SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q


              Quarterly Report Pursuant to Section 13 or 15 (d) of
                       the Securities Exchange Act of 1934
                    For The Quarter Ended September 30, 1996
                         Commission File Number 0-14881


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




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



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



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





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




         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, at the latest  practicable  date.  Common stock, no par
value 11,634,400, November 8, 1996.


<PAGE>






PART I:  FINANCIAL INFORMATION
Item 1.  Financial Statements


                              WASTE RECOVERY, INC.
                           Consolidated Balance Sheets
<TABLE>
<CAPTION>

<S>                                                                            <C>              <C> 


                                Assets                                  September 30, 1996      December 31, 1995
                                ------                                  ------------------      -----------------
                                                                           (Unaudited)
Current Assets:
     Cash and cash equivalents                                           $     318,501          $     726,562
     Accounts receivable, less allowance for doubtful accounts
        of $36,926 and $27,083, respectively                                 1,714,979              1,887,426
     Other receivables (note 2)                                                657,010                  5,758
     Inventories (note 3)                                                      972,834                645,651
     Other current assets                                                      495,199                149,912
                                                                        --------------         --------------
          Total current assets                                               4,158,523              3,415,309
                                                                        --------------         --------------

Property, plant and equipment                                               12,871,308             11,700,255
     Less accumulated depreciation                                           7,581,618              6,840,820
                                                                        --------------         --------------
          Net property, plant and equipment                                  5,289,690              4,859,435
                                                                        --------------         --------------

Restricted cash and cash equivalents (note 2)                                  523,528                998,035
Investment in Waste Recovery - Illinois                                       (338,150)               258,539
Bond and debt issuance costs, less accumulated amortization of
    $177,198 and $153,287, respectively                                        151,136                175,046
Deferred income taxes                                                          447,543                447,543
Goodwill, less accumulated amortization of $82,329 and
    $41,164, respectively                                                      466,530                507,695
Other assets (note 2)                                                          574,820                 70,797
                                                                        --------------         --------------

                                                                         $  11,273,620          $  10,732,399
                                                                        ==============          =============


See accompanying notes to consolidated financial statements.

                                       2
</TABLE>
<PAGE>


                              WASTE RECOVERY, INC.
                           Consolidated Balance Sheets
<TABLE>
<CAPTION>

<S>                                                                           <C>               <C>


                Liabilities and Stockholders' Equity                    September 30, 1996      December 31, 1995
                ------------------------------------                    ------------------      -----------------
                                                                            (unaudited)
Current Liabilities:
     Notes payable                                                        $     235,957        $        28,945
     Convertible subordinated debentures (note 4)                                     -                 40,000
     Current installments of long-term debt (note 5)                          2,250,446                427,552
     Current installments of capital lease obligations                          103,312                 93,423
     Accounts payable                                                         2,528,676              1,996,857
     Accrued wages and payroll taxes                                            203,694                174,753
     Other accrued liabilities                                                  454,978                372,800
     Deferred revenue                                                            43,476                 43,476
                                                                            -----------           ------------
          Total current liabilities                                           5,820,539              3,177,806
                                                                            -----------           ------------

Convertible subordinated debentures, noncurrent (note 4)                              -                495,000
Long-term debt, excluding current installments (note 5)                       1,548,387              3,591,376
Obligations under capital leases, excluding current
   installments                                                                 131,454                178,797
Deferred revenue, noncurrent                                                    213,734                246,338
Note payable                                                                    157,583                144,076
                                                                            -----------           ------------
          Total liabilities                                                   7,871,697              7,833,393
                                                                            -----------           ------------

Stockholders' Equity (notes 4 and 7):
     Cumulative  preferred stock,  $1.00 par value,  250,000 shares  authorized,
        203,580 issued and outstanding in 1996 and 1995 (liquidating  preference
        $14.43 per share, aggregating
         $2,938,606)                                                            203,580                203,580
     Preferred stock, $1.00 par value, authorized and unissued
        9,750,000 shares in 1996 and 1995
     Common stock, no par value, authorized 30,000,000 shares,
        11,584,400 and 10,830,170 shares issued and outstanding
        in 1996 and 1995, respectively                                          407,800                407,800
     Additional paid-in capital                                              13,897,917             13,320,410
     Accumulated deficit                                                    (11,033,494)           (10,958,904)
                                                                              3,475,803              2,972,886
     Treasury stock, at cost, 103,760 common shares                             (73,880)               (73,880)
          Total stockholders' equity                                          3,401,923              2,899,006

                                                                          $  11,273,620        $    10,732,399
                                                                            ===========            ===========


                         See accompanying notes to consolidated financial statements.

                                       3
</TABLE>
<PAGE>


                              WASTE RECOVERY, INC.
                      Consolidated Statements Of Operations
                                   (Unaudited)
<TABLE>
<CAPTION>

<S>                                                                            <C>                <C> 


                                                                             Three Months Ended September 30,
                                                                             -------------------------------
                                                                               1996                   1995
                                                                               ----                   ----

Revenues:
     Tire-derived fuel sales                                               $    402,737            $   254,729
     Wire sales (note 6)                                                        146,146                      -
     Disposal fees, hauling and other revenue                                 3,698,062              3,279,874
                                                                           ------------            -----------
          Total revenues                                                      4,246,945              3,534,603

Operating expenses                                                            2,763,814              2,675,095
                                                                           ------------            -----------
                                                                              1,483,131                859,508

General and administrative expenses                                             758,307                671,351
Depreciation and amortization                                                   273,170                257,292
                                                                           ------------            -----------
                                                                                451,654                (69,135)

Other income (expense):
     Other income (note 7)                                                       12,207                324,775
     Interest income                                                             36,972                 27,174
     Interest expense                                                          (107,793)              (118,885)
     Gain on sale of property and equipment                                       2,400                      -
     Equity in loss from partnership operations                                (192,506)                   505
                                                                           ------------            -----------
                                                                               (248,270)               233,569

Net income before income taxes                                                  203,384                164,434
     Provision for income taxes                                                       -                 21,750
                                                                           ------------            -----------
                                                                                     
Net income                                                                 $    203,384            $   142,684
                                                                           ============            ===========

Undeclared cumulative preferred stock dividends (note 8)                   $     35,919            $    35,919
                                                                           ============            ===========

Net income available to common shareholders                                $    167,465            $   106,765
                                                                           ============            ===========

Net income per common share (note 8)                                       $       0.01            $      0.01
                                                                           ============            ===========

Weighted average number of common and dilutive                               11,966,896             11,241,983
 common equivalent shares outstanding                                      ============            ===========
    





                          See accompanying notes to consolidated financial statements.


                                                      4
 
<PAGE>


                              WASTE RECOVERY, INC.
                      Consolidated Statements Of Operations
                                   (Unaudited)



                                                                             Nine Months Ended September 30,
                                                                             -------------------------------
                                                                               1996                   1995
                                                                               ----                   ----

Revenues:
     Tire-derived fuel sales                                              $     991,968          $     752,089
     Wire sales (note 6)                                                        263,855                      -
     Disposal fees, hauling and other revenue                                10,582,023              9,203,883
                                                                           ------------            -----------
          Total revenues                                                     11,837,846              9,955,972

Operating expenses                                                            8,064,243              7,303,635
                                                                           ------------            -----------
                                                                              3,773,603              2,652,337

General and administrative expenses                                           2,196,284              1,734,083
Depreciation and amortization                                                   811,202                720,219
                                                                           ------------            -----------
                                                                                766,117                198,035
                                                                           ------------            -----------

Other income (expense):
     Other income (note 7)                                                       61,768                362,520
     Interest income                                                             56,620                 42,039
     Interest expense                                                          (369,923)              (350,342)
     Gains on sales of property and equipment                                     7,457                      -
     Equity in loss from partnership operations                                (596,629)               (56,350)
                                                                           ------------            -----------
                                                                               (840,707)                (2,133)

Net income (loss) before income taxes                                           (74,590)               195,902
     Provision for income taxes                                                                         21,750
                                                                                      -
Net income (loss)                                                         $     (74,590)         $     174,152
                                                                           ============            ===========

Undeclared cumulative preferred stock dividends (note 8)                  $     106,977          $     106,585
                                                                           ============            ===========

Net income available to common shareholders                               $    (181,567)         $      67,567
                                                                           ============            ===========

Net income per common share (note 8)                                      $       (0.02)         $        0.01
                                                                           =============           ===========

Weighted average number of common and dilutive
     common equivalent shares outstanding                                    11,046,395              9,247,134
                                                                           ============            ===========





                         See accompanying notes to consolidated financial statements.

                                                  5

</TABLE>
<PAGE>



                              WASTE RECOVERY, INC.
                      Consolidated Statements of Cash Flows
                                   (Unaudited)
<TABLE>
<CAPTION>

<S>                                                                            <C>                <C> 
                                                                             Nine Months Ended September 30,
                                                                             -------------------------------
                                                                               1996                   1995
                                                                               ----                   ----

Cash flows from operating activities:
     Net income (loss)                                                    $     (74,590)          $    174,152
     Adjustments to reconcile net income to net cash provided
        (used) by operating activities:
            Deferred income taxes                                                     -                 21,750
            Depreciation and amortization                                       772,165              1,092,467
            Gain on sale of property, plant and equipment                        (7,457)                     -
            Amortization of goodwill                                             41,165                      -
            Interest imputed on discounted note payable                          13,507                  4,502
            Earnings from Partnership development fee                                 -               (412,500)
            Equity in loss from partnership operations                          596,689                 56,350
            Stock issued to Directors                                            13,995                 12,000
     Changes in assets and liabilities:
            Accounts receivable                                                 172,447                185,786
            Note and other receivables                                           (4,822)                     -
            Inventories                                                        (327,183)              (759,431)
            Other current assets                                               (345,287)               (33,495)
            Other assets                                                         (4,023)                19,899
            Accounts payable                                                    462,056               (518,521)
            Accrued liabilities                                                 111,119                 14,204
            Deferred revenue                                                    (32,604)                     -  
                                                                           ------------           -------------
                                                                                                            
               Net cash provided (used) by operating activities               1,387,177               (142,837)
                                                                           ------------           ------------

Cash flows from investing activities:
     Proceeds received on note and other receivables                                  -                408,204
     Proceeds received on sale of property, plant and equipment                   6,000                      -
     Purchases of property, plant and equipment                              (1,010,749)            (1,328,987)
     Purchase of Domino Salvage, Tire Division, Inc.,
        net of cash received of $16,165                                               -               (151,441)
     Cash placed in restricted accounts                                         (25,493)               (30,200)
     Cash payments out of restricted accounts                                   500,000                      -
     Receivable from affiliate                                               (1,201,667)               (59,274)
                                                                             ----------             ---------- 
               Net cash used by investing activities                         (1,731,909)            (1,161,698)
                                                                             ----------             ---------- 

Cash flows from financing activities:
     Proceeds from issuance of notes payable                                    298,405                 69,034
     Payment of notes payable                                                   (91,393)              (196,531)
     Proceeds from issuance of convertible subordinated debentures               85,000                      -
     Payment upon maturity of convertible subordinated debentures               (85,000)                     -
     Proceeds from issuance of long-term debt                                          -                88,230
     Repayment of long-term debt                                               (220,095)              (169,678)
     Repayment of capital lease obligations                                     (78,758)              (100,712)
     Proceeds from issuance of common stock                                      28,512              2,205,208
                                                                           ------------           ------------
               Net cash provided (used) by financing activities                 (63,329)             1,895,551
                                                                           ------------           ------------

Net increase (decrease) in cash and cash equivalents                           (408,061)               591,016
Cash and cash equivalents at beginning of period                                726,562                261,118
                                                                           ------------           ------------
Cash and cash equivalents at end of period                                 $    318,501           $    852,134
                                                                           ============           ============


                        See accompanying notes to consolidated financial statements.

                                       6
</TABLE>

<PAGE>


                              WASTE RECOVERY, INC.
                   Notes to Consolidated Financial Statements

                               September 30, 1996

Note 1:  Adjustments
         The financial  information presented as of any date other than December
31 has been  prepared  from the  Company's  books  and  records  without  audit.
Financial  information  as of  December  31 has been  derived  from the  audited
financial  statements  of the  Company,  but does not  include  all  disclosures
required  by  generally  accepted  accounting  principles.  In  the  opinion  of
management,  all adjustments,  consisting only of normal recurring  adjustments,
necessary for a fair  presentation of the financial  information for the periods
indicated,  have been  included.  The results of operations for the three months
and nine months ended  September  30, 1996,  are not  necessarily  indicative of
operating  results for the entire year.  For further  information  regarding the
Company's  accounting policies,  refer to the consolidated  financial statements
and related notes  included in the Company's  Annual Report on Form 10-K for the
year ended December 31, 1995.

Note 2:  Note and Other Receivables
         On January 30, 1996,  the Company  advanced  Waste  Recovery - Illinois
$500,000  for the  Illinois  partnership's  February 1, 1996 debt  payment  (the
Company owns a 45% interest in this  partnership).  The loan was approved by the
Executive Committee of the Illinois partnership (the  "Partnership").  The funds
advanced were included in restricted cash at December 31, 1995, and at September
30,  1996  included  in  other  noncurrent  assets  as a note  receivable.  Upon
repayment by Waste  Recovery - Illinois,  the funds will be restricted as to use
and included in restricted cash. The note bears interest at a rate of prime plus
1% with principal and interest due at maturity.  The note matures upon the first
to occur of (i)  determination  by the  Partnership's  Executive  Committee that
there  exists  adequate  funds  available  to make payment to the Company of all
outstanding principal and interest, or (ii) December 31, 1997.

Note 3:  Inventories
         The components of inventories are as follows:

                              September 30, 1996             December 31, 1995
                              ------------------             -----------------
Finished Inventory                    $ 298,136                     $ 228,303
Work-In-Process                         182,484                        12,324
Parts Inventory                         492,214                       405,024
                              -----------------              -----------------
                                      $ 972,834                     $ 645,651
                              =================              =================

Note 4:  Convertible Subordinated Debentures
         As of the  original  maturity  date,  March 15,  1996,  $40,000  of the
convertible  subordinated  debentures  plus interest of $1,995 were converted at
the rate of $.875 per share into 47,994  shares of common  stock.  The remaining
$495,000 in debentures were exchanged for new debentures which carry an interest
rate of 18%  and  mature  on  January  31,  1997.  Other  terms  and  conversion
privileges  are the same as in the  original  debentures.  On July 1, 1996,  the
outstanding  $495,000  in  debentures  plus  accrued  interest  of $46,564  were
converted  at the rate of $.875 per share into 618,930  shares of common  stock.
Upon  conversion,  the debenture  holders also received  warrants to purchase an
additional 304,425 shares of common stock with an exercise price equal to market
at the date of conversion. The warrants expire July 1, 1998.

Note 5:  Long-term Debt
         As of September 30, 1996,  the Company was in technical  default due to
noncompliance  with  its  current  ratio  calculation   required  by  the  10.5%
industrial  development  revenue  bond  debt  covenants.  As a  result  of  this
technical default, $1,560,000 of long-term debt on the bonds was reclassified to
current debt. This default position is not due to nonpayment,  but is the result
of noncompliance  with certain  financial  covenants.  Management of the Company
believes  that  the  direction  of  current  operations  combined  with  actions
currently being taken should cure the technical  noncompliance within the fourth
quarter.


Note 6:  Wire Sales
         As of September  30, 1996,  the Company has completed  installation  of
bead wire  recycling  systems in two plants.  The first system was  installed in
February 1996 at the Baytown  plant,  with the second system  installed in early
June 1996 at the Atlanta  plant.  These systems allow the Company to process the
bead wire  which  was  removed  from the tires  during 

                                       7
<PAGE>


the TDF process into a marketable material. For the three months and nine months
ended  September 30, 1996,  the Company had $146,146 and $263,855 in wire sales,
respectively.

Note 7:  Other Income
         At September 30, 1995,  the Company earned a $750,000  development  fee
from Waste  Recovery-Illinois.  Per the Partnership Agreement, at the completion
and successful  operation of the two Illinois plants, the Company was to be paid
a $750,000 fee.  Fifty-five percent of this fee,  representing the percentage of
the Partnership not owned by the Company,  was recognized in income for the nine
months  ending  September  30, 1995.  The remaining 45% was recorded as deferred
revenue to be recognized such that it will offset the Company's  interest in the
excess depreciation  expense recorded by the Partnership related to this portion
of the plant cost.

Note 8:  Preferred Stock Dividends
         Undeclared  and  therefore  not  payable  cumulative   preferred  stock
dividends were $902,806 at September 30, 1996. Net income or loss is adjusted by
the effect of undeclared  dividends on preferred  stock of $106,977 and $106,585
for the nine months  ended  September  30, 1996 and 1995,  respectively,  and by
$35,919 and  $35,919 for the three  months  ended  September  30, 1996 and 1995,
respectively. The effect was to increase net loss per common share by $.009, and
decrease  net  income  per  common  share by $.012  for the  nine  months  ended
September  30, 1996 and 1995,  respectively,  and decrease net income per common
share by $.003 and $.003 for the three months ended September 30, 1996 and 1995,
respectively.  Primary and fully diluted earnings per share are the same in 1996
and 1995.

Note 9:  Purchase of  Domino Salvage, Tire Division, Inc.
         The following  unaudited pro forma  summary  presents the  consolidated
results of the Company's  operations as if the  acquisition  of Domino  Salvage,
Tire  Division,  Inc. as of March 21, 1995, had occurred at the beginning of the
period  presented.  The  information  does not purport to be  indicative  of the
results that actually would have been obtained if the  operations  were combined
during the periods  presented  and is not intended to be a projection  of future
results or trends.

                                                   For the nine months
                                                 ended September 30, 1995

           Revenues                                     $ 10,190,000
                                                        ============
           Net income (loss)                            $    137,000
                                                        ============
           Earnings per share                           $        .01
                                                        ============

Note 10: The registrant has no material pending legal proceedings.

Other notes have been omitted pursuant to Rule 10-01 (a)(5) of Regulation S-X.


<PAGE>


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


Waste  Recovery,  Inc.,  ("the  Company")  owns and  operates  plants in Baytown
(Houston),   Texas;  Atlanta,  Georgia;   Portland,   Oregon;  and  Conshohocken
(Philadelphia),  Pennsylvania,  the latter  plant  being  owned by a  subsidiary
("Domino") which was purchased on March 21, 1995. Two new tire processing plants
in central and southern Illinois ("the Illinois facilities") began operations in
September  1995.  These plants are owned by Waste Recovery  Illinois,  a general
partnership  ("WR-Illinois") in which the Company owns a 45% interest and is the
managing  partner.  The  Company  operates  the  Illinois  facilities  in  close
coordination with its national system.

Regional  services are coordinated  from the operating  bases  mentioned  above.
Operations encompass full-service scrap tire disposal and the recycling of tires
into a supplemental  fuel form. The Company  generates  revenues from scrap tire
disposal fees,  from the hauling of scrap tires,  from the sale of  tire-derived
fuel  ("TDF"),  and most  recently,  from the sale of bead wire removed from the
tires. At the plants, scrap tires are converted and refined into TDF, a high BTU
supplemental  fuel that is sold  primarily  to major  domestic  cement and paper
manufacturers and, commencing recently, also sold to electric power companies.

To date,  the  effects  of  inflation  on the  Company's  operations  have  been
negligible.

                                General Comments
                                ----------------

Results for the third quarter of 1996 improved as the Company  earned net income
of  $203,384 on  revenues  of  $4,246,945  compared to net income of $142,684 on
revenues of $3,534,603 for the same period in 1995. Revenues were up as a result
of increased TDF sales, higher tire flow, and sales of recycled bead wire, which
represents a new source of revenue for the Company in 1996. TDF sales  increased
at every  plant  Company  wide to $402,737  in 1996 from  $254,729  for the same
period in 1995. While tire flow was flat at the Portland and Atlanta plants, the
Baytown and  Philadelphia  plants showed strong increases for a Company total of
over  41,400  tons in 1996 from  approximately  36,500  tons for the  comparable
period in 1995. The largest increase occurred at the Baytown facility  primarily
due to the fact that the State of Texas' allocation  program,  which limited the
facility's tire flow to a certain  pre-determined  level last year, is no longer
in effect.

The Portland  facility  continues  to maintain its strong  position in the scrap
tire market in the Northwest.  As previously reported,  the Company began a tire
pile clean-up  project in the State of  Washington  in April 1996.  This project
involves the clean-up of approximately  four million  passenger tire equivalents
("PTE's") and 22 million pounds of shredded tires, and has an expected  duration
of approximately  two years if the State dedicates  adequate funds to finish the
project. A wire recycling system like those installed in the Baytown and Atlanta
facilities is currently  being  installed in the Portland plant with an expected
completion date in November 1996.

The Baytown  facility  showed strong  improvement in TDF sales and disposal fees
primarily  as a result  of the  elimination  of the  State  of Texas  allocation
program. Within Texas, the Company is now allowed to collect as many scrap tires
as can be processed  and sold. As the Baytown  facility  entered its second full
quarter of wire  production,  sales were strong as the  response  from the scrap
steel  industry for the Company's  wire product has been very  favorable and has
allowed inventories to turn over quickly.  The Company maintains its position of
being the only  processor in the State of Texas to completely  recycle all scrap
tires received under the Texas program.

The Atlanta facility had increased TDF sales with the addition of a new customer
and increased  consumption by the facility's  existing  customer base.  With the
continued  acceptance  of TDF  as a  supplemental  fuel  by  solid-fuel  burning
industries in the region,  TDF sales are expected to remain consistent and could
continue to  strengthen  in the future.  Tire flow for the Atlanta  facility was
flat for the third  quarter of 1996 when  compared to 1995;  however,  1995 flow
included  tires from the West Virginia  abatement  project as well as a separate
Atlanta cleanup  project,  both of which did not affect the results of the third
quarter of 1996. The absence of scrap tire flow from these sources in 1996 while
maintaining  the same in-flow  level  reflects the growth  achieved in Atlanta's
recurring tire flow customer base.
                                       9

<PAGE>

Although the  Philadelphia  facility  continues  to suffer from a depressed  TDF
market in the  Northeast  with heavy  competition  resulting  in soft demand and
lower prices,  TDF sales were improved for the third quarter in 1996 compared to
the same period in 1995. Tire flow also increased as the result of a more stable
pricing structure.

In late May 1996, legislative changes in the State of Illinois had a significant
impact on WR-Illinois'  operations.  The repeal of certain  legislation  made it
unprofitable  for some Illinois  competitors to collect and process scrap tires.
The impact on  WR-Illinois'  has been very favorable  resulting in a substantial
increase  in tire  flow.  PTE's  received  by  both  Illinois  plants  increased
significantly in the third quarter of 1996. Tire flow for the Southern  Illinois
tire  processing  plant also  increased  due to two tire pile  cleanup  projects
undertaken for the State of Kentucky,  both of which were completed in the third
quarter of 1996. WR-Illinois TDF sales also increased significantly in the third
quarter of 1996.  Although  WR-Illinois has recently  experienced very favorable
changes in the  marketplace  as  described  above,  purchases  of  finished  TDF
inventory from the Company in the third quarter  caused  WR-Illinois to suffer a
net  loss.  In order to ensure an  adequate  TDF  inventory  to  fulfill  supply
contract  requirements during the winter months,  WR-Illinois purchased TDF from
the Company in accordance  with the terms of  WR-Illinois'  general  partnership
agreement.  Associated TDF  transportation  costs in excess of TDF market prices
were expensed,  thus  resulting in a net loss for the third quarter.  Due to the
steady increase of scrap tire flow into the Company's Illinois  facilities,  the
Company  does not expect that  similar  movements  should be necessary in future
periods.
                              Results of Operations
                              ---------------------
                 Third Quarter Ended September 30, 1996 Compared
                 -----------------------------------------------
                   with Third Quarter Ended September 30, 1995
                   -------------------------------------------

Total  revenues of $4,246,945 for the third quarter of 1996 were 20% higher than
the $3,534,603 earned for the same period in 1995. During this period,  disposal
fees, hauling and other revenues increased due to increased tire flow. Increased
TDF sales also  contributed  as did wire sales from wire  systems  installed  in
1996.  Elimination of Texas' allocation program boosted the Baytown plant's tire
flow, and an increase in the Portland  facility's tipping fees combined with the
Washington  clean-up project  contributed to increased revenues for the quarter.
Overall TDF sales increased by  approximately  58% for the third quarter of 1996
when compared to 1995.

Operating  expenses  for the third  quarter  of 1996 were  $2,763,814  or 65% of
revenues, down from $2,675,095 or 76% of revenues for the third quarter of 1995.
The  decrease in  operating  expenses is the result of  production  efficiencies
achieved  through  an  increase  in TDF  production  and the  avoidance  of wire
disposal costs that historically  were incurred.  With an increase in tire flow,
TDF production  increased over 10% in the third quarter of 1996 when compared to
1995,  resulting in the  utilization of excess  production  capacity and thereby
yielding a lower cost per ton for TDF produced.  Operating costs for Domino were
improved for the third  quarter of 1996  compared to 1995  primarily  from these
production  efficiencies  as well as cost  reductions  in the hauling  operation
achieved  since the  acquisition  of Domino at the end of the first  quarter  of
1995.  Operating  expenses were also  positively  affected by the  higher-margin
cleanup project at the Portland plant.

General and  administrative  expenses for the third  quarter of 1996 were higher
when compared to the same period in 1995 ($758,307 to $671,351);  however,  they
decreased  as a percent of total  revenues  from 18.9% in 1995 to 17.9% in 1996.
General  and  administrative  expenses  increased  due to  increases  in  staff,
personnel costs, selling expenses, and other administrative costs resulting from
higher levels of operating activities.

Depreciation and amortization  expense increased 6% to $273,170 from $257,292 in
the third  quarter of 1996  compared to the same period in 1995  primarily  as a
result of the new wire  recycling  systems  installed in the Baytown and Atlanta
plants.

Other income  decreased in the third quarter of 1996 compared to the same period
in 1995 due to the $750,000  development  fee earned by the Company in September
1995. Fifty-five percent of the fee was recognized in income, with the remaining
45% recorded as deferred revenue.

Interest expense  decreased 9% to $107,793 in the third quarter of 1996 compared
to $118,885 in the third quarter of 1995  primarily due to the conversion of the
Company's new subordinated debentures on July 1, 1996.

WR-Illinois, in which the Company has a 45% equity interest, generated a greater
loss in the third quarter of 1996  compared to 1995 as the Illinois  plants were
under the final  stages of  construction  and not  operational  until the end of
September 1995.

                                       10
<PAGE>
                              Results of Operations
                              ---------------------
                  Nine Months Ended September 30, 1996 Compared
                  ---------------------------------------------
                    with Nine Months Ended September 30, 1995
                    -----------------------------------------

The Company's  total revenues of $11,837,846 for the nine months ended September
30,  1996 were 19% higher  than the  $9,955,972  received by the Company for the
same nine-month period in 1995. This increase is the result of a 32% increase in
TDF sales, a 15% increase in disposal fees, hauling and other revenues generated
by increased  tire flow,  and sales of recycled bead wire product from the newly
installed  wire  recycling  systems.  While  tire flow was flat for the  Atlanta
plant, the Portland,  Baytown,  and Domino plants showed greater improvement for
an overall  increase in PTE's  received of 17% for the first nine months of 1996
compared to the same period in 1995.

Operating  expenses for the first nine months of 1996 were  $8,064,243 or 68% of
total revenues  compared to $7,303,635 or 73% for the comparable period in 1995.
Higher tire flow and increased production efficiency, as well as the elimination
of wire disposal  costs at the Baytown and Atlanta  plants,  contributed  to the
improvement  over the  equivalent  period in 1995.  General  and  administrative
expenses increased $462,201 to $2,196,284 for the first nine months of 1996 from
$1,734,083 in the  comparable  period in 1995,  and as percent of total revenues
increased to 18.6% in the first nine months of 1996 from 17.4% in the comparable
1995 period.  The increase is primarily  due to the addition of the Domino plant
which was  purchased  in March  1995,  increased  staffing  at the plant and the
corporate  levels,  higher  salaries  and  health  insurance  costs,  and  other
administrative costs resulting from increased operating activities. Depreciation
and amortization  expense increased 13% due to the acquisition of Domino as well
as capital  expenditures  for the new wire  systems at the  Baytown  and Atlanta
plants. Depreciation and amortization expense as a percent of total revenues was
unchanged at 7%.

Other  income  decreased  in the first nine months of 1996  compared to the same
period in 1995 due to the development fee earned by the Company from WR-Illinois
in September 1995.  Interest expense for the first nine months of 1996 increased
6% to $369,923 or 3% of total revenues from $350,342 or 4% of total revenues due
to the addition of debt in connection with the Domino acquisition, as well as an
increase in the rate carried by the new convertible subordinated debentures that
replaced  the  original  debentures  which  matured on March 15,  1996.  The new
convertible  subordinated  debentures  were  subsequently  converted into common
stock on July 1, 1996.

The Company's  equity in the loss of  WR-Illinois  increased in 1996 compared to
1995 as the partnership was not operational  until late September 1995. Low tire
flow levels  experienced  in the initial  phases of  operations  of the Illinois
plants operated by WR-Illinois resulted in a net operating loss.


                  Financial Condition as of September 30, 1996
                  --------------------------------------------

The  Company's  working  capital  balance at September  30, 1996,  was a deficit
amount of  $1,662,016.  This  deficit  reflects  the current  classification  of
$1,560,000 from long-term debt of the 10.5% industrial revenue bonds as a result
of the  Company's  technical  noncompliance  with  bond debt  covenants  and the
classification  of over $350,000 of the Domino debt in current  liabilities.  In
February 1996, the Company also  restructured its long-term debt of $1.1 million
with a different  financial  institution,  which,  while  decreasing  the annual
interest rate by 1.5 percent,  increased the current  portion of the amount due.
Accounts  payable  and  accrued  liabilities  are also  higher due to  increased
capital expenditures for the wire systems. Although the Company was in technical
default on  certain  debt  covenants,  management  believes  that based upon the
current  trend of its  operations  the  Company  should be able to correct  this
situation within the fourth quarter.

Management  continues to remain  sensitive to the risk that the Company will not
have the  financial  strength to take  advantage of the  opportunities  that are
developing. It is anticipated that with operating results improving, the Company
will be able to adequately  fund its working  capital  requirements  and capital
expenditures for at least the next twelve months.  However, the Company is aware
that each facility must remain  closely  monitored and costs must be controlled.
The Company has gone through a very difficult expansion period;  however,  based
upon the noted recent improvement in the Company's operating results, management
believes that future periods should reflect the value that has been created.

The Company believes that significant capital  expenditures for the remainder of
1996 will be limited to completing  the  installation  of the wire system at the
Portland plant which is scheduled for November 1996.


<PAGE>


                                     PART II
                                Other Information


                                                                   Form 10-Q
                                                                   Part II


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

         (a)      Exhibits

                  10.1  Form of Convertible Debenture Agreement as of 
                  March 15, 1996

         (b)      Reports on Form 8-K

                  None

Item 27. Financial Data Schedule
         -----------------------



<PAGE>



                                   SIGNATURES


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



                                            WASTE RECOVERY, INC.



DATE:  November 13, 1996            /s/THOMAS L. EARNSHAW
                                    ---------------------
                                   By:    THOMAS L. EARNSHAW
                                          President and Chief Executive Officer
                                         (Principal Executive Officer)