U. S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

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

                                   FORM 10-QSB

(Mark One)

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

                  For the quarterly period ended March 31, 1998

                                       or

     [ ]  Transition  Report  Pursuant to Section 13 or 15(d) of the  Securities
          Exchange Act of 1934 For the transition period from ______ to ______

                         Commission File Number 0-12914
                -------------------------------------------------


                               WASTEMASTERS, INC.
        (Exact name of small business issuer as specified in its charter)



   Maryland                                                     52-1507818
(State of                                                    (IRS Employer
Incorporation)                                               Identification No.)





            1230 Peachtree Street, Suite 2545, Atlanta, Georgia 30309
                    (Address of Principal Executive Offices)

       Registrant's telephone number, including area code: (404) 888-0158




     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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

     As of May 20, 1998, the registrant had  outstanding  114,471,472  shares of
its Common Stock, $.01 par value.



<PAGE>


<TABLE>
<CAPTION>
                                                             
                       WasteMasters, Inc. and Subsidiaries

                            FORM 10-QSB REPORT INDEX


                                                                                                 Page No.
<S>                                                                             <C>                <C>    


PART I.   FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

                Consolidated Balance Sheet as of March 31, 1998.................................    3

                Consolidated Statements of Operations For the
                periods ended March 31, 1998 and 1997...........................................    5

                Consolidated Statements of Stockholders' Equity.................................    6

                Consolidated Statements of Cash Flows
                Three months ended March 31, 1998 and 1997......................................    7

                Notes to Consolidated Financial Statements
                   March 31, 1998...............................................................    9

Item 2.  Management's Discussion and Analysis...................................................   19


PART II.  OTHER INFORMATION

       Item 1.  Legal Proceedings...............................................................   20

       Item 2.  Changes in Securities and Use of Proceeds.......................................   22

       Item 4.  Submission of Matters to a Vote of  Securityholders.............................   22

       Item 5.  Other Information...............................................................   24

       Item 6.  Exhibits and Reports on Form 8-K................................................   26

Signatures......................................................................................   26

</TABLE>





                                      -2-

<PAGE>


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

<TABLE>
<CAPTION>

                       WasteMasters, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEET
                                 March 31, 1998
                                   (Unaudited)



                                                                 Proforma        March 31
                                                               (See Note E)         1998
                                                              -------------   -------------
<S>                                                                           <C>         

                                                ASSETS

Current assets:
     Cash                                                     $    108,251    $    108,251
     Accounts receivable, net of allowance
        for doubtful accounts                                    1,107,562       1,107,562
     Inventories                                                 2,450,873       2,450,873
     Other current assets                                          172,911         172,911
                                                              ------------    ------------

         Total current assets                                    3,839,597       3,839,597

Property, plant and equipment, at cost:
     Machinery and equipment                                     3,997,296       3,997,296
     Buildings and improvements                                    582,889         582,889
                                                              ------------    ------------
         Less accumulated depreciation                          (2,325,967)     (2,325,967)
                                                              ------------    ------------
                                                                 2,254,218       2,254,218

     Land                                                          116,235         116,235
     Landfill facilities, net of amortization                    6,048,258       6,048,258
                                                              ------------    ------------

           Total property, plant and equipment                   8,418,711       8,418,711

Other assets:
     Investment - Continental Investment Corporation             7,853,352       7,853,352
     Deposits and other assets                                   1,064,880       1,064,880
     Intangible assets relating to acquired businesses, net     11,924,523      11,924,523
                                                              ------------    ------------

           Total other assets                                   20,842,755      20,842,755
                                                              ------------    ------------

           Total assets                                       $ 33,101,063    $ 33,101,063
                                                              ============    ============
</TABLE>

                                     

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

                                       -3-

<PAGE>

<TABLE>
<CAPTION>

                       WasteMasters, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEET
                                 March 31, 1998
                                   (Unaudited)



                                                                  Proforma          March 31
                                                                 (See Note E)        1998        
                                                                -------------    ------------
<S>                                                                              <C>     

   LIABILITIES AND STOCKHOLDERS EQUITY

Current liabilities:
     Accounts payable, accrued interest,
       and other liabilities                                     $  3,496,191    $  6,221,323
     Short term notes payable                                       2,538,950       2,538,950
     Current maturities of long-term debt                           5,644,414       5,644,414
     Liabilities to related parties, net                              453,468         453,468
                                                                 ------------    ------------

           Total current liabilities                               12,133,023      14,858,155
Long-term and deferred items:
     Long-term debt, less current maturities                        1,491,038       1,491,038
     Accrued environmental and landfill costs                         471,751         471,751
                                                                 ------------    ------------

           Total long-term and deferred items                       1,962,789       1,962,789
                                                                 ------------    ------------
           Total liabilities                                       14,095,812      16,820,944

Commitments and contingencies                                             -0-             -0-

Stockholders' equity:
     Preferred stock, $.01 par value; 5,000,000 shares
        authorized and outstanding                                     50,000          50,000
     Common stock, $.01 par value; 495,000,000 shares
        authorized;  114,471,472 shares issued and outstanding      1,144,715       1,144,715
     Additional paid-in capital                                    61,061,690      61,061,690
     Accumulated deficit                                          (43,251,154)    (45,976,286)
                                                                 ------------    ------------

           Total stockholders' equity                              19,005,251      16,280,119
                                                                 ------------    ------------

           Total liabilities and stockholders' equity            $ 33,101,063    $ 33,101,063
                                                                 ============    ============


</TABLE>


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

                                      -4-

<PAGE>


<TABLE>
<CAPTION>

                       WasteMasters, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                          Three months ended March 31,
                                   (Unaudited)



                                                              Proforma
                                                 1998           1998          1997
                                           -------------   ------------    -----------  
                                                            (See Note E)
<S>                                                                             <C>    
                                                                                               

Revenues                                   $      6,538    $  3,403,790    $    161,298


Expenses
     Cost of sales                               92,694       2,234,594         167,818
     Selling, general and administrative        698,842       2,084,254       1,144,973
                                           ------------    ------------    ------------
                                                791,536       4,318,848       1,312,791

     Earnings (loss) from operations           (784,998)       (915,058)     (1,151,493)


Other income (loss)
     Interest expense, net                      (23,971)       (115,912)       (109,800)
     Write-off of capitalized loan costs       (241,355)       (241,355)            -0-
     Other income                                   -0-          44,329             -0-
                                           ------------    ------------    ------------
                Total other loss               (265,326)       (312,938)       (109,800)
                                           ------------    ------------    ------------

                NET LOSS                   $ (1,050,324)   $ (1,227,996)   $ (1,261,293)
                                           ============    ============    ============


Loss per share                                    ($.01)          ($.02)          ($.05)


Weighted average number of common
   shares outstanding                        73,117,174      73,117,174      25,455,158


</TABLE>







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

                                      -5-

<PAGE>

<TABLE>
<CAPTION>

                       WasteMasters, Inc. and Subsidiaries

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                           Common and Preferred Stock

                                        Common     Preferred     Common     Preferred
                                         Shares      Shares       Stock       Stock      Paid-in       Accumulated
                                      Outstanding  Outstanding    At par     At par       Capital         Deficit        Total
                                     ------------  ----------- ----------   ---------   ----------    -------------    -------------
<S>                                                                             <C>    <C>            <C>              <C>    
                                                                                                                                  

Balance at December 31, 1997          34,967,126   5,000,000   $  349,671   $ 50,000   $ 35,645,461   $ (44,925,962)   $ (8,880,830)

Net loss for period                         -0-          -0-          -0-        -0-            -0-      (1,050,324)     (1,050,324)

Shares issued upon
   exercise of warrants                1,000,000         -0-       10,000        -0-        420,000             -0-         430,000

Shares issued in connection
   with acquisitions                  15,504,346         -0-      155,044        -0-     12,111,886             -0-      12,266,930

Shares issued in cancellation
   of liabilities for debentures,
   accrued interest, and penalties    63,000,000         -0-      630,000        -0-     12,884,343             -0-      13,514,343
                                    ------------   ---------   ----------   --------   ------------   -------------     ------------

Balance at March 31, 1998            114,471,472   5,000,000   $1,144,715   $ 50,000   $ 61,061,690   $ (45,976,286)   $ 16,280,119
                                    ============   =========   ==========   ========   ============   =============    ============

</TABLE>









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



                                      -6-
<PAGE>


<TABLE>
<CAPTION>

                       WasteMasters, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                          Three Months Ended March 31,
                                   (Unaudited)


                                                                    1998           1997
                                                                -----------    -----------
<S>                                                                             <C>    

INCREASE (DECREASE) IN CASH

Cash flows from operating activities
         Net earnings (loss)                                    $(1,050,324)   $(1,261,293)

Adjustments to reconcile  net earnings  (loss) to net cash
 provided by (used in) operating activities:
     Depreciation and amortization                                  191,535        394,676
     Stock issued in lieu of cash payment                               -0-      1,144,973
     Loss on write-off of capitalized loan costs                    241,355            -0-
     Accrual for landfill closure costs                             128,250            -0-

Changes in assets and liabilities:
     Accounts receivable & prepaid expenses                           7,774         47,844
     Accounts payable, accrued interest and other liabilities       190,482        314,718
     Due to related parties                                         (56,989)           -0-
                                                                -----------    -----------

         Net cash provided by (used in) operating activities       (347,917)       640,918

Cash flow from investing activities:
     Deposits on acquisitions                                       (50,034)           -0-
     Business acquisitions                                           75,294            -0-
                                                                -----------    ----------- 
Net cash provided by (used in) investing activities             $    25,260            -0-


</TABLE>











          See accompanying notes to consolidated financial statements.

                                      -7-


<PAGE>

<TABLE>
<CAPTION>

                       WasteMasters, Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued

                          Three Months Ended March 31,
                                   (Unaudited)


                                                                                  1998                  1997
                                                                             -------------          -----------
<S>                                                                             <C>                 <C>   

Cash flows from financing activities:
     Repayments of loans                                                       $       -0-            $(638,800)
     Proceeds from exercise of warrants for common stock                           430,000                  -0-
                                                                               -----------          -----------

Net cash provided by (used in) financing activities:                               430,000             (638,800)
                                                                               -----------          -----------
Net  increase (decrease) in cash                                                   107,343          $     2,118

Cash and cash equivalents at beginning of period                                       908                  -0-
                                                                               -----------          -----------

Cash and cash equivalents at end of period                                        $108,251          $     2,118
                                                                                  ========          ===========


SUPPLEMENTARY DISCLOSURE OF NONCASH TRANSACTIONS
------------------------------------------------

Common stock issued in business acquisitions                                   $12,266,930                  -0-

Common stock issued for services                                                       -0-           $1,144,973

Conversion of debentures for common stock                                              -0-          $   638,800

Common stock issued in cancellation of liabilities for debentures,
   accrued interest and penalties                                              $13,514,343                  -0-


</TABLE>










        The accompanying notes are an integral part of these statements.


                                      -8-


<PAGE>


                       WasteMasters, Inc. and Subsidiaries

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE A

     1.  Basis of Presentation

     The  accompanying  unaudited  financial  statements  have been  prepared by
     WasteMasters,  Inc. (the "Company" or "WasteMasters") pursuant to the rules
     and  regulations of the U. S. Securities and Exchange  Commission.  Certain
     information  and  disclosures   normally   included  in  annual   financial
     statements  prepared  in  accordance  with  generally  accepted  accounting
     principles  have been  condensed  or  omitted  pursuant  to such  rules and
     regulations.  In the opinion of management, all adjustments and disclosures
     necessary to a fair  presentation of these  financial  statements have been
     included.  Such adjustments consist of normal recurring  adjustments.  This
     Form  10-QSB  Report  should be read in  conjunction  with the Form  10-KSB
     Report of WasteMasters,Inc. for the fiscal year ended December 31, 1997, as
     filed with the U. S. Securities and Exchange Commission.

     The  results of  operations  for the period  ended  March 31,  1998 are not
     necessarily  indicative  of the results  that may be expected  for the full
     year.

     2.  Consolidated Statements

     The consolidated financial statements include the accounts of WasteMasters,
     Inc. and its wholly owned  subsidiaries;  WasteMasters  of South  Carolina,
     Inc.;  WasteMasters of Pennsylvania,  Inc.; WasteMasters of New York, Inc.;
     WasteMasters  of Michigan,  Inc.;  WasteMasters  of  Louisiana,  Inc.;  F&E
     Resource Systems  Technology for Baltimore,  Inc., Sales Equipment Company,
     Inc., C.A.T. Recycling,  Inc., Wood Management,  Inc., Mini-Max,  Inc., and
     Southeastern   Research   &   Recovery,   Inc.   Significant   intercompany
     transactions have been eliminated in consolidation.

     3.  Use of Estimates

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

NOTE B - BUSINESS

     1.  The Company

     WasteMasters,  Inc. is a  non-hazardous  solid waste services  company that
     provides collection, transfer, disposal and recycling services. The Company
     was  incorporated in Maryland in July 1981. In 1998, the Company  initiated
     an  aggressive  acquisition  program  in  order  to take  advantage  of the
     consolidation  of the solid waste industry.  From February 18, 1998 through
     May 20, 1998,  Wastemasters  added 5  landfills,  4 hauling  companies,  10
     recycling facilities,  and a state-of-the-art  industrial sludge processing
     facility as a result of the takeover of  companies  that,  as  WasteMasters
     subsidiaries,  are currently generating aggregate annual revenues in excess
     of $40 million. The Company believes that additional acquisition candidates
     meeting   the   Company's   acquisition   criteria,   including   "tuck-in"
     opportunities,  exist within its current and  adjacent  market areas and in
     other prospective markets.
     The Company further believes that the impending merger of USA


                                      -9-

<PAGE>


                       WasteMasters, Inc. and Subsidiaries

     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

     Waste Services,  Inc. and Waste Management,  Inc. will result in the forced
     divestiture  (for  antitrust  reasons) of numerous  potentially  attractive
     acquisition candidates.

      2.  Industry Overview

     The  Company  believes  that the United  States  non-hazardous  solid waste
     services industry generated estimated revenues of approximately $37 billion
     in calendar  1997,  of which  approximately  $26 billion was  generated  by
     publicly-traded  or  privately-owned  waste  companies  with the  remaining
     revenues generated by municipal, county and district operators.

     Currently,  the solid waste services  industry is experiencing  significant
     consolidation and integration. The Company believes that this consolidation
     and  integration has been driven  primarily by four factors:  (i) stringent
     environmental regulations resulting in increased capital requirements; (ii)
     the  inability of many smaller  operators to achieve the economies of scale
     necessary to compete  effectively with large integrated solid waste service
     providers;   (iii)  the  competitive  advantages  of  integrated  companies
     generated  by  providing  integrated  collection,   transfer  and  disposal
     capabilities;   and  (iv)   privatization   of  solid  waste   services  by
     municipalities. Despite the considerable consolidation and integration that
     has  occurred in the solid  waste  industry  in recent  years,  the Company
     believes  the industry  remains  highly  fragmented  both within its target
     markets and nationally.

     Stringent  environmental  regulations,  such as the Subtitle D Regulations,
     have resulted in rising costs for owners of landfills. Subtitle D specifies
     design,  siting,  operating,  monitoring,  closure and  financial  security
     requirements  for landfill  operations.  The permits  required for landfill
     development,  expansion  or  construction  have  also  become  increasingly
     difficult  to obtain.  In  addition,  Subtitle D  requires  more  stringent
     engineering of solid waste landfills  including the  installation of liners
     and leachate and gas  collection  and  monitoring.  These ongoing costs are
     coupled  with  increased  financial  reserve  requirements  for closure and
     post-closure monitoring.  Certain of the smaller industry participants have
     found these costs and  regulations  burdensome  and have decided  either to
     close their  operations or to sell them to larger  operators.  As a result,
     the number of operating landfills has decreased while the size of landfills
     has increased.

     Economies of scale,  driven by the high fixed costs of landfill  assets and
     the associated  profitability of each incremental ton of waste, have led to
     the development of higher volume,  regional  landfills.  Larger  integrated
     operators  achieve  economies  of scale in the solid waste  collection  and
     disposal industry through vertical integration of their operations that may
     generate a significant waste stream for these high-volume landfills.

     Integrated companies gain further competitive advantage over non-integrated
     operators by being able to control the waste  stream.  The ability of these
     companies to internalize  the collected  solid waste (i.e.,  collecting the
     waste at the source,  transferring  it through their own transfer  stations
     and disposing of it at their own disposal facility), coupled with access to
     significant  capital  resources  to  make  acquisitions,   has  created  an
     environment  in which large  integrated  companies  can  operate  more cost
     effectively and competitively than non-integrated operators.

                                      -10-


<PAGE>


                       WasteMasters, Inc. and Subsidiaries

     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

     The trend  toward  consolidation  in the solid waste  services  industry is
     further supported by the increasing  tendency of a number of municipalities
     to privatize  their waste disposal  operations.  Privatization  is often an
     attractive  alternative for municipalities due, among other reasons, to the
     ability of  integrated  operators to leverage  their  economies of scale to
     provide the community  with a broader range of services  while enabling the
     municipality  to reduce its own  capital  asset  requirements.  The Company
     believes that the financial  condition of municipal landfills in the United
     States was  adversely  affected by the 1994  United  States  Supreme  Court
     decision which declared flow control" laws unconstitutional. These laws had
     required waste  generated in counties or districts to be disposed of at the
     respective  county  or  district-owned   landfills  or  incinerators.   The
     reduction in the captive waste stream to these  facilities,  resulting from
     the  invalidation  of such  laws,  forced the  counties  that owned them to
     increase their per ton tipping fees to meet  municipal  bond payments.  The
     Company   believes   that  these  market   dynamics  are  factors   causing
     municipalities to consider the privatization of public facilities.

     3.  Strategy

     The Company's objective is to continue to grow by expanding its services in
     markets where it can be one of the largest and most profitable  solid waste
     services  companies.  The Company is currently operating in certain regions
     of Florida,  South  Carolina,  New Jersey and Ohio, and believes that these
     markets and other markets with similar  characteristics present significant
     opportunities for achieving its objectives. The Company focuses its efforts
     on  markets  which are  characterized  by: (i) a  geographically  dispersed
     population;  (ii) disposal  capacity which the Company  anticipates  may be
     available for acquisition by the Company;  (iii) significant  environmental
     regulation  which  has  resulted  in a  decrease  in the  total  number  of
     operating landfills;  and (iv) a lack of significant competition from other
     well-capitalized  and established waste management  companies.  The Company
     believes  that  these   characteristics   result  in   significant   market
     opportunities  for  the  first  well-managed  market  entrant,  and  create
     economic and  regulatory  barriers to entry by  additional  competitors  in
     these markets.

     The Company's strategy for achieving its objective is: (i) to acquire solid
     waste collection  businesses and disposal  capacity in new markets,  and to
     make "tuck-in"  acquisitions in existing markets; (ii) to generate internal
     growth through  increased sales penetration and the marketing of additional
     services  to  existing   customers;   and  (iii)  to  implement   operating
     enhancements  and  efficiencies.  The  Company  intends to  implement  this
     strategy as follows:

     Expansion through  Acquisitions.  The Company intends to continue to expand
     by acquiring solid waste collection  companies and disposal capacity in new
     markets,  and increasing its revenues and  operational  efficiencies in its
     existing  markets through  "tuck-in" and other  acquisitions of solid waste
     collection  operations.  In considering new markets,  the Company evaluates
     the  opportunities to acquire or otherwise  control  sufficient  collection
     operations  and  disposal  facilities  which would  enable it to generate a
     captive waste stream and achieve the disposal  economies of scale necessary
     to meet  its  market  share  and  financial  objectives.  The  Company  has
     established   criteria   which  enable  it  to  evaluate  the   prospective
     acquisition  opportunity  and the target  market.  In the near future,  the
     Company  intends to enter new markets  which are  adjacent to its  existing
     markets;  however,  the Company may consider new markets in  non-contiguous



                                      -11-

<PAGE>

                       WasteMasters, Inc. and Subsidiaries

     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued


     geographic  areas which meet its  criteria.  The Company is also  targeting
     additional  "tuck-in"  acquisitions within its current markets to allow the
     Company to  further  improve  its market  penetration  and  density  and to
     further increase the internalization rate of its waste streams.

     Internal  Growth.  In order to  generate  continued  internal  growth,  the
     Company intends to focus on increasing sales penetration in its current and
     adjacent markets,  soliciting new commercial,  industrial,  and residential
     customers,  marketing  upgraded  services to existing  customers and, where
     appropriate,  raising prices.  As customers are added in existing  markets,
     the  Company's  revenue  per  routed  truck is  improved,  which  generally
     increases the Company's  collection  efficiencies  and  profitability.  The
     Company uses transfer  stations,  which serve to link disparate  collection
     operations  with  Company-operated  landfills,  as an important part of its
     internal growth strategy.

     Operating  Enhancements for Acquired and Existing  Businesses.  The Company
     intends to implement a system that  establishes  standards  for each of its
     markets  and  tracks  operating  criteria  for  its  collection,  transfer,
     disposal and other  operations  to  facilitate  improved  profitability  in
     existing  and  acquired  operations.  These  measurement  criteria  include
     collection and disposal routing  efficiency,  equipment  utilization,  cost
     controls,  commercial  weight  tracking  and  employee  training and safety
     procedures. The Company believes that by establishing standards and closely
     monitoring  compliance,  it will be able to improve  existing  and acquired
     operations.  Moreover,  where the Company is able to internalize  the waste
     stream of acquired  operations,  it is further  able to increase  operating
     efficiencies and improve capacity utilization.

     4.  Acquisition Program

     The  Company's   acquisition   program  is  founded  on  strong  management
     capabilities,   strict  acquisition   criteria,   and  defined  integration
     procedures. From February 18, 1998 through May 20, 1998, Wastemasters added
     5  landfills,  4  hauling  companies,   10  recycling  facilities,   and  a
     state-of-the-art  industrial sludge processing  facility as a result of the
     takeover of companies  that, as  WasteMasters  subsidiaries,  are currently
     generating  aggregate annual revenues in excess of $40 million. The Company
     believes  that  additional  acquisition  candidates  meeting the  Company's
     acquisition criteria,  including "tuck-in" opportunities,  exist within its
     current and adjacent  market areas and in other  prospective  markets.  The
     Company further  believes that the impending  merger of USA Waste Services,
     Inc. and Waste Management,  Inc. will result in the forced divestiture (for
     antitrust   reasons)  of  numerous   potentially   attractive   acquisition
     candidates.

     The Company has developed a set of  financial,  geographic  and  management
     criteria  designed to assist  management in the  evaluation of  acquisition
     candidates  engaged in solid waste collection and disposal.  These criteria
     consist  of a variety  of  factors,  including,  but not  limited  to:  (i)
     historical  and  projected  financial  performance;  (ii)  internal rate of
     return,  return on assets and  earnings  accretion;  (iii)  experience  and
     reputation of the acquisition  candidate's  management and customer service
     reputation and relationships with the local  communities;  (iv) composition
     and size of the acquisition  candidate's  customer base; (v) opportunity to
     enhance  and/or expand the Company's  market area and/or ability to attract
     other acquisition candidates;  (vi) whether the acquisition will augment or
     increase the  Company's  market  share  and/or help  protect the  Company's
     existing  customer  base;  and (vii)  internalization  opportunities  to be
     gained by combining the acquisition  candidate with the Company's  existing
     operations.


                                      -12-

<PAGE>


                       WasteMasters, Inc. and Subsidiaries

     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

     The Company intends to establish  integration  procedure for newly acquired
     businesses  designed to effect a prompt and  efficient  integration  of the
     acquired  business and minimize  disruption to the ongoing business of both
     the  Company  and the  acquired  business.  Once a solid  waste  collection
     operation is acquired,  the Company intends to implement  programs designed
     to reduce  disposal  costs and improve  collection  and  disposal  routing,
     equipment utilization,  employee  productivity,  operating efficiencies and
     overall  profitability.  The  Company  will  typically  seek to retain  the
     acquired  company's  qualified  managers,  key employees and selected local
     operations,   while  consolidating   purchasing  and  other  administrative
     functions through the Company's corporate offices.


NOTE C - DISCLOSURE REGARDING RISK FACTORS AND  FORWARD LOOKING STATEMENTS

     This Quarterly  Report on Form 10-QSB includes  forward looking  statements
     within  the  meaning  of  Section  27A of the  Securities  Act of 1933,  as
     amended, and Section 21E of the Securities Exchange Act of 1934, as amended
     ("Forward  Looking  Statements").  All statements  other than statements of
     historical fact included in this report are Forward Looking Statements.  In
     the normal course of its business,  the Company,  in an effort to help keep
     its  shareholders  and the public informed about the Company's  operations,
     may from  time to time  issue  certain  statements,  either in  writing  or
     orally,  that contain or may contain Forward Looking  Statements.  Although
     the  Company  believes  that the  expectations  reflected  in such  Forward
     Looking  Statements  are  reasonable,  it can give no  assurance  that such
     expectations will prove to have been correct.  Generally,  these statements
     relate to business plans or strategies,  projected or anticipated  benefits
     or other  consequences  of such  plans or  strategies  (past  and  possible
     future),   acquisitions   and  projected  or   anticipated   benefits  from
     acquisitions made by or to be made by the Company, or projections involving
     anticipated  revenues,  earnings,  level of capital  expenditures  or other
     aspects of operating results. Forward-looking statements by the Company and
     its management are based on estimates, projections, beliefs and assumptions
     of management  and are not  guarantees of future  performance.  The Company
     disclaims any obligation to update or revise any forward-looking  statement
     based on the occurrence of future events,  the receipt of new  information,
     or  otherwise.  All phases of the  Company's  operations  are  subject to a
     number of  uncertainties,  risks and  other  influences,  many of which are
     outside the control of the Company and any one of which,  or a  combination
     of which,  could  materially  affect the results of the Company's  proposed
     operations  and  whether  Forward  Looking  Statements  made by the Company
     ultimately  prove to be accurate.  Such important risk factors  ("Important
     Risk  Factors")  and other  factors  could cause  actual  results to differ
     materially  from the  Company's  expectations.  All  prior  and  subsequent
     written and oral Forward Looking Statements  attributable to the Company or
     persons  acting on its behalf are expressly  qualified in their entirety by
     the Important Risk Factors  described below that could cause actual results
     to differ  materially  from the Company's  expectations as set forth in any
     Forward Looking Statement made by or on behalf of the Company.

     (1)   Ability to Manage Growth

     The Company's objective is to continue to grow by expanding its services in
     markets where it can be one of the largest and most profitable  solid waste
     services  companies.  Consequently,  the Company may experience  periods of
     rapid growth.  Such growth, if it were to occur,  could place a significant
     strain on the Company's  management and on its  operational,  financial and
     other  resources.  Any  failure to expand  its  operational  and  financial
     systems and  controls or to recruit  appropriate  personnel in an efficient

                                      -13-

<PAGE>


                       WasteMasters, Inc. and Subsidiaries

     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

     manner at a pace consistent with such growth would have a material  adverse
     effect on the  Company's  business,  financial  condition  and  results  of
     operations.

     (2)   History of Losses

     The  Company  has  incurred  substantial  net  losses  in the  past and may
     continue to lose money as a result of the adverse effects of one or more of
     the risk factors discussed in this Note C.

     (3)   Ability to Identify, Acquire and Integrate Acquisition Targets

     The Company's  strategy  envisions that a substantial part of the Company's
     future growth will come from acquiring and  integrating  independent  solid
     waste  collection,  transfer  and  disposal  operations.  There  can  be no
     assurance  that the Company will be able to identify  suitable  acquisition
     candidates  and,  once   identified,   to  negotiate   successfully   their
     acquisition at a price or on terms and conditions favorable to the Company,
     or to  integrate  the  operations  of such  acquired  businesses  with  the
     Company. In addition,  the Company competes for acquisition candidates with
     other  entities,  many of which have greater  financial  resources than the
     Company.  Failure by the Company to implement  successfully its acquisition
     strategy would limit the Company's growth potential.

     The consolidation  and integration  activity in the solid waste industry in
     recent  years,  as well as the  difficulties,  uncertainties  and  expenses
     relating to the  development  and  permitting of solid waste  landfills and
     transfer  stations,  has  increased  competition  for  the  acquisition  of
     existing  solid  waste  collection,   transfer  and  disposal   operations.
     Increased  competition  for  acquisition  candidates  may  result  in fewer
     acquisition  opportunities  being made  available to the Company as well as
     less advantageous  acquisition terms,  including increased purchase prices.
     The  Company  also  believes  that a  significant  factor in its ability to
     consummate  acquisitions  will be the relative  attractiveness of shares of
     the  Company's  Common Stock as  consideration  for  potential  acquisition
     candidates.  This  attractiveness may, in large part, be dependent upon the
     relative market price and capital  appreciation  prospects of the Company's
     Common  Stock   compared  to  the  equity   securities   of  the  Company's
     competitors.  If the market  price of the  Company's  Common  Stock were to
     decline,  the Company's  acquisition program could be materially  adversely
     affected.

     The  successful  integration  of acquired  businesses  is  important to the
     Company's future financial  performance.  The anticipated benefits from any
     acquisition  may not be  achieved  unless the  operations  of the  acquired
     businesses are successfully  combined with those of the Company in a timely
     manner.  The  integration  of any of the  Company's  acquisitions  requires
     substantial  attention from  management.  The diversion of the attention of
     management and any  difficulties  encountered  in the  transition  process,
     could have an adverse impact on the Company's business, financial condition
     and results of operations.  There can be no assurance that the Company will
     be able to successfully  identify and close acquisitions and integrate them
     into its organization and operations.


                                      -14-

<PAGE>


                       WasteMasters, Inc. and Subsidiaries

     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued


     (4)   Dependence on Management

     The  Company is highly  dependent  upon the  services of the members of its
     senior management team, the loss of any of whom may have a material adverse
     effect on the  Company's  business,  financial  condition  and  results  of
     operations.

     In addition, the Company's future success depends on its continuing ability
     to identify,  hire, train,  motivate and retain highly qualified personnel.
     Competition  for such  personnel is intense,  and there can be no assurance
     that the  Company  will be able to  attract,  assimilate  or retain  highly
     qualified  personnel in the future. The inability to attract and retain the
     necessary personnel could have a material adverse effect upon the Company's
     business, financial condition and results of operations.

     (5)   Uncertain Ability to Finance the Company's Growth

     The  Company  anticipates  that any future  business  acquisitions  will be
     financed through cash from operations,  borrowings,  the issuance of shares
     of the  Company's  Common Stock and/or  seller  financing.  If  acquisition
     candidates  are unwilling to accept,  or the Company is unwilling to issue,
     shares of the Company's Common Stock as part of the  consideration for such
     acquisitions,  the  Company  would  be  required  to  utilize  more  of its
     available  cash  resources or potential  borrowings in order to effect such
     acquisitions.  To the extent that cash from  operations  or  borrowings  is
     insufficient to fund such requirements, the Company will require additional
     equity  and/or debt  financing  in order to provide the cash to effect such
     acquisitions.  Additionally,  growth through the development or acquisition
     of new landfills,  transfer  stations or other  facilities,  as well as the
     ongoing   maintenance  of  such  landfills,   transfer  stations  or  other
     facilities, will require substantial capital expenditures.  There can be no
     assurance that the Company will have sufficient  existing capital resources
     or will be able to raise sufficient  additional  capital resources on terms
     satisfactory to the Company,  if at all, in order to meet any or all of the
     foregoing capital requirements.

     In order to satisfy the  liquidity  needs of the Company for the  following
     twelve months,  the Company will be primarily  dependent upon proceeds from
     the sale of the Company's  capital stock and cash flow from the  operations
     of other  companies  which have been acquired or may be acquired as part of
     the company's  expansion  plans.  Historically,  revenues from the existing
     operations have not been adequate to fund the operations of the Company. If
     the Company is unable to obtain  adequate  funds from the sale of its stock
     in  public   offerings,   private   placements  or  alternative   financing
     arrangements,  it may be necessary to postpone any additional  acquisitions
     and continue to  consolidate  the  operations of the  acquisitions  already
     completed  and use cash flow for  internal  growth.  Because  of  potential
     political,  legal,  bureaucratic,  and  other  factors,  there  can  be  no
     assurance  that the  Company  will be able to  accomplish  any of its goals
     within a reasonable period of time.

     (6)   Geographic Concentration Risks

     The Company's  operations  and customers are primarily  located in Florida,
     South Carolina,  New Jersey and Ohio.  Therefore,  the Company's  business,
     financial  condition and results of operations are susceptible to downturns
     in the  general  economy in these  states and other  factors  such as state
     regulations and potential severe weather  conditions.  In addition,  as the


                                      -15-

<PAGE>

                       WasteMasters, Inc. and Subsidiaries

     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

     Company expands in its existing  markets,  opportunities  for growth within
     these  regions  will become more  limited.  The costs and time  involved in
     permitting  and the scarcity of available  landfills  may make it difficult
     for the  Company to expand  vertically  in these  markets.  There can be no
     assurance that the Company will be able to complete a sufficient  number of
     acquisitions in other markets to lessen its geographic concentration.

     (7)   Fluctuations in Quarterly Results; Potential Stock Price Volatility

     The market price of the Company's Common Stock has increased  significantly
     since current management began operating the Company in September 1997, and
     has experienced  significant  fluctuations  during this period.  The market
     price of the  Company's  Common Stock has been volatile and may continue to
     be volatile in the future.  The trading price of the Company's Common Stock
     could be subject to wide  fluctuations  in response  to  quarter-to-quarter
     variations in operating results,  changes in revenue and earnings estimates
     by securities  analysts,  announcements  by the Company or its competitors,
     developments in the Company's  acquisition program,  government  regulatory
     action,  challenges  associated  with  integration  of businesses and other
     events or  factors.  Also,  the  market  price of the  Common  Stock may be
     affected by factors  affecting the waste  management  industry in which the
     Company competes.  Due in part to the high level of public awareness of the
     business  in  which  the  Company  is   engaged,   regulatory   enforcement
     proceedings or other  potentially  unfavorable  developments  involving the
     Company's operations or facilities,  including those in the ordinary course
     of business,  may be expected to engender  publicity which could, from time
     to time,  have an adverse  impact upon the market  price for the  Company's
     Common  Stock.  In  addition,  the  stock  market  has  from  time  to time
     experienced significant price and volume

     The Company  believes that  period-to-period  comparisons of its  operating
     results  should not be relied upon as an indication of future  performance.
     Due  to  a  variety  of  factors  including  general  economic  conditions,
     governmental  regulatory  action,  acquisitions,  capital  expenditures and
     other costs related to the expansion of operations and services and pricing
     changes  (including  the  market  prices of  commodities  such as  recycled
     materials),  it is  possible  that in some  future  quarter  the  Company's
     operating results will be below the expectations of securities analysts and
     investors.  In such  event,  the  Company's  Common  Stock  price  could be
     materially adversely affected.

     (8) Highly  Competitive  Industry:  The solid  waste  services  industry is
     highly  competitive  and  fragmented,  and requires  substantial  labor and
     capital resources.  Certain of the markets in which the Company competes or
     will likely  compete are served by one or more of the large  national solid
     waste  companies,  as well as  numerous  regional  and  local  solid  waste
     companies of varying  sizes and  resources.  The Company also competes with
     operators of alternative disposal facilities,  including incinerators,  and
     with  counties,  municipalities,  and solid waste  districts  that maintain
     their  own  waste  collection  and  disposal  operations.  These  counties,
     municipalities, and solid waste districts may have financial advantages due
     to the  availability to them of user fees,  similar charges or tax revenues
     and the  greater  availability  to them of  tax-exempt  financing.  Intense
     competition  exists not only to provide  services to customers  but also to
     acquire  other  businesses  within  each  market.  Many  of  the  Company's
     competitors have  significantly  greater financial and other resources than
     the Company.  From time to time, these or other  competitors may reduce the
     price of their  services  in an effort to expand  market  share or to win a
     competitively  bid municipal  contract.  These practices may either require
     the  Company  to  reduce  the  pricing  of its  services  or  result in the
     Company's  loss of  business.  Municipal  contacts  are subject to periodic
     competitive bidding. There can be no assurance that the Company will be the


                                      -16-

<PAGE>


                       WasteMasters, Inc. and Subsidiaries

     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued


     successful  bidder  to  obtain  or retain  such  contracts.  The  Company's
     inability to compete with larger and better  capitalized  companies,  or to
     replace  municipal  contracts lost through the competitive  bidding process
     with comparable contracts or other revenue sources within a reasonable time
     period,  could have a material  adverse  effect on the Company's  business,
     financial condition and results of operations.

     Intense  competition  exist within the  industry  not only for  collection,
     transportation  and disposal volume,  but also for acquisition  candidates.
     The Company  competes for acquisition  candidates with numerous solid waste
     management  companies,  many of which  are  significantly  larger  and have
     greater  access to capital and greater  financial,  marketing  or technical
     resources than the Company.

     (9)  Economic  Conditions:  The  Company's  businesses  may be  affected by
     general  economic  conditions.  There can be no assurance  that an economic
     downturn  would not result in a reduction in the volume of waste that might
     be  disposed  of at the  Company's  facilities  and/or  the price  that the
     Company would charge for its services.

     (10)  Weather  Conditions:  Protracted  periods of  inclement  weather  may
     adversely  affect  the  Company's  existing  and  potential  operations  by
     interfering   with  collection  and  landfill   operations,   delaying  the
     development  of  landfill  capacity  and/or  reducing  the  volume of waste
     generated by the Company's existing and potential  customers.  In addition,
     particularly   harsh  weather   conditions  may  result  in  the  temporary
     suspension of certain of the Company's  existing and potential  operations.
     The Forward Looking  Statements do not assume that such weather  conditions
     will occur.

     (11)  Influence  of  Government  Regulation:  The  Company's  existing  and
     potential operations are and would be subject to and substantially affected
     by  extensive  federal,  state  and local  laws,  regulations,  orders  and
     permits, which govern environmental  protection,  health and safety, zoning
     and other matters.  These regulations may impose restrictions on operations
     that could adversely affect the Company's  results,  such as limitations on
     the  expansion  of disposal  facilities,  limitations  on or the banning of
     disposal of out-of-state  waste or certain  categories of waste or mandates
     regarding  the  disposal  of solid  waste.  Because  of  heightened  public
     concern,  companies in the waste management  business may become subject to
     judicial and administrative  proceedings involving federal,  state or local
     agencies. These governmental agencies may seek to impose fines or to revoke
     or deny  renewal  of  operating  permits  or  licenses  for  violations  of
     environmental   laws  or   regulations   or  to  require   remediation   of
     environmental  problems at sites or nearby  properties,  or resulting  from
     transportation or predecessors'  transportation and collection  operations,
     all of which could have a material adverse effect on the Company. Liability
     may also arise from actions  brought by individuals or community  groups in
     connection  with the  permitting  or licensing of  operations,  any alleged
     violations  of such  permits  and  licenses or other  matters.  The Forward
     Looking Statements assume that there will be no materially  negative impact
     on its operations due to governmental regulation.

     (12) Potential Environmental  Liability:  The Company may incur liabilities
     for the  deterioration  of the  environment as a result of its existing and
     potential  operations.  Any substantial  liability for environmental damage
     could  materially  adversely  affect the  operating  results and  financial
     condition of the Company.  Due to the limited nature of insurance  coverage
     of  environmental  liability,  if the Company were to incur  liability  for
     environmental  damage,  its  business  and  financial  condition  could  be
     materially adversely affected.


                                      -17-

<PAGE>


                       WasteMasters, Inc. and Subsidiaries

     NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

     (13)Year 2000  Compliance:  Many currently  installed  computer systems and
     software  products  are coded to accept only two digit  entries in the date
     code field.  These date code fields will need to accept four digit  entries
     to  distinguish  21st century dates from 20th century  dates.  As a result,
     computer  systems  and/or  software  used by many  companies may need to be
     upgraded  to comply  with such "Year  2000"  requirements.  The  Company is
     currently  in  the  process  of  evaluating  its   information   technology
     infrastructure  for Year 2000 compliance.  The Company does not expect that
     the cost to modify its  information  technology  infrastructure  to be Year
     2000  compliant  will be material to its financial  condition or results of
     operations.  The Company does not anticipate any material disruption in its
     operations  as a result of any failure by the Company to be in  compliance.
     The Company's  Year 2000 issues relate not only to its own systems but also
     to those of its  customers  and  suppliers.  The Company does not currently
     have  any  information  concerning  Year  2000  compliance  status  of  its
     customers and suppliers. In the event that any of the Company's significant
     customers or suppliers does not  successfully  and timely achieve Year 2000
     compliance,  the  Company's  business  or  operations  could  be  adversely
     affected.


NOTE D - NEW ACCOUNTING PRONOUNCEMENT

    In the  fourth  quarter of 1997,  the  Company  adopted  the  provisions  of
    Statement of Financial  Accounting  Standard No. 128,  "Earnings  Per Share"
    (SFAS 128). In accordance with SFAS 128, the Company computes basic earnings
    per share based on the weighted-average  number of common shares outstanding
    during each period  presented.  Diluted earnings per share is computed based
    on the weighted  average number of common shares plus the dilutive effect of
    all potential dilutive  securities,  principally stock options and warrants,
    outstanding  during each period  presented.  In all periods  presented,  all
    potential common shares were anti-dilutive.
    Accordingly,  the  adoption  of SFAS 128 had no  effect  on loss  per  share
amounts.


NOTE E - ACQUISITIONS
              PROFORMA BLANCE SHEET AND STATEMENT OF OPERATIONS (unaudited)

     The proforma  Statement of Operations  for the quarter ended March 31, 1998
     and  Consolidated  Balance  Sheet as of March 31,  1998,  reflect  five (5)
     acquisitions  which took place during the quarter  ended March 31, 1998 and
     the  elimination  of $2,725,132 of current  liabilities  as a result of the
     Chapter 7 Bankruptcy  filings of five (5) Company  subsidiaries on February
     16, 1998.






                                      -18-


<PAGE>



Item 2. Management's  Discussion and Analysis of Financial Condition and Results
of Operations.

 Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997

Results of Operations

       Revenues for the quarter  ended March 31, 1998 were $6,538 as compared to
$161,298  for the previous  year's  quarter  ended March 31, 1997.  This drastic
reduction  in  revenues  was  primarily  the  result  of the  discontinuance  of
operations of the New York City C&D transfer  station in February,  1997 and the
lower revenues at the landfill in Allendale,  South  Carolina.  Cost of revenues
also  decreased due to the  drastically  reduced level of  operations.  Selling,
general and  administrative  expenses ("SG&A")  decreased from $1,144,973 in the
quarter  ended March 31, 1997 to $698,842 in the quarter  ended March 31,  1998.
This decrease is explained  primarily by the disposal of various Company assets,
and the  resulting  reduction in  management  and staff  compensation.  The SG&A
amount for both  quarters  included  significant  costs  incurred  for legal and
professional  fees associated  with the financial and operational  restructuring
and the search for working capital.  Interest expense decreased from $109,800 in
the quarter ended March 31, 1997 to $23,971 in the quarter ended March 31, 1998.
This  decrease  was due to the absence in 1998 of the  interest  costs that were
incurred in 1997 due to the outstanding  debentures.  In the quarter ended March
31, 1998,  the  debentures  had been  converted into equity and therefore had no
interest accruals.

Acquisitions

       During  the  first  quarter   of   1998,  the   Company  made  five  5 
significant  acquistions.  These  acquisitions   were  completed   primarily  in
exchange for restricted Common Stock of the Company.  Subsequently,  the Company
has comsummated six additional significant acquisitions.

       Based   upon   unaudited   proforma   financial   statements   for  these
acquisitions  for the quarter ended March 31, 1998  revenues were  approximately
$3,403,790.

                  Liquidity and Capital Resources

       The Company's balance sheet for the quarter ended March 31, 1998 reflects
a working capital deficit of $11,018,558. Accounts receivable and inventory were
the principal  components of the current  assets at the end of the quarter,  and
were $1,107,562 and $2,450,873, respectively.

       Additional  financing  is  required  in order  to  complete  the  planned
improvements  necessary to the  Company's  acquisitions.  The Company is seeking
financing  in the  form of  equity  and  debt in  order  to make  the  necessary
improvements and provide working capital.
There are no  assurances  the Company  will be  successful  in raising the funds
required.

       The  Company has issued  shares of its Common  Stock from time to time in
the past to  satisfy  certain  obligations,  and  expects  in the future to also
acquire  certain  services,   satisfy   indebtedness  and/or  make  acquisitions
utilizing authorized shares of the capital stock of the Company.

       The Company  anticipates  that any future business  acquisitions  will be
financed through cash from operations, borrowings, the issuance of shares of the
Company's Common Stock and/or seller  financing.  If acquisition  candidates are
unwilling  to  accept,  or the  Company  is  unwilling  to issue,  shares of the
Company's Common Stock as part of the consideration for such  acquisitions,  the
Company  would be required to utilize more of its  available  cash  resources or
potential  borrowings in order to effect such  acquisitions.  To the extent that
cash from operations or borrowings is  insufficient  to fund such  requirements,
the Company will require  additional  equity  and/or debt  financing in order to



                                      -19-

<PAGE>


provide the cash to effect such acquisitions.  Additionally,  growth through the
development  or  acquisition  of  new  landfills,  transfer  stations  or  other
facilities,  as well as the  ongoing  maintenance  of such  landfills,  transfer
stations or other facilities,  will require  substantial  capital  expenditures.
There can be no assurance that the Company will have sufficient existing capital
resources or will be able to raise sufficient  additional  capital  resources on
terms satisfactory to the Company, if at all, in order to meet any or all of the
foregoing capital requirements.

       In order to satisfy the liquidity  needs of the Company for the following
twelve  months,  the Company will be primarily  dependent upon proceeds from the
sale of the Company's  capital stock and cash flow from the  operations of other
companies  which have been  acquired or may be acquired as part of the company's
expansion plans.  Historically,  revenues from the existing  operations have not
been adequate to fund the operations of the Company. If the Company is unable to
obtain  adequate  funds from the sale of its stock in public  offerings  private
placements  or  alternative  financing  arrangements,  it  may be  necessary  to
postpone any additional  acquisitions and continue to consolidate the operations
of the  acquisitions  already  completed and use cash flow for internal  growth.
Because of potential political,  legal,  bureaucratic,  and other factors, there
can be no assurance that the Company will be able to accomplish any of its goals
within a reasonable period of time.

Potential Discharge of Indebtedness in Bankruptcy Proceedings

       On February 11, 1998, the Company's wholly-owned subsidiary, WasteMasters
of South Carolina,  Inc., filed a voluntary petition for relief under Chapter 11
of the U.S.  Bankruptcy Code with the Bankruptcy Court for the Northern District
of Georgia.

       On February 16, 1998 five (5)  wholly-owned  subsidiaries  of the Company
filed petitions for protection  under Chapter 7 of the United States  Bankruptcy
Code with the  Bankruptcy  Court  for the  Northern  District  of  Georgia.  The
subsidiaries  are:  F&E  Resource  Systems   Technology  for  Baltimore,   Inc.,
WasteMasters of Louisiana, Inc., WasteMasters of Michigan, Inc., WasteMasters of
New York, Inc.
and WasteMasters of Pennsylvania, Inc.

       Active business for each of these subsidiaries had ceased during 1996 and
the assets had been liquidated as the result of various voluntary  dispositions,
foreclosure  proceedings,  or other  creditor  actions.  No assets  exist in the
respective subsidiaries to satisfy the creditors claims, and the parent company,
WasteMasters,  Inc. is believed to have no  obligation  in  connection  with the
indebtedness  of these  subsidiaries.  The bankruptcy  proceedings  are pending;
however,  the Company believes the debt of these subsidiaries will be discharged
upon the completion of the bankruptcy proceedings.  Accordingly, the Company has
determined that debt in the aggregate amount of approximately $2,725,132 will be
extinguished  during  1998,  which will  result in a gain to be  recorded by the
Company.



PART II.  OTHER INFORMATION.

Item 1.  Legal Proceedings.

       Beginning in September  1997, new management has  aggressively  sought to
identify,  evaluate,  and resolve many of the claims  against the Company  which
arose  under  prior  management.  Although  the  ultimate  disposition  of legal
proceedings cannot be predicted with certainty, it is the present opinion of the
Company's management that the outcome of any of these claims which is pending or
threatened, either individually or on a combined basis, will not have a material
adverse effect on the consolidated financial condition of the Company, but could
materially effect consolidated results of operations in a given period.

                                      -20-

<PAGE>



       In the normal  course of its  business  and as a result of the  extensive
governmental  regulation  of the waste  industry,  the Company may  periodically
become  subject to various  judicial and  administrative  proceedings  involving
Federal,  state or local agencies.  In these proceedings,  an agency may seek to
impose  fines on the Company or to revoke,  or to deny  renewal of, an operating
permit held by the Company. In addition, the Company may become party to various
claims and suits pending for alleged  damages to persons and  property,  alleged
violation  of certain  laws and for alleged  liabilities  arising out of matters
occurring  during  the  normal  operations  of the  waste  management  business.
However, there is no current proceeding or litigation involving the Company that
it believes will have a material  adverse  effect upon the  Company's  business,
financial condition and results of operations.

       The Company is  currently  involved in certain  routine  litigation.  The
Company  believes  that all such  litigation  arose in the  ordinary  course  of
business and that costs of settlements or judgments arising from such suits will
not have a materially  adverse effect on the Company's  consolidated  liquidity,
financial position or results of operations.

       Reis v.  WasteMasters,  Inc. On June 4, 1996,  Michael  Reis and Lawrence
Katz filed a complaint in the United States  District  Court for the District of
New  Jersey.  The  Complaint  seeks  unspecified  damages  based on a  purported
contract  between the Plaintiffs  and the Company for a financing  placement and
corporate  development  fee. The Company believes the complaint is without merit
and intends to vigorously defend its position.

       Peerless Group, Inc. In RE: George Cadle v.  WasteMasters,  Inc. et al On
May 8, 1997, the Company was advised by the seller of the land contract purchase
agreement for the landfill in Allendale County,  South Carolina that the Company
was in default under the terms of the contract.  In July,  1997, the seller sued
in the Court of Common Pleas Allendale  County,  South Carolina to terminate the
land contract.  This matter has been stayed by Chapter 11 Bankruptcy proceedings
on February 11, 1998 for WasteMasters of South Carolina.

       CSX Transportation, Inc. v. WasteMasters,  Inc. Suit was filed  September
25, 1997.  Plaintiff's  claim is based on a contract for the  transportation  of
non-hazardous construction debris. Plaintiff demands a judgment for $258,215.60.

       Steffen  Robertson and Kirsten,  Inc.  ("SRK") v.  WasteMasters  of South
Carolina,  Inc.,  George Cadle,  E&J  Landscaping,  Inc.  Court of Common Pleas,
Allendale  County,  South Carolina.  This is an action to foreclose a mechanic's
lien on property  in  Allendale  County due to lack of payment  for  engineering
services.  Damages sought are $135,822.07  plus interest.  Also, as part of this
litigation,  E&J landscaping  also holds an Order of Judgment by Default against
WasteMasters of South Carolina for $458,206.80 plus post-judgment interest. This
matter has been stayed by Chapter 11 Bankruptcy proceedings on February 11, 1998
for WasteMasters of South Carolina.

       Mudge Rose Guthrie Alexander & Ferdon v. Ronald W. Pickett,  F&E Resource
Systems Technology, Inc. and WasteMasters, Inc. United States District Court for
the District of New York.  The  Plaintiff's  claim is based upon legal  services
rendered  to  F&E  Resource  Systems  Technology  and  other  subsidiaries.  The
Plaintiff has demanded the  outstanding  amount of $885,466.80  plus interest at
the maximum  rate  provided,  plus the cost of the lawsuit and other and further
relief. The complaint was filed on September 24, 1997. The Company has filed its
answers and is vigorously defending its position.

       Coastal, Ltd. V. WasteMasters, Inc. et al  Filed in  the Court of  Common
Pleas,  Franklin  County,  Ohio. This suit was brought in relation to an alleged
default  on  a  purchase  agreement  and  sub-lease  situation  on  property  in
Baltimore, Maryland. Plaintiff claims damages of $3.2 million.

Potential Discharge of Indebtedness in Bankruptcy Proceedings

       On February 16, 1998 five (5)  wholly-owned  subsidiaries  of the Company
filed petitions for protection  under Chapter 7 of the United States  Bankruptcy
Code with the  Bankruptcy  Court  for the  Northern  District  of  Georgia.  The
subsidiaries  are:  F&E  Resource  Systems   Technology  for  Baltimore,   Inc.,


                                      -21-

<PAGE>


WasteMasters of Louisiana, Inc., WasteMasters of Michigan, Inc., WasteMasters of
New York, Inc. and WasteMasters of Pennsylvania, Inc.

       Active business for each of these subsidiaries had ceased during 1996 and
the assets had been liquidated as the result of various voluntary  dispositions,
foreclosure  proceedings,  or other  creditor  actions.  No assets  exist in the
respective subsidiaries to satisfy the creditors claims, and the parent company,
WasteMasters,  Inc. is believed to have no  obligation  in  connection  with the
indebtedness  of these  subsidiaries.  The bankruptcy  proceedings  are pending;
however,  the Company believes the debt of these subsidiaries will be discharged
upon the completion of the bankruptcy proceedings.  Accordingly, the Company has
determined that debt in the aggregate amount of approximately $2,725,132 will be
extinguished  during  1998,  which will  result in a gain to be  recorded by the
Company.

       On  February  11,  1998,  the  Company's   wholly-owned   subsidiary, 
WasteMasters of South Carolina,  Inc., filed a voluntary  petition under Chapter
11 of the U. S.  Bankruptcy  Code with the  Bankruptcy  Court  for The  Northern
District of Georgia.

Item 2.  Changes in Securities and Use of Proceeds.

         The  outstanding  principal  amount  of  the  Series  A  and  Series  B
Convertible  Debentures (the  "Debentures") was $2,986,000 at December 31, 1997,
plus accrued interest of approximately $402,326.  Prior to September,  1997, the
Company had defaulted  upon several key  provisions of the  Debentures,  thereby
triggering  substantial  penalties.  The principal,  interest and penalties were
subject to  conversion  into shares of the Company's  Common Stock.  Following a
declaration of default and demand for payment of the unpaid  principal,  accrued
interest  and  penalties,  the  Debenture  holders  filed  a  civil  action  for
collection of amounts due. Following negotiations, the Company and the debenture
holders  entered  into  a  Compromise   Settlement  Agreement  (the  "Settlement
Agreement"),  which was entered as a Consent Judgment and filed February 5, 1998
in the U.S. District Court for the Northern  District of Texas.  Pursuant to the
Settlement Agreement,  the Company was to issue sixty three million (63,000,000)
shares  of  restricted   Common  Stock  in  exchange  for  cancellation  of  the
Debentures,  accrued interest and penalties. The Debenture holders also received
warrants for the purchase of up to one hundred million (100,000,000)  restricted
shares of the Company's  Common Stock  exercisable  in specified  quantities and
time  periods  over the next two (2) to five (5)  years at an  average  price in
excess  of $1.50  per  share.  The  Settlement  Agreement  also  stipulated  the
outstanding  principal  amount of the  Debentures  would be  modified  effective
December  31,  1997,  to  reflect  the total  amount  due  under the  Settlement
Agreement of $13,751,102.  Accordingly,  an additional obligation of $10,441,636
was recorded at December 31, 1997, with a corresponding charge to earnings.  The
entire amount of $13,751,102 was converted in exchange for 63,000,000  shares of
the Company's restricted common stock. As a result of the settlement  agreement,
the Company reflected a reduction of liabilities in the first quarter of 1998 of
$13,751,102, with a corresponding increase in stockholders equity.

Item 4.  Submission of Matters to a Vote of Securityholders.

       At  December  31,  1997,  The  Company's  authorized  capital  stock  was
35,000,000  shares of Common  Stock,  par value $0.01 per share,  and  5,000,000
shares of preferred  stock, par value $0.01 per share. On that date, the Company
had  outstanding  34,967,126  shares of Common  Stock  and  5,000,000  shares of
preferred stock.

Meeting of Stockholders on February 6, 1998.

       An annual meeting of  stockholders  was held on February 6, 1998. At this
meeting,  the  stockholders  approved an amendment to its charter to establish a
classified  board of directors  and to establish  terms for directors in each of
three  classes.  Class A was  designated for directors who are to serve terms of
three years;  Class B was designated for directors who are to serve terms of two
years;  and Class C was  designated  for directors who are to serve terms of one

                                      -22-

<PAGE>

year. For the proposal to establish a classified board of directors,  79,840,258
affirmative votes and 183,469 negative votes were cast, with 82,045  abstentions
and 13,775,594 broker non-votes.

       Persons  elected at this  meeting of  stockholders  to  serve  as Class A
directors were Mr. Douglas C. Holsted and Mr. R. Dale Sterritt,  Jr.; elected to
serve as Class B directors  were Mr. S. Theis Rice and Mr. A. Leon  Blaser;  and
elected to serve as Class C directors were Mr. William L.  Hutchinson,  Mr. Noel
F. Khalil,  and Mr. Brian  Galligan.  The results of voting for the nominees for
director were:

                    Nominee                  Votes For            Votes Withheld
                    -------                  ---------            --------------
          Douglas C. Holsted                93,767,004               114,362
          A. Leon Blaser, Ph.D              93,558,308               323,058
          Brian Galligan                    93,767,379               113,987
          R. Dale Sterritt, Jr.             93,585,104               296,262
          S. Theis Rice                     93,767,379               113,987
          William L. Hutchinson             93,767,379               113,987
          Noel F. Khalil                    93,767,379               113,987

       At this meeting,  the stockholders  also voted upon proposals to effect a
reverse split of the Company's  capital stock and to further approve an increase
in the  amount of its  authorized  Common  Stock and  Preferred  Stock.  For the
proposal to effect a one for ten reverse split of the Company's  capital  stock,
92,409,396  affirmative  votes and 937,936 negative votes were cast, with 47,488
abstentions  and 486,546  broker  non-votes.  For the  proposal to increase  the
authorized Common and Preferred Stock,  79,639,495 affirmative votes and 399,384
negative  votes  were  cast,  with  66,893  abstentions  and  13,775,594  broker
non-votes.

       On  February  5, 1998,  the  Company  and the holders of the Series A and
Series B Convertible  Debentures  (the  "Debentures")  entered into a Compromise
Settlement  Agreement which was entered as a Consent Judgment and filed February
5, 1998 in the U.S.  District Court for the Northern  District of Texas,  Dallas
Division.  This Consent Judgment  provided for the settlement of all claims in a
civil action  brought  against the Company by the holders of the  Debentures for
unpaid  principal,  accrued  interest and penalties.  Pursuant to the Settlement
Agreement the Company was to issue 63 million shares of restricted  Common Stock
in exchange for cancellation of the Debentures,  accrued interest and penalties.
The  Debenture  holders  also  received  warrants  for the purchase of up to 100
million restricted shares of the Company's Common Stock exercisable in specified
quantities  and time periods over the next two to five years at an average price
in excess of $1.50 per share. The Consent Judgment stipulated the holders of the
Debentures  would be  entitled to vote the  63,000,000  shares at the meeting of
shareholders on February 6, 1998.  Therefore,  these shares were included in the
votes counts indicated above.

Consent of Stockholders on February 16, 1998.

       The intent of the Board of Directors in  recommending  the reverse  stock
split to the  stockholders  meeting on  February  6, 1998 was to comply with the
minimum bid price requirements of The Nasdaq Stock Market,  Inc. ("Nasdaq") as a
condition for continued listing on the Nasdaq SmallCap Market. However,  because
the  trading  price of the  Company's  Common  Stock  during  the period of time
following the stockholders' meeting was sufficiently above the minimum bid price
requirement of Nasdaq, the Board of Directors determined it was not necessary at
this time to effectuate the reverse stock split as approved by the  stockholders
at its February 6th meeting.

       Accordingly,  effective  on February  16, 1998, a consent was executed by
shareholders representing 81.9% of the outstanding shares of the Common Stock of
the  Company to  authorize  an  increase in the  authorized  capital  stock from
40,000,000 shares to 500,000,000 shares in order to satisfy the Consent Judgment

                                      -23-

<PAGE>


dated  February  5,  1998  and have  sufficient  shares  to  satisfy  all  other
outstanding  obligations  and ongoing  business  demands.  This  increase in the
number of authorized  shares was in an amount to correspond with the increase in
the capital  stock  approved by  stockholders  at the February  6th meeting,  if
calculated on a pre-split basis. On February 25, 1998,  Articles of Amendment to
the Articles of Incorporation  of WasteMasters,  Inc. were filed in the state of
Maryland  providing  for an increase in the  capital  stock of the Company  from
40,000,000  shares (5,000,000 shares of Preferred Stock and 35,000,000 shares of
Common  Stock) to  500,000,000  shares of capital  stock,  (5,000,000  shares of
Preferred Stock and 495,000,000 shares of Common Stock).

Item 5.  Other Information.

Significant Acquisitions During First Quarter 1998:

       Sales  Equipment  Company,   Inc.  ("SECO")  in  exchange  for  7,600,000
restricted  shares of the  Company's  Common  Stock and  options to  purchase an
additional  3,000,000 restricted shares of its Common Stock until specified time
periods at an exercise  price of $4.17 per share.  SECO,  founded in 1949,  is a
manufacturer  and  distributor  of equipment in the  pressurized  gas  equipment
industry.  SECO has 40  employees  and  generated  revenues in 1997 of over $7.6
million.  SECO's main facility is located in Oklahoma  City,  with  locations in
Tyler and El Paso, Texas.

       C.A.T.  Recycling,  Inc.  ("CAT") in exchange for 3,250,000 shares of the
Company's  restricted  Common  Stock  and  options  to  purchase  an  additional
3,000,000  restricted  shares of its Common Stock at specified  amounts and time
periods at an average  price of $1.56.  CAT,  which owns and operates  recycling
facilities  in Pompano,  St.  Lucie,  Dania,  and West Palm Beach  Florida and a
construction  and demolition  ("C&D")  landfill in Sebring,  Florida,  generated
revenues in 1997 in excess of $3 million.

       Mini-Max Enterprises,  Inc. in exchange for 464,286  restricted shares of
the Company's Common Stock. Mini-Max, founded in 1968, is an interstate trucking
company  licensed by the Interstate  Commerce  Commission to conduct business in
the contiguous 48 states

       Wood Management,  Inc. in exchange for 1,500,000 restricted shares of the
Company's  Common Stock.  Wood  Management,  founded in 1993,  holds a permit to
process 1,200 tons per day of tree stumps,  mixed wood,  pallets and yard waste.
Processing  of these  recyclables  results  in the  production  of end  products
ranging from wood chips to mulch to high quality  topsoil.  Rail access  between
Wood  Management's   16-acre  facility  and  another  of  the  Company's  recent
acquisitions,  Mini-Max  Enterprises,  Inc.,  is  expected  to  provide  certain
synergies of operations.

       Southeastern  Research  and  Recovery,   Inc.  ("SRR")  in  exchange  for
2,400,000  restricted  shares of the Company's Common Stock. The transaction was
closed  effective  March 31, 1998. SRR owns and operates a  non-hazardous  waste
facility located in South Carolina that processes industrial sludge prior to its
disposal in Subtitle D landfills.

Subsequent Events

Potential Discharge of Indebtedness in Bankruptcy Proceedings

       On February 16, 1998 five (5)  wholly-owned  subsidiaries  of the Company
filed petitions for protection  under Chapter 7 of the United States  Bankruptcy
Code with the  Bankruptcy  Court  for the  Northern  District  of  Georgia.  The
subsidiaries  are:  F&E  Resource  Systems   Technology  for  Baltimore,   Inc.,

                                      -24-

<PAGE>


WasteMasters of Louisiana, Inc., WasteMasters of Michigan, Inc., WasteMasters of
New York, Inc. and WasteMasters of Pennsylvania, Inc.

       Active business for each of these subsidiaries had ceased during 1996 and
the assets had been liquidated as the result of various voluntary  dispositions,
foreclosure  proceedings,  or other  creditor  actions.  No assets  exist in the
respective subsidiaries to satisfy the creditors claims, and the parent company,
WasteMasters,  Inc. is believed to have no  obligation  in  connection  with the
indebtedness  of these  subsidiaries.  The bankruptcy  proceedings  are pending;
however,  the Company believes the debt of these subsidiaries will be discharged
upon the completion of the bankruptcy proceedings.  Accordingly, the Company has
determined that debt in the aggregate amount of approximately $2,725,132 will be
extinguished  during  1998,  which will  result in a gain to be  recorded by the
Company.

       On February 11, 1998, the Company's wholly-owned subsidiary, WasteMasters
of South Carolina,  Inc., filed a voluntary petition for reorganization  Chapter
11 of the U. S.  Bankruptcy  Code with the  Bankruptcy  Court  for The  Northern
District of Georgia.

Significant Acquisitions Subsequent to March 31, 1998:

(1) The  controlling  interest in Atlas  Environmental,  Inc.  (Over-the-Counter
Trading Symbol: ATEV) ("Atlas") voting common stock was acquired from a group of
Atlas  shareholders in exchange for 342,591  restricted  shares of the Company's
Common Stock. In connection with the  transaction,  four (4) additional  members
designated by the Company were added to the Atlas board of directors  giving the
Company control of the board.  Atlas is believed to be the largest  construction
and    demolition    debris    recycler   and   the   largest    remediator   of
petroleum-contaminated  soils in the State of Florida. Atlas, which, among other
holdings owns four recycling facilities and a construction and demolition debris
landfill, generated revenues in 1997 in excess of $16 million.

(2) C & D Recycling Corp.  ("C&D") in exchange for 304,000  restricted shares of
the Company's Common Stock. Additional  consideration will be paid to the seller
conditioned upon the granting of a permit for a vertical  expansion.  C&D owns a
64 acre  construction  and  demolition  debris  landfill in  Homestead,  Florida
serving Miami and the Florida Keys. This landfill had ceased operations in early
1998.  The  Company  intends  to reopen  this  landfill  which  has a  potential
remaining capacity of 3,227,500 gate yards.

(3) The assets of  American  Recycling  And  Management  Corporation  ("American
Recycling") located in Perrine (Homestead area), Florida (including equipment, a
40-acre tract of real property newly permitted for a construction and demolition
debris  landfill,  and  associated  permits) in exchange for 837,000  restricted
shares of the Company's  Common Stock.  The Company intends to immediately  open
this landfill  which has a potential  capacity of  approximately  4 million gate
yards.

(4) The assets of Palm Coast  Carting  And  Recycling,  Inc.  ("Palm  Coast") of
Pompano Beach, Florida,  including trucks, containers, and customer contracts in
exchange for 110,000 restricted shares of the Company's Common Stock. Palm Coast
is a commercial  hauler  heavily  engaged in the  recycling  sector of the waste
industry.  The  acquisition is projected to add an additional  $250,000 in gross
annual revenues to the Company.

(5) The assets of Palm Beach Transfer And Recycling  ("Palm  Beach")  located in
West  Palm  Beach,  Florida,  (including  equipment,  a  10-acre  tract  of real
property,  and associated  permits) in exchange for 943,334 restricted shares of
the Company's Common Stock. Palm Beach is currently a five (5) acre transfer and
recycling facility permitted for 560 yards per day. The facility handles roofing
material,  construction and demolition debris, vegetation, clean concrete, clean
wood, and mulch and grass. Effective June 1, this facility will be expanded to a
9.5-acre  site with  increased  permitted  capacity to 2,500 yards per day.  The
acquisition  is  projected  to add an  additional  $3.5 to $4.5 million in gross
annual revenues to the Company.

                                      -25-

<PAGE>


(6) The assets of United Waste Associates, Inc. (including a fleet of collection
vehicles and  approximately  450 "containers") in exchange for 707,334 shares of
restricted  WasteMasters common stock. United, based in Pompano Beach,  Florida,
is a commercial hauler servicing Monroe,  Dade, Broward,  Palm Beach, Martin and
St.  Lucie  Counties,   which  currently  offers  commercial   garbage  service,
construction and demolition debris hauling and comprehensive recycling services.
The United  acquisition  is expected to add  approximately  $3,000,000 in annual
revenues to  WasteMasters,  bringing  the annual "run rate" of the  WasteMasters
family of companies to a figure in excess of $40 million.


Item 6.  Exhibits and Reports on Form 8-K.

          (a) Furnish the exhibits required by Item 601 of Regulation S-B.

                None

          (b) Reports on Form 8-K.

                None



                                   SIGNATURES

       In accordance  with the  requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                                               WASTEMASTERS, INC.

                                                       
                                               By: /S/ G. Michael Lawshe
                                               ---------------------------------
                                               G. Michael Lawshe
                                               Corporate Secretary and Treasurer


DATE:  May 20, 1998





                                      -26-