals, schools, electrical contractors and dentists. The
Company competes in each of its markets with respect to price, service, product
quality and the timeliness of its mercury retorting and lamp recycling
capabilities.

         SALES STRATEGIES. The Company promotes its services and products
through a national direct sales force. The sales force consists of separate
specialized technical sales managers in the areas of mercury retorting services
and lamp recycling services. A customer who recycles lamps may become a customer
for mercury retorting of other wastes. Due to the ongoing generation of waste
material by Company customers, the sales and marketing efforts benefit
substantially from the ability to utilize a building block approach.

         ADVERTISING AND PROMOTION. The Company's direct sales activities are
supported by targeted direct mail activities to waste generators, waste brokers,
waste transporters, permitted waste storage facilities, lighting contractors,
lamp distribution organizations and various other related business entities. Due
to the identifiable nature of target customers, expensive mass media advertising
is not necessary. The Company also displays its products and services at various
regional and national trade shows on a regular basis.

REGULATION

         INTRODUCTION. The Company is currently subject to extensive and
evolving federal, state and local environmental laws and regulations that have
been enacted in response to technological advances and increased concern over
environmental issues. These regulations not only strictly regulate the conduct
of the Company's operations but are also related directly to the demand for many
of the services offered by the Company.

         The regulations affecting the Company are administered by the EPA and
various other federal, state and local environmental, zoning, health and safety
agencies. The Company believes that its facilities are currently in compliance
with all applicable federal, state and local laws, permits, orders and
regulations. The Company believes there will continue to be increased
regulation, legislation and regulatory enforcement actions related to the
hazardous waste and recycling industry. As a result, the Company attempts to
anticipate future regulatory requirements and to plan accordingly to remain in
compliance with the regulatory framework.


<PAGE>

         In order to develop and operate a fluorescent lamp processing facility,
a mercury retorting facility or other hazardous waste related facilities, the
Company must typically go through several governmental review processes in order
to obtain one or more permits/licenses, zoning or other land use approvals.
Obtaining these permits/licenses and zoning or land use approvals is difficult,
time consuming and expensive and is often opposed by various local elected
officials and citizens' groups. Once obtained, operating permits generally must
be periodically renewed and are subject to fees, modification and revocation by
the issuing agency.

         In order to transport hazardous wastes, it is necessary for the Company
to possess one or more permits/licenses from state or local authorities. These
permits must be periodically renewed and are subject to fees, modification and
revocation by the issuing agency. The Company, as a nationwide transporter of
hazardous waste, is subject to strict hazardous waste transportation guidelines
under federal and state Department of Transportation (DOT) regulations. The
Company is governed by both the Hazardous Materials and Federal Motor Carrier
Safety Regulations contained in Title 49 of the Code of Federal Regulations. An
accident during the transportation of hazardous waste or the failure to comply
with any DOT regulation could expose the Company to liability. An unsatisfactory
transportation rating from the DOT could severely limit the Company's ability to
transport hazardous waste.

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

         THE RESOURCE CONSERVATION AND RECOVERY ACT (RCRA) OF 1976, AS AMENDED.
RCRA regulates the generation, treatment, storage, handling, transportation and
disposal of hazardous waste. All Company facilities are governed by RCRA
regulations. RCRA divides solid waste into two groups, hazardous and
nonhazardous. Wastes are generally classified as hazardous if they (i) either
(a) are specifically included on a list of hazardous wastes or (b) exhibit
certain hazardous characteristics and (ii) are not specifically designated as
nonhazardous. Wastes classified as hazardous under RCRA are subject to much
stricter regulation than wastes classified as nonhazardous.

         The EPA regulations issued under Subtitle C of RCRA impose a
comprehensive "cradle to grave" system for tracking the generation,
transportation, treatment, storage and disposal of hazardous wastes. The
Subtitle C regulations provide standards for generators, transporters and
disposers of hazardous wastes, and for the issuance of permits for sites where
such material is treated, stored or disposed. Subtitle C imposes detailed
operating, inspection, training and emergency preparedness and response
standards, as well as requirements for manifesting, record keeping and
reporting, facility closure and financial responsibilities. These regulations
require the Company to demonstrate financial assurance for sudden and non sudden
pollution occurrences and for future facility closure costs. The Company
believes that its hazardous waste transportation activities and its facilities
comply in all material respects with the applicable requirements of Subtitle C
of RCRA.

         THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY
ACT (CERCLA) OF 1980, AS AMENDED. CERCLA established a regulatory and remedial
program intended to provide for the investigation and cleanup of facilities from
which there has been, or is threatened, a release of any hazardous substance
into the environment. CERCLA's primary mechanism for remedying such problems is
to impose strict joint and several liability for cleanup of facilities on
current owners and operators of the site, former owners and operators of the
site at the time of the disposal of the hazardous substances, as well as the
generators of the hazardous substances and the transporters who arranged for
disposal or transportation of the hazardous substances. The costs of a CERCLA
investigation and cleanup can be very substantial. Liability under CERCLA does
not depend upon the existence or disposal of "hazardous waste" as defined by
RCRA, but can also be founded upon the existence of even very small amounts of
the more than 700 "hazardous substances" listed by the EPA, many of which can be
found in household waste. If the Company were to be found to be a responsible
party for a CERCLA cleanup, the enforcing authority could hold the Company, or
any other generator, transporter or owner or operator of the facility,
completely responsible for all investigative and remedial costs even if others
may also be liable. CERCLA also authorizes the imposition of a lien in favor of
the United States upon the real property subject to, or


<PAGE>

affected by, a remedial action for all costs for which a party is liable. CERCLA
provides a responsible party with the right to bring legal action against other
responsible parties for their allocable share of investigative and remedial
costs. The Company's ability to get others to reimburse it for their allocable
share of such costs would be limited by the Company's ability to find other
responsible parties and prove the extent of their responsibility and by the
financial resources of such other parties. CERCLA requires the EPA to establish
a national priorities list of sites at which hazardous substances have been or
are threatened to be released into the environment. Because the Company
participates in the hazardous waste industry, it bears an enhanced risk of being
deemed a responsible party for hazardous waste cleanup.

         THE CLEAN AIR ACT OF 1976, AS AMENDED. The Clean Air Act provides for
regulation, through state implementation of federal requirements, of the
emission of air pollutants from any operating facility. The Clean Air Act
Amendments of 1990 broadened the scope of the law to control air pollution from
additional and often smaller industries. Federal and state air quality
regulations may apply to any facility emitting something into the air. The
amount of air pollution released generally determines whether compliance is
necessary with air quality regulations. Any of the Company's facilities that
have air emissions are in some way governed by federal and state air emission
regulations, compliance agreements or permits and licenses. Some of the
Company's facilities have air emissions that are governed by federal and state
air emission regulations, compliance agreements or permits and licenses. Failure
to comply with air emission standards at any of the Company's facilities could
have a severe impact on the Company ability to operate that facility. Failure to
correct the air emission problems could lead to curtailed operations, fines and
penalties or even closure of the Company facility.

         THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970. The Occupational Safety
and Health Act of 1970, as amended, authorizes the Occupational Safety and
Health Administration (OSHA) to promulgate occupational safety and health
standards. Several of these standards apply to many of the operations at all
Company facility locations. OSHA regulations set standards for employee
protection, including medical surveillance, the use of respirators, protective
clothing, hearing protection and personal protective equipment. OSHA specifies a
maximum permissible exposure level for hazardous materials, including mercury.
Company employees are required to receive hazardous waste training that includes
training to respond to an accidental spill or release of a hazardous material
during processing, recycling or transportation activities. Failure to comply
with OSHA standards could lead to fines or penalties. The inability to
immediately correct a serious problem could lead to curtailed operations or even
closure until the problem is corrected.

         EMERGENCY PLANNING AND COMMUNITY RIGHT-TO-KNOW ACT OF 1986 (SARA TITLE
III). This free-standing law is designed to address concerns about the effect of
chemical releases on communities. Section 312 contains community right-to-know
provisions that grant local emergency response personnel and the general public
access to information on chemicals present in local facilities. Local
participation varies, however, any of the Company's facilities may be subject to
this law and may also be subject to penalties for noncompliance.

         TOXIC SUBSTANCES CONTROL ACT (TSCA) OF 1976. The act established a
system for identifying and evaluating environmental and health effects of
existing chemicals and any new substances entering the U.S. market. TSCA
provides for regulation of chemical substances and mixtures that present an
unreasonable risk of injury or health to the environment. As part of its
business, the Company may handle and/or transport substances (Polychlorinated
Biphenyls -- PCBs) subject to TSCA regulations. All of the Company's facilities
are currently subject to these regulations since it transports, consolidates,
stores and ships PCB lighting ballasts for recycling. Failure to comply with any
of the handling, storage, record keeping or transportation requirements could
lead to fines or penalties for the Company.

         STATE AND LOCAL REGULATIONS. Each state in which the Company currently
operates, or may operate within in the future, has laws and regulations
governing the generation, storage, treatment, recycling, handling,
transportation and disposal of solid and hazardous waste. States also regulate
water and air pollution and, in most cases, the siting, design, operation,
maintenance and closure of hazardous waste management facilities for any of the
activities previously stated. These regulations are in addition to the


<PAGE>

federal regulations and state regulations may be even more restrictive than the
federal regulations. Failure to comply with any of the regulations could subject
the Company to curtailed operations, fines and penalties or even closure of
Company facilities.

         Within Minnesota, the primary responsibility for environmental programs
is shared by the Minnesota Pollution Control Agency (MPCA) and the Minnesota
Attorney General's Office. The MPCA is responsible for developing environmental
regulations, issuing permits, investigating violations of environmental
requirements and initiating administrative enforcement actions. The Company's
Roseville Lamp Recycling Facility is subject to all of Minnesota's hazardous
waste regulations and rules. The Company has entered into a Facility Compliance
Agreement with the MPCA because there is currently no legislation which grants
the MPCA the authority to license/permit this type of facility. The Facility
Compliance Agreement sets standards under which the facility must operate. The
Attorney General is responsible for investigating criminal violations of
environmental laws, representing the MPCA in administrative hearings and
initiating civil judicial enforcement actions.

         In Wisconsin, the primary responsibility for environmental programs
rests with the Wisconsin Department of Natural Resources ("WDNR"). The WDNR is
responsible for developing environmental regulations, issuing permits,
investigating violations of environmental requirements and initiating
administrative actions. WDNR environmental regulations are contained within the
Wisconsin Administrative Code. The Union Grove Retorting Facility is subject to
all of the WDNR's environmental regulations. The Company's Indiana facility is
regulated by the Indiana Department of Environmental Management and the Georgia
facility is subject to regulations administered by the Georgian Department of
Natural Resources. The Company's New York facility is subject to regulations
administered by the New York Department of Environmental Conservation.

         In addition to state regulations, counties and municipalities may issue
operating licenses or permits to operate Company facilities. Failure to comply
with these requirements may also result in curtailed Company operations, fines
and penalties or even closure of Company facilities. The Company's Roseville
Lamp Recycling Facility is located in Ramsey County, Minnesota and some programs
at the facility are regulated by the county. The Special Hazardous Waste Program
is licensed and regulated by Ramsey County which has been granted authority by
the MPCA to regulate such program.

         Many counties and municipalities also have ordinances, local laws and
environmental regulations affecting the Company's operations. These include
zoning and health measures that limit any type of hazardous waste management
facility to specified sites or activities. There has been an increasing trend at
the state and local level to mandate and encourage waste reduction at the source
and to provide waste recycling and limit or prohibit the disposal of certain
types of solid wastes in landfills.

         Many states including Wisconsin and Minnesota, have programs that
require investigation and cleanup of sites containing hazardous materials in a
manner comparable to CERCLA. These statutes impose requirements for
investigation and cleanup of contaminated sites and liability for costs and
damages associated with such sites and some provide for the imposition of liens
on property owned by responsible parties.

         The primary cost of complying with the above laws and regulations is
the establishment of assurance funds which are available to cover processing and
closure costs related to the Company's facilities. In certain jurisdictions, the
Company has funded these obligations with cash held in restricted accounts and
in other jurisdictions this obligation has been funded with insurance. At
December 31, 1998, the Company has approximately $91,000 deposited in closure
trust funds. In addition, the Company had ongoing regulatory permit related
costs that totaled approximately $36,000 in 1998.






<PAGE>

INTELLECTUAL PROPERTY

         The Company has no patents on its lamp recycling equipment or on its
retorting technology. There is significant risk that third parties will
independently develop similar technology. Although the Company has applied to
the United States Patent and Trademark Office for protection of certain aspects
of its technology relating to its lamp recycling and retorting equipment, no
assurance can be given that patent protection will be obtained. There is also no
assurance that any of the Company's intellectual property rights will be
enforceable, even if patented or registered, against any prior users of similar
intellectual property or that the Company will be successful in defending itself
against a third party claiming that the Company's technologies violates an
existing patent. Any such claim, with or without merit, could also be time
consuming and costly to defend.

EMPLOYEES

         As of March 10, 1999 the Company employed 51 persons, all of which are
full-time. No employee is covered by a collective bargaining agreement, and the
Company has never experienced an organized work stoppage, strike or labor
dispute. The Company believes that its relationships with its employees are
good.

ITEM 2. PROPERTIES

         The Company's corporate headquarters are located in Mankato, Minnesota.
The Company leases approximately 1,600 square feet of office space pursuant to a
lease expiring in January, 2001. The Company leases its 6,500 square foot
Roseville facility pursuant to a lease expiring in March, 2002. The Company
leases its 25,000 square foot Union Grove facility pursuant to a lease expiring
in May, 2007, with four renewal options for five years each. The Company leases
its 5,000 square foot Kenosha storage facility pursuant to a month to month
lease. The 10,000 square foot Indianapolis facility is rented pursuant to a
lease expiring in December, 2001. The Company leases its 12,750 square foot
Atlanta storage facility pursuant to a lease expiring in February, 2002, with
one three year renewal option. The Company leases its 2,600 square foot Albany
storage facility pursuant to a lease which expires in May 2001, with three
renewal options totaling nine years.

ITEM 3. LEGAL PROCEEDINGS

         In February 1999, the Company received a Notice of Violation from the
WDNR alleging violation of certain state hazardous waste regulations relating to
its Union Grove Facility. The WDNR's letter identified several alleged
violations and informed the Company it has the authority to impose monetary
penalties. The Company has responded to these violations and is working with the
WDNR towards resolution. It is not known at this time if the Notice of Violation
will result in a legal complaint, monetary penalty, or any other future
regulatory ramification that would have a material adverse effect on the
Company's business.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

         None



<PAGE>






                                     PART II

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

         The Company's Common Stock has been traded on the NASDAQ Small Cap
Market since March 5, 1997, the closing date of its initial public offering. The
following table sets forth the range of high and low closing sales prices for
the Company's Common Stock by NASDAQ for the periods indicated below:



-------------------------------------------------------------------------------
                               Fiscal 1998                 Fiscal 1997
-------------------------------------------------------------------------------
                            High          Low           High          Low
                            ----          ---           ----          ---
First Quarter (1)          $4.00         $2.25         $5.125        $4.75
Second Quarter             $5.00         $3.375        $5.25         $4.375
Third Quarter              $4.875        $3.625        $5.125        $4.625
Fourth Quarter             $4.375        $2.875        $5.125        $2.094
-------------------------------------------------------------------------------


(1) The 1997 period represents the period from March 5, 1997 to March 31, 1997.

         As of March 10, 1999, there were approximately 450 record holders of
the Company's Common Stock. The Company has not paid dividends on its Common
Stock, and the Board of Directors presently intends to retain all earnings, if
any, for use in the Company's business for the foreseeable future.


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

         The following discussion should be read in connection with the
Company's consolidated financial statements and related notes thereto included
within this document.

RESULTS OF OPERATIONS

         OVERVIEW. The Company provides services to mercury waste generators to
reduce the risk of liability associated with mercury waste disposal. The Company
currently operates a mercury waste retorting facility in Union Grove, Wisconsin,
a facility for recycling and storing fluorescent and other mercury-containing
lamps in Roseville, Minnesota and mercury waste storage and collection
facilities in Kenosha, Wisconsin, Indianapolis, Indiana, Atlanta, Georgia and
Albany, New York. In March, 1998, the Company added lamp recycling, storage and
additional retorting capability at its Union Grove Facility.

         On May 11, 1998 the Company completed the acquisition of certain assets
and liabilities relating to the mercury remediation, recycling and refining
business of Mercury Refining Company, Inc., ("MERECO"). MERECO, located in
Albany, New York, had been one of the nation's leading mercury recovery
companies for over 40 years. The acquired assets include an 888 drum permitted
storage facility, MERECO's existing customer list and certain processing
technology and equipment. This acquisition significantly increased the Company's
storage capacity and expanded the Company's customer base.

         REVENUES. Total revenues were $6,299,396 for the year ended December
31, 1998 compared to $2,862,208 for the year ended December 31, 1997, an
increase of $3,437,188 or 120%


<PAGE>

         Mercury retorting revenues, which exclude any recovery for business
interruption insurance claims discussed below, were $3,464,452 for the year
ended December 31, 1998 compared to $1,428,960 for the year ended December 31,
1997, an increase of $2,035,492 or 142%. The Company has continued to experience
mercury retorting revenue growth resulting from what the Company believes is the
increasing impact of its national sales force implemented in 1997, coupled with
increased processing and storage capability at the Union Grove Facility and
revenues generated and storage acquired in the MERECO acquisition. The Company
has expanded its Union Grove Facility which significantly increased retorting
capacity, added lamp processing capacity and added hazardous waste storage
capability. In March 1998, the WDNR granted the Company a variance which will
allow the Company to store up to 181 drums of hazardous waste. The variance is
to remain in effect until the WDNR issues the final hazardous waste storage
permit. This added capability has allowed the Company to pursue larger projects.
In 1998, the Company secured a number of large contracts, the largest of which
exceeded $500,000. This growth and expansion has been achieved in spite of
business interruptions that negatively affected revenues in both the fourth
quarters of 1998 and 1997.

         Lamp Recycling revenues were $2,834,944 for the year ended December 31,
1998 compared to $1,433,248 for the year ended December 31, 1997, an increase of
$1,401,696 or 98%. This increase is due primarily to the acquisition of certain
assets of Ballast & Lamp Recycling, Inc. in September, 1997 which expanded the
Company's lamp recycling market in the Midwest and Southeast.

         For the year ended December 31, 1998, the Company had one customer that
accounted for 12% of revenues. The Company believes it has not been and will not
be economically dependent on this customer.

         COST OF REVENUES. Cost of revenues consists primarily of direct labor
costs to process the waste, transportation costs and direct facility overhead
costs. Gross profit as a percent of revenue was 51% and 45% for the years ended
December 31, 1998 and 1997, respectively.

         Mercury retorting gross profit percentages were 55% for each of the
years ended December 31, 1998 and 1997. While the increased revenues in the 1998
more efficiently utilized the largely fixed cost structure of the Union Grove
Facility, margins remained the same due primarily to some price erosion caused
by competitive pressures and the continued expansion of the Union Grove Facility
to support future revenue growth. Margins in both 1998 and 1997 were negatively
affected by the business interruptions experienced. Lamp recycling gross profit
percentages were 42% and 30% for the years ended December 31, 1998 and 1997,
respectively. The improved margins in the 1998 periods are due to i) increased
sales, resulting in more efficient utilization of lamp processing capacity and
ii) a 1998 focus on higher margin products and services.

         RESEARCH AND DEVELOPMENT. Research and development expense was $12,908
for the year ended December 31, 1998 compared to $137,137 for the year ended
December 31, 1997. The significant decrease in the Company's development
activities in 1998 was due to the completion of development of new lamp
processing equipment, primarily the Model 3000.

         SALES AND MARKETING. Sales and marketing expense was $1,174,228 for the
year ended December 31, 1998 compared to $940,300 for the year ended December
31, 1997, an increase of $233,928 or 25%. As a percent of revenues, sales and
marketing expense was 19% and 33% for the years ended December 31, 1998 and
1997, respectively. The increase in expense was due primarily to sales staff
acquired through business acquisitions, increased sales commissions and one-time
consulting and travel costs related to transitioning MERECO customers.

         GENERAL AND ADMINISTRATIVE. General and administrative expense was
$1,899,267 for the year ended December 31, 1998 compared to $1,262,879 for the
year ended December 31, 1997, an increase of $636,388 or 50%. As a percent of
revenues, general and administrative expense was 30% and 44% for the years ended
December 31, 1998 and 1997, respectively. The increase in administrative expense
in 1998 was principally due to increased amortization resulting from business
acquisitions, personnel investments


<PAGE>

made to support the Company's growth, and professional fees and other costs
associated with being a public company.

         BUSINESS INTERRUPTIONS. In September 1997, the Company had an
electrical power problem that caused a short and took both of its ovens out of
production at its Union Grove facility causing a seven-week production
interruption. The Company has property and business interruption insurance and
filed its claim in March, 1998. This claim was settled in September 1998 for
approximately $663,000. As a result of this claim, the Company incurred expenses
of $110,719 in 1997 and recorded a net recovery of $495,428 in 1998. The 1998
net recovery consists of the gross proceeds received from the insurance company,
net of direct expenses incurred in 1998 consisting primarily of equipment repair
costs and professional fees.

         On October 14, 1998, processing at the Union Grove Facility was
interrupted after the Company received and mistakenly processed three drums of
labeled mercury batteries that contained a small quantity of lithium batteries.
The lithium batteries reacted in one of the Company's ovens, forcing open the
oven. While no one was injured and there was no fire or structural damage, the
incident necessitated an extensive clean up within the building. The Company,
working closely with the WDNR, has revised operating procedures to include
expanded battery sorting protocols and additional notification to customers
regarding acceptance and packaging of materials. Processing resumed on November
9, 1998 after completion of the clean up.

         The Company experienced a loss of revenue due to this incident and as a
result, the Company filed a business interruption insurance claim in February
1999. The claim, which is in excess of $750,000, seeks recovery of expenses
incurred to repair the equipment damage and clean up the facility as well as for
lost revenue during the interruption period. For the year ended December 31,
1998, the Company recorded a net charge of $50,422 related to this incident
which consisted of repair and clean up expenses incurred, net of amounts
received to date from the insurance company of $250,000. While the Company
believes it has a reasonable basis for making its claim, the total amount
recovered on the claim and related timing will ultimately be determined by
settlement with the insurance company. The Company will record a final recovery
on the claim upon reimbursement by the insurance company.

         In January 1999, the U. S. Occupational Safety and Health
Administration ("OSHA") cited the Company for alleged violations of various OSHA
standards at its Union Grove Facility with proposed penalties that were not
material. The Company has contested these violations and is currently in the
process of settlement negotiations. In February 1999, the Company received a
Notice of Violation from the WDNR alleging violation of certain state hazardous
waste regulations relating to its Union Grove Facility. The WDNR's letter
identified several alleged violations and informed the Company it has the
authority to impose monetary penalties. The Company has responded to these
violations and is working with the WDNR towards resolution. It is not known at
this time if the Notice of Violation will result in a legal complaint, monetary
penalty, or any other future regulatory ramification that would have a material
adverse effect on the Company's business. While the Company believes it has
taken all necessary steps to address these regulatory concerns, the October 1998
interruption and related regulatory issues have and may continue to have a
short-term negative impact on revenue growth and profitability.

         INTEREST INCOME AND EXPENSE. Interest income was $14,150 and $69,899
for the years ended December 31, 1998 and 1997, respectively. The decrease in
1998 was due to the decrease in cash and cash equivalents used to fund the
Company's expansion in 1997 and 1998. Interest expense was $172,597 for the year
ended December 31, 1998 compared to $72,001 for the year ended December 31,
1997, an increase of 140%. The 1998 increase is due to the debt incurred in
connection with the MERECO acquisition and increased line of credit borrowings.

         INCOME TAXES. There was no income tax expense (benefit) recorded in
1998 or in 1997. At December 31, 1998, the Company has recorded a valuation
allowance of approximately $361,000 on its net deferred tax assets due to the
uncertainty of their realization. The realization of these deferred tax assets
is dependent upon generating sufficient taxable income during the period that
deductible temporary differences are expected to be available to reduce taxable
income. At December 31, 1998, the Company


<PAGE>

had net operating loss carryforwards, generated since the Company became a C
Corporation, of approximately $610,000 that expire in 2012.

         NET INCOME (LOSS). Resulting from the factors discussed above, the
Company recorded net income of $391,539 in 1998 compared to a net loss of
$1,173,089 in 1997. Basic and diluted earnings per share was $0.11 in 1998
compared to a basic and diluted loss per share of $0.34 in 1997.

LIQUIDITY AND CAPITAL RESOURCES

         The Company had cash and cash equivalents of $75,015 and working
capital of $277,424 at December 31, 1998. Net cash provided by operating
activities was $578,938 for the year ended December 31, 1998, primarily
resulting from net income of $391,539 and depreciation and amortization of
$710,798, offset by an increase in receivables of $591,821 due to increased
sales and the insurance claim.

         Cash flows used in investing activities were $2,384,607 for the year
ended December 31, 1998, consisting primary of payments for capital expenditures
of $907,800 and the cash portion of the purchase price of MERECO of $1,516,517.
The capital expenditures for the period relate primarily to the expansion of the
Union Grove Retorting Facility. The Company expects equipment expenditures to
significantly decrease in 1999.

         Cash provided by financing activities were $1,100,739 for the year
ended December 31,1998, consisting of proceeds of $1,200,000 from a term loan
used to fund the MERECO acquisition, borrowings of $220,000 under the Company's
line of credit and proceeds received on exercise of stock options of $8,000,
offset by payments on long-term debt of $327,261.

         In conjunction with the acquisition of MERECO in May 1998, the Company
replaced its $600,000 revolving credit promissory note with Brad J. Buscher, its
Chairman of the Board and Chief Executive Officer, with a $2,000,000 loan
borrowed from Bankers American Capital Corporation ("BACC"), a corporation
wholly owned by Brad J. Buscher. The $2,000,000 loan consists of a $1,200,000
term loan used to fund the MERECO acquisition and an $800,000 revolving credit
loan to be used for working capital purposes. The term loan has a two-year term
requiring quarterly payments, commencing on September 1, 1998, of $60,000 plus
interest with the balance due in May 2000 and the revolving credit loan has a
one-year term. Borrowings under the loans bear interest at 6% over the prime
rate and are secured by all Company assets. The Company plans to renew the
revolving credit loan in May 1999 under similar terms. At December 31, 1998,
line of credit borrowings totaled $220,000.

         The Company's capital requirements will be significant for 1999 to fund
operations, planned capital expenditures and potential acquisitions. The Company
anticipates that its availability under its revolving credit loan, the proceeds
from settlement of its outstanding insurance claim and cash generated by its
operations will be sufficient to fund its working capital needs and capital
expenditures for at least 12 months, excluding any additional business
acquisitions. In addition to capital needed for any potential acquisitions, if
the Company's business grows more rapidly than anticipated or if anticipated
revenue increases do not materialize, the Company may require additional
capital. There can be no assurance that additional financing will be available
at all or that, if available, such financing would be obtainable on terms
favorable to the Company.

YEAR 2000 COMPLIANCE

         The Company has completed several tasks related to year 2000 compliance
and is on schedule to complete the remaining tasks in the next six months. In
June 1998, the Company purchased, from a worldwide supplier and developer of
information systems, an enterprise-wide information system with written
assurance from the developer that the system will correctly function across the
year 2000. The Company is also in the process of upgrading its plant production
software to become year 2000 compliant. With respect to non-IT applications, the
Company is investigating issues related to the operation of each of its
facilities, such as utilities and security systems. Each facility is being
evaluated individually and


<PAGE>

upgrades to hardware and software are being addressed as they are encountered.
The Company considers risks in this area to be minimal. Through December 31,
1998, the Company has spent approximately $60,000 in upgrading its hardware and
software systems and plans to spend another $40,000 in the next six months.

         The Company is in the process of evaluating the extent to which the
Company is vulnerable to the failure of third parties to solve their own year
2000 compliance issues. Because of the diversity of sources available for the
supplies and services the Company needs to conduct its operations, the Company
believes that the year 2000 issue will not have a material adverse effect on the
Company's ability to provide its recycling services. Although the Company is not
economically dependent on any one customer, failure of a number of larger
customers to become year 2000 compliant could have an adverse effect on the
Company's financial position.

         To supplement the above initiatives, the Company intends to prepare a
contingency plan so that the Company's critical business processes can be
expected to continue to function on January 1, 2000 and beyond. The Company's
contingency plan will be structured to address the continuity of its internal
recycling processes and information systems as well as overall business
operating risks, including potential external risks with vendors or customers.
The Company anticipates the contingency plan to be substantially completed by
September 1999.

FORWARD LOOKING STATEMENTS

         Statements contained in this report regarding the Company's future
operations, performance and results, and anticipated liquidity are
forward-looking and therefore are subject to certain risks and uncertainties,
including those discussed herein. In addition, any forward-looking information
regarding the operations of the Company will be affected by the ability of the
Company to implement its marketing strategies and secure new customers,
successfully operate its Union Grove Facility without interruption, receive
favorable resolutions in the Company's present regulatory matters with OSHA and
the WDNR, secure storage facilities at the Union Grove Facility and other parts
of the country, receive its insurance claim settlement on a timely basis, manage
anticipated growth, complete its year 2000 compliance initiatives and other Risk
Factors included in the Registration Statement on Form SB-2, as amended, filed
with the Securities and Exchange Commission (File No. 333-17399.)

ITEM 7.  FINANCIAL STATEMENTS

         The consolidated financial statements of the Company are included in a
separate financial section at the end of this Annual Report on Form 10-KSB.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

         The information required by this item concerning the Company's
directors and executive officers is incorporated by reference from the Company's
Proxy Statement to be filed no later than 120 days following the close of the
fiscal year ended December 31, 1998.

ITEM 10.  EXECUTIVE COMPENSATION

         The information required by this item is hereby incorporated by
reference from the Company's Proxy Statement relating to the Company's Annual
Meeting of Shareholders.


<PAGE>

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this item is hereby incorporated by
reference from the Company's Proxy Statement relating to the Company's Annual
Meeting of Shareholders.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this item is hereby incorporated by
reference from the Company's Proxy Statement relating to the Company's Annual
Meeting of Shareholders.


                                     PART IV

ITEM 13.  EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

(a)      Financial Statements

         The financial statements filed as part of this Annual Report on Form
10-KSB are described in the Index to Consolidated Financial Statements on page
F-1.

(b)      Reports on Form 8-K

         No reports on Form 8-K were filed during the last quarter of the period
covered by this report.

(c)      Exhibits



<TABLE>
<CAPTION>
     EXHIBIT NO.                            DESCRIPTION
     -----------                            ------------

        <S>      <C>
         2        Asset Purchase Agreement by and between Mercury Waste Solutions, Inc. and U.S. Environmental,
                  Incorporated dated January 4, 1996. (1)
         2.1      Asset Purchase Agreement dated March 11, 1998 by and between MWS New York, Inc. and Mercury
                  Refining Company, Inc. (4)
         3.1      Articles of Incorporation (1)
         3.2      By-laws (1)
         10.1     Commercial Lease dated February 25, 1993 for premises located at 2007 West County Road C-2.
         10.2     Security Agreement by and between the Company and Bradley J. Buscher dated January 4, 1996. (1)
         10.3     Employment Agreement by and between Mercury Waste Solutions, Inc. and Mark Edlund dated as of
                  January 4, 1996. (1)
         10.4     Amended and Restated Distribution Rights Bill of Sale Agreement by and between the Company and
                  USE dated November 30, 1996. (1)
         10.5     Management Consulting Agreement by and between Bankers American Capital Corporation dated as of
                  January 4, 1996. (1)
         10.6     Bill of Sale Agreement dated September 12, 1996 between Resource Technology, Inc. Mercury Waste
                  Solutions, Inc. and certain other parties. (1)
         10.7     Amended and Restated Model 2000 Agreement dated September 12, 1996 between ResourceTechnology,
                  Inc. and Mercury Waste Solutions, Inc. (1)
         10.8     Mercury Waste Solutions, Inc. Stock Option Plan dated September 17, 1996. (1)
         10.9     Employment Agreement by and between Mercury Waste Solutions, Inc. and Bradley J. Buscher
                  dated as of January 22, 1997. (1)
</TABLE>


<PAGE>

<TABLE>
         <S>      <C>
         10.10    Employment Agreement by and between Mercury Waste Solutions, Inc. and Donald J. Wodek dated as of
                  January 22, 1997. (1)
         10.11    Revolving Credit Promissory Note by and between Mercury Waste Solutions, Inc. and Bradley J.
                  Buscher dated as of January 22, 1997. (1)
         10.12    Non Statutory Stock Option Agreement by and between Mercury Waste Solutions, Inc. and Donald J.
                  Wodek dated as of January 22, 1997. (1)
         10.13    Subordination Agreement by and between Bradley J. Buscher and Capital Partners, Ltd. dated
                  January 22, 1997. (1)
         10.14    Lease dated July 15, 1997 by and between Durand Properties and Mercury Waste Solutions, Inc.
                  for premises located at 21211 Durand Ave., Union Grove, Wisconsin 53182. (2)
         10.15    Employment Agreement by and between Mercury Waste Solutions, Inc. and Todd J. Anderson dated as
                  of September 6, 1997. (3)
         10.16    Incentive Stock Option Agreement by and between Mercury Waste Solutions, Inc. and Todd J.
                  Anderson dated as of November 11, 1997. (3)
         10.17    Lease dated May 11, 1998 between Mercury Refining Company, Inc. and 26 Railroad Ave., Inc. and
                  MWS New York, Inc. (a wholly-owned subsidiary of Mercury Waste Solutions, Inc. for premises
                  located at 26 Railroad Avenue, Albany New York, 12205. (5)
         10.17    Loan Agreement dated May 8, 1998 by and between Bankers American Capital Corporation and Mercury
                  Waste Solutions, Inc. (5)
         10.18    Warrant Agreement dated May 8,1998 between Bankers American Capital Corporation and Mercury Waste
                  Solutions, Inc. (5)
         11       Computation of Earnings (Loss) Per Common and Common Equivalent Share.
         23.1     Consent of McGladrey & Pullen, LLP.
         27       Financial Data Schedule.

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

         (1)      Filed as an exhibit to Registration Statement on Form SB-2, as amended (SEC file no. 333-17399)
                  filed on February 25, 1997 and incorporated herein by reference.
         (2)      Filed as an exhibit to Form 10-QSB for the third quarter of fiscal 1997, filed on November 14,
                  1997, and incorporated herein by reference.
         (3)      Filed as an exhibit to Form 10-KSB for the year ended December 31, 1997, filed on March 31, 1998,
                  and incorporated herein by reference.
         (4)      Filed as an exhibit to Form 10-QSB for the first quarter of fiscal 1998, filed on May 15, 1998,
                  and incorporated herein by reference.
         (5)      Filed as an exhibit to Form 8-K filed on May 22, 1998, and incorporated herein by reference.
</TABLE>


<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.



                                     MERCURY WASTE SOLUTIONS, INC.

                                     by:    /s/  BRAD J. BUSCHER
                                        ---------------------------------------
                                             Brad J. Buscher
                                             Chairman of the Board of Directors
                                               and Chief Executive Officer


         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 in the capacities indicated on March 30, 1999.


<TABLE>
<CAPTION>
NAME                                                TITLE
----                                                -----

<S>                                                 <C>
        /s/ BRAD J. BUSCHER                         Chairman of the Board of Directors
----------------------------------------------      and Chief Executive Officer
        Brad J. Buscher


        /s/ TODD J. ANDERSON                        Chief Financial Officer and Treasurer
----------------------------------------------
        Todd J. Anderson


        /s/ MARK G. EDLUND                          President and Director
----------------------------------------------
        Mark G. Edlund


        /s/ ALAN R. GEIWITZ                         Director
----------------------------------------------
        Alan R. Geiwitz


        /s/ JOEL H. GOTTESMAN                       Director
----------------------------------------------
        Joel H. Gottesman


        /s/ ROBERT L. ETTER                         Director
----------------------------------------------
        Robert L. Etter


        /s/ FRANK L. FARRAR                         Director
----------------------------------------------
        Frank L. Farrar
</TABLE>

<PAGE>



                                    CONTENTS

-------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT                                                F-2
-------------------------------------------------------------------------------

FINANCIAL STATEMENTS

     Consolidated balance sheets                                      F-3 - F-4

     Consolidated statements of operations                                  F-5

     Consolidated statements of shareholders' equity                        F-6

     Consolidated statements of cash flows                            F-7 - F-8

     Notes to consolidated financial statements                      F-9 - F-18

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


                                      F-1
<PAGE>


                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
Mercury Waste Solutions, Inc. and Subsidiaries
Mankato, Minnesota

We have audited the accompanying consolidated balance sheets of Mercury Waste
Solutions, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mercury Waste
Solutions, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.




Minneapolis, Minnesota
February 8, 1999



                                      F-2
<PAGE>

MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
ASSETS (NOTES 2 AND 4)                                                  1998          1997
---------------------------------------------------------------------------------------------
<S>                                                                  <C>           <C>
Current Assets
     Cash and cash equivalents                                       $   75,015    $  779,945
     Accounts receivable, less allowance for doubtful accounts of
         $55,000 in 1998 and $40,000 in 1997 (Note 9)                 1,309,757       867,936
     Insurance claim receivable (Note 6)                                150,000             -
     Other current assets                                               265,138       195,749
                                                                     ------------------------
                   TOTAL CURRENT ASSETS                               1,799,910     1,843,630
                                                                     ------------------------

Property and Equipment, at cost
     Leasehold improvements                                             420,160       198,462
     Furniture, fixtures, and equipment                                 370,279       279,039
     Plant equipment                                                  1,915,910       958,683
     Construction in progress                                            49,788       182,623
                                                                     ------------------------
                                                                      2,756,137     1,618,807

     Less accumulated depreciation                                      610,700       303,625
                                                                     ------------------------
                                                                      2,145,437     1,315,182
                                                                     ------------------------

Other Assets
     Cash restricted for closure (Note 6)                                91,278       130,988
     Intangible assets, net (Note 3)                                  2,711,897     1,540,382
                                                                     ------------------------
                                                                      2,803,175     1,671,370
                                                                     ------------------------
                   TOTAL ASSETS                                      $6,748,522    $4,830,182
                                                                     ========================
</TABLE>

See Notes to Consolidated Financial Statements.


                                      F-3
<PAGE>



<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY                                                   1998          1997
--------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>             <C>
Current Liabilities
     Line of credit (Note 4)                                                       $   220,000     $         -
     Current portion of long-term debt                                                 462,393         107,646
     Accounts payable                                                                  395,714         470,543
     Accrued expenses                                                                  337,342         269,718
     Deferred revenue                                                                  107,037          60,309
                                                                                   ---------------------------
                   TOTAL CURRENT LIABILITIES                                         1,522,486         908,216
                                                                                   ---------------------------

Long-Term Liabilities
     Long-term debt, less current portion (Note 4)                                   1,072,571         250,290
     Closure funds (Note 6)                                                             30,300          10,300
                                                                                   ---------------------------
                                                                                     1,102,871         260,590
                                                                                   ---------------------------

Commitments and Contingencies (Note 6)

Shareholders' Equity (Notes 7 and 8)
     Common stock, $0.01 par value; 10,000,000 shares authorized; 3,480,097 and
         3,464,097 shares issued and outstanding in
         1998 and 1997, respectively                                                    34,801          34,641
     Additional paid-in capital                                                      4,792,394       4,722,304
     Accumulated deficit                                                              (704,030)     (1,095,569)
                                                                                   ---------------------------
                                                                                     4,123,165       3,661,376
                                                                                   ---------------------------
                   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                      $ 6,748,522     $ 4,830,182
                                                                                   ===========================
</TABLE>


                                      F-4
<PAGE>

MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                   1998           1997
----------------------------------------------------------------------------------------------------------
<S>                                                                            <C>             <C>
Revenues (Note 9)                                                              $ 6,299,396     $ 2,862,208
Cost of revenues                                                                 3,108,013       1,582,160
                                                                               ---------------------------
                   GROSS PROFIT                                                  3,191,383       1,280,048
                                                                               ---------------------------

Operating expenses:
     Research and development                                                       12,908         137,137
     Sales and marketing                                                         1,174,228         940,300
     General and administrative                                                  1,899,267       1,262,879
                                                                               ---------------------------
                                                                                 3,086,403       2,340,316
                                                                               ---------------------------

                   OPERATING INCOME (LOSS)                                         104,980      (1,060,268)

Business interruption claim recovery (expenses), net (Note 6)                      445,006        (110,719)
Interest income                                                                     14,150          69,899
Interest expense (Note 4)                                                         (172,597)        (72,001)
                                                                               ---------------------------
                   NET INCOME (LOSS)                                           $   391,539     $(1,173,089)
                                                                               ===========================

Basic and diluted earnings (loss) per common share                             $      0.11     $     (0.34)

Weighted-average number of common and common equivalent shares outstanding:
     Basic                                                                       3,480,053       3,498,512
     Diluted                                                                     3,558,858       3,498,512
</TABLE>

See Notes to Consolidated Financial Statements.


                                      F-5
<PAGE>

MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                Common Stock         Additional                        Total
                                                            --------------------      Paid-In      Accumulated     Shareholders'
                                                             Shares      Amount       Capital         Deficit         Equity
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>          <C>        <C>             <C>             <C>
Balance, December 31, 1996                                  2,249,097    $22,491    $ 1,246,649     $  (985,446)    $   283,694
     Initial public offering of common stock, net of
         commissions and offering costs of $1,065,062
         (Note 7)                                           1,095,000     10,950      4,398,988               -       4,409,938
     Reclassification of S Corporation accumulated
         deficit to additional paid-in capital pursuant
         to termination of S Corporation status (Note 7)            -          -     (1,062,966)      1,062,966               -
     Compensation expense on stock option grants
         (Note 8)                                                   -          -          5,833               -           5,833
     Exercise of warrants (Note 7)                            120,000      1,200        133,800               -         135,000
     Net loss                                                       -          -              -      (1,173,089)     (1,173,089)
                                                            -------------------------------------------------------------------
Balance, December 31, 1997                                  3,464,097     34,641      4,722,304      (1,095,569)      3,661,376
     Exercise of stock options                                 16,000        160          7,840               -           8,000
     Compensation expense on stock option grants
         (Note 8)                                                   -          -          7,000               -           7,000
     Warrant issued in conjunction with acquisition
         (Note 7)                                                   -          -         55,250               -          55,250
     Net income                                                     -          -              -         391,539         391,539
                                                            -------------------------------------------------------------------
Balance, December 31, 1998                                  3,480,097    $34,801    $ 4,792,394     $  (704,030)    $ 4,123,165
                                                            ===================================================================
</TABLE>

See Notes to Consolidated Financial Statements.




                                      F-6
<PAGE>

MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                           1998            1997
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>             <C>
Cash Flows From Operating Activities
     Net income (loss)                                                                  $   391,539     $(1,173,089)
     Adjustments to reconcile net income (loss) to net cash provided by (used in)
         operating activities:
         Depreciation                                                                       342,988         204,168
         Amortization                                                                       367,810         167,083
         Noncash compensation                                                                 7,000           5,833
         Changes in assets and liabilities, net of effects of business acquisitions:
            Accounts and insurance receivable                                              (591,821)       (333,536)
            Other current assets                                                             21,899        (147,242)
            Accounts payable                                                                (74,829)        243,644
            Accrued expenses                                                                 67,624          94,356
            Deferred revenue                                                                 46,728          60,309
                                                                                        ---------------------------
                   NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                      578,938        (878,474)
                                                                                        ---------------------------

Cash Flows From Investing Activities
     Purchase of property and equipment                                                    (907,800)       (688,463)
     Acquisition of businesses                                                           (1,516,517)       (268,477)
     (Increase) decrease in restricted cash                                                  39,710         (56,856)
     Settlement of contingent consideration                                                       -         (75,000)
                                                                                        ---------------------------
                   NET CASH USED IN INVESTING ACTIVITIES                                 (2,384,607)     (1,088,796)
                                                                                        ---------------------------

Cash Flows From Financing Activities
     Net proceeds from issuance of common stock                                               8,000       4,528,846
     Increase in line-of-credit borrowings                                                  220,000               -
     Proceeds from long-term debt                                                         1,200,000               -
     Payments on long-term debt                                                            (327,261)     (1,736,631)
     Net proceeds on related-party demand note                                                    -         (45,000)
                                                                                        ---------------------------
                   NET CASH PROVIDED BY FINANCING ACTIVITIES                              1,100,739       2,747,215
                                                                                        ---------------------------

                   INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        (704,930)        779,945

Cash and Cash Equivalents
     Beginning                                                                              779,945               -
                                                                                        ---------------------------
     Ending                                                                             $    75,015     $   779,945
                                                                                        ===========================
</TABLE>

                                   (Continued)



                                      F-7
<PAGE>

MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                        1998          1997
-------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>             <C>
Supplemental Disclosures of Cash Flow Information
     Cash payments for interest                                                     $   171,048     $  86,025
                                                                                    =========================

Supplemental Schedules of Noncash Investing and Financial Activities
     Prepaid insurance funded by notes payable                                      $    91,288     $       -
     Closure fund liability capitalized in property and equipment                        20,000             -
     Subordinated debt satisfied by exercise of warrant                                       -       135,000
     Settlement of contingent consideration by issuance of long-term debt                     -       175,000
                                                                                    =========================

     Business acquisitions (Note 2):
         Fair value of assets acquired, primarily hazardous waste storage permit
             and customer list in 1998 and accounts receivable in 1997              $ 1,586,550     $ 191,562
         Purchase price assigned to goodwill                                            198,218       306,153
         Assumed accounts payable and accrued expenses                                        -      (229,238)
         Long-term debt issued                                                         (213,001)            -
         Issuance of warrant                                                            (55,250)            -
                                                                                    -------------------------
                   CASH PURCHASE PRICE                                              $ 1,516,517     $ 268,477
                                                                                    =========================
</TABLE>

See Notes to Consolidated Financial Statements



                                      F-8
<PAGE>


MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARIES

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

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS AND BASIS OF PRESENTATION: Mercury Waste Solutions, Inc. and
Subsidiaries (the Company) is in the business of providing mercury waste
treatment and recycling solutions to mercury waste generators of all sizes.

The Company offers the following services:

*    Mercury waste retorting: The Company operates a mercury waste retorting
     facility in Union Grove, Wisconsin (Union Grove Facility), that utilizes
     proprietary equipment to process mercury containing waste and the residual
     powder from fluorescent lamps.

*    Lamp recycling: The Company operates a recycling facility in Roseville,
     Minnesota, (Roseville Facility) and Union Grove, Wisconsin, that utilizes
     proprietary equipment to recycle mercury-containing fluorescent lamps.

*    Mercury waste collection and storage: In addition to the above recycling
     facilities, the Company has mercury waste collection facilities in Kenosha,
     Wisconsin; Indianapolis, Indiana; Atlanta, Georgia; and Albany, New York.

A summary of the Company's significant accounting policies follows:

ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount 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 may differ from those estimates.

REVENUE RECOGNITION: The Company recognizes revenue for retorting and recycling
services upon receipt and acceptance of the waste materials at its facilities.
Concurrently, the estimated recycling and disposal costs for the waste materials
are accrued. Amounts billed prior to services being performed are recorded as
deferred revenue.

PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
transactions are eliminated from the consolidated financial statements.

CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the Company
considers all cash and treasury bills, commercial paper, and money market funds
with an initial maturity of three months or less to be cash equivalents. The
Company maintains its cash in bank deposits and money market accounts which, at
times, exceed federally insured limits. The Company has not experienced any
losses in such accounts.



                                      F-9
<PAGE>

MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARIES

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

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LOSS CONTINGENCIES: From time to time, the Company may be subject to contingent
liabilities in the ordinary course of business. The Company records a liability
related to a loss contingency at the time the loss is probable and can be
reasonably estimated.

RESEARCH AND DEVELOPMENT COSTS: Expenditures for research and development are
charged to operations as incurred.

DEPRECIATION AND AMORTIZATION: Depreciation and amortization are provided using
the straight-line method based on the estimated useful lives of individual
assets over the following periods:

                                                          Years
-------------------------------------------------------------------------------
Furniture, fixtures, and equipment                               3-7
Leasehold improvements                                 Life of lease
Acquired equipment and facility rights                            10
Goodwill                                                          10
Other intangibles                                                5-7


ACCOUNTING FOR LONG-LIVED ASSETS: In accordance with Statement of Financial
Accounting Standards No. 121 (SFAS No. 121), ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, the Company
reviews its property, equipment, and intangible assets periodically to determine
potential impairment by comparing the carrying value of the property and
equipment and identified intangibles with the estimated future net undiscounted
cash flows expected to result from the use of the assets, including cash flows
from disposition. Should the sum of the expected future net cash flows be less
than the carrying value, the Company would recognize an impairment loss at the
date. An impairment loss would be measured by comparing the amount by which the
carrying value exceeds the fair value (estimated discounted future cash flows or
appraisal) of the long-lived assets and identified intangibles.

Intangibles, including goodwill not identified with impaired assets, would
continue to be evaluated to determine whether events or circumstances warrant
revised estimates of useful lives pursuant to APB Opinion No. 17. To date,
management has determined that no impairment of property, equipment, and
intangible assets exists.

EARNINGS PER SHARE: Basic per share amounts are computed, generally, by dividing
net income or loss by the weighted-average number of common shares outstanding.
Diluted per share amounts assume the conversion, exercise, or issuance of all
potential common stock instruments unless the effect is antidilutive, thereby
reducing the loss or increasing the income per common share.

The weighted-average number of shares of common stock used to compute the basic
earnings (loss) per share was increased by 78,805 shares using the treasury
stock method for the year ended December 31, 1998, for the assumed exercise of
warrants and employee stock options to acquire 689,711 shares, in computing the
diluted per share data. Shares issuable upon exercise of the warrants and
employee stock options, totaling 475,771, were not included in computing the
diluted per share data for the year ended December 31, 1997, because to do so
would have resulted in reducing the loss per share data as compared to the
amounts reported for the basic per share data.




                                      F-10
<PAGE>

MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARIES

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

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83,
common stock issued and stock options and warrants granted with exercise prices
below the assumed initial public offering (IPO) price during the 1997 period
preceding the date of the initial filing of the registration statement (March 5,
1997) have been included in the 1997 calculation of loss per share as if they
were outstanding for all periods through the effective date of the IPO.

INCOME TAXES: From inception through the date of the initial public offering,
the net loss of the Company was reported in the individual income tax returns of
the shareholders under provisions of Subchapter S of the Internal Revenue Code.
As described in Note 7, the Company completed an initial public offering of its
common stock. Upon completion of this sale, the Company's income tax status
changed, and the Company is required to pay income taxes on its earnings
subsequent to the date it became publicly owned, including deferred taxes
existing at the time that the S Corporation status terminated. At that time, the
Company adopted Statement of Financial Accounting Standards No. 109, ACCOUNTING
FOR INCOME TAXES. Under SFAS No. 109, deferred taxes are provided for on a
liability method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.

From the date of the change to C Corporation status, the Company recorded no
income tax expense. On a pro forma basis, the Company would have had no income
tax expense for the periods it was a S Corporation due to its net losses.

FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were
used to estimate the fair value of each class of financial instruments:

RESTRICTED CASH: Due to the short-term nature of the restricted cash, the
carrying amount approximates fair value.

SHORT- AND LONG-TERM DEBT: The fair value of the short- and long-term debt is
estimated based on interest rates for the same or similar debt offered to the
Company having the same or similar remaining maturities and collateral
requirements. The carrying value of the short- and long-term debt approximates
fair value.



                                      F-11
<PAGE>

MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARIES

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

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SEGMENT INFORMATION: Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION (SFAS 131). SFAS 131 requires that a company
report financial and descriptive information about its reportable operating
segments, defined as those components of an enterprise about which separate
financial information is available and is evaluated regularly by management in
deciding how to allocate resources and in assessing performance. The adoption of
SFAS 131 did not affect the Company's results of operations or financial
position. The Company believes that it has one operating segment, although
certain separate financial information by the Company's various locations is
available to management. The Company is managed as a unit; specifically, it does
not measure profit or loss or maintain assets separately for its
revenue sources.

RECLASSIFICATIONS: Certain reclassifications have been made to the 1997 amounts
to conform to the 1998 presentation.

NOTE 2. ACQUISITIONS

BLR: In September 1997, the Company acquired certain assets and liabilities of
Ballast & Lamp Recycling, Inc. (BLR) for cash of $268,477. The primary business
of BLR is the collection and storage of hazardous mercury-containing lighting
debris and ballasts for recycling. BLR has collection facilities in
Indianapolis, Indiana, and Atlanta, Georgia.

MERECO: In May 1998, the Company completed the purchase of certain assets
relating to the mercury remediation, recycling, and refining business of Mercury
Refining Co., Inc. (MERECO), located in Albany, New York. The acquired assets
included a renewable permit to operate an 888 drum permitted storage facility
under a long-term lease, certain processing and refining technology and
equipment, and MERECO's existing customer list. The purchase price for the
acquisition was $1,784,768 and consisted of $1,516,517 in cash, $213,001 in
notes payable, and $55,250 in a warrant issued.

The acquisition was accounted for as a purchase, and accordingly, the results of
operations of MERECO are included with the Company's since the date of
acquisition. The purchase price was allocated as follows:

Equipment                                           $  246,550
Hazardous waste storage permit                         650,000
Customer list                                          500,000
Other intangibles                                      190,000
Goodwill                                               198,218
                                                    ----------
                                                    $1,784,768
                                                    ==========


                                      F-12
<PAGE>


MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARIES

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

NOTE 2. ACQUISITIONS (CONTINUED)

Unaudited pro forma results of operations for the years ended December 31, 1998
and 1997, as though the Company acquired BLR and MERECO as of January 1, 1997,
are as follows:

                                                 1998          1997
-------------------------------------------------------------------------------
Revenues                                      $6,922,996   $5,535,292
Net income (loss)                                453,469     (937,654)
Basic and diluted earnings (loss) per share         0.11        (0.27)


NOTE 3. INTANGIBLES

Intangible assets consisted of the following:

                                                 1998         1997
-------------------------------------------------------------------------------
Goodwill                                      $1,077,454   $  879,236
Customer lists                                   807,260      306,153
Acquired equipment and facility rights           650,000      650,000
Permits                                          650,000           -
Other intangibles                                190,000           -
                                              ----------   ----------
                                               3,374,714    1,835,389

Less accumulated amortization                    662,817      295,007
                                              ----------   ----------
                                              $2,711,897   $1,540,382
                                              ==========   ==========


NOTE 4. DEBT ARRANGEMENTS

DEMAND NOTE: The Company has an $800,000 line of credit with Bankers American
Capital Corporation (BACC), a related entity owned by its major shareholder and
CEO, of which $220,000 was outstanding at December 31, 1998. The note is secured
by all assets of the Company, bears interest at the prime rate plus 6 percent
(7.75 percent at December 31, 1998), and expires in May 1999.

LONG-TERM DEBT:

<TABLE>
<CAPTION>
                                                                         December 31
                                                                   -------------------------
                                                                      1998           1997
--------------------------------------------------------------------------------------------
<S>                                                                <C>            <C>
Prime plus 6% term note payable to BACC, due in quarterly
  installments of $60,000, with balance due May 2000, secured
  by all company assets                                            $1,080,000     $        -
10% notes payable to related party, due in monthly
  installments of $11,550 to December 1, 2000, secured by all
  assets of the Company                                               250,289        357,936
</TABLE>


                                      F-13
<PAGE>

MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARIES

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

NOTE 4. DEBT ARRANGEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                           December 31
                                                                   --------------------------
                                                                       1998            1997
---------------------------------------------------------------------------------------------
<S>                                                                <C>              <C>
8-14% notes payable, due in varying monthly installments to
  April 2001, unsecured                                               204,675               -
                                                                   --------------------------
                                                                    1,534,964         357,936

Less current maturities                                               462,393         107,646
                                                                   --------------------------
                                                                   $1,072,571        $250,290
                                                                   ==========================
</TABLE>


Annual maturities of long-term debt as of December 31, 1998, were as follows:

Years ending December 31:
     1999                                           $  462,000
     2000                                            1,054,000
     2001                                               19,000
                                                    ----------
                                                    $1,535,000
                                                    ==========


Interest expense to related parties totaled $155,742 and $56,525 for the years
ended December 31, 1998 and 1997, respectively.

NOTE 5. INCOME TAXES

The components of deferred tax assets are as follows:

                                              December 31
                                        -----------------------
                                           1998        1997
---------------------------------------------------------------
Depreciation and amortization           $  53,000   $  60,000
Deferred revenue                           43,000      24,000
Accrued expenses and other                 20,000      16,000
Net operating loss                        245,000     423,000
Less valuation allowance                 (361,000)   (523,000)
                                        ---------------------
                                        $       -   $       -
                                        =====================


Federal income taxes are different from those which would be computed applying
the statutory federal rates to income before income taxes. The following is a
summary of the major items affecting federal and state income taxes:

                                                              December 31
                                                         -----------------------
                                                            1998        1997
--------------------------------------------------------------------------------
Federal taxes (benefit) at statutory rates               $ 137,000    $(411,000)
State taxes, net of federal deductibility                   25,000     (112,000)
Change in valuation allowance due to nonuse (use) of NOL  (178,000)     423,000
Other changes in valuation allowance                        16,000      100,000
                                                         -----------------------
                                                         $       -    $       -
                                                         =======================


                                      F-14
<PAGE>

MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARIES

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

NOTE 5. INCOME TAXES (CONTINUED)

The deferred tax assets include a valuation allowance of $361,000 to reduce the
total to an amount that management believes will ultimately be realized.
Realization of deferred tax assets is dependent upon sufficient future taxable
income during the period that deductible temporary differences and carryforwards
are expected to be available to reduce taxable income. At December 31, 1998, the
Company has net operating losses of approximately $610,000 available to offset
future taxable income through 2012.

NOTE 6. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES: The Company leases its facilities and certain equipment under
noncancelable operating leases with unrelated third parties, expiring at various
times through May 2007. In addition, the Company leases office space with a
related party substantially owned by the Company's major shareholder and CEO.
The lease calls for monthly rent of $1,250, subject to an increase in year three
of the lease, and expires in January 2002. Management believes rental payments
under this lease approximate amounts that would be payable to unrelated third
parties for similar facilities. Certain facility leases require that the Company
pay a portion of the real estate taxes, maintenance, utilities, and insurance.

Approximate future minimum rental commitments, excluding common area costs,
under these noncancelable operating leases are:

Years ending December 31:
   1999                                              $  368,000
   2000                                                 297,000
   2001                                                 242,000
   2002                                                 151,000
   2003                                                 138,000
   Thereafter                                           515,000
                                                     ----------
                                                     $1,711,000
                                                     ==========

Rental expense, including common area costs and short-term equipment rentals,
was approximately $499,000 and $283,000 for the years ended December 31, 1998
and 1997, respectively.

CONSULTING AGREEMENT: The Company has a consulting agreement effective through
January 2000 with BACC. The consulting fees are $10,000 per month. Consulting
expense for the years ended December 31, 1998 and 1997, totaled $120,000.

CLOSURE FUNDS: State environmental laws require that the Company provide
assurance funds that would be available to cover processing and closure costs
related to its facilities. In certain jurisdictions, the Company has funded this
obligation with cash held in restricted accounts, and in other jurisdictions
this obligation has been funded with insurance. As of December 31, 1998, the
Company had deposited $91,278 in restricted cash accounts. The Company also has
recorded a related liability of $30,300 representing an estimate to close its
current facilities, should closure ever be required.



                                      F-15
<PAGE>

MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARIES

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

NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)

BUSINESS INTERRUPTION CLAIMS: In September 1997, the Company had an electrical
power malfunction that took certain of its recycling equipment out of operation,
causing a business interruption for approximately seven weeks. The Company has
property and business interruption insurance and filed its claim in March 1998.
This claim was settled in September 1998 for approximately $663,000. As a
result, the Company incurred expenses of $110,719 in 1997 and a net recovery of
$495,428 in 1998. The 1998 amount consists of the gross proceeds received from
the insurance company, net of direct expenses incurred in 1998, consisting
primarily of equipment repair costs and professional fees.

In October 1998, the Company experienced another processing incident that took
certain of its recycling equipment out of operation and necessitated an
extensive cleanup inside its facility, causing a business interruption during
the fourth quarter at this facility. The Company filed its claim relating to
this incident in February 1999. The claim, which is in excess of $750,000, seeks
recovery of expenses incurred to repair the equipment damage and clean up the
facility, as well as for lost revenue during the interruption period. For the
year ended December 31, 1998, the Company has recorded a net expense of $50,422
related to this incident, which consists of repair and cleanup expenses
incurred, net of amounts received from the insurance company of $250,000, of
which $150,000 was a receivable at December 31, 1998.

REGULATORY NOTICE: In February 1999, the Company received a Notice of Violation
from the Wisconsin Department of Natural Resources (WDNR) alleging violation of
certain state hazardous waste regulations. The WDNR's letter identified several
alleged violations and informed the Company it has the authority to impose
monetary penalties. The Company responded to these violations and is working
with the WDNR towards resolution. It is not known at this time if the Notice of
Violation will result in a legal complaint, monetary penalty, or any other
future regulatory ramification that would have a material adverse effect on the
Company's business.

NOTE 7. SHAREHOLDERS' EQUITY

INITIAL PUBLIC OFFERING: In March 1997, the Company sold 1,000,000 shares of
common stock at $5.00 per share in an initial public offering, realizing net
proceeds of $4,012,017. In April 1997, the Company closed on the over-allotment
for the offering by selling an additional 95,000 shares at $5.00, realizing net
proceeds of $397,921.

Upon the closing of the initial public offering, the Company's S Corporation
election was terminated. At that time, the accumulated deficit balance of
$1,062,966, representing losses on which income tax deductions have been taken,
was reclassified to paid-in capital.



                                      F-16
<PAGE>

MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARIES

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

NOTE 7. SHAREHOLDERS' EQUITY (CONTINUED)

WARRANTS: The Company has issued warrants in conjunction with various debt and
equity transactions. A summary of warrant activity for the years ended December
31, 1998 and 1997, is as follows:

<TABLE>
<CAPTION>
                                                 1998                     1997
                                        -----------------------  ------------------------
                                                   Weighted-                 Weighted-
                                                    Average                   Average
                                        Shares   Exercise Price  Shares    Exercise Price
-----------------------------------------------------------------------------------------
<S>                                     <C>          <C>         <C>           <C>
Outstanding at beginning of period      300,771      $4.85       320,771       $3.27
     Granted                            120,000       3.13       100,000        5.46
     Exercised                                -          -      (120,000)       1.13
                                        --------------------------------------------------
Outstanding at end of period            420,771      $4.36       300,771       $4.85
                                        ==================================================

Weighted-average fair value of
     warrants granted during the year                $0.46                     $   -

</TABLE>


The 1998 warrants were granted in conjunction with the MERECO acquisition. In
conjunction with providing the debt financing for the acquisition, BACC was
granted a ten-year warrant to purchase 100,000 shares of common stock at $3.75.
Pursuant to SFAS No. 123, the fair value of the warrant was measured based on
the terms of the related debt. No value was assigned to this warrant as
management determined that the effective interest rate of the debt was
determined to be equal to the market rate for similar debt instruments with
similar risk. In addition, a shareholder of MERECO was granted a warrant for the
purchase of 20,000 shares of common stock at $0.001. The value of the warrant,
which totaled $55,250, was capitalized as a component of the overall purchase
price and was valued using the Black-Scholes option pricing model.

NOTE 8. STOCK OPTION PLAN

In September 1996, the Company adopted the Mercury Waste Solutions, Inc. Stock
Option Plan (the Plan). The Plan permits the granting of "incentive stock
options" meeting the requirements of Section 422 of the Internal Revenue Code of
1986, as amended, and nonqualified options which do not meet the requirements of
Section 422. A total of 371,000 shares of the Company's common stock have been
reserved for issuance pursuant to options granted or shares awarded under the
Plan. Grants under that plan are accounted for following APB Opinion No. 25 and
related interpretations. There was $7,000 and $5,883 compensation cost charged
to income for the stock option grants for the years ended December 31, 1998 and
1997, respectively. Had compensation cost for all of the stock-based
compensation plans been determined based on the grant date fair value of awards
(the method described in FASB Statement No. 123), reported net income (loss) and
basic and diluted earnings (loss) per common share on a pro forma basis would
have been as shown below:

                                               1998       1997
------------------------------------------------------------------
Net income (loss):
     As reported                             $391,539  $(1,173,089)
     Pro forma                                242,384   (1,186,559)
Basic and diulted earnings (loss) per share:
     As reported                                 0.11        (0.34)
     Pro forma                                   0.07        (0.34)

                                      F-17
<PAGE>


MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARIES

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

NOTE 8. STOCK OPTION PLAN (CONTINUED)

The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:

                                          1998       1997
---------------------------------------------------------

Expected dividend yield                      -          -
Expected stock price volatility          72.00%     53.00
Risk-free interest rate                   5.25%      6.01
Expected life of options (years)             3          3


A summary of the status of the plan at December 31, 1998 and 1997, and changes
during the years then ended is as follows:

<TABLE>
<CAPTION>
                                                  1998                          1997
                                        ------------------------     ----------------------------
                                                     Weighted-                      Weighted-
                                                     Average                         Average
                                        Shares    Exercise Price     Shares       Exercise Price
------------------------------------------------------------------------------------------------
<S>                                     <C>       <C>                <C>          <C>
Outstanding at beginning of period      175,000       $2.00          110,000          $0.67
  Granted                               130,000        3.45           80,000           3.66
  Exercised                             (16,000)       0.50                -              -
  Forfeited                             (20,000)       1.81          (15,000)          1.13
                                        ---------------------------------------------------
Outstanding at end of period            269,000       $2.80          175,000          $2.00
                                        ===================================================

Weighted-average fair value of
  options granted during the year                     $1.75                           $1.91
</TABLE>


The following table summarizes information about stock options outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
                                   Options Outstanding                        Options Exercisable
                    -------------------------------------------------    -----------------------------
                        Number       Weighted-Average                        Number
                    Outstanding at      Remaining        Weighted-       Exercisable at   Weighted-
   Range of          December 31,    Contractual Life     Average          December 31,    Average
Exercis Prices          1998             (Years)       Exercise Price         1998      Exercise Price
------------------------------------------------------------------------------------------------------
<S>                    <C>                 <C>             <C>               <C>           <C>
$0.50                  64,000              7.0             $0.50             16,000        $0.50
$2.75 - $3.88         160,000              9.2              3.29             73,000         3.54
$4.00 - $5.00          45,000              8.8              4.36              9,000         4.36
                    ----------------------------------------------------------------------------------
                      269,000              8.6             $2.80             98,000        $3.12
                    ==================================================================================
</TABLE>


There were 19,000 options exercisable at December 31, 1997, with a
weighted-average exercise price of $0.60.



                                      F-18
<PAGE>

MERCURY WASTE SOLUTIONS, INC. AND SUBSIDIARIES

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

NOTE 9. SOURCES OF REVENUE AND MAJOR

CUSTOMER The Company's revenues were derived from the following sources:

                                         1998       1997
---------------------------------------------------------
Mercury retorting                         55%         50%
Lamp recycling                            45%         50%
                                        -----------------
                                         100%        100%
                                        =================

The Company has one customer that accounted for 12 and 11 percent of total
revenues in 1998 and 1997, respectively. At December 31, 1998, the receivable
balance from this customer was approximately $123,000.

NOTE 10. INCENTIVE SAVINGS PLAN

Effective January 1, 1998, the Company adopted an incentive savings plan that
covers all eligible employees. Employees are permitted to make voluntary
contributions up to 20 percent of their annual aggregate compensation. The plan
also provides for a company-sponsored match to be determined each year. In 1998,
the Company match was 50 percent of employee contributions, to a maximum of 6
percent of compensation. The Company has the option of making discretionary
contributions. For an employee to be eligible for matching and discretionary
contributions, she/he must complete one year of service. The Company contributed
approximately $35,700 in 1998.


                                      F-19