<PAGE>   1
             FORM 10-Q. - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10Q

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

For the quarterly period ended June 30, 1998

Commission File No. 0-25490

                                    KTI, INC.
             (Exact name of registrant as specified in its charter)

          New Jersey                                           22-2665282
(State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                           Identification Number)

7000 Boulevard East
Guttenberg, New Jersey                                                     07093
(Address of principal executive offices)                              (Zip code)

(201) 854-7777
(Registrants 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 registrant's classes of
common stock, as of the latest practicable date:

    Common Stock, No Par Value         9,761,773 Shares as of August 7, 1998
<PAGE>   2
                                TABLE OF CONTENTS

Item Number and Caption                                              Page Number

PART I

Item 1.  Financial Statements                                                  2

Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations                                 9

PART II

Item 1.  Legal Proceedings                                                    15

Item 2.  Changes in Securities                                                15

Item 3.  Defaults Upon Senior Securities                                      15

Item 4.  Submission of Matters to a Vote of Security Holders                  15

Item 5.  Other Information                                                    15

Item 6.  Exhibits and Reports on Form 8K                                      16


                                       1
<PAGE>   3
PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                    KTI, INC.
                           CONSOLIDATED BALANCE SHEET
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                        JUNE 30        DECEMBER 31,
                                                                                          1998             1997
                                                                                       ---------        ---------
<S>                                                                                    <C>             <C>      
                                  ASSETS
Current Assets
     Cash and cash equivalents                                                         $  10,027        $  11,181
     Restricted funds - current portion                                                   16,367           13,103
     Accounts receivable, net of allowances of
        $670 and $294                                                                     21,974           22,126
     Consumables and spare parts                                                           4,156            4,041
     Inventory                                                                             2,044            1,219
     Notes receivable--officers/shareholders and affiliates - current                        516               29
     Other receivables                                                                       795              461
     Deferred taxes                                                                        2,731            2,751
     Other current assets                                                                  1,286              793
                                                                                       ---------        ---------
        Total current assets                                                              59,896           55,704

Restricted funds                                                                           4,851            6,527
Notes receivable - officers/shareholders and affiliates                                       86               81
Other receivables                                                                            204              271
Deferred costs, net of accumulated amortization
     of $885 and $676                                                                      4,690            2,916
Goodwill and other intangibles, net of accumulated amortization
     of $1,610 and $778                                                                   23,319           17,483
Other assets                                                                               2,777            1,768
Deferred project development costs                                                           932              932
Property, equipment and leasehold improvements, net of
     accumulated depreciation of $21,693 and $17,837                                     168,440          156,801
                                                                                       ---------        ---------
     Total assets                                                                      $ 265,195        $ 242,483
                                                                                       =========        =========

                   LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
     Accounts payable                                                                  $   7,842        $   8,779
     Accrued expenses                                                                      3,087            3,825
     Debt, current portion                                                                 6,524           19,794
     Income taxes payable                                                                    251              165
     Other current liabilities                                                             2,020            1,184
                                                                                       ---------        ---------
        Total current liabilities                                                         19,724           33,747

Other liabilities                                                                          3,327            1,918
Debt, less current portion                                                               103,667           74,473

Minority interest                                                                         23,788           22,105
Deferred revenue                                                                          34,474           37,500

Commitments and contingencies

Stockholders' equity
Preferred stock; 10,000,000 shares authorized; Series A, par value $8 per share,
     447,500 shares authorized, issued and
     outstanding in 1997                                                                      --            3,732
     Series B, par value $25 per share, 8.75%, 880,000 shares
     authorized,
     856,000 shares issued and outstanding in 1998 and 1997                               21,400           21,400
 Common stock, no par value (stated value $.01 per share); authorized 40,000,000
      issued and outstanding; 9,683,158 in 1998
     8,912,630 in 1997                                                                        96               89
 Additional paid-in capital                                                               58,931           52,762
 Accumulated (deficit)                                                                      (212)          (5,243)
                                                                                       ---------        ---------
Total stockholders' equity                                                                80,215           72,740
                                                                                       ---------        ---------
     Total liabilities and stockholders' equity                                        $ 265,195        $ 242,483
                                                                                       =========        =========
</TABLE>

See accompanying notes.


                                       2
<PAGE>   4
                                    KTI, INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED                   SIX MONTHS ENDED
                                                               JUNE 30,                            JUNE 30,
                                                        1998             1997              1998                1997
                                                     -----------       ----------       -----------       ----------
<S>                                                  <C>               <C>              <C>               <C>       
Revenues:
    Waste-to-energy:
      Electric power and steam                       $    15,501       $   10,704       $    25,897       $   20,212
      Waste processing                                     8,933            7,906            17,032           15,723
    Recycling                                             16,808            1,871            35,946            3,144
                                                     -----------       ----------       -----------       ----------
               Total revenues                             41,242           20,481            78,875           39,079

Costs and expenses:
    Electric power, steam and waste processing            13,439           11,256            23,904           21,751
    Recycling                                             16,255            1,730            33,723            2,951
    General and administrative                             2,023            1,118             3,113            2,163
    Depreciation and amortization                          2,372            2,254             5,065            4,474
    Interest, net                                          1,550            1,325             3,060            2,325
                                                     -----------       ----------       -----------       ----------
              Total costs and expenses                    35,639           17,683            68,865           33,664

Income before minority interest, taxes
    and extraordinary item                                 5,603            2,798            10,010            5,415

    Minority interest                                      1,920               26             2,989              381
    Pre-acquisition earnings of PERC                          --            1,996                              2,889
    Equity in net income of PERC
                                                     -----------       ----------       -----------       ----------
Income before taxes and extraordinary item                 3,683              776             7,021            2,135
    Income taxes                                             517                                517
                                                     -----------       ----------       -----------       ----------
Income before extraordinary item                           3,166              776             6,504            2,135
    Loss on early extinguishment of debt, net
    of minority interest and taxes                           495               --               495               --
                                                     -----------       ----------       -----------       ----------
Net income                                                 2,671              776             6,009            2,135
    Accretion and accrued and paid dividends
    on preferred stock                                       468              499               977              499
                                                     -----------       ----------       -----------       ----------
Net income available to common shareholders          $     2,203       $      277       $     5,032       $    1,636
                                                     ===========       ==========       ===========       ==========

Earnings per common share:

Basic:
    Income before taxes and extraordinary item       $      0.33       $     0.04       $      0.64       $     0.24
      Income taxes                                   $      0.05       $     0.00       $      0.06       $     0.00
                                                     -----------       ----------       -----------       ----------
    Income before extraordinary item                 $      0.28       $     0.04       $      0.58       $     0.24
      Extraordinary item                             $      0.05       $     0.00       $      0.05       $     0.00
                                                     -----------       ----------       -----------       ----------
    Net income                                       $      0.23       $     0.04       $      0.53       $     0.24

    Weighted average number of shares used in
    calculation                                        9,614,163        6,984,926         9,424,451        6,868,993

Diluted:
    Income before taxes and extraordinary item       $      0.30       $     0.04       $      0.57       $     0.23
      Income taxes                                   $      0.04       $     0.00       $      0.04       $     0.00
                                                     -----------       ----------       -----------       ----------
    Income before extraordinary item                 $      0.26       $     0.04       $      0.53       $     0.23
      Extraordinary item                             $      0.04       $     0.00       $      0.04       $     0.00
                                                     -----------       ----------       -----------       ----------
    Net income                                       $      0.22       $     0.04       $      0.49       $     0.23

    Weighted average number of shares used in
    calculation                                       12,344,172        7,260,467        12,275,785        7,219,758
</TABLE>

See accompanying notes.


                                       3
<PAGE>   5
                                    KTI, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                           Six months ended June 30,
                                                                             1998            1997
                                                                           --------        --------
                                                                                  (Unaudited)
<S>                                                                        <C>             <C>     
OPERATING ACTIVITIES
Net income                                                                 $  6,009        $  2,135
Adjustments to reconcile net income (loss) to net cash
      provided by (used in) operating activities:
   Depreciation and amortization                                              5,065           2,052
   Minority interest, net of distributions                                    1,683             381
   Deferred Revenue                                                          (3,026)         (3,102)
   Provision for losses on accounts receivable                                  570              --
   Interest accrued and capitalized on debt                                     701             833
   Equity in net income of PERC, net of distributions                            --              47
   Gain on sale of assets                                                       (19)             (1)
   Loss on early extinguishment of debt, net                                    495              --
   Changes in operating assets and liabilities
      Accounts receivable                                                     1,095          (1,743)
      Manangement fees receivable                                                               370
      Consumables, spare parts and inventories                                 (712)           (633)
      Deferred taxes                                                             20              --
      Other assets                                                           (1,422)           (227)
      Notes and other receivables                                              (263)            440
      Accounts payable and accrued expenses                                  (2,805)           (297)
      Income taxes payable                                                     (175)             --
      Other liabilities                                                         960            (652)
                                                                           --------        --------
Net cash provided by operating activities                                     8,176            (397)

INVESTING ACTIVITIES
Additions to property, equipment and leasehold improvements                  (4,293)           (729)
Proceeds from sale of assets                                                     33               2
Net changes in restricted funds                                              (1,483)           (995)
Purchase of businesses, net of cash acquired                                (16,468)             --
Notes receivable--affiliates                                                   (492)           (421)
                                                                           --------        --------
Net cash provided by (used in) investing activities                         (22,703)         (2,143)

FINANCING ACTIVITIES
Deferred financing costs                                                     (2,995)           (998)
Proceeds from issuance of debt                                               24,557          14,133
Proceeds from exercise of warrants                                              995              --
Proceeds from exercise of stock options                                       1,365              --
Proceeds from sale of common stock                                               --             370
Proceeds from sale of preferred stock                                            --           3,855
Dividends paid on preferred stock                                              (936)             --
Principal payments on debt                                                   (9,613)        (16,868)
                                                                           --------        --------
Net cash provided by (used in) financing activities                          13,373             492

Increase (decrease) in cash and cash equivalents                             (1,154)         (2,048)
Cash and cash equivalents at beginning of period                             11,181           5,227
                                                                           --------        --------
Cash and cash equivalents at end of period                                 $ 10,027        $  3,179
                                                                           ========        ========
</TABLE>

                                   -Continued-


                                       4
<PAGE>   6
                                    KTI, INC.
               CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<S>                                                            <C>           <C>
 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 Interest paid                                                 2,563         
                                                               =====         ===

 NON CASH INVESTING AND FINANCE ACTIVITIES
Accretion on Class A Preferred Stock                              42         499
                                                               =====         ===
</TABLE>

See accompanying notes.


                                       5
<PAGE>   7
                                    KTI, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                   SERIES A                   SERIES B                                     
                                               PREFERRED STOCK             PREFERRED STOCK             COMMON STOCK        
                                            SHARES         AMOUNT       SHARES        AMOUNT       SHARES        AMOUNT    
                                          -----------   -----------   -----------   -----------  -----------  -----------  
<S>                                       <C>           <C>           <C>           <C>          <C>          <C>          
Balance at December 31, 1996                       --            --            --            --    6,836,766           68  
  Net income                                                                                                               
  Issuance of Series A Preferred Stock
   and common stock purchase warrants         487,500         3,376                                                        
   Accretion of Series A Preferred Stock                        700                                                        
  Issuance of Series B Preferred Stock
   and common stock purchase warrants                                     856,000        21,400                            
  Issuance of common stock and
   common stock purchase warrants for:
     Exercise of options                                                                              85,353            1  
     Exercise of warrants                                                                            692,771            7  
     Conversion of debt                                                                              618,609            6  
     Conversion of preferred stock            (40,000)         (344)                                  40,000            1  
      Employee savings plan contribution                                                               4,117            0  
     Business combinations                                                                           635,014            6  
  Dividends paid on Series B Preerred
    Stock                                                                                                            
                                          -----------   -----------   -----------   -----------  -----------  -----------  
Balance at December 31, 1997                  447,500         3,732       856,000        21,400    8,912,630           89  
  Net income                                                                                                               
Accretion of Series A Preferred Stock                            42                                                        
  Issuance of common stock and
   common stock purchase
warrants for:
     Exercise of options                                                                             180,688            2  
     Exercise of warrants                                                                            138,125            1  
     Conversion of debt
     Conversion of preferred stock           (447,500)       (3,774)                                 447,500            4  
      Employee savings plan contribution                                                               4,215            0  
  Dividends paid on Series B Preferred
    Stock                                                                                                                  
                                          -----------   -----------   -----------   -----------  -----------  -----------  
Balance at June 30, 1998                           --   $        --   $   856,000   $    21,400    9,683,158  $        96  
                                          ===========   ===========   ===========   ===========  ===========  ===========  
</TABLE>

<TABLE>
<CAPTION>
                                             ADDITIONAL
                                               PAID IN    ACCUMULATED
                                               CAPITAL      DEFICIT       TOTAL
                                             -----------  -----------   -----------
<S>                                          <C>          <C>           <C>   
Balance at December 31, 1996                      38,576      (12,940)       25,704
  Net income                                                    8,092         8,092
  Issuance of Series A Preferred Stock
   and common stock purchase warrants                422                      3,798
   Accretion of Series A Preferred Stock            (700)                        --
  Issuance of Series B Preferred Stock
   and common stock purchase warrants             (1,416)                    19,984
  Issuance of common stock and
   common stock purchase warrants for:
     Exercise of options                             502                        503
     Exercise of warrants                          3,611                      3,618
     Conversion of debt                            4,901                      4,907
     Conversion of preferred stock                   343                         --
      Employee savings plan contribution              35                         35
     Business combinations                         6,488                      6,494
  Dividends paid on Series B Preferred
    Stock                                                        (395)         (395)
                                             -----------  -----------   -----------
Balance at December 31, 1997                      52,762       (5,243)       72,740
  Net income                                                    6,009         6,009
Accretion of Series A Preferred Stock                             (42)           --
  Issuance of common stock and
   common stock purchase
warrants for:
     Exercise of options                           1,362                      1,364
     Exercise of warrants                            994                        995
     Conversion of debt
     Conversion of preferred stock                 3,772                          2
      Employee savings plan contribution              41                         41
  Dividends paid on Series B Preferred
    Stock                                                        (936)         (936)
                                             -----------  -----------   -----------
Balance at June 30, 1998                     $    58,931  $      (212)       80,218
                                             ===========  ===========   ===========
</TABLE>


                                       6
<PAGE>   8
                                    KTI, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          (IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

                                  JUNE 30, 1998

1. BASIS OF PRESENTATION

         The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended June 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1997. Certain 1997 financial
information contained herein has been reclassified to conform with the 1998
presentation.

2. EARNINGS PER SHARE

         In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, the basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.

         The following table sets forth the computation of basic and diluted
earnings per share:

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED JUNE 30,         SIX MONTHS ENDED JUNE 30,
                                                                    1998              1997             1998              1997
                                                                 -----------       ----------       -----------       ----------
<S>                                                              <C>               <C>              <C>               <C>       
Numerator:
   Net income                                                    $     2,671       $      776       $     6,009       $    2,135
   Preferred stock dividends                                             468                0               936                0
   Accretion of preferred stock                                            0              499                41              499
                                                                 -----------       ----------       -----------       ----------
   Numerator for basic earnings per share-net income 
    available to common stockholders                                   2,203              277             5,032            1,636
   Effective of dilutive securities (1):                                 468                                936
     Accretion of Preferred Stock                                                                            41
                                                                 -----------       ----------       -----------       ----------
   Numerator for diluted earnings per share-net income 
    available to common stockholders
    after assumed conversions                                    $     2,671       $      277       $     6,009       $    1,636
                                                                 ===========       ==========       ===========       ==========
Denominator:
   Denominator for basic earnings per share-weighted
    average shares                                                 9,614,163        6,894,926         9,424,451        6,868,993
   Effect of dilutive securities:
    Employee stock options                                           559,010          103,432           498,330           97,147
    Warrants                                                         349,722          262,109           432,574          253,618
    Convertible preferred stock                                    1,821,277                          1,920,430
                                                                 -----------       ----------       -----------       ----------
   Dilutive potential common shares
    Denominator for diluted earnings per share-adjusted
     weighted-average shares and assumed conversions              12,344,172        7,260,467        12,275,785        7,219,758
                                                                 ===========       ==========       ===========       ==========
Net income per share-Basic                                       $      0.23       $     0.04       $      0.53       $     0.24
                                                                 ===========       ==========       ===========       ==========
Net income per share-Diluted                                     $      0.22       $     0.04       $      0.49       $     0.23
                                                                 ===========       ==========       ===========       ==========
</TABLE>


                                       7
<PAGE>   9
3. CONTINGENCIES

         The Company is a defendant in certain law suits alleging various claims
incurred in the ordinary course of business. Management of the Company does not
believe that the outcome of these matters, individually or in the aggregate,
will have a material effect on the Company's financial condition, cash flows or
results of operations.


                                       8
<PAGE>   10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

RESULTS OF OPERATIONS

REVENUES

         Consolidated revenue for the three months and six months ended June 30,
1998, compared with the same periods in 1997, increased $20,761 or 101.4% and
$39,796 or 101.8%, respectively. Of these increases approximately $14,937 for
the three months and $32,802 for the six months is attributable to the
recycling division and $5,824 for the three months and $6,994 for the six
months is attributable to the waste to energy division.

         KTI's waste to energy division showed increases in electric power and
steam revenues of $4,796 and $5,685 or 44.81% and 28.1% for the quarter and six
months ended June 30, 1998 as compared to the same periods in 1997.

         Maine Energy posted an overall decrease in revenue for the quarter
ended June 30, 1998 as compared to the same period in 1997 of $622 or 13.37%;
principally from a decrease of $912 in the amortization of deferred revenue.
This decrease was offset by an increase as a result of the scheduled plant
outage in April being less extensive than the prior year, net of the reduced
output experienced during extended periods of heavy rains after the outage
which caused flooding; this, in turn, caused wet fuel issues, and a 2% increase
in contract rate for power at the facility. PERC posted a decrease of $161 or
3.28% for the quarter because it also experienced operational problems from the
heavy rains in the area. The decrease at PERC was offset by a net $5,171
payment from Bangor Hydro under the terms of the restructured Power Purchase
Agreement completed on June 26, 1998. Timber Energy posted an increase over
1997 of $192 or 16.3% because of an increase in the capacity payment from
Florida Power and from a 66% increase in electrical generation. Timber Energy
had its first major overhaul in the second quarter of 1997 and its electrical
generator was off-line for 6 weeks during that quarter. This increase was
offset by a $.004 reduction in the energy rate paid by Florida Power. On June
16, 1998 KTI acquired Multitrade Group, Inc., a Virginia corporation which
currently owns and operates two facilities which incinerate biomass waste and
coal to produce steam for sale to major users under long-term contracts.
Revenue from Multitrade for the period was $216.

         Maine Energy has generated 2.45% fewer kilowatt hours for the six month
period than the prior year while receiving 3.27% higher revenues per kilowatt
hour; resulting in $65 or .74% higher revenues. PERC has generated 1.32% higher
kilowatt hours, but has received .44% less revenue per kilowatt hour for the
same period; resulting in $78 or .87% higher revenues. Timber Energy has
generated 20.4% higher kilowatt hours for the period but has received 11.9% less
per kilowatt hour; resulting in $155 or 6.16% higher revenues. Each of the
facilities have experienced operations problems because of abnormal weather
throughout the six months. Timber also experienced lower generation because of
reduced steam flow to the turbine during the first quarter of 1998, which was
attributable to superheater failures in the boiler. This problem was repaired
during the facility's scheduled outage in April, 1998.

         Revenues from waste processing increased $1,028 or 13.0% for the
quarter ended June 30, 1998 and $1,309 or 8.32% for the six months ended June
30, 1998 as compared to the same periods in 1997.

         Maine Energy received approximately 4,400 or 7.9% tons more MSW in this
quarter than the same period in 1997, and tipping fees averaged approximately
$8.75 or 29% per ton more than 1997. PERC received nearly the same tonnage as in
1997, but tipping fees averaged $2.15 or 4.7% higher than 1997. Timber Energy's
wood chip processing revenues decreased by $22 or 6.7% principally because pulp
mill customers required less tonnage during the quarter. Timber's plastics
division was sold on July 1, 1997; resulting in a reduction of $525 in revenue
for the current quarter. Revenues at AAR Tennessee decreased $124 or 26.6%
because less tonnage was processed. Effective June 1, 1998 all KTI Specialty
Waste tonnage was transferred to Total Waste Management, which was acquired
January 27, 1998. This transfer was part of KTI's long range plan to integrate
the two waste streams into a company that can provide more complete disposal
services over a wider array of waste streams which would command higher tipping
fees. Total Waste posted increased revenues of $861 for the quarter over KTI
Specialty Waste and SEMCO for the same period last year. Effective April 1,
1998 the transportation brokerage business at KTI Bio Fuels was consolidated
with the similar business of Power Ship Transport in an effort to reduce
overall costs and to generate more brokerage revenue. Combined, these two
divisions posted an increase of $71 or 5.8% for the quarter. Power Ship
Transport was formed late in the second quarter of 1997.


                                       9
<PAGE>   11

         Through June 30, 1998 the combined waste processing revenue at Maine
Energy and PERC was $893 or 10.0% higher than the same period in 1997 because
tonnage received was 5.1% higher and average tipping fees were higher. The
success in moving tipping fees higher during the second quarter has resulted in
tipping fees for the six months ending June 30, 1998 being 4.5% higher than the
same period in 1997. KTI Bio Fuel's tipping fees and revenue from sales of wood
chips for the six months ended June 30, 1998 were lower by $193 or 20.8%
compared to the same period in 1997 because of unscheduled outages during the
first quarter of 1998 at plants which purchase chips from Bio Fuels and an ice
storm in Maine in January.

         Sales of recyclables increased $14,918 in the second quarter and
$32,783 for six months of 1998, as compared to the same periods in 1997. This
increase is principally a result of the acquisitions of Zaitlin, K-C
International and the assets of the Prins facilities during the third and fourth
quarter of 1997. Recycling revenues are generated from the sales of waste paper,
ferrous and non-ferrous materials, and plastic materials.

COSTS AND EXPENSES

         Electric power and waste handling operating costs increased by $2,183
or 19.4% for the quarter ended June 30, 1998 and $2,153 or 9.9% for the six
months ended June 30, 1998 as compared to the same periods in 1997. Operating
costs of the new divisions of Total Waste Management and Power Ship were $948
and $904 for the quarter and $1,440 and $1,322 for the six months respectively.
Maine Energy's operating costs were lower by $142 or 3.5% for the quarter and
$248 or 3.7% for the six months principally because of reduced maintenance costs
at the facility. PERC's operating costs were higher by $306 or 8.0% for the
quarter principally because of scheduled major maintenance costs. PERC's six
month costs, however, are on par with costs for the same period in 1997.
Operating costs at Timber Energy are lower by $490 or 36.8% and $944 or 34.2%
for the quarter and six months due to the sale of the plastics division and
overall lower maintenance costs. KTI Bio Fuels has reduced its overall operating
costs for the six month period by $31 or 5.4%. Operating costs at Multitrade
were $63 since its acquisition on June 16, 1998.

         General and administrative expenses increased by $905 or 80.9% for the
three months and $950 or 43.9% for the six months ended June 30, 1998 as
compared to 1997. During the second quarter of 1998 the Company added
administrative staff to develop and install Company wide computer networks; to
support Company wide credit and collection efforts; to identify and pursue
potential mergers and acquisitions; and to develop internal analytical systems
to identify revenue enhancement and cost savings programs in newly acquired
entities.

INTEREST

Interest expense increased $224 or 16.9% for the three months and $735 or 31.6%
for the six months ended June 30, 1998 as compared to the same periods in 1997.
Interest expense at Timber Energy increased $128 or 53.9% due to the
restructuring of the variable rate bonds to fixed coupon rates during the second
quarter of 1997. Reductions in interest expense of $335 were realized through
debt reductions at most of KTI's operating facilities, which were offset by
increases related to increased borrowings on the Company's line of credit to
fund the several acquisitions beginning in the third quarter of 1997.

EXTRAORDINARY LOSS ON EARLY RETIREMENT OF DEBT

The Company recorded an extraordinary loss on early retirement of the PERC bonds
for the quarter and six months of $495. This amount is net of minority interest
and income tax benefits.


                                       10
<PAGE>   12
LIQUIDITY AND CAPITAL RESOURCES

         The Company is a holding company and receives cash flow from its
subsidiaries. Receipt of cash flow from PERC is currently restricted by
covenants under loan agreements, distribution restrictions under partnership
agreements with its equity investors, and put-or-pay agreements with
municipalities. Maine Energy's cash flow is required to retire the remaining
outstanding balance of $15,146 of subordinated notes payable as of June 30, 1998
(approximately $2.5 million of which notes are owned by the Company) before cash
distributions to partners can begin. Timber Energy's cash flow is restricted by
covenants under its bond agreements. As a result, the following discussion is
organized to present liquidity and capital resources of the Company separate
from Maine Energy, PERC and Timber and liquidity and capital resources of each
of Maine Energy, PERC and Timber independently.

  THE COMPANY

         The Company has financed its operations and capital expenditures
primarily from cash flow from its subsidiaries which are not contractually
restricted from making distributions, management fees and allowed distributions
from contractually restricted subsidiaries, collateralized equipment financing,
unsecured subordinated debt, drawings under its lines of credit and proceeds
from the sale of the Company's common stock.

         On June 4, 1997, the Company consummated the private placement of
487,500 shares of its Series A Convertible Preferred Stock for gross proceeds of
$3.9 million. The Series A Convertible Preferred Stock was convertible into
shares of the Company's Common Stock, at a price of $8.00 per share, subject to
adjustment. Purchasers of the shares of Series A Convertible Preferred Stock
also received, in the aggregate, warrants to purchase 243,750 shares of Common
Stock at $9.00 per share and warrants to purchase 32,500 shares of Common Stock
at $10.00 per share. During 1997, 40,000 of the shares of Series A Convertible
Preferred Stock were converted to 40,000 shares of Common Stock. The remaining
shares of Series A Convertible Preferred Stock were converted into 447,500
shares of Common Stock in February 1998. The related warrants were exercised in
July 1998.

         During August 1997, the Company consummated the offering of 856,000
shares of its 8.75% Series B Preferred Stock. The gross proceeds of the offering
were $21.4 million and the net proceeds to the Company were $19,984.

         On June 5, 1998 the Company exercised its operation to exchange all of
the outstanding shares of the Series B Preferred Stock for KTI's 8.75%
Convertible Subordinated Notes. The exchange will be effective August 3, 1998.
The holders of outstanding shares of Series B Preferred are entitled to receive
a $1,000 principal amount exchange note for each 40 shares of Series B Preferred
held. KTI will pay $25.00 per share for the portion of any holder's position
that is less than 40 shares. Dividends on Series B Preferred will cease August
3, 1998 whether or not the certificates for shares have been surrendered.

         The Company and its subsidiaries, other than Maine Energy, PERC and
Timber Energy at June 30, 1998 had indebtedness maturing in the next year of
$5,149. During the first six months of 1998, the Company, other than Maine
Energy, PERC and Timber Energy incurred additional debt of approximately
$24,557, primarily as a result of drawings under its lines of credit for
acquisitions; and retired approximately $6,515 of debt.

         As of June 30, 1998, the Company had cash on hand without regard to
Maine Energy, PERC and Timber Energy of approximately $915 and $5,878 available
in lines of credit from a bank. On May 28, 1998 KeyBank increased its credit
line from $22 million to $30 million as part of its commitment to provide KTI
with an increase in the overall acquisition credit line to $150 million. On July
13, 1998 KeyBank and KTI closed on the $150 million acquisition credit line.
This line of credit can be utilized to fund acquisitions, capital expenditures
and for working capital. There can be no assurance such acquisitions or capital
expenditures will take place, or that working capital will be increased.
Management of the Company believes that cash flow from its subsidiaries and
affiliates and unused lines of credit will meet its current needs for liquidity.
Moreover, management believes that the Company has the ability to access
additional borrowing facilities if needed, although no assurance can be given in
this regard.


                                       11
<PAGE>   13
MAINE ENERGY

         Maine Energy has financed its operations and capital expenditures from
cash flows from operations. Cash provided by operations was $3,175 in 1997, as
compared to $89,280 in 1996. During 1996 Maine Energy sold its generating
capacity to CL One for a period through May 31, 2007. In exchange CL One agreed
to make a series of quarterly payments to Maine Energy including an initial
payment of $85 million. Maine Energy retired the entire outstanding principal
balance of $64.5 million of its tax exempt variable rate revenue bonds and $29.5
million of its subordinated loan accrued interest and principal from the
proceeds from the sale of capacity and cash on hand. As of June 30, 1998 Maine
Energy had total indebtedness of $15,146. Maine Energy capital expenditures
were $2,559 and $2,939 for additions to property, plant and equipment during
1997 and 1996, respectively.

         As of June 30, 1998, in addition to Maine Energy's operating cash of
$1,807, Maine Energy, as required under the terms of the credit agreement with
its letter of credit, has on account an additional $6,081 of reserves to be used
for capital improvements, debt service, operating shortfalls and working capital
requirements.

         Management of the Company believes Maine Energy has adequate cash
resources available to fund its future operations and anticipated capital
expenditures. Capital expenditures for Maine Energy for the year ending December
31, 1998 are expected to be approximately $3,043, of which $1,850 has been set
aside in the above mentioned reserve accounts.

PERC

         PERC has financed its recent operations and capital expenditures
primarily from cash flows from operations. Cash provided by operations was
$11,313 in 1997 as compared to $8,493 in 1996. PERC's capital expenditures were
$314 and $1,192 for additions to property, plant and equipment during 1997 and
1996, respectively.

         On June 26, 1998 KTI completed a major overhaul of the various
contracts and obligations of PERC, which included refinancing PERC's tax exempt
bonds. The refinancing was made possible through the sale of $45,000 in
Electric Rate Stabilization Revenue Refunding Bonds issued by the Finance
Authority of Maine ("FAME"). The interest rate on the bonds ranges from 3.75%
for one-year bonds to 5.20% for 20-year term bonds. This transaction will
reduce PERC's debt service costs while extending its payment obligation over 20
years.

         As of June 30, 1998, in addition to PERC's operating cash of $6,816,
PERC, as required under the terms of the trust indenture governing the FAME
Bonds, had on account an additional $11,700 of cash reserves to be used for
capital improvements, debt service, operating shortfalls and working capital
requirements.

         Company management believes PERC has adequate cash resources available
to fund its current project operations and currently anticipated capital
expenditures. PERC plans capital expenditures for the year ending December 31,
1998 of approximately $765. PERC intends to finance this amount through cash
flow from operations.

Timber Energy

         Timber Energy has financed its operations and capital expenditures
primarily from cash flow from operations since it was acquired on November 22,
1996. Cash provided by operations was $1,807 in 1997. Timber Energy's capital
expenditures were $1,329 during 1997, which were funded out of cash generated
from operations.

         During 1997, Timber retired $13.4 million of variable rate revenues
bonds and paid certain debt financing costs with $13,708 of proceeds from two
1997 Industrial Development Revenue Bond issued (the "1997 Bonds") and cash on
hand. The outstanding 1997 Bonds carry interest at a fixed rate of 7%


                                       12
<PAGE>   14
and have annual sinking fund payments due each December 1 ($1,765 due December
1, 1998) with a final payment of $4,620 due December 1, 2002. During 1997,
Timber repaid $308 which represented the entire balance of one of the 1997 Bond
issuances.

         As of June 30, 1998, Timber Energy had outstanding tax exempt bonds,
together with accrued interest, in the aggregate amount of $13,478. The bonds
are payable pursuant to a mandatory redemption schedule through December 1,
2002.

         As of June 30, 1998, in addition to Timber Energy's operating cash of
$507, Timber Energy, as required by the terms of the refinancing, had an
additional $3,314 of cash reserves to be used for debt service.

         Company management believes Timber Energy has adequate cash resources
available and expects additional cash from operations to fund its current
operations and debt obligations. Timber Energy plans capital expenditures in
1998 of approximately $526, which will be funded from cash provided by
operations.

SUBSEQUENT EVENTS

         On June 29, 1998 the Company announced that it signed letters of intent
to acquire Gaccione Bros. of Clifton, New Jersey and Atlantic Coast Fibers of
Passaic New Jersey. The two companies will be brought together to create one of
the largest high-grade paper processing facilities in the country. The annual
combined revenue of the two companies is approximately $20 million.

         On August 5, 1998, the Company announced that it has reached a
definitive agreement to acquire all of the outstanding stock of FCR, Inc, a
Delaware corporation ("FCR"), having its headquarters in Charlotte, North
Carolina. The purchase price consists of: (a) 1,714,285 shares of the Company's
common stock; (b) $30.0 million in cash; and (c) an earnout of up to $30.0
million to be paid in cash and stock. The number of shares earned will be
calculated at the higher of $23 per share or the then market value of such
shares, based on the average of closing sale price per share during the ten
trading days preceding the payment date.

         The merger is contingent upon compliance with the Hart Scott Rodino
Antitrust Improvement Act and other customary conditions.

         FCR is a national waste processing company, owning 26 plants in 12
states. The plants operate in three businesses; material recovery facilities,
cellulose insulation and plastic recycling.

         Eighteen of the plants are material recovery facilities, based in 10
states. These plants currently process materials at the rate of 650,000 tons of
recyclables per year.

         Five of the plants are cellulose insulation plants, based in four
states. A sixth cellulose insulation plant is under construction. The cellulose
insulation plants operate under the name of U.S. Fiber, Inc.

         The plastic recycling business operates three plastic recycling plants.
These plants currently process plastic at the rate of 50 million pounds per
year. The Company has a subsidiary in the plastic trading and brokerage
business, which presently trades plastic at the rate of 40 million pounds per
year.

         On August 5, 1998 the Company acquired First State Recycling, Inc., a
Delaware corporation headquartered in Wilmington, Delaware, for $1.9 million in
cash and KTI common stock. As a processor of plastics for resale, First State
generated gross revenues of $2 million in 1997 and is expected to reach $4
million in 1998.


                                       13
<PAGE>   15
FORWARD LOOKING STATEMENTS

         All statements contained herein which are not historical facts
including but not limited to statements regarding the Company's plans for future
cash flow and its uses are based on current expectations. These statements are
forward-looking in nature and involve a number of risks and uncertainties.
Actual results may differ materially. Among the factors that could cause actual
results to vary materially is the availability of sufficient capital to finance
the Company's business plan and other capital needs on terms satisfactory to the
Company. The Company wishes to caution readers not to place undue reliance on
any such forward looking statements, which statements are made pursuant to the
Private Litigation Reform Act of 1995 and as such speak only as of the date
made.


                                       14
<PAGE>   16
PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         Maine Energy is the plaintiff in a suit in the State of Maine against
United Steel Structures, Inc. under a warranty to recover the costs, which were,
or will be incurred to replace the roof and walls of the Maine Energy tipping
and processing buildings. The judge in the case entered an order awarding Maine
Energy $3,334 plus interest from May 10, 1994, to the date of the filing of the
lawsuit and court costs. The defendant filed an appeal on December 19, 1997.
There can be no assurance that the Company will be able to collect any amount of
this judgement.

         Lawsuits were filed on September 30, 1997 and March 6, 1998 by Capital
Recycling of Connecticut ("Capital") in a Connecticut State Court against K-C,
certain officers of K-C and other parties. The suits allege fraud, tortuous
interference with business expectancy and violations of the Connecticut Unfair
Trade Practices Act. The actions are based on two contracts between Capital and
K-C. The lawsuit was dismissed with prejudice as to the officers of K-C and all
claims between the parties are to be resolved in the arbitration proceedings.
The Company believes that it has meritorious defenses to the arbitration
proceedings.

         The Company is a defendant in certain other law suits alleging various
claims incurred in the ordinary course of business, none of which, either
individually or in the aggregate, the Company believes will have a material
adverse effect on the Company.

         Management of the Company does not believe that the outcome of the
foregoing matters, individually or in the aggregate, will have a materially
adverse effect on the Company's financial condition, cash flows or results of
operations.

ITEM 2.  CHANGES IN SECURITIES

         Not applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         Not applicable.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Not applicable

ITEM 5.  OTHER INFORMATION

         Not applicable


                                       15
<PAGE>   17
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits

                  None

         (b)      Reports on Form 8-K

                  Six reports on Form 8-K were filed in the second quarter of
1998. The following is a list of the Forms 8-K filed and the dates thereof.

                  (i) A Form 8-K was filed on May 7, 1998 reporting that the
Company signed a letter of intent to acquire FCR, Inc., a Delaware corporation.

                  (ii) A Form 8-K was field on June 17, 1998 announcing the
conversion of the Company's Series B Preferred Stock to 8.75% Convertible
Subordinated Debt effective August 3, 1998.

                  (iii) A Form 8-K was filed on June 25, 1998 announcing the
acquisition of Multitrade Group, Inc., a Virginia corporation.

                  (iv) A Form 8-K was filed on July 8, 1998 reporting that the
Company completed the refinancing of the existing tax exempt bonds issued by the
Town of Orrington, Maine to finance the construction of the facility owned by
PERC.

                  (v) A Form 8-K was filed on July 15, 1998 announcing the
signing of a $150 million acquisition line of credit with KeyBank.

                  (vi) A Form 8-K was filed on August 5, 1998 announcing the
purchase of substantially all of the assets of First State Recycling, Inc. for
cash and stock in the amount of $1.85 million. The Company is purchasing First
State Recycling subject to existing funded debt of $445,000.


                                       16
<PAGE>   18
                                   SIGNATURES

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

                           KTI, Inc.
                           (Registrant)

                           By:      /s/ Ross Pirasteh
                                    Name: Ross Pirasteh
                                    Title: Chairman of the Board of Directors

                           By:      /s/ Martin J. Sergi
                                    Name: Martin J. Sergi
                                    Title: President and Chief
                                           Financial Officer
                                           (Principal Accounting Officer)

Date: August 13, 1998


                                       17