AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1999

REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------

FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------

CASELLA WASTE SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE                                    4953                                   03-0338873
(State or Other Jurisdiction              (Primary Standard Industrial                    (I.R.S. Employer
of Incorporation or Organization)            Classification Code Number)                  Identification Number)

25 GREENS HILL LANE,
RUTLAND, VERMONT 05701
(802) 775-0325
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------

JOHN W. CASELLA
PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN
CASELLA WASTE SYSTEMS, INC.
25 GREENS HILL LANE
RUTLAND, VERMONT 05701
(802) 775-0325
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
------------------------------

COPIES TO:

JEFFREY A. STEIN, ESQ.                                    BRIAN HOFFMANN, ESQ.
HALE AND DORR LLP                                  CADWALADER, WICKERSHAM & TAFT
60 STATE STREET                                          100 MAIDEN LANE
BOSTON, MA 02109                                        NEW YORK, NY 10038
(617) 526-6000                                           (212) 504-6000

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As promptly
as practicable after this registration statement becomes effective and the
effective time of the proposed merger of Rutland Acquisition Sub, Inc., a wholly
owned subsidiary of the Registrant, with and into KTI, Inc. as described herein.

If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ________________

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________________
--------------------------

CALCULATION OF REGISTRATION FEE

PROPOSED             PROPOSED
MAXIMUM              MAXIMUM
TITLE OF EACH CLASS OF                AMOUNT TO BE        OFFERING PRICE          AGGREGATE            AMOUNT OF
SECURITIES TO BE REGISTERED              REGISTERED(1)        PER SECURITY       OFFERING PRICE(2)   REGISTRATION FEE(3)

Class A common stock, par value $0.01 per
share.....................................       8,599,899         Not Applicable        $132,792,566            $36,916

(1) The estimated number of shares of Casella Class A common stock that the
registrant may be required to issue in connection with the merger,
calculated as the product of (a) 16,862,548, the sum of the number of shares
of KTI common stock outstanding on October 1, 1999 plus the number of shares
of KTI common stock issuable upon exercise or conversion of options,
warrants and convertible notes outstanding on such date and (b) an exchange
ratio of 0.51 of a share of Casella Class A common stock for each share of
KTI common stock and common stock equivalents outstanding.

(2) Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act of 1933, as amended, and
computed pursuant to Rules 457(f)(1) and 457(c) thereunder on the basis of
the market value of the KTI common stock and common stock equivalents to be
received by the registrant or cancelled in the merger, calculated as the
product of (a) $7.875 (the average of the high and low sale prices for
shares of KTI common stock on the Nasdaq National Market on November 5,
1999) and (b) 16,862,548 shares of KTI common stock and common stock
equivalents to be received by the registrant or cancelled in the merger.

(3) A fee of $72,834.00 was paid on February 5, 1999 in connection with the
filing under the Securities Exchange Act of 1934, as amended, of preliminary
copies of the proxy materials included herein. Therefore, no registration
fee is payable upon the filing of this registration statement.

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT OR AMENDMENTS WHICH SPECIFICALLY STATES THAT THE
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL SUCH REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE OR DATES AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.

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PROXY STATEMENT/PROSPECTUS

[LOGO]                                                                                [LOGO]

WE ARE PROPOSING THAT YOU VOTE TO APPROVE A MERGER
YOUR VOTE IS VERY IMPORTANT

The boards of directors of Casella Waste Systems, Inc. and KTI, Inc. have
agreed to merge. We are seeking your vote on this important transaction.

If the merger is completed, KTI shareholders will receive 0.51 of a share of
Casella Class A common stock for each share of KTI common stock that they own.
Based upon the number of outstanding shares of Casella common stock and KTI
common stock as of October 1, 1999, KTI shareholders immediately prior to the
merger are expected to own approximately 30.88% of the outstanding shares of
Casella common stock immediately after the merger, representing approximately
22.31% of the votes entitled to be cast by Casella stockholders after the
closing of the merger. Casella stockholders will continue to own their existing
shares after the merger. Casella Class A common stock is traded on the Nasdaq
National Market under the symbol "CWST".

The merger cannot be completed unless KTI shareholders approve the merger
agreement and Casella stockholders approve the issuance of shares of Casella
Class A common stock to KTI shareholders. In addition, Casella stockholders are
being asked to vote on other matters that are described in this proxy
statement/prospectus. Casella stockholders will vote on their proposals at
Casella's 1999 annual meeting and KTI shareholders will vote on their proposals
at a special meeting.

Whether or not you plan to attend your stockholders meeting, please take the
time to vote by completing and mailing the enclosed proxy card in the enclosed
envelope. If you sign, date and mail your proxy card without indicating how you
want to vote, your proxy will be counted as a vote in favor of the proposals
submitted at your stockholders meeting.

The dates, times and places of the meetings are as follows:

For Casella stockholders:                         For KTI shareholders:
December 8, 1999                                  December 8, 1999
10:00 am, local time                              10:00 am, local time
Casella Waste Systems, Inc.                       KTI, Inc.
25 Greens Hill Lane                               7000 Boulevard East
Rutland, Vermont 05701                            Guttenberg, New Jersey 07093

This proxy statement/prospectus gives you detailed information about the
proposed merger and the other matters to be voted on at your stockholders
meeting. Please also refer to the section which we have entitled "Where You Can
Find More Information" on page 164 for additional information about Casella and
KTI on file with the Securities and Exchange Commission. We encourage you to
read this additional information.

YOU SHOULD READ THE "RISK FACTORS" ON PAGES 11 THROUGH 16 BEFORE VOTING.

Neither the Securities and Exchange Commission nor any state securities
regulators have approved or disapproved the Casella Class A common stock to be
issued in the merger, or determined if this proxy statement/prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.

This proxy statement/prospectus is dated November 12, 1999, and was first
mailed to stockholders of KTI on or about November 15, 1999 and to stockholders
of Casella on or about November 15, 1999.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 8, 1999

To the stockholders of Casella Waste Systems, Inc.:

The annual meeting of stockholders of Casella Waste Systems, Inc. will be
held on Wednesday, December 8, 1999 at our corporate offices located at 25
Greens Hill Lane, Rutland, Vermont 05701, commencing at 10:00 am., local time,
to consider and vote on:

1.  A proposal to issue shares of Casella Class A common stock as
contemplated by the merger agreement among KTI, Inc., Casella and our
wholly-owned subsidiary. The merger agreement provides that our
wholly-owned subsidiary will be merged into KTI. As a result of the
merger, KTI will become a wholly-owned subsidiary of Casella, and each
KTI shareholder will receive 0.51 of a share of Casella Class A common
stock for each share of KTI common stock held by them;

2.  A proposal to elect two directors for the ensuing three years;

3.  A proposal to approve an amendment to our Amended and Restated 1997
Stock Incentive Plan increasing the aggregate number of shares of Casella
Class A common stock that may be issued under the plan from 3,328,135
shares to 5,328,135 shares;

4.  A proposal to approve amendments to our 1997 Non-Employee Director Stock
Option Plan increasing the aggregate number of shares of Casella Class A
common stock that may be issued under the plan from 50,000 shares to
100,000 shares and increasing the number of shares subject to stock
options granted to non-employee directors upon initial election to the
Casella board and on the date of each annual meeting to 7,500 shares;

5.  A proposal to approve an amendment to our Amended and Restated 1997
Employee Stock Purchase Plan increasing the aggregate number of shares
that may be issued under the plan from 300,000 shares to 600,000 shares;

6.  A proposal to ratify the selection of Arthur Andersen LLP as our
independent auditors for the current fiscal year; and

7.  To transact such other business as may properly be brought before the
annual meeting, or any adjournment or postponement thereof.

We have attached a copy of the merger agreement to the proxy
statement/prospectus which accompanies this notice of meeting. We are also
enclosing a copy of our annual report to stockholders for the fiscal year ended
April 30, 1999, which contains consolidated financial statements and other
information of interest to you.

Those of you who were holders of record of Casella Class A common stock or
Casella Class B common stock at the close of business on October 15, 1999 are
entitled to receive this notice and to vote at the annual meeting. We urge you
to attend the annual meeting in person. However, in order to make sure that you
are represented at the annual meeting, we also urge you to complete, sign and
return the enclosed proxy card as promptly as possible in the enclosed
postage-prepaid envelope.

By the order of the board of directors

John W. Casella, Secretary

November 15, 1999
Rutland, Vermont

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 8, 1999

To the shareholders of KTI, Inc.:

A special meeting of shareholders of KTI, Inc. will be held on Wednesday,
December 8, 1999 at our corporate offices located at 7000 Boulevard East,
Guttenberg, New Jersey 07093, commencing at 10:00 am., local time, for the
following purposes:

1.  To consider and vote on the merger agreement among KTI, Casella Waste
Systems, Inc. and Casella's wholly-owned subsidiary. The merger agreement
provides that Casella's wholly-owned subsidiary will be merged into KTI.
As a result of the merger, KTI will become a wholly-owned subsidiary of
Casella, and you and each other shareholder of KTI will receive 0.51 of a
share of Casella Class A common stock for each share of KTI common stock
you hold; and

2.  Other matters incidental to the approval of the matters presented for
action at the meeting or the conduct of the meeting that may be properly
brought before the meeting or any adjournment or postponement thereof.

We have attached a copy of the merger agreement to the proxy
statement/prospectus which accompanies this notice of meeting.

If the merger agreement is approved by KTI shareholders at the meeting, and
the merger takes place, then any KTI shareholder who complies with certain
procedures under New Jersey law and whose shares are not voted in favor of the
merger may be entitled to demand payment for his or her shares and to obtain an
appraisal of the value of those shares. The procedures you must follow to have
these rights are summarized in the accompanying proxy statement/prospectus.

Those of you who were holders of record of KTI common stock at the close of
business on November 10, 1999 are entitled to receive this notice and to vote at
the shareholders meeting. We urge you to attend the meeting in person. However,
in order to make sure that you are represented at the meeting, we also urge you
to complete, sign and return the enclosed proxy card as promptly as possible in
the enclosed postage-prepaid envelope.

By the order of the board of directors

Robert E. Wetzel, Secretary

November 15, 1999
Guttenberg, New Jersey

TABLE OF CONTENTS

SUMMARY.....................................................       1

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS................................................      10

RISK FACTORS................................................      11
Risks relating to the merger............................      11
Because the exchange ratio is fixed, KTI and Casella
shareholders are exposed to the risk that the market
price of the other company's stock will drop.........      11
Our earnings could suffer if we do not realize the
operational efficiencies we anticipate from the
merger...............................................      11
Casella's ability to manage the operations acquired
from KTI may be adversely affected if KTI's
Management does not remain in place..................      11
We will default under our credit facility if we do not
obtain a replacement credit facility within 30 days
following the closing of the merger..................      12
Our ability to borrow after the merger may be
adversely affected by our increased leverage.........      12
Risks relating to the waste management industry or
particular to Casella or KTI...........................      12
Our growth rate may be adversely affected if we are
not able to continue to implement our acquisition
strategy.............................................      12
Environmental regulations could subject us to fines,
penalties and limitations on our ability to expand...      13
Our results of operations could be adversely affected
by changing prices or market requirements for
recyclable materials.................................      13
The seasonality of our revenues could adversely impact
our financial condition..............................      14
Our business is geographically concentrated and is
therefore subject to regional economic downturns.....      14
We may not be able to effectively compete in the
highly competitive solid waste services industry.....      14
KTI Energy of Virginia, Inc. sells its entire output
to a few customers and lacks the capacity to meet all
of its commitments...................................      15
Our results of operations and financial condition may
be negatively affected if we inadequately accrue for
closure and post-closure costs.......................      15
We could be precluded from entering into contracts or
obtaining permits if we are unable to obtain third
party financial assurance to secure our contractual
obligations..........................................      15
We may be required to write-off capitalized charges in
the future, which could adversely affect our
earnings.............................................      16
The Casella Class B common stock has ten votes per
share and is held exclusively by John W. Casella and
Douglas R. Casella...................................      16

COMPARATIVE PER SHARE DATA..................................      17

MARKET PRICE AND DIVIDEND INFORMATION.......................      18
Market prices...........................................      18
Dividends...............................................      19

THE MEETINGS................................................      20
The Casella annual meeting..............................      20
The KTI shareholders meeting............................      22

THE MERGER..................................................      25
Background of the merger................................      25
Reasons for the merger..................................      32
Joint reasons for the merger..........................      32
Casella's consideration of factors for and against the
merger...............................................      34
KTI's consideration of factors for and against the
merger...............................................      35

Opinion of KTI financial advisor........................      37
Interests of executive officers and directors of Casella
and KTI in the merger..................................      43
Directors and executive officers of the combined company
following the merger...................................      44
Material federal income tax consequences................      46
Accounting treatment....................................      48
Regulatory approvals....................................      48
Federal securities laws consequences....................      48
Stock exchange quotation................................      49
Appraisal rights........................................      49

THE MERGER AGREEMENT........................................      51
Structure of the merger.................................      51
Consummation of the merger..............................      51
Merger consideration....................................      51
Exchange of stock certificates..........................      51
Treatment of KTI common stock options and warrants......      52
Representations and warranties..........................      52
Certain covenants.......................................      53
Interim operations of Casella and KTI.................      53
Conditions to the merger................................      54
Conditions to each party's obligations to effect the
merger...............................................      54
Conditions to the obligations of Casella..............      54
Conditions to the obligations of KTI..................      54
Amendments; Waivers.....................................      55
No solicitation by KTI..................................      55
Termination of the merger agreement.....................      55
Termination fees and expenses...........................      56
Payment of expenses of the merger generally...........      56
Payment of Casella's expenses by KTI; Termination
fees.................................................      56
Payment of KTI's expenses by Casella..................      57
Stock option agreement..................................      57

THE COMPANIES...............................................      59
Casella.................................................      59
Company overview......................................      59
Service Area..........................................      60
Operations............................................      61
Competition...........................................      64
Marketing and Sales...................................      65
Employees.............................................      65
Risk Management, Insurance and Performance or Surety
Bonds................................................      66
Regulation............................................      66
Properties............................................      70
Legal Proceedings.....................................      70
Stock ownership of management.........................      73
Executive compensation................................      74
Certain relationships and related transactions........      78
Section 16(a) beneficial ownership reporting
compliance...........................................      79
Stock performance graph...............................      80
Casella Selected Historical Financial Information.....      81
Casella Management's Discussion and Analysis of
Financial Condition and Results of Operations........      83

ii

KTI.....................................................      93
Company overview......................................      93
Waste-to-energy segment...............................      94
Residential recycling segment.........................      99
Commercial recycling segment..........................     100
Finished products segment.............................     101
Properties............................................     103
Legal proceedings.....................................     104
Governmental regulation...............................     105
Stock ownership of management.........................     108
Executive compensation................................     110
Certain relationships and related transactions........     113
KTI Selected Historical Financial Information.........     114
KTI Management's Discussion and Analysis of Financial
Condition and Results of Operations..................     116

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION...............................................     132

KTI UNAUDITED ADJUSTED HISTORICAL STATEMENTS OF
OPERATIONS................................................     138

DESCRIPTION OF CASELLA CAPITAL STOCK........................     142
Authorized capital stock................................     142
Common stock............................................     142
Preferred stock.........................................     144
Delaware law and charter and by-law provisions..........     145
Transfer agent and registrar............................     146

COMPARISON OF STOCKHOLDER RIGHTS............................     147
Voting requirements.....................................     147
Stockholder power to call special stockholders
meeting................................................     148
Dissolution.............................................     148
Cumulative voting.......................................     149
Classified board of directors...........................     149
Rights of dissenting shareholders.......................     149
Stockholder consent to corporate action.................     150
Advance notice by-laws..................................     150
Dividends...............................................     151
By-laws.................................................     151
Limitations of liability of directors and officers......     151
Consideration of acquisition proposals..................     151

ELECTION OF CASELLA DIRECTORS...............................     153
General.................................................     153
Board of directors and committee meetings...............     155
Compensation of directors...............................     155
Compensation committee interlocks and insider
participation..........................................     156

APPROVAL OF AMENDMENT TO THE CASELLA AMENDED AND RESTATED
1997 STOCK INCENTIVE PLAN.................................     158

APPROVAL OF AMENDMENTS TO THE CASELLA 1997 NON-EMPLOYEE
DIRECTOR STOCK OPTION PLAN................................     161

APPROVAL OF AMENDMENT TO THE CASELLA AMENDED AND RESTATED
1997 EMPLOYEE STOCK PURCHASE PLAN.........................     162

iii

RATIFICATION OF THE SELECTION OF CASELLA'S INDEPENDENT
AUDITORS..................................................     163

STOCKHOLDER PROPOSALS.......................................     163

WHERE YOU CAN FIND MORE INFORMATION.........................     164

LEGAL MATTERS...............................................     164

EXPERTS.....................................................     164

KTI FINANCIAL STATEMENTS....................................     F-1

CASELLA FINANCIAL STATEMENTS................................    F-83

ANNEX   A     AGREEMENT AND PLAN OF MERGER, AS AMENDED....................    A-1

ANNEX   B-1   OPINION OF CIBC WORLD MARKETS CORP..........................  B-1-1
B-2   LETTER FROM CIBC WORLD MARKETS CORP. REAFFIRMING ITS
OPINION.....................................................  B-2-1

ANNEX   C     NEW JERSEY DISSENTERS' STATUTE..............................    C-1

ANNEX   D-1   CASELLA AMENDED AND RESTATED 1997 STOCK INCENTIVE PLAN......  D-1-1
D-2   CASELLA 1997 AMENDED NON-EMPLOYEE DIRECTOR STOCK OPTION
PLAN........................................................  D-2-1
D-3   CASELLA AMENDED AND RESTATED 1997 EMPLOYEE STOCK PURCHASE
PLAN........................................................  D-3-1

iv

QUESTIONS AND ANSWERS ABOUT THE MERGER

Q:  WHAT DO I NEED TO DO NOW?

A: After you have carefully read this proxy statement/prospectus, please mail
your signed proxy card in the enclosed postage-prepaid return envelope as
soon as possible, so that your shares may be represented at your
stockholders meeting. In addition, you may attend your stockholders meeting
in person and vote, whether or not you have signed and mailed your proxy
card.

Q:  WHAT DO I DO IF I WANT TO CHANGE MY VOTE?

A: Just send in a later-dated, signed proxy card before the stockholders meeting
or attend the stockholders meeting in person and vote. You may revoke any
proxy by written notice to the secretary of your company prior to your
stockholders meeting.

Q:  SHOULD I SEND IN MY STOCK CERTIFICATES NOW?

A: No. After the merger occurs, Casella will mail instructions to all former KTI
shareholders for surrendering their stock certificates. Certificates
representing shares of Casella common stock will continue to represent
shares of Casella common stock after the merger, and Casella stockholders
should not at any time surrender their stock certificates.

Q:  WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?

A: We are working toward completing the merger as quickly as possible. We hope
to complete the merger prior to December 10, 1999.

Q:  WHOM SHOULD I CALL WITH QUESTIONS?

A: KTI shareholders should call Ross Pirasteh at (201) 854-7777. Casella
stockholders should call Joseph S. Fusco at (802) 775-0325.

v

SUMMARY

THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY
STATEMENT/PROSPECTUS. IT MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS
IMPORTANT TO YOU IN ORDER TO UNDERSTAND THE MERGER FULLY OR THE OTHER PROPOSALS
TO BE VOTED ON AT YOUR STOCKHOLDERS MEETING. FOR A MORE COMPLETE DESCRIPTION OF
THE MERGER AND THE OTHER PROPOSALS TO BE VOTED ON AT YOUR STOCKHOLDERS MEETING,
YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE DOCUMENTS TO WHICH WE
HAVE REFERRED YOU. SEE "WHERE YOU CAN FIND MORE INFORMATION" (PAGE 164).

THE COMPANIES (PAGES 59 THROUGH 131)

Casella Waste Systems, Inc.
25 Greens Hill Lane
Rutland, Vermont 05701
(802) 775-0325

Casella is a regional, integrated, non-hazardous solid waste services
company that provides collection, transfer, disposal and recycling services in
Vermont, New Hampshire, Maine, upstate New York, northern Pennsylvania and
Massachusetts. At September 1, 1999, Casella owned and/or operated five Subtitle
D landfills and two permitted construction and demolition debris landfills, 54
transfer stations, 24 recycling processing facilities and 38 collection
operations which together serve over 500,000 commercial, municipal and
residential customers. Subtitle D landfills are solid waste landfills that must
be built, operated and then maintained after they stop operating in accordance
with state and federal regulations, commonly referred to as Subtitle D.

KTI, Inc.
7000 Boulevard East
Guttenberg, New Jersey 07093
(201) 854-7777

KTI is an integrated solid waste processing company serving commercial,
industrial and residential customers primarily in the eastern United States. At
September 1, 1999, KTI processed solid waste through a network of 50 facilities
in 19 states, including six waste-to-energy plants, 22 material recycling
facilities and 11 finished products facilities.

THE MERGER (PAGES 25 THROUGH 58)

WHAT KTI SHAREHOLDERS WILL RECEIVE IN THE MERGER.  As a result of the
merger, KTI will become a direct, wholly-owned subsidiary of Casella. Each KTI
shareholder will receive 0.51 of a share of Casella Class A common stock in
exchange for each share of KTI common stock that they own. The exact number of
shares of Casella Class A common stock issuable because of the merger will
depend on the number of shares of KTI common stock, options, warrants and
convertible notes outstanding immediately prior to the merger. Casella will not
issue fractional shares in the merger. Instead, KTI shareholders will receive
cash for any fraction of a share of Casella Class A common stock to which he or
she becomes entitled.

WHAT KTI OPTIONHOLDERS AND WARRANTHOLDERS WILL RECEIVE IN THE MERGER.  KTI
options and warrants outstanding and unexercised at the time of the merger will
be converted into rights to acquire Casella Class A common stock under the same
terms on which outstanding shares are to be exchanged, provided that the number
of shares will decrease and the exercise price per share will increase to
reflect the exchange ratio. For example, an option to purchase 100 shares of KTI
common stock at an exercise price of $10.00 per share will become an option to
purchase 51 shares of Casella Class A common stock at an exercise price of
$19.61 per share.

WHAT CASELLA STOCKHOLDERS WILL RECEIVE IN THE MERGER.  Holders of Casella
Class A common stock will continue to own their existing shares after the
merger. However, as a result of the merger, they will own shares of a larger,
more diversified company, as described in this proxy statement/prospectus.

KTI SHAREHOLDERS' OWNERSHIP OF CASELLA AFTER THE MERGER

Based upon the number of outstanding shares of Casella common stock and KTI
common stock as of October 1, 1999, KTI shareholders immediately prior to the
merger are expected to own approximately 30.88% of the outstanding shares of
Casella common stock immediately after the merger, or 31.24% on a fully diluted
basis assuming the exercise of all KTI and Casella options, warrants and
convertible notes. These shares of Casella common stock would represent in the
aggregate approximately 22.31% of the votes entitled to be cast by Casella
stockholders after the merger, including the outstanding shares of Casella
Class B common stock, or 23.61% on a fully diluted basis assuming the exercise
of all KTI and Casella options, warrants and convertible notes.

OUR REASONS FOR THE MERGER (PAGES 32 THROUGH 37)

We believe that the merger represents a highly favorable strategic
opportunity for Casella and KTI, two companies with complementary business
operations and geographical presence. The Casella board and the KTI board have
identified a number of potential benefits of the merger which they believe will
contribute to the success of the combined company, including:

- complementary operations;

- operational efficiencies of the combined company;

- growth opportunities;

- compatible strategies;

- expected profitability;

- larger critical mass; and

- increased liquidity of the common stock of the combined company.

APPRAISAL RIGHTS (PAGES 49 AND 50)

KTI shareholders who vote against the merger and who make the specified
written filing with KTI prior to the KTI shareholders meeting are entitled under
New Jersey law to seek an appraisal of the fair value of their shares and to be
paid cash for their shares. If a KTI shareholder does not follow the proper
procedures in exercising these appraisal rights or if a KTI shareholder
withdraws his demand for appraisal with KTI's consent, his KTI shares will be
converted into shares of Casella Class A common stock in accordance with the
merger agreement. We have attached a copy of the dissenters' rights statute as
Annex C to this proxy statement/prospectus, which you should be sure to read.

Under Delaware law, Casella stockholders are not entitled to an appraisal of
the value of their shares in connection with the merger.

RECOMMENDATIONS OF THE CASELLA BOARD AND THE KTI BOARD RELATING TO THE MERGER
(PAGES 20 AND 23)

The Casella board recommends voting "FOR" the issuance of Casella Class A
common stock pursuant to the merger agreement. The KTI board recommends voting
"FOR" the approval of the merger agreement.

DIRECTORS AND EXECUTIVE OFFICERS OF CASELLA AFTER THE MERGER (PAGES 44 THROUGH
46)

The Casella board immediately after the merger will consist of the following
9 people: John W. Casella, Douglas R. Casella, James W. Bohlig, John F. Chapple
III and Gregory B. Peters, all of whom are currently directors of Casella, and
Ross Pirasteh, Martin J. Sergi, George J. Mitchell and Wilbur L.

2

Ross, Jr., all of whom are currently directors of KTI. In addition, two
additional directors may be designated by John W. Casella.

After the merger, Casella's executive officers will include the following:

- Ross Pirasteh, currently chairman of the KTI board, will serve as chairman
of the Casella board;

- John W. Casella, currently chairman, president and chief executive officer
of Casella, will continue as president and chief executive officer;

- James W. Bohlig, currently senior vice president and chief operating
officer of Casella, will continue as senior vice president and chief
operating officer;

- Martin J. Sergi, currently president of KTI, will serve as executive vice
president--business development; and

- Jerry S. Cifor, currently senior vice president and chief financial
officer of Casella, will continue as senior vice president and chief
financial officer.

INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS OF CASELLA AND KTI IN THE MERGER
(PAGES 43 AND 44)

In connection with the merger, Casella will enter into employment agreements
with each of Messrs. Pirasteh, Casella, Bohlig, Sergi and Cifor. These
employment agreements are summarized in this proxy statement/prospectus.

In connection with the merger, Paul Garrett, vice chairman of the KTI board,
will receive a payment of approximately $1.2 million in connection with his
existing employment agreement with KTI, which will be terminated.

OPINION OF KTI FINANCIAL ADVISOR (PAGES 37 THROUGH 43)

On September 15, 1999, CIBC World Markets delivered an oral opinion, which
opinion was subsequently confirmed by delivery of a written opinion dated
September 15, 1999, to the KTI board as to the fairness, from a financial point
of view, of the exchange ratio to the holders of KTI common stock. On
September 23, 1999, after being advised that the merger is anticipated to be
accounted for as a purchase rather than as a pooling-of-interests transaction,
CIBC World Markets reaffirmed the conclusions of its written opinion dated
September 15, 1999. We have attached a copy of the full text of the written
opinion as Annex B-1 and a copy of the September 23, 1999 letter as Annex B-2 to
this proxy statement/prospectus. We urge you to read the opinion and the letter
in their entirety. THE OPINION IS DIRECTED TO THE KTI BOARD AND IS NOT A
RECOMMENDATION TO YOU AS TO HOW YOU SHOULD VOTE ON ANY MATTER RELATING TO THE
MERGER.

CONDITIONS TO BE SATISFIED BEFORE THE MERGER WILL OCCUR (PAGES 54 AND 55)

Our obligations to complete the merger are subject to the satisfaction or
waiver of several conditions, including the following:

- Casella stockholders must approve the issuance of shares to KTI
shareholders;

- KTI shareholders must approve the merger agreement;

- there must not be any court order which effectively prohibits the merger;

- each of Messrs. Pirasteh, John Casella, Bohlig, Sergi, Cifor and Garrett
must have entered into lock-up agreements pursuant to which they agree not
to sell their shares of Casella common stock for a period of 365 days
after the merger;

3

- the shares of Casella Class A common stock to be issued in the merger and
upon the exercise of KTI options, warrants and convertible notes must be
authorized for listing on the Nasdaq National Market; and

- each company's representations and warranties contained in the merger
agreement must be materially true and correct, and each company must have
performed all of its material obligations under the merger agreement.

The companies will recirculate revised proxy materials and resolicit proxies
if there are any material changes in the terms of the merger, including changes
that result from waivers of these conditions.

WHO CAN TERMINATE THE MERGER AGREEMENT; FEES AND EXPENSES (PAGES 55 THROUGH 57)

The companies can agree to terminate the merger agreement without completing
the merger, and either company can terminate the merger agreement if any of the
following occur:

- the merger is not completed by December 15, 1999;

- a court or other governmental authority permanently prohibits the merger;

- KTI shareholders do not approve the merger agreement or Casella
stockholders do not approve the issuance of shares to KTI shareholders; or

- the other company materially breaches the merger agreement and the breach
is not cured within 30 days.

In addition, Casella can terminate the merger agreement without completing
the merger if the KTI board:

- changes its recommendation of the merger;

- does not reconfirm its recommendation of the merger after receipt of a
competing bid;

- recommends a competing transaction to KTI shareholders;

- recommends that KTI shareholders accept a tender offer or exchange offer
for 25% or more of KTI's outstanding capital stock; or

- fails to call and hold the KTI shareholders meeting by December 15, 1999.

If the merger is completed, Casella will pay all fees and expenses incurred
in connection with the merger. If the merger agreement is terminated before the
merger takes place, either company may be required to reimburse the other party
for expenses of up to $3.0 million. In addition, if the merger agreement is
terminated before the merger takes place, KTI may be required to pay a
termination fee of $10.0 million to Casella.

THE VOTES REQUIRED AT THE STOCKHOLDERS MEETINGS TO APPROVE THE PROPOSALS (PAGES
20 THROUGH 24)

CASELLA.  A majority of the votes cast at the Casella annual meeting by the
holders of shares of Casella Class A common stock and Casella Class B common
stock, voting together as a class, is required to approve the issuance of shares
to KTI shareholders, to amend the Casella stock plans and to ratify the
selection of Casella's independent auditors for the current fiscal year. A
plurality of the votes cast by the holders of shares of Casella Class A common
stock and Casella Class B common stock, voting together as a class, is required
for the election of directors other than the Class A director. A plurality of
the votes cast by the holders of shares of Casella Class A common stock is
required for the election of the Class A director.

4

The executive officers and directors (and a former director) of Casella have
agreed to vote all of their shares in favor of the proposal to issue shares to
KTI shareholders pursuant to the merger agreement and will be able to approve
the proposal without any other stockholder voting. Each share of Casella
Class A common stock will be entitled to one vote on each matter to be voted
upon at the Casella annual meeting, and each share of Casella Class B common
stock will be entitled to ten votes on each matter to be voted upon at the
Casella annual meeting other than the election of the Class A director.

KTI.  The affirmative vote of a majority of the shares of KTI common stock
represented and voting at the KTI shareholders meeting is required to approve
the merger agreement. Directors and executive officers of KTI representing
approximately 16.7% of the shares of KTI common stock entitled to vote at the
shareholders meeting as of KTI's record date have agreed to vote all of their
shares in favor of the approval of the merger agreement.

THE RIGHTS OF KTI SHAREHOLDERS WILL CHANGE AS A RESULT OF THE MERGER (PAGES 147
THROUGH 152)

Currently, the rights of KTI shareholders are governed by New Jersey law and
KTI's charter and by-laws, and the rights of Casella stockholders are governed
by Delaware law and Casella's charter and by-laws. After the merger, KTI
shareholders will become stockholders of Casella and their rights will be
governed by Delaware law and Casella's charter and by-laws.

FEDERAL TAX CONSEQUENCES OF THE MERGER (PAGES 46 AND 47)

We expect that for federal income tax purposes, KTI shareholders will
generally not recognize any gain or loss as a result of the exchange of shares
of KTI common stock for Casella Class A common stock. KTI shareholders will,
however, recognize income or gain in connection with any cash received instead
of fractional shares of Casella Class A common stock. A KTI shareholder's
holding period for the Casella Class A common stock received in the merger
generally will include the holding period of the KTI common stock exchanged in
the merger. The holding period is important because it determines how any gain
or loss should be treated for federal income tax purposes upon future sales of
Casella Class A common stock. Please remember that the tax consequences of the
merger may be different for you because of your particular tax status.
Accordingly, we urge you to consult with your tax advisor.

STOCK OPTION AGREEMENT (PAGES 57 AND 58)

To induce Casella to enter into the merger agreement, KTI granted Casella an
option to purchase up to 2,769,331 shares of KTI common stock, representing
approximately 19.9% of KTI common stock at the date the merger agreement was
amended in May 1999, at a price of $10.40 per share. Casella may only exercise
this option under circumstances in which either Casella would be entitled to a
termination fee, or a third party makes an offer to acquire KTI.

ACCOUNTING TREATMENT (PAGE 48)

We expect the merger to be accounted for using purchase accounting, with
Casella being deemed to have acquired KTI.

OTHER PROPOSALS TO BE CONSIDERED AT THE CASELLA ANNUAL MEETING (PAGES 153
THROUGH 163)

THE ELECTION OF CASELLA DIRECTORS.  Because this meeting is also Casella's
1999 annual meeting of stockholders, Casella stockholders are being asked to
vote for the election of James W. Bohlig and Gregory B. Peters as directors of
Casella, to serve for a term expiring in 2002. Both of Messrs. Bohlig

5

and Peters are currently directors of Casella. The Casella board recommends
voting "FOR" the election of these nominees.

THE PROPOSAL TO RATIFY THE SELECTION OF ARTHUR ANDERSEN LLP AS CASELLA'S
AUDITORS.  Casella stockholders are being asked to ratify the selection of
Arthur Andersen LLP as Casella's independent auditors for the fiscal year ending
April 30, 2000. The Casella board recommends voting "FOR" this proposal.

THE PROPOSALS TO AMEND THE CASELLA STOCK PLANS.  The Casella board has
approved amendments to its Amended and Restated 1997 Stock Incentive Plan, 1997
Non-Employee Director Stock Option Plan and Amended and Restated 1997 Employee
Stock Purchase Plan. These amendments would increase the number of shares of
Casella Class A common stock issuable under the plans and, with respect to the
1997 Non-Employee Director Stock Option Plan, increase the number of stock
options issuable to non-employee directors upon initial election to the Casella
board and at each annual meeting of stockholders. After considering the increase
in the number of Casella employees and directors as a result of the merger, the
Casella board believes that these amendments are necessary to ensure that an
adequate number of shares are available for grant to the eligible participants
under the plans, and recommends voting "FOR" the amendments to the Casella stock
plans. We have attached a copy of each of these plans as Annexes D-1, D-2 and
D-3 to this proxy statement/prospectus, which you should be sure to read.

6

SUMMARY UNAUDITED PRO FORMA COMBINED INFORMATION

The following unaudited pro forma combined financial information gives
effect to the merger under the purchase method of accounting. This pro forma
information is presented for illustrative purposes only. The pro forma
adjustments are based upon available information and certain assumptions that
management believes are reasonable. The pro forma combined financial information
does not purport to represent what the results of operations or financial
position of Casella would actually have been if the merger had in fact occurred
on such dates, nor does it purport to project the results of operations or
financial position of Casella for any future period or as of any date.
Additionally, no pro forma adjustments have been made to reflect potential
effects of (a) the efficiencies that may be obtained by combining the operations
of Casella and KTI or (b) the costs of restructuring, integrating or
consolidating the operations of Casella and KTI, except as disclosed in
Note 4(g). Under the purchase method of accounting, tangible and identifiable
intangible assets acquired and liabilities assumed are recorded at their
estimated fair values. The excess of the purchase price, including estimated
fees and expenses related to the merger, over the fair value of tangible net
assets acquired has preliminarily been allocated to goodwill and is being
amortized over an estimated blended life of 30 years. The estimated fair values
and useful lives of assets acquired and liabilities assumed are based on a
preliminary valuation and are subject to final valuation adjustments.

Casella's and KTI's fiscal years end on different dates. Accordingly, to
prepare the pro forma combined financial statements:

- The unaudited pro forma combined condensed balance sheet information as of
July 31, 1999 was prepared by combining the balance sheet at July 31, 1999
for Casella, with certain adjustments, with the balance sheet at June 30,
1999 for KTI, giving effect to the merger as though it had been completed
on July 31, 1999;

- The unaudited pro forma combined condensed statement of operations for the
three months ended July 31, 1999 was prepared by combining Casella's
statement of operations for the three months ended July 31, 1999, with
certain adjustments, with KTI's statement of operations for the three
months ended June 30, 1999, giving effect to the merger as if it had
occurred on May 1, 1998; and

- The unaudited pro forma combined condensed statement of operations for the
year ended April 30, 1999 was prepared by combining Casella's statements
of operations for the year ended April 30, 1999, with certain adjustments,
with KTI's statements of operations for the twelve months ended March 31,
1999, as adjusted for an acquisition and the sale of substantially all
assets of a business, giving effect to the merger as if it had occurred on
May 1, 1998.

For a description of the adjustments made in connection with the preparation
of the unaudited pro forma information, see "Unaudited Pro Forma Combined
Condensed Financial Information" beginning on page 132. For a description of the
adjustments made to KTI's historical financial information to adjust for certain
acquisitions, see "KTI Unaudited Adjusted Historical Statement of Operations"
beginning on page 138.

The summary unaudited pro forma information is derived from the unaudited
pro forma financial information and related notes included elsewhere in this
proxy statement/prospectus, which you should read in its entirety.

7

SUMMARY UNAUDITED PRO FORMA COMBINED INFORMATION
(IN THOUSANDS EXCEPT PER SHARE DATA)

THREE
YEAR       MONTHS
ENDED      ENDED
APRIL 30,   JULY 31,
1999        1999
---------   --------

PRO FORMA STATEMENT OF OPERATIONS DATA:
Revenues....................................................   402,160     116,429
Operating income............................................    27,699       1,876
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle..................     4,325      (4,039)
========    ========
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle per common share:
Basic.....................................................      0.20       (0.18)
========    ========
Diluted...................................................      0.19       (0.18)
========    ========
Weighted average common shares outstanding:
Basic.....................................................    21,433      23,076
Diluted...................................................    22,739      23,076

OTHER DATA:
Adjusted EBITDA (1).........................................    70,737      17,727
========    ========

JULY 31,
1999
--------

PRO FORMA BALANCE SHEET DATA:
Cash and cash equivalents...................................    10,309
Working capital.............................................    28,956
Property and equipment, net.................................   357,358
Total assets................................................   724,052
Long term obligations, less current maturities..............   328,641
Total stockholders' equity..................................   262,664

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

(1) Adjusted EBITDA is defined as operating income less minority interest plus
depreciation and amortization and loss on impairment of long-lived assets.
Adjusted EBITDA does not represent, and should not be considered as, an
alternative to net income or cash flows from operating activities, each as
determined in accordance with generally accepted accounting principles
(GAAP). Moreover, Adjusted EBITDA does not necessarily indicate whether cash
flow will be sufficient to meet working capital, capital expenditures or
other requirements, or to react to changes in our industry or to the economy
generally. We believe that Adjusted EBITDA is a measure commonly used by
lenders and certain investors to evaluate a company's performance in the
solid waste industry. We also believe that Adjusted EBITDA data may help you
to understand our performance because such data may reflect our ability to
generate cash flows, which is an indicator of our ability to satisfy our
debt service, capital expenditure and working capital requirements. Since
all companies and analysts do not calculate Adjusted EBITDA in the same
fashion, the Adjusted EBITDA measures presented by us may not be comparable
to similarly titled measures reported by other companies. Therefore, in
evaluating Adjusted EBITDA data, investors should consider, among other
factors: the non-GAAP nature of Adjusted EBITDA data; actual cash flows; the
actual availability of funds for debt service, capital expenditures and
working capital; and the

8

comparability of our Adjusted EBITDA data to similarly-titled measures
reported by other companies. For more information about cash flows, see the
consolidated statements of cash flows in the consolidated financial
statements that we have included in this proxy statement/prospectus.

The following table reconciles operating income to the pro forma
presentation of Adjusted EBITDA:

THREE
YEAR       MONTHS
ENDED      ENDED
APRIL 30,   JULY 31,
1999        1999
---------   --------
RESTATED
(IN THOUSANDS)

Operating income............................................   27,699       1,876
Depreciation and amortization...............................   44,268      13,009
Loss on impairment of long-lived assets.....................        0       3,000
Minority interest...........................................   (1,230)       (158)
------      ------
Adjusted EBITDA.............................................   70,737      17,727
======      ======
Adjusted EBITDA as a percentage of revenues.................     17.6%       15.2%

9

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements in this proxy statement/prospectus constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are included in the Summary and
elsewhere in this proxy statement/prospectus, including under the following
captions:

- "Risk Factors";

- "The Merger--Reasons for the merger;

- "The Companies";

- "Combined Unaudited Pro Forma Financial Information"; and

- "Notes to Combined Unaudited Pro Forma Financial Information".

We may be making forward-looking statements when we make statements that
include the words "believes", "expects", "anticipates" or similar expressions.
Additionally, our discussion of anticipated operational efficiencies appearing
in "Risk Factors" and "The Merger--Reasons for the merger" and our projected
operating results for the current fiscal year and future fiscal years appearing
in "The Merger--Reasons for the merger", including projected operating results
for the combined company and for each company as a stand alone entity,
constitute forward-looking statements. You should read these statements with
caution because our actual results or experience could differ materially from
the forward-looking statements. These differences could arise as a result of
many factors, including those set forth in "Risk Factors".

10

RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, IN DETERMINING
HOW TO VOTE AT YOUR STOCKHOLDERS MEETING. REFERENCES TO "WE" OR "US" IN THESE
RISK FACTORS MEANS THE COMBINED COMPANY FOLLOWING THE MERGER.

RISKS RELATING TO THE MERGER

BECAUSE THE EXCHANGE RATIO IS FIXED, KTI AND CASELLA SHAREHOLDERS ARE EXPOSED
TO THE RISK THAT THE MARKET PRICE OF THE OTHER COMPANY'S STOCK WILL DROP

The fixed exchange ratio may not reflect the market value of Casella or KTI
common stock at the time the merger takes place, and KTI shareholders may
receive Casella Class A common stock with a market value greater than or below
the value of their KTI common stock. KTI shareholders will receive 0.51 of a
share of Casella Class A common stock in exchange for each share of KTI common
stock that they own. The market value of Casella Class A common stock and/or KTI
common stock at the closing of the merger may vary significantly from the price
as of the date the exchange ratio was fixed, the date of this proxy
statement/prospectus or the date on which stockholders vote on the merger. These
variations may be due to, among other factors:

- market perception of the operational efficiencies and cost savings
expected to be achieved by the merger;

- changes in the business, operations or prospects of Casella and/or KTI;

- market assessments of the likelihood that the merger will be consummated
and its timing; and

- general market and economic conditions.

OUR EARNINGS COULD SUFFER IF WE DO NOT REALIZE THE OPERATIONAL EFFICIENCIES
WE ANTICIPATE FROM THE MERGER

Our inability to successfully or timely integrate the operations of the two
companies could have a material adverse effect on our business and operating
results. The managements of Casella and KTI have publicly announced that they
expect annualized operational efficiencies of approximately $8.2 million, plus
annualized interest savings of approximately $800,000, to be realized from the
merger. Integrating the operations and management of the two companies will be a
detailed, time-consuming process. The combined company's management team will
need to address the issues related to the management of a large number of
employees located at geographically dispersed facilities, as well as issues
related to doing business in Canada, including compliance with a variety of
environmental and other laws and regulatory requirements. These issues could
place a significant strain on our management and our operating, financial and
other resources, and we cannot assure you that the merger will result in the
anticipated operational efficiencies. Moreover, the dedication of management
resources to the integration of Casella and KTI may temporarily distract
management's attention from our day-to-day business, including the ongoing
acquisition program.

CASELLA'S ABILITY TO MANAGE THE OPERATIONS ACQUIRED FROM KTI MAY BE
ADVERSELY AFFECTED IF KTI'S MANAGEMENT DOES NOT REMAIN IN PLACE

If key members of KTI's management were to terminate their employment with
KTI, or with the combined company following the merger, Casella's ability to
manage and integrate KTI's business and workforce would be harmed and Casella's
operations could be disrupted. The integration of Casella's and KTI's operations
will require substantial attention from Casella's management, and we will rely
on KTI's management for the initial successful operation of these assets. We
will be dependent on our management to run the combined company's business,
which will include operations not currently

11

conducted by Casella, and with respect to which Casella management has limited
experience, including waste-to-energy operations and the manufacturing of
finished products from recyclables.

WE WILL DEFAULT UNDER OUR CREDIT FACILITY IF WE DO NOT OBTAIN A REPLACEMENT
CREDIT FACILITY WITHIN 30 DAYS FOLLOWING THE CLOSING OF THE MERGER

If we do not obtain a new revolving credit facility to replace Casella's
existing credit agreement within the earlier of 30 days following the closing of
the merger or November 15, 1999, we will be in default under Casella's existing
credit facility. At September 1, 1999, an aggregate of $96.9 million was
outstanding under this credit facility, which we will have to repay immediately
if we are in default. We do not have sufficient funds to repay this credit
facility if it were to be called for immediate repayment. Casella is currently
in negotiations with a number of banks, including BankBoston, N.A., which is the
lead bank under its existing credit facility, for a new credit facility to be
put in place upon the closing of the merger. We cannot assure you that we will
be able to obtain a credit facility on terms favorable to us, if at all. In the
event we are unable to obtain a credit facility on favorable terms, our
acquisition program would be significantly limited, and, if we were required to
repay the existing credit facility immediately as a result of a default, our
business, results of operations and financial condition would be materially
adversely affected, including as a result of the foreclosure by the banks of the
assets held by them as security for the credit facility.

OUR ABILITY TO BORROW AFTER THE MERGER MAY BE ADVERSELY AFFECTED BY OUR
INCREASED LEVERAGE

The combined company's financial position will be more leveraged than
Casella's current financial position. Before the merger, Casella's debt to
capitalization ratio was 32.1% compared to KTI's 64.6%. Immediately upon the
closing of the merger, the combined company's debt to capitalization ratio is
expected to be approximately 55%. Although Casella has not yet negotiated the
terms of the agreement relating to a new credit facility, that agreement may
contain financial or other covenants that may, among other things, limit the
combined company's ability to incur additional indebtedness, and thereby limit
the company's ongoing acquisition program.

RISKS RELATING TO THE WASTE MANAGEMENT INDUSTRY OR PARTICULAR TO CASELLA OR KTI

OUR GROWTH RATE MAY BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO CONTINUE TO
IMPLEMENT OUR ACQUISITION STRATEGY

Our failure to implement successfully our acquisition strategy would limit
our growth potential. We may not be able to implement our acquisition strategy,
on which our future growth is substantially based, due to the consolidation and
integration activity in the solid waste industry in recent years, as well as the
difficulties and expenses relating to the development and permitting of solid
waste landfills and transfer stations. These factors may result in fewer
acquisition opportunities for us as well as less advantageous acquisition terms,
including increased purchase prices. In addition, it may be difficult initially
to integrate the operations of any acquired businesses with the newly combined
company's business.

We also believe that a significant factor in our ability to close
acquisitions will be the attractiveness of Casella Class A common stock as
consideration for potential acquisition candidates. This attractiveness may, in
large part, be dependent upon the relative market price and capital appreciation
prospects of Casella Class A common stock compared to the equity securities of
our competitors. If the market price of Casella Class A common stock were to
decline, our acquisition program could be materially adversely affected.

12

ENVIRONMENTAL REGULATIONS COULD SUBJECT US TO FINES, PENALTIES AND
LIMITATIONS ON OUR ABILITY TO EXPAND

The combined business will be subject to potential liability and
restrictions under environmental laws. The waste-to-energy and manufacturing
facilities are subject to regulations limiting discharges of pollution into the
air and water, and the solid waste operations are subject to a wide range of
federal, state and, in some cases, local environmental and land use
restrictions. If we are not able to comply with the requirements that apply to a
particular facility, we could be subject to fines and penalties, and we may be
required to spend large amounts to bring an operation into compliance or to
temporarily or permanently stop an operation that is not permitted under the
law. Those costs or actions could have a material adverse effect upon our
business, financial condition and results of operations.

Environmental and land use laws also can have an impact on whether our
operations can expand and, in the case of our solid waste operations, may
dictate those geographic areas from which we must, or, from which we may not,
accept waste. The waste management industry has been and likely will continue to
be subject to regulation, as well as to attempts to regulate the industry
through new legislation. Those regulations and laws also may limit the overall
size and daily waste volume that may be accepted by a solid waste operation. If
we are not able to expand or otherwise operate one or more of our facilities
profitably because of limits imposed under environmental laws, we may be
required to increase our utilization of disposal facilities owned by third
parties, and if so, our business, financial condition and results of operation
could suffer a material adverse effect.

Both Casella and KTI have grown through acquisitions, and both businesses
have tried to evaluate and address environmental risks and liabilities presented
by newly acquired businesses as they have identified them. It is possible that
some liabilities, including ones that may exist only because of the past
operations of an acquired business, may prove to be more difficult or costly to
address than we anticipate. It is also possible that government officials
responsible for enforcing environmental laws may believe an issue is more
serious than we would expect, or that we will fail to identify or fully
appreciate a historic liability before we become legally responsible to address
it. Some of the legal sanctions to which we could become subject could cause us
to lose a needed permit, or prevent us from or delay us in obtaining or renewing
permits to operate our facilities. The number, size and nature of those
liabilities could have a material adverse effect on our business, financial
conditions and results of operations.

OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED BY CHANGING PRICES OR
MARKET REQUIREMENTS FOR RECYCLABLE MATERIALS

Our results of operations may be materially adversely affected by changing
purchase or resale prices or market requirements for recyclable materials. Our
recycling business involves the purchase and sale of recyclable materials, some
of which are priced on a commodity basis. The resale and purchase prices of, and
market demand for, recyclable materials, particularly wastepaper, plastic and
ferrous and aluminum metals, can be volatile due to numerous factors beyond our
control. These changes have in the past contributed, and may continue to
contribute, to significant variability in our period-to-period results of
operations.

Some of our subsidiaries involved in the recycling business use long-term
supply contracts with customers with floor price arrangements to minimize the
commodity risk for recyclable materials, particularly wastepaper and aluminum
metals. Under these contracts, our subsidiaries obtain a guaranteed minimum
floor price for the recyclable materials along with a commitment to receive
additional amounts if the current market price rises above the minimum price.
These contracts are generally with large domestic companies which use the
recyclable materials in their manufacturing processes. Any failure to continue
to secure long-term supply contracts with minimum price arrangements, or a
breach by customers of one or more of these contracts could reduce our recycling
revenues and have a material adverse effect on our business, financial condition
and results of operations.

13

THE SEASONALITY OF OUR REVENUES COULD ADVERSELY IMPACT OUR FINANCIAL
CONDITION

Future seasonal fluctuations in our revenues could have a material adverse
effect on our business, financial condition and results of operations. Casella's
and KTI's revenues have historically been lower during the months of November
through March. This seasonality reflects the lower volume of solid waste during
the late fall, winter and early spring months resulting primarily from:

- the volume of solid waste relating to construction and demolition
activities decreasing substantially during the winter months in the
northeastern United States; and

- decreased tourism in Vermont, Maine and eastern New York during the winter
months, which tends to lower the volume of solid waste generated by
commercial and restaurant customers, which is only partially offset by the
winter ski industry.

Since some of our operating and fixed costs remain constant throughout the
fiscal year, our operating income is seasonally impacted. In addition,
particularly harsh weather conditions could result in increased operating costs
for some of our operations.

OUR BUSINESS IS GEOGRAPHICALLY CONCENTRATED AND IS THEREFORE SUBJECT TO
REGIONAL ECONOMIC DOWNTURNS

Our operations and customers are principally located in the eastern United
States. Therefore, our business, financial condition and results of operations
are susceptible to regional economic downturns and other regional factors,
including state regulations and severe weather conditions. In addition, as we
expand in our existing markets, opportunities for growth within these regions
will become more limited. The costs and time involved in permitting and the
scarcity of available landfills will make it difficult for us to expand
vertically in these markets. We cannot assure you that we will complete enough
acquisitions in other markets to lessen our regional geographic concentration.

WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE IN THE HIGHLY COMPETITIVE SOLID
WASTE SERVICES INDUSTRY

The solid waste services industry is highly competitive, is undergoing a
period of increasingly rapid consolidation, and requires substantial labor and
capital resources. Some of the markets in which we compete or will likely
compete are served by one or more of the large national or multinational solid
waste companies, as well as numerous regional and local solid waste companies.
Intense competition exists not only to provide services to customers but also to
acquire other businesses within each market. Some of our competitors have
significantly greater financial and other resources than us. From time to time,
competitors may reduce the price of their services in an effort to expand market
share or to win a competitively bid municipal contract. These practices may
either require us to reduce the pricing of our services or result in our loss of
business. As is generally the case in the industry, municipal contracts are
subject to periodic competitive bidding. There can be no assurance that we will
be the successful bidder to obtain or retain these contracts. If we are unable
to compete with larger and better capitalized companies, or to replace municipal
contracts lost through the competitive bidding process with comparable contracts
or other revenue sources within a reasonable time period, our business,
financial condition and results of operations could be materially adversely
affected.

In our solid waste disposal markets, we also compete with operators of
alternative disposal and recycling facilities and with counties, municipalities
and solid waste districts that maintain their own waste collection, recycling
and disposal operations. These entities may have financial advantages because
user fees or similar charges, tax revenues and tax-exempt financing may be more
available to them than to us.

Our insulation manufacturing operations compete primarily with large
manufacturers of fiberglass insulation, including Owens Corning, Certainteed and
Johns Mansville Corp. and with Louisiana Pacific Corporation, a manufacturer of
cellulose insulation. These companies have substantially greater resources than
Casella which they could use for product development, marketing or other
purposes to the detriment of Casella.

14

KTI ENERGY OF VIRGINIA, INC. SELLS ITS ENTIRE OUTPUT TO A FEW CUSTOMERS AND
LACKS THE CAPACITY TO MEET ALL OF ITS COMMITMENTS

KTI Energy of Virginia, Inc., a subsidiary of KTI, operates three steam
generating plants, one of which produces steam for a facility owned by E. I. du
Pont de Nemours and Company under a five-year contract expiring on May 30, 2003.
Du Pont has significantly reduced operations at this facility, and has the
option to terminate the contract upon payment of a termination fee. The second
plant produces steam for an industrial park. Approximately 85% of the steam
produced by the plant is purchased by one customer under a contract that may not
be terminated by the customer except for cause, and the balance is sold to ten
customers under contracts which provide that KTI Energy of Virginia may elect
not to supply steam. Currently, maximum contracted capacity for all customers
for steam exceeds the maximum rated capacity that may be produced by this plant.
Actual demand, however, has not exceeded the maximum rated capacity. If actual
demand grows, the plant may need to install equipment to respond to peak
demands, as well as equipment which may be necessary to allow the plant to meet
stricter air quality standards, which may be adopted in the near future. The
cost of this air quality equipment, not including the equipment necessary to
respond to peak demands, is expected to be approximately $1.2 million. A third
steam generating plant operated by a subsidiary of KTI Energy of Virginia sells
all of its output to one customer under a contract that provides the customer
the option to terminate the contract upon payment of a termination fee of
approximately $250,000. The termination of the contract with Du Pont or any of
the significant customers who purchase steam from KTI Energy of Virginia or its
subsidiary could have a material adverse effect on our business, financial
condition and results of operations.

OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE NEGATIVELY AFFECTED
IF WE INADEQUATELY ACCRUE FOR CLOSURE AND POST-CLOSURE COSTS

We have material financial obligations relating to closure and post-closure
costs of our existing landfills and will have material financial obligations
with respect to any disposal facilities which we may own or operate in the
future. In addition to the landfills Casella currently operates, Casella owns
four unlined landfills which are not currently in operation. Casella has
provided and will in the future provide accruals for financial obligations
relating to closure and post-closure costs of its owned or operated landfills,
generally for a term of 30 years after final closure of a landfill. We cannot
assure you that our financial obligations for closure or post-closure costs will
not exceed the amount accrued and reserved or amounts otherwise receivable
pursuant to trust funds established for this purpose. Such a circumstance could
result in unanticipated charges and have a material adverse effect on our
business, financial condition and results of operations.

WE COULD BE PRECLUDED FROM ENTERING INTO CONTRACTS OR OBTAINING PERMITS IF
WE ARE UNABLE TO OBTAIN THIRD PARTY FINANCIAL ASSURANCE TO SECURE OUR
CONTRACTUAL OBLIGATIONS

Municipal solid waste collection and recycling contracts, obligations
associated with landfill closure and the operation and closure of
waste-to-energy facilities may require performance or surety bonds, letters of
credit or other means of financial assurance to secure our contractual
performance. If we are unable to obtain the necessary financial assurance in
sufficient amounts or at acceptable rates, we could be precluded from entering
into additional municipal solid waste collection contracts or from obtaining or
retaining landfill operating permits. Any future difficulty in obtaining
insurance could also impair our ability to secure future contracts conditioned
upon the contractor having adequate insurance coverage. Accordingly, our failure
to obtain financial assurance bonds, letters of credit or other means of
financial assurance or to maintain adequate insurance could have a material
adverse effect on our business, financial condition and results of operations.

15

WE MAY BE REQUIRED TO WRITE-OFF CAPITALIZED CHARGES IN THE FUTURE, WHICH
COULD ADVERSELY AFFECT OUR EARNINGS

Any charge against earnings could have a material adverse effect on our
earnings and the market price of Casella Class A common stock. In accordance
with generally accepted accounting principles, we capitalize certain
expenditures and advances relating to our acquisitions, pending acquisitions,
landfills and development projects. From time to time in future periods, we may
be required to incur a charge against earnings in an amount equal to any
unamortized capitalized expenditures and advances, net of any portion thereof
that we estimate will be recoverable, through sale or otherwise, relating to
(a) any operation that is permanently shut down or has not generated or is not
expected to generate sufficient cash flow, (b) any pending acquisition that is
not consummated and (c) any landfill or development project that is not expected
to be successfully completed. We have incurred such charges in the past.

THE CASELLA CLASS B COMMON STOCK HAS TEN VOTES PER SHARE AND IS HELD
EXCLUSIVELY BY JOHN W. CASELLA AND DOUGLAS R. CASELLA

The holders of Casella Class B common stock are entitled to ten votes per
share and the holders of Casella Class A common stock are entitled to one vote
per share. At September 1, 1999, an aggregate of 988,200 shares of Casella
Class B common stock, representing 9,882,000 votes, were outstanding, all of
which were beneficially owned by John W. Casella, the president and chief
executive officer of Casella and chairman of the Casella board, or by his
brother, Douglas R. Casella, the vice chairman of the Casella board. Based on
the number of shares of Casella common stock and KTI common stock outstanding at
September 1, 1999, the shares of Casella Class A common stock and Class B common
stock held by John W. Casella and Douglas R. Casella will represent
approximately 35.4% of the aggregate voting power of Casella immediately
following the merger. Consequently, John W. Casella and Douglas R. Casella will
be able to substantially influence all matters for stockholder consideration.

16

COMPARATIVE PER SHARE DATA

This table summarizes information about our historical basic and diluted
(loss) income per common share and book value per share. The table also presents
information on an unaudited pro forma combined basis after giving effect to the
merger using the purchase method of accounting for business combinations.

Neither Casella nor KTI has paid cash dividends on its common stock.

The historical financial information for Casella has been restated to
reflect the mergers with Corning Community Disposal and Resource Waste Systems
consummated on June 4, 1999 and July 1, 1999, respectively, accounted for using
the pooling of interests method of accounting.

The pro forma financial information is not necessarily indicative of what
our results of operations or financial position would have been if the merger
actually occurred on the dates indicated, nor are they necessarily indicative of
the future operating results or financial position of the combined company. We
have not included pro forma adjustments that reflect potential effects of
(a) the efficiencies that may be obtained by combining the operations of Casella
and KTI, or (b) the costs of restructuring, integrating or consolidating the
operations of Casella and KTI, except as disclosed in note 4(g).

You should read this table in conjunction with the selected historical
financial information of Casella and KTI and the unaudited pro forma combined
financial information included elsewhere in this proxy statement/prospectus.

THREE MONTHS
YEAR ENDED      ENDED
APRIL 30,      JULY 31,
1999          1999
----------   ------------

HISTORICAL--CASELLA
Income from continuing operations per common share
Basic.....................................................    $0.44         $0.19
=====         =====
Diluted...................................................    $0.41         $0.18
=====         =====
Book value per common share (at end of period)..............    $9.55         $9.46
=====         =====

SIX MONTHS
YEAR ENDED      ENDED
DECEMBER 31,    JUNE 30,
1998          1999
------------   ----------

HISTORICAL--KTI
Income (loss) from continuing operations before
extraordinary item and cumulative effect of change in
accounting principle per common share
Basic.....................................................     $0.29         $(0.43)
=====         ======
Diluted...................................................     $0.27         $(0.43)
=====         ======
Book value per common share (at end of period)..............     $7.40         $ 7.45
=====         ======

TWELVE
MONTHS     THREE MONTHS
ENDED         ENDED
MARCH 31,      JUNE 30,
1999          1999
----------   ------------

KTI ADJUSTED PRO FORMA:
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle per common share
Basic.....................................................    $ 0.06        $(0.45)
======        ======
Diluted...................................................    $ 0.05        $(0.45)
======        ======
Book value per common share (at end of period)..............    $ 7.94        $ 7.45
======        ======

THREE MONTHS
YEAR ENDED      ENDED
APRIL 30,      JULY 31,
1999          1999
----------   ------------

CASELLA PRO FORMA COMBINED:
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle per common share
Basic.....................................................    $ 0.20        $(0.18)
======        ======
Diluted...................................................    $ 0.19        $(0.18)
======        ======
Book value per common share (at end of period)..............                  $11.36
======
KTI EQUIVALENT PRO FORMA:
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle per common share
Basic.....................................................    $ 0.10        $(0.09)
======        ======
Diluted...................................................    $ 0.10        $(0.09)
======        ======
Book value per common share (at end of period)..............                  $ 5.79
======

17

MARKET PRICE AND DIVIDEND INFORMATION

Casella Class A common stock is traded on the Nasdaq National Market under
the symbol "CWST". KTI common stock is traded on the Nasdaq National Market
under the symbol "KTIE". Between April 21, 1999 and June 18, 1999, KTI common
stock was traded on the Nasdaq National Market under the symbol "KTIEE."

On April 19, 1999, KTI received a letter from the staff of The Nasdaq
National Market, Inc. commencing a delisting action against KTI for failure to
comply with the filing requirements for listing on the Nasdaq National Market.
On June 16, 1999, KTI received a second letter from the staff of The Nasdaq
National Market, Inc. granting KTI's request for continued listing, provided
that KTI complies with the necessary filing requirements and gives notice to the
staff of the closing of the merger by August 31, 1999. On August 31, 1999, KTI
received a letter from the staff of The Nasdaq National Market, Inc. extending
the date for notification of the closing of the merger until October 15, 1999.
On October 27, 1999, KTI received a letter from the staff of The Nasdaq National
Market, Inc. further extending the date until December 15, 1999. KTI is
currently in compliance with the filing requirements of the Nasdaq National
Market.

MARKET PRICES

The table below sets forth, for the quarterly periods indicated, the range
of high and low sale prices of Casella Class A common stock and KTI common stock
as reported on the Nasdaq National Market.

CASELLA CLASS A
COMMON STOCK        KTI COMMON STOCK
-------------------   -------------------
HIGH       LOW        HIGH       LOW
--------   --------   --------   --------

Quarter ended July 31, 1996.............................  $  *       $  *       $ 8.125    $ 6.250
Quarter ended October 31, 1996..........................     *          *        10.125      6.250
Quarter ended January 31, 1997..........................     *          *        10.000      7.500
Quarter ended April 30, 1997............................     *          *         9.125      7.500

Quarter ended July 31, 1997.............................     *          *         9.313      7.875
Quarter ended October 31, 1997*.........................   22.750     20.250     16.938      9.125
Quarter ended January 31, 1998..........................   26.375     19.000     17.125     14.250
Quarter ended April 30, 1998............................   34.000     23.750     18.500     15.188

Quarter ended July 31, 1998.............................   31.500     24.375     25.500     19.000
Quarter ended October 31, 1998..........................   34.000     24.000     23.000     15.375
Quarter ended January 31, 1999..........................   39.000     25.000     24.378     20.000
Quarter ended April 30, 1999............................   27.000     17.250     22.500      7.000

Quarter ended July 31, 1999.............................   26.875     19.063     15.500      8.938
Quarter ended October 31, 1999..........................   26.625     12.750     14.938      6.063
Quarter ended January 31, 2000+.........................   17.438     13.125      8.500      6.500

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

*   Casella Class A common stock was not publicly traded until October 29, 1997.

+   Through November 10, 1999.

On September 8, 1999, the last full trading day before the public
announcement of the amendment to the merger agreement which resulted in the 0.51
exchange ratio, the last reported sale price of Casella Class A common stock was
$14.688 per share and the last reported sale price of KTI common stock was
$6.938 per share, each as reported on the Nasdaq National Market. Based on the
exchange ratio, the pro forma equivalent value of KTI common stock at the close
of trading on September 8, 1999 was $7.491 per share.

18

On November 10, 1999, the most recent practicable date prior to the printing
of this proxy statement/prospectus, the last reported sale price of Casella
Class A common stock was $16.1875 per share and the last reported sale price of
KTI common stock was $7.8125 per share, each as reported on the Nasdaq National
Market.

Because the market prices of Casella Class A common stock and KTI common
stock are subject to fluctuation, the market value of the shares of Casella
Class A common stock that holders of KTI common stock will receive in the
merger, and the market value of the KTI common stock exchanged in the merger,
may increase or decrease prior to or after the merger.

WE URGE YOU TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE CASELLA CLASS A
COMMON STOCK AND THE KTI COMMON STOCK.

DIVIDENDS

Neither Casella nor KTI has ever paid cash dividends on its common stock.
The decision whether to pay any dividends in the future on Casella common stock
will be made by the Casella board from time to time in the exercise of its
business judgment. The Casella board does not currently intend to pay cash
dividends in the foreseeable future. Casella's revolving credit facility
restricts its ability to pay dividends.

19

THE MEETINGS

THE CASELLA ANNUAL MEETING

WHEN AND WHERE THE ANNUAL MEETING WILL BE HELD

This proxy statement/prospectus solicits, on behalf of the Casella board,
proxies to be voted at the Casella annual meeting to be held as follows, and at
any adjournment or postponement thereof:

Wednesday, December 8, 1999
10:00 a.m., local time
Casella Waste Systems, Inc.
25 Greens Hill Lane
Rutland, Vermont 05701

MATTERS TO BE CONSIDERED AT THE CASELLA ANNUAL MEETING

At the Casella annual meeting, Casella stockholders will consider and vote
on:

- a proposal to issue shares of Casella Class A common stock in exchange for
shares of KTI common stock pursuant to the merger agreement;

- a proposal to elect two directors for the ensuing three years;

- a proposal to approve an amendment to Casella's Amended and Restated 1997
Stock Incentive Plan increasing the aggregate number of shares of Casella
Class A common stock that may be issued under the plan from 3,328,135
shares to 5,328,135 shares;

- a proposal to approve amendments to Casella's 1997 Non-Employee Director
Stock Option Plan increasing the aggregate number of shares of Casella
Class A common stock that may be issued under the plan from 50,000 shares
to 100,000 shares and increasing the number of shares of Casella Class A
common stock subject to stock options issuable to non-employee directors
upon initial election to the Casella board and on the date of each annual
meeting to 7,500 shares;

- a proposal to approve an amendment to Casella's Amended and Restated 1997
Employee Stock Purchase Plan increasing the aggregate number of shares of
Casella Class A common stock that may be issued under the plan from
300,000 shares to 600,000 shares;

- a proposal to ratify the selection of Arthur Andersen LLP as independent
auditors of Casella for the current fiscal year; and

- to transact such other business as may properly be brought before the
Casella meeting or any adjournment or postponement thereof.

RECOMMENDATION OF THE CASELLA BOARD

The Casella board has unanimously approved the merger agreement, and each of
the proposals to be presented at the annual meeting, and recommends that you
vote "FOR" approval of each of these proposals.

STOCKHOLDERS ENTITLED TO VOTE; THE VOTE REQUIRED IS ASSURED

The merger cannot be completed without Casella stockholder approval of the
proposal to issue shares in exchange for KTI shares. The directors and executive
officers of Casella, voting together, represent sufficient votes to approve the
proposals without any other Casella stockholder voting on the proposals. Each
director and executive officer (and a former director) of Casella has agreed to
vote all of his shares in favor of the proposal to issue shares to KTI
shareholders pursuant to the merger agreement. Accordingly, a vote in favor of
the proposal to issue shares to KTI shareholders pursuant to the merger
agreement is assured.

20

The Casella board has fixed October 15, 1999 as the record date for
determination of Casella stockholders entitled to vote at the Casella annual
meeting. Only holders of record of Casella common stock at the close of business
on the record date will be entitled to notice of and to vote at the Casella
annual meeting. On October 15, 1999, there were 15,023,105 shares of Casella
Class A common stock, which were held by 268 holders of record, and 988,200
shares of Casella Class B common stock, which were held by two holders of
record, outstanding and entitled to vote.

Each share of Casella Class A common stock will have one vote for each
matter properly submitted to the Casella annual meeting, and each share of
Casella Class B common stock will have ten votes for each matter properly
submitted to the Casella annual meeting other than the election of the Class A
director.

The approval of the proposals to issue shares to KTI shareholders pursuant
to the merger agreement, to amend the Casella stock plans and to ratify the
selection of Casella's independent auditors for the current fiscal year requires
a majority of the votes cast at the Casella annual meeting by the holders of
shares of Casella Class A common stock and Casella Class B common stock, voting
together as a class. The approval of the proposal to issue shares to KTI
shareholders pursuant to the merger agreement is required under the maintenance
requirements of The Nasdaq Stock Market, Inc. The approval of the proposal to
elect directors, other than the Class A director, requires a plurality of the
votes cast at the Casella annual meeting by the holders of shares of Casella
Class A common stock and Casella Class B common stock, voting together as a
class. A plurality of the votes cast at the Casella annual metting by the
holders of shares of Casella Class A common stock is required for the election
of the Class A director.

As of October 15, 1999, the directors (and the former director who agreed to
vote in favor of the proposal to issue shares in exchange for KTI shares) and
executive officers of Casella and certain of their affiliates beneficially owned
16.82% of the outstanding shares of Casella common stock, representing
approximately 46.53% of the votes entitled to be cast at the Casella annual
meeting. These figures are calculated without counting shares which could be
acquired by exercising stock options because the shares underlying those options
cannot be voted at the annual meeting.

The presence, in person or by proxy, of shares representing a majority of
the votes entitled to be cast at the Casella annual meeting by the holders of
Casella Class A common stock and Casella Class B common stock, voting together
as a class, is necessary to constitute a quorum other than for the election of
the Class A director. The presence, in person or by proxy, of shares
representing a majority of the votes entitled to be cast at the Casella annual
meeting by the holders of Casella Class A common stock is necessary to
constitute a quorum for the election of the Class A director.

VOTING OF PROXIES

All shares held by Casella stockholders who are entitled to vote and who are
represented at the Casella annual meeting by properly executed proxies received
prior to or at the annual meeting will be voted in accordance with the
instructions you indicate on the proxy card, unless you revoke the proxy prior
to the vote. If you send us a proxy card which does not instruct us how to vote,
your shares will be voted "FOR" approval of each of the proposals, and "FOR"
each nominee for election as a director, set forth in the notice of the meeting
to which this proxy statement/prospectus is attached.

You may revoke any proxy that you give at any time before it is used to cast
your vote. To revoke a proxy, you must either:

- file with the secretary of Casella, at or before the taking of the vote, a
written notice of revocation bearing a later date than the proxy;

- duly execute a later dated proxy relating to the same shares and deliver
it to the secretary of Casella before the taking of the vote; or

21

- attend the Casella annual meeting and vote in person. ATTENDANCE AT THE
CASELLA ANNUAL MEETING, IF YOU DO NOT VOTE, WILL NOT BE SUFFICIENT TO
REVOKE A PROXY.

Any written notice of revocation or subsequent proxy should be sent to:

Casella Waste Systems, Inc.
25 Greens Hill Lane
Rutland, Vermont 05701
Attention: Secretary

If you have indicated on your proxy that your shares should be voted "FOR"
approval of the matters presented to Casella stockholders at the Casella
meeting, the proxies will have discretion to vote your shares on any other
matters which are properly presented at the Casella annual meeting for
consideration, including a motion to adjourn the Casella meeting to another time
or place for the purpose of soliciting additional proxies, unless you withhold
your authorization for the proxies to use their discretion. To withhold
authorization, instruct us to vote "NO" on the proxy card. Casella is not aware
of any matters expected to be presented at its annual meeting other than the
proposals described in the notice of meeting.

If a broker does not have discretionary voting authority to vote shares for
which it is the holder of record as to a particular matter at the Casella annual
meeting, the shares, although they will be counted in determining whether a
quorum is present, cannot be voted by the broker. Accordingly, these broker
non-votes and abstentions will have no effect on whether a proposal presented at
the Casella annual meeting is approved or not.

SOLICITATION OF PROXIES

The expenses of the solicitations for the Casella annual meeting, including
the cost of printing and distributing this proxy statement/prospectus and the
forms of proxy, will be paid by Casella. In addition to solicitation by mail,
proxies may be solicited by directors, officers and employees of Casella in
person or by telephone, telecopier or other means of communication. These
persons will not receive additional compensation for solicitation of proxies,
but may be reimbursed for reasonable out-of-pocket expenses in connection with
this solicitation. Arrangements will also be made by Casella with custodians,
nominees and fiduciaries for forwarding of proxy solicitation materials to the
beneficial owners of shares, and Casella will reimburse these persons for
reasonable expenses incurred in connection with this solicitation.

THE KTI SHAREHOLDERS MEETING

WHEN AND WHERE THE SHAREHOLDERS MEETING WILL BE HELD

This proxy statement/prospectus solicits, on behalf of the KTI board,
proxies to be voted at the KTI shareholders meeting to be held as follows, and
at any adjournment or postponement thereof:

Wednesday, December 8, 1999
10:00 a.m., local time
KTI, Inc.
7000 Boulevard East
Guttenberg, New Jersey 07093

MATTERS TO BE CONSIDERED AT THE KTI SHAREHOLDERS MEETING

At the KTI shareholders meeting, KTI shareholders will consider and vote on:

- the approval of the merger agreement; and

22

- any other matters incidental to the approval of the merger agreement or to
the conduct of the KTI shareholders meeting that may properly be brought
before the KTI shareholders meeting or at any adjournment or postponement
thereof.

RECOMMENDATION OF THE KTI BOARD

The KTI board has unanimously approved the merger agreement and recommends
that you vote "FOR" approval of the merger agreement. See "The Merger--Reasons
for the merger".

SHAREHOLDERS ENTITLED TO VOTE; VOTE REQUIRED

The merger cannot be completed without KTI shareholder approval. Directors
and executive officers of KTI representing in the aggregate approximately 16.7%
of the outstanding shares of KTI as of November 10, 1999 have agreed to vote all
the shares they beneficially own in favor of the proposal to approve the merger
agreement.

The KTI board has fixed November 10, 1999 as the record date for
determination of KTI shareholders entitled to vote at the KTI shareholders
meeting. Only holders of record of KTI common stock at the close of business on
the record date will be entitled to receive notice of and to vote at the KTI
shareholders meeting. On the record date, there were 14,023,838 shares of KTI
common stock outstanding and entitled to vote at the KTI shareholders meeting,
which were held by approximately 240 holders of record.

Each share of KTI common stock will have one vote for each matter properly
submitted to the KTI shareholders meeting. The affirmative vote of a majority of
the shares of KTI common stock represented and voting at the KTI shareholders
meeting is required in order to approve the merger agreement.

The required vote of the KTI shareholders on the merger agreement is based
upon the number of shares which are actually voted, rather than the total number
of outstanding shares of KTI common stock. Thus, if you abstain from voting or
if you do not submit a proxy card and do not vote in person at the KTI
shareholders meeting, your action will have no effect. Also, any broker non-vote
will have no effect.

As of the record date, the directors and executive officers of KTI
beneficially owned 2,336,052 shares of KTI common stock, representing
approximately 16.7% of the issued and outstanding shares of KTI common stock.
These figures are calculated without counting shares which could be acquired by
exercising stock options or warrants because the shares underlying those options
cannot be voted at the meeting.

The presence, in person or by proxy, of a majority of the KTI common stock
issued and outstanding and entitled to be voted at the KTI shareholders meeting
is necessary to constitute a quorum.

VOTING OF PROXIES

If you properly execute a proxy card and send it to KTI in a timely manner,
your proxy will be voted in accordance with the instructions you indicate on the
proxy card, unless you revoke your proxy prior to the vote. If you send us a
proxy card which does not instruct us how to vote, your shares will be voted
"FOR" approval of the merger agreement.

You may revoke any proxy that you give at any time before it is used to cast
your vote. Attendance at the KTI shareholders meeting will not be sufficient to
revoke your proxy. To revoke a proxy, you must either:

- attend the KTI shareholders meeting and vote in person;

- file a written notice of revocation with the KTI secretary; or

23

- deliver a properly executed proxy with a later date to the KTI secretary.

The KTI secretary will be in attendance at the KTI shareholders meeting and,
prior thereto, can be reached at the following address:

KTI, Inc.
7000 Boulevard East
Guttenberg, New Jersey 07093
Attention: Ross Pirasteh

If you have indicated on your proxy that your shares should be voted "FOR"
approval of the matters presented to KTI shareholders at the meeting, the
persons named on the enclosed proxy card will have the discretion to vote on any
other matters which are properly presented at the KTI shareholders meeting,
including a motion to adjourn the meeting to another time or place for the
purpose of soliciting additional proxies, unless you specifically withhold that
authorization when you complete your proxy card. To withhold authorization,
instruct us to vote "NO" on the proxy card. KTI is not aware of any matters that
will come before the KTI shareholders meeting other than the vote on the merger.

Votes cast by proxy or in person at the KTI shareholders meeting will be
tabulated by the election inspectors appointed for the meeting, who will
determine whether or not a quorum is present. Where proxies are marked as
abstentions, where shareholders appear in person but abstain from voting, or
where a broker indicates on a proxy that it does not have discretionary voting
authority regarding certain shares, those abstentions and broker non-votes will
be treated as shares that are present and entitled to vote for purposes of
determining the presence of a quorum.

KTI SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.

SOLICITATION OF PROXIES

In addition to using the mails, the directors, officers and employees of KTI
may solicit proxies for the KTI shareholders meeting from shareholders in person
or by telephone. These directors, officers and employees will not be
specifically compensated for their services. KTI has retained D.F. King and Co.,
Inc., a proxy soliciting firm, to assist in soliciting proxies. D.F. King and
Co., Inc. will be paid a fee and reimbursed for certain out-of-pocket expenses,
in an aggregate amount of approximately $25,000. KTI will also make arrangements
with brokerage firms and other custodians, nominees and fiduciaries to send
proxy materials to their principals and will reimburse those parties for their
expenses in doing so. KTI will pay all costs of soliciting proxies for the KTI
shareholders meeting.

24

THE MERGER

BACKGROUND OF THE MERGER

Historically, Casella and KTI have had mutual customer/vendor relationships
in the state of Maine. As a result of this relationship, the management of both
companies were quite familiar with each other. On August 18, 1998, KTI entered
into a letter of intent to acquire Recovery Technology Inc., a Canadian company
which specializes in a cryogenic tire recycling process. As a result of that
contemplated acquisition, Ross Pirasteh, the chairman of the KTI board and
Martin J. Sergi, the president of KTI, began to consider the acquisition of
Casella's tire processing facility in Elliott, Maine. In early November, 1998,
Mr. Pirasteh called John W. Casella, the chairman of the board, chief executive
officer and president of Casella, to arrange meetings on November 10th and 11th
to discuss expanding the relationship of the two companies, including a purchase
of the tire processing facility and other strategic ventures.

On November 10 and 11, 1998, John W. Casella and James W. Bohlig, the chief
operating officer and senior vice president of Casella, met at the New York
Hilton with Ross Pirasteh, Martin J. Sergi and Paul A. Garrett, vice chairman of
the KTI board. At that meeting, the participants discussed the possibility of a
strategic business combination between Casella and KTI as a means of creating
value for each company's stockholders. KTI indicated that it would be interested
in considering such a transaction if the exchange ratio reflected a premium over
its current stock price, which was below its 52-week high. The participants also
discussed, on a preliminary basis, certain significant terms of a potential
business combination, including among other things, the desired accounting and
tax treatment, the structure and composition of the combined company's
management and board of directors, and potential operating efficiencies. The
parties tentatively agreed in concept, subject to definitive documentation and
due diligence, to an exchange ratio whereby each share of KTI common stock would
be exchanged for one share of Casella Class A common stock.

On November 12, 1998, Mr. Casella asked Donaldson, Lufkin & Jenrette
Securities Corporation to prepare an analysis of the transaction for purposes of
advising Casella's management team and board. Also, on or about November 16,
1998, Mr. Casella asked Goldman, Sachs & Co. to begin to analyze the transaction
for purposes of being in a position to render a fairness opinion to the Casella
board as to the proposed one-for-one exchange ratio.

On November 16, 1998, the KTI board held a telephonic meeting to discuss the
terms of the proposed merger. In particular, the KTI board discussed the
exchange ratio and the feasibility of adjusting the exchange ratio based upon
fluctuations in the market price of KTI and Casella common stock. In addition,
the KTI board also discussed the structure of the Casella board and management
team after the merger and noted that after the merger no one person or group
would control the combined company. After discussing the accounting treatment of
the merger, the anticipated operational efficiencies, the combined company's
voting power and possible market reaction, the KTI board decided to pursue
further discussions with Casella.

On November 18, 1998, the KTI board held another telephonic meeting to
discuss the current status of the proposed merger. The KTI board discussed the
status of the legal, environmental and financial due diligence review of Casella
and the accounting treatment of the merger. The KTI board also discussed the
possible timing of the signing of the merger agreement and the consummation of
the merger. At the meeting, the KTI board authorized KTI to retain Credit Suisse
First Boston Corporation and CIBC World Markets Corp. to act as financial
advisors to KTI in connection with the proposed merger.

On November 19, 1998, Hale and Dorr LLP, Casella's legal advisors,
distributed the first draft of the proposed merger agreement. On November 23,
1998, Mr. Casella, Mr. Bohlig, Mr. Pirasteh and their respective legal advisors,
together with representatives of Donaldson, Lufkin & Jenrette and

25

Credit Suisse First Boston, met at the offices of KTI's legal advisors, in New
York City to negotiate provisions of the draft merger agreement.

On December 2, 1998, at Casella's regularly scheduled board meeting,
Messrs. Casella and Bohlig updated the Casella board on the status of
negotiations with KTI. At that meeting, the Casella board reviewed a number of
documents relating to the proposed merger, including drafts of the merger
agreement and proposed employment agreements, due diligence memoranda, KTI's
filings with the Securities and Exchange Commission, the resolutions that would
need to be approved by the Casella board in connection with the merger and
financial models. Casella's legal advisors also advised the Casella board of
their fiduciary duties in considering the transaction.

Between November 20 and December 9, 1998, representatives of Donaldson,
Lufkin & Jenrette, Goldman, Sachs, Credit Suisse First Boston and CIBC World
Markets, along with Casella's and KTI's legal advisors, consultants and
accountants, conducted due diligence investigations of the respective companies.

On December 10, 1998, Messrs. Casella and Bohlig updated the Casella board
as to the status of the merger negotiations. At the meeting, Messrs. Casella and
Bohlig informed the Casella board that, after further due diligence and
analysis, Goldman, Sachs had indicated to Casella that, based on their analysis
of KTI's projected results of operations, they did not believe that the
one-for-one exchange ratio was warranted.

On December 11, 1998, Messrs. Casella, Bohlig and Cifor met with
representatives of Goldman, Sachs to provide them with further information on
the proposed merger and the basis for the one-for-one exchange ratio. In
addition, Messrs. Casella and Bohlig discussed with KTI management their
interest in proceeding with the merger at a reduced exchange ratio. At the time,
KTI was not receptive to the discussions. On December 15, 1998, a representative
of Goldman, Sachs again informed Mr. Casella that Goldman, Sachs did not believe
the one-for-one exchange ratio was warranted.

During the balance of the week of December 14, 1998 and for the following
week, Donaldson, Lufkin & Jenrette conducted further due diligence and analysis.
On December 17, 1998, Messrs. Casella and Bohlig and representatives of
Donaldson, Lufkin & Jenrette met with Messrs. Pirasteh, Sergi and Garrett at
KTI's offices in Guttenberg, New Jersey. Mr. Casella indicated that Casella was
not prepared to proceed with a transaction with a one-for-one exchange ratio.
The parties discussed a proposal that the exchange ratio be modified. Based on
Donaldson, Lufkin & Jenrette's analysis, a level of approximately 0.90 shares of
Casella Class A common stock for every share of KTI common stock was proposed.

Following that meeting, Casella, KTI and representatives of Donaldson,
Lufkin & Jenrette and Credit Suisse First Boston had numerous discussions by
phone and in person to negotiate aspects of the transaction, including the
exchange ratio. Casella, during that process, rejected a number of KTI proposals
ranging from 0.975 to 0.925.

On January 6, 1999, Messrs. Casella and Bohlig updated the Casella board as
to the status of the merger negotiations in a telephone conference call meeting.

On January 8 and 9, Messrs. Casella and Pirasteh and representatives of
Donaldson, Lufkin & Jenrette and Credit Suisse First Boston had a number of
telephone conversations, resulting in a tentative agreement, subject to the
approval of the parties' respective boards of directors and appropriate fairness
opinions, on a 0.91 exchange ratio. Messrs. Casella and Pirasteh based their
agreement on, among other factors, the historical financial results of Casella
and KTI, the projected operating results and financial condition of the combined
company and expected operational efficiencies resulting from the transaction.
Between January 9, 1999 through the signing of the merger agreement,
representatives of Casella and KTI and their respective legal and financial
advisors continued to discuss the terms of the merger agreement and related
documents, as well as accounting

26

and other transaction issues, and continued their financial, legal,
environmental and accounting due diligence investigations of the respective
companies.

On January 11, 1999, the KTI board held a telephonic meeting to discuss the
revised terms of the merger agreement and the exchange ratio. In particular, the
KTI board reviewed the expenses and termination fee payable by KTI under the
merger agreement and reviewed the conditions to the consummation of the merger.
KTI's legal advisors advised the KTI board of its fiduciary duties in
considering the approval of the merger agreement. The KTI board reviewed the
provisions of the merger agreement limiting their ability to talk to competing
bidders, unless required to do so consistent with their fiduciary duties. The
agreements to be signed by the directors requiring them to vote in favor of the
merger agreement and not to sell their shares of KTI common stock were also
discussed. Copies of the revised draft of the merger agreement were sent to each
member of the KTI board in advance of the meeting the following day.

On January 12, 1999, the Casella board met at the offices of Donaldson,
Lufkin & Jenrette to consider the approval of the merger agreement. Members of
Casella's management team and legal advisors also attended the meeting. At the
meeting, the board reviewed the proposed terms of the merger agreement,
Casella's legal, financial, environmental and accounting due diligence
investigations of KTI, the regulatory approvals that would be required to
consummate the merger, the potential effects of the merger, the potential impact
of not proceeding with the merger, the potential effects of the merger on the
combined company and the board's fiduciary duties. At the board meeting,
Donaldson, Lufkin & Jenrette delivered its written and oral opinion to the
Casella board that, as of such date, and based upon and subject to the
assumptions made, matters considered and limitations on the review undertaken
set forth in the Donaldson, Lufkin & Jenrette opinion, the 0.91-for-one exchange
ratio was fair to Casella and its stockholders from a financial point of view.
At the meeting, the Casella board unanimously approved the merger agreement and
the transactions contemplated thereby, declared the advisability of the merger
agreement, and unanimously recommended that the holders of Casella common stock
vote to approve the issuance of shares of Casella Class A common stock to KTI
shareholders in connection with the merger. Casella had requested a fairness
opinion from Donaldson, Lufkin & Jenrette because of their close involvement in
advising Casella as to all aspects of the transaction, particularly in
connection with the reduction of the exchange ratio. Casella had not requested
Goldman, Sachs to advise it in connection with the negotiations with KTI and
accordingly did not request Goldman, Sachs to deliver a fairness opinion as to
the 0.91-for-one exchange ratio.

On January 12, 1999, the KTI board met at the offices of its legal advisors
in New York City to consider the approval of the merger. KTI's legal advisors
also attended the meeting and discussed the board's fiduciary duties to KTI
shareholders. At the meeting, the board reviewed the proposed terms of the
merger agreement, KTI's legal, financial, environmental and accounting due
diligence investigations of Casella, the regulatory approvals that would be
required to consummate the merger, the potential effects of the merger, the
potential effects of not proceeding with the merger, and the potential effects
of the merger on the combined company. At the board meeting, each of Credit
Suisse First Boston and CIBC World Markets presented their respective financial
analyses with respect to the 0.91-for-one exchange ratio and delivered separate
opinions to the KTI board that, as of that date and based upon and subject to
the matters stated in their respective opinions, the 0.91-for-one exchange ratio
was fair, from a financial point of view, to the holders of KTI common stock. At
the meeting, the KTI board unanimously approved the merger agreement and the
transactions contemplated thereby, and unanimously recommended that the holders
of KTI common stock vote to approve the merger.

During the evening of January 12, 1999, following the approval of the merger
agreement and related matters by the Casella board and the KTI board, Casella
and KTI finalized, executed and delivered the merger agreement and related
documents. A joint public announcement of the merger was made by Casella and KTI
on the morning of January 13, 1999.

27

Following the announcement of the merger, Casella and KTI and their
representatives took actions necessary to close the merger, including filing
this proxy statement/prospectus with the Securities and Exchange Commission and
a Hart-Scott-Rodino Pre-merger Notification and Report Form with the Department
of Justice and the Federal Trade Commission.

On February 22, 1999, KTI publicly announced that it had restated its
financial results for each of the first three quarters of 1998, resulting in no
change to total earnings per share for such nine month period but resulting in a
shift in its earnings per share in the three quarters.

On March 3, 1999 and again on March 4, 1999, the Casella board held
telephonic meetings to discuss KTI's restatement of its financial results and
other due diligence matters relating to the merger and to discuss progress being
made in connection with the merger.

On March 30, 1999, KTI publicly announced the results of its fourth quarter
of 1998, which were substantially lower than its expected operating results for
that quarter.

Between March 30, 1999 and April 14, 1999, representatives of Casella and
KTI and their respective financial advisors held a number of discussions in
which Casella indicated that it believed that KTI may have breached the merger
agreement and expressed the view that the exchange ratio should be revised to
reflect KTI's financial difficulties. During these discussions, while KTI
maintained that Casella was still bound by its obligations under the merger
agreement, KTI indicated that, in order to avoid having to engage in litigation
relating to the merger agreement, which would cause uncertainty and distract KTI
management, it might be willing to consider an appropriate adjustment in the
exchange ratio.

On March 23, 1999 and again on April 6, 1999, the KTI board held telephonic
meetings to discuss the status of the merger and KTI's alternatives if Casella
terminated the merger agreement. During these meetings KTI's management also
presented its view on KTI's business prospects, including the view that, due to
the adverse results for the fourth quarter of 1998, KTI's ability, as an
independent company, to raise additional capital on satisfactory terms was
substantially and negatively impacted.

During this period, the parties did not reach agreement, and on April 14,
1999, Casella notified KTI in writing of its intention to terminate the merger
agreement upon the expiration of the 30-day cure period set forth in the merger
agreement and issued a public announcement to such effect. Casella's notice
alleged breaches by KTI of, among other things, representations and warranties
on financial statements, contingent liabilities, financial condition, operations
and properties and environmental compliance. On April 20, 1999, KTI responded to
Casella's notice of termination by advising Casella in writing that Casella had
no basis for terminating the merger agreement.

On April 16, 1999, KTI announced that it would not be able to file its
annual report on Form 10-K with the Securities and Exchange Commission on a
timely basis due to the developments regarding the merger. Additionally, on
April 28, 1999, KTI announced earnings for the first quarter of 1999 that were
$0.10 per share before certain special charges and $0.07 per share after such
charges.

Between April 14, 1999 and May 12, 1999, the parties, together with their
financial advisors, continued to discuss a possible revision to the exchange
ratio. During the week of May 3, 1999, Messrs. Casella and Pirasteh reached a
tentative agreement, subject to the approval of the parties' respective boards
of directors and appropriate fairness opinions, on a revised exchange ratio of
0.59 of a share of Casella Class A common stock for each share of KTI common
stock. Messrs. Casella and Pirasteh reached this tentative agreement after
several extended discussions of different exchange ratios and narrowing the
range of ratios to 0.50 to 0.65. When Mr. Casella expressed the view that an
exchange ratio of 0.60 of a share of Casella Class A common stock for each share
of KTI common stock was not warranted, Mr. Pirasteh suggested 0.59 of a share of
Casella Class A common stock for each share of KTI common stock.

28

On May 11, 1999, the Casella board held a telephonic meeting to discuss the
revised exchange ratio, certain due diligence matters relating to KTI and the
proposed amendment to the merger agreement. The board discussed the potential
effects of proceeding and of not proceeding with the merger.

On May 11, 1999, the KTI board held a telephonic meeting to discuss the
proposed amendments to the merger agreement. The KTI board discussed the
fairness of proceeding with the merger at the proposed exchange ratio and the
ability of KTI to continue as an independent company in the absence of the
merger. The KTI board also discussed the potential effects on KTI and KTI
shareholders of pursuing its rights under the merger agreement through
litigation.

On May 12, 1999, the Casella board held a telephonic meeting to consider the
approval of the amendment to the merger agreement. Members of Casella's
management team and financial and legal advisors also attended the meeting. At
the board meeting, Donaldson, Lufkin & Jenrette delivered its written and oral
opinion to the Casella board that, as of such date, and based upon and subject
to the assumptions made, matters considered and limitations on the review
undertaken set forth in the Donaldson, Lufkin & Jenrette opinion, the
0.59-for-one exchange ratio was fair to Casella and its stockholders from a
financial point of view. At the meeting, the Casella board unanimously approved
the amendment to the merger agreement, and unanimously recommended that the
holders of Casella common stock vote to approve the issuance of shares of
Casella Class A common stock to KTI shareholders in connection with the merger,
as amended.

On May 12, 1999, the KTI board met to consider the approval of the proposed
amendments to the merger agreement. Members of KTI's management team and
financial and legal advisors also attended the meeting. At the meeting, each of
Credit Suisse First Boston and CIBC World Markets presented its financial
analyses with respect to the 0.59-for-one exchange ratio and delivered separate
opinions to the KTI board that, as of that date and based upon and subject to
the matters stated in their respective opinions, the 0.59-for-one exchange ratio
was fair, from a financial point of view, to the holders of KTI common stock. In
response to questions from KTI directors, both financial advisors indicated that
they had not been approached by, or made aware of, any third parties that were
interested in entering into an alternative transaction with KTI. The KTI board
also discussed the issues set forth in Casella's letter giving notice of its
intention to terminate the merger agreement. The KTI board weighed the prospects
of continuing as an independent company while pursuing its rights under the
merger agreement through litigation against approving a merger with Casella at
the proposed 0.59-for-one exchange ratio. At the meeting, the KTI board
unanimously approved the amendments to the merger agreement, and unanimously
recommended that the holders of KTI common stock vote to approve the merger
agreement, as amended.

During the evening of May 12, 1999, following approval of the amendment to
the merger agreement and related matters by the Casella board and the KTI board,
Casella and KTI finalized, executed and delivered the amendment to the merger
agreement and related documents. A joint public announcement of the amendment to
the merger agreement was made by Casella and KTI on the morning of May 13, 1999.

On August 15, 1999, KTI publicly announced the results of its second quarter
of 1999, which were substantially lower than its expected operating results for
that quarter.

Following the release of KTI's financial results for the second quarter,
Casella and KTI and their representatives continued to take actions to close the
merger prior to September 30, 1999, when the agreement would be terminable by
either party. On September 5, 1999, Messrs. Casella and Bohlig informed Mr.
Pirasteh that they did not believe that the merger could be closed by
September 30, and, based on KTI's results of operations for the second quarter,
proposed a second amendment to the merger agreement which would reduce the
exchange ratio and provide Casella with an additional board seat in exchange for
providing KTI with greater certainty that the merger would close. In addition,
the

29

amendment would require as a condition of the merger that each of Messrs.
Pirasteh, John Casella, Bohlig, Sergi, Cifor and Garrett would sign lock-up
agreements whereby they agreed not to sell their shares for a period of
365 days after the merger. Although various exchange ratios between 0.50 to 0.52
were discussed, no agreement was reached at that time.

On September 7, 1999, the KTI board held a telephonic meeting to discuss the
proposed second amendment to the merger agreement. The KTI board discussed the
fairness of proceeding with the merger at exchange ratios being discussed,
ranging from 0.50 to 0.52, and the likelihood that the merger would be
consummated in the absence of the second amendment. The KTI board considered the
fact that no person had approached KTI or its financial advisors to express an
interest in entering into an alternative transaction with KTI. The KTI board
also discussed the prospects of attempting to extend the date after which either
party could terminate the merger agreement if the merger were not yet
consummated through litigation. In order to minimize KTI's expenses, the KTI
board determined to seek an opinion regarding the fairness of the new exchange
ratio from only one financial advisor, rather than from two advisors as had been
done previously. The KTI management decided to request the opinion from CIBC
World Markets, rather than Credit Suisse First Boston. Neither CIBC World
Markets nor Credit Suisse First Boston provided any financial advice to KTI
during the period after May 12, 1999 until September 7, 1999.

On the morning of September 8, 1999, the Casella board held a telephonic
meeting to discuss the proposed second amendment at the exchange ratios being
discussed, ranging from 0.50 to 0.52, and related matters. Casella's legal
advisors also participated in the meeting. At that meeting, the board discussed,
among other things:

- the terms of the proposed amendment, including the reduction in the
exchange ratio and the additional board seat to be filled by Casella;

- KTI's business and assets;

- the anticipated synergies and other prospective benefits of the merger,
and the fairness of the modified exchange ratio;

- Casella's rights under the agreement as still in effect to terminate the
merger agreement if the merger were not completed by September 30, 1999
(including the potential for litigation if the agreement were terminated
on this basis); and

- the impact of proceeding or not proceeding with the merger on Casella's
future business opportunities.

In addition, the Casella board considered the advisability of conditioning
the second amendment on the receipt of an updated fairness opinion. In assessing
whether such an opinion was advisable, the Casella board considered a number of
factors. Among other things, the board considered the following:

- that, due to the substantial period of time that had elapsed since merger
discussions were initiated, Casella management had become increasingly
familiar with KTI's assets, operating management and financial results;

- Casella had continued to conduct due diligence throughout the KTI
organization, and as a result had an increasingly significant
understanding of the nature and scope of problems facing KTI as well as
the means for addressing those problems;

- Casella had further developed its integration plan, and continued to
assess the savings and other synergies and growth opportunities which
would benefit Casella and its existing assets on a post-merger basis but
which would not be reflected in a financial analysis of KTI;

30

- Casella management's long and significant experience in making
acquisitions on behalf of the company, including its demonstrated ability
to negotiate appropriate purchase prices and to successfully integrate
those acquisitions into the company as projected;

- Casella's long familiarity as a customer of KTI with significant KTI
assets;

- the willingness of members of Casella management to sign lock-up
agreements in connection with the merger; and

- the Casella board's long and open communication with Casella management
relating to all company matters, including during the discussions with
KTI, as well as the numerous lengthy conversations among the members of
the Board relating to the transaction.

Based on these factors, the board determined that it was adequately informed
with respect to the merger, and that a fairness opinion would not provide it
with a significant benefit in its consideration of the proposed amendment.

During the day on September 8, 1999, Messrs. Casella and Pirasteh reached
agreement, subject to the approval of their respective boards of directors, on
an exchange ratio of 0.51-for-one.

On September 8, 1999, the KTI board held a telephonic meeting to consider
the approval of the proposed second amendment to the merger agreement, subject
to the receipt of an opinion from a financial advisor to the effect that the
proposed 0.51-for-one exchange ratio is fair to the holders of KTI common stock
from a financial point of view. Members of KTI's management team and legal
advisors also participated in the meeting. The KTI board weighed the prospects
of consummating the merger in the absence of the second amendment against
approving a merger with Casella at the proposed 0.51-for-one exchange ratio. The
KTI board also discussed the prospects of continuing as an independent company
in the absence of the merger, in light of KTI's operating results for its second
quarter and its future expected operating results. At the meeting, the KTI board
unanimously approved the second amendment to the merger agreement, subject to
the receipt of an opinion, satisfactory in form and substance to KTI in its
reasonable judgment, from a financial advisor to the effect that the proposed
0.51-for-one exchange ratio is fair to the holders of KTI common stock from a
financial point of view.

In the evening of September 8, 1999, the Casella board held a telephonic
meeting to consider the approval of the proposed second amendment. Casella's
legal advisors also participated in the meeting. The board considered the terms
of the proposed amendment and reviewed the matters considered by the board at
its meeting earlier in the day. At the meeting, the board unanimously approved
the second amendment to the merger agreement. The board's decision to recommend
the merger was not at all based on the opinions it previously received from
Donaldson, Lufkin & Jenrette Securities Corporation.

During the evening of September 8, 1999, following approval of the amendment
to the merger agreement, Casella and KTI finalized, executed and delivered the
amendment to the merger agreement. A joint public announcement of the amendment
to the merger agreement was made by Casella and KTI on the morning of
September 9, 1999.

On September 15, 1999, the KTI board held a telephonic meeting during which
CIBC World Markets made an oral presentation of its financial analyses with
respect to the 0.51-for-one exchange ratio, and set forth that in CIBC World
Markets' opinion the exchange ratio was fair, from a financial point of view, to
the holders of KTI common stock. CIBC World Markets subsequently confirmed their
opinion by delivery of a written opinion dated September 15, 1999 to the KTI
board. At the meeting, the KTI board unanimously determined that CIBC World
Markets' fairness opinion was reasonably acceptable.

On September 17, 1999, the Casella board held a telephonic meeting to
consider for approval a proposed third amendment to the merger agreement. The
proposed amendment would reflect that the

31

merger would be treated for accounting purposes as a purchase rather than as a
pooling-of-interests as previously contemplated. The Casella board had been
advised that such accounting treatment would likely be required because Casella
management was strongly considering the possibility of divesting certain
underperforming KTI assets following the merger, although no specific assets had
yet been identified and Casella was not engaged in discussions with any third
party to divest of such assets. The assets being considered for divestiture are
non-core assets in KTI's commercial recycling and finished products divisions
which constitute approximately 10 to 15 percent of KTI's gross assets. At the
meeting, the board unanimously approved the third amendment, subject to
management confirming the accounting treatment with the company's auditors and
determining that there would be no adverse tax consequences to the tax treatment
of the merger. At November 9, 1999, Casella was engaged in preliminary
discussions with third parties regarding potential asset sales, although no
definitive agreements had been reached.

On September 21, 1999, the KTI board held a telephonic meeting to consider
for approval the proposed third amendment to the merger agreement. At the
meeting, the board unanimously approved the third amendment to the merger
agreement, subject to management determining that there would be no adverse
consequences to the tax treatment of the merger or on CIBC World Markets'
fairness opinion.

On September 23, 1999, CIBC World Markets was advised that the merger is
anticipated to be accounted for as a purchase rather than as a
pooling-of-interests transaction. In a letter dated September 23, 1999, CIBC
World Markets reaffirmed the conclusions of its written opinion dated
September 15, 1999, subject to the qualifications and limitations contained in
the September 15, 1999 letter. The September 23, 1999 letter is attached as
Annex B-2 to this proxy statement/prospectus and is incorporated by reference
herein. On September 23, 1999, Casella and KTI executed and delivered the third
amendment to the merger agreement. A joint public announcement of the amendment
to the merger agreement was made by Casella and KTI later the same day.

REASONS FOR THE MERGER

JOINT REASONS FOR THE MERGER

The Casella board and the KTI board believe that the merger represents a
highly favorable strategic opportunity for two companies with complementary
business operations and geographical presence. The two boards believe that the
combined company will have greater financial strength, operational efficiencies,
earning power and growth potential than either Casella or KTI would have on its
own. The Casella board and the KTI board identified a number of potential
benefits of the merger which they believe will contribute to the success of the
combined company, including the following:

- COMPLEMENTARY OPERATIONS. Casella is a strong regional non-hazardous solid
waste services company with collection and disposal operations primarily
in Vermont, New Hampshire, Maine, upstate New York, Massachusetts and
northern Pennsylvania. KTI has substantial waste-to-energy and recycling
facilities and operations in Casella's core northeastern market and in
contiguous areas of Pennsylvania, New Jersey, New York, Connecticut and
Massachusetts, as well as in a number of additional states, primarily in
the eastern United States. As of September 1, 1999, KTI processed solid
waste through a network of 50 facilities in 19 states, including six
waste-to-energy facilities, 22 material recycling facilities and 11
finished products facilities. The existence of KTI's waste-to-energy and
recycling facilities within Casella's core market will permit greater
integration of Casella's solid waste services and lower disposal costs.
Casella's collection services, in turn, will add additional volume to
KTI's waste-to-energy operations. The disposal capacity of KTI's
facilities will also provide the opportunity for Casella to expand its
collection services through acquisitions both within its core markets and
in the expanded contiguous markets where KTI facilities exist.

32

- OPERATIONAL EFFICIENCIES OF THE COMBINED COMPANY. Each board believes that
the merger will result in cost savings. The managements of KTI and Casella
have identified approximately $9.0 million of annual cost savings expected
to result from the merger, including approximately $3.1 million from
disposal of solid waste at facilities owned by the combined company rather
than through third parties, approximately $3.8 million from combining
administrative operations and reducing redundant capabilities,
approximately $900,000 from recycling efficiencies, approximately $800,000
from lower interest costs due to improved cash flow from operations, and
approximately $400,000 from consolidation of overlapping collection
routes. A portion of these anticipated annual operational efficiencies
(based on the timing of the merger) is expected to be realized in fiscal
2000, with the full $9.0 million expected to be realized commencing in
fiscal 2001.

- GROWTH OPPORTUNITIES. The combined company's strategy of continued growth
through acquisitions will be enhanced by the existence of substantial KTI
facilities within Casella's core northeastern market, in contiguous
states, and throughout the eastern United States beyond Casella's core
market.

- COMPATIBLE STRATEGIES. The compatible strategies of each of KTI and
Casella of expanding geographically and further integrating their
operations are also satisfied by this strategic business combination,
which creates a combined company with greater resources, more fully
integrated operations, and a more diversified range of services in the
solid waste disposal and recycling industry. Both companies have grown
rapidly through acquisitions, and their combined strength will be
advantageous in seeking additional future acquisitions.

- EXPECTED PROFITABILITY. The merger is expected to be accretive to
Casella's earnings in fiscal year 2001 by approximately $0.12 per share,
and the combined company projects earnings per share in fiscal year 2001
of approximately $1.46 per share, compared to projected earnings of
approximately $1.34 per share for Casella as a stand-alone entity for the
fiscal year ending April 30, 2001. For the fiscal year ending April 30,
2000, the merger is expected to be accretive by approximately $0.01 per
share, reflecting combined company earnings per share of approximately
$1.04, compared to projected earnings of approximately $1.03 per share for
Casella on a stand-alone basis. These projected results for fiscal year
2001 reflect a downward adjustment from projections previously released on
September 9, 1999 as a result of the reclassification of KTI's deferred
revenues on a pro forma combined basis.

- LARGER CRITICAL MASS. Immediately following the merger, the annualized
revenues and EBITDA of the combined company based on results in July, 1999
and acquisitions closed through July 31, 1999 would be approximately $488
million and $123 million, respectively, and total assets of the combined
company would be in excess of $790 million. Its operations will be
significantly more diversified than the operations of either Casella or
KTI prior to the merger. Greater vertical integration of combined
operations is expected to increase profitability and help the combined
company achieve sustained earnings growth. For the fiscal year ending
April 30, 2000, the combined company has publicly projected revenues of
approximately $505 million and EBITDA of approximately $127 million. Prior
to the execution of the merger agreement in January 1999, KTI delivered
projections for KTI on a stand-alone basis to Casella. These projections,
dated November 30, 1998, reflected revenues of $313 million and EBITDA of
$65 million for the year ending December 31, 1999 and revenues of $409
million and EBITDA of $92 million for the year ending December 31, 2000.
After KTI announced its results for the quarter ended March 31, 1999, and
prior to the amendment to the merger agreement on May 12, 1999, KTI
delivered revised projections, dated May 3, 1999, for KTI on a stand-alone
basis, showing revenues of $292 million and EBITDA of $53 million for the
year ending December 31, 1999 and revenues of $320 million and EBITDA of
$62 million for the year ending December 31, 2000. Following KTI's
announcement of its results for the quarter ended June 30, 1999, and in

33

connection with the amendments to the merger agreement in September 1999,
Casella did not utilize KTI projections but instead based its models
solely on the results of its due diligence. Prior to the execution of the
merger agreement in January 1999, Casella delivered projections for
Casella on a stand-alone basis to KTI. These projections showed revenues
of $164 million and EBITDA of $46 million for the fiscal year ended
April 30, 1999, revenues of $235 million and EBITDA of $68 million for the
fiscal year ended April 30, 2000 and revenues of $297 million and EBITDA
of $86 million for the fiscal year ended April 30, 2001. The Casella and
KTI boards believe that greater size and financial strength will improve
the combined company's ability to compete with other large and well
capitalized companies in the solid waste, recycling and waste-to-energy
markets.

- INCREASED LIQUIDITY OF THE COMMON STOCK OF THE COMBINED COMPANY. The
increased number of shares in the public market following the merger is
expected to result in increased liquidity for the Casella Class A common
stock.

CASELLA'S CONSIDERATION OF FACTORS FOR AND AGAINST THE MERGER

In reaching its conclusion to approve the amended merger agreement and the
proposals set forth in the notice of meeting, the Casella board consulted with
management of Casella, as well as with its financial, accounting and legal
advisors, and considered the factors described above under "Joint reasons for
the merger" and the following factors, which together encompassed all the
material factors the Casella board considered. Among the factors considered by
the Casella board were the following factors in favor of the merger:

- the current economic, financial and business environment generally and the
present and anticipated environment in the waste management industry in
particular, including the strategic options which might become available
to Casella if it were or were not to proceed with the merger and the
effects on Casella of potential further consolidation within the industry;

- the judgment, advice and analysis of Casella's management with respect to
the strategic, financial and operational benefits of the merger, based in
part on the business, financial, accounting and legal due diligence
investigations performed with respect to KTI, as well as the Casella
board's own knowledge of Casella, KTI and their respective businesses;

- the effectiveness of the merger in implementing and accelerating Casella's
long-term growth strategy compared to Casella's continuing as a
stand-alone entity;

- the financial condition, results of operations, businesses and prospects
of Casella and KTI, including, but not limited to, information regarding
their respective recent and historic stock prices and earnings
performance;

- the express terms of the merger agreement, which were viewed as providing
an equitable basis for the merger from the standpoint of Casella;

- the $10.0 million termination fee to be paid by KTI to Casella and the
reimbursement of up to $3.0 million of expenses by KTI to Casella in the
event of the termination of the merger agreement for reasons identified in
the merger agreement;

- the stock option on 19.9% of KTI common stock granted by KTI to Casella;

- the fact that of the 11 members of the board following the merger, seven
would be representatives of Casella or designated by John W. Casella;

- the other proposed corporate governance arrangements with respect to the
board and management of the combined company following the merger;

- the likelihood of the merger being approved by the appropriate regulatory
authorities;

34

- the effect of the merger on Casella's other constituencies, including its
senior management and other employees, customers and the communities
served by Casella;

- the opportunity presented by a combination with KTI to expand Casella's
business beyond its current geographic presence in the northeast; and

- the implications of adding KTI's recycling business, waste-to-energy
plants and other operations to the traditional solid waste management
business of Casella.

The Casella board also considered factors which weighed against the merger,
including:

- KTI's recent financial and operating difficulties and the restatement of
its quarterly results;

- the difficulty and management distraction inherent in integrating two
large and geographically dispersed operations and the risk that the
operational efficiencies and benefits sought in the merger would not be
achieved;

- the number of shares of Casella Class A common stock to be issued to KTI
shareholders in the merger, and the fact that, based on trading prices for
Casella Class A common stock and KTI common stock immediately prior to the
announcement of the exchange ratio, the KTI shareholders would receive a
premium over the then current market price of KTI common stock;

- the risk that the merger would not be consummated, and the effect that the
public announcement of the merger would have on the market price of
Casella Class A common stock; and

- the reimbursement of up to $3.0 million of expenses by Casella to KTI in
the event of the termination of the merger agreement for reasons
identified in the merger agreement.

On balance, considering all the foregoing factors and risks, the Casella
board concluded that the terms of the merger are fair to, and in the best
interests of the Casella stockholders, and the Casella board unanimously
approved the merger agreement, as amended, and declared it advisable.
Accordingly, the Casella board recommends that the Casella stockholders vote to
approve the shares issuable to KTI shareholders pursuant to the merger
agreement.

KTI'S CONSIDERATION OF FACTORS FOR AND AGAINST THE MERGER

In reaching its conclusion to approve the amended merger agreement, the KTI
board consulted with management of KTI, as well as with KTI's financial,
accounting and legal advisors, and considered the factors described above under
"Joint reasons for the merger" and the following factors, which together
encompassed all the material factors the KTI board considered. Among the factors
considered by the KTI board were the following factors in favor of the merger:

- the financial performance and condition, businesses and prospects of
Casella and KTI, including, but not limited to, information regarding
their respective recent and historic stock prices and earnings
performance;

- the effectiveness of the merger in implementing and accelerating KTI's
basic long-term growth strategy;

- the KTI board's own knowledge of Casella, KTI and their respective
businesses;

- the effect on KTI shareholders of KTI continuing as a stand-alone entity
compared to the effect of KTI combining with Casella, in light of the
factors summarized here with respect to the financial condition and
prospects of the two companies on a stand-alone basis and of the combined
company, and the current economic, financial and business environment,
taking into account, in the case of KTI, the anticipated difficulty of
raising additional capital and KTI's series of defaults under its credit
facility;

35

- the fact that, despite the public announcement of the merger agreement and
the public announcement of Casella's allegations of KTI's breaches of the
merger agreement, no person had approached KTI or its financial advisors
to express an interest in engaging in an alternative transaction with KTI;

- the uncertainty of success and the timing of resolution of any litigation
involving the merger agreement;

- the benefits that would accrue to KTI shareholders as holders of Casella
Class A common stock after a merger with KTI;

- the ability of the KTI board to confirm the fairness of the merger by
receiving an opinion by September 30, 1999, satisfactory in form and
substance to KTI in its reasonable judgment, from a financial advisor to
the effect that the 0.51-for-one exchange ratio is fair to the holders of
KTI common stock from a financial point of view, or to terminate the
merger agreement without liability, a fairness opinion which was
subsequently received from CIBC World Markets on September 15, 1999;

- the increased likelihood that the merger will be consummated, due to the
elimination of certain conditions to the obligations of Casella and the
extension of the date after which either party may terminate the merger
from September 30 to December 15, 1999;

- the fact that the current chairman of the KTI board, Ross Pirasteh, and
president, Martin J. Sergi, will join the senior management team of the
combined company as chairman of the board and executive vice
president--business development, respectively;

- the confluence of the corporate cultures of Casella and KTI;

- the reimbursement of up to $3.0 million of expenses by Casella to KTI in
the event of the termination of the merger agreement for reasons
identified in the merger agreement;

- the advice of KTI's counsel that the merger should be treated as a
tax-free reorganization; and

- the effect of the merger on KTI's other constituencies, including its
senior management and other employees, customers and the communities
served by KTI.

The KTI board also considered factors which weighed against the merger,
including:

- the difficulty and management distraction inherent in integrating two
large and geographically dispersed operations and the risk that the
operational efficiencies and benefits sought in the merger would not be
fully achieved;

- the risk that the merger would not be consummated and that KTI, having
signed the second amendment to the merger agreement, would no longer have
the ability to pursue its rights under the first amendment to the merger
agreement, including the 0.59 exchange ratio, through litigation;

- the substantial charges, approximately $25 million, expected to be
incurred by the combined company in connection with the merger;

- the $10.0 million termination fee to be paid by KTI to Casella and the
reimbursement of up to $3.0 million of expenses by KTI to Casella in the
event of the termination of the merger agreement for reasons identified in
the merger agreement and the stock option granted by KTI to Casella to
purchase 19.9% of the outstanding stock of KTI; and

- the fact that John W. Casella and Douglas R. Casella hold in the aggregate
988,200 shares of Casella's Class B common stock entitling them to ten
votes per share, and the fact that they will control approximately 35.4%
of the voting power of the combined company.

36

The KTI board did not undertake to make any specific determination as to
whether any particular factor, or any aspect of any particular factor, in
isolation, was favorable or unfavorable to its ultimate determination. Examined
separately, some of the analyses contained in the financial presentation of CIBC
World Markets reflected an implied exchange ratio that is different, some
higher, some lower, than the exchange ratio provided for in the merger.
Specifically, certain aspects of the analyses relating to the "KTI Contribution
Analysis" and the "KTI Pro Forma Merger Analysis" reflected an implied exchange
ratio that is higher than the exchange ratio provided for in the merger. As a
result, the actual ratios viewed in isolation, could appear inadequate. The KTI
board did not form a conclusion as to whether any individual analysis,
considered in isolation, supported or failed to support a determination that the
exchange ratio was fair. Rather, the KTI board reached a general consensus,
based on the totality of the factors described above, that the merger was in the
best interest of KTI and its shareholders. On balance, considering all the
foregoing factors and risks, the KTI board concluded that the terms of the
merger are fair to, and in the best interests of KTI shareholders; and the KTI
board unanimously approved the merger agreement, as amended and declared it
advisable. Accordingly, the KTI board recommends that KTI shareholders vote to
approve the merger.

OPINION OF KTI FINANCIAL ADVISOR

KTI retained CIBC World Markets Corp. to render its opinion to the KTI board
as to the fairness, from a financial point of view, to the shareholders of KTI,
of the exchange ratio provided in the draft merger agreement dated January 11,
1999, as amended by Amendment No. 1 thereto dated May 11, 1999 and Amendment
No. 2 thereto dated September 8, 1999. The KTI board selected CIBC World Markets
because CIBC World Markets is an internationally recognized investment banking
firm that has substantial experience in the solid waste and environmental
services industry and is familiar with KTI and its businesses. As part of its
investment banking business, CIBC World Markets is regularly engaged in the
valuation of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.

On September 15, 1999, CIBC World Markets delivered an oral opinion, which
opinion was subsequently confirmed by delivery of a written opinion dated
September 15, 1999, to the KTI board that, as of such date, the exchange ratio
provided in the amended merger agreement was fair, from a financial point of
view, to the shareholders of KTI. The exchange ratio was determined through
negotiations between KTI and Casella. CIBC World Markets did not provide advice
to KTI during the course of such negotiations.

The full text of the CIBC World Markets fairness opinion, which sets forth
certain assumptions made, certain procedures followed and certain matters
considered by CIBC World Markets, is attached as Annex B-1 to this proxy
statement/prospectus and is incorporated by reference herein. This summary is
qualified in its entirety by reference to the CIBC World Markets fairness
opinion. KTI and Casella each provided CIBC World Markets with its respective
financial forecasts. With respect to the financial forecasts and other data
concerning KTI reviewed by CIBC World Markets, the management of KTI advised
CIBC World Markets that such forecasts and other data had been reasonably
prepared on bases reflecting such management's best currently available
estimates and judgment as to the future financial performance of KTI. With
respect to the financial forecasts and other data concerning Casella reviewed by
CIBC World Markets, the management of Casella advised CIBC World Markets that
such forecasts and other data had been reasonably prepared on bases reflecting
such management's best currently available estimates and judgment as to the
future financial performance of Casella. CIBC World Markets relied upon the
estimates of the managements of KTI and Casella of the operating synergies
achievable as a result of the merger and its discussion of such synergies with
the respective managements of KTI and Casella.

37

In connection with CIBC World Markets review, CIBC World Markets did not
assume responsibility for independent verification of any of the information
considered for its review and has relied upon such information being complete
and accurate in all respects. In arriving at its opinion, CIBC World Markets
neither made nor obtained any independent evaluation or appraisal of the assets
or liabilities, contingent or otherwise, of KTI or Casella, nor was it furnished
with any such evaluations or appraisals. CIBC World Markets also assumed,
without independent verification, the accuracy of the advice and conclusions of
the parties' legal counsel and accountants with respect to tax and accounting
matters, including, without limitation, the treatment of the merger as a
tax-free reorganization for federal income tax purposes and the accounting of
the merger as a pooling-of-interests business combination. Upon learning that
the merger would be accounted for under the purchase method of accounting rather
than the pooling method, CIBC World Markets reviewed each of its analyses to
determine the impact, if any, of such change. CIBC World Markets concluded that
the change in accounting method had no impact on the implied exchange ratios
derived from its analyses and was immaterial to its overall opinion. The CIBC
World Markets fairness opinion was necessarily based on information available to
CIBC World Markets and on the general economic, financial and stock market
conditions and circumstances as they existed and could be evaluated by CIBC
World Markets on the date of the CIBC World Markets fairness opinion. No
limitations were imposed by KTI or Casella on CIBC World Markets with respect to
the investigations made or procedures followed by CIBC World Markets.

THE SUMMARY OF THE WRITTEN CIBC WORLD MARKETS FAIRNESS OPINION SET FORTH IN
THIS PROXY STATEMENT/ PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF THE OPINION WHICH IS ATTACHED AS ANNEX B-1 HERETO. KTI
SHAREHOLDERS ARE URGED TO, AND SHOULD, READ THIS OPINION CAREFULLY IN ITS
ENTIRETY IN CONJUNCTION WITH THIS PROXY STATEMENT/PROSPECTUS FOR THE ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY CIBC WORLD MARKETS. THE
CIBC WORLD MARKETS FAIRNESS OPINION IS DIRECTED ONLY TO THE FAIRNESS, FROM A
FINANCIAL POINT OF VIEW, OF THE EXCHANGE RATIO PROVIDED IN THE AMENDED MERGER
AGREEMENT AND DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER. THE CIBC WORLD
MARKETS FAIRNESS OPINION DOES NOT CONSTITUTE AN OPINION AS TO THE PRICE AT WHICH
THE KTI COMMON STOCK OR THE CASELLA CLASS A COMMON STOCK WILL ACTUALLY TRADE AT
ANY TIME. THE CIBC WORLD MARKETS FAIRNESS OPINION DOES NOT CONSTITUTE A
RECOMMENDATION TO KTI SHAREHOLDERS AS TO HOW SUCH SHAREHOLDERS SHOULD VOTE WITH
RESPECT TO THE APPROVAL OF THE MERGER.

In rendering its opinion, CIBC World Markets:

- reviewed the merger agreement, draft exhibits thereto, Amendment No. 1
thereto dated May 12, 1999 and Amendment No. 2 thereto dated September 8,
1999;

- reviewed the historical financial statements and financial forecasts and
other information prepared by representatives of KTI and Casella;

- reviewed certain publicly available information for KTI and Casella,
including periodic and other reports filed with the Securities and
Exchange Commission;

- reviewed the reported market prices and trading volumes for KTI and
Casella shares;

- held discussions with the senior management and representatives of KTI and
Casella concerning each company's historical and current operations,
financial condition and prospects; and

- reviewed such other documents and financial, economic and market
information and made such other investigations as we deemed appropriate
for the purposes of the opinion.

The financial forecasts reviewed by CIBC World Markets that were prepared by
representatives of Casella are the same projections that Casella provided to
KTI. See "Reasons for the Merger--Joint reasons for the merger--Larger critical
mass." The following is a summary of all material financial

38

analyses used by CIBC World Markets in connection with providing its opinion to
the KTI board on September 15, 1999.

IMPLIED EXCHANGE RATIOS

IMPLIED EXCHANGE RATIO
----------------------
LOW      AVERAGE      HIGH
--------   --------   --------

Comparable Companies Analysis...............................   0.20 x     0.41 x     0.79 x
Comparable Mergers & Acquisitions Analysis..................   0.16 x     0.43 x     0.85 x
Discounted Cash Flow Analysis...............................   0.24 x     0.37 x     0.56 x
--------------------------------------------------------------------------------------------

Average Implied Exchange Ratio..............................   0.20 x     0.40 x     0.73 x

In establishing the range of exchange ratios resulting from the application
of each of the analyses, CIBC World Markets made qualitative judgments as to the
meaningfulness of the valuation measurements. The judgments were based upon the
number and similarity of comparable companies and transactions, as well as the
predictability and volatility of future earnings when assessing the relative
significance of the discounted cash flow analysis described below. The relative
appropriateness of certain other valuation measurements, such as operating cash
flow or price/earnings multiples, as used generally for comparative purposes,
were also taken into account in making such judgments.

Based on the closing price of Casella Class A common stock of $15.56 on
September 10, 1999, the last trading day prior to preparation of materials for
CIBC World Markets presentation to the KTI board, the Exchange Ratio results in
an implied price per share of KTI common stock of $7.94. This implied value is
based upon the relative market valuations of the KTI common stock and the
Casella Class A common stock as of such date, which may change prior to
consummation of the merger.

COMPARABLE COMPANIES ANALYSIS.  CIBC World Markets performed a comparable
companies analysis of KTI and Casella to evaluate the exchange ratio. CIBC World
Markets compared KTI to two groups of environmental services companies which are
publicly traded and are deemed by CIBC World Markets to be similar to KTI based
on their business and operations. The first group consisted of the following
five solid waste management services companies:

- Allied Waste Industries, Inc.

- Capital Environmental Resource Inc.

- Republic Services, Inc.

- Waste Connections, Inc.

- Waste Industries, Inc.

The second group consisted of the following four resource recovery
/recycling companies:

- FiberMark, Inc.

- IMCO Recycling Inc.

- Republic Group Incorporated

- Wellman, Inc.

CIBC World Markets compared Casella to the five solid waste management
services companies listed above which are publicly traded and are deemed by CIBC
World Markets to be similar to Casella based on their business operations.

39

Using publicly available information, CIBC World Markets analyzed, among
other things, the market values and certain financial criteria for the
comparable companies including their:

- revenue,

- earnings before interest, taxes, depreciation and amortization,

- earnings before interest and taxes and

- net income, in each case, on an estimated basis, for the calendar years
ending 1999 and 2000.

In the Case of KTI, CIBC World Markets derived 66 multiples in this analysis
and excluded 10 statistics that were statistically aberrational. In the Case of
Casella, CIBC World Markets derived 37 multiples in this analysis and excluded
six statistics that were statistically aberrational. For each of the multiples
of revenue, EBITDA, EBIT and net income, CIBC World Markets took the high, low
and average for the comparable companies and applied these multiples to KTI's
and Casella's estimated results for the calendar years ending 1999 and 2000 to
derive a range of implied exchange ratios. The comparable company analysis
resulted in implied exchange ratios which ranged from a low of 0.20x to a high
of 0.79x, with an average of 0.41x, as compared to the exchange ratio in the
merger of 0.51x.

COMPARABLE MERGERS AND ACQUISITIONS TRANSACTION ANALYSIS.  CIBC World
Markets performed a comparable mergers and acquisitions transaction analysis of
KTI and Casella to evaluate the exchange ratio. Using publicly available
information, CIBC World Markets analyzed the consideration paid in two groups of
selected environmental services merger and acquisition transactions. The first
group consisted of 15 selected merger and acquisition transactions involving
selected solid waste management companies deemed by CIBC World Markets to be
similar to KTI based on their business and operations:

ACQUIROR                        TARGET
--------                        ------

Vivendi S.A...................  Superior Services, Inc.;
Allied Waste Industries,        Browning-Ferris Industries, Inc.;
Inc.........................
Waste Management, Inc.........  Eastern Environmental Services, Inc.;
Allied Waste Industries,        American Disposal Services, Inc.;
Inc.........................
Superior Services, Inc........  GeoWaste Incorporated;
USA Waste Services, Inc.......  Waste Management, Inc.;
USA Waste Services, Inc.......  United Waste Systems, Inc.;
USA Waste Services, Inc.......  Allied Waste Industries (selected Canadian assets);
Allied Waste Industries,        Solid Waste Operations of Laidlaw Waste Systems, Inc.;
Inc.........................
USA Waste Services, Inc.......  Sanifill, Inc.;
Republic Industries, Inc......  Addington Resources, Inc.;
Republic Industries, Inc......  Continental Waste Industries, Inc.;
USA Waste Services, Inc.......  Western Waste Industries;
USA Waste Services, Inc.......  Chambers Development Company, Inc.; and
Browning-Ferris Industries,     Attwoods plc.
Inc.........................

40

The second group consisted of ten selected merger and acquisition
transactions involving selected resource recovery/recycling companies deemed by
CIBC World Markets to be similar to KTI based on their business and operations:

ACQUIROR                        TARGET
--------                        ------

KTI, Inc......................  FCR, Inc.;
Waste Management, Inc.........  Wheelabrator Technologies Inc.;
KTI, Inc......................  Prins Recycling Corp. (selected facilities);
KTI, Inc......................  Timber Energy Investments, Inc.;
The Maxim Group, Inc..........  Image Industries, Inc.;
Waste Management, Inc.........  Resource Recycling Technologies, Inc.;
Equus II Incorporated.........  ARI Glass Newco, Inc.;
Louisiana-Pacific Corp........  GreenStone Industries, Inc.;
IMCO Recycling, Inc...........  Alchem Aluminum; and
IMCO Recycling, Inc...........  IMSAMET, Inc.

CIBC World Markets compared Casella to the 15 selected merger and
acquisition transactions listed above involving selected solid waste management
companies deemed by CIBC World Markets to be similar to Casella based on their
business and operations.

CIBC World Markets calculated the multiples of the consideration paid in
relation to the acquired companies (a) revenue, (b) EBITDA, (c) EBIT and
(d) net income, in each case for the most recent annualized period ending prior
to the date of the announcement of the acquisition for which financial data were
available. In the case of KTI, CIBC World Markets derived 99 multiples in this
analysis and excluded 21 statistics that were statistically aberrational. In the
Case of Casella, CIBC World Markets derived 60 multiples in this analysis and
excluded 15 statistics that were statistically aberrational. For each of the
multiples of revenue, EBITDA, EBIT and net income, CIBC World Markets took the
high, low and average for the comparable transactions and applied these
multiples to KTI's and Casella's latest quarter annualized ("LQA") results for
the three months ended July 31, 1999 to derive a range of implied exchange
ratios. The comparable mergers and acquisitions transaction analysis resulted in
implied exchange ratios which ranged from a low of 0.16x to a high of 0.85x,
with an average of 0.43x, as compared to the exchange ratio in the merger of
0.51x.

DISCOUNTED CASH FLOW ANALYSIS.  CIBC World Markets performed a discounted
cash flow analysis of KTI and Casella to evaluate the exchange ratio. In
conducting its analysis, CIBC World Markets relied on certain assumptions,
financial projections and other information provided by KTI and Casella
management. Using the information set forth in KTI's and Casella's projections,
CIBC World Markets performed discounted cash flow analyses of the projected
after-tax cash flows of KTI and Casella on a stand-alone basis for the twelve
month periods ending April 30, 2000 through April 30, 2004. This analysis
consisted of adding the discounted present value of the projected future cash
flows and the discounted present value of the terminal value at the end of the
reference period from KTI and Casella on a stand-alone basis, respectively. In
the case of KTI, CIBC World Markets then used discount rates ranging from 14% to
17% and calculated the terminal value by applying EBITDA multiples ranging from
5.5x to 6.5x to the projected EBITDA for KTI for the year ending April 30, 2004.
In the case of Casella, CIBC World Markets used discount rates ranging from 11%
to 14% and calculated the terminal value by applying EBITDA multiples ranging
from 7.0x to 8.0x to the projected EBITDA for Casella for the fiscal year ending
April 30, 2004. The Discounted Cash Flow Analyses resulted in implied exchange
ratios which ranged from a low of 0.24x to a high of 0.56x, with an average of
0.37x, as compared to the exchange ratio in the merger of 0.51x.

KTI COMMON STOCK TRADING ANALYSIS.  To provide contextual data and
comparative market data, CIBC World Markets examined the history of the trading
prices and their relative relationships for KTI

41

common stock and Casella Class A common stock during the 12 month period from
September 8, 1998 to September 8, 1999 and the period from January 12, 1999 to
September 8, 1999. This information was presented solely to provide the KTI
board with background information regarding the stock prices of KTI and Casella
over the periods indicated. An analysis of the daily closing price ratio,
calculated as KTI's closing price divided by Casella's closing price, indicated
that the average daily closing price ratio during the period from May 13, 1999,
the date following the announcement of Amendment No. 1 to the merger agreement,
through September 8, 1999, the date of approval of Amendment No. 2 to the merger
agreement, ranged from a low of 0.42x to a high of 0.57x, with an average of
0.53x, as compared to the exchange ratio in the merger of 0.51x.

KTI PRO FORMA MERGER ANALYSIS.  CIBC World Markets prepared pro forma
analyses of the financial impact of the merger. Using earnings estimates
prepared by KTI and Casella management for the years ending April 30, 2000, 2001
and 2002, CIBC World Markets compared the earnings per share of Casella's common
stock, on a stand-alone basis, to the EPS of the common stock of the combined
company. Based on the exchange ratio in the merger of 0.51x, this analysis
indicated that the proposed merger would be 6.3% accretive to KTI's earnings per
share in 2000, 3.4% dilutive in 2001 and 1.3% dilutive in 2002. The actual
results achieved by the combined company may vary from projected results and the
variations may be material.

KTI CONTRIBUTION ANALYSIS.  CIBC World Markets analyzed KTI's and Casella's
relative contribution to the combined company with respect to total revenues,
EBITDA, EBIT, total assets, net income, book value and tangible book value. Its
analysis was made for the year ending April 30, 2000 based on projected results
for both KTI and Casella. With respect to the implied enterprise value of the
combined company (equity value plus associated debt less cash of KTI) this
analysis yielded the following results:

KTI CONTRIBUTION   IMPLIED ENTERPRISE VALUE
----------------   ------------------------

Revenues.................................................        55.5%                  47.7%
EBITDA...................................................        44.4%                  47.7%
EBIT.....................................................        47.6%                  47.7%
Total Assets.............................................        61.3%                  47.7%

With respect to the KTI shareholders, ownership of the common stock on a
fully diluted basis of the combined company, this analysis yielded the following
results (prior to taking into account any operating synergies which may result
from the merger):

KTI CONTRIBUTION   PRO FORMA KTI OWNERSHIP
----------------   -----------------------

Net Income.............................................        31.5%                 30.7%
Book Value.............................................        46.2%                 30.7%
Tangible Book Value....................................         5.5%                 30.7%

The summary set forth above does not purport to be a complete description of
the analyses performed by CIBC World Markets. The preparation of a CIBC World
Markets fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. Accordingly, notwithstanding the
separate factors summarized above, CIBC World Markets believes that its analyses
must be considered as a whole and that selecting portions of its analyses and
the factors considered by it, without considering all analyses and factors,
could create an incomplete or misleading view of the evaluation process
underlying its opinions. For example, in isolation the results of some analyses
reflect an implied exchange ratio that is higher or lower than the exchange
ratio provided for in the merger. CIBC World Markets did not form a conclusion
as to whether any individual analysis or factor, considered in isolation,
supported or

42

failed to support an opinion as to fairness from a financial point of view. In
performing its analyses for purposes of the CIBC World Markets fairness opinion,
CIBC World Markets made numerous assumptions with respect to industry
performance, business and economic conditions and other matters. In addition,
CIBC World Markets noted the dual class structure of Casella common stock. The
analyses performed by CIBC World Markets are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by such analyses.

ENGAGEMENT LETTER.  Pursuant to the terms of CIBC World Markets' engagement,
KTI has agreed to pay CIBC World Markets for its fairness opinion in connection
with the merger an aggregate fairness opinion fee of $3.0 million. KTI has also
agreed to reimburse CIBC World Markets for its reasonable out-of-pocket
expenses, including reasonable fees and expenses of legal counsel, and to
indemnify CIBC World Markets and certain related persons against certain
potential liabilities arising out of the engagement of CIBC World Markets,
including liabilities under the federal securities laws.

In the ordinary course of business, CIBC World Markets may actively trade
the securities of both KTI and Casella for its own account and for the accounts
of its customers and, accordingly, may at any time hold a long or short position
in such securities. CIBC World Markets has provided financial advisory and
investment banking services to Casella in the past, including (a) acting as a
managing underwriter in an initial public offering of Casella Class A common
stock completed in October, 1997, and (b) acting as a managing underwriter in a
public offering of Casella Class A common stock completed in July, 1998, and has
in each case received usual and customary fees for rendering such services,
totaling approximately $2.0 million. CIBC World Markets acted as financial
advisor to FCR, Inc., a wholly-owned subsidiary of KTI, in connection with its
acquisition by KTI in 1998 and received aggregate compensation of approximately
$400,000.

INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS OF CASELLA AND KTI IN THE MERGER

The executive officers of Casella and KTI who will continue after the merger
have interests in the merger that are in addition to their interests as Casella
or KTI shareholders generally. The Casella and KTI boards were aware of these
interests and considered them, among other matters, in approving the merger
agreement and the transactions contemplated thereby. These interests are as
follows:

EMPLOYMENT AGREEMENTS.  In connection with the consummation of the merger,
Casella will enter into employment agreements with each of Messrs. John W.
Casella, Bohlig, Cifor, Pirasteh and Sergi. Each employment agreement commences
at the closing of the merger for a term of three years and is automatically
renewable for additional terms of one year. During the three years, each of
these employees will be entitled to a specified annual base salary and a bonus
consisting of cash, stock options or a combination thereof in an amount
determined by Casella's compensation committee prior to the conclusion of each
fiscal year, and to a severance package upon the termination of their
employment. The base salaries are as follows for the first year of the agreement
(which are equal to the base salaries payable to each such person immediately
prior to the merger):

Ross Pirasteh...............................................  $250,000
John W. Casella.............................................  $262,000
James W. Bohlig.............................................  $250,000
Jerry S. Cifor..............................................  $230,000
Martin J. Sergi.............................................  $250,000

Each employee has also agreed not to compete with Casella for a period of
two years after the termination of the employee's employment within 300 miles of
any facility operated by the combined company during the term of his employment.
In addition, each employee has agreed that during this period, he will not
solicit customers or accounts or other employees of the combined company. In the
event an employee were to terminate his employment voluntarily and as a result
he is not entitled to severance, the non-compete would not apply unless Casella
continues to pay the employee's base salary. In the event of a termination of
the employee's employment without cause, Casella will be required to

43

pay the employee an amount equal to (A) three times the sum of (i) his highest
base salary paid under the agreement and (ii) the higher of the most recent
bonus paid to the employee under the agreement or 50% of his base salary
immediately prior to such termination; plus (B) an amount in cash equal to the
value of any accrued but unpaid base salary, bonus and vacation pay. In
addition, the employee will continue to receive benefits for a period of three
years from the date of termination. In the event that the employee terminates
his employment by Casella following a change of control of Casella in which
specified events occur which affect the terms of the employee's employment, the
employee will receive the payments described in the preceding two sentences plus
an additional payment intended to compensate the employee for taxes payable in
connection with the severance payments. Mr. Cifor will also be entitled to
continue to receive his base salary until the first anniversary of the closing
of the merger even if he were to terminate his employment without cause during
such period.

TERMINATION PAYMENTS.  In connection with the merger, Paul A. Garrett, vice
chairman of the KTI board, will receive a payment of approximately $1.2 million
in connection with his existing employment agreement with KTI, which will be
terminated.

INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE.  The merger agreement
provides that after the merger, Casella and the surviving corporation will
indemnify each present and former director, officer, employee and agent of KTI
and any of its subsidiaries against any costs and expenses incurred in
connection with any claim or action relating to matters existing or occurring at
or prior to the closing of the merger to the fullest extent that KTI would have
been permitted to do so under New Jersey law and KTI's charter and by-laws in
effect on January 12, 1999. In addition, Casella will also advance expenses as
incurred to the fullest extent permitted under applicable law, subject to the
conditions set forth in the merger agreement.

For a period of six years after the closing of the merger, Casella will
maintain in effect a directors' and officers' liability insurance policy
covering those persons who are currently covered by KTI's directors' and
officers' liability insurance policy with coverage in an amount and scope at
least as favorable to these persons as KTI's existing coverage.

The directors, officers and principal shareholders of KTI and Casella and
their associates have had in the past and may in the future have transactions in
the ordinary course of business with Casella or KTI and their subsidiaries and
affiliates. Any future transactions are expected to be on substantially the same
terms as those prevailing at the time for comparable transactions with
unaffiliated third parties.

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMBINED COMPANY FOLLOWING THE MERGER

The Casella board, immediately following the merger, is expected to consist
of the following nine persons: Douglas R. Casella, John W. Casella, James W.
Bohlig, John F. Chapple III and Gregory B. Peters, all of whom are currently
directors of Casella, and Ross Pirasteh, Martin J. Sergi, George J. Mitchell and
Wilbur L. Ross, Jr., all of whom are currently directors of KTI. Pursuant to the
merger agreement, John W. Casella will have the opportunity to select two
additional members of the board. Set forth below is information and ages as of
September 1, 1999 of the expected members of the Casella board:

POSITION WITH CASELLA IMMEDIATELY
NAME                                  AGE                              FOLLOWING THE MERGER
----                          --------------------   --------------------------------------------------------

Ross Pirasteh...............                    61   Director and chairman of the Casella board
John W. Casella.............                    48   Director, chief executive officer and president
James W. Bohlig.............                         Director, chief operating officer and senior vice
53   president
Martin J. Sergi.............                         Director and executive vice president--business
42   development
Douglas R. Casella..........                    43   Director
John F. Chapple III.........                    58   Director
George J. Mitchell..........                    65   Director
Gregory B. Peters...........                    53   Director
Wilbur L. Ross, Jr..........                    61   Director

44

Ross Pirasteh has been employed by KTI since January 1, 1996 and became a
director of the company on May 14, 1996. Mr. Pirasteh was elected as the
chairman of the executive committee of the KTI board in February, 1997 and as
chairman of the KTI board in September, 1997. Mr. Pirasteh was also appointed to
the board of directors of Oakhurst Company, Inc., a company in which KTI holds a
35% interest, on January 19, 1999. Mr. Pirasteh served as a management
consultant to KTI from 1995 to 1996, providing consulting with respect to bank
financing and structural organization. In 1994, he also acted as a consultant
for various other companies, with respect to bank financing and capital funding.
Mr. Pirasteh has also been an entrepreneurial investor for the past five years,
investing his personal funds in real estate and privately held companies.

John W. Casella has served as president, chief executive officer and
chairman of the board of Casella since 1993, and has been chairman of the board
of Casella Waste Management, Inc. since 1977. Mr. Casella has actively
supervised all aspects of Casella's operations since 1976, sets overall
corporate policies and serves as chief strategic planner of corporate
development. Mr. Casella is also an executive officer and director of Casella
Construction, Inc., a company owned by Mr. Casella and Douglas R. Casella, which
specializes in general contracting, soil excavation and related heavy equipment
work.

James W. Bohlig has served as senior vice president and chief operating
officer, with primary responsibility for business development, acquisitions and
operations, and as a director of Casella since 1993. Mr. Bohlig is a director of
Consumat Environmental Systems, Inc., a designer and manufacturer of
incineration and pollution control equipment.

Martin J. Sergi has been a senior executive officer and director of KTI
since 1985 and currently serves as a director and president of KTI. He also
serves as president of each of KTI's subsidiaries other than Data Destruction
Services, Inc., K-C International, Ltd., Manner Resins, Inc., Power Ship
Transport, Seaglass, Inc., and Total Waste Management Corporation, and is a
director of Oakhurst Company. He is licensed as a certified public accountant in
New York.

Douglas R. Casella founded Casella in 1975, and has been a director of
Casella since that time. He has served as vice chairman of the Casella board
since 1993 and has been president of Casella Waste Management, Inc., a
subsidiary of Casella, since 1975. Since 1989, Mr. Casella has been president of
Casella Construction, Inc., a company owned by Mr. Casella and John W. Casella
which specializes in general contracting, soil excavation and related heavy
equipment work. Mr. Casella is the brother of John W. Casella.

John F. Chapple III has served as a director of Casella since 1994. Mr.
Chapple was president and owner of Catamount Waste Services, Inc., a central
Vermont hauling and landfill operation, which was purchased by Casella in
May 1994. Mr. Chapple has been retired since 1995.

George J. Mitchell has been a director of KTI since 1998. Senator Mitchell
is special counsel to the law firm of Verner, Liipfert, Bernhard, McPherson &
Hand in Washington, D.C. and senior counsel to the firm of Preti, Flaherty,
Beliveau & Pachios in Portland, Maine. He also serves as an advisor to B.T.
Wolfensohn, an investment banking firm. He served as a United States Senator for
fifteen years beginning in 1980, and was Senate Majority Leader from 1989 to
1995. Senator Mitchell is a member of the board of directors of UNUM
Corporation, a disability insurance company, FDX corporation, an international
provider of transportation and delivery services, Xerox Corporation, a
manufacturer of photocopier equipment, The Walt Disney Company, an entertainment
company, and Staples, Inc., an office supply company. He is also a trustee of
Starwood Hotels & Resorts. He has also served as chairman of the peace
negotiations in Northern Ireland, the ethics committee of the U.S. Olympic
Committee and the National Health Care Commission.

Gregory B. Peters has served as a director of Casella since 1993. Mr. Peters
has been a general partner of Vermont Venture Capital Partners, L.P., a venture
capital management company which is the general partner of The Vermont Venture
Capital Fund, L.P., since April 1988; a general partner of

45

North Atlantic Capital Partners, L.P., a venture capital management company
which is the general partner of North Atlantic Venture Fund II, L.P., since July
1987; and a general partner of North Atlantic Investors, a venture capital
management company which is the general partner of North Atlantic Venture Fund
II, L.P., since July 1997.

Wilbur L. Ross, Jr. has been a director of KTI since 1997. Mr. Ross has been
a Managing Director of Rothschild Inc., an investment banking firm, since 1976
and senior managing director since 1988. He is chief executive officer and
director of News Communications, Inc., a publisher of community oriented
newspapers. He is a member of the boards of Mego Financial Corp., a premier
developer of timeshare properties, and Syms Corp., a clothing retailer.

After the merger, Casella's senior management team will include the
following:

- Ross Pirasteh, currently chairman of the KTI board, will serve as chairman
of the board;

- John W. Casella, currently chairman, president and chief executive officer
of Casella, will continue as president and chief executive officer;

- James W. Bohlig, currently senior vice president and chief operating
officer of Casella, will continue as senior vice president and chief
operating officer;

- Martin J. Sergi, currently president of KTI, will serve as executive vice
president--business development; and

- Jerry S. Cifor, currently senior vice president and chief financial
officer of Casella, will continue as senior vice president and chief
financial officer. Mr. Cifor joined Casella as chief financial officer in
January 1994. From 1992 to 1993, Mr. Cifor was vice president and chief
financial officer of Earthwatch Waste Systems, a waste management company
based in Buffalo, New York. From 1986 to 1991, Mr. Cifor was employed by
Waste Management of North America, Inc., a waste management company, in a
number of financial and operational management positions. Mr. Cifor is a
certified public accountant and was with KPMG Peat Marwick from 1983 until
1986.

MATERIAL FEDERAL INCOME TAX CONSEQUENCES

The following discussion addresses the material federal income tax
consequences of the merger that are generally applicable to holders of KTI
common stock exchanging their KTI common stock for Casella Class A common stock.
KTI shareholders should be aware that the federal income tax discussion set
forth below may not be applicable to certain classes of taxpayers, including,
for example, securities dealers and others that use a "mark-to-market" method of
accounting for federal income tax purposes, banks, insurance companies, tax
exempt organizations or trusts, foreign persons, persons who hold shares of KTI
common stock as part of a straddle or conversion transaction and persons who
acquired shares of KTI common stock pursuant to the exercise of employee stock
options or rights or otherwise as compensation. In addition, the following
discussion does not address the tax consequences of the merger under foreign,
state or local tax laws.

KTI SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY AND
EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS.

46

Casella and KTI intend for the merger to be treated as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code. McDermott,
Will & Emery, tax counsel to KTI, has rendered a tax opinion to KTI stating that
for federal income tax purposes the merger will be treated as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code. The tax
opinion is not binding on the Internal Revenue Service, and there can be no
assurance that the IRS will not contest the conclusions expressed therein. The
tax opinion is based in part upon factual assumptions and representations made,
and certificates delivered, by Casella and KTI, which representations and
certificates McDermott, Will & Emery has assumed to be true, correct and
complete. If the representations or certificates are inaccurate, the tax opinion
could be adversely affected.

The following summary constitutes the opinion of McDermott, Will & Emery and
sets forth anticipated material federal income tax consequences of the merger to
KTI shareholders. The tax treatment of each KTI shareholder will depend in part
upon that shareholder's particular situation. This summary is based on the
provisions of the Internal Revenue Code, the treasury regulations promulgated
thereunder and administrative and judicial interpretations thereof, all as in
effect as of the date hereof. These laws, regulations or interpretations may
differ at the time the merger is completed, and relevant facts also may differ.
Subject to the limitations and qualifications referred to herein and in the tax
opinion, filed as an exhibit to the registration statement of which this proxy
statement/ prospectus is a part. The merger will have the following federal
income tax consequences to KTI shareholders:

- No gain or loss will be recognized by a KTI shareholder who receives
solely Casella Class A common stock for shares of KTI common stock, except
to the extent the shareholder receives cash in lieu of a fractional share
interest in Casella Class A common stock;

- The aggregate tax basis of the Casella Class A common stock received by a
KTI shareholder will equal that shareholder's aggregate tax basis in the
exchanged shares of KTI common stock;

- The holding period of the Casella Class A common stock received by a KTI
shareholder will include the holding period of the shares of exchanged KTI
common stock, provided that these shares were held as a capital asset as
of the date the merger was completed; and

- A KTI shareholder who receives cash in lieu of a fractional share of
Casella Class A common stock will be treated as having received the
fractional share and then as having exchanged the fractional share for
cash in a redemption by Casella subject to Section 302 of the Internal
Revenue Code. This redemption generally will be treated as a sale of the
fractional share. If the Casella Class A common stock represents a capital
asset in the hands of the shareholder, the shareholder will generally
recognize capital gain or loss on the redemption of the fractional share
in an amount determined by the difference between the amount of cash
received and the shareholder's tax basis in the fractional share, and any
capital gain or loss will be a long-term capital gain or loss if the
exchanged KTI common stock was held for more than one year. Long-term
capital gain of a non-corporate stockholder is generally subject to a
maximum capital gains rate of 20%.

Unless an exemption applies under applicable law and regulations, the entity
which is designated to serve as exchange agent for KTI shares will be required
to withhold 31% of any cash payments to which a non-corporate shareholder or the
payee is entitled pursuant to the merger unless the shareholder or other payee
provides its social security number, employer identification number or
individual taxpayer identification number, and certifies that the number is
correct. Each shareholder and, if applicable, each payee must provide the
information and certification necessary to avoid backup withholding, unless an
applicable exemption exists and is established in a manner satisfactory to
Casella and the exchange agent.

47

ACCOUNTING TREATMENT

The merger is expected to be accounted for using purchase accounting, with
Casella being deemed to have acquired KTI. Under the purchase method of
accounting, tangible and identifiable intangible assets acquired and liabilities
assumed are recorded at their estimated fair values. The excess of the purchase
price, including estimated fees and expenses related to the merger, over net
assets acquired is classified as goodwill.

REGULATORY APPROVALS

Each of Casella and KTI has agreed to use all reasonable efforts to take or
cause to be taken all action and to do or cause to be done all things reasonably
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by the merger
agreement, including using all reasonable efforts to do the following:

- cooperate in the preparation and filing of the registration statement of
which this proxy statement/prospectus forms a part, and any amendments
thereto, with the SEC, any filings that may be required under the
Hart-Scott-Rodino Antitrust Improvements Act and any filings under similar
merger notification laws or regulations of other governmental entities;
and

- obtain consents of all third parties and governmental entities necessary,
proper or advisable for the consummation of the transactions contemplated
by the merger agreement.

ANTITRUST.  Under the Hart-Scott-Rodino Antitrust Improvements Act, and the
rules promulgated thereunder by the U.S. Federal Trade Commission, the merger
may not be consummated until notifications have been given and certain
information has been furnished to the Federal Trade Commission or the Antitrust
Division of the U.S. Department of Justice and the specified waiting period has
been satisfied. Casella and KTI were notified by the Federal Trade Commission on
February 23, 1999 that the waiting period has been satisfied.

FILINGS WITH THE TREASURER OF THE STATE OF NEW JERSEY.  A certificate of
merger must be filed with the treasurer of the State of New Jersey to consummate
the merger.

Casella and KTI are not aware of any other required regulatory approvals or
actions that are required prior to the parties' consummation of the merger.
Casella and KTI presently contemplate that if any additional governmental
approvals or actions are required that they will try to obtain them. There can
be no assurance, however, that any additional approvals or actions will be
obtained.

FEDERAL SECURITIES LAWS CONSEQUENCES

The issuance of shares of Casella Class A common stock to KTI shareholders
in the merger and upon exercise of outstanding KTI options, warrants and
convertible notes after the merger has been registered under the Securities Act.
The shares of Casella Class A common stock issued in the merger may be traded
freely and without restriction by those KTI shareholders and holders of KTI
options or warrants not deemed to be "affiliates" of KTI as that term is defined
under the Securities Act. An affiliate of KTI is defined as a person who
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, KTI. Any subsequent transfer of
shares received in the merger by any person who is an affiliate of KTI at the
time the merger is submitted for a vote of KTI shareholders will, under existing
law, require either:

- the further registration under the Securities Act of the shares of Casella
Class A common stock to be transferred;

- compliance with Rule 145 under the Securities Act, which permits limited
sales; or

- the availability of another exemption from registration.

48

The foregoing restrictions are expected to apply to the directors and
executive officers of KTI and the holders of 10% or more of the outstanding
shares of KTI common stock, if any, and to some relatives or the spouses of
these persons and any trusts, estates, corporations or other entities in which
the person has a 10% or greater beneficial or equity interest. Casella will give
stop transfer instructions to the transfer agent with respect to the Casella
Class A common stock to be received by persons subject to the restrictions
described above, and the certificates for the stock will be appropriately
legended.

STOCK EXCHANGE QUOTATION

It is a condition to the merger that the shares of Casella Class A common
stock to be issued pursuant to the merger agreement be approved for listing on
the Nasdaq National Market, subject to official notice of issuance.

APPRAISAL RIGHTS

The KTI shareholders are entitled to dissent and dissenters' rights under
Sections 14A:11-1 through 14A:11-11 of the New Jersey Business Corporation Act.
The following discussion summarizes all material provisions of the dissenters'
statute under New Jersey law. However, this discussion is not a complete
statement of the relevant provisions and is qualified by reference to the full
text of the dissenters' rights statute, which is attached as Annex C to this
proxy statement/prospectus. A person having a beneficial interest in shares of
KTI common stock that are held of record in the name of another person, for
example, a bank, broker or other nominee, must act promptly to cause the record
holder to follow the steps summarized below properly and in a timely manner if
such person wishes to exercise his or her dissenters' rights.

THIS DISCUSSION AND ANNEX C SHOULD BE REVIEWED CAREFULLY BY ANY KTI
SHAREHOLDER WHO WISHES TO EXERCISE DISSENTERS' RIGHTS OR WHO WISHES TO PRESERVE
THE RIGHT TO DO SO, BECAUSE FAILURE TO COMPLY WITH ANY OF THE PROCEDURAL
REQUIREMENTS OF THE DISSENTERS' RIGHTS STATUTE COULD RESULT IN A LOSS OF THESE
RIGHTS.

Under the dissenters' rights statute, each KTI shareholder electing to
dissent from the merger and demand payment of the fair value of his or her
shares of KTI common stock must file with KTI a written notice of dissent
stating that he or she intends to demand payment for his or her shares if the
merger is consummated. The written notice of dissent must be filed with KTI
before the vote of KTI shareholders on the merger. A KTI shareholder may dissent
only as to all of the shares he or she beneficially owns.

Within ten days after the closing of the merger, KTI will give written
notice of the closing by certified mail to each KTI shareholder who filed a
written notice of dissent, except for any shareholder who subsequently voted for
the merger. Within 20 days after KTI mails this notice of the closing, a
dissenting shareholder may make written demand on KTI for payment of the fair
value of his or her shares.

Within 20 days after demanding payment for his or her shares, a KTI
shareholder must submit any certificate(s) representing his or her shares to KTI
for notation that the payment demand has been made. The certificate(s) will then
be returned to the KTI shareholder. Ten days after the expiration of the 20 day
period during which a KTI shareholder may make a demand for payment, KTI will
mail to each dissenting KTI shareholder KTI's financial statements as of the
latest available date. KTI may accompany the mailing with a written offer to pay
each dissenting KTI shareholder a specified price deemed by KTI to be the fair
value of the shareholder's shares. An agreement by any dissenting shareholder
and KTI as to the fair value will not bind any other dissenting shareholders.
If, within 30 days after the expiration of the ten day period during which KTI
mails its financial statements, the fair value of the shares is agreed upon
between any dissenting shareholder and KTI, payment will be made

49

upon surrender of any certificate(s) representing dissenting shares. The "fair
value" is determined as of the day prior to the KTI shareholders meeting.

If the fair value of the shares is not agreed upon within the 30 day period,
the dissenting shareholder may serve upon KTI a written demand that KTI commence
an action in the Superior Court of New Jersey for the determination of the fair
value of the shares. The demand must be served by the KTI shareholder not later
than 30 days after the expiration of the 30 day period in which the KTI
shareholder and KTI could not agree upon the fair value of the shares. The
action must be commenced by KTI not later than 30 days after receipt of the
demand. If KTI fails to commence the action within the 30 day period, a
dissenting KTI shareholder may do so in the name of KTI, not later than 60 days
after the expiration of the 30 day period in which KTI may commence the action.
KTI does not intend to commence an action for the determination of the fair
value of the shares upon the demand to do so by a dissenting KTI shareholder.

All dissenting KTI shareholders except, those who have agreed with KTI upon
the fair value of the shares, must be made parties to the action. The court will
determine the fair value of the dissenting shares. The judgment will include
interest from the date of the dissenting KTI shareholder's demand for payment to
the day of payment, unless the court finds that the refusal of any dissenting
KTI shareholder to accept an offer of payment made by KTI was not made in good
faith. The court will determine and assess the reasonable expenses incurred by
the court appraiser, which will be apportioned by the court among the parties.
These expenses do not include reasonable fees or expenses of counsel or experts
employed by any party. However, the fees and expenses of such counsel or experts
may be assessed against KTI if the court finds that the offer of payment made by
KTI was not made in good faith or if no such offer was made.

A KTI shareholder who makes a written demand for payment under the
dissenters' rights statute will cease to have any of the rights of a KTI
shareholder except the right to be paid the fair value of his or her shares. The
right of a KTI shareholder to be paid the fair value of his or her shares will
terminate for a number of reasons, including:

- failure to submit any certificate(s) held for notation;

- if the demand for payment is withdrawn with the written consent of KTI;

- if the fair value of the shares is not agreed upon and no action for the
determination of fair value by the Superior Court of New Jersey is
commenced within the appropriate time period;

- if the Superior Court of New Jersey determines that the KTI shareholder is
not entitled to payment for his or her shares;

- if the merger is abandoned; or

- if a court having jurisdiction prohibits or sets aside the merger.

50

THE MERGER AGREEMENT

THE FOLLOWING IS A SUMMARY OF ALL MATERIAL PROVISIONS OF THE MERGER
AGREEMENT. THE MERGER AGREEMENT, INCLUDING ALL AMENDMENTS THERETO, IS ATTACHED
AS ANNEX A AND IS INCORPORATED BY REFERENCE INTO THIS PROXY
STATEMENT/PROSPECTUS. YOU SHOULD READ THE MERGER AGREEMENT FOR A COMPLETE
UNDERSTANDING OF ITS TERMS.

STRUCTURE OF THE MERGER

The merger agreement provides that, following the approval of the merger
agreement by KTI shareholders and the approval of the issuance of the shares
pursuant to the merger agreement by Casella stockholders and the satisfaction or
waiver of the other conditions to the merger, a wholly-owned subsidiary of
Casella will be merged with and into KTI. KTI will be the surviving corporation
and will become a direct, wholly-owned subsidiary of Casella.

CONSUMMATION OF THE MERGER

It is expected that the closing contemplated by the merger agreement will
take place after all the conditions to the merger have been satisfied or waived,
which is expected to be prior to December 10, 1999.

MERGER CONSIDERATION

At the closing of the merger, by virtue of the merger and without any action
on the part of any KTI shareholder, each share of KTI common stock issued and
outstanding immediately prior to the closing, except for shares owned by KTI as
treasury stock or owned by Casella, will be converted into the right to receive
0.51 of a share of Casella Class A common stock.

EXCHANGE OF STOCK CERTIFICATES

As soon as practicable after the closing, we will cause an exchange agent to
deliver transmittal forms to each holder of record of KTI common stock to be
used in surrendering shares in exchange for shares of Casella Class A common
stock. No fractional shares of Casella Class A common stock will be issued in
the merger. Each holder of KTI common stock who otherwise would be entitled to
receive a fraction of a share of Casella Class A common stock in the merger will
be paid an amount in cash, without interest, equal to the applicable fraction
multiplied by the average of the closing prices for the Casella Class A common
stock over the ten trading days preceding the closing date of the merger.

After receipt of the transmittal form, KTI shareholders should surrender
their certificates to the exchange agent. Each holder surrendering his or her
certificates will then receive a certificate representing the number of whole
shares of Casella Class A common stock to which the holder is entitled and a
check for the cash payable in lieu of a fractional share of Casella Class A
common stock. The transmittal forms will be accompanied by instructions
specifying other details of the exchange.

KTI SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A
TRANSMITTAL FORM.

After the closing of the merger, each certificate representing shares of KTI
common stock, until so exchanged, will be deemed, for all purposes, to evidence
the right to receive the number of shares of Casella Class A common stock into
which the shares of KTI common stock evidenced by the certificate have been
converted and the right to receive a cash payment, if any, in lieu of a
fractional share of Casella Class A common stock.

51

TREATMENT OF KTI COMMON STOCK OPTIONS AND WARRANTS

STOCK OPTIONS.  At the closing of the merger, each outstanding option to
purchase shares of KTI common stock that is then outstanding and unexercised
will be assumed by Casella. Each option will continue to have, and be subject
to, the same terms and conditions set forth in the applicable stock option
agreement immediately prior to the effective time, except that each option will
be exercisable, or will become exercisable in accordance with its terms, for
that number of shares of Casella Class A common stock equal to the product of
multiplying (a) the number of shares of KTI common stock that were issuable upon
exercise of the option immediately prior to the closing of the merger by
(b) the exchange ratio. The exercise price per share of Casella Class A common
stock under the new option will be equal to the exercise price per share of KTI
common stock under the original option, divided by the exchange ratio.

WARRANTS.  At the closing of the merger, each outstanding warrant to
purchase shares of KTI common stock, whether or not exercisable, will be assumed
by Casella. Each warrant will continue to have, and be subject to, the same
terms and conditions set forth in the applicable warrant immediately prior to
the closing of the merger, except that each warrant will be exercisable, or will
become exercisable in accordance with its terms, for that number of shares of
Casella Class A common stock equal to the product of the number of shares of KTI
common stock that were issuable upon exercise of the warrant immediately prior
to the closing of the merger multiplied by the exchange ratio. The exercise
price per share of Casella Class A common stock under the new warrant will be
equal to the exercise price per share of KTI common stock under the original
warrant, divided by the exchange ratio.

REPRESENTATIONS AND WARRANTIES

KTI and Casella have each made customary representations and warranties to
the other in the merger agreement relating to, among other things:

- their organization, the organization of their subsidiaries and similar
corporate matters;

- their capital structure;

- the authorization, execution, delivery and performance of the merger
agreement and the absence of conflicts, violations or defaults under their
respective organizational documents or conflicts with or violations of any
laws as a result of executing the merger agreement;

- governmental consents and filings;

- financial statements;

- the absence of undisclosed liabilities and material adverse events;

- the filing of tax returns and the payment of taxes;

- title to properties;

- disclosure of material agreements and commitments;

- disclosure of litigation;

- compliance with environmental laws and other environmental matters;

- compliance with governmental regulations concerning employee benefit
plans;

- the absence of actions which would prevent the merger from constituting a
tax-free reorganization;

- labor matters;

52

- KTI's receipt of a fairness opinion from its financial advisor (a fairness
opinion which has been received); and

- in the case of KTI, that KTI has taken all actions so that no "fair
price", "business combination", "control share acquisition", or similar
statute will apply to the merger.

CERTAIN COVENANTS

INTERIM OPERATIONS OF CASELLA AND KTI

From the date of the merger agreement until the closing, KTI and Casella
have agreed to carry on their businesses in the ordinary course consistent with
past practice. Each of KTI and Casella have also agreed to use all reasonable
efforts consistent with past practice and policies to preserve intact their
present business organizations, keep available the services of their present
officers and key employees, and preserve their relationships with customers,
suppliers and others having business dealings with them.

During the period before the closing, neither KTI nor Casella will, without
the consent of the other, do or agree to do any of the following:

- issue any shares of its capital stock or options or warrants to purchase
its capital stock, except (a) the grant of options to employees for the
purchase of up to an aggregate of 100,000 shares of its common stock, (b)
the issuance of shares of its common stock upon the exercise of options,
warrants and convertible notes outstanding at the time of execution of the
merger agreement and (c) the issuance of securities to the sellers of
businesses acquired by it as permitted under the merger agreement;

- acquire another business or its assets, other than businesses individually
having annual revenues not greater than $10.0 million and collectively not
greater than, in the case of KTI, $20.0 million or, in the case of
Casella, $30.0 million or businesses set forth on a list of permitted
acquisitions given by it to the other prior to the execution of the merger
agreement;

- increase the compensation payable to its officers or employees, except for
increases (other than officers, in the case of KTI) in accordance with
past practices, grant additional severance or termination pay, enter into
a collective bargaining agreement, adopt any bonus or benefit plan for the
benefit of its employees, or pay any bonus except for bonuses based on the
performance of the respective company and its employees during the
immediately preceding fiscal year and consistent with the prior year and
bonuses paid to existing contracts;

- incur any indebtedness for borrowed money other than pursuant to existing
credit agreements or in the form of deferred payments to sellers of
businesses which it is permitted to acquire;

- sell or dispose of any of its material properties or assets, except for
sales of inventory in the ordinary course of business;

- amend its charter or by-laws;

- declare or pay any dividends or make any distributions with respect to its
capital stock or acquire any of its capital stock except from former
employees in accordance with stock repurchase agreements;

- amend any material contract, except in the ordinary course of business;

- make or commit to any capital expenditures that exceed a capital budget
furnished by it to the other; or

53

- make any cash disbursement exceeding $1.0 million except as disclosed to
the other in a disclosure schedule to the merger agreement or consistent
with the capital budget furnished by it to the other.

CONDITIONS TO THE MERGER

CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER

The respective obligations of KTI and Casella to effect the merger are
subject to the satisfaction of certain conditions, including the following:

- approval of the merger agreement and the merger by the KTI shareholders;

- approval of the issuance of shares by Casella stockholders;

- the registration statement of which this proxy statement/prospectus forms
a part shall not be subject to any stop order or proceeding by the SEC;

- no injunction, order, statute, rule, regulation or similar directive shall
be in effect which has the effect of making the merger illegal, or
otherwise prohibiting the merger; and

- approval for listing on the Nasdaq National Market of the shares of
Casella Class A common stock issuable to KTI shareholders in the merger.

CONDITIONS TO THE OBLIGATIONS OF CASELLA

The obligations of Casella to effect the merger are further subject to the
satisfaction of certain conditions, including the following:

- the representations and warranties of KTI contained in the merger
agreement are true and correct;

- KTI has performed in all material respects all obligations required to be
performed by it under the merger agreement;

- Messrs. Pirasteh, Sergi and Garrett shall have each entered into an
agreement with Casella pursuant to which they agree not to offer, sell or
otherwise dispose of any shares of Casella common stock for 365 days
following the closing of the merger; provided that they may borrow against
their shares, and the restrictions may be waived by the Casella board
after the closing of the merger;

- KTI's employee benefit plans named in the merger agreement will have been
terminated;

- the shares of KTI common stock held by dissenting shareholders does not
exceed 10% of the shares of KTI common stock issued and outstanding on the
closing date;

- the officers of KTI who will serve as officers of Casella following the
closing date will have entered into employment agreements with Casella at
compensation levels comparable to their existing compensation; and

- Martin J. Sergi, president of KTI, will have amended his existing
employment agreement with KTI to eliminate the bonus based on a percentage
of income of KTI.

CONDITIONS TO THE OBLIGATIONS OF KTI

The obligations of KTI to effect the merger are further subject to the
satisfaction of additional conditions, including the following:

54

- the representations and warranties of Casella contained in the merger
agreement are true and correct;

- Messrs. John Casella, Bohlig and Cifor shall have each entered into an
agreement with Casella pursuant to which they agree not to offer, sell or
otherwise dispose of any shares of Casella common stock for 365 days
following the closing of the merger; provided that they may borrow against
their shares, and the restrictions may be waived by the Casella board
after the closing of the merger;

- Casella has performed in all material respects all obligations required to
be performed by it under the merger agreement; and

- the executive officers of Casella will have entered into employment
agreements with Casella.

AMENDMENTS; WAIVERS

The merger agreement may be amended by a written amendment executed by each
of the parties. After approval of the merger by the shareholders of KTI or of
Casella, no amendment will be made that by law requires approval of the
shareholders without obtaining their approval.

Any agreement by a party to an extension or waiver under the merger
agreement will be valid only if set forth in a written instrument signed on
behalf of the party making the waiver or granting the extension.

NO SOLICITATION BY KTI

KTI has agreed not to solicit, initiate or encourage, including by the way
of furnishing non-public information, any inquiries or proposals relating to the
possible acquisition of KTI or any substantial part of its businesses or
properties by any party other than Casella.

However, KTI may furnish information to, and participate in negotiations
with, a person who has made an unsolicited proposal which is more favorable than
the transaction contemplated by the merger agreement if the KTI board determines
in good faith, based on the advice of outside counsel, that failure to do so
would be reasonably likely to constitute a breach of the board's fiduciary
duties to KTI shareholders under applicable law. KTI has agreed to notify
Casella if it receives an acquisition proposal or any inquiry from a person
considering such a proposal.

TERMINATION OF THE MERGER AGREEMENT

The merger agreement may be terminated at any time prior to the closing of
the merger, whether before or after approval of the merger by the shareholders
of KTI and Casella, by:

- mutual consent of KTI and Casella;

- either KTI or Casella:

- if the merger has not been consummated by December 15, 1999, provided
that neither party may terminate if its breach is the reason for the
failure of the merger to occur before that date;

- if a court or a government entity has taken action to restrain or
prohibit the merger;

- if the required approval of the shareholders of KTI or Casella is not
obtained, provided that the right to terminate for this reason is not
available to either party if it is at that time in breach or has failed
to fulfill its obligations under the merger agreement;

55

- if there has been a breach of any representation, warranty, covenant or
agreement on the part of the other party which is not cured within 30
days of notice of the breach from the other party;

- by Casella:

- if the KTI board has withdrawn or modified its recommendation of the
merger agreement or the merger;

- if, after receipt by KTI of an acquisition proposal, Casella asks the
KTI board to reconfirm its recommendation of the merger agreement or
the merger and the KTI board fails to do so within 10 business days;

- if the KTI board has recommended to the KTI shareholders the
acquisition by a person other than Casella of more than 25% of the
outstanding KTI common stock or more than 20% of KTI's assets;

- if a tender offer or exchange offer for 25% or more of the outstanding
KTI common stock is commenced by a person other than Casella and the
KTI board recommends that KTI shareholders tender their shares; or

- if for any reason KTI fails to call and hold the KTI shareholders
meeting to approve the merger before December 15, 1999.

If the merger agreement is validly terminated, the merger agreement will
immediately become void, except for the provisions relating to confidentiality
and payment of expenses, and the termination will be without any liability on
the part of either party unless that party is in willful breach of the merger
agreement.

TERMINATION FEES AND EXPENSES

PAYMENT OF EXPENSES OF THE MERGER GENERALLY

If the merger is completed, Casella will pay all fees and expenses incurred
in connection with the merger. If the merger is not completed, except as
described below and for fees and expenses incurred in connection with the
printing and filing of this proxy statement/prospectus and the registration
statement, which will be shared equally by KTI and Casella, all fees and
expenses incurred in connection with the merger will be paid by the party
incurring the expenses.

PAYMENT OF CASELLA'S EXPENSES BY KTI; TERMINATION FEES

KTI will pay Casella up to $3.0 million as reimbursement for Casella's
expenses relating to the merger if:

- Casella terminates the merger agreement because KTI shareholders fail to
approve the merger;

- the KTI board withdraws its recommendation of the merger, fails to
reconfirm its recommendation after receipt of an acquisition proposal from
a third party, recommends to KTI shareholders the acquisition by a person
other than Casella of more than 25% of the outstanding KTI common stock or
more than 20% of KTI's assets or recommends that KTI shareholders tender
their shares to a third party making an offer for 25% or more of the
outstanding shares of KTI common stock;

- KTI fails to hold its shareholders meeting by December 15, 1999; or

- KTI is in breach of its warranties, representations or covenants under the
merger agreement.

56

In addition, KTI will pay Casella a termination fee of $10.0 million if
Casella terminates the merger agreement because:

- KTI is in breach of its warranties, representations or covenants under the
merger agreement;

- KTI has committed a willful breach of the agreement and, at the time of
the breach, it has received an acquisition proposal; or

- KTI shareholders have failed to approve the merger if, at the time of the
KTI shareholders meeting, an alternative transaction has been announced
relating to KTI which has not been absolutely and unconditionally
withdrawn and abandoned.

PAYMENT OF KTI'S EXPENSES BY CASELLA

Casella will pay KTI up to $3.0 million as reimbursement for KTI's expenses
relating to the merger if KTI terminates the merger agreement because:

- Casella stockholders fail to approve the merger;

- the merger was not consummated by December 15, 1999 as a result of the
failure of Casella to confirm that its representations are true and
correct as of the closing date; or

- Casella is in breach of its representations, warranties or covenants under
the merger agreement.

STOCK OPTION AGREEMENT

As an inducement and as a condition to enter into the merger agreement, KTI
and Casella entered into a stock option agreement, as amended on May 12, 1999,
whereby KTI granted Casella an option entitling Casella to purchase up to
2,769,331 shares of KTI common stock, representing approximately 19.9% of the
shares of KTI common stock outstanding as of the signing of the amendment to the
merger agreement, at an exercise price of $10.40 per share. The closing market
price of KTI common stock on May 12, 1999 was $11.125 per share. The option
granted may be exercised by Casella in whole or in part at any time after a
proposal for an alternative transaction, as defined in the merger agreement and
summarized below, involving KTI has been made, and one of the following events
has occurred on or after the making of the proposal:

- the vote of KTI shareholders in favor of the merger has not been obtained
at the KTI shareholders meeting;

- the KTI board withdrew or modified its recommendations of the merger
agreement or the merger;

- the KTI board failed to confirm its recommendation of the merger agreement
or the merger within ten business days after a written request by Casella
to do so;

- the KTI board recommended to KTI shareholders an alternative transaction;

- a tender offer or exchange offer of 25% or more of the outstanding shares
of KTI has been commenced, other than by Casella, and the KTI board
recommended that KTI shareholders tender their shares; or

- for any reason KTI failed to call and hold its special meeting of
shareholders by December 15, 1999 and KTI is not at that time otherwise
entitled to terminate the merger agreement because of a breach by Casella.

An "alternative transaction" is defined in the merger agreement as:

- the acquisition by a third party of more than 25% of the outstanding
shares of KTI common stock;

57

- a merger or other business combination involving KTI in which a third
party acquires more than 25% of the outstanding shares of KTI common stock
or of the surviving entity;

- any other transaction in which a third party acquires assets of KTI having
a fair market value of more than 20% of the value of all the assets of
KTI; or

- any public announcement by a third party of a proposal, plan or intention
to do any of the foregoing or an agreement to engage in any of the
foregoing.

If at any time the option becomes exercisable, Casella may elect, in lieu of
exercising its option to purchase KTI common stock, to receive a cash amount
equal to the excess of the exercise price of the option over the higher of
(a) the highest price per share of KTI common stock paid by any person pursuant
to a superior proposal, or (b) the closing price of KTI common stock on the
Nasdaq Stock Market on the last trading day immediately prior to the date of the
election.

The stock option agreement also contains provisions relating to, among other
things, representations and warranties of KTI, registration rights of Casella
and specific performance of the stock option agreement.

Notwithstanding the foregoing, Casella's profit on the exercise of the
option may not exceed $11.0 million after taking into account the exercise price
of the option and the amounts payable to Casella as a termination fee pursuant
to the merger agreement.

58

THE COMPANIES

CASELLA

COMPANY OVERVIEW

Casella Waste Systems, Inc. is a regional, integrated, non-hazardous solid
waste services company that provides collection, transfer, disposal and
recycling services in Vermont, New Hampshire, Maine, Massachusetts, upstate New
York and northern Pennsylvania. As of September 1, 1999, Casella owned and/or
operated five Subtitle D landfills, two landfills permitted to accept
construction and demolition materials, 54 transfer stations, 24 recycling
processing facilities, and 40 solid and liquid waste collection divisions, which
collectively served over 500,000 commercial, industrial and residential
customers. Casella was founded in 1975 as a single-truck operation in Rutland,
Vermont and subsequently expanded its operations throughout the state of
Vermont. In 1993, Casella initiated an acquisition strategy to take advantage of
anticipated reductions in available landfill capacity in Vermont and surrounding
states due to increasing environmental regulation and other market forces
driving consolidation in the solid waste industry. From May 1, 1994 through
April 30, 1999, Casella acquired ownership or long-term operating rights to 132
solid waste businesses, including 7 landfills, and between May 1, 1999 and July
31, 1999 Casella acquired an additional 13 such businesses.

During the fiscal year ended April 30, 1999, Casella expanded and
strengthened its market presence throughout its three geographic regions by
acquiring 55 solid and liquid waste management businesses totaling approximately
$54.5 million in revenues, including the following:

On September 4, 1998 Casella completed a merger with Hakes C & D Disposal,
Inc. This facility is a permitted landfill in western New York State designed to
accept construction and demolition material. As of July 15, 1999 the facility
was under construction and had not begun accepting waste. Casella believes this
facility will allow it to realize the financial and operational benefits of
disposing of construction and demolition debris collected by its own operations
in its own facility in a key market for Casella.

On October 29, 1998, Casella completed a merger with Waste Stream Inc., B&C
Sanitation Corporation, North Country Trucking, Inc., Better Bedding Corp., R.A.
Bronson, Inc., BBC LLC, NTC LLC and Grasslands, Inc., (together, "Waste
Stream"), which provide solid waste and recycling collection services in
northern New York State. Casella believes the acquisition of Waste Stream
further strengthens Casella's market position in upstate New York.

On December 23, 1998, Casella completed a merger with Northern Sanitation,
Inc and Northern Properties Corp. of Plattsburgh, Inc. (together, "Northern
Sanitation"), a solid waste collection company in Clinton County, New York.
Casella believes the proximity of Northern Sanitation to Casella's Clinton
County landfill gives it a stronger market presence in that region.

On April 30, 1999 Casella completed a merger with Natural Environmental,
Inc., Schultz Landfill, Inc. and Blasdell Development Group, Inc. (together,
"NEI"), a collection, transfer and construction & demolition debris disposal
company serving the Buffalo, New York region. Also on April 30, 1999, Casella
completed a merger with Westfield Disposal Service, Inc. and Portland C & D
Landfill, Inc. (together, "Westfield Disposal"), a collection company, transfer
station, and construction and demolition debris landfill serving Chautauqua
County, New York and Erie, Pennsylvania. Casella believes that these
acquisitions provide Casella with a new growth platform in western New York and
expand geographically Casella's existing operations in its Western Region.

Since the end of Casella's 1999 fiscal year on April 30, 1999, Casella
entered the eastern Massachusetts market with the acquisition of Resource Waste
Systems, Inc., Resource Recovery of Cape Cod, Inc., and Resource Transfer, Inc.
(collectively, "Resource Waste Systems, Inc."), which provide solid waste
collection and transfer services, and construction and demolition debris
processing

59

in eastern Massachusetts. Casella believes that the acquisition of Resource
Waste Systems provides Casella with a new growth platform in a market contiguous
to its existing markets, particularly when matched with the assets and
operations in southern Maine expected to be acquired in the merger with KTI.

SERVICE AREA

Casella is managed on a decentralized basis, with its operations divided
into three geographic regions: the Central, Eastern and Western regions. These
three regions are further divided into divisions organized around smaller market
areas, known as "waste sheds", each of which contains the complete cycle of
activities in the solid waste service process, from collection to transfer
stations to disposal. The following are Casella's three geographic regions that
comprise Casella's service area:

CENTRAL REGION

The Central Region consists of Vermont, portions of New Hampshire and
eastern upstate New York. Casella was founded in 1975 in Rutland, Vermont, and
has continued to grow its market presence in the Central Region. The portion of
upstate New York within Casella's Central Region as of July 15, 1999 extends
from Interstate 90 north to the Canadian border and from the Vermont border west
to Interstate 81 and the eastern shore of Lake Ontario. Casella owns and
operates Subtitle D landfills in Bethlehem, New Hampshire; Coventry, Vermont;
and, through a 25-year capital lease, operates the Clinton County landfill
located in Schuyler Falls, New York. In addition, Casella operated 18 collection
operations and 27 transfer stations in the Central Region as of July 15, 1999.
See "--Legal Proceedings."

EASTERN REGION

Casella's Eastern Region consists of the State of Maine and southeastern New
Hampshire. Casella established a market presence in Maine through the
acquisition of the Sawyer Companies in January 1996. Casella owns the SERF
landfill located in Hampden, Maine, which disposes of ash, construction and
demolition debris, special waste and front end processing residue primarily from
throughout the State of Maine. In addition, at July 15, 1999 Casella operated
six collection operations and 12 transfer stations, and collected solid waste
from commercial, industrial and residential customers in the Eastern Region.
Casella's waste tire processing facility, located in Eliot, Maine, has the
capacity to process approximately 3.5 million tires per year and generates tire
derived fuel, which Casella sells to paper mills for consumption as a
supplemental energy source for boiler fuel.

Unlike the other states in Casella's existing market area, Maine has an
aggressive incineration program and Casella believes that approximately 80% of
the waste shed in Casella's market area is disposed of through incineration.
However, Casella believes that approximately 35% of the tonnage delivered to
incinerators is returned to landfills as ash and front end processing residue,
and Casella is the largest disposer of incinerated waste material in Maine.

WESTERN REGION

The Western Region is comprised of the south central, western and southern
tier of upstate New York (including Ithaca, Elmira, Horsehead, Corning and
Watkins Glen) and the northern tier of Pennsylvania. Through the acquisition of
the Superior Disposal Services companies in January 1997, Casella established
its market presence in the Western Region. At July 15, 1999 Casella operated 15
transfer stations and 14 collection operations, and collected solid waste from
commercial, industrial and residential customers. During fiscal 1999 Casella
acquired a Subtitle D permitted landfill, the Hyland facility, in Angelica, New
York, which serves the western upstate portion of our New York waste shed.

60

See "--Legal Proceedings". Casella also acquired two landfills in fiscal 1999
permitted to accept construction and demolition materials, the Hakes and
Portland facilities.

OPERATIONS

Casella's operations include the ownership and/or operation of landfills,
solid waste collection services, transfer stations, recycling services,
septic/liquid waste operations, and tire processing and other services.

LANDFILLS

Casella currently owns four Subtitle D landfill operations and operates a
fifth Subtitle D landfill under a 25-year lease arrangement with a county. All
of Casella's operating Subtitle D landfills include leachate collection systems,
groundwater monitoring systems and, where required, active methane gas
extraction and recovery systems. In addition to these landfills Casella owns two
landfills permitted to accept only construction and demolition materials. These
types typically, depending on the state in which they are located, are
constructed in accordance with lower environmental standards than Subtitle D
landfills, reflecting the inert nature of the materials deposited in them.

During the fiscal year ended April 30, 1999, approximately 71% of the waste
volumes received by Casella's landfills were from internal sources such as
Casella's hauling divisions or transfer stations.

The following table provides certain information regarding the landfills
that Casella operates. All of such information is provided as of July 15, 1999.

APPROXIMATE
ESTIMATED
TOTAL REMAINING   ESTIMATED CAPACITY
PERMITTED        IN PERMITTING
CAPACITY            PROCESS
LANDFILL                         LOCATION          (TONS)(1)        (TONS) (1)(2)
-------------------------------------------  ------------------  ---------------   ------------------

Clinton County (3).........................  Schuyler Falls, NY       788,000           1,200,000
Waste USA..................................     Coventry, VT        1,800,000                -0 -
SERF (4)...................................     Hampden, ME            53,000           3,500,000
NCES.......................................    Bethlehem, NH          150,000             544,000
Hyland.....................................     Angelica, NY        1,615,000                -0 -
Hakes (5)..................................     Campbell, NY          825,000                -0 -
Portland (6)...............................     Portland, NY           20,250                -0 -

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

(1) Casella converts estimated remaining permitted and permittable capacity
calculated in cubic yards to tons by assuming a compaction factor equal to
the historic average compaction factor applicable for the respective
landfill.

(2) Represents capacity for which Casella has begun the permitting process. Does
not include additional available capacity at the site for which permits have
not yet been sought.

(3) Operated pursuant to a capital lease expiring in 2021.

(4) Of the 3,500,000 additional in-process tonnage, 3,300,000 has received all
required permits from the State of Maine; however the town of Hampden,
Maine, where the site is located, has not issued the required construction
permits for work to begin on the expansion. Casella has brought a legal
action against the town to set aside the town's efforts to block the
expansion. See "--Legal Proceedings." The remaining 200,000 tons meets all
state and local requirements.

(5) First cell under construction. Projected opening November 1999.

(6) Facility currently under construction.

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SERF.  The SERF landfill is located in Hampden, Maine. The SERF landfill
processes ash, special waste and front end processing residue (i.e., glass and
other material segregated and disposed of separately from solid waste prior to
incineration), for the Penobscot Energy Recovery Corporation's incinerator under
a contract expiring in 2003. As noted above, the Town of Hampden has delayed the
construction of the newest permitted cell of this site by failing to issue a
construction permit in a timely manner. Although Casella has initiated legal
proceedings in an effort to prevent the Town from continuing to obstruct
expansion, there can be no assurance Casella will prevail. See "--Legal
Proceedings." The Penobscot Energy Recovery Corporation's incinerator is owned
by a limited partnership in which KTI holds a 70.36% ownership interest.

NCES.  The NCES landfill, located in Bethlehem, New Hampshire, serves the
northern and central New Hampshire waste sheds and portions of the Maine and
Vermont waste sheds. The Town of Bethlehem has adopted a zoning ordinance which
precludes the `expansion of any existing landfills'. Casella has contested this
ordinance vigorously. See "--Legal Proceedings" for details of these
proceedings.

WASTE USA.  The Waste USA landfill is located in Coventry, Vermont and
serves the northern two-thirds of Vermont.

CLINTON COUNTY.  The Clinton County landfill, located in Schuyler Falls, New
York, is leased by Casella from Clinton County, New York pursuant to a 25-year
capital lease which expires in 2021. Under the lease, Casella is generally
obligated to expand the landfill at its own cost. Under the terms of the lease,
the Clinton County landfill cannot receive waste from certain geographic regions
in New York. The facility has a permitted capacity of 175,000 tons per year.
Under the lease, Casella is responsible for operating the landfill in compliance
with all applicable environmental laws, including without limitation, possessing
and complying with all necessary permits and licenses. Casella must indemnify
the County for all liabilities resulting from any violations of those laws
(exclusive of violations based on pre-existing conditions, which remain the
responsibility of the County and with respect to which the County indemnifies
Casella). In addition, Casella is responsible for the composition of waste
deposited at the landfill during the lease term, regardless of Casella's
knowledge or monitoring efforts. The lease gives Casella full physical and
managerial control over an unlined landfill on the site, which was operated by
Casella from July 1996 through July 1997, while the lined landfill was under
construction. Clinton County has agreed to indemnify Casella for environmental
liabilities arising from the unlined landfill prior to its operation by Casella.
Casella was responsible for the closure of the unlined landfill, and
post-closure care is the responsibility of the County. Casella completed the
closure and capping activities at this landfill in September 1997. Casella is
also responsible for performing certain cleanup work with respect to the unlined
landfill and has agreed to absorb the resulting costs subject to satisfactory
construction of the lined portion. Casella is responsible for both closure and
post-closure care with respect to the lined landfill upon exhaustion of the
corresponding airspace.

HYLAND.  The Hyland landfill, located in Angelica, New York in Allegany
County, serves Casella's Western Region. The Town of Angelica has adopted a
local ordinance seeking to restrict the manner in which Casella may operate or
expand this facility.

HAKES.  This facility is located in Campbell, New York. The first cell of
this facility is currently under construction and is projected to be open in
November 1999.

PORTLAND.  This facility, acquired on April 30, 1999 as part of the
Westfield Disposal merger, is located in Portland, New York. The facility is
currently under construction and is projected to re-open in October 1999.

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Casella also owns and/or operated five unlined landfills, which are not
currently in operation. All of these landfills have been closed and
environmentally capped by Casella. One of the unlined landfills, a municipal
landfill which is adjacent to the Subtitle D Clinton County landfill being
operated by Casella, was operated by Casella from July 1996 through July 1997.
Casella completed the closure and capping activities at this landfill in
September 1997, and is indemnified by Clinton County for environmental
liabilities arising from such landfill prior to Casella's operation.

Casella regularly monitors the available permitted in-place disposal
capacity at each of its landfills and evaluates whether to seek to expand this
capacity. In making this evaluation, Casella considers various factors,
including the volume of solid waste projected to be disposed of at the landfill,
the size of the unpermitted capacity included in the landfill, the likelihood
that Casella will be successful in obtaining the approvals and permits required
for the expansion and the costs that would be involved in developing the
expanded capacity. Casella also considers on an ongoing basis the extent to
which it is advisable, in light of changing market conditions and/or regulatory
requirements, to seek to expand or change the permitted waste streams at a
particular landfill or to seek other permit modifications.

The permitting process is lengthy, difficult and expensive, and is subject
to substantial uncertainty and there can be no assurance that any such permits
or expansion requests will be granted. Often, even when permits are granted,
they are not granted until the landfill's remaining capacity is very low. There
can be no assurance that Casella will be able to add additional disposal
capacity when needed or, if added, that such capacity can be added on
satisfactory terms or at its landfills where expansion is most immediately
needed. If Casella is not able to add additional disposal capacity when and
where needed, it may need to dispose of its collected waste at its other
landfills or at landfills owned by others. Such a circumstance could have a
material adverse effect on Casella's business, financial condition and results
of operations.

Once the permitted capacity of a particular landfill is reached, the
landfill must be closed and capped if additional capacity is not authorized.
Casella establishes reserves for the estimated costs associated with such
closure and post-closure costs over the anticipated useful life of such
landfill.

SOLID WASTE COLLECTION

Casella's 38 solid waste collection divisions served over 500,000
commercial, industrial and residential customers at September 1, 1999. During
fiscal 1999, approximately 49% of the solid waste collected by Casella was
delivered for disposal at its landfills. Casella's collection operations are
generally conducted within a 125-mile radius of its landfills. A majority of
Casella's commercial and industrial collection services are performed under
one-to-three-year service agreements, and fees are determined by such factors as
collection frequency, type of equipment and containers furnished, the type,
volume and weight of the solid waste collected, the distance to the disposal or
processing facility and the cost of disposal or processing. Casella's
residential collection and disposal services are performed either on a
subscription basis (i.e., with no underlying contract) with individuals, or
under contracts with municipalities, homeowners associations, apartment owners
or mobile home park operators.

TRANSFER STATION SERVICES

Casella operated 54 transfer stations as of September 1, 1999, of which 27
were owned by Casella and 27 were operated under contracts with municipalities.
The transfer stations receive, compact and transfer solid waste collected
primarily from Casella's various collection operations to larger company-owned
vehicles for transport to landfills. Casella believes that transfer stations
benefit Casella by: (i) increasing the size of the waste shed which has access
to Casella's landfills; (ii) reducing costs by improving utilization of
collection personnel and equipment; and (iii) building relationships with

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municipalities that may lead to future business opportunities, including
privatization of the municipality's waste management services.

RECYCLING SERVICES

Casella has sought to position itself to provide recycling services to
customers who are willing to pay for the cost of the recycling service.
Depending on the terms of the individual customer contracts and the level of
recovered material commodity prices, the proceeds generated from reselling the
recycled materials are occasionally shared between Casella and its customers. In
addition, Casella has adopted a pricing strategy of charging collection and
processing fees for recycling volume collected from its customers. By
structuring its recycling service program in this way, Casella has sought to
reduce its exposure to commodity price risk with respect to the recycled
materials.

As of September 1, 1999 Casella operated 24 recycling processing facilities.
Casella processes more than 20 classes of recyclable materials originating from
the municipal solid waste stream, including cardboard, office paper, containers
and bottles. Casella's recycling operations are concentrated principally in
Vermont, as the public sector in other states in Casella's service area has
generally taken primary responsibility for recycling efforts. At September 1,
1999, Casella employed one commodity sales manager to develop end markets, and
had 71 employees in the recycling facilities to support the processing of
approximately 70,000 tons of recyclable materials annually.

WASTE TIRE PROCESSING AND OTHER SERVICES

Casella's waste tire processing facility, located in Eliot, Maine, has the
capacity to process approximately 3.5 million tires per year and generates tire
derived fuel, which Casella sells to paper mills for consumption as a
supplemental energy source for boiler fuel. In June 1997, Casella was selected
by the State of Maine to process an estimated 2.5 million tires over an 18-month
period. Because of continuing losses in Casella's waste tire processing
facility, in the fourth quarter of fiscal 1998 Casella wrote-down the carrying
value of the tire processing facility in the amount of $971,000. See "Casella
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 2(j) of Notes to Consolidated Financial Statements.

Casella's other services include two septic/liquid waste operations, located
in Casella's Central Region.

COMPETITION

The solid waste services industry is highly competitive, undergoing a period
of consolidation, and requires substantial labor and capital resources. Casella
competes with numerous solid waste management companies, many of which are
significantly larger and have greater access to capital and greater financial,
marketing or technical resources than Casella. Certain of Casella's competitors
are large national companies that may be able to achieve greater economies of
scale than Casella. Casella also competes with a number of regional and local
companies. In addition, Casella competes with operators of alternative disposal
facilities, including incinerators, and with certain municipalities, counties
and districts that operate their own solid waste collection and disposal
facilities. Public sector facilities may have certain advantages over Casella
due to the availability of user fees, charges or tax revenues and the greater
availability to them of tax-exempt financing. In addition, recycling and other
waste reduction programs may reduce the volume of waste deposited in landfills.

Casella competes for collection and disposal volume primarily on the basis
of the price and quality of its services. From time to time, competitors may
reduce the price of their services in an effort to expand market share or to win
a competitively bid municipal contract. These practices may also lead to reduced
pricing for Casella's services or the loss of business.

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Competition exists within the industry not only for collection,
transportation and disposal volume, but also for acquisition candidates. Casella
generally competes for acquisition candidates with publicly owned regional and
national waste management companies.

MARKETING AND SALES

Casella has a coordinated marketing and sales strategy which is formulated
at the corporate level and implemented at the divisional level. Casella markets
its services locally through division managers and direct sales representatives
who focus on commercial, industrial, municipal and residential customers. As of
September 1, 1999, Casella had 39 division managers, 4 sales managers and 43
direct sales representatives. Casella also obtains new customers from referral
sources, its general reputation and local market print advertising. Leads are
also developed from new building permits, business licenses and other public
records. Additionally, each division generally advertises in the yellow pages
and other local business print media that cover its service area.

Maintenance of a local presence and identity is an important aspect of
Casella's marketing plan, and many of Casella's managers are involved in local
governmental, civic and business organizations. Casella's name and logo, or,
where appropriate, that of Casella's divisional operations, are displayed on all
company containers and trucks. Additionally, Casella attends and makes
presentations at municipal and state conferences and advertises in governmental
associations' membership publications.

Casella markets its commercial, industrial and municipal services through
its sales representatives who visit customers on a regular basis and make sales
calls to potential new customers. These sales representatives receive a
significant portion of their compensation based upon meeting certain incentive
targets. Casella emphasizes providing quality services and customer satisfaction
and retention, and believes that its focus on quality service will help retain
existing and attract additional customers.

EMPLOYEES

At September 1, 1999, Casella employed approximately 1,504 full-time
employees, including approximately 117 professionals or managers, approximately
1,173 employees involved in collection, transfer and disposal operations, and
approximately 214 sales, clerical, data processing or other administrative
employees.

On October 30, 1998, Casella merged with Waste Stream. Prior to the merger
the employees of Waste Stream's Malone, New York location had voted in favor of
representation by Chauffeurs, Teamsters, Warehousemen and Helpers Union
("Teamsters") Local #687, but at that time they did not have an approved,
ratified contract with Waste Stream. Negotiations between the represented
employees and Casella are ongoing.

On May 11, 1999 a petition for representation was filed with the National
Labor Relations Board by Teamsters Local #597 on Casella Transportation, Inc. On
June 25, 1999 the employees of Casella Transportation, Inc. rejected the measure
to select union representation.

On July 1, 1999 Casella acquired Resource Waste Systems, Inc. The drivers at
Resource Waste Systems, Inc. are represented by the National Industries Union
Local #88 and the Teamsters Local #379.

Through a labor utilization agreement, Casella utilizes the services of
Clinton County employees at the Clinton County landfill. The Clinton County
employees are represented by a labor union.

Casella is aware of no other organizational efforts among its employees.
Casella believes that its relations with its employees are good.

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RISK MANAGEMENT, INSURANCE AND PERFORMANCE OR SURETY BONDS

Casella actively maintains environmental and other risk management programs
which it believes are appropriate for its business. Casella's environmental risk
management program includes evaluating existing facilities, as well as potential
acquisitions, for environmental law compliance and operating procedures. Casella
also maintains a worker safety program which encourages safe practices in the
workplace. Operating practices at all company operations are intended to reduce
the possibility of environmental contamination and litigation.

Casella carries a range of insurance intended to protect its assets and
operations, including a commercial general liability policy and a property
damage policy. A partially or completely uninsured claim against Casella
(including liabilities associated with cleanup or remediation at its own
facilities) if successful and of sufficient magnitude, could have a material
adverse effect on Casella's business, financial condition and results of
operations. Any future difficulty in obtaining insurance could also impair
Casella's ability to secure future contracts, which may be conditioned upon the
availability of adequate insurance coverage.

Effective July 1, 1999, Casella established a captive insurance company,
"Casella Insurance Company", through which it is self-insured for Workman's
Compensation coverage. Casella's maximum exposure under this plan is $250,000
per individual event, $2.7 million total, after which reinsurance takes effect
and limits Casella's exposure.

Municipal solid waste collection contracts and landfill closure obligations
may require performance or surety bonds, letters of credit or other means of
financial assurance to secure contractual performance. Casella has not
experienced difficulty in obtaining performance or surety bonds or letters of
credit. If Casella were unable to obtain performance or surety bonds or letters
of credit in sufficient amounts or at acceptable rates, it may be precluded from
entering into additional municipal solid waste collection contracts or obtaining
or retaining landfill operating permits.

REGULATION

INTRODUCTION

Casella is subject to extensive and evolving Federal, state and local
environmental laws and regulations which have become increasingly stringent in
recent years. The environmental regulations affecting Casella are administered
by the EPA and other Federal, state and local environmental, zoning, health and
safety agencies. Casella believes that it is currently in substantial compliance
with applicable Federal, state and local environmental laws, permits, orders and
regulations, and it does not currently anticipate any material environmental
costs to bring its operations into compliance (although there can be no
assurance in this regard). Casella anticipates there will continue to be
increased regulation, legislation and regulatory enforcement actions related to
the solid waste services industry. As a result, Casella attempts to anticipate
future regulatory requirements and to plan accordingly to remain in compliance
with the regulatory framework.

In order to transport solid waste, it is necessary for Casella to possess
and comply with one or more permits from state or local agencies. These permits
also must be periodically renewed and may be modified or revoked by the issuing
agency.

The principal Federal, state and local statutes and regulations applicable
to Casella's various operations are as follows:

THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976 ("RCRA")

RCRA regulates the generation, treatment, storage, handling, transportation
and disposal of solid waste and requires states to develop programs to ensure
the safe disposal of solid waste. RCRA divides solid waste into two groups,
hazardous and nonhazardous. Wastes are generally classified as hazardous if they
(i) either (a) are specifically included on a list of hazardous wastes, or (b)
exhibit certain

66

characteristics defined as hazardous; and (ii) are not specifically designated
as nonhazardous. Wastes classified as hazardous under RCRA are subject to much
stricter regulation than wastes classified as nonhazardous, and businesses that
deal with hazardous waste are subject to regulatory obligations in addition to
those imposed on handlers of nonhazardous waste.

Among the wastes that are specifically designated as nonhazardous are
household waste and "special" waste, including items such as petroleum
contaminated soils, asbestos, foundry sand, shredder fluff and most nonhazardous
industrial waste products.

The EPA regulations issued under Subtitle C of RCRA impose a comprehensive
"cradle to grave" system for tracking the generation, transportation, treatment,
storage and disposal of hazardous wastes. The Subtitle C Regulations impose
obligations on generators, transporters and disposers of hazardous wastes, and
require permits that are costly to obtain and maintain for sites where such
material is treated, stored or disposed. Subtitle C requirements include
detailed operating, inspection, training and emergency preparedness and response
standards, as well as requirements for manifesting, record keeping and
reporting, corrective action, facility closure, post-closure and financial
responsibility. Most states have promulgated regulations modeled on some or all
of the Subtitle C provisions issued by the EPA. Some state regulations impose
different, additional obligations.

Casella is currently not involved with transportation or disposal of
hazardous substances (as defined in CERCLA) in concentrations or volumes that
would classify those materials as hazardous wastes. However, Casella has
transported hazardous substances in the past and very likely will remain
involved with hazardous substance transportation and disposal in the future to
the extent that materials defined as hazardous substances under CERCLA are
present in consumer goods and in the waste streams of its customers.

In October 1991, the EPA adopted the Subtitle D Regulations governing solid
waste landfills. The Subtitle D Regulations, which generally became effective in
October 1993, include location restrictions, facility design standards,
operating criteria, closure and post-closure requirements, financial assurance
requirements, groundwater monitoring requirements, groundwater remediation
standards and corrective action requirements. In addition, the Subtitle D
Regulations require that new landfill sites meet more stringent liner design
criteria (typically, composite soil and synthetic liners or two or more
synthetic liners) intended to keep leachate out of groundwater and have
extensive collection systems to carry away leachate for treatment prior to
disposal. Groundwater monitoring wells must also be installed at virtually all
landfills to monitor groundwater quality and, indirectly, the effectiveness of
the leachate collection system. The Subtitle D Regulations also require, where
certain regulatory thresholds are exceeded, that facility owners or operators
control emissions of methane gas generated at landfills in a manner intended to
protect human health and the environment. Each state is required to revise its
landfill regulations to meet these requirements or such requirements will be
automatically imposed by the EPA upon landfill owners and operators in that
state. Each state is also required to adopt and implement a permit program or
other appropriate system to ensure that landfills within the state comply with
the Subtitle D Regulations criteria. Various states in which Casella operates or
in which it may operate in the future have adopted regulations or programs as
stringent as, or more stringent than, the Subtitle D Regulations.

THE FEDERAL WATER POLLUTION CONTROL ACT OF 1972

The Federal Water Pollution Control Act of 1972, as amended ("Clean Water
Act"), regulates the discharge of pollutants from a variety of sources,
including solid waste disposal sites and transfer stations, into waters of the
United States. If run-off from Casella's transfer stations or if run-off or
collected leachate from Casella's owned or operated landfills is discharged into
streams, rivers or other surface waters, the Clean Water Act would require
Casella to apply for and obtain a discharge permit, conduct sampling and
monitoring and, under certain circumstances, reduce the quantity of pollutants
in such discharge. Also, virtually all landfills are required to comply with the
EPA's storm water

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regulations issued in November 1990, which are designed to prevent contaminated
landfill storm water runoff from flowing into surface waters. Casella believes
that its facilities are in compliance in all material respects with Clean Water
Act requirements.

THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION, AND LIABILITY ACT OF
1980

CERCLA established a regulatory and remedial program intended to provide for
the investigation and cleanup of facilities where or from which a release of any
hazardous substance into the environment has occurred or is threatened. CERCLA's
primary mechanism for remedying such problems is to impose strict joint and
several liability for cleanup of facilities on current owners and operators of
the site, former owners and operators of the site at the time of the disposal of
the hazardous substances, as well as the generators of the hazardous substances
and the transporters who arranged for disposal or transportation of the
hazardous substances. In addition, CERCLA also imposes liability for the cost of
evaluating and remedying any damage done to natural resources. The costs of
CERCLA investigation and cleanup can be very substantial. Liability under CERCLA
does not depend upon the existence or disposal of "hazardous waste" as defined
by RCRA, but can also be founded upon the existence of even very small amounts
of the more than 700 "hazardous substances" listed by the EPA, many of which can
be found in household waste. In addition, the definition of "hazardous
substances" in CERCLA incorporates substances designated as hazardous or toxic
under the federal Clean Water Act, Clear Air Act and Toxic Substances Control
Act. If Casella were found to be a responsible party for a CERCLA cleanup, the
enforcing agency could hold Casella, or any other generator, transporter or the
owner or operator of the contaminated facility, responsible for all
investigative and remedial costs even if others may also be liable. CERCLA also
authorizes the imposition of a lien in favor of the United States upon all real
property subject to, or affected by, a remedial action for all costs for which a
party is liable. CERCLA provides a responsible party with the right to bring a
contribution action against other responsible parties for their allocable shares
of investigative and remedial costs. Casella's ability to get others to
reimburse it for their allocable shares of such costs would be limited by
Casella's ability to find other responsible parties and prove the extent of
their responsibility and by the financial resources of such other parties.

THE CLEAN AIR ACT

The Clean Air Act generally, through state implementation of Federal
requirements, regulates emissions of air pollutants from certain landfills based
upon the date of the landfill construction and volume per year of emissions of
regulated pollutants. The EPA has promulgated new source performance standards
regulating air emissions of certain regulated pollutants (methane and non-
methane organic compounds) from municipal solid waste landfills. Landfills
located in areas that do not comply with certain requirements of the Clean Air
Act may be subject to even more extensive air pollution controls and emission
limitations. In addition, the EPA has issued standards regulating the disposal
of asbestos-containing materials.

All of the Federal statutes described above contain provisions authorizing,
under certain circumstances, the institution of lawsuits by private citizens to
enforce the provisions of the statutes. In addition to a penalty award to the
United States, some of those statutes authorize an award of attorney's fees to
parties successfully advancing such an action.

THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970 ("OSHA")

OSHA establishes employer responsibilities and authorizes the promulgation
by the Occupational Safety and Health Administration of occupational health and
safety standards, including the obligation to maintain a workplace free of
recognized hazards likely to cause death or serious injury, to comply with
adopted worker protection standards, to maintain certain records, to provide
workers with required disclosures and to implement certain health and safety
training programs. Various of those promulgated standards may apply to Casella's
operations, including those standards concerning notices

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of hazards, safety in excavation and demolition work, the handling of asbestos
and asbestos-containing materials, and worker training and emergency response
programs.

STATE AND LOCAL REGULATIONS

Each state in which Casella now operates or may operate in the future has
laws and regulations governing the generation, storage, treatment, handling,
transportation and disposal of solid waste, water and air pollution and, in most
cases, the siting, design, operation, maintenance, closure and post-closure
maintenance of landfills and transfer stations. In addition, many states have
adopted statutes comparable to, and in some cases more stringent than, CERCLA.
These statutes impose requirements for investigation and cleanup of contaminated
sites and liability for costs and damages associated with such sites, and some
provide for the imposition of liens on property owned by responsible parties.
Some of those liens may take priority over previously filed instruments.
Furthermore, many municipalities also have local ordinances, laws and
regulations affecting company operations. These include zoning and health
measures that limit solid waste management activities to specified sites or
conduct, flow control provisions that direct the delivery of solid wastes to
specific facilities or to facilities in specific areas, laws that grant the
right to establish franchises for collection services and then put out for bid
the right to provide collection services, and bans or other restrictions on the
movement of solid wastes into a municipality.

Certain permits and approvals may limit the types of waste that may be
accepted at a landfill or the quantity of waste that may be accepted at a
landfill during a given time period. In addition, certain permits and approvals,
as well as certain state and local regulations, may limit a landfill to
accepting waste that originates from specified geographic areas or seek to
restrict the importation of out-of-state waste or otherwise discriminate against
out-of-state waste. Generally, restrictions on importing out-of-state waste have
not withstood judicial challenge. However, from time to time Federal legislation
is proposed which would allow individual states to prohibit the disposal of
out-of-state waste or to limit the amount of out-of-state waste that could be
imported for disposal and would require states, under certain circumstances, to
reduce the amounts of waste exported to other states. Although such legislation
has not been passed by Congress, if this or similar legislation is enacted,
states in which Casella operates landfills could limit or prohibit the
importation of out-of-state waste. Such state actions could materially adversely
affect the business, financial condition and results of operations of landfills
within those states that receive a significant portion of waste originating from
out-of-state.

In addition, certain states and localities may for economic or other reasons
restrict the export of waste from their jurisdiction or require that a specified
amount of waste be disposed of at facilities within their jurisdiction. In 1994,
the U.S. Supreme Court held unconstitutional, and therefore invalid, a local
ordinance that sought to impose flow controls on taking waste out of the
locality. However, certain state and local jurisdictions continue to seek to
enforce such restrictions and, in certain cases, Casella may elect not to
challenge such restrictions. In addition, the aforementioned proposed Federal
legislation would allow states and localities to impose certain flow control
restrictions. These restrictions could reduce the volume of waste going to
landfills in certain areas, which may materially adversely affect Casella's
ability to operate its landfills and/or affect the prices that can be charged
for landfill disposal services. These restrictions may also result in higher
disposal costs for Casella's collection operations. If Casella were unable to
pass such higher costs through to its customers, Casella's business, financial
condition and results of operations could be materially adversely affected.

There has been an increasing trend at the Federal, state and local levels to
mandate or encourage both waste reduction at the source and waste recycling, and
to prohibit or restrict the disposal in landfills of certain types of solid
wastes, such as yard wastes, leaves and tires. The enactment of regulations
reducing the volume and types of wastes available for transport to and disposal
in landfills could affect Casella's ability to operate its landfill facilities.

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PROPERTIES

The principal fixed assets used by Casella in connection with its landfill
operations are its landfills which are described above.

Other than the landfills, the principal fixed assets used by Casella in its
solid waste collection and landfill operations included, at July 15, 1999,
approximately 1,402 collection vehicles, 195 pieces of heavy equipment and 261
support vehicles. At September 1, 1999, transfer station operations included 54
transfer stations, 27 of which are owned and 27 of which are leased and/or
operated under agreements expiring between 1999 and 2021.

At September 1, 1999, Casella utilized 16 recycling facilities in its
service areas, of which seven are owned and nine are leased and/or operated
under agreements expiring between 1999 and 2021.

Casella owns and operates a 46-acre tire processing facility located in
Eliot, Maine, consisting of storage facilities, tire shredding machines and a
scale and receiving area.

Casella's facility in Rutland, Vermont, consisting of approximately 10,000
square feet utilized for Casella's headquarters, and its solid waste collection,
maintenance and septic hauling facility located in Montpelier, Vermont,
consisting of an aggregate of approximately 24,000 square feet, are leased from
Casella Associates, a company owned by John and Douglas Casella.

LEGAL PROCEEDINGS

On or about October 30, 1997, Mr. Matthew M. Freeman commenced a civil
lawsuit against Casella and two of Casella's officers and directors in the
Rutland Superior Court, Rutland County, State of Vermont. In the complaint, Mr.
Freeman seeks compensation for services allegedly performed by him prior to
1995. Mr. Freeman is seeking a three-percent equity interest in Casella or the
monetary equivalent thereof, as well as punitive damages. Casella and the
officers and directors have answered the complaint, denied Mr. Freeman's
allegations of wrongdoing, and asserted various defenses. In order to facilitate
the completion of the initial public offering of Casella's Class A Common Stock
in November, 1997, certain stockholders of Casella agreed to indemnify Casella
for any settlement by Casella or any award against Casella in excess of $350,000
(but not legal fees paid by or on behalf of Casella or any other third party).
Casella accrued a $215,000 reserve for this claim during the year ended
April 30, 1998.

On May 12, 1998, Casella filed suit in New York Supreme Court, Allegany
County against the Town of Angelica, New York seeking a temporary restraining
order and preliminary injunctive relief against the Town's enforcement of a
recently-enacted local law which would prohibit the expansion of the Hyland
landfill, would require the landfill and the operator thereof to receive an
additional permit from the Town of Angelica to continue to operate, would
prevent the disposal of yard waste, may preclude the disposal of certain types
of industrial waste and would impose certain other restrictions on the landfill.
A temporary restraining order was granted by the court on May 14, 1998 in favor
of Casella, and by a decision dated July 13, 1998, the court granted Casella's
motion for a preliminary injunction. On September 9, 1998, the Town of Angelica
filed a Notice of Appeal but has not yet perfected that appeal. If Casella is
not successful in its lawsuit, and if the Town of Angelica seeks to enforce the
law by its terms, then Casella would be required to obtain an additional permit
from the Town of Angelica to operate the Hyland landfill, the expansion of the
landfill beyond the current permitted capacity would be prohibited, and Casella
would be unable to dispose of yard waste and may be precluded from disposing of
certain industrial wastes at the landfill. There can be no assurance that such
limitations would not have a material adverse effect on Casella's business,
financial condition and results of operations. Casella began accepting waste at
the Hyland facility on July 22, 1998, and is in active settlement negotiations
with the town.

Casella's wholly-owned subsidiary, North Country Environmental Services,
Inc. ("NCES"), is a party to consolidated civil actions (Case Nos. 98-E-141 and
98-E-151) against the Town of Bethlehem,

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New Hampshire, before the Grafton Superior Court in North Haverhill, New
Hampshire. On October 16, 1998, NCES commenced an action for declaratory relief
against the Town of Bethlehem seeking, on a variety of grounds, to invalidate a
zoning ordinance which purports to prohibit the expansion of NCES's landfill
beyond its currently permitted capacity. The Town of Bethlehem has taken the
position that NCES may not expand the landfill beyond Stage II, Phase I, which
has reached capacity. NCES sought a declaration that it requires no further
approvals from the Town of Bethlehem to expand the landfill throughout its
87-acre parcel and that certain financial exactions imposed by a 1986 Town of
Bethlehem land-use approval are invalid. In the alternative, NCES sought
compensation under state law for the inverse condemnation of its property.

On October 23, 1998, the Town filed a petition for injunctive and
declaratory relief against NCES. The Town's petition sought to enjoin NCES's
construction of Stage II, Phase II of the landfill and to prevent any further
expansion as violative of the above-noted Town zoning ordinance. The
construction of Stage II, Phase II was proceeding at that time pursuant to a
construction permit issued by the New Hampshire Department of Environmental
Services (NHDES) on September 15, 1998. On October 30, 1998, the court entered a
preliminary injunction requiring NCES to suspend construction of Stage II, Phase
II. When the Town failed to post an injunction bond, however, the court
permitted NCES to complete and cover the liner system in Stage II, Phase II,
before the onset of winter.

On November 30, 1998, NCES and the Town proceeded to trial on eight of
NCES's eleven claims for relief and on the Town's claims for permanent
injunctive and declaratory relief. Earlier, the remaining three NCES claims were
bifurcated for later trial, if needed. On the day of trial, the Town filed two
counterclaims seeking to establish the lawfulness of the financial exactions
challenged by NCES's October 16, 1998 petition.

The Grafton Superior Court issued its order on NCES's first eight claims and
the Town's request for a permanent injunction and declaratory relief on
February 1, 1999. The court declined to decide whether the Town's zoning
ordinance is valid; rather, the court held that NCES had appropriated a 51-acre
tract of land comprised of a 10-acre and a 41-acre parcel for landfilling
purposes. Stage II, Phase II is within the 51-acre tract. The court also found
that NCES had obtained permission to operate its landfill facility on this
51-acre tract prior to the enactment of the challenged zoning ordinance and held
that the ordinance did not apply to NCES's operation of its landfill facility on
this tract. Consequently, the court held that the Town lacked authority to
enforce the zoning ordinance against NCES with respect to the 51-acre tract and
denied the Town's petition in its entirety. The court did not decide the
validity of the zoning ordinance as it relates to 36 acres adjoining the 51-acre
tract after finding that NCES had not demonstrated a present intent to develop
this property for landfilling. Consequently, NCES's ability to use this 36 acres
for landfilling remains unresolved.

On February 10, 1999, the Town moved the Grafton Superior Court to clarify
and reconsider its order. On March 22, 1999, the court denied reconsideration
but offered some clarification which did not result in any substantive change in
its earlier order. On April 20, 1999, the Town filed a notice of appeal with the
New Hampshire Supreme Court seeking review of the superior court's order. NCES
filed a notice of cross-appeal on April 29, 1999.

Concurrently, on March 24, 1999, a special interest group, Environmental
Action for Northern New Hampshire, Inc. ("EANNH") sought to intervene before the
superior court. The reason EANNH gave for seeking intervention was to introduce
evidence which it claimed showed that there were size limitations on the
landfill implicit in the land-use approvals obtained by NCES's predecessors in
1976 and 1986. The superior court denied EANNH intervention on April 22, 1999,
and on May 24, 1999, EANNH appealed the denial of intervention to the New
Hampshire Supreme Court.

The Town's notice of appeal centers on its argument that there were implied
limitations upon the size of the landfill that could be operated by NCES and its
predecessors under the land-use approvals granted by the Town in 1976 and 1986.
NCES's cross-appeal seeks a determination that it has all local approvals
necessary to landfill throughout the entire 87-acre parcel, that the Town's
restrictive zoning

71

ordinance is unlawful for several reasons, and that the Town's attempted
enforcement of the zoning ordinance was in bad faith, entitling NCES to its
attorney's fees.

The New Hampshire Supreme Court has yet to accept any of the appeals. NCES
has filed a motion for summary disposition of EANNH's appeal, but there has yet
to be a ruling on that motion. NCES has also learned that a second special
interest group, AWARE, Inc., intends to seek AMICUS CURIAE status so it may
submit briefs to the Supreme Court in support of the Town's appeal.

In summer 1999, the superior court found that the financial exactions
imposed in 1986 by the Town as a condition of land-use approval were unlawful.
These exactions consisted of a discounted tipping fee for Town solid waste and a
per-ton payment to the Town for all solid waste originating from outside the
Town and deposited at the landfill. NCES stopped complying with the exactions in
October of 1998. NCES expects an appeal.

In a separate but related matter, the Waste Management Division of NHDES
issued operating approval to NCES for Stage II, Phase II of the landfill on
March 25, 1999. NCES has been landfilling in Stage II, Phase II since that time.
On April 23, 1999, EANNH appealed the operating approval to the Waste Management
Council, an appellate administrative body with jurisdiction to review certain
decisions of the Waste Management Division. EANNH has contended on its appeal
that the operating approval should be suspended because the superior court's
order in NCES's favor is on appeal and hence not final. EANNH has also argued
that NCES misled the Waste Management Division into issuing the operating
approval by certifying that it had all local approvals necessary to operate
Stage II, Phase II when the order establishing this proposition was on appeal.

NCES has filed a motion to dismiss EANNH's appeal to the Waste Management
Council on the ground that the Council lacks jurisdiction over the appeal and
that EANNH lacks standing to assert it. The Office of the Attorney General of
the State of New Hampshire has joined in that motion. In the alternative, NCES
has sought a stay of the Council proceedings pending the outcome of the Supreme
Court appeal. EANNH has agreed to a stay provided there is a suspension of the
operating approval during the pendency of the Supreme Court appeal. NCES has
objected to any such suspension.

Following the announcement of the merger, Casella received a request for
certain information and documents from the Maine Attorney General related to its
existing operations in the State of Maine, and to the competitive impact of the
proposed merger with KTI. In response to this request, Casella made available
certain responsive information and documents. Since that time, without an
admission of any liability, Casella has entered into an agreement resolving the
Attorney General's competitive concerns. The agreement, formally contained in a
Consent Order, was submitted to the Maine Superior Court and approved on
September 28, 1999, to become effective upon the date of the consummation of the
merger. In summary, the Order requires Casella to modify its existing small
containerized hauling contracts in northern Maine to permit termination upon
thirty days written notice and to limit the charge for early termination to a
certain amount. It also requires Casella to operate (to the extent it controls
such operation) the gate, scale house and disposal area of the Penobscot
waste-to-energy facility in Orrington, Maine, under terms and conditions no less
favorable than those provided to it and to be recused from participation in the
bid process for contracts relating to the transportation or disposal or residue
from that facility.

Casella has brought an action against the Town of Hampden, Maine to set
aside the Town's efforts to block Casella's construction of approximately
3,300,000 tons of capacity, for which Casella has been granted a permit by the
State of Maine. The action is pending in the Penobscot County Superior Court in
Bangor, Maine.

Casella offers no prediction of the outcome of any of the proceedings
described above.

72

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

STOCK OWNERSHIP OF MANAGEMENT

The following table sets forth information as of September 1, 1999 and
immediately following the merger, regarding the beneficial ownership of Casella
common stock by (a) each person or entity known to Casella to beneficially own
more than five percent of Casella common stock; (b) each director; (c) the chief
executive officer and the two other most highly compensated executive officers
of Casella as of September 1, 1999; and (d) all current directors and executive
officers of Casella as a group.

Beneficial ownership is determined in accordance with the rules of the SEC,
and includes generally voting power and/or investment power with respect to
securities. Shares of common stock subject to options and/or warrants currently
exercisable or exercisable within 60 days of September 1, 1999 are deemed
outstanding for computing the percentage beneficially owned by the person
holding the options and/or warrants but are not deemed outstanding for purposes
of computing the percentage beneficially owned by any other person. Except as
indicated by footnote, Casella believes that the persons named in this table,
based on information provided by these persons, have sole voting and investment
power with respect to the shares of common stock indicated.

AS OF SEPTEMBER 1, 1999                 TOTAL CASELLA CLASS A AND
---------------------------------------------------        CASELLA CLASS B
CASELLA CLASS A            CASELLA CLASS B         COMMON STOCK AFTER THE
COMMON STOCK               COMMON STOCK                  MERGER
------------------------   ------------------------   -------------------------
NAME OF BENEFICIAL OWNER              # OF SHARES   % OF CLASS   # OF SHARES   % OF CLASS   OWNERSHIP    VOTING POWER
------------------------              -----------   ----------   -----------   ----------   ----------   ------------

John W. Casella(1)..................     772,150        5.08%      494,100          50%         5.43%        17.72%
Douglas R. Casella(2)...............     772,150        5.08       494,100          50          5.43         17.72
James W. Bohlig(3)..................     550,000        3.60            --          --          2.45          1.70
Jerry S. Cifor(4)...................     224,656        1.48            --          --             *             *
John F. Chapple III.................     190,643        1.27            --          --             *             *
Gregory B. Peters...................      19,684           *            --          --             *             *
Weston Presidio Capital II,
L.P.(5)...........................     775,370        5.16            --          --          3.50          2.42
J.W. Seligman & Co.
Incorporated(6)...................   1,327,783        8.84            --          --          5.99          4.14
Warburg Pincus Asset
Management, Inc.(7)...............     755,000        5.03            --          --          3.41          2.36
Directors and executive officers as
a group (6 people)(8).............   2,529,283       15.97       988,200         100%        15.30%        37.75%

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

*   Represents less than 1% of the outstanding shares of Casella common stock.

(1) Includes (a) 193,500 shares issuable on the exercise of options or warrants
within 60 days of September 1, 1999 and (b) 4,800 shares of Casella Class A
common stock held in trust for the benefit of Mr. Casella's minor children.
Mr. Casella disclaims beneficial ownership of these shares. Does not include
shares of Casella Class A common stock issuable at any time upon the
conversion of Casella Class B common stock on a one-for-one basis. The
address of Mr. Casella is c/o Casella Waste Systems, Inc., 25 Greens Hill
Lane, Rutland, Vermont 05701.

73

(2) Includes (a) 193,500 shares issuable on the exercise of options or warrants
within 60 days of September 1, 1999 and (b) 1,600 shares of Casella Class A
common stock held in trust for the benefit of Mr. Casella's minor children.
Mr. Casella disclaims beneficial ownership of these shares. Does not include
shares of Casella Class A common stock issuable at any time upon the
conversion of Casella Class B common stock on a one-for-one basis. The
address of Mr. Casella is c/o Casella Waste Systems, Inc., 25 Greens Hill
Lane, Rutland, Vermont 05701.

(3) Includes (a) 280,000 shares issuable on the exercise of options or warrants
within 60 days of September 1, 1999 and (b) 8,000 shares of Class A common
stock held in trust for the benefit of Mr. Bohlig's minor children. Mr.
Bohlig disclaims beneficial ownership of these shares.

(4) Includes 156,656 shares issuable on the exercise of options or warrants
within 60 days of September 1, 1999.

(5) The address of Weston Presidio Capital II, L.P. is One Federal Street,
Boston, MA 02110.

(6) Based on a Schedule 13G/A filed by J.W. Seligman & Co. with the SEC
April 12, 1999. The address of J.W. Seligman & Co. is 100 Park Avenue, New
York, NY 10017.

(7) Based on a Schedule 13G filed by Warburg Pincus Asset Management, Inc. with
the SEC on January 13, 1999. The address of Warburg Pincus Asset Management
Inc. is 466 Lexington Avenue, 10th floor, New York, NY 10017.

(8) Includes 823,656 shares issuable on the exercise of options or warrants
within 60 days of September 1, 1999.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth information for each of the last three fiscal
years with respect to the cash compensation paid and the shares underlying
options granted to (a) Casella's chief executive officer and (b) each of the
other executive officers of Casella who received annual compensation in excess
of $100,000 during fiscal 1999, collectively, the "Casella named executive
officers".

SUMMARY COMPENSATION TABLE

LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION            -------------
------------------------------------    SECURITIES
OTHER        UNDERLYING
FISCAL                              ANNUAL       OPTIONS/SARS       ALL OTHER
NAME AND PRINCIPAL POSITION        YEAR     SALARY(1)    BONUS     COMPENSATION         (#)        COMPENSATION(2)
---------------------------      --------   ---------   --------   -------------   -------------   ---------------

John W. Casella................    1999     $162,157    $60,000    $1,638,575(3)          90,000       $500
President and Chief Executive      1998      156,965     50,000        14,279(4)              --        500
Officer                            1997      136,141     45,000        22,755(4)          20,000        985

James W. Bohlig................    1999      152,109    199,900       882,700(3)         150,000        500
Senior Vice President and Chief    1998      146,591     50,000            --                 --         --
Operating Officer                  1997      126,538     45,000            --             30,000         --

Jerry S. Cifor.................    1999      132,430     50,000       413,120(3)         110,000        500
Vice President and Chief           1998      126,235     42,000            --                 --        500
Financial Officer                  1997      107,692     38,000            --             16,000        838

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

(1) In the current fiscal year, the base salary of Mr. Casella is $262,000, the
base salary of Mr. Bohlig is $250,000 and the base salary of Mr. Cifor is
$230,000.

(2) Consists of amount paid by Casella to the named executive officer's account
in Casella's 401(k) plan.

74

(3) Consists of the difference between the price paid by the named executive
officer upon exercise of a stock option and the fair market value of the
Class A common stock which he received on the date of exercise.

(4) Consists of life insurance premiums paid by Casella on behalf of the named
executive officer.

STOCK OPTION GRANTS

The following table sets forth information for each of the Casella named
executive officers with respect to the grant of stock options to purchase shares
of Casella Class A common stock during fiscal 1999.

OPTION GRANTS IN LAST FISCAL YEAR

PERCENT
NUMBER OF         OF TOTAL                                       POTENTIAL REALIZABLE VALUE AT
SECURITIES        OPTIONS                                           ASSUMED ANNUAL RATES OF
UNDERLYING       GRANTED TO       EXERCISE                        STOCK PRICE APPRECIATION FOR
OPTIONS        EMPLOYEES IN       OR BASE       EXPIRATION              OPTION TERM(3)
NAME                       GRANTED(1)      FISCAL YEAR       PRICE(2)          DATE              5%               10%
----                       ----------      ------------      ---------      ----------      ------------      ------------

John W. Casella......        90,000              8.0%        $29.70           5/27/03        $  266,991        $  868,292

James W. Bohlig......       150,000             13.5          27.00           5/27/08         2,203,792         5,455,477

Jerry S. Cifor.......       110,000              9.8          27.00           5/27/08         1,616,114         4,000,683

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

(1) Each option is fully exercisable.

(2) Options were granted at the fair market value determined as of the date of
the grant, based upon the last reported sale price of Casella Class A common
stock on the Nasdaq National Market.

(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (5% and 10%) on
the market value (110% of fair market value in the case of Mr. Casella) of
Casella Class A common stock on the date of the option grant over the term
of the options. These numbers are calculated based on rules promulgated by
the SEC and do not reflect Casella's estimate of future stock price growth.
Actual gains if any, on stock option exercise and Casella Class A common
stock holdings are dependent on the timing of the exercise and the future
performance of Casella Class A common stock. There can be no assurance that
the rates of appreciation assumed in this table can be achieved or that the
amounts reflected will be received by the individuals.

FISCAL YEAR-END OPTION VALUES

The following table sets forth information for each of the Casella named
executive officers with respect to the exercise of options to purchase shares of
Casella Class A common stock during fiscal 1999 and the number and value of
options outstanding as of the fiscal year ended 1999.

75

AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999
AND FISCAL YEAR-END OPTION VALUES

NUMBER OF SHARES
UNDERLYING UNEXERCISED         VALUE OF UNEXERCISED
SHARES                           OPTIONS AT               IN-THE-MONEY OPTIONS
ACQUIRED       VALUE          APRIL 30, 1999 (#)         AT APRIL 30, 1999 ($)(2)
ON EXERCISE    REALIZED    ---------------------------   ---------------------------
NAME                          (#)         ($)(1)     EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                      -----------   ----------   -----------   -------------   -----------   -------------

John W. Casella.........     65,000     $1,141,450     135,000         45,000      $2,011,250       --
President and Chief
Executive Officer

James W. Bohlig.........     35,000        882,700     350,000         75,000       6,352,350       --
Senior Vice President
and
Chief Operating Officer

Jerry S. Cifor..........     65,344        318,176     101,656         55,000         989,088       --
Vice President and Chief
Financial Officer

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

(1) Based on the closing price of Casella Class A common stock as reported on
the Nasdaq National Market on the date of exercise less the option exercise
price.

(2) These values have been calculated on the basis of the last reported sale
price of Casella Class A common stock on the Nasdaq National Market on
April 30, 1999, $25.00 per share, less the aggregate exercise price.

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

The compensation committee of the Casella board reviews executive salaries,
administers any bonus, incentive compensation and stock option plans of Casella,
and approves the salaries and other benefits of the executive officers of
Casella. In addition, the compensation committee consults with Casella's
management regarding pension and other benefit plans and compensation policies
and practices of Casella.

The compensation committee, including its stock plan subcommittee, seeks to
achieve three broad goals in connection with Casella's executive compensation
program. First, the compensation committee seeks to reward executives for the
achievement of business objectives of Casella. Second, the executive
compensation program is intended to provide executives with equity incentives so
as to link a portion of the executive's compensation with the future performance
of Casella Class A common stock. Finally, the compensation committee structures
its executive compensation program so as to enable it to attract and retain key
executives.

To achieve these objectives, the compensation program for Casella's
executive officers consists principally of three elements: base salary, cash
bonuses and long-term incentive compensation in the form of participation in
Casella's stock option plans.

In determining base salaries for the executive officers, the compensation
committee evaluates the executive's experience, historical salary level and the
responsibilities of the specific executive position. In addition, the
compensation committee assesses Casella's financial and operational performance
for the prior fiscal year and the competitiveness of Casella's executive
compensation program and executive compensation packages of comparable
companies. To the extent determined to be appropriate, the compensation
committee also considers general economic conditions and forecasts. Base
salaries are generally set at or somewhat below competitive levels, with the
result that Casella relies on cash

76

bonuses and longer term incentive compensation to motivate its executive
officers to perform to the full extent of their abilities.

The compensation committee also considers the payment of cash bonuses as
part of its compensation program. Annual cash bonuses reflect a policy of
requiring a certain level of company financial and operational performance for
the prior fiscal year before any cash bonuses are earned by executive officers.
In general, the compensation committee has tied potential bonus compensation to
performance factors, including the executive officer's efforts and contributions
towards obtaining company objectives and Casella's overall growth.

The executive officers are also eligible to receive stock options under
Casella's stock option plans. The compensation committee believes that it is to
Casella's advantage to increase the interest of the executives in Casella's
welfare, as these employees share the primary responsibility for Casella's
management and growth. In addition, the compensation committee believes that,
because new option grants are generally set at fair market value, the grants
have the effect of "re-setting" the executive's price targets for Casella
Class A common stock. Moreover, Casella's stock option plans provide a
significant non-cash form of compensation, which is intended to benefit Casella
by enabling it to continue to attract and to retain qualified personnel without
negatively impacting cash flow. The stock plan subcommittee administers the
issuance of stock options and other awards under Casella's stock option plans to
the executive officers. See "Report of the stock plan subcommittee on executive
compensation".

COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)

Section 162(m) of the Internal Revenue Code of 1986, as amended, enacted in
1993, generally disallows a tax deduction to public companies for compensation
over $1,000,000 paid to its chief executive officer and its four other most
highly compensated executive officers. Qualifying performance-based compensation
will not be subject to the deduction limit if certain requirements are met. In
this regard, Casella has limited the number of shares subject to stock options
which may be granted to Casella's employees in a manner that complies with the
performance-based requirements of Section 162(m). Based on the compensation
awarded to the chief executive officer and the other named executive officers of
Casella, it does not appear that the Section 162(m) limitation will have a
significant impact on Casella in the near term. Incentive stock-based awards
granted prior to fiscal 1999 by Casella generally qualify as a performance-based
compensation pursuant to the "grandfather" provision of Section 162(m).

COMPENSATION COMMITTEE

John W. Casella
John F. Chapple III
Gregory B. Peters

REPORT OF THE STOCK PLAN SUBCOMMITTEE ON EXECUTIVE COMPENSATION

The stock plan subcommittee of the compensation committee administers the
issuance of stock options and other awards under Casella's stock option plans to
Casella's executive officers and approves the compensation of Mr. John W.
Casella.

The use of stock options is a significant element of the compensation
packages of Casella's executive officers. The timing of new grants depends upon
a number of factors, including the executives' current stock and option holdings
and such other factors as the stock plan subcommittee deems relevant. In fiscal
1999, the stock plan subcommittee granted stock options to each of the named
executive officers. In its determination to grant stock options to the Casella
named executive officers,

77

the stock plan subcommittee specifically considered the successful consummation
of Casella's secondary public offering of its Class A common stock, the entering
into of the agreement and plan of merger with KTI, the achievement of certain
milestones with respect to the company's landfills and Casella's successful
business acquisitions.

When recommending the grant of stock options, it has been the policy of the
stock plan subcommittee to recommend that the exercise price of the options be
equal to the fair market value of a share of Casella Class A common stock as of
the date of grant.

The compensation of the chief executive officer is based upon the same
elements and measures of performance as is the compensation for Casella's other
executive officers. In its determination to approve a cash bonus in fiscal 1999
to Mr. John W. Casella of $60,000, the stock plan subcommittee specifically
considered the successful consummation of Casella's secondary public offering of
its Class A common stock, the entering into of the agreement and plan of merger
with KTI, Casella's successful business acquisitions and Casella's overall
growth during fiscal 1999.

STOCK PLAN SUBCOMMITTEE

John F. Chapple III
Gregory B. Peters

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Casella has from time to time engaged Casella Construction, Inc., a company
owned by John W. Casella and Douglas R. Casella, a director, to provide
construction services for the company, including construction, closure and
capping activities at the company's landfills. In fiscal 1999, the company paid
Casella Construction, Inc. an aggregate of $5,198,000.

Casella is party to two real estate leases with Casella Associates, a
Vermont partnership owned by John W. Casella and Douglas R. Casella, relating to
facilities occupied by the company. The leases, relating to the company's
corporate headquarters in Rutland, Vermont and its Montpelier, Vermont facility,
call for aggregate monthly payments of approximately $18,000 and expire in
April 2003. These leases have been classified by the company as capital leases
for financial reporting purposes. In addition, the company leases furniture and
fixtures from Casella Associates pursuant to an operating lease which bore rent
at $950 per month and which expired in May 1999. In fiscal 1999, the company
paid Casella Associates an aggregate of $237,101 for such leases. In
November 1997, the lease relating to the company's corporate headquarters in
Rutland, Vermont was amended to allow the company to upgrade and make capital
improvements to the premises at an estimated cost of $500,000, to be paid by the
company. Casella Associates was granted the option to purchase the capital
improvements by December 31, 2002, and if it does not elect to exercise the
option the company has the right to purchase the premises for $324,000, the fair
market value of the premises prior to the capital improvements, at the
expiration of the term of the lease.

Casella operated an unlined landfill located in Whitehall, New York owned by
Bola, Inc., a corporation owned by John W. Casella and Douglas R. Casella which
operated as a single-purpose real estate holding company. The company paid the
cost of closing this landfill in 1992, and has agreed to pay all post-closure
obligations. In fiscal 1999, the company paid an aggregate of $3,161 pursuant to
this arrangement.

In connection with and at the time of Casella's acquisition of the business
of Catamount Waste Services, Inc., Casella entered into a lease in June 1994
with CV Landfill, Inc., a Vermont corporation affiliated with Catamount Waste
Services, Inc., pursuant to which Casella agreed to lease a transfer station for
a term of 10 years. CV Landfill, Inc. is owned by John F. Chapple III, who
became a

78

director of Casella at the time of the acquisition of the business of Catamount
Waste Services, Inc. Pursuant to the lease agreement, Casella pays monthly rent
for the first five years at a rate of $5.00 per ton of waste disposed of at the
transfer station, with a minimum rent of $6,650 per month. Following the fifth
anniversary of the lease agreement, Casella is required to pay monthly rent at a
rate of $2.00 per ton, with a minimum rent of $2,500 per month. In fiscal 1999,
Casella paid CV Landfill, Inc. an aggregate of $116,116.

In connection with the settlement of certain litigation naming the company,
four of its subsidiaries, Messrs. James W. Bohlig and John W. and Douglas R.
Casella and one unrelated person as defendants, the company paid an aggregate of
$450,000 plus approximately $200,000 in legal expenses incurred by the
defendants. The lawsuit was brought derivatively in the name of Meridian, a
Vermont corporation which has been inactive since 1993, of which Messrs. Bohlig
and John Casella were officers, directors and stockholders, as well as
individually in the names of the plaintiffs, who were also stockholders of
Meridian. In response to the lawsuit, in an effort to expedite adjudication, a
majority of Meridian's directors, including Messrs. Bohlig and John Casella,
voted to place Meridian into bankruptcy, and Meridian filed a petition under
Chapter 7. The lawsuit was subsequently removed to the United States Bankruptcy
Court for the District of Vermont. On July 14, 1997, the bankruptcy court
approved the settlement. Messrs. Bohlig and John Casella were officers and
directors of Meridian at the time Meridian filed the petition under Chapter 7.

On or about October 30, 1997, Mr. Matthew M. Freeman commenced a civil
lawsuit against the company and Messrs. James W. Bohlig and John W. Casella in
the Rutland Superior Court, Rutland County, State of Vermont. In the complaint,
Mr. Freeman seeks compensation for services allegedly performed by him prior to
1995. Mr. Freeman is seeking a three percent equity interest in the company or
the monetary equivalent thereof, as well as punitive damages. The company and
Messrs. Bohlig and Casella have answered the complaint, denied Mr. Freeman's
allegations of wrongdoing, and asserted various defenses. In order to facilitate
the completion of the Casella initial public offering, certain stockholders of
the company, including the two officers named as defendants, agreed to indemnify
the company for any settlement by the company or any award against the company
in excess of $350,000, but not including legal fees paid by or on behalf of the
company or any other party. The company has agreed to indemnify Messrs. Bohlig
and Casella for legal fees incurred by them in connection with the lawsuit, plus
settlements or awards up to $350,000 in the aggregate.

Casella believes that each transaction described above was on terms at least
as favorable as those Casella would expect to negotiate with disinterested third
parties. In addition, in connection with the proposed merger with KTI, certain
executive officers and directors of Casella and KTI have interests in the merger
that are in addition to their interests as stockholders of the companies
generally. See "The Merger--Interests of executive officers and directors of
Casella and KTI in the merger" and "The Companies--KTI--Certain relationships
and related transactions".

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based solely on its review of copies of reports filed by reporting persons
pursuant to Section 16(a) of the Securities Exchange Act of 1934, or written
representations from reporting persons that no Form 5 filing was required for
such person, Casella believes that, during fiscal 1999, all filings required to
be made by reporting persons of Casella were timely made in accordance with the
requirements of the Exchange Act other than the filing of a Form 4 by
Mr. Robert G. Banfield, a vice president, which reported two late transactions;
the filing of a Form 4 by Mr. Michael P. Barrett, a vice president, which
reported five late transactions; the filing of a Form 4 by Mr. James W. Bohlig,
senior vice president, chief operating officer and a director, which reported
three late transactions; the filing of a Form 5 by Mr. Douglas R. Casella, a
director, which reported two late transactions; the filing of a Form 4 and a
Form 5 by Mr. John W. Casella, president, chief executive officer and chairman,
each of which reported two late transactions; the filing of a Form 4 by
Mr. Christopher M. DesRoches, a vice president, which

79

reported two late transactions; the filing of a Form 4 by Mr. Joseph S. Fusco, a
vice president, which reported two late transactions; the filing of a Form 4 by
Mr. Larry B. Lackey, a vice president, which reported five late transactions;
and the filing of a Form 4 by Mr. Gregory B. Peters, a director, which reported
two late transactions, all of which reports were filed late.

STOCK PERFORMANCE GRAPH

The stock performance graph below compares the percentage change in
cumulative stockholder return on Casella Class A common stock for the period
from October 29, 1997, the first day of trading of Casella Class A common stock,
through April 30, 1999 with the cumulative total return on the Nasdaq Composite
Index and Casella's Industry Peer Group on the Nasdaq National Market. This
graph assumes the investment on October 29, 1997 of $100.00 in Casella Class A
common stock, at the initial public offering price, the Nasdaq Composite Index
and Casella's Industry Peer Group, and assumes dividends are reinvested.

[LOGO]

OCTOBER 29, 1997   APRIL 30, 1998   APRIL 30, 1999
----------------   --------------   --------------

Casella Waste Systems, Inc.                        $100.00           $139.89          $112.36

Nasdaq Composite Index                              100.00            116.58           158.65

Industry Peer Group(1)                              100.00            122.26            77.90

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

(1) The selected peer group is comprised of securities of Waste Industries, Inc.
and Superior Services, Inc.

80

CASELLA SELECTED HISTORICAL FINANCIAL INFORMATION

The selected historical financial information as of April 30, 1995, 1996 and
1997 and for the years ended April 30, 1995 and 1996 are derived from financial
statements of Casella not included herein. The selected historical balance sheet
data as of April 30, 1998 and 1999 and as of July 31, 1998 and 1999 and
statements of operations data for each of the three years in the period ended
April 30, 1999 and each of the three month periods ended July 31, 1998 and 1999
are derived in part from the financial statements of Casella which have been
included in this proxy statement/prospectus. The selected historical financial
information presented below has been restated to reflect mergers completed by
Casella during the most recent fiscal year in transactions accounted for as
poolings of interests, as more fully described in note (1) below. You should
read this information in conjunction with the respective historical financial
statements and notes we have included in this proxy statement/prospectus.

THREE MONTHS
FISCAL YEAR ENDED APRIL 30,                    ENDED JULY 31,
--------------------------------------------------------   -------------------
1995       1996         1997         1998       1999       1998       1999
--------   --------   ------------   --------   --------   --------   --------
(RESTATED(1))
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Revenues.........................................  $38,633    $ 58,932     $103,520     $143,710   $184,246   $ 45,084   $ 55,036
-------    --------     --------     --------   --------   --------   --------
Operating Expenses:
Cost of Operations.............................   23,631      35,878       65,460       89,581    110,008     27,336     30,946
General and Administrative.....................    6,065      10,416       16,139       20,926     27,043      6,416      7,798
Merger Costs...................................       --          --           --          290      1,951         --      1,490
Depreciation and Amortization..................    6,106       9,206       15,371       19,959     25,899      5,897      7,622
Loss on Impairment of Long-Lived Assets........       --          --           --        1,571         --         --         --
-------    --------     --------     --------   --------   --------   --------
35,802      55,500       96,970      132,327    164,901     39,649     47,856
-------    --------     --------     --------   --------   --------   --------
OPERATING INCOME.................................    2,831       3,432        6,550       11,383     19,345      5,435      7,180

Other (Income) Expense
Interest Income................................       --          --         (286)        (265)       (77)       (41)       (73)
Interest Expense...............................       --          --        5,226        7,638      5,651      1,937      1,678
Other Expense (Income), net....................    1,951       3,168          846         (337)      (353)      (257)       (57)
-------    --------     --------     --------   --------   --------   --------
Other Expense, net...............................    1,951       3,168        5,786        7,036      5,221      1,639      1,548
INCOME BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY ITEMS............................      880         264          764        4,347     14,124      3,796      5,632
Provision for Income Taxes.......................      222         148          681        2,512      7,509      1,675      2,591
Extraordinary Items, net.........................       --         326           --           --         --         --         --
-------    --------     --------     --------   --------   --------   --------
NET INCOME (LOSS)................................      658        (210)          83        1,835      6,615      2,121      3,041

Accretion of preferred stock and put warrants....   (2,380)     (2,967)      (8,530)      (5,738)        --         --         --
=======    ========     ========     ========   ========   ========   ========

NET INCOME (LOSS) APPLICABLE TO COMMON
STOCKHOLDERS...................................  $(1,722)   $ (3,177)    $ (8,447)    $ (3,903)  $  6,615   $  2,121   $  3,041
=======    ========     ========     ========   ========   ========   ========

Basic net income (loss) per common share.........  $ (0.45)   $  (0.71)    $  (1.52)    $  (0.41)  $   0.44   $   0.16   $   0.19
=======    ========     ========     ========   ========   ========   ========

Basic Weighted average common shares
outstanding....................................    3,822       4,504        5,548        9,547     15,145     13,287     15,979
=======    ========     ========     ========   ========   ========   ========

Diluted net income (loss) per common share.......  $ (0.45)   $  (0.71)    $  (1.52)    $  (0.41)  $   0.41   $   0.15   $   0.18
=======    ========     ========     ========   ========   ========   ========

Diluted weighted average common shares
outstanding....................................    3,822       4,504        5,548        9,547     16,019     14,410     16,539
=======    ========     ========     ========   ========   ========   ========

OTHER OPERATING DATA:

Capital Expenditures.............................  $(4,651)   $(12,293)    $(20,825)    $(29,416)  $(57,126)  $(10,180)  $(16,069)

OTHER DATA:

Cash Flows from operating activities.............  $ 6,624    $  9,840     $ 17,280     $ 21,080   $ 39,573   $ 13,330   $  9,153

Cash flows from investing activities.............  $(9,408)   $ 29,547     $(56,495)    $(61,263)  $(97,968)  $(19,760)  $(19,702)

Cash flows from financing activities.............  $ 3,317    $ 19,164     $ 40,116     $ 40,672   $ 59,300   $  7,194   $ 11,235

ADJUSTED EBITDA..................................  $ 8,937    $ 12,638     $ 21,921     $ 32,913   $ 45,244   $ 11,332   $ 14,802
=======    ========     ========     ========   ========   ========   ========

81

THREE MONTHS
ENDED
APRIL 30,                              JULY 31,
----------------------------------------------------   -------------------
1995       1996       1997       1998       1999       1998       1999
--------   --------   --------   --------   --------   --------   --------
(IN THOUSANDS)

BALANCE SHEET DATA:

Cash and cash equivalents............................      817      1,938       2,838      3,327      4,232      4,092      4,918

Working (deficit) capital............................   (1,314)      (716)     (4,554)     4,210      3,284        658      9,496

Property and equipment, net..........................   23,264     43,528      75,626     91,451    131,431    102,341    140,581

Total assets.........................................   38,721     74,650     153,366    205,509    282,302    232,006    300,639

Long-term obligations, less current maturities.......   23,049     28,165      82,187     83,681     88,193     43,515    102,002

Redeemable preferred stock and put warrants..........    3,142     23,296      31,826         --         --         --         --

Total stockholders' equity...........................    5,568     25,451      35,449     83,764    147,978    141,654    151,667

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

(1) Casella has restated the selected historical financial information for all
periods presented to reflect the mergers with Corning Community Disposal and
Resource Waste Systems, consummated during the three months ended July 31,
1999, accounted for as poolings of interests. See Note 3 of the Notes to
Consolidated Financial Statements.

(2) For a description of Adjusted EBITDA see note (l) on summary unaudited pro
forma combined information.

82

CASELLA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion of Casella's financial condition and results of
operations should be read in conjunction with Casella's Consolidated Financial
Statements and Notes thereto, and other financial information included elsewhere
herein.

OVERVIEW

Casella is a regional, integrated solid waste services company that provides
collection, transfer, disposal and recycling services in Vermont, New Hampshire,
Maine, upstate New York, Massachusetts and northern Pennsylvania. Casella's
objective is to continue to grow by expanding its services in markets where it
can be one of the largest and most profitable fully-integrated solid waste
services companies.

Casella's revenues have increased from $38.6 million for the fiscal year
ended April 30, 1995, to $184.2 million for the fiscal year ended April 30,
1999. From May 1, 1994 through April 30, 1999, Casella acquired 132 solid waste
collection, transfer and disposal operations. Between May 1 and July 31, 1999,
Casella acquired an additional 13 such businesses. All but two of these
acquisitions were accounted for under the purchase method of accounting for
business combinations. Under the rules of purchase accounting the acquired
companies' revenues and results of operations have been included together with
those of Casella from the actual dates of the acquisitions and will materially
affect the period-to-period comparisons of Casella's historical results of
operations. In December 1997 Casella acquired a waste collection and transfer
operation in a transaction recorded as a pooling of interests. During the fiscal
year ended April 30, 1999 Casella acquired five waste collection, transfer and
disposal operations in transactions accounted for as poolings of interest. From
May 1, 1999 through July 31, 1999 Casella acquired two additional waste
collection and transfer operations in transactions accounted for as poolings of
interests. Under the rules governing poolings of interest, the prior period and
year to date financial statements of Casella have been restated for all prior
years to reflect the financial position, results of operations and cash flows of
the merged entities as if they had been one company for all periods presented in
the accompanying financial statements.

GENERAL

Casella's revenues are attributable primarily to fees charged to customers
for solid waste collection, disposal, transfer and recycling services. Casella
derives a substantial portion of its collection revenues from commercial,
industrial and municipal services that are generally performed under service
agreements or pursuant to contracts with municipalities. The majority of
Casella's residential collection services are performed on a subscription basis
with individual households. Landfill and transfer customers are charged a
tipping fee on a per ton basis for disposing of their solid waste at Casella's
disposal facilities and transfer stations. The majority of Casella's landfill
and transfer customers are under one-year to ten-year disposal contracts, with
most having clauses for annual cost of living increases. Recycling revenues
consist of revenues from the sale of recyclable commodities and from the sale of
tire derived fuel. Other revenues consist primarily of revenue from waste tire
tipping fees, and septic/liquid waste operations. Casella's revenues are shown
net of intercompany eliminations. Casella typically establishes its intercompany
transfer pricing based upon prevailing market rates.

The table below shows, for the periods indicated, the percentage of
Casella's revenues attributable to services provided. The increase in Casella's
collection revenues as a percentage of revenues for the fiscal years ended
April 30, 1998 and 1999 is primarily attributable to the impact of Casella's
acquisition of collection businesses during these periods, as well as to
internal growth through price and business volume increases. The decrease in
Casella's landfill revenues and in Casella's transfer revenues as a percentage
of revenues for the fiscal years ended April 30, 1998 and fiscal 1999 is mainly
due to a

83

proportionately greater increase in collection and other revenues occurring as
the result of acquisitions in those areas; also, as Casella acquires collection
businesses from which it previously had derived transfer or disposal revenues,
the acquired revenues are recorded by Casella as collection revenues. The
decrease in Casella's collection revenues as a percentage of revenues and the
increase of Casella's landfill revenues as a percentage of revenues for the
three months ended July 31, 1999 is primarily attributable to the impact of
Casella's acquisition of Hyland Landfill during the first quarter of fiscal 1999
plus the increased utilization of its North Country Landfill in Bethlehem, New
Hampshire during the first quarter of fiscal 2000. The increase in transfer
revenues as a percentage of revenues for the three months ended July 31, 1999 is
mainly due to the acquisition of transfer station operations in the prior fiscal
year. The increase in recycling revenues for the three months ended July 31,
1999 is due primarily to increased volumes with additional increased prices
received from the sale of recycled commodities. The increase in liquid waste and
other revenues as a percentage of revenues for the three months ended July 31,
1999 is primarily due to the impact of acquisitions of septic/liquid waste
operations since the first quarter of fiscal 1999.

% OF REVENUES

THREE MONTHS
YEAR ENDED APRIL 30,                  ENDED JULY 31,
------------------------------------      ----------------------
1997          1998          1999          1998          1999
--------      --------      --------      --------      --------

Collection..........................................    76.4%         77.7%         80.5%         77.6%         71.2%

Landfill............................................    12.0          10.3           8.4           7.6           9.5

Transfer............................................     5.1           4.9           4.6           6.3           8.7

Recycling...........................................     5.5           5.5           5.9           5.3           6.1

Liquid Waste and Other..............................     1.0           1.6           0.6           3.2           4.5
-----         -----         -----         -----         -----

Total Revenues......................................   100.0%        100.0%        100.0%        100.0%        100.0%
=====         =====         =====         =====         =====

Cost of operations includes labor, tipping fees paid to third party disposal
facilities, fuel, maintenance and repair of vehicles and equipment, worker's
compensation and vehicle insurance, the cost of purchasing materials to be
recycled, third party transportation expense, district and state taxes, host
community fees and royalties. Landfill operating expenses also include a
provision for closure and post-closure expenditures anticipated to be incurred
in the future, and leachate treatment and disposal costs.

General and administrative expenses include management, clerical and
administrative compensation and overhead, professional services and costs
associated with Casella's marketing and sales force and community relations
expense.

Depreciation and amortization expense includes depreciation of fixed assets
over the estimated useful lives of the assets using the straight line method,
amortization of landfill airspace assets under the units-of-production method,
and the amortization of goodwill and other intangible assets using the straight
line method. The amount of landfill amortization expense related to airspace
consumption can vary materially from landfill to landfill depending upon the
purchase price and landfill site and cell development costs. Casella depreciates
all fixed and intangible assets, excluding non-depreciable land, down to a $0
net book value, and does not apply a salvage value to any of its fixed assets.

Certain direct landfill development costs, such as engineering, permitting,
legal, construction and other costs directly associated with expansion of
existing landfills, are capitalized by Casella. Additionally, Casella also
capitalizes certain third party expenditures related to pending acquisitions,

84

such as legal and engineering. Casella will have material financial obligations
relating to closure and post-closure costs of its existing landfills and any
disposal facilities which it may own or operate in the future. Casella has
provided and will in the future provide accruals for future financial
obligations relating to closure and post-closure costs of its landfills
(generally for a term of 30 years after final closure of a landfill) based on
engineering estimates of consumption of permitted landfill airspace over the
useful life of any such landfill. There can be no assurance that Casella's
financial obligations for closure or post-closure costs will not exceed the
amount accrued and reserved or amounts otherwise receivable pursuant to trust
funds. Casella routinely evaluates all such capitalized costs, and expenses
those costs related to projects not likely to be successful. Internal and
indirect landfill development and acquisition costs, such as executive and
corporate overhead, public relations and other corporate services, are expensed
as incurred.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage
relationship that certain items from Casella's Consolidated Financial Statements
bear in relation to revenues.

% OF REVENUES

THREE MONTHS
YEAR ENDED APRIL 30,                  ENDED JULY 31,
------------------------------------      ----------------------
1997          1998          1999          1998          1999
--------      --------      --------      --------      --------

Revenues............................................   100.0%        100.0%        100.0%        100.0%        100.0%

Cost of operations..................................    63.3          62.3          59.7          60.6          56.2

General and administrative..........................    15.6          14.6          14.7          14.2          14.2

Merger related costs................................     0.0           0.2           1.1           0.0           2.7

Depreciation and amortization.......................    14.8          13.9          14.1          13.1          13.9

Loss on impairment of long-lived assets.............     0.0           1.1           0.0           0.0           0.0
-----         -----         -----         -----         -----

Operating income....................................     6.3           7.9          10.4          12.1          13.0

Interest expense, net...............................     4.7           5.1           3.0           4.2           2.9

Other (income) expenses, net........................     0.8          (0.2)         (0.2)        (0.6)         (0.1)

Provision for income taxes..........................     0.7           1.7           4.0           3.7           4.7
-----         -----         -----         -----         -----

Net income (loss)...................................     0.1           1.3           3.6           4.8           5.5
=====         =====         =====         =====         =====

Adjusted EBITDA*....................................    21.2%         22.9%         24.6%         25.1%         26.9%
=====         =====         =====         =====         =====

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

*   See discussion and computation of adjusted EBITDA below.

THREE MONTHS ENDED JULY 31, 1999 VERSUS JULY 31, 1998

REVENUES.  Revenues increased $9.9 million, or 22.2%, to $55.0 million in
the quarter ended July 31, 1999 from $45.1 in the quarter ended July 31, 1998.
Of this increase, $5.7 million of the growth was due to the impact of businesses
acquired during fiscal year 1999 and during the first quarter of the current
fiscal year. The balance of the increase was due to internal volume and price
growth.

COST OF OPERATIONS.  Cost of operations increased approximately
$3.6 million, or 13.2%, to $30.9 million in the quarter ended July 31, 1999 from
$27.3 million in the same quarter of the prior

85

fiscal year. Cost of operations as a percentage of revenues decreased to 56.2%
in the quarter ended July 31, 1999 from 60.6% in the same quarter of the prior
fiscal year. The decrease was primarily the result of: (i) productivity
improvements in Casella's collection operations as a result of better route
density from acquisitions, routing efficiencies through route audits and
front-end loader vehicle conversions completed throughout fiscal 1999; and
(ii) margin improvements because of price increases in fiscal 1999 and the first
quarter of fiscal year 2000.

GENERAL AND ADMINISTRATIVE.  General and administrative expenses increased
approximately $1.4 million, or 21.9%, to $7.8 million in the quarter ended
January 31, 1999 from $6.4 million in the same quarter of the prior fiscal year.
General and Administrative expenses as a percentage of revenues have remained
approximately level in the periods under discussion.

MERGER COSTS.  The merger related costs of $1.5 million recorded in the
quarter ended July 31, 1999 were incurred in association with the Resource Waste
Systems, Inc. and Corning Community Disposal, Inc. mergers accounted for as
poolings of interests.

DEPRECIATION AND AMORTIZATION.  Depreciation and amortization expense
increased $1.7 million, or 28.8%, to $7.6 million in the quarter ended July 31,
1999 from $5.9 million in the same quarter of the prior fiscal year.
Depreciation and amortization as a percentage of revenues increased to 13.9% in
the quarter ended July 31, 1999 from 13.1% in the same quarter of the prior
fiscal year. The increase in depreciation and amortization is due to the
increased concentration of revenues in landfill activities, which typically have
higher depreciation and amortization charges relative to revenues compared to
hauling revenues.

INTEREST EXPENSE, NET.  Net interest expense decreased approximately $0.3
million, or 15.8% to $1.6 million in the quarter ended July 31, 1999 from $1.9
million in the same quarter of the prior fiscal year. This decrease primarily
reflects the reduction of the outstanding balance under Casella's acquisition
line of credit and other notes payable from the proceeds of Casella's public
stock offering in July, 1998.

OTHER (INCOME) EXPENSE, NET.  Net other (income) expense has not
historically been material to Casella's results of operations.

PROVISION FOR INCOME TAXES.  Provision for income taxes increased
approximately $0.9 million to $2.6 million in the quarter ended July 31, 1999
from $1.7 million in the same quarter of the prior fiscal year. This increase
reflects Casella's increase in profits in the quarter ended July 31, 1999 over
the same quarter in the prior fiscal year. The combined effective tax rate used
by Casella in recording taxes for interim periods has been increased from 44.1%
in the quarter ended July 31, 1998 to 46.0% in the same quarter of the current
fiscal year. This increase reflects the non-deductible merger expenses incurred
during the quarter ended July 31, 1999.

FISCAL YEAR ENDED APRIL 30, 1999 VERSUS APRIL 30, 1998

REVENUES.  Revenues increased $40.5 million, or 28.2%, to $184.2 million in
fiscal 1999 from $143.7 million in fiscal 1998. Approximately $28.6 million of
the increase was attributable to the impact of businesses acquired throughout
fiscal 1998 and fiscal 1999. In addition, approximately $11.9 million of the
increase was attributable to internal volume and price growth (net of the
negative impact of lower average recycled commodity processing in fiscal 1999
compared to fiscal 1998).

COST OF OPERATIONS.  Cost of operations increased approximately $20.4
million, or 22.8%, to $110.0 million in fiscal 1999 from $89.6 million in fiscal
1998, an increase corresponding primarily to Casella's revenue growth described
above. Cost of operations as a percentage of revenues decreased to 59.7% in
fiscal 1999 from 62.3% in fiscal 1998. The decrease was primarily the result of:
(i) productivity improvements in Casella's collection operations as a result of
better route density from acquisitions,

86

routing efficiencies through route audits and front-end loader vehicle
conversions completed throughout fiscal 1998 and 1999; (ii) margin improvements
because of price increases in fiscal 1998 and 1999 and (iii) higher landfill
internalization due to the Hyland landfill becoming operational in July, 1998.

GENERAL AND ADMINISTRATIVE.  General and administrative expenses increased
approximately $6.1 million, or 29.2%, to $27.0 million in fiscal 1999 from $20.9
million in fiscal 1998. General and administrative expenses as a percentage of
revenues increased to 14.7% in fiscal 1999 from 14.6% in fiscal 1998 due
primarily to an increase in management information systems spending and public
company expenditures for a full year in fiscal 1999 compared to a partial year
in fiscal 1998.

MERGER-RELATED COSTS.  Merger-related costs consists of legal, engineering,
accounting and other costs associated with the various poolings of interests
consummated during fiscal 1998 and 1999. One such transaction occurred during
fiscal 1998 and five occurred fiscal 1999, resulting in an increase of $1.7
million or 567%. Merger-related costs as a percentage of revenue increased from
0.2% in fiscal 1998 to 1.1% in fiscal 1999.

DEPRECIATION AND AMORTIZATION.  Depreciation and amortization expense
increased $5.9 million, or 29.5%, to $25.9 million in fiscal 1999 from $20.0
million in fiscal 1998. As a percentage of revenues, depreciation and
amortization expense increased to 14.1% in fiscal 1999 from 13.9% in fiscal
1998. The increase in depreciation and amortization expense as a percentage of
revenues was primarily the result of: (i) higher rates of disposal
internalization due to the opening of the Hyland landfill, (ii) higher landfill
volumes in fiscal 1999 compared to fiscal 1998, resulting in higher landfill
amortization expense, and (iii) front end loader conversions resulting in double
container depreciation charges at certain locations.

LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS.  Casella recognized losses on
impairment of long-lived assets in the fourth quarter of fiscal 1998 in the
amount of $1.6 million. The impairment charges were non-cash charges to write
down the assets of Casella's waste tire processing facility in Eliot, Maine and
the Grasslands composting facility in Malone, New York to their fair market
values as of April 30, 1998.

INTEREST EXPENSE, NET.  Net interest expense decreased approximately $1.8
million, or 24.3% to $5.6 million in fiscal 1999 from $7.4 million in fiscal
1998. This decrease primarily reflects decreased average indebtedness in fiscal
1999, resulting from debt payoffs following the public stock offerings in
October 1997 and July 1998, from the increased use of Casella's Class A common
stock in effecting acquisitions, and from improved collections efforts. Days
sales in accounts receivable was 45.3 at April 30, 1999 compared to 50.3 at
April 30, 1998. Casella capitalized a total of $0.5 million in interest expense
in fiscal 1999, compared to a total of $0.1 million in fiscal 1998.

OTHER (INCOME) EXPENSE, NET.  Net other (income) expense was not material to
Casella's results of operations in fiscal 1998 and 1999.

PROVISION FOR INCOME TAXES.  Provision for income taxes increased
approximately $5.0 million, or 199.2%, to $7.5 million in fiscal 1999 from $2.5
million in fiscal 1998. This increase reflects Casella's increase in
profitability in fiscal 1999 compared to fiscal 1998. Among the factors causing
income tax expense as a percentage of pre-tax net income to vary materially from
year to year are: (i) the recording of a fixed asset impairment charge in fiscal
1998 which was non-deductible for income tax purposes, and (ii) poolings of
interest resulting in prior period restatements of entities not liable for
federal income tax due to subchapter S status.

87

FISCAL YEAR ENDED APRIL 30, 1998 VERSUS APRIL 30, 1997

REVENUES.  Revenues increased $40.2 million, or 38.8%, to $143.7 million in
fiscal 1998 from $103.5 million in fiscal 1997. Approximately $36.0 million of
the increase was attributable to the impact of businesses acquired throughout
fiscal 1997 and fiscal 1998. In addition, approximately $3.8 million of the
increase was attributable to internal volume and price growth. The balance of
the increase of approximately $400,000 was due to higher average recyclable
commodity prices in fiscal 1998 compared to fiscal 1997.

COST OF OPERATIONS.  Cost of operations increased $24.1 million, or 36.8%,
to $89.6 million in fiscal 1998 from $65.5 million in fiscal 1997, an increase
corresponding primarily to Casella's revenue growth described above. Cost of
operations as a percentage of revenues decreased to 62.3% in fiscal 1998 from
63.3% in fiscal 1997. The decrease was primarily the result of:
(i) productivity improvements in Casella's collection operations as a result of
better route density from acquisitions, routing efficiencies through route
audits and front-end loader vehicle conversions completed throughout fiscal
1998, and (ii) margin improvements because of price increases in fiscal 1998.

GENERAL AND ADMINISTRATIVE.  General and administrative expenses increased
approximately $4.8 million, or 29.8%, to $20.9 million in fiscal 1998 from $16.1
million in fiscal 1997. General and administrative expenses as a percentage of
revenues decreased to 14.6% in fiscal 1998 from 15.6% in fiscal 1997 due to
improved economies of scale related to the significant increase in revenues, and
operating enhancements made to certain acquired operations.

DEPRECIATION AND AMORTIZATION.  Depreciation and amortization expense
increased approximately $4.6 million, or 29.9%, to $20.0 million in fiscal 1998
compared to $15.4 million in fiscal 1997. As a percentage of revenues,
depreciation and amortization expense decreased to 13.9% during fiscal 1998 from
14.8% in fiscal 1997. The decrease in depreciation and amortization expense as a
percentage of revenues was primarily the result of an increase in Casella's
collection operations as a percentage of total revenues in fiscal 1998, which
generally have lower depreciation and amortization expenses than other
operations.

INTEREST EXPENSE, NET.  Net interest expense increased approximately $2.5
million, or 51.0%, to $7.4 million in fiscal 1998 from $4.9 million in fiscal
1997. This increase primarily reflects increased indebtedness incurred in
connection with acquisitions and capital expenditures.

OTHER (INCOME) EXPENSE.  Other (income) expense has not historically been
material to Casella's results of operations. However, during fiscal 1997,
Casella established a reserve of $650,000 related to a lawsuit that was settled
for $450,000 in the first quarter of fiscal 1998. Casella also paid $200,000 in
attorneys' fees in connection with such settlement. Additionally, Casella wrote
off $283,000 for recycling facility assets that were deemed to have no value in
the year ended April 30, 1997.

PROVISION FOR INCOME TAXES.  Provision for income taxes increased
approximately $1.8 million, or 257%, to $2.5 million in fiscal 1998 from
$0.7 million in fiscal 1997. Among the factors causing income tax expense as a
percentage of pre-tax net income to vary materially from year to year are:
(i) the recording of a fixed asset impairment charge in fiscal 1998 which was
non-deductible for income tax purposes and (ii) poolings of interest resulting
in prior period restatements of entities not liable for federal income due to
subchapter S status.

LIQUIDITY AND CAPITAL RESOURCES

Casella's business is capital intensive. Casella's capital requirements
include acquisitions, fixed asset purchases and capital expenditures for
landfill development, cell construction, and site and cell closure. Casella had
positive net working capital of $3.3 million at April 30, 1999 and $9.5 million
at July 31, 1999, compared to $4.2 million positive net working capital at April
30, 1998.

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Casella has a $150 million revolving line of credit with a group of banks
for which BankBoston, N.A. is acting as agent. This line of credit is secured by
all assets of Casella, including Casella's interest in the equity securities of
its subsidiaries. Subject to the following paragraph, this revolving line of
credit matures in January, 2003. Funds available to Casella under the line of
credit were $77.7 million at April 30, 1999 and $55.6 million at July 31, 1999.

In connection with the merger with KTI, Casella will be required to replace
its existing credit facility. Although Casella is in the process of negotiating
a new credit facility, there can be no assurance that it will obtain such a
credit facility in the amount, or on the timetable, sought by Casella. In the
event that it is unable to obtain a sufficient credit facility, Casella's
acquisition program, results of operations and financial condition would be
materially and adversely affected. If Casella were unable to obtain a new credit
facility, it will be unable to repay its existing credit facility and will be in
default.

In July 1998 Casella completed a follow-on public offering of 2,060,587
shares of its Class A Common Stock at $27.25 per share. In addition, as part of
this same offering, 1,470,580 shares of Casella's Class A Common Stock were sold
by certain selling shareholders at $27.25 per share. Casella's proceeds of the
offering, net of underwriters' discounts and issuance costs were $52,231,490.
The proceeds were used for debt reduction, acquisitions and other general
corporate purposes.

As part of the July 1998 public stock offering Casella registered an
additional 2,000,000 shares of its class A common stock as a `shelf'
registration. The intended use of these additional registered but unissued
shares is as an additional source of capital for Casella's acquisition policy.
As of July 31, 1999, 990,042 shares of Casella's class A common stock had been
issued pursuant to this registration statement.

Casella believes that its cash provided internally from operations together
with Casella's available credit facilities and anticipated new credit facility
should enable it to meet its needs for working capital for the next twelve
months. In addition, Casella also plans to file a new shelf registration
statement following the KTI merger for use in connection with its acquisition
program.

Net cash provided by operations was $9.2 million for the three months ended
July 31, 1999 compared to $13.3 million for the same period of the prior fiscal
year. The decrease was primarily due to the decrease in accounts payable and the
increase in accounts receivable due to the extensive growth, partially offset by
the increase in Casella's net income for the three months ended July 31, 1999
over the prior fiscal year, increased depreciation and amortization and
increased closure/post closure accruals.

Net cash provided by operations for the fiscal years ended April 30, 1999
and April 30, 1998 was $39.6 million and $21.1 million, respectively. The
increase was primarily due to the increase in Casella's net income for the 1999
fiscal year, together with an increase in depreciation and amortization and an
increase in Casella's accrued closure and post closure costs. The increase in
the closure/post closure accrual is due to the completion in the 1998 fiscal
year of work required to close an unlined cell at the Clinton County landfill
and at stage one of Casella's NCES landfill.

Net cash provided by operations in fiscal 1998 increased to $21.1 million
from $17.3 million in fiscal 1997 primarily due to increases in net income,
depreciation and amortization, asset impairment charges and deferred income tax
provisions, offset by decreases in accrued closure/post closure costs and in
Casella's working capital.

Cash used in investing activities decreased $0.1 million from $19.8 million
to $19.7 million in the three months ended July 31, 1999 over the same period of
the prior fiscal year. The decrease in investing activities reflects fewer
acquisitions for the quarter ended July 31, 1999 accounted for as purchases,
offset by capital expenditures. For fiscal 1999 and fiscal 1998, cash used in
investing activities was $98.0 million and $61.3 million, respectively. The
increase in investing activities reflected Casella's capital expenditure and
capital needs for acquisitions. Casella's cash needs to fund investing
activities

89

are expected to increase further as Casella continues to complete acquisitions
and continues to expend capital in order to service internal growth.

Net cash provided by financing activities was $11.2 million in the three
months ended July 31, 1999 compared to $7.2 million for the same period of the
prior year. The net cash provided by financing activities in the three months
ended July 31, 1999 reflects the borrowings on Casella's credit facility, offset
by repayments. Net cash provided by financing activities in the comparable
period of the prior year reflects the net proceeds of the follow-on offering and
borrowings on Casella's credit facility, offset by repayments.

For fiscal 1999 and fiscal 1998, Casella's financing activities provided
cash of $59.3 million and $40.7 million, respectively. Net cash provided by
financing activities was $40.1 million in the fiscal year ended April 30, 1997.
The net cash provided by financing activities in the fiscal years ended
April 30, 1999 and 1998 primarily reflects the net proceeds of the public stock
offerings and borrowings on Casella's credit facility, offset by repayments. Net
cash provided by financing activities in fiscal 1997 reflects primarily bank
borrowings and seller subordinated notes, less principal payments on debt.

SEASONALITY

Casella's revenues have historically been lower during the months of
November through March. This seasonality reflects the lower volume of waste
during the late fall, winter and early spring months primarily because: (i) the
volume of waste relating to construction and demolition activities decreases
substantially during the winter months in the northeastern United States; and
(ii) decreased tourism in Vermont, Maine and eastern New York during the winter
months tends to lower the volume of waste generated by commercial and restaurant
customers, which is partially offset by the winter ski industry. Since certain
of Casella's operating and fixed costs remain constant throughout the fiscal
year, operating income results are therefore impacted by a similar seasonality.
In addition, particularly harsh weather conditions could result in increased
operating costs to certain of Casella's operations.

Casella's quarterly revenues and operating results have varied significantly
in the past and are likely to vary substantially from quarter to quarter in the
future. Casella establishes its expenditure levels based on its expectations as
to future revenues, and, if revenue levels are below expectations, expenses can
be disproportionately high. Due to a variety of factors including general
economic conditions, governmental regulatory action, acquisitions, capital
expenditures and other costs related to the expansion of operations and services
and pricing changes, it is possible that in some future quarter, Casella's
operating results will be below the expectations of public market analysts and
investors. In such events, Casella's Class A Common Stock price would likely be
materially and adversely affected.

INFLATION AND PREVAILING ECONOMIC CONDITIONS

To date, inflation has not had a significant impact on Casella's operations.
Consistent with industry practice, most of Casella's contracts provide for a
pass through of certain costs, including increases in landfill tipping fees and,
in some cases, fuel costs. Casella therefore believes it should be able to
implement price increases sufficient to offset most cost increases resulting
from inflation. However, competitive factors may require Casella to absorb at
least a portion of these cost increases, particularly during periods of high
inflation.

Casella's business is located in the northeastern United States. Therefore,
Casella's business, financial condition and results of operations are
susceptible to downturns in the general economy in this geographic region and
other factors affecting the region such as state regulations and severe weather
conditions. Casella is unable to forecast or determine the timing and/or the
future impact of a sustained economic slowdown.

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YEAR 2000 ISSUES

The approach of the year 2000 has raised concerns about the ability of
information technology systems and non-information technology systems, primarily
computer software programs, to properly recognize and process date-sensitive
information with respect to the Year 2000.

Casella has undertaken a Year 2000 project, comprised of four phases, to
address these concerns. Phase one, which has been completed, consisted of
awareness, Year 2000 planning, preparing a written plan, management approval and
support. Phase two involved the evaluation of all significant systems and
equipment, including hardware, software, security and voice mail, with respect
to Year 2000 compliance. Phase two was completed on June 30, 1999. Phase three
involved addressing deficiencies identified in Phase two, which was completed on
July 31, 1999. Phase four involves the validation and testing of all systems and
equipment, and the anticipated completion date is September 30, 1999. Casella
has performed, and continues to perform routine updates of all software and
hardware systems to facilitate Year 2000 compliance.

Casella has completed numerous acquisitions in recent months, and the
information systems of a limited number of these acquired operations have not
yet been fully integrated with Casella's information systems. This integration
of the completed acquisitions is expected to occur by October 31, 1999. Casella
continues to make acquisitions as an integral component of its growth strategy.
There is no assurance that the information systems of all acquired operations,
particularly those acquisitions completed in the latter portion of calendar
1999, will be Year 2000 compliant by December 31, 1999.

Casella uses well-regarded nationally known software vendors for both its
general accounting applications and industry-specific customer information and
billing systems, and all internal productivity software. Casella has been
informed by the respective vendors that all application software is fully Year
2000 compliant.

Casella's banking arrangement is with an international banking institution
which has informed Casella that it is taking all necessary steps to insure its
customers uninterrupted service throughout applicable Year 2000 time frames.
Casella's payroll is out-sourced by the largest provider of third-party payroll
services in the country, which has made a commitment of uninterrupted service to
their customers throughout applicable Year 2000 time frames.

Casella is currently in the process of replacing older personal computers
and servers. There are two servers and 25 additional personal computers that
will be replaced, 16 of which will be for the weight-measurement systems. The
two servers were replaced during the first quarter of fiscal 2000 (ending
July 31, 1999). Casella has acquired a weight-measurement system which it has
been informed is Year 2000 compliant. Currently six beta sites are operational
and Casella is in the process of defining the implementation plan for other
sites. During the implementation, all non Year 2000 compliant hardware is
expected to be replaced.

Casella currently plans a final testing of all systems in the second quarter
of fiscal 2000 (ending October 31, 1999) and expects to be fully Year 2000
compliant by the end of that fiscal quarter.

Casella has expended approximately $1.5 million dollars over the last
eighteen months to address hardware and software-related Year 2000 compliance
issues, principally through the implementation of a new frame network system. A
portion of this investment is attributable to integrating information systems of
companies that Casella has acquired. Casella will use funds from current
operations or Casella's line of credit to meet Year 2000 remediation expenses.

No single customer represents more than one percent of Casella's revenues,
and we do not expect any material adverse effect on Casella's revenues in the
event an individual customer experiences Year 2000 problems.

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In addition, Casella does not believe the Year 2000 noncompliance of
Casella's suppliers of goods and services, other than as specifically discussed
above, would have a material adverse effect on Casella's revenues and results of
operations. Accordingly, Casella has not sought assurances of Year 2000
compliance from these other vendors.

Casella expects to begin its evaluation of its most reasonably likely worst
case scenarios with respect to the Year 2000 in the third quarter of fiscal
2000. Based upon the results of that evaluation, Casella may develop an
appropriate contingency plan.

ADJUSTED EBITDA

Adjusted EBITDA represents operating income (earnings before interest and
taxes, or "EBIT") plus depreciation and amortization expense and loss on
impairment of long-lived assets. Adjusted EBITDA is not a measure of financial
performance under generally accepted accounting principles, but is provided
because Casella understands that certain investors use this information when
analyzing the financial position and performance of Casella.

FISCAL YEAR   THREE MONTHS
ENDED         ENDED
APRIL 30,      JULY 31,
1999           1999
-----------   ------------
RESTATED (IN THOUSANDS)

Operating income............................................    $19,345        $ 7,180

Depreciation and amortization...............................     25,899          7,622

Loss on impairment of long-lived assets (1).................         --             --
-------        -------

Adjusted EBITDA.............................................    $45,244        $14,802
=======        =======

Adjusted EBITDA as a percentage of revenues.................       24.6%          26.9%

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

(1) See Note 2 of Notes to Consolidated Financial Statements.

Analysis of the factors contributing to the change in EBITDA is included in
the discussions above.

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KTI

COMPANY OVERVIEW

KTI was incorporated in New Jersey in 1985. KTI is a holding company that
owns substantially all of its operating assets through corporate and partnership
subsidiaries. KTI's operations include majority-owned consolidated subsidiaries
and wholly-owned consolidated subsidiaries.

MAJORITY-OWNED CONSOLIDATED SUBSIDIARIES   WHOLLY-OWNED SUBSIDIARIES
- Maine Energy Recovery Company, Limited   - Timber Energy Resources, Inc.
Partnership                              - K-C International, Ltd.
- American Ash Recycling of Tennessee,     - Manner Resins, Inc.
Ltd.
- Penobscot Energy Recovery Company,       - Data Destruction Services, Inc.
Limited Partnership                      - KTI Recycling of New Jersey, Inc.
- KTI Recycling of New England, Inc.
- KTI Specialty Waste Services, Inc.
- FCR, Inc.
- KTI New Jersey Fibers, Inc.
- KTI Energy of Virginia, Inc. (also referred
to as "Multitrade Group, Inc." or
"Multitrade")

KTI provides integrated waste handling services, including processing and
recycling of wood, paper, metals, plastic and glass, municipal solid waste
processing and disposal, specialty waste disposal, ash residue recycling and the
manufacturing of finished products using recyclable materials. KTI's business
emphasizes the use of low-cost processing to add value to the waste products
delivered and, in some cases, the generation of electric power and steam.

KTI operates its business under four reportable segments:

- waste-to-energy;

- residential recycling;

- commercial recycling; and

- finished products.

Each reportable segment is a business unit that offers different products or
services. Each is managed separately and provides distinct products or services
using different production facilities.

The waste-to-energy segment consists of the operations of the following:

- Maine Energy Recovery Company;

- Penobscot Energy Recovery Company;

- Timber Energy Resource's two facilities;

- Speciality Waste;

- American Ash Recycling;

- KTI BioFuels, Inc.;

- Total Waste Management Corporation (acquired January 1998);

- Multitrade Group, Inc. (acquired June 1998);

- Russell Stull (acquired October 1998); and

- KTI Recycling of Canada (acquired November 1998).

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The residential recycling segment consists of the eighteen facilities that
process and market recyclable materials under long-term contracts with
municipalities and commercial customers which KTI acquired as part of the
acquisition of FCR in August 1998. In addition, the Boston recycling plants
acquired in 1997 are included in this segment.

The commercial recycling segment consists of the operations of the
following:

- K-C International (acquired September 1997);

- KTI Recycling of New Jersey;

- KTI Recycling of New England; and

- KTI New Jersey Fibers, which consists of the operations of the following:

- Gaccione Bros., Inc. & Co. and PGC Corporation (collectively,
"Gaccione") (acquired August 1998); and

- Atlantic Coast Fibers, Inc. (acquired August 1998).

These operations process and market paper fibers obtained from commercial
customers and broker paper fibers for KTI's processing facilities and external
customers.

The finished products segment consists of the operations of the following:

- Power Ship Transport;

- Manner (acquired November 1996);

- the cellulose insulation plants and the plastic reprocessing plants
acquired with FCR;

- the plastic reprocessing operations of First State Recycling, Inc.
(acquired August 1998); and

- the glass pellet processor Seaglass, Inc. (formed in February 1998 and 80%
owned by KTI).

These operations manufacture or distribute finished products that use recyclable
materials as their primary raw material.

KTI evaluates performance and allocates resources based on profit or loss
from operations before interest and income taxes. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies section of the KTI financial statements. KTI
records intersegment sales at cost plus an agreed-upon profit. Please refer to
the segment reporting information in KTI's notes to consolidated financial
statements.

WASTE-TO-ENERGY SEGMENT

KTI developed and currently owns majority interests in two waste-to-energy
facilities in Maine. The first facility is an 83.75% owned subsidiary, Maine
Energy, a Maine limited partnership, which is located in Biddeford, Maine. The
other facility is a 70.04% owned subsidiary, Penobscot, a Maine limited
partnership, located in Orrington, Maine. These two facilities use non-hazardous
solid waste from residential, commercial and industrial sources as their source
of fuel.

A third facility, part of Timber Energy Resources, located in Telogia,
Florida, uses biomass waste as its source of fuel to be combusted for the
production of electricity for sale to the local electric utility. KTI also
operates two wood processing facilities, BioFuels in Lewiston, Maine and Timber
Chip, also a part of Timber Energy Resources, in Cairo, Georgia.

Total Waste Management operates an emergency response and hazardous waste
site assessment and clean-up business. In addition, it also provides hazardous
and non-hazardous waste management in the New England area.

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Multitrade owns or operates three waste-to-energy facilities in
Martinsville, Virginia. These facilities use biomass and coal to produce steam
for sale to industrial users under long-term contracts.

Russell Stull is a commercial hauler of non-hazardous waste in the state of
Maine, with revenues of approximately $2.5 million in 1997.

KTI Recycling of Canada produces crumb rubber from used tires using a
proprietary cryogenic technology in a plant in Ontario.

On December 28, 1998, the bankruptcy court in Delaware approved a Plan of
Reorganization, which provided for KTI, on the one hand, and Grace
Brothers, Ltd. and SC Fundamental Investments L.P., the majority bond holders of
the Ford Heights, Illinois Waste Tire to Energy project, on the other hand, each
to own 50% of New Heights Recovery & Power, LLC and its facility, which was
built in 1996 at a cost of approximately $110 million for the purpose of
combusting waste rubber to produce electricity. The bondholders converted
$80 million in bonds and other claims into equity in New Heights, and KTI
committed to investing up to $17 million in equity for working capital and
retrofitting and upgrading of the facility.

KTI holds a 35% stake in Oakhurst Company Inc., which owns two distributors
in the automotive aftermarket. KTI has assigned its interest in and obligations
to New Heights to Oakhurst and agreed to assign KTI Recycling of Canada's
proprietary cryogenic rubber technology to Oakhurst, for use at the New Heights
facility. In return, Oakhurst agreed to purchase an unspecified number of crumb
rubber systems and entered into a royalty agreement with KTI to pay $0.0075
cents per tire processed by Oakhurst using these crumb rubber systems. Oakhurst
also agreed to engage a subsidiary of KTI to be the operating manager of New
Heights and to pay the subsidiary of KTI management fees for each facility
operated.

KTI has completed the acquisition of AFA Group, Inc., which is now
integrated into its business.

KTI also owns a 60% limited partnership interest in American Ash Recycling,
a limited partnership that operates a permitted municipal waste combustor ash
recycling facility in Nashville, Tennessee. This facility, which commenced
operations in 1993, is the first commercially operational municipal waste
combustor ash recycling facility in the United States.

The waste-to-energy segment also engages in other waste management and
processing activities, including commercial hauling, non-hazardous waste
management, ash recycling and tire recycling. These activities are complementary
extensions of the waste-to-energy facilities that enable KTI to provide a wider
range of services to customers and provide strategic opportunities for future
growth through vertical integration.

MAINE ENERGY POWER PURCHASE AGREEMENT

The electricity produced by the Maine Energy facility is sold to Central
Maine Power pursuant to the power purchase agreement with Central Maine. Central
Maine serves more than 490,000 customers in an 11,000 square mile service area
in central and southern Maine and purchases substantial amounts of power from
Canadian utilities as well as independent power producers such as Maine Energy.
In 1998, Maine Energy derived approximately $16.1 million, or 54.2% of its
revenues, from the sale of electricity to Central Maine.

In May 1996, Maine Energy restructured its agreement with Central Maine by
entering into a series of agreements with CL Power Sales One, L.L.C. and Central
Maine that provided for the purchase of Maine Energy's available power
generation capacity by CL Power Sales, and by amending the Central Maine
agreement. CL Power Sales made an initial payment of $85 million and agreed to
make additional quarterly payments through May 31, 2007 to Maine Energy as a
portion of the purchase price and for reimbursement to Maine Energy of certain
expenses. In consideration of its payments to Maine Energy, CL Power Sales was
assigned all rights to capacity from the Maine Energy

95

facility through May 31, 2007. In the restructuring, the term of the Central
Maine agreement was extended from May 31, 2007 to December 31, 2012. Under its
agreements, Maine Energy has agreed to sell energy to Central Maine through
May 31, 2007 at an initial rate of 7.18 cents per kilowatt-hour ("kWh"), which
escalates annually by 2%. From June 1, 2007 until the expiration date of the
Central Maine agreement, Maine Energy is to be paid market value for both its
energy and capacity by Central Maine.

Under the terms of the Central Maine restructuring, a $45.0 million letter
of credit was issued to Central Maine by ING (US) Capital Corporation.

- If, in any year, Maine Energy fails to produce 100,000,000 kWh of
electricity and Maine Energy does not have a force majeure defense, such
as physical damage to the plant and other similar events, Maine Energy
must pay approximately $3.8 million to Central Maine as liquidated
damages. This payment obligation is secured by the ING letter of credit.
In each year in which 100,000,000 kWh is produced, the balance of the ING
letter of credit is to be reduced by approximately $3.8 million.

- If, in any year, Maine Energy fails to produce 15,000,000 kWh of
electricity and Maine Energy does not have a force majeure defense, Maine
Energy must pay the then balance of the ING letter of credit to Central
Maine as liquidated damages.

In 1998, the 15,000,000 kWh test was met in February and the 100,000,000 kWh
test was met in August, resulting in a reduction of the amount of the ING letter
of credit by approximately $3.8 million. With respect to 1999, the 15,000,000
kWh test was met in February; however, Maine Energy's past performance is no
indication of its future performance.

MAINE ENERGY LONG-TERM WASTE HANDLING AGREEMENTS

Approximately 28% of the municipal solid waste provided to Maine Energy is
delivered pursuant to waste handling agreements with 18 charter municipalities
with terms expiring on June 30, 2007 or later. The agreements are substantially
similar in content except that:

- 16 charter municipalities are entitled to various concessions as a result
of having participated in the financial restructuring of Maine Energy in
1991; and

- the two "host" charter municipalities of Biddeford and Saco pay tipping
fees in the amount of one-half of those paid by the other charter
municipalities.

Approximately 9.4% of Maine Energy's total revenue in 1998 was attributable
to these long-term waste handling agreements.

Under the Maine Energy long-term waste handling agreements, each
municipality agrees to deliver acceptable waste to the Maine Energy facility in
an amount equal to its guaranteed annual tonnage. Maine Energy is required to
accept up to 110% of each municipality's guaranteed annual tonnage. A
municipality is required to pay to Maine Energy the tipping fee for the amount
of any shortfall from its guaranteed annual tonnage. As a corollary to the
"put-or-pay" delivery guarantee, each municipality enacted a flow control
ordinance pursuant to Maine law that designates the Maine Energy facility as the
exclusive disposal or reclamation facility to which all acceptable waste
generated within the municipality must be delivered regardless of which entity
picks up waste in such municipality. See "Governmental Regulations--Flow
Control." Each municipality has the right, once a year, to terminate its
long-term waste handling agreement on one year's prior notice.

PENOBSCOT POWER PURCHASE AGREEMENT

The Penobscot facility sells the electricity it produces to Bangor Hydro
under a power purchase agreement. Bangor Hydro serves approximately 97,000
customers in a 4,900 square mile service area in

96

portions of the counties of Penobscot, Hancock, Washington, Waldo, Piscataquis
and Aroostook, Maine. In 1998, Penobscot derived approximately $18.9 million, or
58.7% of its revenues, from the sale of electricity to Bangor Hydro.

On June 26, 1998 the Bangor Hydro agreement was restructured. Under the
terms of the new power purchase agreement, Bangor Hydro agreed to purchase all
the electricity generated by the Penobscot facility up to 25 megawatts (the
practical limit of the facility's equipment) through 2018. Under the agreement,
Penobscot is required to deliver at least 105,000,000 kWh to Bangor Hydro in any
calendar year. If Penobscot fails to deliver this output, Penobscot must pay
Bangor Hydro $4,000 for each 1,000,000 kWh that the deliveries fall below
105,000,000 kWh. The restructured power purchase agreement did not change this
delivery obligation.

PENOBSCOT LONG-TERM WASTE HANDLING AGREEMENTS

As of December 31, 1998, Penobscot had in place 130 long-term waste handling
agreements, of which 85 cover approximately 200 charter municipalities with
terms expiring on March 31, 2018, unless terminated sooner, and all of which are
substantially similar in content. The agreements provide Penobscot with
approximately 195,000 tons per year of municipal solid waste. In addition,
Penobscot receives approximately 18,000 tons per year of municipal solid waste
from municipalities with whom Penobscot has short-term waste handling
agreements, 20,000 tons per year from commercial haulers and 30,000 tons per
year from the spot market. Total waste processing revenues of Penobscot in 1998
were approximately $13.7 million of which approximately 42.9% is attributable to
municipal solid waste received from charter municipalities.

The Penobscot long-term waste handling agreements with the charter
municipalities are substantially similar to the Maine Energy long-term waste
handling agreements, including the inclusion of guaranteed annual tonnages and
"put-or-pay" provisions and a variable tipping fee for "pass through" and change
in law costs. The performance credit received by each charter municipality may
be used to reduce future tipping fee payments at the option of the charter
municipalities in lieu of cash payment.

The amended waste disposal agreements generally provide that the charter
municipalities, Bangor Hydro, and partners in Penobscot would each receive
one-third of Penobscot's cash flows. Prior to this amendment, the municipalities
received one-half Penobscot's distributable cash. Based on Penobscot's cash
flow, distributable cash of approximately $4.6 million was payable for 1998 and
approximately $1.1 million for 1997. Of these amounts, approximately
$0.4 million as of December 31, 1998 and approximately $1.1 million as of
December 31, 1997 remained unpaid and was included in accrued expenses.

On one year's notice, a Penobscot charter municipality may terminate its
long-term waste handling agreement as of March 31, 2000 or March 31, 2002. If
the termination notices received from charter municipalities cause the aggregate
guaranteed annual tonnage of non-terminating municipalities to fall below
180,000 tons, Penobscot may elect to terminate all waste handling agreements
with charter municipalities. No charter municipality has given a termination
notice for March 31, 2000.

The waste disposal agreements permit the charter municipalities to:

- make equity contributions to Penobscot, only and to the extent of the
Municipal Review Committee's share of distributable cash from Penobscot
and one-half of the Bangor Hydro quarterly payment, of up to
$31.0 million, which will be used to prepay the outstanding municipal
bonds (if all $31.0 million is contributed the municipalities will own a
50% partnership interest in Penobscot);

- purchase all of the remaining Penobscot interests in 2018 at the then fair
market value, in lieu of the existing right to purchase Penobscot at its
then book value in 2004; and

- extend the term of the waste disposal agreements to 2018.

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TIMBER ENERGY RESOURCES POWER PURCHASE AGREEMENT

The Telogia facility sells the electricity that it generates to Florida
Power Corporation under a power purchase agreement with Florida Power. Florida
Power serves more than 1.3 million customers in a 20,000 square mile service
area in central and northern Florida. During 1998, approximately 81.6% of the
Telogia facility's revenue was derived from the sale of electricity to Florida
Power, with the majority of the remainder from tipping fees paid by third
parties. Under the power purchase agreement, Florida Power has agreed to
purchase all of the energy generated by the Telogia facility, except for the
energy consumed by the facility.

CUSTOMERS

Under the terms of their contracts, Maine Energy must sell all of the
electricity generated at its facilities to Central Maine, Timber Energy
Resources must sell all of its electricity to Florida Power and Penobscot must
sell all of its electricity to Bangor Hydro. The loss of these customers would
have a material adverse affect on the business and financial condition of KTI.

COMPETITION

KTI faces significant competition in each of its waste handling markets.
Maine Energy and Penobscot compete with landfills and several waste-to-energy
facilities and municipal incinerators in Maine and the New England region.

KTI believes that the refuse derived fuel technology employed by the Maine
Energy and Penobscot facilities compares favorably with the mass-burn technology
used by many other waste-to-energy facilities. In refuse derived fuel systems,
municipal solid waste is preprocessed to remove various non-combustible items
that are recycled or landfilled. This results in a significantly reduced volume
of ash residue, thereby lowering ultimate disposal costs, and is also
complementary to current recycling programs.

The Telogia facility competes for biomass fuel supply with paper companies
that employ on-site power generation. The Telogia facility is permitted to
combust 100% of tipping fee-based fuels. Competition for tipping fee based
material will come principally from landfills whose cost structure is believed
by KTI to be greater than that of the Telogia facility.

RAW MATERIALS

The raw material demands of the Penobscot facility currently are met mainly
by Penobscot's long-term waste handling agreements with approximately 200
municipalities in Maine. Penobscot received approximately 75% of its raw
materials in 1998 from these municipalities. Maine Energy received 28% of its
raw materials in 1998 from 18 Maine municipalities under long-term waste
handling agreements and the majority of the balance from commercial and private
waste haulers and municipalities with short-term contracts.

The Telogia facility uses biomass fuels that are a by-product of the paper
pulp woodchip industry as its raw material. KTI plans to supplement and replace
this raw material with tipping fee based biomass waste, such as construction and
demolition debris and non-recyclable paper products.

SEASONALITY

The municipal solid waste market in Maine Energy's and Penobscot's market
areas is seasonal, with one-third more municipal solid waste generated in the
summer months than is generated during the rest of the year.

98

EMPLOYEES

As of September 1, 1999, the waste-to-energy segment had a total of 457
full-time employees. The employees of the Penobscot facility and the Nashville
facility are not KTI employees. The employees of Maine Energy have elected to be
represented by the International Union of Operating Engineers. Negotiations to
enter into a collective bargaining agreement between Maine Energy and the union
began on September 1, 1999. KTI considers its employee relations to be good.

RESIDENTIAL RECYCLING SEGMENT

The residential recycling segment consists of eighteen facilities that
process and market recyclable materials under long-term contracts with
municipalities and commercial customers. The recyclable materials consist
principally of old newspapers, old corrugated containers, mixed paper and
commingled bottles and cans consisting of steel, aluminum, plastic and glass.

On August 28, 1998, KTI acquired the stock of FCR. FCR is a diversified
recycling company, headquartered in Charlotte, North Carolina that provides
residential and commercial recycling, processing and marketing services and
manufactures finished products, such as cellulose insulation, using recyclable
materials. FCR owns and operates seventeen material recycling facilities, six
cellulose insulation manufacturing facilities and three plastic reprocessing
facilities located in 12 states. The material recycling facilities are included
in the residential recycling segment while the insulation and plastic facilities
are in the finished products segment. The aggregate purchase price of
approximately $63.6 million consisted of 1,714,285 shares of KTI common stock
and approximately $31.1 million in cash.

A significant portion of the material provided to the residential recycling
segment is delivered pursuant to long-term contracts with municipal customers.
The contracts generally have a term of five to ten years and these contracts
expire at various times between 1999 and 2018. The terms of each of the
contracts vary but all the contracts provide that the municipality or a third
party deliver materials to KTI's facility. In approximately 41% of the
contracts, the municipalities agree to deliver a guaranteed tonnage and the
municipality pays a fee for the amount of any shortfall from the guaranteed
tonnage. Under the terms of the individual contracts, KTI pays or charges the
municipality a fee for each ton of material delivered. Some contracts contain
revenue sharing arrangements under which KTI pays the municipality a specified
percentage of the revenue from the sale of the recovered materials.

The residential recycling segment derives a significant portion of its
revenues from the sale of recyclable materials. The resale and purchase prices
of the recyclable materials, particularly newspaper, corrugated containers,
plastic, ferrous and aluminum metals, can fluctuate based upon market
conditions. KTI uses long-term supply contracts with customers with floor price
arrangements to reduce the commodity risk for certain recyclables, particularly
newspaper and aluminum metals. Under such contracts, KTI obtains a guaranteed
minimum price for the recyclable materials along with a commitment to receive
additional amounts if the current market price rises above the floor price. The
contracts are generally with large domestic companies that use the recyclable
materials in their manufacturing process. In 1998, 66% of the revenues from the
sale of recyclable materials of the residential recycling segment were derived
from sales under these long-term contracts.

COMPETITION

The residential recycling industry is highly competitive and requires
substantial capital resources and prior experience to bid on municipal
contracts. Competition is both national and regional in nature. Some of the
markets in which KTI competes are served by one or more of the large national
solid waste companies, such as Waste Management, BFI, Allied Waste and Republic
Services, as well as numerous regional and local competitors that offer
competitive prices and quality service.

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RAW MATERIALS

In 1998, the residential recycling segment received 74.2% of its material
under long-term agreements with municipalities. These contracts generally
provide that all recyclables collected from the municipal recycling programs be
delivered to a facility that is owned or operated by KTI. The quantity of
material delivered by these communities is dependent on the participation of
individual households in the recycling program.

SEASONALITY

The residential recycling segment experiences increased volumes of newspaper
in November and December due to increased newspaper advertising and retail
activity during the holiday season. Additionally, the facilities located in
Florida experience increased volumes of recyclable materials during the winter
months followed by decreases in the summer months in connection with seasonal
changes in population.

EMPLOYEES

As of September 1, 1999, the residential recycling segment had a total of
690 full-time employees. None of the residential recycling segment's employees
have collective bargaining agreements, and KTI considers its employee relations
to be good.

COMMERCIAL RECYCLING SEGMENT

The commercial recycling segment processes and markets paper fibers obtained
from commercial customers and brokers paper fibers for KTI's processing
facilities and external customers.

KTI has merged I. Zaitlin and Sons, Inc., a wholly-owned operating
subsidiary acquired in August 1997, into KTI Recycling of New England, which
remains as the surviving entity.

On June 4, 1999, KTI sold all of the operating assets of KTI Recycling of
Illinois, Inc. to a third party. KTI Recycling of Illinois operated a facility
located in Chicago, Illinois, which served the low-grade, post-consumer
recycling market.

COMPETITION

KTI's waste paper brokerage business and waste paper processing plants face
extensive competition. Principal attributes of these markets contributing to
such competition are industry-wide overcapacity and continual price pressures.

CUSTOMERS

The commercial recycling segment processing facilities provide recycling
services to:

- municipalities;

- commercial haulers; and

- commercial waste generators within the geographic proximity of the
processing facilities.

KTI acts as a broker of products, including recyclable material processed at
facilities operated by the residential and commercial recycling segments,
principally to paper and box board manufacturers in the United States, Canada,
Pacific Rim countries, Europe and South America.

RAW MATERIALS

The raw materials for KTI's commercial recycling segment generally come from
printers and publishing houses and other recyclers and haulers. The waste paper
brokered by KTI is generated

100

principally from the commercial recycling segment, the New England facility
within the residential recycling segment, from waste generators, and from third
party processors.

SEASONALITY

The commercial recycling segment experiences increased quantities of
newspaper and corrugated containers in November and December, followed by
reduced quantities in January, due to increased newspaper advertising and retail
activity during the holiday season.

EMPLOYEES

As of September 1, 1999, the commercial recycling segment had a total of 254
full time employees. The employees at KTI New Jersey Fibers in Passaic, New
Jersey are represented by the Laborers' International Union under three separate
collective bargaining agreements. The collective bargaining agreements expire on
dates ranging from February 2000 to November 2000. On July 30, 1999, a vote was
held among the employees of KTI Recycling of New Jersey to determine whether the
employees would be represented by the Laborer's International Union in the
collective bargaining process. The employees voted against representation by the
union, but there can be no assurance that the union will not challenge the
outcome of the vote or that, if challenged, the outcome will be upheld. KTI
considers its employee relations to be good.

FINISHED PRODUCTS SEGMENT

The finished products segment consists primarily of cellulose insulation
plants and plastic reprocessing plants.

INSULATION DIVISION

The insulation division manufactures cellulose insulation, which is
primarily used in the construction of manufactured housing and single family
residential homes. KTI believes it is the second largest producer of cellulose
insulation in the United States and operates six manufacturing facilities
located in Ronda, North Carolina; Tampa, Florida; Phoenix, Arizona; Clackamas,
Oregon; Delphos, Ohio; and Waco, Texas. KTI primarily sells the insulation
produced by the insulation division to the makers of manufactured housing and
insulation contractors throughout the country.

PLASTICS DIVISION

The plastics division is a reprocessor of high density polyethylene ("HDPE")
plastics collected primarily from residential recycling programs and industrial
suppliers. The plastics division obtains a majority of its raw materials from
the residential recycling segment. Until August 1998, the plastics division
operated three manufacturing facilities located in Reidsville, North Carolina;
Rockingham, North Carolina; and Hamlet, North Carolina. In August 1998, KTI
closed the Rockingham plant and relocated the equipment to Reidsville and
Hamlet.

The plastics division has a long-term contract with its largest customer
that expires on August 31, 2000. This contract requires the customer to purchase
a specified quantity of plastic at prices determined by a tolling formula
defined in the contract. Sales to this customer in 1998 represented 47.7% of the
net revenues of the plastics division (11% of total revenues of the finished
products segment). On December 23, 1998 KTI signed a long-term contract with
another significant customer.

COMPETITION

The insulation industry is highly competitive and requires substantial
capital and labor resources.

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- In its insulation manufacturing activities, KTI primarily competes with
manufacturers of fiberglass insulation such as Owens Corning, Certainteed
and Schuller International. The fiberglass insulation manufacturers
currently have a significant market share and are substantially better
capitalized than KTI.

- The largest producer of cellulose insulation is Louisiana Pacific, a large
building products manufacturer.

- KTI believes that it competes with cellulose and fiberglass insulation
manufacturers by charging competitive prices and offering a quality
product and excellent customer service support.

The plastics industry is highly competitive and requires substantial capital
investment in equipment.

- The plastics division's primary competition comes from other reprocessors
of recycled plastics, as well as suppliers of virgin HDPE resin. These
competitors have significantly greater financial and other resources than
KTI.

- The plastics division competes primarily by obtaining a guaranteed stream
of quality raw material from KTI's residential recycling segment. KTI
believes that it offers competitive pricing because the cost to reprocess
plastics requires a lower amount of investment in capital than the
manufacturing of virgin plastic resin and usually sells at a lower price
per pound. This enables the plastics division to obtain long-term supply
contracts with customers to ensure a consistent sales volume for its
facilities.

KTI also competes with several other recycled plastic brokers and direct
marketing from plastic recycling plants for post-industrial plastic scrap, and
with materials recovery facilities for post-consumer plastics. KTI believes that
it will continue to be competitive because of its knowledge of the plastic
recycling market and its reputation and relationship with its customers.

CUSTOMERS

The insulation division sells its products to manufacturers of manufactured
homes, insulation contractors, and retail home improvement stores throughout the
United States. The plastics division sells the majority of its products under
long-term contracts with two customers located adjacent to the KTI facility.

RAW MATERIALS

The primary raw material for the insulation division is newspaper collected
from residential recycling programs, including those operated by KTI's
residential recycling segment. In 1998, the insulation division purchased 9.1%
of the newspaper used by it from the residential recycling segment. It purchased
the remaining newspaper from municipalities, commercial haulers, and paper
brokers. The chemicals used to make the newspaper fire retardant are purchased
from industrial chemical manufacturers located in the United States and South
America.

The plastics division's primary raw materials are baled plastic containers
collected from residential recycling programs, such as those operated by KTI's
residential recycling segment, and ground material from industrial customers. In
1998, the plastics division purchased 53.0% of its raw material from KTI's
residential recycling facilities.

SEASONALITY

The insulation division experiences lower sales in November and December
because of lower production of manufactured housing due to holiday plant shut
downs.

EMPLOYEES

As of September 1, 1999, the finished products segment had a total of 319
full time employees. None of the finished product segment's employees have
collective bargaining agreements and KTI considers its employee relations to be
good.

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PROPERTIES

The following is a summary of the principal properties of KTI as of
September 1, 1999.

SQUARE
FACILITY                       TYPE                  LOCATION         FEET               STATUS
---------------------------  ---------------------------  ----------------   --------   ---------------------------

WASTE-TO-ENERGY
Maine Energy (majority       Power Generation             Biddeford, ME      137,000    Owned
owned)
Penobscot (majority owned)   Power Generation             Orrington, ME      177,000    Owned
Telogia Facility             Power Generation             Telogia, FL         73,000    Owned
Multitrade-Martinsville      Steam Generation             Martinsville, VA    24,000    Owned
Multitrade-Martinsville      Steam Generation             Martinsville, VA    11,000    Owned
Multitrade-Dupont            Steam Generation             Martinsville, VA     1,300    Lease expiring 2015
American Ash Recycling       Ash Recycling                Nashville, TN       15,000    Note 1
(majority owned)
Total Waste Management and   Waste Processing             Newington, NH        6,500    Owned
Specialty Waste
BioFuels                     Waste Processing             Lewiston, ME        14,700    Lease expiring 2015
Cairo Facility               Wood Processing              Cairo, GA            6,000    Owned
KTI Recycling of Canada      Tire Processing              Cambridge,          32,000    Owned
Ontario, Canada
Administrative               Office Space                 Saco, ME             5,800    Lease expiring 2003
AFA Group                    Mulch Processing             Newark, NJ          70,000    Lease expiring 2004
RESIDENTIAL RECYCLING
Boston Commercial Recycling  MRF                          Charlestown, MA     62,000    Lease expiring 2002
Plant
Boston Recycling Plant       MRF                          Charlestown, MA     75,000    Lease expiring 2002
Stratford                    MRF                          Stratford, CT       46,000    Note 2
Mecklenburg County           MRF                          Charlotte, NC       90,000    Note 2
Greensboro                   MRF                          Greensboro, NC      42,000    Lease expiring 2003
Camden                       MRF                          Camden, NJ          45,000    Lease expiring 2003
Lee County                   MRF                          Ft. Myers, FL       45,000    Note 2
Morris County                MRF                          Mine Hill, NJ       26,000    Lease expiring 2000
Memphis                      MRF                          Memphis, TN         40,000    Note 1
Washington                   MRF                          Alexandria, VA      50,000    Lease expiring 2005
Hartford                     MRF                          Hartford, CT        45,000    Note 1
Greenville                   MRF                          Greenville, SC      60,000    Lease expiring 2002
West Palm Beach              MRF                          West Palm, FL       70,000    Note 2
Ann Arbor                    MRF                          Ann Arbor, MI       30,000    Note 2
Saginaw                      MRF                          Saginaw, MI         25,000    Owned
Columbia County              MRF                          Claverack, NY       18,000    Owned
Athen/Clarke                 MRF                          Athens, GA          22,000    Owned
Sarasota                     MRF                          Sarasota, FL        33,000    Owned
Administration               Office Space                 Charlotte, NC       20,000    Lease expiring 2003
COMMERCIAL RECYCLING
KTI Recycling of New         MRF/Warehouse                Biddeford, ME       30,000    Owned
England
KTI Recycling of New         MRF                          Biddeford, ME       12,000    Owned
England
KTI Recycling of New Jersey  MRF                          Newark, NJ         135,000    Lease expiring 2007
KTI New Jersey Fibers        MRF/Office                   Passaic, NJ         85,000    Lease expiring 2006
K-C International            Office                       Portland, OR         2,352    Lease expiring 2000
K-C International            Office                       Lakewood, NJ         1,865    Lease expiring 2000
FINISHED PRODUCTS
Ronda                        Insulation                   Ronda, NC           77,000    Lease expiring 2005
Tampa                        Insulation                   Tampa, FL           70,759    Lease expiring 2018
Clackamas                    Insulation                   Clackamas, OR       10,000    Lease expiring 2002
Delphos                      Insulation                   Delphos, OH         26,000    Lease expiring 2003
Phoenix                      Insulation                   Phoenix, AZ         31,820    Lease expiring 2004
Waco                         Insulation                   Waco, TX            60,000    Lease expiring 2006
Reidsville                   Plastic Reprocessing         Reidsville, NC      80,000    Lease expiring 2007
Hamlet                       Plastic Reprocessing         Hamlet, NC          46,400    Lease expiring 2000
First State                  Plastic Reprocessing         Wilmington, DE      40,000    Lease expiring 2003
Manner, Power Ship           Office                       Annapolis, MD        2,000    Lease expiring 2003
Seaglass                     Glass Processing             Newark, NJ           5,000    Lease expiring 2007
CORPORATE
Executive Office             Office                       Guttenberg, NJ       5,000    Lease expiring 2001

------------------------
Note 1:  The facility is owned and operated by a subsidiary of KTI; however, the
land on which the facility is located is owned by the municipality.
Note 2:  These properties are owned by the municipalities and operated by a
subsidiary of KTI

103

LEGAL PROCEEDINGS

On May 11, 1994, Maine Energy filed a suit in a Maine state court 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 building. The judge in the case entered an order awarding Maine
Energy approximately $3.3 million 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. In February 1999, the appellate court reversed the trial
court's verdict in favor of KTI and returned the case to the trial court, which
ordered a new trial.

On September 30, 1997 and March 6, 1998, Capital Recycling of Connecticut
filed two suits in a Connecticut state court against K-C International, certain
officers of K-C International and other parties. The suits allege fraud,
tortious 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 International. The contracts require all disputes to be resolved
by arbitration in Portland, Oregon. Pursuant to this requirement, K-C
International initiated the arbitration process in Portland, Oregon.
Subsequently, the parties agreed to arbitrate the dispute in Hartford,
Connecticut. The plaintiffs were seeking approximately $1.9 million in damages.
On October 20, 1999, KTI paid Capital $350,000 in final settlement of these
claims.

On September 30, 1998, the Equal Employment Opportunity Commission filed a
lawsuit against FCR Tennessee, Inc. in the United States District Court for the
Western District of Tennessee, alleging sexual harassment by two managers and a
sexually hostile work environment. The complainants seek compensation for past
and future pecuniary and non-pecuniary losses as well as punitive damages and
potential reinstatement of employment for Valerie L. Jacobs. FCR has retained
counsel to defend this suit and has reported the lawsuit to FCR's director's and
officer's insurance carrier. Management is currently reviewing the lawsuit. The
plaintiffs have demanded $105,000 and KTI has offered $30,000 in settlement. No
agreement on a settlement has been reached. KTI's insurance carrier has agreed
to defend the case.

On April 1, 1999, William F. Kaiser, a former Executive Vice President and
Treasurer of KTI, filed a lawsuit against KTI in the U.S. District Court for the
District of New Jersey. The suit alleges breach of contract, wrongful
termination, breach of the implied covenant of good faith and fair dealing,
misrepresentation of employment terms and failure to pay wages, all arising out
of Mr. Kaiser's employment agreement with KTI. The suit also alleges that KTI
inaccurately reported its financial results for the first quarter of 1998 and
failed to properly disclose the change of control provision in Mr. Kaiser's
employment agreement. Mr. Kaiser is seeking a declaratory judgment that, upon
closing of the merger, the change of control provision entitles him to receive a
severance payment of two years' salary, in the amount of $320,000, and to
exercise 132,000 unvested options for KTI common stock. Mr. Kaiser is also
seeking damages in the amount of $40,000 for an additional severance payment, as
well as undisclosed damages for outstanding salary, bonus and other payments and
from his sale of approximately 50,000 shares of KTI common stock resulting from
KTI's allegedly inaccurate financial reports.

On April 6, 1999, Dennis McDonnell filed a lawsuit in a Florida state court
against U.S. Fiber, Inc., a subsidiary of FCR. Mr. McDonnell, a former employee
of U.S. Fiber, seeks a declaratory judgment regarding his rights and obligations
under an employment non-competition agreement and an employment agreement that
he previously had signed with two corporations that subsequently were merged
with and into U.S. Fiber. KTI is defending the suit and believes it has
meritorious defenses.

On April 15, 1999, C.H. Lee, a former employee of FCR and a former majority
shareholder of Resource Recycling, Inc., commenced arbitration proceedings with
the American Arbitration Association in Charlotte, North Carolina against KTI,
FCR and FCR Plastics, Inc. in connection with the acquisition of Resource
Recycling by FCR. Mr. Lee alleges that FCR and FCR Plastics acted to frustrate
the "earn-out" provisions of the acquisition agreement and thereby precluded
Mr. Lee from receiving, or alternatively, reduced, the sums to which he was
entitled to under the agreement. He also alleges that FCR and FCR Plastics
wrongfully terminated his employment agreement. The claim for

104

arbitration alleges direct charges in excess of $5.0 million and requests
punitive damages, treble damages and attorneys fees. KTI, FCR and FCR Plastics
responded to the demand, denying liability, and filed a counterclaim for
$1.0 million for misrepresentations. KTI believes it has meritorious defenses to
these claims. If, however, the damages and charges claimed by Mr. Lee are
awarded, KTI's business, financial condition and results of operation could be
materially adversely affected.

On or about April 26, 1999, Salvatore Russo filed an action in the U.S.
District Court, District of New Jersey against KTI and two of its principal
officers, Ross Pirasteh and Martin J. Sergi, purportedly on behalf of all
shareholders who purchased KTI common stock from May 4, 1998 through August 14,
1998. Melanie Miller filed an identical complaint on May 14, 1999. The
complaints allege that the defendants made material misrepresentations in KTI's
quarterly report on Form 10-Q for the period ended March 31, 1998 in violation
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended,
concerning KTI allowance for doubtful accounts and net income. The plaintiffs
are seeking undisclosed damages. KTI believes it has meritorious defenses to
these complaints. On June 15, 1999, Mr. Russo and Ms. Miller, together with
Fransisco Munero, Timothy Ryan and Steven Storch, moved to consolidate the two
complaints. This motion is currently pending in the District Court of New
Jersey.

On July 1, 1999, Michael P. Kuruc filed a demand for arbitration with the
American Arbitration Association in Charlotte, North Carolina, seeking
approximately $1.0 million for compensation due under an employment agreement
that he alleges he has with KTI and losses allegedly suffered in connection with
his sale of KTI common stock. KTI believes that it has meritorious defenses, has
retained counsel to defend this suit and has filed an action to stay the
arbitration in Mecklenburg County Superior Court in North Carolina. On
October 11, 1999, the Superior Court denied KTI's request to stay the
arbitration. If the damages claimed by Mr. Kuruc are awarded, KTI's business,
financial condition and results of operation could be materially adversely
affected.

Through a newspaper report dated October 19, 1999, KTI learned that the City
Council of Biddeford has authorized the filing of a lawsuit to enjoin the merger
of KTI and Casella. The City of Biddeford has claimed that, under Maine Energy's
waste handling agreements with the City of Biddeford and the City of Saco, KTI
would be required, if the merger is completed, to make a payment to the cities
equal to 20% of Maine Energy's value. The waste handling agreement provides in
part that, in the event that cash proceeds from a capital transaction become
distributable to the partners of Maine Energy (including KTI) on account of the
partners' equity interests, then the Cities (Biddeford and Saco) shall be
entitled to receive a residual cancellation payment equal to their proportionate
share of 20% of such cash distribution. KTI is neither engaging in a capital
transaction relating to Maine Energy, nor receiving cash in the merger. To date
no litigation has been brought. KTI believes it has meritorious defenses to
these claims if litigation is commenced by the City of Biddeford.

On October 22, 1999, Kyle Trayner filed an action in Putnam Superior Court
in Connecticut against K-C International seeking approximately $400,000
allegedly due for compensation under an employment agreement and for payment on
a promissory note issued by K-C International to Mr. Trayner. KTI believes that
it has meritorious defenses to these claims and intends to retain counsel to
defend this suit.

KTI is a defendant in certain other lawsuits alleging various claims
incurred in the ordinary course of business, none of which, either individually
or in the aggregate, KTI believes are material to its financial condition,
results of operations or cash flows.

GOVERNMENTAL REGULATION

GENERAL

The operations of KTI's waste handling businesses are subject to extensive
governmental regulations at the federal, state, local and provincial levels. KTI
believes that its operations are in material compliance with existing laws and
regulations material to its business. The laws, rules and regulations that
govern the waste handling businesses are very broad and are subject to
continuing change and interpretation. KTI

105

cannot assure you that it will be able to obtain or maintain the licenses,
permits and approvals necessary to conduct its current business or possible
future expansions of its business. The failure to obtain or maintain requisite
licenses, permits and approvals or otherwise to comply with existing or future
laws, rules and regulations or their interpretations could have a material
adverse effect on the operations of the combined company following the merger.
The following discussions of statutes, regulations and court decisions are brief
summaries, are not intended to be complete and are qualified in their entirety
by reference to such statutes, regulations and court decisions.

ENERGY AND UTILITY REGULATION

Each of the Maine Energy facility, the Penobscot facility and the Telogia
facility has been certified by the Federal Energy Regulatory Commission as a
"qualifying small power production facility" under the Public Utility Regulatory
Policies Act of 1978, as amended ("PURPA"). PURPA grants an exemption for
qualifying facilities from most federal and state laws governing electric
utility rates and financial organization. A qualified small power production
facility is exempt from the Public Utility Holding Company Act of 1935 and from
certain state laws and regulations governing electric utility rates and
financial organization. The rates charged by Maine Energy and Penobscot for
acceptance of waste at their facilities are not subject to regulation under
existing state and federal law.

PURPA requires that electric utilities purchase electricity generated by
qualifying facilities at a price equal to the purchasing utility's full "avoided
cost". Avoided costs are defined by PURPA as the incremental costs to the
utility of electric energy or capacity that the utility would generate itself or
purchase from another source if it could not purchase from the qualifying
facility.

KTI's waste-to-energy business, which accounted for approximately 42.8% of
KTI's revenue during 1998, is dependent upon electric utilities that purchase
energy produced at KTI's waste-to-energy plants. Under the Central Maine
agreement, the Bangor Hydro agreement and the Florida Power agreement, these
utilities have agreed to purchase electricity generated by the KTI
waste-to-energy facility at contractually agreed rates. Sales of electricity to
these utilities accounted for approximately 54.2% of Maine Energy's, 58.7% of
Penobscot's and 81.6% of the Telogia facility's revenues in 1998. In the event
of the deregulation of electric utilities, certain electric companies may no
longer be financially viable. If the electric utilities with whom KTI has
contracts are adversely impacted by deregulation, the utilities may not be able
to perform their obligations under their purchase power agreements. The State of
Maine has recently enacted deregulation legislation that will require the local
utilities to transfer their contracts with Maine Energy and Penobscot to newly
formed regulated transmission and distribution companies. The costs of the
contracts will be passed through to rate-payers beginning in the year 2000
through these transmission and distribution companies.

FLOW CONTROL

From time to time state and local governments have enacted to flow control
ordinances. These ordinances generally require that all waste generated in a
municipality be directed to a specified disposal site. The enactment of flow
control ordinances was authorized by Maine law, and most of the municipalities
that Maine Energy and Penobscot serve enacted such ordinances. From the
municipality's perspective, having the ordinance in place was a corollary to its
agreement to a "put-or-pay" waste handling agreement that requires the
municipality to pay a guaranteed annual minimum fee to the waste-to-energy
facility regardless of the actual amount of municipal solid waste delivered to
the facility.

In May 1994, in C&A Carbone, Inc. v. Town of Clarkstown, the United States
Supreme Court struck down, as an unlawful violation of the "commerce clause" of
the United States Constitution, a flow control ordinance enacted by the Town of
Clarkstown, New York. KTI does not believe that loss of flow control provisions
would adversely impact operations at either the Maine Energy facility or the
Penobscot facility. The long-term waste handling agreements for such facilities
contractually require the municipalities to pay for waste disposal whether or
not the waste is delivered.

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ENVIRONMENTAL LAWS

While increasing environmental regulation often presents new business
opportunities to KTI, it likewise often results in increased operating costs as
well. KTI strives to conduct its operations in compliance with applicable laws
and regulations, including environmental rules and regulations. This effort
requires programs to promote compliance, such as training employees and
customers, purchasing health and safety equipment, and in some cases hiring
outside consultants and lawyers. Even with these programs, KTI believes that in
the ordinary course of doing business, companies in the environmental services
and waste disposal industry are faced with governmental enforcement proceedings
resulting in fines or other sanctions and will likely be required to pay civil
penalties or to expend funds for remedial work on waste management facilities.

In March 1999, KTI voluntarily disclosed to civil regulatory authorities at
the Florida Department of Environmental Protection ("FDEP") violations of a
condition of its Clean Water Act waste water discharge permit and related
reporting obligations at its Telogia, Florida facility. On July 28, 1999, KTI
entered into an administrative consent order with FDEP resolving the state civil
aspects of those violations. The violations involved the temperature of the
water discharged from the cooling process. Under the consent order, KTI was
required to pay penalties and expenses totaling $131,000 and must satisfy
certain interim waste water discharge monitoring and reporting requirements,
submit and implement a plan of study for the purpose of obtaining a revised
permit, and either obtain a revised permit or install additional cooling
equipment at the facility. KTI believes it is currently in compliance with the
interim requirements.

Substantial expenditures could result from governmental proceedings. In
addition, federal, state and local regulators have the power to suspend or
revoke permits or licenses needed for operation of our plants, equipment, and
vehicles or any of our operating subsidiaries based on its compliance record.
Also, customers may decide not to use a particular disposal facility or do
business with a company because of concerns about its compliance record.
Suspension or revocation of permits or licenses would have a negative impact on
our business and operations and could have a material adverse impact on our
financial results.

KTI's waste-to-energy, ash recycling and wood processing business activities
at its facilities and its transportation and waste disposal business activities
are regulated pursuant to federal, state and local environmental laws. Federal
laws such as the Clean Air Act of 1990 as amended, and the Clean Water Act and
their state analogs govern discharges of pollutants from waste-to-energy
facilities to air and water, and other federal, state and local laws such as the
Resource Conservation and Recovery Act of 1976, as amended ("RCRA"),
comprehensively govern the generation, transportation, storage, treatment and
disposal of solid waste. These environmental regulatory laws, and others such as
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), may make KTI potentially liable in the event of
environmental contamination associated with its activities, facilities or
properties.

The environmental regulatory laws and regulations or licenses and permits
issued thereunder also establish operational standards, including specific
limitations on emissions of certain air and water pollutants. Failure to meet
these standards could subject the facilities to enforcement actions and, unless
excused by particular circumstances, fines or other liabilities.

Standards established pursuant to the environmental regulatory laws and
governmental policies governing their enforcement may change. For example, new
technology may be required or stricter standards may be established for the
control of discharges of air or water pollutants or for solid waste or ash
handling and disposal. Such future developments could affect the manner in which
KTI operates its facilities and could require significant additional capital
expenditures to achieve compliance with such requirements or policies and other
environmental remediation laws may subject KTI to strict joint and several
liability for the costs of remediating contamination associated with
contaminated sites, including landfills, at which there has been disposal of
residue or other waste handled, transported or processed by KTI and real
property owned by KTI that may be contaminated.

107

Applications have been made for the air emissions permits for the Maine
Energy, Penobscot and Telogia facilities. Under Maine regulatory law, a permit
continues in effect provided that a timely application for renewal is made. In
Maine Energy's case, the application was submitted in compliance with state
mandate during August 1996. In December 1996, a public hearing was held by the
Maine Department of Environmental Protection on the application and to address
the favorable results of an independently conducted health risk assessment
pertaining to Maine Energy.

In the case of Penobscot, a renewal application was submitted in advance of
the deadline. Penobscot is awaiting notification from the state of Maine to
finalize approval of the air emission permit.

KTI believes that the Maine Energy, Penobscot and Telogia facilities are in
compliance with the federal Clean Air Act, its implementing regulations and all
other applicable regulations and, therefore, KTI anticipates that the permits
will be renewed following the hearings. There can be no assurance, however, that
new conditions will not be imposed in the permits or that the permits will be
renewed.

In City of Chicago v. Environmental Defense Fund, a case interpreting
provisions of RCRA, the United States Supreme Court determined that the
generation of ash residue from waste-to-energy facilities in the incineration
process is not exempt from hazardous waste regulation. The ash produced at the
Maine Energy, Penobscot and the Telogia facilities is typically tested for
hazardous wastes and has generally met the requirements of non-hazardous
material according to the regulations implementing RCRA promulgated by the
Environmental Protection Agency since their adoption. Any ash residue that is
designated as hazardous material is disposed of according to regulations
governing the disposal of such material. Moreover, KTI's ash residue is disposed
in landfills segregated to accept ash residue only, and, to KTI's knowledge, the
landfill facilities at which the ash residue is disposed meet or exceed the
applicable standards for such facilities under RCRA. Further, KTI has been
indemnified by Waste Management of Maine, Inc. with respect to potential
environmental liabilities relating to ash residue delivered for disposal by
Maine Energy. There can be no assurance, however, that the current regulations
governing the testing and disposition of ash residue will not be modified and
made more stringent and require operational or technological adjustments at the
Maine Energy, Penobscot and the Telogia facilities, which adjustments could have
a material adverse effect on the operation of such facilities and the financial
viability or profitability of the combined company.

Maine Energy's waste handling agreements with its host communities of
Biddeford and Saco prescribe a set of standards for noise, odor and ash
emissions from the Maine Energy facility and impose penalties in the event of
non-compliance. Since the Maine Energy facility is sited directly in the
commercial area of Biddeford, KTI has implemented stringent operational
practices to mitigate the escape of odors from the Maine Energy facility
including the use of air lock doors at the waste-hauling trucks' entrance to,
and exit from, the facility's tipping floor.

KTI's Total Waste Management subsidiary is involved in the transportation of
both liquid and solid waste. Total Waste Management is a hazardous waste
transporter and operates both a hazardous waste and a special waste transfer
facility at its Newington, New Hampshire site. Total Waste Management also
operates a 700,000 gallon used oil processing and marketing facility at the
Newington site.

STOCK OWNERSHIP OF MANAGEMENT

The following table sets forth information, as of September 1, 1999,
regarding the beneficial ownership of KTI common stock by (a) each person or
entity known to KTI to beneficially own more than five percent of KTI common
stock; (b) each director; (c) the chief executive officer and the four other
most highly compensated executive officers of KTI as of December 31, 1998; and
(d) all current directors and executive officers of KTI as a group.

108

Beneficial ownership is determined in accordance with rules of the SEC, and
includes generally voting power and/or investment power with respect to
securities. Shares of common stock subject to options and/or warrants currently
exercisable or exercisable within 60 days of September 1, 1999 are deemed
outstanding for computing the percentage beneficially owned by the person
holding the options and/or warrants but are not deemed outstanding for purposes
of computing the percentage beneficially owned by any other person. Except as
indicated by footnote, KTI believes that the persons named in this table, based
on information provided by these persons, have sole voting and investment power
with respect to the shares of common stock indicated.

KTI                      CASELLA
COMMON STOCK                 CLASS A             TOTAL CASELLA CLASS A AND
OWNED                COMMON STOCK OWNED          CLASS B COMMON STOCK
PRIOR TO THE MERGER          AFTER THE MERGER             AFTER THE MERGER
NAME OF BENEFICIAL      ------------------------   ------------------------   ----------------------------
OWNER                   # OF SHARES   % OF CLASS   # OF SHARES   % OF CLASS     OWNERSHIP     VOTING POWER
------------------      -----------   ----------   -----------   ----------   -------------   ------------

Ross Pirasteh (1).....     567,847        4.0%        289,601       1.3%           1.3%             *
Martin J. Sergi (2)...   1,059,784        7.5         540,489       2.4            2.3            1.5%
Paul A. Garrett (3)...     404,383        2.9         206,235         *              *              *
Ken (Kook Joo)
Choi (4)............     207,707        1.5         105,930         *              *              *
David E. Hill (5).....      49,559          *          25,275         *              *              *
Robert E. Wetzel
(6).................     117,298          *          59,821         *              *              *
Carlos Aguero (7).....      15,584          *           7,947         *              *              *
Dibo Attar (8)........      38,273          *          19,519         *              *              *
W. Chris Hegele (9)...     125,889          *          64,203         *              *              *
Paul Kleinaitis
(10)................      21,727          *          11,080         *              *              *
George J. Mitchell
(11)................      17,500          *           8,925         *              *              *
Jack Polak (12).......      38,506          *          19,638         *              *              *
Wilbur L. Ross, Jr.
(13)................      15,000          *           7,650         *              *              *
Directors and
executive officers
as group (15
persons) (14).......   2,883,756       19.8%      1,470,715       6.6%           6.4%           3.7%

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

* Represents less than 1% of the outstanding shares of common stock.

(1) Includes 169,223 shares of KTI common stock issuable upon the exercise of
options and warrants within 60 days of September 1, 1999.

(2) Includes 116,950 shares of KTI common stock issuable upon the exercise of
options within 60 days of September 1, 1999. The address of Mr. Sergi is
c/o KTI, Inc., 7000 Boulevard East, Guttenberg, New Jersey 07093.

(3) Includes 23,332 shares of KTI common stock issuable upon the exercise of
options within 60 days of September 1, 1999.

(4) Includes 1,750 shares of KTI common stock issuable upon the exercise of
options within 60 days of September 1, 1999.

(5) Includes 29,651 shares of KTI common stock issuable upon the exercise of
options within 60 days of September 1, 1999.

(6) Includes 64,483 shares of KTI common stock issuable upon the exercise of
options and warrants within 60 days of September 1, 1999.

(7) Includes 7,500 shares of KTI common stock issuable upon the exercise of
warrants within 60 days of September 1, 1999.

109

(8) Includes 35,824 shares of KTI common stock issuable upon the exercise of
options within 60 days of September 1, 1999.

(9) Includes 125,889 shares of KTI common stock held by Kitty Hawk Capital
Limited Partnership II. Mr. Hegele is an executive officer and director of
the general partner of Kitty Hawk Capital Limited Partnership II. Also
includes 7,500 shares of KTI common stock issuable upon the exercise of
warrants within 60 days of September 1, 1999.

(10) Includes 15,000 shares of KTI common stock issuable upon the exercise of
options within 60 days of September 1, 1999.

(11) Includes 17,500 shares of KTI common stock issuable upon the exercise of
warrants within 60 days of September 1, 1999.

(12) Includes 30,576 shares of KTI common stock issuable upon the exercise of
options and warrants within 60 days of September 1, 1999.

(13) Includes 15,000 shares of KTI common stock issuable upon the exercise of
options and warrants within 60 days of September 1, 1999.

(14) Includes 547,704 shares of KTI common stock issuable upon the exercise of
options and warrants within 60 days of September 1, 1999.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth information for each of the last three fiscal
years, with respect to the cash compensation paid and the shares underlying
options granted to each person who (a) will serve as a director or executive
officer of Casella after the merger and (b) who received annual compensation in
excess of $100,000 during KTI's fiscal 1998, collectively the "KTI named
executive officers."

SUMMARY COMPENSATION TABLE

LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION        SECURITIES      ALL OTHER
-------------------------     UNDERLYING     COMPENSATION
NAME AND PRINCIPAL POSITION                 YEAR      SALARY ($)     BONUS ($)     OPTIONS (#)         ($)
---------------------------               --------    ----------    -----------    ------------    ------------

Martin J. Sergi.......................      1998       $227,885     $     --        100,000        $     --
President                                   1997        210,000        4,038         75,000           7,000(1)
1996        199,423      149,038(2)      26,250           6,000(1)

Ross Pirasteh.........................      1998        227,885           --        100,000              --
Chairman of the Board                       1997        204,712       54,038         75,000           7,000(1)
1996        152,019        2,981         26,250              --

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

(1) Consists of amount paid by KTI to the named executive officer's account in
KTI's 401(k) plan.

(2) Mr. Sergi was to be paid a bonus of approximately $500,000 for 1996 pursuant
to his employment agreement with KTI. Pursuant to a letter agreement with
the KTI board, Mr. Sergi agreed to reduce this bonus to $145,000. Mr. Sergi
was entitled to receive a bonus of approximately $120,000 and $250,000 for
1997 and 1998, respectively, pursuant to his employment agreement. However,
Mr. Sergi waived receipt of these bonuses.

110

CURRENT EMPLOYMENT AGREEMENTS

KTI's employment agreement with Martin J. Sergi provided for his employment
as president of KTI. This employment agreement will be terminated upon the
effectiveness of the merger, and will be replaced with the employment agreement
described above under "The Merger--Interests of executive officers and directors
of Casella and KTI in the merger." Mr. Sergi's annual base salary was increased
from $185,000 to $210,000, effective as of May 1996, and from $210,000 to
$250,000 effective as of August 1998. Prior to the most recent amendment,
Mr. Sergi was entitled to a bonus of 2% of pre-tax consolidated net income of
KTI and its subsidiaries of between $3,000,000 and $4,000,000; 4% of pre-tax
consolidated net income of KTI and its subsidiaries between $4,000,001 and
$5,000,000; and 6% of pre-tax consolidated net income of KTI and its
subsidiaries over $5,0000,000. Mr. Sergi was entitled to a bonus of
approximately $500,000 for 1996 under the formula in his employment agreement
with KTI. Pursuant to a letter agreement with the KTI board, this bonus was
reduced to $145,000. For 1997, Mr. Sergi was entitled to a bonus of
approximately $120,000, but Mr. Sergi waived receipt of this bonus. Currently,
Mr. Sergi was to receive a bonus based on the attainment of certain goals set by
the KTI board. The agreement also provided that Mr. Sergi would participate in
any employee benefit plans established for senior management of KTI, that he is
entitled to payments not in excess of $700 per month as an automobile allowance,
that KTI will pay premiums for $250,000 of term life insurance on his life and
that he will be entitled to participate in a disability plan maintained by KTI.
KTI also agreed that Mr. Sergi will be entitled to participate in an incentive
stock option plan for senior management.

KTI agreed with Mr. Sergi that if his employment terminated other than by
reason of his death, retirement, disability or for cause, or if he should elect
to terminate his employment as a result of "good reason," he would be entitled
to continue receiving his annual base salary for a period of three years and
would also be entitled to receive payment of an amount intended to compensate
him for retirement benefits he would have received had he remained in KTI's
employ until retirement. "Good reason" is defined to mean, among other things,
(a) the assignment to the employee of materially different duties than those
existing at the commencement of the agreement or which require travel
significantly more time consuming than that required at the commencement of the
agreement and (b) the reduction of employee's authority as a senior executive
officer. However, Mr. Sergi may not terminate the employment agreement for
reasons specified in clause (a) above more than six months following a
"change-of-control" of KTI, as defined in the employment agreement.

KTI's employment agreement with Ross Pirasteh provided for his employment as
the chairman and a member of the executive committee of the KTI board. This
employment agreement will be terminated upon the effectiveness of the merger and
will be replaced with the employment agreement described above under "The
Merger--Interests of executive officers and directors of Casella and KTI in the
merger." Mr. Pirasteh's annual base salary is $250,000, and he was entitled to a
bonus in an amount determined by the compensation committee of the KTI board.
The agreement also provided that Mr. Pirasteh would participate in any employee
benefit plans established for senior management of KTI, that he was entitled to
all fringe benefits and perquisites generally available to senior management of
KTI, that KTI would pay premiums for $250,000 of term life insurance on his life
and that he would be entitled to participate in a disability plan maintained by
KTI. KTI has also agreed that Mr. Pirasteh would be entitled to participate in
an incentive stock option plan for senior management.

KTI agreed with Mr. Pirasteh that if his employment terminates other than by
reason of his death, retirement, disability or for cause, or if he should elect
to terminate his employment as a result of "good reason," he would be entitled
to receive an amount equal to three times the sum of (i) his highest annual base
salary prior to termination and (ii) the higher of his most recent bonus or 50%
of his base salary at the time of termination, and would also be entitled to the
benefits he would have received had he remained in KTI's employ for a period of
three years. "Good reason" is defined to mean, among other things, (a) the
assignment to the employee of duties inconsistent with those existing

111

at the commencement of the agreement or which require travel significantly more
time consuming than that required at the commencement of the agreement, (b) the
material alteration of employee's responsibilities and (c) a "change-of-control"
of KTI, as defined in the employment agreement.

COMPENSATION OF DIRECTORS

In 1998, KTI paid each non-employee director a fee of $12,500 per annum. In
1997 and 1996, KTI paid each non-employee director a fee of $7,500 per annum.
Non-employee directors also participate in the KTI, Inc. Directors' Stock Option
Plan pursuant to which non-employee directors are granted a nonstatutory stock
option to purchase up to 7,500 shares of KTI common stock on the date of each
annual meeting of shareholders. Employee directors currently do not receive an
additional fee for their services as directors.

STOCK OPTION GRANTS

The following table sets forth information for each of the KTI named
executive officers with respect to the grant of stock options to purchase shares
of KTI common stock during fiscal 1998.

OPTION GRANTS IN LAST FISCAL YEAR

PERCENT OF                                   POTENTIAL REALIZABLE VALUE
TOTAL                                        AT ASSUMED ANNUAL RATES
NUMBER OF     OPTIONS                                           OF STOCK PRICE
SECURITIES   GRANTED TO                                     APPRECIATION FOR OPTION
UNDERLYING   EMPLOYEES    EXERCISE OR                               TERM(3)
OPTIONS     IN FISCAL       BASE                         ---------------------------
GRANTED(1)      YEAR       PRICE(2)     EXPIRATION DATE       5%             10%
----------   ----------   -----------   ---------------   -----------   -------------

Martin J. Sergi...........     6,000        0.44%      $18.2875     1/2/08             $ 52,757      $  149,001
19,000        1.39        16.6250        1/2/08           198,652         503,423
75,000        5.50        16.6250        1/2/08           784,153       1,987,198
Ross Pirasteh.............     6,000        0.44        16.6250     1/2/08               62,732         158,977
19,000        1.39        16.6250        1/2/08           198,652         503,423
75,000        5.50        16.6250        1/2/08           784,153       1,987,198

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

(1) In 1998, Mr. Sergi was granted 25,000 options under KTI's incentive option
plan. Of the 25,000 options granted in 1998, 6,000 are incentive stock
options and 19,000 are nonstatutory options. The additional 75,000 options
granted in 1998 were nonstatutory, non-plan options. In 1998, Mr. Pirasteh
was granted 25,000 options under KTI's incentive option plan. Of the 25,000
options granted in 1998, 6,000 are incentive stock options and 19,000 are
nonstatutory options. The additional 75,000 options granted in 1998 were
nonstatutory, non-plan options. The options granted to Messrs. Sergi and
Pirasteh under the plan vest in 60 equal monthly installments with full
vesting to occur after five years. The non-plan options were fully vested on
the date of grant.

(2) Options were granted at the fair market value determined as of the date of
the grant, based upon the last reported sale price of KTI common stock on
the Nasdaq National Market.

(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (5% and 10%) on
the market value of KTI common stock on the date of the option grant over
the term of the options. These numbers are calculated based on rules
promulgated by the SEC and do not reflect KTI's estimate of future stock
price growth. Actual gains if any, on stock option exercise and KTI common
stock holdings are dependent on the timing of the exercise and the future
performance of KTI common stock. There can be no assurance that the rates of
appreciation assumed in this table can be achieved or that the amounts
reflected will be received by the individuals.

112

FISCAL YEAR-END OPTION VALUES

The following table sets forth information for each of the KTI named
executive officers with respect to the exercise of options to purchase shares of
KTI common stock during fiscal 1998 and the number and value of options
outstanding as of the fiscal year ended 1998.

AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
AND FISCAL YEAR-END OPTION VALUES

NUMBER OF
SECURITIES
UNDERLYING                VALUE OF UNEXERCISED
UNEXERCISED                   IN-THE-MONEY
SHARES                        OPTIONS AT FISCALS          OPTIONS AT DECEMBER 31,
ACQUIRED ON      VALUE             YEAR END (#)                    1998($)(2)
EXERCISE      REALIZED     ---------------------------   ----------------------------
NAME                       (#)         ($)(1)      EXERCISABLE   UNEXERCISABLE   EXERCISABLE    UNEXERCISABLE
----                   -----------   -----------   -----------   -------------   ------------   -------------

Martin J. Sergi......     68,381      $490,447        87,525        97,842        $  700,054      $971,321
President

Ross Pirasteh........     --            --           124,318        76,931         1,144,264       688,994
Chairman of the Board

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

(1) Based on the closing price of KTI common stock as reported on the Nasdaq
National Market on the date of exercise less the option exercise price

(2) These values have been calculated on the basis of the last reported sale
price of KTI common stock on the Nasdaq National Market on December 31,
1998, $21.625 per share, less the aggregate exercise price.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the fiscal year ended December 31, 1998, Paul Kleinaitis, Jack Polak
and Wilbur Ross served on KTI's compensation committee. No member of the
compensation committee was involved in an interlocking relationship or insider
participation with respect to the compensation committee.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

KTI leases office space from the Mall at the Galaxy, Inc., a corporation
that is 72% owned by Martin J. Sergi, a principal shareholder and president of
KTI. The mall leases space to 27 tenants under long-term operating leases. KTI
made rental payments to the mall of $96,000 in fiscal year 1998. KTI believes
that the lease for the office space was made on terms comparable to those which
could have been obtained from an unaffiliated lessor.

KTI held a promissory note of the Mall at the Galaxy, Inc. dated January 1,
1994 in the original principal amount of $121,581, with a balance including
interest accrued as of December 31, 1998 of $62,486. This note was issued in
replacement of a note dated May 30, 1989 in the original principal amount of
$74,076. The note bears interest at 10% per annum. KTI believes that this note
was issued on terms comparable to those which could have been obtained from an
unaffiliated lessor.

During 1996, KTI made private placements of $2,003,314 of 8% notes due
July 31, 1996 together with 333,882 warrants to purchase KTI common stock at
$6.00 per share, subject to adjustment, which expire five years from the date of
issue. In this private placement, Mr. Pirasteh purchased $60,000 in notes and
10,500 warrants, which were registered in the names of others. KTI believes that
the terms on which Mr. Pirasteh received securities in this private placement
are comparable to those which were obtained from unaffiliated investors
concurrently with Mr. Pirasteh's investments.

113

KTI SELECTED HISTORICAL FINANCIAL INFORMATION

The selected historical financial information as of December 31, 1994 and
1995 and for the years ended December 31, 1994 and 1995 are derived from
financial statements of KTI not included herein. The selected historical balance
sheet data as of December 31, 1997 and 1998 and statements of operations data
for each of the three years in the period ended December 31, 1998 are derived
from the audited financial statements of KTI included in this proxy
statement/prospectus. The selected historical financial data for the six months
ended June 30, 1998 and 1999 are derived from the unaudited financial statements
of KTI and, in the opinion of the management of KTI, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial information. Operating results for the interim
periods are not necessarily indicative of the results of KTI that may be
expected for the entire year. You should read this information in conjunction
with the respective historical financial statements and notes we have included
in this proxy statement/prospectus.

FISCAL YEAR ENDED DECEMBER 31,                         SIX MONTHS ENDED
---------------------------------------------------------------   --------------------------
JUNE 30,       JUNE 30,
1994         1995         1996         1997         1998          1998           1999
----------   ----------   ----------   ----------   -----------   -----------   ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)   (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues...........................  $   37,783   $   38,083   $   35,717   $   98,587   $   179,007   $   72,666    $    130,921
Cost of operations.................      22,656       18,634       19,499       69,296       144,885       58,468         101,111
Selling, general and
administrative...................       2,401        2,941        2,389        2,978         5,977        3,113           9,546
Restructuring charge...............          --           --           --           --            --           --           3,719
Asset impairment charge............          --           --           --           --            --           --           3,000
Depreciation and amortization......       2,843        7,505        6,694        6,786        13,749        5,334          10,770
----------   ----------   ----------   ----------   -----------   ----------    ------------
27,900       29,080       28,582       79,060       164,611       66,915         128,146
----------   ----------   ----------   ----------   -----------   ----------    ------------
Income from operations.............       9,883        9,003        7,135       19,527        14,396        5,751           2,775
Other expense, net.................       9,391        9,044        4,427        4,696        10,667        3,060          10,045
----------   ----------   ----------   ----------   -----------   ----------    ------------
Income (loss) from continuing
operations before minority
interest, provision (benefit) for
income taxes, extraordinary item
and cumulative effect of change
in accounting principle..........         492          (41)       2,708       14,831         3,729        2,691          (7,270)
Minority interest(1)...............      (1,920)      (1,287)      (1,185)      (7,244)       (3,702)      (1,046)         (1,176)
----------   ----------   ----------   ----------   -----------   ----------    ------------
Income (loss) from continuing
operations before provision
(benefit) for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle........................      (1,428)      (1,328)       1,523        7,587            27        1,645          (8,446)
Provision (benefit) for income
taxes............................          --           65           --       (2,586)       (3,023)         614          (2,565)
Extraordinary item.................          --         (148)       2,248           --           351          495              --
Loss from discontinued
operations.......................          --           86          714           --            --           --              --
Cumulative effect of change in
accounting principle.............          --           --           --           --            --           --              58
----------   ----------   ----------   ----------   -----------   ----------    ------------
Net income (loss)..................      (1,428)      (1,331)      (1,439)      10,173         2,699          536          (5,939)
Accretion and paid and accrued
dividends on preferred stock.....          --           --           --       (1,408)       (1,133)        (978)             --
----------   ----------   ----------   ----------   -----------   ----------    ------------
Net income (loss) available to
common stockholders..............  $   (1,428)  $   (1,331)  $   (1,439)  $    8,765   $     1,566   $     (442)   $     (5,939)
==========   ==========   ==========   ==========   ===========   ==========    ============
Diluted income (loss) per common
share............................  $    (0.42)  $    (0.25)  $    (0.23)  $     1.08   $      0.14   $    (0.04)   $      (0.43)
==========   ==========   ==========   ==========   ===========   ==========    ============
Diluted weighted average common
shares outstanding(2),(3)........   3,409,081    4,558,460    6,255,088    8,426,190    11,398,151    9,424,451      13,818,290
OTHER OPERATING DATA:
Capital expenditures...............  $      511   $    2,916   $    3,412   $    5,072   $     8,581   $    4,183    $      6,379
==========   ==========   ==========   ==========   ===========   ==========    ============
OTHER DATA:
Cash flow (used in) provided by
operating activities.............  $    4,487   $    8,355   $   85,609   $    9,322   $     1,181   $    2,264    $     (6,552)
==========   ==========   ==========   ==========   ===========   ==========    ============
Cash flow (used in) provided by
investing activities.............  $    6,391   $     (764)  $    2,969   $  (33,428)  $   (69,561)  $  (20,962)   $     (9,473)
==========   ==========   ==========   ==========   ===========   ==========    ============
Cash flow provided by (used in)
financing activities.............  $   (3,922)  $   (8,523)  $  (89,805)  $   30,060   $    66,625   $   17,544    $     11,990
==========   ==========   ==========   ==========   ===========   ==========    ============
Adjusted EBITDA(4).................  $   10,806   $   15,221   $   12,644   $   19,069   $    24,443   $   10,039    $     12,369
==========   ==========   ==========   ==========   ===========   ==========    ============

114

DECEMBER 31,
----------------------------------------------------   JUNE 30,
1994       1995       1996       1997       1998       1999
--------   --------   --------   --------   --------   ---------
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash and cash equivalents...................................  $ 7,386    $ 6,454    $ 5,227    $ 11,181   $  9,426   $   5,391
Working capital (deficit)(5)................................    8,517      8,713      9,084      21,957     42,826    (108,492)
Property and equipment, net.................................   91,989     86,363     99,126     164,753    213,669     216,777
Total assets................................................  131,383    132,906    133,615     252,487    436,485     463,034
Long-term obligations, less current maturities..............  121,979    107,398     34,949      74,473    202,153      69,869
Redeemable preferred stock..................................       --         --         --      25,132         --          --
Total stockholders' equity (deficit)........................   (3,911)     6,881     10,599      59,716     98,187     103,624

------------------------------
(1) Minority interest for the year ended December 31, 1997 includes $4,620 and
$102 for preacquisition earnings of PERC and AARNE, respectively. Minority
interest for the year ended December 31, 1994 includes $1,367 of
preacquisition earnings of Maine Energy.

(2) An adjustment for shares issued during the twelve month period prior to the
Company's initial registration statement has been made.

(3) All periods reflect the effect of a 5% common stock dividend declared by the
Board of Directors on February 28, 1997 and paid March 28, 1997.

(4) For a description of Adjusted EBITDA see note (1) to summary unaudited pro
forma combined information.

(5) The working capital deficit at June 30, 1999 is a result of the
reclassification of certain debt due to a default of one of the financial
covenants.

115

KTI MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following is a discussion of certain factors affecting KTI's results for
the three and six months ended June 30, 1999, and the three fiscal years in the
period ended December 31, 1998, as well as our liquidity and capital resources.
When used in this discussion, the terms "we" and "our" refer to KTI or its
management. This discussion should be read in conjunction with our historical
financial statements and notes, which can be found on pages F-1 to F-128.

We are a holding company and derive our earnings from our subsidiaries.
During 1998 and the first six months of 1999, as part of our integrated waste
management strategy, we acquired several businesses and additional partnership
interests. As a result of the acquisitions completed in 1998, we began reporting
the results of operations by the following four segments: waste-to-energy,
residential recycling, commercial recycling and finished products.

Our municipal solid waste disposal operations are subject to seasonal
fluctuations due to less waste being generated during the winter months because
of seasonal changes in population, which impacts our revenues. The
waste-to-energy facilities also have scheduled shutdowns each year, usually two
weeks in April or May, for major maintenance and capital projects.

In June 1998, we refinanced Penobscot's outstanding bonds. As a result,
Bangor Hydro Electric Company, which purchases the power from Penobscot, made a
one-time payment of $6.0 million in cash, issued a non-interest bearing note due
in 16 quarterly payments of $250,000 commencing on October 1, 1998 and issued
warrants to our subsidiary to purchase 713,000 shares of Bangor Hydro common
stock. Pursuant to the amended power disposal agreement, Bangor Hydro is
entitled to receive a one-third share of Penobscot's distributable cash.

The $6.0 million payment, the present value of the Bangor Hydro payments,
approximately $3.6 million, and the warrant valuation of approximately
$3.8 million were recorded as a customer advance. The customer advance, net of
transaction costs, is being amortized over the life of the Power Purchase
agreement with Bangor Hydro. Pursuant to the amended power disposal agreement,
Bangor Hydro is entitled to receive a one-third share of Penobscot's
distributable cash.

The residential recycling facilities also generate revenues from the sale of
recyclable materials, which revenues fluctuate with the changes in the market
price. We use long-term supply contracts with floor price arrangements to
minimize commodity risk for certain recyclables. Under these contracts, we
obtain a guaranteed minimum price for the recyclable materials as well as with a
commitment to receive additional amounts if current market prices rise above the
floor price.

The operations of our commercial recycling segment have continued to be
below our expectations because of low volumes in our processing plants, reduced
brokerage volumes as a result of the economic downturn in the Pacific Rim, and
lower commodity prices that have reduced profit margins.

Our acquisition of FCR in August 1998 provided us with a new line of
business, the manufacturing of finished products that use recyclable materials
as a primary raw material. The insulation division manufactures cellulose
insulation which is used primarily in the construction of manufactured housing
and single family residential homes in six plants located throughout the
country. The plastics division is a reprocessor of plastics collected primarily
from residential recycling programs and industrial suppliers in two plants
located in North Carolina. The plastics division also brokers post-industrial
and post consumer plastics.

116

On July 19, 1996, DataFocus, one of our wholly owned subsidiaries, executed
an agreement with CIBER, Inc. Under the agreement, DataFocus sold substantially
all of the assets of its business systems division, other than cash and accounts
receivable, to CIBER for $5.0 million, subject to customary purchase price
adjustments. DataFocus retained cash, accounts receivables and substantially all
of the liabilities of its business systems division that arose before July 26,
1996. The net proceeds of this sale, including cash and accounts receivable
retained, less related liabilities, were approximately $4.3 million.

Additionally, on July 29, 1996, we sold our stock in DataFocus to certain
members of the management of DataFocus. Pursuant to the sale, we received $5,000
in cash, the cancellation by DataFocus management of stock options for 132,328
shares of our common stock, the cancellation of an option to purchase 20% of the
common stock of DataFocus and a royalty agreement. We received royalties of
$60,000 in 1998 and 1997. A loss from discontinued operations of approximately
$0.7 million for the year ended December 31, 1996 resulted from the sale and
disposal of our computer service division.

RESULTS OF OPERATIONS

SIX AND THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THE
SIX AND THREE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)

THREE MONTHS ENDED JUNE 30,                    SIX MONTHS ENDED JUNE 30,
(IN THOUSANDS)                                 (IN THOUSANDS)
-------------------------------------------    ------------------------------------------
1999         %          1998        %          1999        %          1998        %
---------   --------    --------   --------    --------   --------    --------   --------

Revenues...............  $  64,793     100.0%    $ 34,790     100.0%    $130,921     100.0%    $72,666     100.0%
Cost of operations.....     56,188      86.7%      32,980      94.8%     109,246      83.4%     63,693      87.7%
---------               --------               --------               -------
Gross Profit.........      8,605      13.3%       1,810       5.2%      21,675      16.6%      8,973      12.3%
Selling, general and
administrative.......      6,285       9.7%       2,086       6.0%      12,181       9.3%      3,222       4.4%
Restructuring charge...      2,971       4.6%          --                  3,719       2.8%         --
Asset impairment
charge...............      3,000       4.6%          --                  3,000       2.3%         --
---------               --------               --------               -------
Income (loss) from
operations...........     (3,651)     (5.6)%       (276)     (0.8)%      2,775       2.1%      5,751       7.9%
Interest expense,
net..................      5,319       8.2%       1,550       4.5%       9,053       6.9%      3,060       4.2%
Other expense..........        861       1.3%          --                    992       0.8%         --
---------               --------               --------               -------
Income (loss) before
minority interest,
provision (benefit)
for income taxes,
extraordinary item
and cumulative
effect of change in
accounting
principle..........     (9,831)    (15.2)%     (1,826)     (5.2)%     (7,270)     (5.6)%     2,691       3.7%
Minority interest......        490       0.8%         (86)     (0.2)%      1,176       0.9%      1,046       1.4%
---------               --------               --------               -------
Income (loss) before
provision (benefit)
for income taxes,
extraordinary item
and cumulative
effect of change in
accounting
principle..........    (10,321)    (15.9)%     (1,740)     (5.0)%     (8,446)     (6.5)%     1,645       2.3%
Provision (benefit) for
income taxes.........     (3,417)     (5.3)%       (732)     (2.1)%     (2,565)     (2.0)%       614       0.8%
---------               --------               --------               -------

117

THREE MONTHS ENDED JUNE 30,                    SIX MONTHS ENDED JUNE 30,
(IN THOUSANDS)                                 (IN THOUSANDS)
-------------------------------------------    ------------------------------------------
1999         %          1998        %          1999        %          1998        %
---------   --------    --------   --------    --------   --------    --------   --------

Income (loss) before
extraordinary item
and cumulative
effect of change in
accounting
principle..........     (6,904)    (10.7)%     (1,008)     (2.9)%     (5,881)     (4.5)%     1,031       1.4%
Extraordinary item.....         --                    495       1.4%          --                   495       0.7%
---------               --------               --------               -------
Income (loss) before
cumulative effect of
change to accounting
principles...........     (6,904)    (10.7)%     (1,503)     (4.3)%     (5,881)     (4.5)%       536       0.7%
Cumulative effect of
change in accounting
principle............         --                     --                     58       0.0%         --
---------               --------               --------               -------
Net income (loss)....     (6,904)    (10.7)%     (1,503)     (4.3)%     (5,939)     (4.5)%       536       0.7%
Accretion and accrued
and paid dividends on
preferred stock......         --                    469       1.3%          --                   978       1.3%
---------               --------               --------               -------
Loss available to
common
shareholders.......  $  (6,904)    (10.7)%   $ (1,972)     (5.7)%   $ (5,939)     (4.5)%   $  (442)     (0.6)%
=========               ========               ========               =======

REVENUES

Consolidated revenues for the three and six months ended June 30, 1999 were
$64.8 million and $130.9 million, respectively. Compared with the same periods
in 1998, consolidated revenues increased $30.0 million or 86.2% and
$58.3 million or 80.2%, respectively.

WASTE-TO-ENERGY SEGMENT

Total revenues for this business unit were approximately $25.4 and
$49.0 million for the three and six months ended June 30, 1999, respectively,
compared to approximately $17.3 and $35.8 million, respectively, for the same
periods in 1998. This represents an increase of approximately $8.1 million or
46.8% and $13.2 million and 36.9% for the three and six months ended June 30,
1999, respectively, compared to the same periods in 1998.

Revenues in the waste-to-energy segment are primarily derived from waste
processing and electric power sales. Total tons received by the waste-to-energy
facilities increased by 5.0% and 4.2% for the three and six months ended
June 30, 1999, respectively, compared to the same periods in 1998. The tons
received at Penobscot increased approximately 3.3% and 0.2% for the three and
six months ended June 30, 1999, respectively, compared to the same periods in
1998. This increase at Penobscot was a result of the scheduled plant shutdown
occurring during the first quarter in 1999. In 1998, Penobscot's scheduled plant
shutdown occurred in the second quarter. The tons received by American Ash
Recycling increased approximately 79.9% and 81.3% for the three and six months
ended June 30, 1999, respectively compared to the same periods in 1998. The
increases at the American Ash facility were partially offset by a 3.8% and 4.4%
decrease in tons at Maine Energy for the three and six months ended June 30,
1999, respectively, compared to the same periods in 1998. The decrease at Maine
Energy was due to lower production as a result of repairs to the primary
processing equipment.

Waste processing revenues increased by approximately $2.8 million or 31.1%
and approximately $3.8 million or 22.4% for the three and six months ended
June 30, 1999, respectively, compared to the same periods in 1998. This increase
in revenue is a result of the net increase in tonnage discussed above, increased
prices charged per ton during 1999 compared to 1998 of approximately 7.2% and

118

additional revenues from the Multitrade, Russell Stull, AFA Group and KTI
Recycling of Canada acquisitions. The increases from the acquisitions were
offset by reductions at KTI BioFuels due to the elimination of brokerage
operations on March 31, 1998.

Electric power revenues for the three and six months ended June 30, 1999
increased approximately $0.5 million or 3.9% and approximately $1.4 million or
4.1% compared to the same periods in 1998. The increase in revenues is due to
amortization of the customer advance at Penobscot and additional revenues from
Multitrade which was acquired in June 1998. This was offset by higher
performance credits as a result of the amended Power Purchase and Waste Disposal
Agreements.

RESIDENTIAL RECYCLING SEGMENT

This segment, which includes the residential recycling plants of FCR and the
KTI Recycling of New England facilities in Boston posted revenues of
approximately $6.0 million and $15.1 million for the three and six months ended
June 30, 1999, respectively, compared to approximately $1.5 and $3.2 million,
respectively, for the same periods in 1998. This increase of approximately $4.5
and $11.9 million, respectively, is a result of the acquisition of FCR being
completed in the third quarter of 1998.

COMMERCIAL RECYCLING SEGMENT

The commercial recycling segment had total revenues for the three and six
months ended June 30, 1999 of approximately $19.3 and $40.4 million,
respectively, compared to $13.5 and $29.5 million, respectively, for the same
periods in 1998. This represents an increase of approximately $5.8 and
$10.9 million, respectively. These increases are primarily as a result of the
acquisition of KTI New Jersey Fibers, Inc., which was completed in the third
quarter of 1998, and higher commodity prices for paper fibers in the second
quarter of 1999 compared to the second quarter of 1998. These increases were
partially offset by lower volumes at the commercial processing plants due to the
sale of the KTI Recycling of Illinois facility in Chicago.

FINISHED PRODUCTS SEGMENT

Total revenues for this segment for the three and six months ended June 30,
1999 were approximately $14.1 and $26.4 million, respectively, compared to
approximately $2.5 and $4.2 million for the same periods in 1998. This
represents an increase of approximately $11.5 and $22.2 million, respectively.
The increase in revenues is primarily the result of acquisitions discussed above
and higher volumes at Manner. These volumes were partially offset by decreases
in plastic prices in the second quarter of 1999 compared to the same period in
1998.

COSTS AND EXPENSES

WASTE-TO-ENERGY SEGMENT

Cost of operations in this segment consists primarily of electric power and
waste handling costs which were approximately $20.8 and $37.7 million, during
the three and six months ended June 30, 1999, respectively, compared to
approximately $16.5 and $29.2 million, respectively, for the same periods in
1998. This is an increase of approximately $4.3 million or 26.1% and
$8.5 million or 29.1%, respectively. The increase was primarily a result of the
Total Waste Management, Multitrade, Russell Stull, AFA Group and KTI Recycling
of Canada acquisitions discussed above which had total costs of operations of
approximately $5.4 million for the six months ended June 30, 1999. In addition,
Penobscot's operating costs decreased 5.3% due to lower costs associated with
the planned plant shutdown. Timber Energy Resources costs decreased by 12.5% as
a result of an increase in tipping fee based material which reduced fuel costs
and the elimination of the costs associated with the KTI BioFuels brokerage
discussed above.

119

RESIDENTIAL RECYCLING SEGMENT

Cost of operations in this segment for the three and six months ended
June 30, 1999 was approximately $6.3 and $14.8 million, respectively, compared
to approximately $1.3 and $2.5 million, respectively, for the same periods in
1998. This was because of our acquisition of FCR in the third quarter of 1998.

COMMERCIAL RECYCLING SEGMENT

Cost of operations in this segment for the three and six months ended
June 30, 1999 was approximately $23.2 and $44.1 million, respectively, compared
to approximately $14.1 and $29.8 million, respectively, during the same periods
in 1998. This increase is primarily due to our acquisition of KTI New Jersey
Fibers in August 1998 and higher commodity purchase prices which were partially
offset by lower volumes at the commercial processing plants.

FINISHED PRODUCTS

Cost of operations in this segment for the three and six months ended
June 30, 1999 was approximately $15.1 and $26.7 million, respectively, compared
to approximately $2.6 and $3.9 million, respectively, during the same periods in
1998. The increase was primarily a result of the acquisitions discussed above
and increased volumes at Manner. The increased volumes at Manner were partially
offset by lower purchase prices in 1999.

OTHER ITEMS

Selling, general and administrative expenses increased by approximately $4.2
and $9.0 million for the three and six months ended June 30, 1999, respectively,
compared to the same periods in 1998. The increase is a result of selling,
general administrative costs added through acquisitions throughout 1998 and the
addition of administrative staff to develop and install corporate-wide
information systems; to develop and support a formal strategic planning and
budgeting process; to support company-wide credit and collection efforts; to
identify and pursue potential mergers and acquisitions; and to develop internal
information systems to identify revenue enhancement and cost savings programs in
newly acquired entities.

On June 1, 1999, KTI completed the sale of its Chicago commercial recycling
facility and recorded a loss of approximately $0.4 million.

As a result of this loss, KTI initiated an impairment review of the
long-lived assets, including goodwill, in the commercial recycling segment. A
revised operating plan for each of the remaining facilities in the commercial
recycling segment was developed. While revenues are stable, the commercial
recycling segment continues to operate at levels of profitability which are
significantly below the levels anticipated when the acquisitions were completed.
In addition, with the continued consolidation of the solid waste industry and
the continued focus on the disposal aspects of this industry, the possibility of
selling these facilities for amounts approximating their carrying value is
remote.

KTI continued to experience low operating results in the commercial
recycling segment and determined that the estimated future undiscounted cash
flows for the KTI Recycling of New Jersey facility in Newark were below the
carrying value of the long-lived assets. KTI adjusted the carrying value of the
equipment and leasehold improvements of the Newark facility by approximately
$3.0 million to their estimated fair value of approximately $1.2 million. The
fair value of the long-lived assets was based on the expected cash flows
discounted at a rate commensurate with the risk involved.

120

Interest expense increased approximately $3.8 and $6.0 million during the
three and six months ended June 30, 1999, respectively, compared to the same
periods in 1998. These increases are related principally to increased borrowings
on KTI's line of credit to fund several acquisitions, incremental interest
expense on debt assumed as part of these acquisitions, higher interest rates on
KTI's line of credit, fees associated with the amendment of financial covenants,
and the conversion of the Series B Preferred Stock to convertible debt. These
increases were partially offset by lower interest rates at Penobscot as a result
of the refinancing of the bonds payable and lower debt levels at Maine Energy.

COMPARISON OF YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS)
---------------------------------------------------------------
1998                  1997                  1996
-------------------   -------------------   -------------------

Revenues.............................  $179,007     100.0%   $98,587      100.0%   $ 35,717     100.0%
Cost of operations...................   156,664      87.5%    75,864       77.0%     26,048      72.9%
--------    ------    -------     ------    --------    ------
Gross Profit.......................    22,343      12.5%    22,723       23.0%      9,669      27.1%
Selling, general and
administrative.....................     7,947       4.4%     3,196        3.2%      2,534       7.1%
--------    ------    -------     ------    --------    ------
Income from operations...............    14,396       8.1%    19,527       19.8%      7,135      20.0%
Interest expense, net................    10,667       6.0%     5,086        5.2%      4,464      12.5%
Other income, net....................        --                 (390)      (0.4)%       (37)     (0.1)%
--------    ------    -------     ------    --------    ------
Income from continuing operations
before minority interest, benefit
for income taxes and
extraordinary item...............     3,729       2.1%    14,831       15.0%      2,708       7.6%
Minority interest....................     3,702       2.1%     2,522        2.6%      1,185       3.3%
Pre-acquisition earnings.............        --                4,722        4.8%         --
--------    ------    -------     ------    --------    ------
Income from continuing operations
before benefit for income taxes and
extraordinary item.................        27       0.0%     7,587        7.6%      1,523       4.3%
Benefit for income taxes.............    (3,023)     (1.7)%   (2,586)      (2.6)%        --
--------    ------    -------     ------    --------    ------
Income before extraordinary item...     3,050       1.7%    10,173       10.2%      1,523       4.3%
Discontinued operations--Loss from
discontinued operations (including
a loss on disposal of $549 and a
provision for income taxes of
$200)..............................        --                   --                    714       2.0%
--------    ------    -------     ------    --------    ------
Income (loss) before extraordinary
item.............................     3,050       1.7%    10,173       10.2%        809       2.3%
Extraordinary item--Loss on early
extinguishment of debt, net of
minority interest and taxes........       351       0.2%        --                  2,248       6.3%
--------    ------    -------     ------    --------    ------
Net income (loss)..................     2,699       1.5%    10,173       10.2%     (1,439)     (4.0)%
Accretion and accrued and paid
dividends on preferred stock.......    (1,133)     (0.6)%   (1,408)      (1.4)%        --
--------    ------    -------     ------    --------    ------
Net income (loss) available to
common shareholders..............  $  1,566       0.9%   $ 8,765        8.8%   $ (1,439)     (4.0)%
========    ======    =======     ======    ========    ======

YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997

REVENUES

Consolidated revenue for the year ended December 31, 1998, compared with the
same period in 1997, increased approximately $80.4 million or 81.6%.

121

WASTE-TO-ENERGY SEGMENT

The total revenues for the waste-to-energy segment were approximately
$76.7 million for the year ended December 31, 1998, compared to approximately
$74.2 million for the same period in 1997. This is an increase of approximately
$2.5 million or 3.4%.

Revenues in the waste-to-energy segment were primarily produced from waste
processing and electric power sales. Total tons received by Maine Energy and
Penobscot increased 2.0% and 4.1%, respectively, in 1998, compared to 1997.
These increases were due to higher municipal solid waste disposal rates in the
areas close to the facilities, which improved the competitive pricing position
for Maine Energy and Penobscot. Waste processing revenues decreased by
approximately $2.0 million or 8.3% for the year. This decrease was due to higher
performance credits due to the restructuring of the Bangor Hydro power purchase
agreement. This decrease was reduced by an approximately 5.0% increase in the
prices charged per ton during 1998 versus 1997 and additional revenues from the
Total Waste Management acquisition, offset by a 12.2% decrease in volume versus
1997 as a result of lower volumes at Timber Energy Resources' Cairo facility.

Electric power revenues increased about $8.0 million or 20.4% during the
year. Revenue for the year increased due to the restructuring of the Bangor
Hydro power purchase agreement in the second quarter. In connection with the
restructuring of the Bangor Hydro power purchase agreement, we received
$6.0 million in cash and an agreement from Bangor Hydro to pay us $250,000 per
quarter over the next four years, a total of $4.0 million. Bangor Hydro also
issued warrants to purchase one million shares of Bangor Hydro common stock to
the partners of Penobscot. Our share, which was based upon our ownership
percentage at Penobscot, was approximately 713,000 warrants. The estimated fair
market value of these warrants at the date of issue was $5.35 per warrant. The
$6.0 million in cash, the present value of the payments from Bangor Hydro of
approximately $3.6 million, and the fair value of the warrants of approximately
$3.8 million were recorded as a customer advance and are being amortized over
the life of the Bangor Hydro power purchase agreement. The amount recorded as
revenue for the year ended December 31, 1998 was $0.5 million. The remaining
increase in revenues resulted from the acquisition of Multitrade, the 3%
increase in the price per kilowatt hour charged during 1998, and the 1% increase
in kilowatt hours as a result of a shorter down period for Timber Energy
Resources' Cairo Facility in 1998.

RESIDENTIAL RECYCLING SEGMENT

This segment includes the residential recycling plants of FCR. This segment
posted revenues of approximately $11.8 million for 1998. This segment had no
revenues for the same period in 1997 because the acquisition was completed in
1998.

COMMERCIAL RECYCLING SEGMENT

Total revenue for this segment for the year ended December 31, 1998 was
approximately $68.1 million compared to $17.7 million for the same period in
1997. This is an increase in sales of approximately $50.4 million compared to
the same period in 1997. The increase in revenues is primarily the result of a
full year of operations in 1998 compared to five months of operations for K-C
International and six weeks of operations for KTI Recycling of Illinois, KTI
Recycling of New England and KTI Recycling of New Jersey in 1997, and the KTI
New Jersey Fibers acquisitions. These increases were partially offset by lower
commodity prices for paper fibers in 1998.

FINISHED PRODUCTS SEGMENT

Total revenue for this segment for the year ended December 31, 1998 was
approximately $22.3 million compared to approximately $6.5 million for the same
period in 1997. This represents an increase of approximately $15.8 million. The
increase in revenues primarily resulted from the

122

acquisitions discussed above, which were partially offset by lower revenues at
Manner due to decreases in plastic prices in 1998.

COSTS AND EXPENSES

WASTE-TO-ENERGY SEGMENT

Cost of operations in this segment was approximately $59.1 million during
the year ended December 31, 1998, compared to approximately $54.4 million during
1997. This represents an increase of approximately $4.7 million or 8.6%. The
increase was primarily a result of the Total Waste Management and Multitrade
acquisitions discussed above, which had total costs of operations of
approximately $5.3 million. These increases were offset by a decrease in costs
at Timber Energy Resources of approximately $1.1 million. Timber Energy
Resources incurred additional costs during 1997 due to an extended shutdown at
its Telogia Facility.

RESIDENTIAL RECYCLING SEGMENT

Cost of operations in this segment was approximately $10.4 million for 1998.
We acquired the FCR facilities during 1998.

COMMERCIAL RECYCLING SEGMENT

Cost of operations in this segment for the year ended December 31, 1998 was
approximately $68.6 million in 1998 compared to approximately $17.2 million in
1997. This represents an increase of approximately $51.4 million compared to the
same period in 1997. This increase is due primarily to the acquisition of KTI
New Jersey Fibers in August 1998 as well as the inclusion of K-C International
and the KTI Recycling of Illinois, KTI Recycling of New England and KTI
Recycling of New Jersey facilities for a full year in 1998 compared to five
months of operations for K-C International and six weeks of operations for each
of the Illinois, New England and New Jersey facilities in 1997.

FINISHED PRODUCTS

Cost of operations in this segment for the year ended December 31, 1998 was
approximately $21.5 million compared to approximately $6.4 million in 1997. The
increase was primarily a result of the acquisitions discussed above and was
partially offset by lower purchase prices at Manner due to decreases in plastics
prices in 1998.

OTHER ITEMS

Selling, general and administrative expenses increased by approximately
$4.8 million during 1998 compared to 1997. Other than costs added through recent
acquisitions, we have added administrative staff to develop and install
corporate-wide information systems; to develop and support a formal strategic
planning and budgeting process; 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 expenses increased approximately $5.6 million or 109.7% during 1998
compared to the same periods in 1997. These increases are principally related to
increased borrowings on our line of credit in order to fund several
acquisitions, the conversion of the Series B Preferred Stock to convertible
debt, and the premium of approximately $1.4 million on the conversion of the
debt to equity. These increases were partially offset by lower interest rates at
Penobscot because of the refinancing of the outstanding bonds and lower debt
levels at Maine Energy.

The income tax benefit was approximately $3.0 million for 1998 compared to
approximately $2.6 million in 1997. The income tax benefit includes a credit of
approximately $3.2 million in 1998 and $5.1 million in 1997, due to the reduced
valuation allowance for deferred tax assets as a result of the determination
that we will be able to utilize net operating loss carryforwards.

123

The extraordinary loss represents the loss on early retirement of the
Penobscot bonds of approximately $0.4 million net of minority interest and
income tax benefits.

YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996

REVENUES

WASTE-TO-ENERGY

Revenue increased by approximately $38.5 million during the year ended
December 31, 1997 compared to 1996. The net increase was a result of both
increased sales of approximately $30.8 million and the consolidation of
Penobscot for financial reporting purposes during 1997, which includes
approximately $23.6 million of revenues from the period prior to the date we
acquired our controlling interest in Penobscot, and approximately $4.5 million
for a full year effect of certain acquisitions during 1997.

COMMERCIAL RECYCLING

Sales of recyclables increased to approximately $24.2 million in 1997 as a
result of acquiring I. Zaitlin & Sons, K-C International and the KTI Recycling
of Illinois, KTI Recycling of New England and KTI Recycling of New Jersey
facilities in 1997.

COSTS AND EXPENSES

WASTE-TO-ENERGY

Electric power waste handling operating costs increased by approximately
$28.3 million, for the year ended December 31, 1997 compared to 1996. The
increase was a result of consolidation of Penobscot in 1997, which led to costs
and expenses of approximately $17.8 million in 1997, which includes
approximately $13.1 million of costs and expenses from the period prior to the
date we acquired our controlling interest in Penobscot, and a full year effect
of certain acquisitions.

COMMERCIAL RECYCLING

The approximately $23.6 million increase in recycling costs was primarily
caused by the 1997 acquisitions of K-C International, Zaitlin and the KTI
Recycling of Illinois, KTI Recycling of New England and KTI Recycling of New
Jersey facilities, as well as the inclusion of Manner for the entire year of
1997 compared to only one month in 1996. These costs primarily reflect the costs
of acquired recyclables for resale.

OTHER ITEMS

Expenses related to sales, administrative and general items increased by
approximately $0.7 million or 26.1% for the year ended December 31, 1997
compared to 1996. This increase was primarily caused by salaries of additional
management personnel and associated expenses resulting from the acquisitions of
K-C International, Zaitlin and the KTI Recycling of Illinois, KTI Recycling of
New England and KTI Recycling of New Jersey facilities in 1997, as well as the
inclusion of Timber Energy Resources and Manner for a full year in 1997 compared
to only five weeks for 1996.

Depreciation and amortization for the year ended December 31, 1997 increased
by approximately $2.7 million or 40.4% compared to 1996. The increase resulted
from the consolidation of Penobscot in 1997, which includes approximately $3.0
million of depreciation and amortization from the period prior to the date we
acquired our controlling interest in Penobscot, and the full year effect in 1997
of certain acquisitions, offset by a decrease in depreciation at Maine Energy
due to the full year effect of the change in estimated useful lives of property,
plant and equipment beginning in the fourth quarter of 1996.

124

Interest, net increased by approximately $0.6 million or 13.9% for the year
ended December 31, 1997 compared to 1996. This increase resulted from
consolidating Penobscot, which includes approximately $2.2 million of interest
from the period before the date when we acquired our controlling interest, and
including a full year of interest for acquisitions during the fourth quarter of
1996. These increases were partially offset by a decrease in interest expense as
a result of the repayments of $64.5 million in outstanding bonds and
$29.5 million in subordinated debt at Maine Energy and a continued reduction in
our outstanding debt.

Equity in net income of Penobscot was eliminated as a result of the
consolidation of Penobscot for 1997. Pre-acquisition minority earnings of
approximately $4.6 million for the nine month period ended September 30, 1997
are included in minority interest in 1997.

Loss on sale of investments in 1996 was related to sales of securities in
connection with the early retirement of debt at Maine Energy. None of these
transactions occurred in 1997.

The tax benefit of approximately $2.6 million in 1997 is the result of a
reduction in our valuation allowance on net deferred tax assets. Our ability to
use our net operating loss carry forwards is limited as discussed below. The tax
benefit recorded in 1997 is based on management's evaluation that we will be
able to use all net operating loss and alternative minimum credit carry forwards
that are available to offset 1998 and 1999 income.

LIQUIDITY AND CAPITAL RESOURCES

We are a holding company and receive a portion of the cash flows of our
subsidiaries. Receipt of cash flow from Penobscot is currently restricted by
covenants under loan agreements, distribution restrictions under partnership
agreements with Penobscot's equity investors, and put-or-pay agreements with
municipalities. Maine Energy's cash flow is required to retire the remaining
outstanding subordinated debt balance of approximately $11.5 million as of
June 30, 1999 before partners' cash distributions can begin (approximately
$7.6 million of these notes are owned by KTI). Timber Energy Resources' 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
KTI separate from Maine Energy, Penobscot and Timber Energy Resources and
liquidity and capital resource of each of Maine Energy, Penobscot and Timber
Energy Resources independently.

We operate in industries that require high levels of capital investment. Our
capital requirements basically stem from (i) our working capital for ongoing
operations, (ii) capital expenditures for new plants and equipment and
(iii) business acquisitions. Our strategy has been to meet these capital needs
from internally generated funds that are not contractually restricted, drawings
under our lines of credit, collateralized equipment financing and proceeds from
the sale of our common stock.

As of June 30, 1999, KTI was in default of the financial covenants of its
$150.0 million line of credit. KTI's lender has waived the violation of the
financial covenants through January 1, 2000. As a result of the default, the
outstanding amount under the line of credit has been classified as a current
liability as of June 30, 1999. Upon the consummation of the merger, this line of
credit will be replaced by the credit facility of the combined company. However,
no assurances can be given that the conditions of the merger will be satisfied
or that the merger will be consummated.

If the merger is not consummated, KTI will be required to modify the
financial covenants or obtain an additional waiver from the lender. The lender
is under no obligation to amend the financial covenants or provide such a
waiver. KTI management believes that KTI will either obtain an additional waiver
or an amendment to the financial covenants; however, there can be no assurances
that this can be accomplished. As of June 30, 1999, no funds were available to
KTI under its revolving credit agreement. Though KTI management believes that
cash flows from its subsidiaries will meet its current needs for working capital
and capital expenditures, KTI's ability to expand its current operations is

125

dependent on cash flow from its subsidiaries. We believe that KTI has the
ability to access additional facilities to fund capital expenditures if needed;
although no assurance can be given in this regard.

As of June 30, 1999, one of KTI's subsidiaries was in violation of the
financial covenants of its revolving line of credit. KTI believes that these
violations were cured as of October 31, 1999. Upon the consummation of the
merger, this line of credit will be replaced by the credit facility of the
combined company. We cannot assure you that the conditions of the merger will be
satisfied or the merger will be consummated.

As of June 30, 1999, as a result of a reclassification of the outstanding
balance under the Revolving Credit Agreement, we had a working capital deficit
of approximately $107.3 million (ratio of current assets to current liabilities
of 0.46:1) and a cash balance of approximately $5.4 million which compared to
working capital of approximately $42.8 million (a ratio of current assets to
current liabilities of 2.11:1) and a cash balance of approximately $9.4 million
at December 31, 1998. As of June 30, 1999, we had a working capital deficit and
cash on hand without regard to Maine Energy, Penobscot and Timber Energy
Resources of approximately $137.7 million (a ratio of current assets to current
liabilities of 0.28:1) and approximately $1.6 million, respectively, which
compared to working capital of approximately $12.9 million (a ratio of current
assets to current liabilities of 1.41:1) and a cash balance of approximately
$3.9 million at December 31, 1998.

Our ability to make future acquisitions depends on our ability to increase
our line of credit. Our ability to increase the line of credit is dependent on
our ability to raise additional equity or raise capital from financial
instruments that are subordinated to the KeyBank credit line. We believe that we
have the ability to raise additional capital if needed; however, there can be no
assurance that this can be accomplished at terms and conditions that would be
acceptable to us.

As of June 30, 1999, we and our subsidiaries, other than Maine Energy,
Penobscot and Timber Energy Resources, had current maturities of indebtedness of
approximately $155.3 million (including the reclassified debt), including
borrowings under revolving credit facilities. During the six months ended
June 30, 1999, we, apart from Maine Energy, Penobscot and Timber Energy,
increased net borrowings on our lines of credit by approximately $12.4 million,
primarily for the refinancing of debt assumed from acquisitions, the funding of
business operations and capital expenditures.

MAINE ENERGY

Maine Energy has financed its operations and capital expenditures from cash
flows from operations. Cash provided by operations was approximately
$0.1 million for the six months ended June 30, 1999 compared to approximately
$1.2 million during the same period in 1998. Maine Energy's capital expenditures
were approximately $1.0 million and $1.7 million during the six months ended
June 30, 1999 and 1998, respectively.

As of June 30, 1999 and December 31, 1998, Maine Energy had operating cash
of approximately $0.3 million and $2.4 million, respectively, and as required
under the terms of the credit agreement underlying its letter of credit, Maine
Energy has on account an additional approximately $5.5 million and
$6.0 million, respectively, of reserves to be used under certain circumstances
for capital improvements, debt service, operating shortfalls and working capital
requirements. As of June 30, 1999, Maine Energy had total indebtedness of
approximately $11.5 million.

We believe Maine Energy's cash flows from operations and cash resources
available will be sufficient to fund anticipated capital expenditures and debt
service requirements. Capital expenditures for Maine Energy for the remainder of
1999 are not expected to be significant.

126

PENOBSCOT

Penobscot has financed its operations and capital expenditures primarily by
cash flow from operations. Cash provided by operations was approximately
$2.7 million for the six months ended June 30, 1999 compared to approximately
$5.9 million in the same period in 1998. Penobscot's capital expenditures were
approximately $1.3 million and $0.2 million during the six months ended
June 30, 1999 and 1998, respectively.

On June 26, 1998, we completed a major restructuring of the various
contracts and obligations of Penobscot, which included refinancing Penobscot's
tax exempt bonds. The refinancing was made possible by the sale of approximately
$45.0 million in Electric Rate Stabilization Revenue Refunding Bonds issued by
Finance Authority of Maine. The proceeds, and certain funds from operations were
used to repay the outstanding Revenue Bonds. The interest rate on the bonds
ranges from 3.75% for one-year bonds to 5.20% for 20-year term bonds. The
refinancing will reduce Penobscot's debt service costs while extending its
payment obligation over 20 years.

As of June 30, 1999, in addition to Penobscot's operating cash of
approximately $2.8 million, Penobscot, as required under the terms of the trust
indenture governing the FAME Bonds, had on account an additional approximately
$15.4 million of cash reserves to be used for capital improvements, debt
service, operating shortfalls and working capital requirements.

We believe Penobscot's cash flows from operations and cash resources
available will be sufficient to fund anticipated capital expenditures and debt
service requirements. Penobscot plans capital expenditures for the remainder of
1999 of approximately $0.4 million, which has largely been set aside in the
reserve accounts.

TIMBER ENERGY RESOURCES

Timber Energy Resources has financed its operations and capital expenditures
primarily by cash flows from operations. Cash provided by operations was
approximately $0.7 million for the six months ended June 30, 1999 compared to
approximately $0.8 million during the same period in 1998.

Timber Energy Resources has two 1997 Industrial Development Revenue Bond
issues outstanding that carry interest at a fixed rate of 7% and have annual
sinking fund payments due each December 1 with a final payment due December 1,
2002. As of June 30, 1999, Timber Energy Resources had $11.6 million outstanding
in 1997 Bonds.

As of June 30, 1999 and December 31, 1998, in addition to Timber Energy
Resources' operating cash of approximately $0.7 million and $0.8 million,
respectively, Timber Energy Resources, as required under the terms of its
then-existing debt agreements, had on account approximately $1.8 and
$2.1 million, respectively, of reserves to be used under certain circumstances
for capital improvements, debt service, operating shortfalls and working capital
requirements.

We believe Timber Energy Resources' cash flows from operations and cash
resources available will be sufficient to fund anticipated capital expenditures
and debt service requirements. We expect capital expenditures for Timber Energy
Resources for the remainder of 1999 to be approximately $0.2 million. Timber
Energy Resources intends to finance the requirements through cash flow from
operations.

TAX LOSS CARRYFORWARDS

At June 30, 1999, we had net operating loss carryforwards of approximately
$55.4 million for income tax purposes that expire in years 2002 through 2018 and
are subject to the limitations described below. In addition, we have general
business credit carryforwards of approximately $0.5 million that expire in the
years 1999 through 2006 and alternative minimum tax credit carryforwards of
approximately $0.9 million that are not subject to limitation.

127

The Tax Reform Act of 1986 enacted a complex set of rules limiting the
potential utilization of net operating loss and tax credit carryforwards in
periods following a corporate "ownership change." In general, for federal income
tax purposes, an ownership change occurs if the percentage of stock of a loss
corporation owned, actually, constructively and, in some cases, deemed, by one
or more "5% shareholders" increases by more than fifty (50) percentage points
over the lowest percentage of such stock owned during a three-year testing
period.

During 1994, we had such a change in ownership. As a result of the change,
our ability to use our net operating loss carryforwards and general business
credits will be limited to approximately $1.2 million of taxable income, or
approximately $0.4 million of equivalent credit per year. This limitation may be
increased if we recognize a gain on the disposition of an asset that had a fair
market value greater than its tax basis on the date of the ownership change.

In connection with the acquisition of Timber Energy Resources, FCR and Total
Waste Management, we recorded net operating loss carryforwards of approximately
$25.6 million, $12.5 million and $0.5 million, respectively, which are included
in the total of $55.4 million in loss carryforwards and which are also subject
to a corporate "ownership change". As a result of the change, our ability to use
the net operating loss carryforwards related to these entities is limited to
approximately $1.0 million, $3.2 million and $0.1 million, respectively, per
year.

ENVIRONMENTAL CONTINGENCIES

While increasing environmental regulation often presents new business
opportunities to us and our subsidiaries, it likewise often results in increased
operating costs as well. We and our subsidiaries strive to conduct our
operations in full compliance with applicable laws and regulations, including
environmental rules and regulations. This effort requires programs to promote
compliance, such as training employees and customers, purchasing health and
safety equipment, and in some cases hiring outside consultants and lawyers. Even
with these programs, we believe that in the ordinary course of doing business,
companies in the environmental services and waste disposal industry face
governmental enforcement proceedings resulting in fines or other sanctions and
will likely be required to pay civil penalties or to expend funds for remedial
work on waste management facilities.

In March 1999, KTI voluntarily disclosed to civil regulatory authorities at
the Florida Department of Environmental Protection ("FDEP") violations of a
condition of its Clean Water Act waste water discharge permit and related
reporting obligations at its Telogia, Florida facility. On July 28, 1999, KTI
entered into an administrative consent order with FDEP resolving the state civil
aspects of those violations. The violations involved the temperature of the
water discharged from the cooling process. Under the consent order, KTI was
required to pay penalties and expenses totaling $131,000 and must satisfy
certain interim waste water discharge monitoring and reporting requirements,
submit and implement a plan of study for the purpose of obtaining a revised
permit, and either obtain a revised permit or install additional cooling
equipment at the facility. KTI believes it is currently in compliance with the
interim requirements.

As of June 30, 1999, no pending governmental environmental enforcement
proceedings exist for which we or any of our subsidiaries believe that potential
monetary sanctions will exceed $0.1 million. The possibility always exists that
substantial expenditures could result from governmental proceedings, which would
have a negative impact on our earnings for a particular reporting period. More
importantly, federal, state and local regulators have the power to suspend or
revoke permits or licenses needed for the operation of our or our subsidiaries'
plants, equipment, and vehicles based on the applicable company's compliance
record, and customers may decide not to use a particular disposal facility or do
business with a company because of concerns about its compliance record.
Suspension or revocation of permits or licenses would negatively impact our
business and operations and could have a material adverse impact on our
financial results.

128

INFLATION

Inflation has had a minimal effect on our operating costs in the past three
years. Most of our operating expenses are inflation sensitive, with increases in
inflation generally resulting in increased costs of operation. The effect of
inflation-driven cost increases on each of our project's overall operating costs
is not expected to be greater for such projects than for our competitor's
projects. In addition, each of Maine Energy's and Penobscot's contracts and the
majority of our residential recycling contracts allow us to increase waste
processing fees paid by municipal customers annually based on inflation.

YEAR 2000 ISSUE

Year 2000 compliance is the ability of computer hardware and software to
respond to the problems posed by the fact that computer programs have
traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer systems will not be
able to differentiate between the year 2000 and 1900. Systems must also
recognize the Year 2000 as a leap year. Failure to address this problem could
result in system failures and the generation of erroneous data. This could
potentially impact our ability to perform our obligations under long-term
contracts, which could result in legal and other liabilities that would have a
material adverse effect.

We are in the process of contacting our customers and vendors and have
received letters from each of our applications vendors stating that the majority
of our information technology systems, such as accounting, data processing,
plant operations systems and telephone/PBX systems, are Year 2000 compliant.
Several insignificant software applications that represent 20% of our
applications are not Year 2000 compliant. We plan to replace or upgrade these
applications with compliant versions by the end of the third quarter of 1999. We
have also begun an assessment of our non-information technology systems, such as
our security systems and telephones, to determine if they are Year 2000
compliant. We plan to initiate formal communications with the vendors of our
remaining non-information technology systems. Based on our assessment to date,
we believe that our non-information technology systems will be Year 2000
compliant prior to the Year 2000.

We have also begun an assessment of our significant vendors, suppliers, and
service providers to determine the extent to which we are vulnerable to those
third parties' failure to remediate their own Year 2000 compliance issues. To
date, we believe, based on information published or otherwise provided by the
third parties, that all of their systems are or will be Year 2000 compliant. We
plan to initiate formal communications with significant remaining third parties.
Based on our assessment to date, we believe that our significant vendors,
suppliers and service providers will be Year 2000 compliant prior to the Year
2000.

129

The following table summarizes the status of our Year 2000 compliance
program:

ASSESSMENT           REMEDIATION            TESTING          IMPLEMENTATION
-------------------  -------------------  -------------------  -------------------

Information Technology........  Completed            90% complete         90% complete         90% complete

Expected completion  Expected completion  Expected completion
date, December 1999  date, December 1999  date, December 1999

Operating Equipment with        Completed            Completed            Completed            Completed
Embedded Chips or Software....

3(rd) Party...................  Completed for        Completed for        95% complete for     95% complete for
system interface.    system interface.    system interface.    system interface.
Completed for all
other material       Contingency plans    Expected completion  Expected completion
exposures.           completed.           date for system      date for system
interface work,      interface work,
December 1999        December 1999

Implement
contingency plans
or other
alternatives as
necessary, December
1999.

We have also conducted tests of all of our internal information and
non-information technology systems and all of our system interfaces with
significant vendors, suppliers and service providers to ensure Year 2000
compliance. All of our accounting and data processing equipment is based on
microcomputer hardware and related software. 80% of this equipment has been
certified as Year 2000 compliant by the applicable manufacturer or developer.
However, we have determined that the plant control systems may contain embedded
technology that is not Year 2000 compliant. These control systems were replaced
by Year 2000 compliant systems. However, despite our efforts to ensure that our
internal systems and the systems of our significant vendors, suppliers and
service providers are Year 2000 compliant, we cannot guarantee that the failure
of certain systems will not have a material adverse effect on us.

To date, we have used internal resources to reprogram or replace, test, and
implement the software and hardware modifications for Year 2000. Our only costs
have been the salary costs of our internal staff of four. To date, we have
incurred approximately $0.1 million (30% expensed and 70% capitalized for new
systems and equipment), related to all phases of the Year 2000 project. We
estimate that the remaining project costs will be less than $0.1 million for the
purchase of new software and hardware and approximately $0.1 million of internal
resources. Although we currently expect to be able to complete our Year 2000
compliance program using only internal resources, we cannot guarantee that we be
able to do so.

The most significant risk identified by us is the inability of the power
plants to generate electric power. We have received assurances that the process
control systems will be Year 2000 compliant with the installation of new
hardware components. We performed a complete test of the systems during the
planned shutdown periods that were completed during the third quarter of 1999.
In addition, we have developed contingency plans for this risk as well as other
internal and external applications which involve manual workarounds, increasing
inventories and adjusting staffing strategies. This risk could cause a default
under our power purchase agreements with customers or a loss of electric power
revenue. We are unable to reasonably estimate the impact of this risk; however,
there can be no guarantee that this risk will not have a material adverse effect
on us. We also cannot guarantee that we have identified all the significant
risks associated with Year 2000 compliance.

130

RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements that are not required to be adopted as of
June 30, 1999, include the following Statement of Financial Accounting Standards
("SFAS") and the American Institute of Certified Public Accountants Statements
of Position ("SOP"):

SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
which we will be required to adopt as of January 1, 2001, establishes standards
for derivative instruments including those embedded in other contracts and for
hedging activities. The new standard requires us to recognize all derivatives as
either assets or liabilities and measure those instruments at fair value. We
believe that the adoption of SFAS No. 133 will not have a material impact on our
financial statements.

SOP 98-1, ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE will be required to be adopted by us as of January 1, 2000. Our
current policy falls within the guidelines of SOP 98-1.

QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

KTI currently utilizes no material derivative financial instruments which
expose it to significant market risk. KTI is exposed to cash flow and fair value
risk due to changes in interest rates with respect to its debt. The table below
presents principal cash flows and related weighted average interest rates of the
KTI's debt at June 30, 1999 by expected maturity dates. Weighted average
variable rates are based on forward rates in United States Government Treasury
Constant Maturities at June 30, 1999. Forward rates should not be considered a
predictor of actual future interest rates.

INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
(IN THOUSANDS)

1999        2000        2001        2002        2003      THEREAFTER    FAIR VALUE
--------    --------    --------    --------    --------    ----------    ----------

Fixed Rate Debt.........   $  5,696     $8,071      $7,509      $8,153      $3,088       $50,466      $ 83,115

Average Interest Rate...       6.60%      6.50%       7.30%       6.30%       6.27%         5.04%

Variable Rate Debt......    155,092                                                                   $155,092

Average Interest Rate...       8.53%

131

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION

The following unaudited pro forma combined financial statements give effect
to the merger under the purchase method of accounting. These pro forma
statements are presented for illustrative purposes only. The pro forma
adjustments are based upon available information and certain assumptions that
management believes are reasonable. The pro forma combined financial statements
do not purport to represent what the results of operations or financial position
of Casella would actually have been if the merger had in fact occurred on such
dates, nor do they purport to project the results of operations or financial
position of Casella for any future period or as of any date. Additionally, no
pro forma adjustments have been made to reflect potential effects of (a) the
efficiencies that may be obtained by combining the operations of Casella and KTI
or (b) the costs of restructuring, integrating or consolidating the operations
of Casella and KTI, except as disclosed in Note 4(g). Under the purchase method
of accounting, tangible and identifiable intangible assets acquired and
liabilities assumed are recorded at their estimated fair values. The excess of
the purchase price, including estimated fees and expenses related to the merger,
over the fair value of net tangible assets acquired has preliminarily been
allocated to goodwill, and is being amortized over an estimated blended life of
30 years. The estimated fair values and useful lives of assets acquired and
liabilities assumed are based on a preliminary valuation and are subject to
final valuation adjustments.

Casella's and KTI's fiscal years end on different dates. Accordingly, to
combine Casella's and KTI's financial information:

- The unaudited pro forma combined condensed balance sheet information as of
July 31, 1999 was prepared by combining the balance sheet at July 31, 1999
for Casella, with certain adjustments, with the balance sheet at June 30,
1999 for KTI, giving effect to the merger as though it had been completed
on July 31, 1999;

- The unaudited pro forma combined condensed statements of operations for
the three months ended July 31, 1999 was prepared by combining Casella's
statement of operations for the three months ended July 31, 1999, with
certain adjustments, with KTI's statement of operations for the three
months ended June 30, 1999, giving effect to the merger as if it had
occurred on May 1, 1998; and

- The unaudited pro forma combined condensed statement of operations for the
year ended April 30, 1999 was prepared by combining Casella's statements
of operations for the year ended April 30, 1999, with certain adjustments,
with KTI's statements of operations for the twelve months ended March 31,
1999, as adjusted for an acquisition and the sale of substantially all
assets of a business, giving effect to the merger as if it had occurred on
May 1, 1998.

The unaudited pro forma financial information should be read in conjunction
with the respective audited historical financial statements, the unaudited
interim financial statements and the notes thereto of Casella and KTI which we
included in this proxy statement/prospectus.

132

UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JULY 31, 1999
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

CASELLA           KTI         PRO FORMA       PRO FORMA
JULY 31, 1999   JUNE 30, 1999   ADJUSTMENTS      BALANCES
-------------   -------------   -----------      ---------

Cash and cash equivalents........................    $  4,918        $  5,391       $      --       $ 10,309
Restricted funds.................................         629          21,053              --         21,682
Accounts receivable and other....................      29,463          41,705              --         71,168
Other current assets.............................       4,688          21,669              --         26,357
--------        --------       ---------       --------
Total current assets.............................      39,698          89,818              --        129,516
Property, plant, and equipment, net..............     140,581         216,777              --        357,358
Intangible assets, net...........................     107,443         126,420        (126,420)(4)    215,741
108,298 (4)
Other assets.....................................      12,917          30,019          (6,300)(3)     21,437
(1,900)(4)
(13,299)(4)
--------        --------       ---------       --------
120,360         156,439         (39,621)       237,178
--------        --------       ---------       --------
Total assets.....................................    $300,639        $463,034       $ (39,621)      $724,052
========        ========       =========       ========

Current maturities of long-term obligations......    $  2,998        $161,436        (150,000)(4)   $ 14,434
Accounts payable.................................      17,944          19,109          18,700 (3)     55,753
Other current liabilities........................       9,260          16,613           4,500 (4)     30,373
--------        --------       ---------       --------
Total current liabilities........................      30,202         197,158        (126,800)       100,560
Long-term obligations, less current maturities...     102,002          76,639         150,000 (4)    328,641
Minority interest................................          --          14,037              --         14,037
Deferred revenue.................................          --          70,194         (70,194)(4)         --
Other long term liabilities......................      16,768           1,382              --         18,150
--------        --------       ---------       --------
118,770         162,252          79,806        360,828
Stockholders' equity:
Casella Class A common stock:
Authorized--100,000,000 shares, $.01 par
value
Issued and Outstanding--15,039,441 shares
historical and 22,136,722 shares pro forma            150              --              71            221
KTI common stock:
Authorized--40,000,000 shares, no par value
(stated value $.01 per share)
Issued and Outstanding--13,916,238 shares
historical and 0 shares pro forma                      --             139            (139)            --
Casella Class B common stock.....................
Authorized--1,000,000 shares, $.01 par value
10 votes per share. Issued and Outstanding--
988,200 shares historical and pro forma....          10              --              --             10
Additional paid-in capital.......................     155,379         126,396         (15,470)       266,305
Accumulated deficit..............................      (3,872)        (22,911)         22,911         (3,872)
--------        --------       ---------       --------
Total stockholders' equity                        151,667         103,624           7,373        262,664
--------        --------       ---------       --------
Total liabilities and stockholders' equity.......    $300,639        $463,034       $ (39,621)      $724,052
========        ========       =========       ========

133

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)

KTI
CASELLA        ADJUSTED
HISTORICAL      HISTORICAL      PRO FORMA          PRO FORMA
JULY 31, 1999   JUNE 30, 1999   ADJUSTMENTS          BALANCES
-------------   -------------   -----------         ----------

Revenues...............................................     $55,036        $ 64,501        $(1,112)(2)        $116,429
(1,996)(5)

Cost of operations.....................................      30,946          50,254         (1,112)(2)          80,088
General and administrative.............................       7,798           6,197             --              13,995
Merger-related costs...................................       1,490              --             --               1,490
Restructuring charge...................................          --           2,971             --               2,971
Depreciation and amortization..........................       7,622           5,538           (151)(4)          13,009
Loss on impairment of long-lived assets................          --           3,000             --               3,000
-------        --------        -------            --------
47,856          67,960         (1,263)            114,553
-------        --------        -------            --------
Operating income (loss)................................       7,180          (3,459)        (1,845)              1,876
Loss on sale of business...............................          --              --             --                  --
Equity loss in subsidiary                                        --             214             --                 214
Other expense, net.....................................       1,548           5,487             --               7,035
-------        --------        -------            --------
Income (loss) before minority interest and provision
(benefit) for income taxes...........................       5,632          (9,160)        (1,845)             (5,373)
Minority interest......................................          --             490           (332)                158
-------        --------        -------            --------
Income (loss) before provision (benefit) for income
taxes................................................       5,632          (9,650)        (1,513)             (5,531)
Provision (benefit) for income taxes...................       2,591          (3,417)          (666)             (1,492)
-------        --------        -------            --------
Net income (loss)......................................     $ 3,041        $ (6,233)       $  (847)           $ (4,039)
=======        ========        =======            ========

Income (loss) before extraordinary item and cumulative
effect of change in accounting principle per common
share:
Basic..............................................     $  0.19        $  (0.45)                          $  (0.18)
=======        ========                           ========
Diluted............................................     $  0.18        $  (0.45)                          $  (0.18)
=======        ========                           ========

Weighted average common shares outstanding:
Basic..............................................      15,979          13,916                             23,076
Diluted............................................      16,539          13,916                             23,076

134

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED APRIL 30, 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)

KTI
CASELLA          ADJUSTED
HISTORICAL       HISTORICAL      PRO FORMA          PRO FORMA
APRIL 30, 1999   MARCH 31, 1999   ADJUSTMENTS          BALANCES
--------------   --------------   -----------         ----------

Revenues.............................................     $184,246        $ 231,881        $(5,981)(2)        $402,160
(7,986)(5)

Cost of operations...................................      110,008          182,182         (5,981)(2)         286,209
General and administrative...........................       27,043           14,242             --              41,285
Merger-related costs.................................        1,951               --             --               1,951
Restructuring charge.................................           --              748             --                 748
Depreciation and amortization........................       25,899           18,973           (604)(4)          44,268
--------        ---------        -------            --------
164,901          216,145         (6,585)            374,461
--------        ---------        -------            --------
Operating income.....................................       19,345           15,736         (7,382)             27,699
Other expense, net...................................        5,221           15,521             --              20,742
--------        ---------        -------            --------
Income (loss) before minority interest, provision
(benefit) for income taxes, extraordinary item and
cumulative effect of change in accounting
principle..........................................       14,124              215         (7,382)              6,957
Minority interest....................................           --            3,256         (2,026)              1,230
--------        ---------        -------            --------
Income (loss) before provision (benefit) for income
taxes, extraordinary item and cumulative effect of
change in accounting principle.....................       14,124           (3,041)        (5,356)              5,727
Provision (benefit) for income taxes.................        7,509           (3,723)        (2,384)              1,402
--------        ---------        -------            --------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle..........................................     $  6,615        $     682        $(2,972)           $  4,325
========        =========        =======            ========
Income (loss) before extraordinary item and
cumulative effect of change in accounting principle
per common share:
Basic............................................     $   0.44        $    0.06                           $   0.20
========        =========                           ========
Diluted..........................................     $   0.41        $    0.05                           $   0.19
========        =========                           ========

Weighted average common shares outstanding:
Basic............................................       15,145           12,330                             21,433
Diluted..........................................       16,019           13,176                             22,739

135

NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION

NOTE 1. PRO FORMA INCOME (LOSS) PER COMMON SHARE

The pro forma combined income (loss) per share calculations are based on the
combined basic and diluted weighted average number of shares outstanding of
Casella and KTI utilizing an exchange ratio of 0.51 shares of Casella Common
Stock for each share of KTI Common Stock.

NOTE 2. INTERCOMPANY TRANSACTIONS

All material intercompany transactions between Casella and KTI have been
eliminated from all periods presented.

NOTE 3. MERGER COSTS

Casella and KTI estimate that they will incur direct merger costs of
approximately $25.0 million associated with the merger, consisting of
transaction fees for investment bankers, severance, attorneys, accountants, and
other related charges as follows:

AMOUNT IN
MILLIONS
---------

Investment banking fees.....................................    $13.9
Severance charges...........................................      7.0
Professional fees (legal, accounting, printing).............      4.1
-----
Total estimated direct costs..............................    $25.0
Less: amounts incurred and reflected in historical balance
sheets..................................................     (6.3)
-----
Additional direct costs to be incurred..................     18.7
=====

NOTE 4. PURCHASE PRICE ALLOCATION

The fair value of the consideration to acquire KTI's common stock will be
allocated to the assets and liabilities of KTI based on their estimated fair
value. A preliminary allocation is presented below in which the fair value of
the identifiable net assets are assumed to equal the net book value of such
assets, as adjusted, more fully described in (d) below. The excess of
consideration over the fair value of the identifiable net assets has been
preliminarily allocated to goodwill as follows (in thousands, except share and
per share data):

KTI shares outstanding at June 30, 1999.                         13,916

Exchange ratio............................................       0.51
---------
Number of Casella shares to be issued.......................      7,097
Price per share (a).......................................  $   15.64
---------
Total stock consideration...................................  $ 110,997
Merger costs (b)............................................     25,000
---------
Total purchase price........................................    135,997
Estimated fair value of KTI tangible net assets (c).........     27,699
---------
Excess of purchase price over fair value of tangible net
assets (primarily goodwill)................................  $ 108,298
=========

(a) The estimated consideration and purchase price allocation used for pro forma
purposes are based on a value of $15.64 per share of Casella common stock
(average of closing market price from two business days prior to the
announcement to two days after the announcement).

136

NOTE 4. PURCHASE PRICE ALLOCATION (CONTINUED)
(b) Merger costs primarily include investment banking fees, severance and other
professional fees (see note 3 above).

(c)  Reconciliation of KTI identifiable net assets to tangible
net assets as of June 30, 1999:
Net Book Value of KTI identifiable net assets...............  $103,624
Less: Intangible assets.....................................  (126,420)
Less: Deferred financing fees (d)...........................    (1,900)
Plus: Deferred revenue (f)..................................    70,194
Less: Net deferred tax asset related to deferred revenue....   (13,299)
Less: Incremental liabilities related to planned asset
divestitures (g)............................................    (4,500)
--------
Estimated fair value of KTI tangible net assets.............  $ 27,699
========

(d) Casella and KTI expect to enter into a new line of credit agreement
immediately following the consummation of the merger. Therefore, deferred
financing fees of $1.9 million on KTI's June 30, 1999 balance sheet have
been given no value in the combined unaudited pro forma balance sheet. When
the new line of credit has been obtained, current liabilities of $150
million will convert to long term obligations.

(e) A pro forma adjustment has been made for the three months ended July 31,
1999 and the twelve months ended April 30, 1999 to reflect the amortization
of acquired intangibles using an estimated blended life of 30 years.

(f) KTI had deferred revenue related to certain contracts that is not considered
an assumed liability to the combined company.

(g) A pro forma adjustment has been made as of June 30, 1999 to reflect
estimated incremental liabilities related to planned divestitures of KTI
assets and other matters following the merger. The incremental liabilities
can be summarized as follows:

--  $3.5 million estimate related to facility abandonment charges,
including residual waste material clean-up and disposal costs, lease
termination fees and miscellaneous other charges. Of these charges,
$1.5 million relates to residual waste material clean-up and disposal
costs that will be incurred by certain KTI businesses which are not
expected to be sold.

--  $1.0 million estimate related to employee severance and separation
costs, and employment contract early termination costs.

No pro forma adjustments have been made to the statement of operations to
reflect the impact of these proposed asset divestitures because the
estimated impact is immaterial. In addition, the foregoing pro forma
adjustments relate only to certain planned divestitures expected to occur
shortly following the merger and do not include adjustments associated with
divestitures of the remainder of the 10 to 15 percent of KTI assets planned
to be divested. No pro forma adjustments have been made with respect to such
additional planned divestitures because plans relating to those divestitures
are preliminary at this time.

NOTE 5. REVENUE

A pro forma adjustment has been made for the three months ended July 31,
1999 and the twelve months ended April 30, 1999 to eliminate previously
recognized revenue relative to the deferred revenue discussed in Note 4 (f).

137

KTI UNAUDITED ADJUSTED HISTORICAL STATEMENT OF OPERATIONS

The KTI unaudited adjusted historical statement of operations for the twelve
months ended March 31, 1999 and the three months ended June 30, 1999 include the
effect of KTI's acquisition of FCR on August 28, 1998 and KTI's sale of
substantially all the assets of KTI Recycling of Illinois, Inc. on June 1, 1999,
as if the acquisition and sale had occurred on April 1, 1998. This acquisition
was accounted for under the purchase method of accounting and accordingly, the
results of operations since the acquisition date is included in the historical
financial statements of KTI.

The KTI unaudited adjusted historical statement of operations is not
necessarily indicative of the results of operations which would have been
reported if the acquisition and sale had occurred on April 1, 1998, nor is it
necessarily indicative of the future operating results of the combined company.
Furthermore, the adjusted historical statement of operations does not give
effect to all cost savings or incremental costs that may occur as a result of
the integration and consolidation of the completed acquisition. In the opinion
of management, all adjustments necessary to present fairly such adjusted
historical statement of operations have been made.

The KTI unaudited adjusted historical statement of operations should be read
in conjunction with the historical consolidated financial statements of KTI
which we have included elsewhere in this proxy statement/prospectus.

138

KTI UNAUDITED ADJUSTED HISTORICAL STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)

COMPLETED
SALE
COMPLETED ACQUISITION                                  -------------
---------------------------------------                         KTI RECYCLING
FCR              FCR                  TOTAL           OF
KTI           FCR      ACQUISITION(1)   ADJUSTMENTS            ACQUISITION   ILLINOIS
--------      --------   --------------   -----------            ----------   -------------

Revenues..............................  $207,259      $25,682        $1,258         $    --               $26,940        $(2,318)
Cost of operations....................   165,062       19,191         1,194              --                20,385         (3,265)
Selling, general and administrative...    10,382        4,032           509              --                 4,541             --
Restructuring charge..................       748           --            --              --         --         --             --
Depreciation and amortization.........    16,352        1,667           260             (27)    (1)(2)      1,900            (94)
--------      -------        ------         -------               -------        -------
192,544       24,890         1,963             (27)               26,826         (3,359)
Operating income (loss)...............    14,715          792          (705)             27                   114          1,041
Interest expense, net.................    12,942        1,553           183              34        (3)      1,770             --
--------      -------        ------         -------               -------        -------
Income (loss) before minority
interest, provision (benefit) for
income taxes, extraordinary item and
cumulative effect of change in
accounting principle................     1,773         (761)         (888)             (7)               (1,656)         1,041
Minority interest.....................     3,256           --            --              --                    --             --
--------      -------        ------         -------               -------        -------
Income (loss) before provision
(benefit) for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle...........................    (1,483)        (761)         (888)             (7)               (1,656)         1,041
Provision (benefit) for income
taxes...............................    (3,517)        (201)            8             (13)       (4)       (206)            --
--------      -------        ------         -------               -------        -------
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle.............  $  2,034      $  (560)       $ (896)        $     6               $(1,450)       $ 1,041
========      =======        ======         =======               =======        =======
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle per common
share:
Basic.............................  $   0.09
========
Diluted...........................  $   0.08
========
Weighted average common shares
outstanding:
Basic.............................    11,631
Diluted...........................    12,440

KTI
ADJUSTED
PRO FORMA           HISTORICAL
ADJUSTMENTS         BALANCES
-----------         ----------
Revenues..............................    $    --            $231,881
Cost of operations....................         --             182,182
Selling, general and administrative...       (681)    (5)      14,242
Restructuring charge..................         --      --         748
Depreciation and amortization.........        815     (6)      18,973
-------            --------
134             216,145
Operating income (loss)...............       (134)             15,736
Interest expense, net.................        809     (7)      15,521
-------            --------
Income (loss) before minority
interest, provision (benefit) for
income taxes, extraordinary item and
cumulative effect of change in
accounting principle................       (943)                215
Minority interest.....................         --               3,256
-------            --------
Income (loss) before provision
(benefit) for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle...........................       (943)             (3,041)
Provision (benefit) for income
taxes...............................         --              (3,723)
-------            --------
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle.............    $  (943)           $    682
=======            ========
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle per common
share:
Basic.............................                       $   0.06
========
Diluted...........................                       $   0.05
========
Weighted average common shares
outstanding:
Basic.............................                         12,330
13,176
Diluted...........................

139

KTI UNAUDITED HISTORICAL STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)

COMPLETED                         KTI
KTI            SALE                          ADJUSTED
HISTORICAL     KTI RECYCLING    PRO FORMA       HISTORICAL
JUNE 30, 1999    OF ILLINOIS    ADJUSTMENTS       BALANCES
-------------   -------------   -----------      ----------

Revenues..................................................     $64,793        $    292        $    --         $ 64,501

Cost of operations........................................      50,614             360             --           50,254
General and administrative................................       6,285              88             --            6,197
Restructuring charge......................................       2,971              --             --            2,971
Depreciation and amortization.............................       5,574              36             --            5,538
Loss on impairment of long-lived assets...................       3,000              --             --            3,000
-------        --------        -------         --------
68,444             484             --           67,960
-------        --------        -------         --------
Operating loss............................................      (3,651)           (192)            --           (3,459)
Loss on sale of business..................................         444             444             --               --
Equity loss in subsidiary.................................         214              --             --              214
Other expense, net........................................       5,522              --            (35 )(4)       5,487
-------        --------        -------         --------
Loss before minority interest and benefit for income
taxes...................................................      (9,831)           (636)            35           (9,160)
Minority interest.........................................         490              --             --              490
-------        --------        -------         --------
Loss before benefit for income taxes......................     (10,321)           (636)            35           (9,650)
Benefit for income taxes..................................      (3,417)             --             --           (3,417)
-------        --------        -------         --------
Net loss..................................................     $(6,904)       $   (636)       $    35         $ (6,233)
=======        ========        =======         ========
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle:

Basic...................................................     $ (0.50)                                       $  (0.45)
=======                                        ========
Diluted.................................................     $ (0.50)                                       $  (0.45)
=======                                        ========
Weighted average common shares outstanding:

Basic...................................................      13,916                                          13,916
Diluted.................................................      13,916                                          13,916

140

KTI, INC.
NOTES TO KTI UNAUDITED ADJUSTED HISTORICAL STATEMENT OF OPERATIONS
(IN THOUSANDS)

1. DESCRIPTION OF TRANSACTIONS

On August 28, 1998, KTI, Inc. (KTI) acquired FCR, Inc. (FCR) for $30.0
million in cash, and issued 1,714,285 shares of KTI common stock.

On July 2, 1998, FCR acquired Resource Recovery Systems, Inc. (RRS).

All the acquisitions discussed above were accounted for under the purchase
method of accounting and accordingly, the results of operations since the
respective acquisition dates are included in the historical financial statements
of KTI.

On June 1, 1999, KTI sold substantially all the assets of KTI Recycling of
Illinois, Inc. (Illinois) for $1.8 million in cash.

The KTI unaudited adjusted historical statement of operations is not
necessarily indicative of the results of operations which would have been
reported if the acquisitions or the sale of Illinois had occurred on April 1,
1998, nor are they necessarily indicative of the future operating results of the
combined company. Furthermore, the adjusted historical statement of operations
do not give effect to any cost savings or incremental costs that may occur as a
result of the integration and consolidation of the completed acquisitions. In
the opinion of management, all adjustments necessary to present fairly such
adjusted historical statement of operations have been made.

The KTI unaudited adjusted historical statement of operations should be read
in conjunction with the historical consolidated financial statements of KTI,
which we included in this proxy statement/ prospectus.

2. PRO FORMA ADJUSTMENTS

(1) Reduction in depreciation expense resulting from the reduction in carrying
value of acquired assets based on purchase price allocation of $49.
Depreciation is recorded over the estimated remaining lives of property,
plant, and equipment.

(2) Reflects additional goodwill amortization expense of $22. Goodwill is
amortized over 40 years.

(3) Adjustment to interest expense on refinanced and incremental debt
outstanding, assuming an average interest rate of 8.85%.

(4) Provision (benefit) for income taxes on the pro forma adjustments at a 39.5%
tax rate before non-deductible depreciation expense and goodwill
amortization.

(5) Elimination of legal and investment banking fees incurred by FCR in
connection with KTI's acquisition of FCR.

(6) Additional goodwill amortization expense. Goodwill is amortized over 30
years.

(7) Additional interest expense on refinanced and incremental debt outstanding
assuming an average interest rate of 8.75%.

3. EARNINGS PER SHARE

The pro forma earnings per share calculations are based on the unaudited
adjusted historical basic and diluted weighted average number of shares
outstanding adjusted for the issuance of shares for the acquisition of FCR.

141

DESCRIPTION OF CASELLA CAPITAL STOCK

AUTHORIZED CAPITAL STOCK

The authorized capital stock of Casella consists of 100,000,000 shares of
Casella Class A common stock, $0.01 par value per share, 1,000,000 shares of
Casella Class B common stock, $0.01 par value per share, and 1,000,000 shares of
preferred stock, $0.01 par value per share.

COMMON STOCK

The shares of Casella Class A common stock and Casella Class B common stock
are identical in all respects, except for voting rights, conversion rights and
transfer restrictions. The number of authorized shares of any class or classes
of capital stock of Casella may be increased or decreased, but not below the
number of shares then outstanding, by the affirmative vote of the holders of a
majority of the voting power of common stock entitled to elect directors and
irrespective of the provisions of Section 242(b)(2) of the Delaware General
Corporation Law statute.

VOTING RIGHTS.  The holders of Casella Class A common stock are entitled to
one vote per share. Holders of Casella Class B common stock are entitled to ten
votes per share. Holders of all classes of common stock entitled to vote will
vote together as a single class on all matters, except that the holders of
Casella Class A common stock will be entitled to elect, without the Casella
Class B common stock voting, at least one director, and that director may be
removed, with or without cause, by the holders of the Casella Class A common
stock. Mr. Gregory B. Peters is the designee of the holders of Casella Class A
common stock.

DIVIDENDS.  If dividends are declared by the Casella board, holders of
Casella Class A common stock and Casella Class B common stock will receive them
at the same rate, but only after any dividends required to be paid on shares of
preferred stock have been paid. Casella may not make any dividend or
distribution to any holder of any class of common stock unless it simultaneously
makes the same dividend or distribution to each outstanding share of common
stock regardless of class. In the case of a dividend or other distribution
payable in shares of a class of common stock, Casella Class A common stock will
be distributed in respect of holders of Casella Class A common stock and Casella
Class B common stock will be distributed in respect of holders of Casella
Class B common stock and the number of shares of each class of common stock
payable per share of that class of common stock will be equal in number. In the
case of dividends or other distributions consisting of other voting securities
of Casella, Casella will declare and pay dividends in two separate classes of
the voting securities, identical in all respects except that:

- the security issued to holders of Casella Class B common stock will
convert into the security issued to the holders of Casella Class A common
stock upon the same terms and conditions applicable to the conversion of
Casella Class B common stock into Casella Class A common stock and will
have the same restrictions on transfer and ownership applicable to the
transfer and ownership of the Casella Class B common stock;

- with respect only to dividends or other distributions of voting securities
of a wholly owned subsidiary of Casella, the voting rights of each
security issued to holders of Casella Class A common stock and Casella
Class B common stock with respect to elections of directors will be the
same as those of the Casella Class A common stock and Casella Class B
common stock described above; and

- in the case of dividends or other distributions consisting of securities
convertible into, or exchangeable for, voting securities of Casella, the
company will provide that the convertible or exchangeable securities and
the underlying securities be identical in all respects, including the
conversion or exchange rate, except that the underlying securities may
have the same differences

142

as they would have if the company issued voting securities of Casella,
exchangeable for the securities.

RESTRICTIONS ON ADDITIONAL ISSUANCES AND TRANSFER.  Casella may not issue or
sell any shares of Casella Class B common stock or any securities convertible
into shares of Casella Class B common stock to any person who is not a Casella
Class B permitted holder, as described below. Additionally, shares of Casella
Class B common stock may not be transferred to a person other than a Casella
Class B permitted holder. However, these transfer restrictions shall not apply
in the case of a merger, consolidation or business combination involving Casella
in which the acquiror purchases all of the outstanding shares of common stock
and preferred stock of Casella.

CONVERSION.  Casella Class A common stock has no conversion rights. Shares
of Casella Class B common stock are convertible into Casella Class A common
stock, in whole or in part, at any time and on more than one occasion, at the
holder's option, on the basis of one share of Casella Class A common stock for
each share of Casella Class B common stock converted. Each share of Casella
Class B common stock will also automatically convert into one share of Casella
Class A common stock if, on the record date for any meeting of the stockholders
of Casella, the number of shares of common stock held by the Class B permitted
holders is less than 1,077,874 shares, subject to appropriate adjustment for
stock splits, reverse stock splits, stock dividends and similar transactions.
Additionally, at the time a person ceases to be a Class B permitted holder, any
share of Casella Class B common stock held by that person will automatically
convert into a share of Casella Class A common stock. Casella has agreed that it
will:

- reserve and keep available out of its authorized but unissued shares of
Casella Class A common stock, the number of shares of Casella Class A
common stock issuable upon the conversion of all outstanding shares of
Casella Class B common stock;

- register and obtain the necessary governmental approvals for any shares of
Casella Class A common stock issuable upon conversion of a share of
Casella Class B common stock before the shares of Casella Class A common
stock are issued; and

- use its best efforts to list the shares of Casella Class A common stock
issuable upon conversion of Casella Class B common stock on the national
securities exchange on which outstanding Casella Class A common stock is
then listed before those issuable shares of Casella Class A common stock
are delivered.

RECLASSIFICATION AND MERGER.  In the event of a reclassification or other
similar transaction which results in shares of Casella Class A common stock
being converted into another security, then a holder of Casella Class B common
stock will be entitled to receive upon conversion the amount of the other
security that the holder would have received if the conversion occurred
immediately prior to the record date of the reclassification or other similar
transaction. No adjustments for dividends will be made upon the conversion of
any share of Casella Class B common stock; except if a share is converted
subsequent to the record date for the payment of a dividend or other
distribution on shares of Casella Class B common stock but prior to the payment,
then the registered holder of the share at the close of business on the record
date will receive the dividend or other distribution payable on that date
regardless of the conversion or Casella's default in payment of the dividend due
on the date.

In the event Casella enters into any consolidation, merger, combination or
other transaction in which shares of common stock are exchanged for or changed
into other stock or securities, cash and/or any other property, then the shares
of each class of common stock will be exchanged for or changed into either:

- the same amount of stock, securities, cash and/or any other property into
which each share of any other class of common stock is exchanged or
changed; provided, however, that if shares of common stock are exchanged
for or changed into shares of capital stock, the shares so

143

exchanged for or changed into may differ only to the extent that the
Casella Class A common stock and the Casella Class B common stock differ
as provided in Casella's charter; or

- if holders of each class of common stock are to receive different
distributions of stock, securities, cash and/or any other property, an
amount of stock, securities, cash and/or property per share having a
value, as determined by an independent investment banking firm of national
reputation selected by the board of directors, equal to the value per
share into which or for which each share of any other class of common
stock is exchanged or changed.

LIQUIDATION.  In the event of a liquidation of Casella, after the payment of
its debts and other liabilities and after making provision for the holders of
preferred stock, if any, the remaining assets of Casella will be distributable
ratably among the holders of the Casella Class A common stock and Casella
Class B common stock.

OTHER PROVISIONS.  The holders of the Casella Class A common stock and
Casella Class B common stock are not entitled to preemptive rights. None of the
Casella Class A common stock or Casella Class B common stock may be subdivided
or combined in any manner unless the other classes are subdivided or combined in
the same proportion. Casella may not make any offering of options or other
rights to subscribe for shares of Casella Class B common stock. If Casella makes
an offering of options or other rights to subscribe for shares of any class of
capital stock, other than Casella Class B common stock, to all holders of a
class of common stock, then it is required to simultaneously make an identical
offering to all holders of the other classes of common stock, unless that class
votes to waive that right. All such options or other rights offerings shall
offer the respective holders of Casella Class A common stock and Casella
Class B common stock the right to subscribe at the same rate per share.

A "Class B permitted holder" includes only the following persons:

- John W. Casella or Douglas R. Casella and their spouses and each of their
respective estates, guardians, conservators or committees;

- each descendant of John W. Casella or Douglas R. Casella and their
respective estates, guardians, conservators or committees;

- any (a) not-for-profit corporation if at least a majority of its board of
directors is composed of John W. Casella or Douglas R. Casella, their
spouses and/or descendants of John W. Casella or Douglas R. Casella; (b)
other corporation if at least a majority of the value of its outstanding
equity is owned by Class B permitted holders; (c) partnership if at least
a majority of the economic interest of its partnership interests are owned
by Class B permitted holders; and (d) limited liability or similar company
if at least a majority of the economic interest of Casella is owned by
Class B permitted holders; and

- trustees, in that capacity, of trusts where the primary beneficiaries are
John W. Casella or Douglas R. Casella, their spouses, the descendants of
John W. Casella and Douglas R. Casella, and the spouses of these
descendants and each of their respective estates, guardians, conservator
or committees and/or charitable organizations, provided that if the trust
is a wholly charitable trust, at least a majority of the trustees of the
trust consist of John W. Casella or Douglas R. Casella, their spouses
and/or Class B permitted holders.

PREFERRED STOCK

The Casella board is authorized, without stockholder approval, to issue up
to 1,000,000 shares of preferred stock in one or more series. The Casella board
will determine the rights, preferences, privileges and restrictions, including
voting rights, dividend rights, exchange rights, conversion rights, redemption
privileges and liquidation preferences, of each series of preferred stock. The
rights of the holders of shares of common stock are subject to, and may be
adversely affected by, the rights of the holders of any shares of preferred
stock that may be issued. Preferred stock may, at the discretion of

144

the Casella board, be entitled, before the common stock, to the payment of
dividends and the distribution of assets in the event of the liquidation,
dissolution or winding up of the company. Additionally, the issuance of shares
of preferred stock could also decrease the amount of earnings and assets
available for distribution to the holders of Casella common stock. If any
cumulative dividends or amounts payable on a return of capital are not paid in
full, all shares of preferred stock would participate ratably according to the
amounts that would be payable on these shares if all (a) dividends were declared
and paid in full, or (b) sums which would be payable on these shares on the
return of capital were paid in full.

The purpose of authorizing the board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting capital stock of Casella. Casella has no
present plans to issue any shares of preferred stock.

DELAWARE LAW AND CHARTER AND BY-LAW PROVISIONS

Casella is subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, this statute prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person becomes an interested stockholder, unless the business
combination is approved in a prescribed manner. An "interested stockholder" is a
person who, together with affiliates and associates, owns or within the prior
three years did own 15% or more of the corporation's voting stock.

Casella's charter provides that vacancies on the board of directors may only
be filled by a majority of the board of directors then in office. Furthermore,
any director elected by the stockholders, or by the board of directors to fill a
vacancy, may be removed only by a vote of 75% of the combined voting power of
the shares of common stock entitled to vote for the election of directors,
provided that the director elected by the holders of Class A common stock,
voting separately as a class, may be removed only by the holders of at least 75%
of the outstanding shares of Class A common stock.

Casella's charter and by-laws provide that any action required or permitted
to be taken by the stockholders of Casella may be taken only at a duly called
annual or special meeting of stockholders. These provisions could have the
effect of delaying until the next stockholders meeting stockholder actions which
are favored by the holders of a majority of the outstanding voting securities of
Casella, especially since special meetings of stockholders may be called only by
the board of directors or president of Casella. These provisions may also
discourage another person or entity from making a tender offer for Casella's
common stock, because that person or entity, even if it acquired a majority of
the outstanding voting securities of Casella, would be able to take action as a
stockholder, including electing new directors or approving a merger, only at a
duly called stockholders meeting, and not by written consent. The by-laws also
establish procedures, including advance notice procedures, with regard to the
nomination, other than by or at the direction of the board of directors, of
candidates for election as directors and other matters to be brought before
stockholders meetings.

Casella's charter and by-laws also provide for the classification of the
board of directors, whereby no more than one-third of the board is elected in
any one year. The effect of such provision could be to delay the ability of
another person or entity to take control of the board.

These provisions, which may be amended only by a 75% vote of the
stockholders, could make it more difficult for a third party to effect a change
in the control of the board of directors. In addition, these provisions could
make it more difficult for a third party to acquire, or it could discourage a
third

145

party from attempting to acquire, a majority of the outstanding voting stock of
Casella and may make more difficult or discourage a takeover of Casella.

Casella has also included in its charter provisions to eliminate the
personal liability of its directors for monetary damages resulting from breaches
of their fiduciary duty to the extent permitted by Delaware General Corporation
Law and to indemnify its directors and officers to the fullest extent permitted
by Section 145 of the Delaware General Corporation Law.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Casella common stock is Boston
EquiServe, L.P., Canton, Massachusetts.

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COMPARISON OF STOCKHOLDER RIGHTS

Casella is incorporated in Delaware and KTI is incorporated in New Jersey.
As a result of the merger, KTI shareholders will receive, in exchange for their
shares of KTI common stock, shares of Casella Class A common stock and will
become stockholders of Casella. The rights of Casella stockholders are governed
by Delaware law and Casella's charter and by-laws.

The New Jersey Business Corporation Act, which governs the rights of KTI
shareholders, and the Delaware General Corporation Law, which governs the rights
of Casella stockholders, differ in many respects. In addition, Casella's charter
and by-laws differ in several significant respects from KTI's charter and
by-laws. The following summary of significant differences that may affect the
rights and interests of stockholders is not intended to be a complete discussion
of the differences, and is qualified in its entirety by reference to Casella's
charter and by-laws and KTI's charter and by-laws, the relevant statutes under
Delaware and New Jersey law, all of which may change from time to time.

VOTING REQUIREMENTS

Both the New Jersey and Delaware law provide, except as set forth below,
that whenever any action is to be taken by vote of the stockholders, it shall be
authorized by a majority of the votes cast at a meeting of stockholders by the
holders of shares entitled to vote, unless a greater plurality is required by
the corporation's charter, or another section of the New Jersey or Delaware law
is applicable.

Under New Jersey law, unless a greater vote is specified in the
corporation's charter, (a) any amendment to a New Jersey corporation's charter,
(b) the voluntary dissolution of the corporation, (c) the sale or other
disposition of all or substantially all of a corporation's assets otherwise than
in the ordinary course of business or (d) the merger or consolidation of the
corporation with another corporation, requires in each case the affirmative vote
of a majority of the votes cast by shareholders of the corporation entitled to
vote thereon.

The New Jersey Shareholders Protection Act limits certain transactions
involving an "interested stockholder" and a resident domestic corporation. An
"interested stockholder" is a direct or indirect beneficial owner of 10% or more
of the voting power of the outstanding voting stock of a resident domestic
corporation. This New Jersey statute prohibits certain business combinations
between an interested stockholder and a resident domestic corporation for a
period of five years after the date the interested stockholder first becomes an
interested stockholder, unless the business combination was approved by the
resident domestic corporation's board of directors prior to the date the
interested stockholder first becomes an interested stockholder. After the
five-year period expires, the prohibition on these business combinations
continues unless the combination is approved by (a) the affirmative vote of
two-thirds of the voting stock not beneficially owned by the interested
stockholder, (b) by the board prior to the interested stockholder first becoming
an interested stockholder or (c) certain fair price provisions are satisfied.

The KTI charter contains provisions known as "supermajority" and "fair
price" provisions which are anti-takeover measures and could affect the price
KTI shareholders receive for shares of KTI common stock.

Under Delaware law, unless otherwise specified in the charter of a Delaware
corporation, (a) an amendment to the charter, (b) the sale or other disposition
of all or substantially all of the assets of a corporation, or (c) the merger or
consolidation of a corporation with another corporation all require the
affirmative vote of a majority of the outstanding stock entitled to vote
thereon, and, with respect to the amendment of the charter, the affirmative vote
of a majority of the outstanding shares of stock of each class entitled to vote
thereon is also required. Provisions of Casella's charter relating to limiting

147

stockholder action only to duly called annual or special meetings and removal of
directors may only be amended by a 75% vote of Casella stockholders.

Under Delaware law, subject to certain exceptions, an interested stockholder
of a Delaware corporation may not engage in any business combination with the
corporation for a three-year period following the time that the stockholder
becomes an interested stockholder unless:

- prior to the time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;

- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding certain shares held by officers and
directors and shares held in employee stock plans; or

- on or subsequent to the time, the business combination is approved by the
board of directors of the corporation and authorized at an annual or
special meeting of stockholders by the affirmative vote of at least
two-thirds of the outstanding voting stock which is not owned by the
interested stockholder.

Except as otherwise specified in the statute, an interested stockholder
includes:

- any person that is the owner of 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately prior
to the relevant date; and

- the affiliates and associates of any such person.

Under certain circumstances, the statute makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. Casella's charter does not exclude it from the restrictions imposed
under the statutes.

STOCKHOLDER POWER TO CALL SPECIAL STOCKHOLDERS MEETING

Under New Jersey law, special meetings of the shareholders may be called by
the president or the board of directors, or by other officers, directors or
shareholders as may be provided in the by-laws. In addition, upon the
application of the holders of not less than 10% of all shares entitled to vote
at the meeting, the Superior Court, for good cause shown, may order a special
meeting of the shareholders. KTI's by-laws provide that special shareholders
meetings can be called by a majority of the KTI board, the president, the
chairman of the board, or the secretary if the holders of at least 25% of the
shares entitled to vote at the meeting request the meeting in writing, stating
the purpose and the matters proposed to be acted on.

Under Delaware law, special meetings of the stockholders may be called by
the board of directors or by persons as may be authorized by the corporation's
charter or by-laws. The Casella by-laws provide that special meetings of
stockholders can be called by the chairman of the Casella board or the
president.

DISSOLUTION

Under New Jersey law, a corporation may be dissolved by the consent of all
its shareholders entitled to vote thereon. New Jersey law further provides that
a corporation may also be dissolved by action of its board of directors and its
shareholders if the board of directors recommends that the

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corporation be dissolved, directs that the question of dissolution be submitted
to a vote at a meeting of shareholders and the dissolution is approved by the
affirmative vote of a majority of the votes cast by holders of the outstanding
shares of common stock present in person or represented by proxy and entitled to
vote at the meeting. The charter may provide for greater requirements. The KTI
charter requires the affirmative vote of two-thirds of the votes.

Under Delaware law, the board of directors may, by a majority of the whole
board at any meeting called for that purpose, cause notice of dissolution to be
mailed to each stockholder entitled to vote thereon, and the majority of the
outstanding stock of the corporation entitled to vote must vote for the proposed
dissolution. Dissolution may also be authorized without action of the directors
if all of the stockholders entitled to vote thereon consent in writing and a
certificate of dissolution is filed with the Secretary of State.

CUMULATIVE VOTING

Under New Jersey law, shareholders of a New Jersey corporation do not have
cumulative voting rights in the election of directors unless the certificate of
incorporation so provides. The KTI charter does not presently provide for
cumulative voting.

Under Delaware law, stockholders of a Delaware corporation do not have
cumulative voting rights in the election of directors unless the certificate of
incorporation so provides. The Casella charter does not presently provide for
cumulative voting.

CLASSIFIED BOARD OF DIRECTORS

New Jersey law permits a New Jersey corporation to provide for a classified
board in its charter. The KTI board is not divided into classes. New Jersey law
also permits the removal of directors with cause or, unless otherwise provided
in the charter, without cause. KTI's charter does not provide otherwise.

Delaware law permits a Delaware corporation to provide for a classified
board in its charter or by-laws. The Casella charter provides that the Casella
board is divided into three classes, each of which contains approximately
one-third of the whole number of members of the Casella board. Each class serves
a staggered term, with approximately one-third of the total number of directors
being elected each year. Under Delaware law, directors on a classified board may
only be removed for cause, unless the charter of the company provides otherwise.
Casella's charter provides for the removal of directors with and without cause
by the holders of 75% of the votes entitled to be cast for the election of such
directors.

RIGHTS OF DISSENTING STOCKHOLDERS

Shareholders of a New Jersey corporation who dissent from a merger,
consolidation, sale of all or substantially all of the corporation's assets or
certain other corporate transactions are generally entitled to appraisal rights.
No statutory right of appraisal exists, however, where the stock of the New
Jersey corporation is:

- listed on a national securities exchange;

- is held of record by not less than 1,000 holders; or

- where the consideration to be received pursuant to the merger,
consolidation or sale consists of cash or securities or other obligations
which, after the transaction, will be listed on a national securities
exchange or held of record by not less than 1,000 holders.

149

Stockholders of a Delaware corporation who dissent from a merger or
consolidation of the corporation may be entitled to appraisal rights. There are
no statutory rights of appraisal with respect to stockholders of a corporation
whose shares are either:

- listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc.; or

- held of record by more than 2,000 stockholders, where stockholders receive
only shares of stock or depository receipts of the corporation surviving
or resulting from the merger or consolidation or shares of stock or
depository receipts of any other corporation which at the effective date
of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security on
an interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 stockholders (or cash
in lieu of fractional share interests therein).

STOCKHOLDER CONSENT TO CORPORATE ACTION

New Jersey law permits any action required or permitted to be taken at a
meeting of shareholders to be taken without a meeting if all of the shareholders
who are entitled to vote on the action consent to the action in writing, except
if the action is to approve a merger or consolidation of the corporation or the
sale of substantially all of the corporation's assets the action may be taken
without a meeting only if (a) all the corporation's shareholders consent to the
action in writing or (b) all of the corporation's shareholders who are entitled
to vote on the action consent to the action in writing and the corporation
provides to all other shareholders notice of the action in advance of the
proposed effective date of the action. If the charter of a New Jersey
corporation does not provide otherwise and certain notice and other requirements
are complied with, New Jersey law also permits any action required or permitted
to be taken at a meeting of the shareholders, other than the annual election of
directors, to be taken without a meeting, without prior notice and without a
vote, upon the written consent of the minimum number of votes which would be
necessary to authorize the action at a meeting at which all shareholders
entitled to vote on the action were present and voting. Since KTI's charter does
not prohibit shareholder action by less than unanimous consent, such action may
be taken by KTI's shareholders.

Unless otherwise provided in the charter, Delaware law permits stockholders
to act by written consent if consents setting forth the action being taken are
signed by the holders of the outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take the action at a
meeting at which all shares entitled to vote thereon were present and voted.
Directors may be elected by written consent in lieu of an annual meeting only if
unanimous or, if such consent is less than unanimous, if all of the
directorships to which directors could be elected at an annual meeting are
vacant and are filled by the written action. The Casella by-laws provide that
vacancies and newly created directorships shall be filled by a majority of
directors then in office although less than a quorum. The Casella charter does
not permit stockholders to act by written consent.

ADVANCE NOTICE BY-LAWS

Both New Jersey law and Delaware law as well as both KTI's by-laws and
Casella's by-laws provide that their stockholders must receive written notice of
meetings not less than 10 and not more than 60 days before a meeting of
stockholders is held. Casella's by-laws provide for advance notice procedures
with regard to the nomination, other than by or at the direction of the Casella
board, of candidates for election of directors and other matters to be brought
before the stockholder's meeting.

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DIVIDENDS

Unless there are other restrictions contained in a corporation's charter,
New Jersey law generally provides that a New Jersey corporation may declare and
pay dividends on its outstanding stock so long as the corporation can pay its
debts as they become due in the usual course of its business or its total assets
are more than its total liabilities. KTI's charter does not contain this
restriction.

Delaware law generally limits dividends payable by Casella to an amount
equal to the excess of the net assets of the company over its statutory capital,
or if there is no excess, to its net profits for the current and/or immediately
preceding fiscal year.

BY-LAWS

Under New Jersey law, the board of directors of a New Jersey corporation has
the power to adopt, amend, or repeal the corporation's by-laws, unless the
powers are reserved in the charter to the shareholders. KTI's charter does not
presently reserve such powers for its stockholders.

Under Delaware law, the stockholders of a Delaware corporation have the
power to adopt, amend, or repeal the corporation's by-laws, unless such powers
also are reserved in the charter to the board of directors. Casella's by-laws
may be amended by the board of directors.

LIMITATIONS OF LIABILITY OF DIRECTORS AND OFFICERS

Under New Jersey law, a New Jersey corporation may include in its charter a
provision which would, subject to the limitations described below, eliminate or
limit directors' or officers' liability to the corporation or to its
shareholders, for damages for breaches of any duty owed to the corporation or
its shareholders. A director or officer cannot be relieved from liability for
any breach of duty based upon an act or omission (a) in breach of such person's
duty of loyalty to the corporation or its shareholders, (b) not in good faith or
involving a knowing violation of law, or (c) resulting in receipt by such person
of an improper personal benefit. KTI's charter contains provisions which limit a
director's or officer's liability to the full extent permitted by New Jersey
law.

Under Delaware law, a Delaware corporation may include in its charter a
provision which would, subject to the limitations described below, eliminate or
limit directors' liability to the corporation or its stockholders, for monetary
damage for breaches of their fiduciary duty of care. A director cannot be
relieved from liability or otherwise indemnified (a) for breach of the
director's duty of loyalty, (b) for acts or omissions not in good faith or
involving intentional misconduct or knowing violation of law, (c) for willful or
negligent conduct in paying dividends or repurchasing stock out of other than
lawfully available funds, or (d) for any transaction from which the director
derives an improper personal benefit. Casella's charter contains provisions
which limit a director's liability to the full extent permitted by Delaware law.

CONSIDERATION OF ACQUISITION PROPOSALS

New Jersey law provides that in determining whether a proposal or offer to
acquire a corporation is in the best interest of the corporation, the board may,
in addition to considering the effects of any action on shareholders, consider
any of the following:

- the effects of the proposed action on the corporation's employees,
suppliers, creditors and customers;

- the effects of the proposed action on the community in which the
corporation operates; and

151

- the long-term as well as the short-term interests of the corporation and
its shareholders, including the possibility that those interests may be
served best by the continued independence of the corporation.

The statute further provides that if, based on those factors, the board
determines that any such offer is not in the best interest of the corporation,
it may reject the offer. If the board determines to reject an offer, the statute
provides that the board will have no obligation to facilitate, remove any
barriers to or refrain from impeding the offer. These provisions may make it
more difficult for a shareholder to challenge a New Jersey corporation's board's
rejection of, and may facilitate the board's rejection of, an offer to acquire
the corporation.

There are no comparable provisions under Delaware law. Casella's charter
permits the board of directors to take into account the interests of creditors,
customers, employees and other constituencies in considering corporate actions.

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ELECTION OF CASELLA DIRECTORS

GENERAL

Casella has three classes of directors consisting of one Class I director,
two Class II directors and two Class III directors. At each annual meeting,
directors are elected for a full term of three years to succeed those whose
terms are expiring. The terms of the three classes are staggered in a manner so
that only one class is elected by stockholders annually. The two Class II
directors are proposed for election this year to serve as members of the Casella
board until the 2002 annual meeting of stockholders, or until their successors
are elected and qualified. After the merger, the Casella board will be increased
to 11 members, consisting of four Class I directors, four Class II directors and
three Class III directors. See "The Merger--Directors and executive officers of
the combined company following the merger".

The persons named in the enclosed proxy will vote at the Casella annual
meeting to elect, as Class II directors, Messrs. James W. Bohlig and Gregory P.
Peters, the two director nominees named below, unless the proxy is marked
otherwise. Messrs. Bohlig and Peters are currently members of the Casella board.
Mr. Peters has been nominated as the designee of the holders of Casella Class A
common stock.

Each of the nominees has indicated his willingness to serve, if elected;
however, if any nominee should be unable to serve, the person acting under the
proxy may vote the proxy for a substitute nominee designated by the Casella
board. The Casella board has no reason to believe that any of the nominees will
be unable to serve if elected.

Set forth below for each Casella director, including the director nominees,
is information as of September 1, 1999 with respect to (a) his name and age,
(b) position and offices at Casella, (c) principal occupation and business
experience during the past five years, (d) directorships, if any, of other
publicly held companies and (e) the year he became a director of Casella.

DIRECTOR       PRINCIPAL OCCUPATION, OTHER BUSINESS EXPERIENCE
NAME                                   AGE    SINCE        DURING THE PAST FIVE YEARS AND OTHER DIRECTORSHIPS
----                                   ---   --------      --------------------------------------------------

CLASS II DIRECTORS, NOMINEES TO BE
ELECTED AT THE ANNUAL MEETING (TERMS
EXPIRING IN 2002)

James W. Bohlig                        53      1993        Mr. Bohlig joined Casella as senior vice president
and chief operating officer in 1993 with primary
responsibility for business development,
acquisitions and operations. From 1989 until he
joined Casella, Mr. Bohlig was executive vice
president and chief operating officer of Russell
Corporation, a general contractor and developer
based in Rutland, Vermont. Mr. Bohlig is a
director of Consumat Environmental Systems, Inc.,
a designer and manufacturer of incineration and
pollution control equipment.

153

DIRECTOR       PRINCIPAL OCCUPATION, OTHER BUSINESS EXPERIENCE
NAME                                   AGE    SINCE        DURING THE PAST FIVE YEARS AND OTHER DIRECTORSHIPS
----                                   ---   --------      --------------------------------------------------

Gregory B. Peters                      52      1993        Mr. Peters has been a general partner of Vermont
Venture Capital Partners, L.P., a venture capital
management company which is the general partner of
The Vermont Venture Capital Fund, L.P.; a general
partner of North Atlantic Capital Partners, L.P.,
a venture capital management company which is the
general partner of North Atlantic Venture Fund II,
L.P.; and a general partner of North Atlantic
Investors, a venture capital management company
which is the general partner of North Atlantic
Venture Fund II L.P.

CLASS III DIRECTORS (TERMS EXPIRING
IN 2000)

John W. Casella                        48      1993        Mr. Casella has served as president and chief
executive officer and chairman of the Casella
board since 1993. Mr. Casella has served as
chairman of the board of directors of Casella
Waste Management, Inc. since 1977. Mr. Casella has
actively supervised all aspects of company
operations since 1976, sets overall corporate
policies, and serves as chief strategic planner of
corporate development. Mr. Casella is also an
executive officer and director of Casella
Construction, Inc., a company owned by Mr. Casella
and Douglas R. Casella which specializes in
general contracting, soil excavation and related
heavy equipment work. See "The
Companies--Casella--Certain Relationships and
Related Transactions". Mr. Casella is the brother
of Douglas R. Casella.

John F. Chapple III                    58      1994        From August 1989 to July 1994, Mr. Chapple was
president and owner of Catamount Waste Services,
Inc., a central Vermont hauling and landfill
operation, which was purchased by the company in
May 1994. Mr. Chapple has been retired since 1995.

CLASS I DIRECTORS (TERMS EXPIRING IN
2001)

Douglas R. Casella                     43      1993        Mr. Casella founded Casella in 1975. He has served
as vice chairman of the Casella board since 1993
and has been president of Casella Waste
Management, Inc. since 1975. Since 1989, Mr.
Casella has been president of Casella
Construction, Inc., a company owned by Mr. Casella
and John W. Casella which specializes in general
contracting, soil excavation and related heavy
equipment work. See "The
Companies--Casella--Certain Relationships and
Related Transactions". Mr. Casella is the brother
of John W. Casella.

154

See "The Companies--Casella--Certain relationships and related transactions"
and "--Stock ownership of management" for information concerning Casella
directors, including those who are nominees for election as Class II directors.

The holders of Casella Class A common stock, voting separately as a class,
will at all times be entitled to elect at least one director. Mr. Peters, a
Class II director nominee, has been nominated to be the designee of the holders
of Casella Class A common stock as a result of the resignation of
Michael Cronin, formerly the designee of the holders of Casella Class A common
stock.

Messrs. Bohlig, John W. Casella, Douglas R. Casella, Chapple and Peters were
elected to the Casella board pursuant to the terms of an agreement by and
between Casella and certain stockholders. The agreement terminated upon
completion of Casella's initial public offering of its common stock in
November 1997.

BOARD OF DIRECTORS AND COMMITTEE MEETINGS

The Casella board met ten times, including by telephone conference, during
fiscal 1999. All directors attended at least 75% of the meetings of the Casella
board and the meetings of the committees on which they served, except that
Mr. Chapple did not attend the meeting of the audit committee.

The Casella board has established a compensation committee. The compensation
committee, which currently consists of Messrs. John W. Casella, Chapple and
Peters, reviews executive salaries, administers any bonus, incentive
compensation and stock option plans of Casella, and approves the salaries and
other benefits of the executive officers of Casella. In addition, the
compensation committee consults with Casella management regarding pension and
other benefit plans and compensation policies and practices of Casella. The
stock plan subcommittee of the compensation committee, which currently consists
of Messrs. Chapple and Peters, administers the issuance of stock options and
other awards under Casella's stock option plans to Casella's executive officers
and approves the compensation of Mr. John W. Casella. The compensation committee
and the stock plan subcommittee each held one meeting during fiscal 1999.

The Casella board has also established an audit committee. The audit
committee, which currently consists of Messrs. Chapple and Peters, reviews the
professional services provided by Casella's independent auditors, the
independence of the auditors from management of Casella and Casella's annual
financial statements and system of internal accounting controls. The audit
committee also reviews such other matters with respect to the accounting,
auditing and financial reporting practices and procedures of Casella as it may
find appropriate or as may be brought to its attention. The audit committee held
one meeting during fiscal 1999.

Casella does not have a nominating committee or a committee serving a
similar function. Nominations are made by and through the full Casella board.

COMPENSATION OF DIRECTORS

Casella reimburses non-employee directors for expenses incurred in attending
Casella board meetings. Non-employee directors of Casella receive stock options
under Casella's 1997 Non-Employee Director Stock Option Plan. The Non-Employee
Director Plan currently provides that each non-employee director will receive an
automatic grant of a nonqualified stock option to purchase 5,000 shares of
Casella Class A common stock upon his or her initial election to the Casella
board, vesting in three equal installments beginning on the first anniversary of
the date of grant. In addition, an option to purchase 2,000 shares of Casella
Class A common stock is granted to each incumbent non-employee director on the
date of each annual meeting of stockholders, vesting in three equal annual
installments beginning on the first anniversary of the date of grant. Options
granted under the Non-Employee

155

Director Plan expire ten years from the date of grant. The exercise price of
options granted under the Non-Employee Director Plan is equal to the fair market
value of a share of Casella Class A common stock as of the date of grant.
Casella has reserved a total of 50,000 shares of Casella Class A common stock
for issuance under the Non-Employee Director Plan, 46,000 of which were
available for grant as of July 30, 1999.

The Casella board has recommended increasing the number of shares of Casella
Class A common stock available for grant under the Non-Employee Director Plan
from 50,000 to 100,000 and to increase the number of shares subject to the stock
options granted to non-employee directors upon initial election to the Casella
board and on the date of each annual meeting from 5,000 and 2,000, respectively,
to 7,500 on the date of each such event. See "Approval of Amendments to the
Casella 1997 Non-Employee Director Stock Option Plan."

Casella has also entered into or engaged in certain transactions with
directors of Casella or affiliates of directors of Casella. See "The
Companies--Casella--Certain relationships and related transactions".

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The current members of the compensation committee of the Casella board are
Messrs. John W. Casella, Chapple and Peters. The current members of the stock
plan subcommittee of the Casella board are Messrs. Chapple and Peters.
Mr. Casella has served as president and chief executive officer of Casella since
1993.

Casella has from time to time engaged Casella Construction, Inc., a company
owned by John W. Casella and Douglas R. Casella, a director, to provide
construction services for the company, including construction, closure and
capping activities at the company's landfills. In fiscal 1999, the company paid
Casella Construction, Inc. an aggregate of $5,198,000.

Casella is party to two real estate leases with Casella Associates, a
Vermont partnership owned by John W. Casella and Douglas R. Casella, relating to
facilities occupied by the company. The leases, relating to the company's
corporate headquarters in Rutland, Vermont and its Montpelier, Vermont facility,
call for aggregate monthly payments of approximately $18,000 and expire in
April 2003. These leases have been classified by the company as capital leases
for financial reporting purposes. In addition, the company leases furniture and
fixtures from Casella Associates pursuant to an operating lease which bore rent
at $950 per month and which expired in May 1999. In fiscal 1999, the company
paid Casella Associates an aggregate of $237,101 for such leases. In
November 1997, the lease relating to the company's corporate headquarters in
Rutland, Vermont was amended to allow the company to upgrade and make capital
improvements to the premises at an estimated cost of $500,000, to be paid by the
company. Casella Associates was granted the option to purchase the capital
improvements by December 31, 2002, and if it does not elect to exercise the
option the company has the right to purchase the premises for $324,000, the fair
market value of the premises prior to the capital improvements, at the
expiration of the term of the lease.

Casella operated an unlined landfill located in Whitehall, New York owned by
Bola, Inc., a corporation owned by John W. Casella and Douglas R. Casella which
operated as a single-purpose real estate holding company. The company paid the
cost of closing this landfill in 1992, and has agreed to pay all post-closure
obligations. In fiscal 1999, the company paid an aggregate of $3,161 pursuant to
this arrangement.

In connection with and at the time of Casella's acquisition of the business
of Catamount Waste Services, Inc., Casella entered into a lease in June 1994
with CV Landfill, Inc., a Vermont corporation affiliated with Catamount Waste
Services, Inc., pursuant to which Casella agreed to lease a transfer station for
a term of 10 years. CV Landfill, Inc. is owned by John F. Chapple III, who
became a

156

director of Casella at the time of the acquisition of the business of Catamount
Waste Services, Inc. Pursuant to the lease agreement, Casella pays monthly rent
for the first five years at a rate of $5.00 per ton of waste disposed of at the
transfer station, with a minimum rent of $6,650 per month. Following the fifth
anniversary of the lease agreement, Casella is required to pay monthly rent at a
rate of $2.00 per ton, with a minimum rent of $2,500 per month. In fiscal 1999,
Casella paid CV Landfill, Inc. an aggregate of $116,116.

Casella believes that each transaction described above was on terms at least
as favorable as those Casella would expect to negotiate with disinterested third
parties. In addition, in connection with the proposed merger with KTI, certain
executive officers and directors of Casella have interests in the merger that
are in addition to their interests as stockholders of Casella generally. See
"The Merger--Interests of executive officers and directors of Casella and KTI in
the merger". Furthermore, certain executive officers and directors of KTI have
entered into or engaged in certain transaction with KTI. See "The
Companies--KTI--Certain relationships and related transactions".

157

APPROVAL OF AMENDMENT TO THE CASELLA
AMENDED AND RESTATED 1997 STOCK INCENTIVE PLAN

The Casella board believes stock options and stock-based incentives play an
important role in attracting and retaining the services of outstanding personnel
and in encouraging such employees to have a greater personal financial
investment in Casella.

Casella stockholders approved the Casella 1997 Stock Incentive Plan in
July 1997 at a special meeting. In October 1998, Casella stockholders approved
an amendment to the Incentive Plan to increase the shares available for issuance
under the plan from 2,308,500 to 3,328,135, including up to 1,019,635 shares
subject to outstanding options under Casella's three terminated stock option
plans which are not issued under those terminated plans because the options
expire or are terminated or cancelled. A copy of the Amended and Restated 1997
Stock Incentive Plan is attached to this proxy statement/prospectus as Annex
D-1, which you should be sure to read.

The Incentive Plan permits Casella to grant incentive stock options,
non-qualified options, restricted stock awards and other stock-based awards,
including the grant of shares based on certain conditions, the grant of
securities convertible into Casella Class A common stock and the grant of stock
appreciation rights. Stock options may not be granted at an exercise price which
is less than 100% of the fair market value of Casella Class A common stock on
the date of grant and may not be granted for a term in excess of ten years.
Subject to adjustment in the event of a stock split or other similar events,
grants may currently be made under the Incentive Plan for up to 3,328,135 shares
of Casella Class A common stock, including up to 1,019,635 shares of Casella
Class A common stock which are currently subject to outstanding options under
terminated option plans, which are not issued under those plans because the
options expire or are terminated or cancelled. Grants may be made to officers,
employees, directors, consultants and advisors of Casella who are responsible
for or contribute to the management, growth, success and profitability of
Casella and who are designated by the committee that administers the Incentive
Plan.

The Incentive Plan is administered by the compensation committee, provided
that the stock plan subcommittee administers the issuance of awards to Casella's
executive officers. The stock plan subcommittee currently consists of two
outside directors. The compensation committee has the authority to adopt, amend
and repeal the administrative rules, guidelines and practices relating to the
Incentive Plan and to interpret the provisions of the Incentive Plan. The
compensation committee selects the recipients of grants and determines:

- the number of shares of Casella Class A common stock covered by options
and the dates upon which the options become exercisable;

- the exercise price of options;

- the duration of options; and

- the number of shares of Casella Class A common stock subject to any
restricted stock or other stock-based awards and the terms and conditions
of the awards, including conditions for repurchase, issue price and
repurchase price.

The Casella board is required to make appropriate adjustments in connection
with the Incentive Plan and any outstanding awards to reflect stock dividends,
stock splits and certain other events. In the event of a merger, liquidation or
other acquisition event, outstanding awards will be assumed unless the acquiring
or succeeding corporation does not agree to assume the options, in which case
the Casella board will accelerate the awards to make them fully exercisable
prior to consummation of the acquisition event or provide for a cash-out of the
value of any outstanding options. If any award expires or is terminated,
surrendered, cancelled or forfeited, the unused shares of Casella Class A common
stock subject to the award will again be available for grant under the Incentive
Plan.

158

As of September 1, 1999, options to purchase a total of 1,085,960 shares of
Casella Class A common stock were outstanding under the Incentive Plan, no
restricted stock awards had been made under the plan and 2,243,175 shares
remained available for future awards. As of September 1, 1999, Casella had 1,504
full-time employees, all of whom were eligible to participate in the plan.
Through September 1, 1999, under the Incentive Plan, John W. Casella, the chief
executive officer, had received 90,000 options, James W. Bohlig, the chief
operating officer, had received 150,000 options and Jerry S. Cifor, the chief
financial officer, had received 110,000 options. As a group, these executive
officers had received an aggregate of 350,000 options through September 1, 1999.
As of such date, all current officers had received an aggregate of 440,000
options under the Incentive Plan. As a group, all employees, excluding the named
executive officers, had received an aggregate of 673,000 options through
September 1, 1999. On September 15, 1999, Casella granted an aggregate of
938,000 options to certain employees, including 75,000 options to each of
John W. Casella and Douglas R. Casella, 150,000 options to James W. Bohlig and
125,000 options to Jerry S. Cifor.

After considering the increase in the number of employees as a result of the
merger, the Casella board has amended the Incentive Plan to increase the number
of shares of Casella Class A common stock authorized for the granting of awards
under the plan from an aggregate of 3,328,135, including up to 1,019,635 shares
subject to outstanding options under terminated stock option plans, which are
not issued under those terminated plans because the options expire or are
terminated or cancelled, to 5,328,135 and has directed that the amendment be
submitted for approval by a vote of Casella stockholders. As of October 1, 1999,
Casella had approximately 16,011,305 shares outstanding and, if the merger is
approved, will have approximately 23,163,462 shares outstanding. The Casella
board believes stockholder approval of the amendment to the Incentive Plan is
necessary to assure that an adequate number of shares of Casella Class A common
stock will be available for future award in order to provide appropriate
incentives to employees of Casella, including KTI employees upon consummation of
the merger.

In accordance with the requirements of the regulations under Section 162(m)
of the Internal Revenue Code, the Incentive Plan limits the number of shares
that may be granted to an individual participant in any fiscal year to 200,000
shares.

The number of individuals receiving stock options or restricted stock awards
varies from year to year depending on various factors, such as the number of
promotions and the company's hiring needs during the year, and thus Casella
cannot now determine future option or award recipients or the amounts to be
allocated to these individuals.

SOME FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS

NONQUALIFIED STOCK OPTIONS.  The grant of a nonqualified stock option will
not result in the recognition of taxable income by the participant or in a
deduction to Casella. Upon exercise, a participant will recognize ordinary
income in an amount equal to the excess of the fair market value of the stock
purchased over the exercise price. Casella is required to withhold tax on the
amount of income so recognized, and a tax deduction is allowable equal to the
amount of such income, subject to the satisfaction of certain conditions under
Section 162(m) of the Internal Revenue Code in the case of options exercised by
certain of the highest paid officers. Gain or loss upon a subsequent sale of any
stock received upon the exercise of a nonqualified stock option generally would
be taxed as long-term or short-term capital gain or loss, depending upon the
holding period of the stock sold. Certain additional rules apply if the exercise
price for an option is paid in shares previously owned by the participant.

INCENTIVE STOCK OPTIONS.  Upon the grant or exercise of an incentive stock
option within the meaning of Section 422 of the Internal Revenue Code, no income
will be realized by the participant for federal income tax purposes and Casella
will not be entitled to any deduction. However, the excess of

159

the fair market value of the stock as of the date of exercise over the exercise
price will constitute an adjustment to taxable income for purposes of the
alternative minimum tax. If the shares of stock underlying an incentive stock
option are not disposed of within the one-year period beginning on the date of
the transfer of the shares to the participant, nor within the two-year period
beginning on the date of grant of the option, any profit realized by the
participant upon the disposition of the shares will be taxed as long-term
capital gain and no deduction will be allowed to Casella. If the shares are
disposed of within the one-year period from the date of transfer of the shares
to the participant, or within the two-year period from the date of grant of the
option, the excess of the fair market value of the shares upon the date of
exercise or, if less, the fair market value on the date of disposition, and a
corresponding deduction will be allowed to Casella. Certain additional rules
apply if the exercise price for an option is paid in shares previously owned by
the participant. If an option that is intended to qualify as an incentive stock
option is exercised by a person who was not continually employed by Casella or
certain of its affiliates from the date of grant of the option to a date not
more than three months prior to such exercise, or one year if such person is
disabled, then the option will not qualify as an incentive stock option plan and
will instead be taxed as a nonqualified stock option, as described above.

This summary is not a definitive statement of the federal income tax effects
of options under the Incentive Plan, and you should consult with your own tax
advisor to determine the particular tax effects to you of the provisions
discussed here.

RECOMMENDATION OF THE CASELLA BOARD.  The Casella board recommends that
Casella stockholders vote "FOR" approval of the amendment to the Incentive Plan
to increase the number of shares of Casella Class A common stock that may be
issued under the Incentive Plan from 3,328,135 to 5,328,135.

VOTE REQUIRED FOR APPROVAL.  The affirmative vote of the holders of shares
representing a majority of the votes cast by the holders of the Casella common
stock entitled to vote at the Casella annual meeting is required for approval of
the amendment to the Incentive Plan.

160

APPROVAL OF AMENDMENTS TO THE
CASELLA 1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

The Casella stockholders initially approved the Casella 1997 Non-Employee
Director Stock Option Plan in July 1997 at a special meeting. A copy of the 1997
Non-Employee Director Stock Option Plan is attached to this proxy
statement/prospectus as Annex D-2, which you should be sure to read.

The Non-Employee Director Plan currently provides that each non-employee
director will receive an automatic grant of a nonqualified stock option to
purchase 5,000 shares of Casella Class A common stock upon his or her initial
election to the board, vesting in three equal installments beginning on the
first anniversary of the date of grant. An option to purchase 2,000 shares of
Class A common stock is granted to each incumbent non-employee director on the
date of each annual meeting of stockholders, vesting in three equal annual
installments beginning on the first anniversary of the date of grant. The
exercise price of options granted under the Non-Employee Director Plan is equal
to the fair market value of a share of Casella Class A common stock as of the
date of grant.

After considering the increase in the number of non-employee directors as a
result of the merger, the Casella board has amended the Non-Employee Director
Plan to increase the number of shares of Casella Class A common stock authorized
for granting of awards under the Non-Employee Director Plan from 50,000 to
100,000 and to increase the number of shares subject to the stock options
granted to non-employee directors upon initial election to the Casella board and
on the date of each annual meeting of stockholders from 5,000 and 2,000,
respectively, to 7,500 on the date of each such event. The Casella board has
directed that the amendments be submitted for approval by a vote of Casella
stockholders. As of October 1, 1999, Casella had 16,011,305 shares outstanding
and, if the merger is approved, will have approximately 23,163,462 shares
outstanding. As of September 1, 1999, options to acquire approximately 4,000
shares of Casella Class A common stock had been granted under the Non-Employee
Director Plan. Following consummation of the merger, grants will no longer be
made under the KTI plan. The Casella board believes stockholder approval of the
amendments to the Non-Employee Director Plan is necessary to assure that an
adequate number of shares of Casella Class A common stock will be available for
future award in order to provide appropriate incentives to non-employee
directors of Casella, including KTI directors who become Casella directors after
consummation of the merger.

All options granted under the Non-Employee Director Plan are nonqualified
options not entitled to special tax treatment under Section 422 of the Internal
Revenue Code. For a discussion of certain tax consequences of options, see
"Approval of Amendment to the Casella Amended and Restated 1997 Stock Incentive
Plan--Certain Federal Income Tax Consequences of Options" above.

RECOMMENDATION OF THE CASELLA BOARD.  The Casella board recommends that
Casella stockholders vote "FOR" approval of the amendments to the Casella 1997
Non-Employee Director Plan to increase the number of shares of Casella Class A
common stock that may be issued under the Casella 1997 Director Plan from 50,000
to 100,000 and to increase the number of shares subject to the stock options
granted to non-employee directors upon initial election to the board and on the
date of each annual meeting from 5,000 and 2,000, respectively, to 7,500 on the
date of each such event.

VOTE REQUIRED FOR APPROVAL.  The affirmative vote of the holders of shares
representing a majority of the votes cast by the holders of the Casella common
stock entitled to vote at the Casella annual meeting is required for approval of
the amendments to the Casella 1997 Non-Employee Director Plan.

161

APPROVAL OF AMENDMENT TO THE
CASELLA AMENDED AND RESTATED 1997 EMPLOYEE STOCK PURCHASE PLAN

The Casella stockholders initially approved the Casella Amended and Restated
1997 Employee Stock Purchase Plan in July 1997 at a special meeting. A copy of
the Amended and Restated 1997 Employee Stock Purchase Plan is attached to this
proxy statement/prospectus as Annex D-3, which you should be sure to read. The
Employee Stock Purchase Plan provides eligible participating employees with an
opportunity to purchase shares of Casella Class A common stock at below fair
market value. A maximum of 300,000 shares of Casella Class A common stock were
authorized for issuance under the Employee Stock Purchase Plan.

The Employee Stock Purchase Plan is administered by the compensation
committee of the Casella board. All employees of Casella, except employees who
own five percent or more of Casella common stock, whose customary employment is
more than 20 hours per week and who have been employed by Casella for at least
six months, are eligible to participate in the Employee Stock Purchase Plan. To
participate in the Employee Stock Purchase Plan, an employee must authorize
Casella to deduct an amount, up to ten percent of the employee's regular pay,
from his or her pay during six-month periods commencing on January 1 and July 1,
or the first business day thereafter, of each year. The maximum number of shares
of Casella Class A common stock that an employee may purchase in any payment
period is determined by applying the formula stated in the Employee Stock
Purchase Plan. The exercise price for the option for each payment period is 85%
of the lesser of the average market price of Casella Class A common stock on the
first or last business day of the payment period. If an employee is not a
participant on the last day of the payment period, the employee is not entitled
to exercise his or her option, and the amount of his or her accumulated payroll
deductions will be refunded. An employee's rights under the Employee Stock
Purchase Plan terminate upon his or her voluntary withdrawal from the plan or
upon termination of employment.

After considering the increase in the number of employees as a result of the
merger, the Casella board has amended the Employee Stock Purchase Plan to
increase the number of shares of Casella Class A common stock authorized for
issuance under the Employee Stock Purchase Plan from 300,000 to 600,000 shares,
and has directed that the amendment be submitted for approval by a vote of
Casella stockholders. Prior to the amendment and as of October 1, 1999, 9,949
shares had been granted under the Employee Stock Purchase Plan and 290,051
shares remained available for future grant. The Casella board believes
stockholder approval of this amendment is necessary to assure that an adequate
number of shares of Casella Class A common stock will be available for future
grants in order to provide appropriate incentives to employees of Casella,
including KTI employees upon consummation of the merger.

RECOMMENDATION OF THE CASELLA BOARD.  The Casella board recommends that the
Casella stockholders vote "FOR" approval of the amendment to the Casella Amended
and Restated 1997 Employee Stock Purchase Plan to increase the number of shares
of Casella Class A common stock that may be issued under the Employee Stock
Purchase Plan from 300,000 to 600,000.

VOTE REQUIRED FOR APPROVAL.  The affirmative vote of the holders of shares
representing a majority of the votes cast by the holders of the Casella common
stock entitled to vote at the Casella annual meeting is required for approval of
the amendment to the Casella Amended and Restated 1997 Employee Stock Purchase
Plan.

162

RATIFICATION OF THE SELECTION
OF CASELLA'S INDEPENDENT AUDITORS

The Casella board has selected Arthur Andersen LLP as independent auditors
of Casella for the current fiscal year ending April 30, 2000, subject to
ratification by stockholders at the annual meeting. If the stockholders do not
ratify the selection of Arthur Andersen LLP, the Casella board will reconsider
the matter. A representative of Arthur Andersen LLP, which served as auditors
for fiscal 1999, is expected to be present at the annual meeting, to respond to
appropriate questions, and to make a statement if he or she so desires.

STOCKHOLDER PROPOSALS

The Casella board will consider proposals of stockholders intended to be
presented for action at Casella's 2000 annual meeting of stockholders. A
stockholder proposal must have been submitted in writing and received at
Casella's principal executive offices, 25 Greens Hill Lane, Rutland, Vermont,
05701, Attention: Secretary, by July 19, 2000, to be considered for inclusion in
Casella's proxy statement relating to the 2000 annual meeting of stockholders.

In connection with Casella's 2000 annual meeting of stockholders, the
persons appointed by the Casella board will, if Casella does not receive notice
of a matter or proposal to be considered by October 4, 2000, be allowed to use
their discretionary voting authority with respect to any such action or proposal
that is raised at such annual meeting.

If the merger is not consummated, KTI will hold a 1999 annual meeting of
stockholders. If the KTI annual meeting is held, shareholder proposals intended
to be presented at the KTI annual meeting must be received by KTI prior to a
date to be announced by KTI in advance of the meeting, if they are to be
included in KTI's proxy materials for the annual meeting.

163

WHERE YOU CAN FIND MORE INFORMATION

Casella has filed a registration statement (file no. 333-     ) on Form S-4
with the SEC. This proxy statement/prospectus, which is a part of that
registration statement, does not contain all of the information included in the
registration statement. You should refer to the registration statement and its
exhibits for this information. Although we have discussed all material terms of
each contract, agreement or other document of Casella referenced in this
document, these discussions are not necessarily complete and you should refer to
the exhibits attached to the registration statement for copies of the actual
contract, agreement or other document. You may review a copy of the registration
statement, including exhibits, at the SEC's public reference room at:

- Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;

- Seven World Trade Center, 13th Floor, New York, New York 10048; or

- Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661.

Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference rooms.

Casella and KTI also file annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information on file at the public reference rooms.
You can also request copies of these documents, for a copying fee, by writing to
the SEC.

Casella's and KTI's SEC filings and the registration statement can also be
reviewed by accessing the SEC's Internet site at http://www.sec.gov, which
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC.

LEGAL MATTERS

Certain legal matters in connection with this merger have been passed upon
for Casella by Hale and Dorr LLP, Boston, Massachusetts. Certain legal matters
in connection with the Federal income tax consequences of the merger to KTI
shareholders have been passed upon for KTI by McDermott, Will & Emery, New York,
New York.

EXPERTS

The audited financial statements of Casella included in this proxy
statement/prospectus have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.

The consolidated financial statements and schedule of KTI and the financial
statements of Penebscot Energy Recovery Company, Limited Partnership, included
in this proxy statement/prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports included herein. Such
financial statements and schedule are included herein in reliance on Ernst &
Young LLP's reports, given on their authority as experts in accounting and
auditing.

The consolidated financial statements of FCR, Inc. and subsidiaries as of
December 31, 1997 and 1996 and for each of the two years then ended, included in
this prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.

164

KTI, INC.
INDEX TO FINANCIAL STATEMENTS

PAGE
--------

The following consolidated financial statements and schedules of KTI,
Inc.:
Consolidated Financial Statements of KTI, Inc.:
Report of Independent Auditors............................     F-2
Consolidated Balance Sheets at December 31, 1998 and
1997....................................................     F-3
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1998.......     F-4
Consolidated Statements of Changes in Stockholders' Equity
for each of the three years in the period ended December
31, 1998................................................     F-5
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1998.......     F-6
Notes to Consolidated Financial Statements................     F-8
Financial Statements of Penobscot Energy Recovery Company:
Report of Independent Auditors............................    F-41
Statement of Income for the year ended December 31,
1996....................................................    F-42
Statement of Changes in Partners' Capital for the year
ended December 31, 1996.................................    F-43
Statement of Cash Flows for the year ended December 31,
1996....................................................    F-44
Notes to Financial Statements.............................    F-45
The following consolidated financial statement schedules of
KTI, Inc.:
Report of Independent Auditors on Financial Statement
Schedules...............................................     S-1
I Condensed Financial Information of Registrant.............     S-2
II Valuation and Qualifying Accounts........................     S-7
Consolidated Financial Statements of KTI, Inc.:
Consolidated Balance Sheet at June 30, 1999 (unaudited)...    F-48
Consolidated Statements of Operations (unaudited) for the
three and six months ended June 30, 1999 and 1998.......    F-49
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 1999 (unaudited)..................    F-51
Consolidated Statements of Cash Flows (unaudited) for the
six months ended June 30, 1999 and 1998.................    F-52
Notes to Consolidated Financial Statements................    F-54
Consolidated Financial Statements of FCR, Inc. and
subsidiaries:
Report of Independent Public Accountants..................    F-64
Consolidated Balance Sheets at December 31, 1997 and
1996....................................................    F-65
Consolidated Statement of Operations for the Years Ended
December 31, 1997 and 1996..............................    F-66
Consolidated Statement of Stockholders' Equity for the
Years Ended December 31, 1997 and 1996..................    F-67
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996..............................    F-68
Notes to Consolidated Financial Statements................    F-69

All other schedules for which provision is made in the applicable accounting
regulations of the Securities Exchange Act of 1934 are not required under the
related instructions or are inapplicable, and therefore have been omitted.

F-1

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
KTI, Inc.

We have audited the accompanying consolidated balance sheets of KTI, Inc. as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of KTI, Inc. at
December 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 1998
in conformity with generally accepted accounting principles.

As discussed in Note 2, the previously issued financial statements for each of
the three years in the period ended December 31, 1998 have been restated to
reflect the deferral of revenue related to certain proceeds received in
connection with the restructuring of a power purchase agreement and the sale of
electric generating capacity with two utilities.

ERNST & YOUNG LLP

Hackensack, New Jersey
March 30, 1999, except for the
second paragraph of Note 9 as to
which the date is August 27, 1999,

Note 2 as to which the date is

August 30, 1999 and the first
paragraph of Note 21 as to
which the date is September 23, 1999

F-2

KTI, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

DECEMBER 31,   DECEMBER 31,
1998           1997
------------   ------------

ASSETS
Current Assets
Cash and cash equivalents.................................    $  9,426       $ 11,181
Restricted funds..........................................      19,088         13,103
Accounts receivable, net of allowances of $1,313 and
$294....................................................      29,272         22,126
Consumables and spare parts...............................       4,483          4,041
Inventory.................................................       4,866          1,219
Notes receivable--officers/shareholders and affiliates....       1,858             29
Other receivables.........................................       4,158            461
Deferred taxes............................................       4,832          2,751
Other current assets......................................       3,370            793
--------       --------
Total current assets....................................      81,353         55,704

Restricted funds............................................       4,350          6,527
Notes receivable--officers/shareholders and affiliates......       1,534             81
Other receivables...........................................       3,025            271
Other assets................................................       6,167          1,768
Deferred taxes..............................................       1,407
Deferred costs, net of accumulated amortization of $1,610
and $676..................................................       5,268          2,911
Goodwill and other intangibles, net of accumulated
amortization of $4,354 and $1,422.........................     119,712         19,535
Deferred project development costs..........................                        937
Property, equipment and leasehold improvements, net of
accumulated depreciation of $27,724 and $18,369...........     213,669        164,753
--------       --------
Total assets............................................    $436,485       $252,487
========       ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable..........................................    $ 14,940       $  8,779
Accrued expenses..........................................       9,313          3,990
Debt, current portion.....................................       9,775         19,794
Other current liabilities.................................       4,499          1,184
--------       --------
Total current liabilities...............................      38,527         33,747

Other liabilities...........................................       4,227          1,918
Debt, less current portion..................................     202,153         74,473
Minority interest...........................................      12,437         14,077
Deferred revenue............................................      61,396         68,556
Customer advance............................................      12,788
Convertible subordinated notes..............................       6,770

Commitments and contingencies

Stockholders' equity
Preferred stock; 10,000,000 shares authorized;
Series A; non-voting; par value $8 per share; 447,500
shares authorized, issued and outstanding in 1997.......                      3,732
Series B; voting; par value $25 per share; 8.75%, 880,000
shares authorized;
856,000 shares issued and outstanding in 1997...........                     21,400
Common stock; no par value (stated value $.01 per share);
authorized 40,000,000 in 1998 and 20,000,000 in 1997,
issued and outstanding 13,266,204 and 8,912,630 shares
in 1998 and 1997, respectively..........................         133             89
Additional paid-in capital..................................     115,026         52,762
Accumulated deficit.........................................     (16,972)       (18,267)
--------       --------
Total stockholders' equity..................................      98,187         59,716
--------       --------
Total liabilities and stockholders' equity..............    $436,485       $252,487
========       ========

SEE ACCOMPANYING NOTES.

F-3

KTI , INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

YEAR ENDED DECEMBER 31,
-------------------------------------

1998          1997         1996
-----------   ----------   ----------
Revenues................................................  $   179,007   $   98,587   $   35,717
Cost of operations......................................      156,664       75,864       26,048
-----------   ----------   ----------
Gross Profit..........................................       22,343       22,723        9,669
Selling, general and administrative.....................        7,947        3,196        2,534
-----------   ----------   ----------
Income from operations................................       14,396       19,527        7,135
Interest expense, net...................................      (10,667)      (5,086)      (4,464)
Other income, net.......................................                       390           37
-----------   ----------   ----------
Income from continuing operations before minority
interest, benefit for income taxes and extraordinary
item..................................................        3,729       14,831        2,708
Minority interest.......................................        3,702        2,522        1,185
Pre-acquisition earnings................................                     4,722
-----------   ----------   ----------
Income from continuing operations before benefit for
income taxes and extraordinary item...................           27        7,587        1,523
Benefit for income taxes................................       (3,023)      (2,586)
-----------   ----------   ----------
Income from continuing operations before extraordinary
item..................................................        3,050       10,173        1,523
Discontinued operations
Loss from discontinued operations (including a loss on
disposal of $549 and provision for income taxes of
$200).................................................                                    714
-----------   ----------   ----------
Income before extraordinary item......................        3,050       10,173          809
Extraordinary item--Loss on early extinguishment of
debt, net of minority interest and in 1998, taxes.....          351                     2,248
-----------   ----------   ----------
Net income (loss).....................................        2,699       10,173       (1,439)
Accretion and accrued and paid dividends on preferred
stock.................................................       (1,133)      (1,408)
-----------   ----------   ----------
Net income (loss) available to common shareholders....  $     1,566   $    8,765   $   (1,439)
===========   ==========   ==========
Net income (loss) per common share:
Basic:
Income from continuing operations before
extraordinary item....................................  $      0.18   $     1.18   $     0.25
Loss from discontinued operations.....................                                  (0.12)
-----------   ----------   ----------
Income before extraordinary item......................         0.18         1.18         0.13
Extraordinary item....................................        (0.03)                    (0.37)
-----------   ----------   ----------
Net income (loss).....................................  $      0.15   $     1.18   $    (0.24)
===========   ==========   ==========
Weighted average number of shares used in
computation...........................................   10,548,570    7,403,681    6,090,956
===========   ==========   ==========
Diluted:
Income from continuing operations before
extraordinary item....................................  $      0.17   $     1.08   $     0.24
Loss from discontinued operations.....................                                  (0.11)
-----------   ----------   ----------
Income before extraordinary item......................         0.17         1.08         0.13
Extraordinary item....................................        (0.03)                    (0.36)
-----------   ----------   ----------
Net income (loss).....................................  $      0.14   $     1.08   $    (0.23)
===========   ==========   ==========
Weighted average number of shares used in
computation...........................................   11,398,151    8,426,190    6,255,088
===========   ==========   ==========

See accompanying notes.

F-4

KTI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)

SERIES A              SERIES B
PREFERRED STOCK       PREFERRED STOCK         COMMON STOCK
-------------------   -------------------   ---------------------   ADDITIONAL   ACCUMULATED
SHARES     AMOUNT     SHARES     AMOUNT      SHARES      AMOUNT     PAID-IN       DEFICIT
--------   --------   --------   --------   ----------   --------   ----------   ------------

Balance at December 31, 1995.......                                               5,946,973     $ 59      $ 33,427      $(26,606)
Net loss.........................                                                                                       (1,439)
Issuance of common stock for:
Exercise of options............                                                  55,346        1           280
Exercise of warrants...........                                                  41,183                    225
Conversion of debt.............                                                 725,015        7         4,045
Business combinations..........                                                  68,249        1           455
Issuance of stock purchase
warrants.......................                                                                            144
--------   -------    --------   --------   ----------     ----      --------      --------
Balance at December 31, 1996.......                                               6,836,766       68        38,576       (28,045)
Net income.......................                                                                                       10,173
Issuance of preferred stock and
common stock purchase
warrants.......................   487,500   $ 3,376                                                        422
Accretion of preferred stock.....                 700                                                       (700)
Issuance of preferred stock and
common stock purchase
warrants.......................                         856,000   $ 21,400                              (1,416)
Issuance of common stock and
common stock purchase warrants
for:
Exercise of options............                                                  85,353        1           502
Exercise of warrants...........                                                 692,771        7         3,611
Conversion of debt.............                                                 618,609        6         4,901
Conversion of preferred
stock........................   (40,000)     (344)                             40,000        1           343
Employee savings plan
contribution.................                                                   4,117                     35
Business combinations..........                                                 635,014        6         6,488
Dividends paid on Series B
Preferred Stock................                                                                                         (395)
--------   -------    --------   --------   ----------     ----      --------      --------
Balance at December 31, 1997.......   447,500     3,732     856,000     21,400    8,912,630       89        52,762      $(18,267)
Net income.......................                                                                                        2,699
Accretion of preferred stock.....                  42                                                        (42)
Issuance of common stock and
common stock purchase warrants
for:
Exercise of options............                                                 235,682        2         1,894
Exercise of warrants...........                                                 411,894        4         1,648
Non-employee director's
compensation.................                                                                            205
Conversion of preferred stock:
Series A.....................  (447,500)   (3,774)                            447,500        4         3,770
Series B.....................                        (856,000)   (21,400)      25,531        1           300
Conversion of debt.............                                               1,283,399       13        15,686
Employee savings plan
contribution.................                                                   4,215                     41
Business combinations..........                                               1,945,353       20        38,122
Tax benefit realized from stock
option transactions............                                                                            738
Dividends paid on Series B
Preferred Stock................                                                                                       (1,404)
Additional costs related to
preferred stock issuance.......                                                                            (98)
--------   -------    --------   --------   ----------     ----      --------      --------
Balance at December 31, 1998.......                                              13,266,204     $133      $115,026      $(16,972)
========   =======    ========   ========   ==========     ====      ========      ========

TOTAL
--------

Balance at December 31, 1995.......  $  6,880
Net loss.........................    (1,439)
Issuance of common stock for:
Exercise of options............       281
Exercise of warrants...........       225
Conversion of debt.............     4,052
Business combinations..........       456
Issuance of stock purchase
warrants.......................       144
--------
Balance at December 31, 1996.......    10,599
Net income.......................    10,173
Issuance of preferred stock and
common stock purchase
warrants.......................     3,798
Accretion of preferred stock.....
Issuance of preferred stock and
common stock purchase
warrants.......................    19,984
Issuance of common stock and
common stock purchase warrants
for:
Exercise of options............       503
Exercise of warrants...........     3,618
Conversion of debt.............     4,907
Conversion of preferred
stock........................
Employee savings plan
contribution.................        35
Business combinations..........     6,494
Dividends paid on Series B
Preferred Stock................      (395)
--------
Balance at December 31, 1997.......    59,716
Net income.......................     2,699
Accretion of preferred stock.....
Issuance of common stock and
common stock purchase warrants
for:
Exercise of options............     1,896
Exercise of warrants...........     1,652
Non-employee director's
compensation.................       205
Conversion of preferred stock:
Series A.....................
Series B.....................   (21,099)
Conversion of debt.............    15,699
Employee savings plan
contribution.................        41
Business combinations..........    38,142
Tax benefit realized from stock
option transactions............       738
Dividends paid on Series B
Preferred Stock................    (1,404)
Additional costs related to
preferred stock issuance.......       (98)
--------
Balance at December 31, 1998.......  $ 98,187
========

See accompanying notes.

F-5

KTI, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
------------------------------------
1998         1997         1996
----------   ----------   ----------
(IN THOUSANDS)

OPERATING ACTIVITIES
Net income (loss)...........................................  $    2,699   $   10,173   $   (1,439)
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss on disposal of discontinued operations.............                                   550
Extraordinary loss......................................         351                     2,248
Depreciation and amortization...........................      13,749        6,786        6,694
Minority interest, net of distributions.................       1,114        2,522        1,185
Deferred revenue and customer advance...................      (7,807)      (7,281)      (4,854)
Deferred income taxes...................................      (3,913)      (2,751)
Provision for losses on accounts receivable.............       1,289          193
Interest accrued and capitalized on debt................       1,109          906        1,451
Write-off of deferred project development costs.........         937
Non-cash directors' compensation........................         205
Premium for conversion of convertible debt to common
stock.................................................       1,370
Other non-cash charges..................................         187          (83)         262
Equity in net income of subsidiaries, net of
distributions.........................................                                  (198)
Loss on sale of debt securities.........................                                   296
Changes in operating assets and liabilities:
Accounts receivable...................................       1,866       (2,458)       4,703
Consumables, spare parts and inventory................      (1,104)          71         (842)
Other receivables.....................................       1,206          244         (258)
Other assets..........................................      (1,172)        (503)      (1,410)
Accounts payable and accrued expenses.................      (9,038)       1,285       (3,283)
Other liabilities.....................................      (1,867)         218         (187)
Proceeds from sale of electric generating capacity, net
of transaction costs..................................                                80,691
----------   ----------   ----------
Net cash provided by operating activities...................       1,181        9,322       85,609

INVESTING ACTIVITIES
Additions to property, equipment and leasehold
improvements..............................................      (8,581)      (5,072)      (3,412)
Proceeds from sale of assets................................         460          203          469
Proceeds from sale of discontinued operation................                                 5,005
Deferred project development costs..........................                      (45)        (910)
Net change in restricted funds:
Cash equivalents........................................      (3,251)      (2,149)          (3)
Debt securities available-for-sale......................                                 5,579
Purchase of additional partnership interests................      (2,410)     (14,532)        (792)
Cash acquired in purchase of additional partnership
interests.................................................                    5,375
Purchase of businesses, net of cash acquired................     (55,499)     (17,548)      (2,958)
Investment in unconsolidated affiliate......................        (865)
Notes receivable--officers/shareholders and affiliates......      (1,400)         340           (9)

Proceeds from sale of business..............................       1,985
----------   ----------   ----------
Net cash provided by (used in) investing activities.........     (69,561)     (33,428)       2,969

F-6

KTI, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

YEAR ENDED DECEMBER 31,
------------------------------------
1998         1997         1996
----------   ----------   ----------
(IN THOUSANDS)

FINANCING ACTIVITIES
Deferred financing costs....................................      (3,901)      (1,265)      (1,188)
Net borrowings on lines of credit...........................     133,573       30,107        8,786
Proceeds from issuance of debt..............................      44,995
Additional preferred stock issuance costs...................         (98)       4,121          506
Proceeds from customer advance, net.........................       5,900
Proceeds from sale of common stock..........................       3,548
Proceeds from sale of preferred stock.......................                   23,782
Dividends paid..............................................      (1,404)        (395)
Principal payments on debt..................................    (115,988)     (26,290)     (97,909)
----------   ----------   ----------
Net cash provided by (used in) financing activities.........      66,625       30,060      (89,805)
----------   ----------   ----------
Increase (decrease) in cash and cash equivalents............      (1,755)       5,954       (1,227)
Cash and cash equivalents at beginning of year..............      11,181        5,227        6,454
----------   ----------   ----------
Cash and cash equivalents at end of year....................  $    9,426   $   11,181   $    5,227
==========   ==========   ==========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid...............................................  $    8,864   $    2,792   $    6,145
Taxes paid..................................................         150           75

NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations entered into for lease of
equipment.................................................       1,725          347
Purchase of businesses and additional partnership interest,
net of cash acquired:
Working capital surplus (deficit), net of cash
acquired..............................................      (1,772)       6,293        1,311
Property, equipment and leasehold improvements..........      48,277       67,660        8,012
Purchase price in excess of net assets acquired.........     102,866       14,235        3,256
Other assets............................................       4,466          667          591
Non-current liabilities.................................      57,786       55,659        8,964
Common stock and common stock purchase warrants
issued................................................      38,142        6,494          456

See accompanying notes

F-7

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. ORGANIZATION

KTI, Inc. ("KTI") and subsidiaries (collectively, the "Company"), is an
integrated waste handling business providing wood, paper, corrugated, metals,
plastic and glass processing and recycling, municipal solid waste processing and
disposal capabilities, specialty waste disposal services, recycling of ash
combustion residue, the generation of electricity and steam and the manufacture
of finished products utilizing recyclable materials. The Company also markets
recyclable metals, plastic, paper and corrugated processed at its facilities and
by third parties. The Company operates 53 facilities in 21 states and Canada in
four operating segments: Waste-to-Energy Processing, Finished Products,
Commercial Recycling and Residential Recycling.

There are significant restrictions on the ability of certain of the
Company's subsidiaries to distribute assets to the Company. These restrictions
result from the terms of certain indebtedness and provisions of other agreements
with third parties. These subsidiaries include the Company's majority-owned
consolidated subsidiaries, Maine Energy Recovery Company ("Maine Energy") and
Penobscot Energy Recovery Company ("PERC") and the Company's wholly-owned
subsidiary Timber Energy Resources, Inc. ("TERI"). At December 31, 1998, the net
assets of these subsidiaries was $51,551.

Maine Energy, PERC and TERI are subject to the provisions of various
federal, state, local and provincial energy laws and regulations, including the
Public Utility Regulatory Policy Act of 1978, as amended. In addition, federal,
state and local environmental laws establish standards governing certain aspects
of the Company's operations. The Company believes it has all permits, licenses
and approvals necessary to operate.

2. RESTATEMENT

The Company's balance sheets as of December 31, 1998 and 1997 and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998 have been restated. The
restatement is a result of the Securities and Exchange Commission's review of
the Company's proxy materials related to the prospective merger with Casella
Waste Systems (See note 21). The restatement relates to revenue recognized as a
result of the restructuring of a power purchase agreement and the sale of
electric generating capacity by two of the Company's majority-owned subsidiaries
with its customers, BHE and CMP, which were completed in 1998 and 1996,
respectively (See notes 4 and 5). At the time of these transactions, the Company
had recognized revenues representing a portion of the cash received in 1996 and
the total consideration received in 1998. After discussions with the staff of
the Securities and Exchange Commission, the Company agreed to defer these
amounts and recognize them over the term of the respective power purchase and
capacity purchase agreements to comply with generally accepted accounting
principles. In addition, performance credits previously reported as expense have
been reclassified as a reduction of

F-8

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

2. RESTATEMENT (CONTINUED)
revenues. The impact of the restatement on the Company's consolidated financial
results as originally reported is summarized as follows:

AS REPORTED                        RESTATED
------------------------------   ------------------------------
1998       1997       1996       1998       1997       1996
--------   --------   --------   --------   --------   --------

Revenues............................  $192,977   $96,157    $68,508    $179,007   $98,587    $35,717
Income before extraordinary item....     7,069     8,092     15,914       3,050    10,173        809
Net income (loss)...................     6,718     8,092     13,666       2,699    10,173     (1,439)
Net income (loss) available to
common shareholders...............     5,585     6,684     13,666       1,566     8,765     (1,439)
Net income (loss) per share:
Basic.............................      0.53      0.90       2.25        0.15      1.18      (0.24)
Diluted...........................      0.49      0.83       2.05        0.14      1.08      (0.24)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of KTI and its
wholly-owned and majority-owned subsidiaries. All significant intercompany
accounts and transactions are eliminated in consolidation. As described in
Note 6, during 1997 the Company acquired in two transactions certain limited
partnership interests in PERC aggregating 64.29%. Prior to these transactions,
the Company was a 7.00% owner and the managing general partner of PERC. As a
result of the Company's aggregate ownership interest, PERC's financial
statements have been included in the Company's consolidated statement of income
for the year ended December 31, 1997. The consolidated statement of income
includes PERC's operations for the year ended December 31, 1997 as though the
acquisition had occurred at the beginning of the year and includes adjustments
to eliminate minority interest and the pre-acquisition earnings of PERC
attributable to the partnership interests acquired as of the respective dates.
Prior to 1997, the Company's investment in PERC was accounted for under the
equity method based on the Company's significant influence over its financial
and operating policies.

The ownership interest of minority owners in the equity and earnings of the
Company's less than 100 percent-owned consolidated subsidiaries is recorded as
minority interest.

CASH EQUIVALENTS

The Company considers all highly liquid investments with an original
maturity of 90 days or less when purchased to be cash equivalents.

RESTRICTED FUNDS

Restricted funds consist of cash and cash equivalents held in trust, all of
which are available, under certain circumstances, for current operating
expenses, debt service, capital improvements and repairs and maintenance in
accordance with certain contractual obligations and cash deposited in a bank in
connection with certain of the Company's debt and standby letter of credit
obligations. Restricted funds available for current operating and debt service
purposes are classified as current assets.

F-9

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK

Within the Waste-to-Energy segment, Maine Energy, PERC and TERI each sell
electricity to the local electric utility in their respective geographic
locations (Central Maine Power Company, ("CMP"), Bangor Hydro Electric Company
("BHE") and Florida Power Company ("FPC"), respectively). Electric power revenue
from such utilities during 1998 totaled approximately $19,326, $14,676 and
$5,593, respectively, and $18,780, $17,492 and $5,126, respectively, in 1997 and
$21,441 in 1996 for CMP. Accounts receivable from CMP, BHE and FPC were $1,393,
$3,166 and $472, respectively, at December 31, 1998 and $2,163, $3,212 and $454,
respectively, at December 31, 1997. In addition, Maine Energy and PERC earn
substantial portions of their waste handling revenues from municipalities in
their respective geographic regions in the state of Maine. TERI also earns a
significant portion of its revenue from a large national paper manufacturer.
Such revenues are earned under the terms of long-term agreements. American Ash
Recycling of Tennessee, Ltd. ("AART") earns a substantial portion of its
revenues as the result of a contract with the City of Nashville, Tennessee.

Although less than 10% of consolidated revenue, a significant portion of
sales of recyclables in the Commercial segment is to international (including
Pacific Rim countries, South America and Europe) and domestic paper
manufacturers. The Company performs periodic credit evaluations of these
customers. Although the Company's exposure to credit risk associated with
non-payment by paper manufacturers is affected by conditions within the paper
industry and the general economic condition of countries within the Pacific Rim,
South America and Europe, a significant portion of outstanding receivables are
supported through letters of credit either issued, confirmed or discounted by
banks located in the United States. No single paper manufacturer or customer
exceeded 5% of the Company's total accounts receivable at December 31, 1998.

Although less than 10% of consolidated revenue, a significant portion of
sales in the Residential Recycling segment is to two customers. The facilities
within the Residential Recycling segment operate under long-term contracts with
the local municipalities or contract waste haulers. This segment earns a portion
of its revenues from these municipalities and waste haulers within the
geographic region surrounding the respective facilities. In addition, the
Residential Recycling segment enters into long-term contracts to sell recyclable
materials at prices based on market price with a contractual floor. These
contracts have terms from one to ten years and expire through 2008. No
individual municipality or customer under long-term commodity contracts exceeded
5% of the Company's total accounts receivable at December 31, 1998.

Although less than 10% of consolidated revenue, a significant portion of
sales in the Finished Products segment is to one customer. This customer is
under a contract to purchase a specified quantity of product at rates that
approximate market value through August, 2000. In addition, a significant
portion of this segment's sales are to manufacturers of manufactured homes and
insulation contractors throughout the United States and thus the revenues are
impacted by sales of new homes, which are cyclical in nature. No individual
customer of this segment exceeded 5% of the Company's total accounts receivable
at December 31, 1998.

Other financial instruments which subject the Company to concentrations of
credit risk are cash and cash equivalents including restricted funds. The
Company restricts its cash investments to financial institutions with high
credit standings and securities backed by the United States Government.

F-10

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES

Inventories, consisting of secondary fibers, recyclables ready for sale and
certain finished products, include costs paid to third parties for purchased
materials and are stated at the lower of cost (first-in, first-out) or market.
Inventories consisted of finished goods of approximately $4,065 and $1,219 at
December 31, 1998 and 1997 respectively, and raw material of approximately $801
at December 31, 1998.

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. All costs incurred for additions and
improvements, including interest during construction, are capitalized. The
Company capitalized net interest costs of $285, $20 and $110, in 1998, 1997 and
1996, respectively. Depreciation of property and equipment is provided using the
straight-line method over the estimated useful lives ranging principally from
three to twenty-five years. Assets under capital leases are amortized using the
straight-line method over the estimated useful lives ranging from five to ten
years. Amortization of assets under capital leases is included in depreciation
expense. Leasehold improvements are amortized on a straight-line basis over the
shorter of the term of the lease or the estimated useful life of the
improvement.

GOODWILL

Goodwill represents costs in excess of net assets of businesses acquired in
purchase transactions. Goodwill is being amortized on a straight-line basis over
periods up to thirty years.

DEFERRED FINANCING COSTS

Costs incurred in connection with debt and letter of credit financings are
deferred and are being amortized over the life of the related debt or letter of
credit issues using the interest method. The unamortized portion of such costs
related to the previously outstanding PERC bonds in 1998 and the Maine Energy
bonds in 1996 were included in the determination of the extraordinary loss.

DEFERRED PROJECT DEVELOPMENT COSTS

The Company defers certain external costs incurred in the development of new
projects including design and costs related to obtaining required permits.
Amortization of these costs begins when the project becomes operational. If
management concludes that the related project will not be completed, the
deferred costs are expensed immediately.

REVENUE RECOGNITION

Revenues from the sale of electricity to local utilities are recorded at the
contract rate specified in each entity's power purchase agreement ("PPA") as it
is delivered. Revenue includes the portion of the deferred gain on the sale of
electric generating capacity at Maine Energy (see Note 5) which is being
amortized on a straight-line basis over the term of the capacity agreement
(eleven years). Revenue also

F-11

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
includes the amortization of the customer advance at PERC (see note 4) which is
being amortized on a straight-line basis over the term of the Power Purchase
Agreement (nineteen years).

Revenues from waste processing consist principally of fees charged to
customers for waste disposal. Substantially all waste processing revenues are
earned from customers located in a geographic region proximate to the respective
facility. Revenue is generally recorded upon acceptance and in certain cases is
based on rates specified in long-term contracts. Certain of these rates are
subject to adjustment based on the levels of certain costs and expenses, as
defined, of Maine Energy and PERC. The Company periodically reviews the
long-term contracts and any anticipated losses are charged to operations in the
period the losses are first determinable. The Company's evaluation is based on
estimated revenues and direct costs related to the respective contracts.

Revenues from the sale of recycled materials ($72,130, and $17,004 in 1998
and 1997, respectively) and finished products are recognized upon shipment.
Rebates to certain municipalities based on sales of recyclable materials are
recorded upon the sale of such recyclables to third parties and are included in
cost of operations. Revenues for processing of recyclable materials are
recognized upon delivery of recycled materials to the Company and totaled $7,791
and $690 in 1998 and 1997, respectively.

Management fees from affiliates for 1996, related to providing general
partner services to PERC, were recognized in accordance with the partnership
agreement and were included in waste processing revenues. Such amounts have been
eliminated in consolidation for 1998 and 1997. Service and other revenues in
connection with transportation and waste management are recognized upon
completion of the services.

INCOME TAXES

Deferred income taxes are determined using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

BUSINESS COMBINATIONS

The Company has accounted for all business combinations under the purchase
method of accounting. Under this method, the purchase price is allocated to the
assets and liabilities of the acquired enterprise as of the acquisition date (to
the extent of the Company's ownership interest) based on their estimated
respective fair values and are subject to revision for a period not to exceed
one year from the date of acquisition. The results of operations of the acquired
enterprise are included in the Company's consolidated financial statements for
the period subsequent to the acquisition.

F-12

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS

Net income available for common shareholders represents net income adjusted
for:

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

Accretion of preferred stock to redemption value............   $   42     $  700
Preferred stock dividends...................................    1,091        395
Dividends earned but not paid or accrued....................                 313
------     ------
$1,133     $1,408
======     ======

EVALUATION OF LONG-LIVED ASSETS

The Company assesses long-lived assets for impairment, including goodwill
associated with assets acquired in a business combination when events or
circumstances exist that indicate the carrying amount of those assets may not be
recoverable. The Company performs an evaluation comparing the estimated future
undiscounted cash flows associated with the asset to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value is
required. No such events or circumstances existed at December 31, 1998.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

RECENT ACCOUNTING DEVELOPMENTS

Recent accounting pronouncements which are not required to be adopted at
December 31, 1998, include the following Statement of Financial Accounting
Standards ("SFAS") and the American Institute of Certified Public Accountants
Statements of Position ("SOP"):

SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
which will be required to be adopted by the Company as of January 1, 2001,
establishes standards for derivative instruments, including those embedded in
other contracts and for hedging activities. The new standard requires the
Company to recognize all derivatives as either assets or liabilities and measure
those instruments at fair value. Management believes that the adoption of SFAS
No. 133 will not have a material impact on the Company's financial statements.

SOP 98-1, ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE is required to be adopted by the Company as of January 1, 2000.
The Company's current policy falls within the guidelines of SOP 98-1. Also, SOP
98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES is required to be adopted by
the Company as of January 1, 1999. Management believes that the adoption of SOP
98-5 will not have a material impact on the Company's financial statements.

F-13

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform with the
current year presentation.

4. AMENDMENT OF PERC'S POWER PURCHASE AGREEMENT AND WASTE DISPOSAL AGREEMENTS

On June 26, 1998, PERC completed an amendment of its PPA with BHE. At
closing, PERC received $6,000 in cash and BHE agreed to make 16 quarterly
payments of $250 commencing October 1, 1998 (the "BHE Note"). For financial
statement purposes, the BHE Note has been discounted using an effective interest
rate of 5.45%. The $6,000 cash payment and the present value of the BHE Note
($3,572) are being accounted for as a customer advance. Imputed interest on the
BHE Note is being amortized over its term and is included in interest income. In
addition, BHE issued the Company warrants to purchase 712,857 shares of BHE
common stock at an exercise price of $7.00 per share, exercisable 25% annually
with an expiration date of June 26, 2008. The estimated aggregate fair value of
these warrants at the date of issuance was approximately $3,814 ($5.35 per
share) which was also recorded as a customer advance. The customer advance, net
of transaction costs, is being amortized over the life of the PPA with BHE (19
years). As of December 31, 1998 the remaining customer advance in connection
with this transaction was approximately $12,788.

In connection with the amendment, PERC's waste disposal agreements with
certain municipalities (the "Amending Charter Municipalities") were amended to
extend the term of such agreements to 2018. In addition, PERC granted the
Amending Charter Municipalities the right to purchase up to a 50% limited
partnership interest in PERC for an aggregate purchase price of $31,000. Such
purchases may only be made to the extent of their respective share of
distributable cash from PERC, as defined, and one-half of the quarterly payments
to be made under the BHE Note. Any such amounts paid by the Amending Charter
Municipalities must be used to prepay PERC's outstanding bonds payable. The
Amending Charter Municipalities were also granted the right to purchase the
remaining partnership interests in 2018 at the then fair market value, as
defined.

The waste disposal agreements were further amended to provide that the
Amending Charter Municipalities, BHE, and partners in PERC would each receive
one-third of PERC's cash flows, as defined. Prior to this amendment, the
municipalities received one-half PERC's distributable cash, as defined. Based on
PERC's cash flow, as defined, distributable cash of approximately $4,616 and
$1,101 was payable for 1998 and 1997, respectively. Of these amounts,
approximately $413 and $1,101 remained unpaid as of December 31, 1998 and 1997,
respectively, and was included in accrued expenses.

Under the PPA, PERC is required to deliver at least 105,000,000 kWh to BHE
in any Calendar year. In the event PERC fails to deliver this output, PERC is
obligated to pay $4 for each 1,000,000 kWh by which such deliveries fall below
105,000,000 kWh.

5. SALE OF ELECTRIC GENERATION CAPACITY AND RESTRUCTURE OF POWER PURCHASE
AGREEMENT

On May 3, 1996, Maine Energy completed a restructuring of its PPA with CMP
and the sale of the rights to its electrical generating capacity to CL Power
Sales One, L.L.C. ("CL One"). At closing, Maine Energy received a payment from
CL One of $85,000 ("Capacity Payment") and the PPA was amended to reflect a
reduction in CMP's purchase price for electric power. In addition, the term of
the

F-14

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

5. SALE OF ELECTRIC GENERATION CAPACITY AND RESTRUCTURE OF POWER PURCHASE
AGREEMENT (CONTINUED)
PPA was extended from 2007 to 2012. The Company also received reimbursement of
certain transaction costs, including interest on the Capacity Payment from
November 6, 1995 to closing and certain other payments. The Company recorded the
payment from CL One, net of transaction costs, of approximately $80,691 as
deferred revenue in 1996. This amount is being recognized on a straight-line
basis as revenue over the life of the capacity agreement with CL One (eleven
years). As of December 31, 1998 and 1997 the remaining deferred revenue was
$61,276 and $68,556, respectively.

Under the terms of the agreements, Maine Energy will be liable to CMP for
liquidated damages of $3,750 for any calendar year through the year 2006 and on
a pro rata basis for the period from January 1, to May 31, 2007 in which it does
not deliver at least 100,000,000 kilowatt hours ("kWh"). Also, if during the
same period, Maine Energy fails to deliver at least 15,000,000 kWh in any
calendar year through the year 2006 and on a pro rata basis for the period from
January 1, to May 31, 2007 it will be liable to CMP for liquidated damages of
$3,750 times the number of years remaining in the term of the agreement. Both
the 100,000,000 kWh and the 15,000,000 kWh levels are adjusted in the case of a
force majeure event, as defined. Maine Energy produced approximately 166,000,000
and 168,000,000 kWh of electricity in each of 1998 and 1997, respectively. In
order to secure CMP's right to liquidated damages, Maine Energy has obtained an
irrevocable letter of credit in the initial amount of $45,000 which will be
reduced by $3,750 for each completed year in which no event requiring the
payment of liquidated damages occurs. Under the terms of the letter of credit
agreement, Maine Energy is required to maintain certain restricted funds. The
letter of credit is collateralized by liens on substantially all of Maine
Energy's assets.

Maine Energy used the proceeds from the sale of its capacity to repay the
then outstanding Maine Energy Resource Recovery Bonds and to retire the related
bank letter of credit. This prepayment resulted in the recognition of an
extraordinary loss of $2,248 (net of minority interest of $2,213) in 1996.

6. ACQUISITIONS

1998 ACQUISITIONS

The Company acquired ten companies and an additional partnership interest in
one company during 1998. Payment of the aggregate purchase price for these
acquisitions consisted of (i) 1,945,353 shares of the Company's common stock at
a weighted-average value of $19.06 per share (based on the closing prices of the
common stock on the date of announcement of each acquisition); (ii) $57,909 in
cash (net of cash acquired of $6,198); (iii) a promissory note in the principal
amount of $1,086; and (iv) warrants to purchase 130,000 shares of common stock
valued at approximately $1,060 as of the date of acquisition. These acquisitions
were accounted for as purchases, and accordingly, the assets and liabilities of
the acquired entities have been recorded at their estimated fair value at the
dates of acquisition. The excess of the purchase price over the fair value of
the acquired net assets aggregating $102,866 has been recorded as goodwill and
is being amortized on a straight line basis over 30 years. The more significant
1998 acquisitions are described below.

In August 1998, the Company acquired FCR, Inc. ("FCR") a diversified
recycling company that provides residential and commercial recycling, processing
and marketing services and primarily manufactures cellulose insulation and
plastics using recycled materials. FCR owns or operates eighteen

F-15

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

6. ACQUISITIONS (CONTINUED)
material recovery facilities, six cellulose insulation manufacturing facilities
and three plastic processing facilities in twelve states. Payment of the
purchase price, including all direct costs, of $63,581 consisted of
(i) 1,714,285 shares of the Company's common stock valued at $18.96 per share
(based on the closing price of the common stock on the date of announcement) and
(ii) $31,074 in cash. An additional payment of up to $30,000 may have been
required based on the earnings of FCR for the period July 1, 1998 through
December 31, 1998 (the "Earnout"). Based on FCR's earnings during the period, no
payments are due under the Earnout. The cost of the acquisition exceeded the
fair value of the acquired net assets by approximately $70,032.

In August 1998, the Company acquired certain assets and assumed certain
liabilities of Atlantic Coast Fibers, Inc. ("Atlantic Coast") and Gaccione
Bros. & Co., Inc. and PGC Corporation (collectively, "Gaccione"). Atlantic Coast
operates a high-grade paper processing facility. Payment of the purchase price,
including all direct costs, for Atlantic Coast of $9,655 consisted of
(i) 123,532 shares of the Company's common stock valued at $20.29 per share
(based on the closing price of the common stock on the date of the
announcement), (ii) $6,995 in cash and (iii) warrants to purchase 20,000 shares
of common stock valued at approximately $153 as of the date of acquisition.
Gaccione operated a high-grade paper processing facility. Payment of the
purchase price, including all direct costs, for Gaccione of $6,975 consisted of
(i) $5,889 in cash and (ii) a 7% promissory note in the principal amount of
$1,086. In September 1998, the Company agreed to a payment of an additional
purchase price for Atlantic Coast and Gaccione consisting of 150,000 shares of
common stock. The Company recorded this additional purchase price as a liability
and an addition to goodwill. Subsequent to year-end, the Board of Directors
approved the payment of the additional purchase price and the common stock was
issued. The cost of these acquisitions exceeded the fair value of the acquired
net assets by approximately $18,104.

In June 1998, the Company acquired Multitrade Group, Inc. ("Multitrade").
Multitrade operates three waste-to-energy facilities utilizing biomass and coal
to produce steam for sale to major industrial users under long-term contracts.
Payment of the purchase price, including all direct costs, for Multitrade was
$12,347 in cash. The cost of the acquisition exceeded the fair value of the
acquired net assets by approximately $4,537.

In December 1998, the Company acquired an additional 9.6% limited
partnership interest in Maine Energy from one of the existing limited partners.
The cost of the acquisition was $2,410. The transaction has been accounted for
under the purchase method of accounting and the cost of the purchase price has
been allocated to the assets and liabilities of Maine Energy (to the extent of
the Company's additional ownership interest) based on their estimated fair
values as of the date of acquisition and resulted in an increase in the carrying
value of property and equipment of approximately $1,670.

1997 ACQUISITIONS

On September 30, 1997 and November 12, 1997, the Company purchased certain
limited partnership interests in PERC aggregating 64.29% from one of the
existing limited partners. The aggregate cost of the acquisitions was $14,500.
The purchase price has been allocated to the assets and liabilities of PERC (to
the extent of the Company's additional ownership interest) based on their
estimated fair values as of the date of acquisition and resulted in a reduction
in the carrying value of

F-16

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

6. ACQUISITIONS (CONTINUED)
property and equipment of approximately $8,038. Prior to the acquisition of the
additional 64.29% limited partnership interest, the Company accounted for its 7%
ownership under the equity method. The excess of the Company's actual capital
contributions over its original 7% ownership interest in the partnership's total
contributed capital is being amortized over the term of the partnership's energy
sales contract. This amount is included in goodwill.

In November, 1997, the Company acquired certain assets and assumed certain
liabilities of Prins Recycling Corp. and its subsidiaries ("Prins") pursuant to
an order of the Bankruptcy Court for the District of New Jersey. Prins was
engaged in the operation of three material recycling facilities located in or
proximate to Newark, New Jersey, Chicago, Illinois and Charlestown,
Massachusetts. The aggregate purchase price including all direct costs was
approximately $15,100 and included warrants to purchase 92,250 shares of the
Company's common stock at exercise prices ranging from $8.10 to $9.25 per share.
The warrants are exercisable at any time and expire on various dates between
December 31, 1999 and April 30, 2002. During 1998 and 1997, 40,000 and 17,325 of
these warrants were exercised. At December 31, 1998, 34,925 of these warrants
remain outstanding. In connection with the transaction, the Company assumed
certain administrative claims against Prins. The cost of the acquisition
exceeded the fair value of the acquired net assets by approximately $6,374 which
has been recorded as goodwill and is being amortized on a straight line basis
over 15 years. During 1998, the Company finalized its allocation of the purchase
price which resulted in certain changes in estimated liabilities as of the
acquisition date, including certain additional administrative claims against
Prins and fair values assigned to property, equipment and leasehold
improvements. Such adjustments resulted in an increase in goodwill of
approximately $1,865.

On September 19, 1997, the Company acquired all of the outstanding common
stock of K-C Industries, Inc. ("K-C"). K-C is engaged in the marketing of paper
and secondary fibers. The aggregate purchase price, including all direct costs,
was approximately $6,739 and included 425,014 shares of the Company's common
stock. The cost of the acquisition exceeded the fair value of the acquired net
assets by approximately $5,035 which has been recorded as goodwill and is being
amortized on a straight line basis over 15 years.

In August, 1997, the Company acquired all of the outstanding common stock of
I. Zaitlin and Sons, Inc. ("Zaitlin"), a company engaged in the recycling
business in Maine, and Data Destruction Services, Inc., a company engaged in the
destruction of confidential records. The aggregate purchase including all direct
costs was approximately $2,245 and included 200,000 shares of the Company's
common stock. The cost of the acquisition exceeded the fair value of the
acquired net assets by approximately $2,498 which has been recorded as goodwill
and is being amortized on a straight line basis over 10 years. During 1998, the
Company finalized its allocation of the purchase price which resulted in certain
changes in estimated liabilities as of the acquisition date. Such adjustments
resulted in an increase in goodwill of approximately $105 during 1998.

In June, 1997, the Company acquired the entire general partnership interest
in AARNE from the existing general partner. The aggregate cost of the
acquisition was $560 which exceeded the carrying value of the minority interest
by approximately $328 which was recorded as goodwill and is being amortized on a
straight line basis over 15 years. Subsequent to the acquisition, the Company
owns 100% of AARNE.

F-17

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

6. ACQUISITIONS (CONTINUED)

1996 ACQUISITIONS

On May 3, 1996, the Company purchased additional limited partnership
interests in Maine Energy aggregating 23.77% from certain other existing limited
partners. The aggregate cost of the acquisitions was approximately $485.
Subsequent to this acquisition, the Company's ownership in Maine Energy
aggregated 74.15%. Prior to September 16, 1994 (the date at which the Company
acquired its initial limited partnership interests and became majority owner in
Maine Energy), the Company accounted for its 10% ownership interest under the
equity method. The difference between the Company's actual capital contributions
and its ownership interest in the partnership's total contributed capital is
being amortized over the term of the partnership's energy sales contract. This
amount is included in goodwill.

During the fourth quarter of 1996, the Company acquired all of the
outstanding common stock of Timber Energy Investments, Inc. ("TEII"). TEII,
through its subsidiaries, is engaged in the generation of electricity and the
processing of wood and plastic materials. The purchase price, including all
direct costs, was approximately $2,142. The cost of the acquisition exceeded the
fair value of TEII's net assets by approximately $2,035 which has been recorded
as goodwill and is being amortized on a straight line basis over 10 years.
During 1997, the Company finalized its allocation of the purchase price which
resulted in certain changes in the fair values assigned to property, equipment
and leasehold improvements and the reduction of certain assumed liabilities.
Such adjustments resulted in an increase of goodwill of approximately $229.

On March 31, 1996, the Company acquired a 60% limited partnership interest
in American Ash Recycling Co. of Tennessee, a limited partnership, ("AART").
AART is engaged in the processing of ash residue from a waste-to-energy facility
located in Nashville, Tennessee. The purchase price for the limited partnership
interest was $2,100. The cost of the acquisition exceeded the fair value of
AART's net assets by approximately $800 which has been recorded as goodwill and
is being amortized on a straight line basis over 10 years.

On November 25, 1996, the Company acquired all of the outstanding common
stock of Manner Resins, Inc. ("Manner") a company engaged in the purchase and
sale of recyclable plastic materials. The purchase price was approximately $456
and was entirely financed through the issuance of 65,000 shares of the Company's
common stock. The cost of the acquisition exceeded the fair value of Manner's
net assets by approximately $421 which has been recorded as goodwill and is
being amortized on a straight line basis over 5 years.

The following unaudited pro forma summary presents selected operating data
as if the significant 1998 and 1997 acquisitions described above had occurred as
of January 1, 1997, and does not purport

F-18

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

6. ACQUISITIONS (CONTINUED)
to be indicative of the results that would have occurred had the transactions
been completed as of those dates or of results which may occur in the future.

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

Net revenues................................................  $239,541   $240,354
Income (loss) from continuing operations before
extraordinary item........................................      (686)     4,603
Net income (loss)...........................................    (1,037)     4,603
Net income (loss) available for common shareholders.........    (2,170)     2,031
Net income (loss) per share-basic...........................     (0.18)      0.21
Net income (loss) per share-diluted.........................     (0.18)      0.21

7. DISPOSAL OF COMPUTER SERVICES SEGMENT

During 1996, the Company disposed of its computer services segment which was
comprised entirely of its wholly-owned subsidiary Convergent Solutions, Inc.
("CSI"). The sale was completed in two separate transactions. On July 26, 1996
certain assets and liabilities of CSI were sold to Ciber, Inc. for $5,000. Also,
on July 29, 1996, all of the outstanding common stock of CSI was sold to certain
members of its management for $5. In addition, the Company had notes receivable
from the buyers aggregating $445 at December 31, 1996. The notes receivable were
repaid during 1997. The results of operations of CSI for 1996 have been
classified as discontinued operations in the accompanying financial statements.
CSI's revenues for 1996 were $5,785.

8. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements consist of the following at:

DECEMBER 31,
-------------------
1998       1997
--------   --------

Land........................................................  $  3,018   $  2,171
Buildings and site improvements.............................    43,772     40,942
Machinery and equipment.....................................   184,589    137,184
Automobiles and trucks......................................     3,694
Furniture and fixtures......................................     2,300      2,075
Leasehold improvements......................................     2,917        750
Construction-in-progress....................................     1,103
--------   --------
241,393    183,122
Less accumulated depreciation...............................   (27,724)   (18,369)
--------   --------
$213,669   $164,753
========   ========

Beginning October 1, 1996 Maine Energy revised the estimated average useful
lives used to compute depreciation for substantially all of its plant and
equipment. These revisions were made to more properly reflect the remaining
useful lives of the assets. The change had the effect of increasing income
before extraordinary item and net income by approximately $482 ($.08 per share,
basic and $.07 diluted per share) for 1996.

F-19

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

9. DEBT

The Company's debt consists of the following:

DECEMBER 31,
-------------------
1998       1997
--------   --------

(A)  Revolving credit agreement..................................  $138,628
(A)  Revolving and term loan payable.............................             $12,411
(B)  Capital lease obligations...................................     5,466       357
(C)  Revolving credit facility...................................     4,000     4,000
(D)  Promissory note payable.....................................     1,086
(E)  Bonds Payable...............................................       760
(F)  Secured term notes payable..................................       555       692
(G)  Term loan payable...........................................       460       489
(H)  Secured note payable to bank................................        50     1,555
(I)  Term note payable to bank...................................                 304
Other.......................................................               1,210

PERC Bonds Payable..........................................    44,995    47,900
Revenue Bonds Payable by TERI...............................    11,635    13,400
Convertible Subordinated Notes..............................     6,770
Subordinated Notes Payable to Maine Energy Limited
Partners..................................................     4,293    11,949
--------   -------
218,698    94,267
Less current portion........................................     9,775    19,794
--------   -------
$208,923   $74,473
========   =======

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

(A) During July 1998, the Company entered into a Revolving Line of Credit
Agreement with a bank (the "Credit Agreement") which provides for
borrowings of up to $150,000. The Credit Agreement expires in
April 2001. The Company may select interest rates on the outstanding
borrowings based on the bank's prime rate or LIBOR rates. The interest
rates range from the bank's prime rate to the bank's prime rate plus
0.75% or LIBOR rates plus 1.75% to LIBOR rates plus 2.50% depending on
the attainment of certain financial covenants, as defined in the Credit
Agreement. All borrowings under the Credit Agreement at December 31, 1998
were at LIBOR plus 2.50% (8.05% at December 31, 1998). The Credit
Agreement also provides standby letters of credit which reduce the total
borrowings available to the Company. At December 31, 1998, approximately
$2,275 in standby letters of credit were outstanding and the Company had
approximately $9,097 in available borrowings under the Credit Agreement.
All borrowings under the Credit Agreement are secured by substantially
all of the Company's assets which have not been pledged for other
borrowings or certain standby letters of credit. Among other things, the
Credit Agreement restricts the Company's ability to incur additional
indebtedness and requires it to maintain certain financial ratios. At
December 31, 1998, the Company was in default of a debt covenant and
received a waiver from the bank for this default. Certain borrowings
under this Credit Agreement were utilized to repay the revolving and term
loan payable discussed below.

F-20

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

9. DEBT (CONTINUED)
On May 12, 1999, the Company executed an amendment to the Credit
Agreement (the "Amended Agreement") modifying certain financial covenants
and requiring bank approval for all acquisitions. The Amended Agreement
requires that the Company and certain subsidiaries, as defined, maintain
certain specified financial covenants, including, a minimum interest
coverage ratio, a maximum funded debt to EBITDA ratio, a minimum fixed
charge coverage ratio, and a maximum debt to capitalization ratio, each
as defined in the Amended Agreement. The Company's ability to satisfy
these covenants is dependent on its ability to substantially achieve its
operating plan. As of June 30, 1999, the Company was in default of
certain of these covenants and received a waiver from the bank for this
default through January 1, 2000. The Company will continue to select
interest rates on the outstanding borrowings based on the banks prime
rate or LIBOR rates, however, the interest rates range from the bank's
prime rate to the bank's prime rate plus 1.50% or LIBOR plus 1.88% to
LIBOR plus 3.25% depending on the attainment of a financial covenant, as
defined, in the Amended Agreement.

During 1997, the Company had entered into an Amended and Restated
Revolving and Term Loan and Security Agreement with the same bank which
provided an $11,000 revolving credit facility and $7,500 term loan. At
December 31, 1997, $5,000 and $7,411 were outstanding under the revolving
credit facility and term loan, respectively. The revolving line of credit
interest was at the bank's prime rate plus 0.75% (8.75% at December 31,
1997) payable monthly. The term loan bore interest at the bank's prime
rate plus 1.25% (9.25% at December 31, 1997), and was due in monthly
installments of $89 plus interest. These obligations were repaid in
July 1998.

(B) The Company leases certain machinery and equipment under capital leases
expiring at various times through 2008. These capital lease obligations
have a weighted average interest rate of 9.46% at December 31, 1998 and
monthly principal and interest payments totaling $129. These obligations
are secured by machinery and equipment with a net carrying value of
$6,702 at December 31, 1998.

(C) A subsidiary of the Company has a $8,000 revolving line of credit
(including $1,000 available for letters of credit) with a bank (the
"Revolving Credit Agreement") which expires in May 2000. Borrowings under
the Revolving Credit Agreement are based on eligible collateral which
includes specified percentages of certain cash, accounts receivable and
inventory, as defined. Interest on borrowings is at LIBOR rate plus 2.25%
(weighted average rate of 7.78% and 9.50% at December 31, 1998 and 1997,
respectively). Among other things, the Revolving Credit Agreement
restricts the subsidiary's ability to incur additional indebtedness and
requires it to maintain certain financial ratios, as defined.

(D) Promissory note payable to sellers in a business transaction with
interest at 7% and principal due in February 2001.

(E) A subsidiary of the Company financed the construction of a facility by
issuing bonds with a maturity date of November 1, 1999. Interest is
payable monthly at a variable rate, as defined in the bond agreement
(3.2% at December 31, 1998). The bonds contain certain restrictive
covenants for the subsidiary including maintenance of certain financial
ratios and minimum

F-21

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

9. DEBT (CONTINUED)
net worth requirements. The bonds are secured by the facility and the
related equipment with an aggregate net carrying value of $2,138 at
December 31, 1998. These bonds were paid in full subsequent to
December 31, 1998.

(F) The notes payable to various commercial lenders bear interest at rates
between 7.90% and 12.5%, with a weighted average interest rate of 8.17%
at December 31, 1998, with monthly payments of principal totaling $18.
The notes mature at various dates through 2002. The notes are secured by
equipment with an aggregate net carrying value of $2,201 at December 31,
1998.

(G) A subsidiary has a term loan payable to a private lender. The principal
payments are $7 per month plus interest at 12.5% through May 2007.

(H) During 1997, a subsidiary of the Company entered into a working capital
and term financing agreement (the "Financing Agreement") with a bank. The
balance outstanding at December 31, 1998, is under a $500 working capital
loan which carries interest at the bank's prime rate plus 0.75% (8.50% at
December 31, 1998), is secured by substantially all of the assets of the
subsidiary and expires in April 1999. At December 31, 1997 the Financing
Agreement included a term loan with an outstanding principal balance of
$780, with interest at the bank's prime rate plus 1.25% (9.75%) and was
secured by equipment with a carrying value of approximately $1,300; a
5 year mortgage loan with an outstanding principal balance of $670, with
interest at the bank's prime rate plus 1.25% (9.75%) and was secured by
certain real estate with a carrying value of approximately $715; and $105
outstanding under the working capital loan. The term loan and mortgage
loan were repaid in full during 1998.

(I) On April 1, 1997, the Company and a bank entered into a Second Amended
and Restated Term Note for $607. The bank agreed to forgive $150 of the
outstanding balance under the previous Amended and Restated Term Note.
This amount is included in other income in 1997. The Second Amended and
Restated Term Note was due in monthly installments of $38 plus interest
at the bank's prime rate (8.5% at December 31, 1997). The obligation was
repaid in full during 1998.

PERC BONDS PAYABLE

On June 26, 1998, the Finance Authority of Maine ("FAME") issued $44,995 par
amount Finance Authority of Maine Electric Rate Stabilization Revenue Refunding
Bonds, Series 1998 A and Series B (Penobscot Energy Recovery Company, LP) (the
"1998 Bonds"). The proceeds of the 1998 Bonds were used to repay all of the
outstanding balance due on PERC's existing Floating Rate Demand Resource
Recovery Revenue Bonds (the "1986 Bonds"), which were called for redemption
during July 1998. The redemption resulted in the recognition of an extraordinary
loss of $351 (net of minority interest of $249 and tax of $267) which included
the unamortized portion of the deferred financing costs associated with the
original issuance. The 1998 Bonds are fixed rate bonds with yields ranging from
3.75% to 5.20% with a weighted-average yield of approximately 5.06%.

The 1998 Bonds are subject to mandatory redemption in annual installments of
varying amounts through July 1, 2018. Beginning July 1, 2008, the 1998 Bonds are
subject to redemption at the option of

F-22

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

9. DEBT (CONTINUED)
PERC at a redemption price equal to 102%, through June 30, 2009, 101% for the
period July 1, 2009 to June 30, 2010 and 100% thereafter of the principal amount
outstanding plus accrued interest.

In conjunction with the refinancing, PERC entered into a loan agreement with
FAME, which contains various provisions including the maintenance of certain
restricted funds and certain restrictive covenants relating to the 1998 Bonds.
The covenants restrict PERC's ability to incur additional indebtedness and
restrict the ability of the general partners to sell, assign or transfer their
general partner interests. The bonds are collateralized by liens on
substantially all of PERC's assets

In connection with the refinancing, the Company issued a $3,000 limited
guaranty of PERC's payment obligation under the Loan Agreement, in the favor of
FAME and the 1998 Bond Trustee. In addition, BHE also issued a guaranty to FAME
and the 1998 Bond Trustee in the amount equal to the annual payments for
principal and interest on the 1998 Bonds. Demands on the above guaranties are to
be on a pro-rata basis. If either party shall default under such demand, the
other guarantor is liable for the entire demand, up to the limit on such
guarantor's guaranty. In addition, the 1998 Bonds are insured by Financial
Security Assurance, Inc.

At December 31, 1997, two series of the 1986 Bonds totaling $47,900 were
outstanding. The interest rates on the Revenue bonds were based on rates for
certain tax-exempt obligation, as determined weekly by the remarketing agent for
the bonds with a weighted-average interest rate of 4.32% at December 31, 1997.

TERI REVENUE BONDS PAYABLE

During June 1997, TERI issued two series of 1997 Industrial Development
Revenue Bonds: Series A in the amount of $13,400 and Series B in the amount of
$308. The Series B bonds carried interest at 10% and were paid in full in
December 1997. The Series A bonds bear interest at 7.0%. The Series A bonds have
an annual sinking fund payment due each December, ($2,030 due December 1, 1999),
with final payment of $4,620 due December 2002. The bond agreements require,
among other things, maintenance of various insurance coverages and restrict the
borrowers ability to incur additional indebtedness. The bonds are collateralized
by liens on TERI's electric generating facility located in Telogia, Florida. The
proceeds from these bonds were utilized to repay certain then outstanding
indebtedness.

CONVERTIBLE SUBORDINATED NOTES

During August 1998, the Company issued $21,099 of Convertible Subordinated
Notes (the "Convertible Notes") in exchange for substantially all the
outstanding shares of the Series B Preferred Stock. This exchange was made in
accordance with the original terms of the Series B Preferred Stock. The
Convertible Notes carry interest at 8.75% and are due in August 2004. In
accordance with the terms of the Convertible Notes established concurrently with
the issuance of the Series B Preferred Stock, the holders of Convertible Notes
have the option to convert the principal amount of the Convertible Notes into
shares of the Company's Common Stock at $11.75 per share. During November 1998,
$14,329 of the then outstanding Convertible Notes were converted to common
shares (see Note 11).

F-23

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

9. DEBT (CONTINUED)
SUBORDINATED NOTES PAYABLE TO MAINE ENERGY LIMITED PARTNERS

These notes, as amended, bear interest at 12%. Payments of principal and
interest are made solely at the discretion of Maine Energy's general partner.
However, all principal and interest must be repaid prior to any partner
distributions. To the extent interest is not paid, accrued interest is
capitalized. As a holder of a portion of the Subordinated Notes Payable, the
Company is entitled to receive a proportionate share of such payments. At
December 31, 1998 and 1997, Maine Energy had $12,880 and $14,307, respectively,
outstanding under the notes of which the Company held $8,587 and $2,358,
respectively.

Excluding any amounts which may be paid on the subordinated notes payable to
the Maine Energy Limited Partners, aggregate maturities as of December 31, 1998
of the Company's debt are as follows:

1999..............................................  $  9,775
2000..............................................     5,960
2001..............................................   143,731
2002..............................................     6,742
2003..............................................     2,065
Thereafter........................................    46,132

10. PREFERRED STOCK

SERIES A PREFERRED STOCK

In June 1997 the Company sold 487,500 shares of Series A Preferred Stock
(the "Original Series A Preferred") for gross proceeds of $3,900 and net
proceeds of $3,798, and issued 243,750 common stock purchase warrants with an
exercise price of $9.00 per share, subject to adjustment, (the "$9.00 Warrants")
and 32,500 common stock purchase warrants with an exercise price of $10.00 per
share, subject to adjustment (the "$10.00 Warrants"). Both the $9.00 Warrants
and the $10.00 Warrants are exercisable at any time until June 4, 2003. The
$9.00 Warrants and the $10.00 Warrants had an aggregate fair value of $524 at
the date of issuance which has been accounted for as additional paid-in capital.
During 1998, 234,500 of the $9.00 Warrants and 31,267 of the $10.00 Warrants
were exercised. At December 31, 1998, 9,250 of the $9.00 Warrants and 1,233 of
the $10.00 Warrants remained outstanding.

In October 1997, 40,000 shares of the Original Series A Preferred were
converted into 40,000 shares of common stock. In December 1997, the remaining
outstanding shares of Original Series A Preferred were converted into newly
issued Series C Preferred Stock. The Series C Preferred Stock was subsequently
renamed Series A Preferred ("Series A Preferred"). During the first quarter of
1998, all of the remaining 447,500 shares of the Series A Preferred were
converted into 447,500 shares of common stock.

The Company accreted the carrying value of the Series A Preferred by $42 and
$228 in 1998 and 1997, respectively, representing periodic accretion to the
mandatory redemption value of $12.00 per share and $472 in 1997 which represents
the difference between the initial allocated value of the Series A Preferred and
the initial conversion rate.

F-24

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

10. PREFERRED STOCK (CONTINUED)
SERIES B PREFERRED STOCK

In August 1997, the Company sold 856,000 shares of Series B Convertible
Preferred Stock (the "Series B Preferred") for gross proceeds of $21,400 and net
proceeds to the Company of $19,984. Dividends at an annual rate of 8.75% were
cumulative and were payable quarterly.

Except under certain circumstances, principally resulting from the
non-payment of dividends or a change of control of the Company, as defined, the
Series B Preferred were non-voting. The Series B Preferred placed certain
restrictions on the Company's ability to issue securities in parity with, or
senior to, the Series B Preferred. These restrictions principally involved the
Company satisfying certain financial ratios, as defined.

In June 1998, the Company exercised its option to exchange all of the
outstanding shares of the Series B Preferred for the Company's Convertible
Subordinated Notes due August 2004. During August 1998, 843,960 shares of
Series B Preferred were exchanged for Convertible Subordinated Notes pursuant to
their original terms at a conversion price of $25.00 per share totaling $21,099.
The remaining 12,040 shares were converted at the holder's option into 25,531
shares of common stock at a conversion price of $11.75 per share and $1 in
exchange for fractional shares.

11. STOCKHOLDERS' EQUITY

In November 1998, $14,329 of the Convertible Subordinated Notes were
exchanged for 1,219,489 shares of common stock at $11.75 per share. The
conversion included a premium equal to 3.0% of the face value of the
Subordinated Convertible Notes and nine months forward interest at 8.75%, paid
to the Convertible Subordinated noteholders in the form of 63,910 shares of
common stock valued at $21.44 per share. The premium, aggregating $1,370, was
recorded as interest expense.

During 1998, the Company issued warrants to purchase 40,000 shares of its
common stock at prices ranging from $15.31 to $22.25 per share to certain
members of the Board of Directors. These warrants expire ten years from the date
of issue with 7,500 of the warrants exercisable immediately and the remaining
warrants exercisable beginning one year from the date of issue. These warrants
had an aggregate fair value of $205 at the date of issuance which was recorded
as compensation expense during 1998. All such warrants remain outstanding at
December 31, 1998.

The Company issued warrants to purchase 130,000 shares of the Company's
common stock at prices ranging from $19.75 to $21.88 per share in connection
with certain business acquisitions during 1998. These warrants have a ten year
life, and vest ratably over a 60-month period, beginning one month after the
date of issue. All such warrants remain outstanding at December 31,1998.

During 1997, the Company issued warrants to purchase 149,750 shares of its
common stock at prices ranging from $5.71 to $10.00 as consideration for
services rendered in connection with certain equity issuances. These warrants
are exercisable at any time and expire at various dates ranging from April 30,
2001 to August 15, 2002. During 1998, warrants to purchase 30,592 shares of the
Company's common stock were exercised and warrants to purchase 119,158 shares of
the Company's common stock remain outstanding at December 31, 1998.

F-25

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

11. STOCKHOLDERS' EQUITY (CONTINUED)
In February 1997, the Company issued 10,500 shares of its common stock and
warrants to purchase an additional 2,100 shares at a price of $8.10 in
connection with the purchase of certain minority interests in a subsidiary.
These warrants were exercised during 1998.

In connection with certain debt obligations issued during 1996, the Company
issued warrants to purchase 420,572 shares of common stock at $5.71 per share.
The aggregate original issue discount representing the fair value of the
warrants was $144. These warrants are exercisable at any time and expire at
various dates from March 31, 2001 to June 30, 2001. During 1998 and 1997,
warrants to purchase 39,900 and 259,015, respectively, shares of common stock
were exercised and at December 31, 1998, warrants to purchase 121,657 shares
remain outstanding.

During 1996, the Company issued warrants to purchase 210,000 shares of its
common stock at a price of $7.10 per share as consideration for consulting
services. During 1998 and 1997, warrants to purchase 50,000 and 160,000 shares
of common stock, respectively, were exercised.

In September of 1996, the Company issued warrants to purchase 26,250 shares
of common stock to an officer of the Company, at an exercise price of $8.08.
These warrants vested 100% one year from the date of issue and have a 10-year
life. All such warrants remain outstanding at December 31, 1998.

In addition, warrants issued prior to 1996 to purchase 87,499 shares of
common stock at $5.71 per share were exercised during 1998.

As of December 31, 1998, the Company has reserved shares of common stock for
issuance as follows:

NUMBER
OF SHARES
---------

Conversion of Convertible Subordinated Notes Payable........    588,774
Exercise of common stock purchase warrants..................    482,473
Exercise of common stock options............................  2,177,068
Employee savings plan.......................................    191,668
---------
3,439,983
=========

Certain of the Company's outstanding warrants contain provisions which allow
for the conversion of such warrants into a lesser number of shares without the
payment of cash into the Company (so-called "cashless exercise" provisions).
Accordingly, there can be no assurance that, even if all such warrants are
exercised, the Company will receive all the aggregate gross proceeds.

12. STOCK OPTION PLANS

The Company has four stock option plans; the 1986 Stock Option Plan of KTI
(the "1986 Plan"), the KTI 1994 Long-Term Incentive Award Plan and the DataFocus
Long-Term Incentive Plan (collectively, the "1994 Incentive Plans") and the KTI
Directors Stock Option Plan (the "Directors Plan"). All plans are administered
by the Compensation Committee of the Board of Directors.

The Company has elected to follow Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
Interpretations in accounting for its employee stock

F-26

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

12. STOCK OPTION PLANS (CONTINUED)
options because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, ("SFAS
No. 123") requires use of option valuation models that were not developed for
use in valuing employee stock options. Under APB 25, because the exercise price
of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.

Elements of the various plans include the following:

THE 1986 PLAN. A maximum of 66,190 shares are subject to the 1986 Plan.
Options were granted at prices not less than the fair market value at the date
of grant. All options granted had 10 year terms and vested immediately. No new
options can be granted under this plan.

THE 1994 INCENTIVE PLANS. A maximum of 1,383,333 shares are subject to grant
under the 1994 Incentive Plans. Options may be granted at prices not less than
the fair market value at the date of grant. All grants prior to January 1, 1998
primarily vest at 20% per year beginning one year from the date of grant. Grants
subsequent to January 1, 1998 vest ratably over a 60-month period beginning one
month from the date of grant. Vested options may be exercised at any time until
their expiration which may be up to ten years from the date of grant. Unvested
options are forfeited upon termination of employment.

THE DIRECTORS PLAN. A maximum of 200,000 shares are subject to the Directors
Plan. Under the Directors Plan, non-employee Directors are automatically granted
non-statutory options on August 1 of each year. The number of shares granted is
equal to the lesser of (i) 7,500 shares or (ii) a number of shares having a
maximum market value of $68. Options granted may not be exercised within one
year of grant and have 10 year terms.

In addition to the Plans described above, the Company's Board of Directors
from time to time has granted key employees non-plan options. During 1998 and
1997, the Board of Directors made non-plan option grants. These non-plan options
have a ten-year term, and were granted at the then current fair market value.
The 1997 grants vested on the date of grant. The 1998 grants had vesting
schedules ranging from immediate vesting to ratably over a 60-month period
beginning one month from the date of grant.

F-27

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

12. STOCK OPTION PLANS (CONTINUED)

Option activities under the plans and for the non-plan options are detailed
in the following table:

1994                                     WEIGHTED
INCENTIVE                               AVERAGE EXERCISE
1986 PLAN     PLANS      DIRECTOR PLAN   NON-PLAN   PRICE PER SHARE
---------   ----------   -------------   --------   ----------------

Outstanding at January 1, 1996....     15,263      542,566       16,800        52,500        $ 6.28
Granted.........................                 225,475       31,500                        7.23
Exercised.......................                 (55,346)                                    5.38
Forfeited.......................                (238,355)                                    6.15
---------   ----------      -------      --------        ------
Outstanding at January 1, 1997....     15,263      474,340       48,300        52,500          6.82
Granted.........................                 169,500       37,500       175,000         10.03
Exercised.......................                 (85,353)                                    5.89
Forfeited.......................                 (46,356)                                    7.75
---------   ----------      -------      --------        ------
Outstanding at January 1, 1998....     15,263      512,131       85,800       227,500          8.33
Granted.........................                 884,250       30,000       495,000         16.86
Exercised.......................    (15,263)     (80,720)     (21,324)     (118,375)         8.00
Forfeited.......................                (129,815)                  (149,000)        15.54
---------   ----------      -------      --------        ------
Outstanding at December 31,
1998............................               1,185,846       94,476       455,125        $14.11
=========   ==========      =======      ========        ======
Exercisable at December 31,
1998............................                 254,383       64,476       218,636        $12.11
=========   ==========      =======      ========        ======

The weighted-average fair value of options granted was $8.60, $4.95 and
$5.12 for 1998, 1997 and 1996, respectively.

At December 31, 1998, for each of the following classes of options as
determined by range of exercise price, information regarding weighted-average
exercise prices and weighted-average remaining contractual lives of each class
is as follows:

WEIGHTED-AVERAGE                       WEIGHTED-
WEIGHTED-            REMAINING                           AVERAGE
AVERAGE        CONTRACTUAL LIFE OF    NUMBER OF    EXERCISE PRICE OF
NUMBER OF    EXERCISE PRICE OF       OUTSTANDING         OPTIONS          OPTIONS
OPTIONS        OUTSTANDING            OPTIONS          CURRENTLY        CURRENTLY
OPTION CLASS         OUTSTANDING        OPTIONS              (YEARS)         EXERCISABLE      EXERCISABLE
--------------------------  -----------   -----------------   -------------------   -----------   -----------------

Price of $4.70 to $7.05...     207,094         $ 6.51                6.70             111,121          $ 6.39
Price of $7.051 to
$9.40...................     319,400         $ 8.64                8.00             157,524          $ 8.63
Price of $9.401 to
$11.75..................      21,620         $10.18                8.50               8,737          $10.18
Price of $14.01 to
$18.80..................     934,833         $16.09                9.10             243,955          $16.52
Price of $18.801 to
$23.50..................     252,500         $20.27                9.60              16,158          $19.76
---------                                                -------
Total.....................   1,735,447         $14.11                8.70             537,495          $12.11

Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had been
accounting for its employee stock options under the fair value method of that
statement. The fair value of these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions for
1998, 1997 and 1996, respectively: weighted average risk-free interest rates of
5.5%, 5.9% and 6.5%; no dividends;

F-28

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

12. STOCK OPTION PLANS (CONTINUED)
volatility factors of the expected market price of the Company's common stock of
.517, .494 and .642; and weighted-average expected life of 5 years, 5 years and
8 years.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options granted subsequent to 1994 is amortized to expense over the options'
vesting period. The Company's pro forma information follows:

1998       1997       1996
--------   --------   --------

Pro forma net income (loss) available for common
shareholders..............................................   $ (602)    $7,973    $(1,803)
Pro forma basic earnings (loss) per share...................   $(0.06)    $ 1.08    $ (0.30)
Pro forma diluted earnings (loss) per share.................   $(0.06)    $ 0.99    $ (0.30)

The pro forma disclosures presented above reflect compensation expense only
for options granted subsequent to 1994. These amounts may not necessarily be
indicative of the pro forma effect of SFAS No. 123 for future periods in which
options may be granted.

F-29

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

13. EARNINGS PER SHARE

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

1998          1997         1996
-----------   ----------   ----------

NUMERATOR:
Income from continuing operations.....................  $     3,050   $   10,173   $    1,523
Preferred stock dividends.............................       (1,091)        (708)
Accretion of preferred stock..........................          (42)        (700)
-----------   ----------   ----------
Numerator for basic earnings per share-income from
continuing operations available to common
stockholders........................................        1,917        8,765        1,523
Effective of dilutive securities:
Convertible subordinated notes payable (1)..........                       345
-----------   ----------   ----------
Numerator for diluted earnings per share-income from
continuing operations available to common
stockholders after assumed conversions..............  $     1,917   $    9,110   $    1,523
===========   ==========   ==========
DENOMINATOR:
Denominator for basic earnings per share-weighted
average shares......................................   10,548,570    7,403,681    6,090,956
Effect of dilutive securities:
Employee stock options..............................      517,426      203,883       55,043
Warrants............................................      332,155      342,382      109,089
Convertible subordinated notes payable (1)............                   476,244
-----------   ----------   ----------
Dilutive potential common shares......................      849,581    1,022,509      164,132
-----------   ----------   ----------
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions.....   11,398,151    8,426,190    6,255,088
===========   ==========   ==========
Income from continuing operations per share-Basic.......  $      0.18   $     1.18   $     0.25
===========   ==========   ==========
Income from continuing operations per share-Diluted.....  $      0.17   $     1.08   $     0.24
===========   ==========   ==========

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

(1) Preferred shares outstanding during 1998 and the convertible subordinated
notes payable in 1998 and 1996 are anti-dilutive and the preferred shares
were anti-dilutive in 1997.

For additional disclosures regarding dilutive securities see Notes 9 through
12.

F-30

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

14. INCOME TAXES

At December 31, 1998 the Company has net operating loss carryforwards of
approximately $52,500 for income tax purposes that expire in years 2002 through
2018 and general business credit carryforwards of approximately $530 which
expire in years 1999 through 2006. All of these carryforwards are subject to
limitation as described below. In addition, the Company has $906 of minimum tax
credit carryovers available that are not subject to limitation.

Significant components of the Company's deferred tax assets and liabilities
are as follows:

DECEMBER 31,
--------------------------------
1998        1997        1996
--------   ----------   --------

Deferred tax assets
Current:
Alternative minimum tax credit carryforwards...  $   906     $   815
General business credit carryforwards..........      204
Net operating loss carryforwards...............    2,191       1,930
Reserve on notes and accounts receivable.......      525          65     $    37
State taxes, net...............................        7          14          14
Other liabilities..............................      999          22          47
-------     -------     -------
Total current deferred tax assets............    4,832       2,846          98
Valuation allowance for current deferred tax
assets.......................................                  (95)        (98)
-------     -------     -------
Net current deferred tax assets................    4,832       2,751
-------     -------     -------
Non-current:
Deferred revenues..............................   20,510      17,074      18,887
Basis difference in partnership interest.......   14,127      14,555         118
State taxes, net...............................    2,182       2,507       3,294
General business credit carryforwards..........      326         530         530
Alternative minimum tax credit carryforwards...                              687
Deferred development fees......................      104         110         117
Net operating loss carryforwards...............   16,194      13,098      16,655
-------     -------     -------
Total non-current deferred tax assets........   53,443      47,874      40,288
Valuation allowance for non-current deferred
tax assets...................................  (12,708)    (15,645)    (23,467)
-------     -------     -------
Net non-current deferred tax assets............   40,735      32,229      16,821
Non-current deferred tax liabilities:
Goodwill amortization on asset purchases.......     (107)
Deferred development expenses..................      (61)
Depreciation...................................  (39,160)    (32,229)    (16,821)
-------     -------     -------
Net non-current deferred taxes.................  $ 1,407     $           $
=======     =======     =======

F-31

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

14. INCOME TAXES (CONTINUED)
Significant components of the provision (benefit) for income taxes on
continuing operations before extraordinary item are as follows:

YEAR ENDED DECEMBER 31,
------------------------------
1998       1997       1996
--------   --------   --------

Current:
Federal.........................................  $   746    $    65
State...........................................      144        100
-------    -------    -------
Total current.....................................      890        165
Deferred:
Federal.........................................     (882)     3,095    $(3,602)
State...........................................        1        362        (44)
Valuation allowance.............................   (3,032)    (6,208)     3,646
-------    -------    -------
Total deferred....................................   (3,913)    (2,751)
-------    -------    -------
$(3,023)   $(2,586)   $
=======    =======    =======

The components of the provision (benefit) from deferred income taxes on
continuing operations before extraordinary item for 1998, 1997, and 1996 are as
follows:

YEAR ENDED DECEMBER 31,
------------------------------
1998       1997       1996
--------   --------   --------

Deferred revenues................................  $(3,436)   $ 1,813    $(18,887)
Net operating loss carryforwards.................    1,648      1,627        (635)
General business and minimum tax credit
carryforwards..................................      (91)      (128)        320
Basis difference in partnership interests........    1,103        388      17,875
State taxes, net.................................      635        510      (1,401)
Deferred development fees........................       (2)         7           3
Goodwill amortization on asset acquisitions......      107
Depreciation.....................................     (636)      (757)     (1,110)
Change in reserve on receivables.................     (368)       (28)         13
Accrued and other expenses.......................      159         25         176
Change in valuation allowance....................   (3,032)    (6,208)      3,646
-------    -------    --------
Provision (benefit) for deferred income taxes....  $(3,913)   $(2,751)   $
=======    =======    ========

F-32

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

14. INCOME TAXES (CONTINUED)
The reconciliation of income tax computed at the federal statutory tax rates
to benefit for income taxes on continuing operations before extraordinary item
is:

YEAR ENDED DECEMBER 31,
------------------------------
1998       1997       1996
--------   --------   --------

Tax at US statutory rates.........................  $     9    $ 2,655    $  (254)
State income taxes, net of federal tax benefit....      145        455        (44)
Amortization of goodwill..........................      812        250         42
Change in valuation allowance.....................   (3,032)    (6,208)     3,646
Other.............................................     (957)       262     (3,390)
-------    -------    -------
$(3,023)   $(2,586)   $
=======    =======    =======

The Tax Reform Act of 1986 enacted a complex set of rules limiting the
potential utilization of net operating loss and tax credit carryforwards in
periods following a corporate "ownership change". In general, for federal income
tax purposes, an ownership change is deemed to occur if the percentage of stock
of a loss corporation owned (actually, constructively and, in some cases,
deemed) by one or more "5% shareholders" has increased by more than
50 percentage points over the lowest percentage of such stock owned during a
three-year testing period. During 1994, such a change in ownership occurred. As
a result of the change, the Company's ability to utilize certain of its net
operating loss carryforwards and general business credits will be limited to
approximately $1,200 of taxable income, or approximately $375 of equivalent
credit per year. This limitation may be increased if the Company recognizes a
gain on the disposition of an asset which had a fair market value greater than
its tax basis on the date of the ownership change.

The Company recorded net operating loss carryforwards of $25,580, $12,525
and $525 related to the acquisition of TEII, FCR and Total Waste
Management, Inc., respectively, which are also subject to a corporate "ownership
change". As a result of the change, the Company's ability to utilize the net
operating loss carryforwards are limited to approximately $989, $3,219 and $71
per year, respectively.

15. COMMITMENTS

The Company has entered into various facility and equipment operating
leases. The facility lease agreements generally require the Company to pay
certain expenses including maintenance costs and a percentage of real estate
taxes. The leases expire at various times ranging through 2007. Rental expense
for all operating leases including facilities, amounted to approximately $3,747,
$1,192 and $145 for the years ended December 31, 1998, 1997 and 1996,
respectively. Included in the Company's operating leases are leases of certain
administrative offices from companies whose principals include certain officers
and shareholders of the Company. Rent expense under these leases was $708, $96
and $110 for the years ended December 31, 1998, 1997 and 1996, respectively. In
addition, the Company leases certain other office and operating facilities from
individuals who are shareholders and employees. As of

F-33

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

15. COMMITMENTS (CONTINUED)
December 31, 1998, future minimum rental commitments on non-cancelable operating
leases, are as follows:

THIRD-PARTY   RELATED-PARTY
LEASES         LEASES
-----------   -------------

1999.................................................     $3,920        $  815
2000.................................................      3,252           815
2001.................................................      2,685           785
2002.................................................      2,127           675
2003.................................................      1,565           480
Thereafter...........................................      3,826         1,280

The Company has entered into employment agreements with certain of its key
employees which provide for fixed compensation and bonuses based on operating
results, as defined. These agreements generally continue until terminated by the
employee or the Company and, under certain circumstances, provide for salary
continuation for a specified period. At December 31, 1998 the Company's maximum
aggregate liability under the agreements if all the employees were terminated by
the Company is $13,129.

In connection with their operations, Maine Energy, TERI and PERC have
entered into certain contractual agreements with respect to the supply and
acceptance of municipal solid waste and the sale of electric power.

In 2007, certain of Maine Energy's municipal customers have the right to
obtain a 20% interest in Maine Energy's cash flows, as defined in certain
agreements, to be applied against the municipalities' future waste disposal
costs.

FCR Plastics, Inc. ("Plastics"), a subsidiary of FCR, has committed to fund
a maximum of $700 towards the construction of certain machinery and equipment on
behalf of a customer. The equipment will be located within Plastics facility and
the customer will repay the total cost of the equipment up to Plastics maximum
contribution of $700. Repayment of the notes will commence as soon as
installation of the equipment is complete.

On December 31, the Company acquired a 35% interest in the Oakhurst
Company, Inc. ("Oakhurst") for approximately $900. Oakhurst is a public holding
company which owns two businesses which are distributors in the automotive
aftermarket. As part of this transaction, the Company assigned its interest in a
joint venture with Grace Brothers, Ltd. and SC Fundamental Investments L.P., the
majority bond holders of the Ford Heights, Illinois Waste Tire to Energy
Project, to own and operate this facility. Due to amendments to the Illinois
Retail Rate Act, which repealed certain incentives to the facility, it was
closed during startup testing and the owner sought protection under federal
bankruptcy laws. On December 28, the bankruptcy court in Delaware approved the
amended Plan of Reorganization which provided for the Company and the
bondholders each to own 50% of the reorganized entity which was renamed New
Heights Recovery & Power, LLC ("New Heights"). The bondholders converted $80.0
million in bonds and other claims into equity and KTI committed to investing up
to $17.0 million in equity for working capital, retrofitting and upgrading of
the facility. This commitment to New Heights was transferred to Oakhurst and the
Company has agreed to provide financing to Oakhurst. During 1998, the Company
advanced $1,500 to Oakhurst. This amount is included in notes
receivable-officers/shareholders and affiliates at December 31, 1998.

F-34

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

15. COMMITMENTS (CONTINUED)

During 1997, FCR acquired a company whereby the former shareholder of the
Company may receive up to $2,000 of additional consideration. The amount of the
additional consideration will be based on the earnings of the Company for the
12 months ended April 30,1998 and 1999, as defined in the purchase agreement.
Any additional consideration will be recorded as an addition to goodwill. Of the
potential additional consideration $924 was advanced at closing and is recorded
as a note receivable from the former shareholder. Upon reaching the earnings
targets discussed above, this amount will be reclassified to goodwill.

16. EMPLOYEE BENEFIT PLAN

The Company has established defined contribution employee savings and
investment retirement plans under Section 401(k) of the Internal Revenue Code
which cover substantially all employees after satisfying certain eligibility
requirements. The Company contributes on behalf of each participating employee
an amount as defined in the plans. The Company's contribution was approximately
$596, $290 and $164 for the years ended December 31, 1998, 1997 and 1996,
respectively. Included in the 1998, 1997 and 1996 Company contributions were
4,215, 4,117 and 4,322 shares, respectively, of the Company's common stock. The
4,322 shares contributed for 1996 were purchased by the Company from third
parties. The aggregate fair value of the stock was $41, $35 and $32,
respectively.

17. RELATED PARTY TRANSACTIONS

The Company receives an annual management fee (adjusted annually for changes
in the Consumer Price Index) as co-general partner of PERC. During the year
ended December 31, 1996, the Company earned management fees of approximately
$418. All such amounts are eliminated in consolidation in 1998 and 1997.

During 1998, the Company advanced $1,500 to New Heights with an interest
rate at 14%. The advance is due in 2001 and is recorded as a note
receivable-affiliate at December 31, 1998.

18. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of financial instruments have been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The carrying amount and estimated fair
values of financial instruments at December 31, 1998 and 1997 are summarized as
follows:

The following methods and assumptions were used to estimate the fair value
of financial instruments:

CASH, RESTRICTED CASH AND ACCOUNTS RECEIVABLE--the carrying amounts reported
in the balance sheet for cash, cash equivalents, restricted funds including debt
securities, and accounts receivable approximate their fair value.

NOTES AND OTHER RECEIVABLES--the fair value is estimated using discounted
cash flow analyses, using appropriate interest rates.

F-35

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

18. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
RESOURCE RECOVERY REVENUE BONDS PAYABLE--the fair value of bonds payable is
estimated using discounted cash flow analyses, using appropriate interest rates.

OTHER DEBT--the fair value is estimated based on discounting the estimated
future cash flows using the Company's incremental borrowing rate for similar
debt instruments.

DECEMBER 31, 1998       DECEMBER 31, 1997
---------------------   ---------------------
CARRYING   ESTIMATED    CARRYING   ESTIMATED
AMOUNT    FAIR VALUE    AMOUNT    FAIR VALUE
--------   ----------   --------   ----------

ASSETS
Cash and cash equivalents..............  $ 9,426     $ 9,426     $11,181     $11,181
Restricted cash........................   23,438      23,438      19,630      19,630
Accounts receivable, net...............   29,272      29,272      22,126      22,126
Notes receivable, officers/shareholders
and affiliates.......................    3,392       3,642         110          90
Other receivables......................    7,183       6,785         732         618
Stock purchase warrant included in
other assets.........................    3,814       6,459
LIABILITIES
Resources Recovery
Revenue Bonds Payable................   56,630      56,630      61,300      61,300
Other debt.............................  162,068     162,484      32,967      27,625

19. SEGMENT REPORTING

Information as to the operations of the Company in different business
segments is set forth below based on the nature of the services and products
offered. The Company evaluates performance and allocates resources based on
profit or loss from operations before interest and income taxes. The accounting
policies of the business segments are the same as those described in the summary
of significant accounting policies. Intersegment sales are accounted for at fair
value as if the sales were to third parties.

During 1998, the Company operated in the business units as indicated below.

COMMERCIAL   FINISHED   RESIDENTIAL
WASTE-TO-ENERGY   RECYCLING    PRODUCTS    RECYCLING
---------------   ----------   --------   -----------

Revenues
Unaffiliated customers........      $76,680        $68,139     $22,346      $11,782
Intersegment revenues.........          273          5,307         427          770
Segment Profit (Loss)...........       17,606           (412)        826        1,349
Depreciation and Amortization...        8,628          2,303       1,095        1,082
Identifiable Assets.............      231,767         56,557      54,850       65,662
Capital Expenditures............        4,812          1,904       1,786           42

F-36

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

19. SEGMENT REPORTING (CONTINUED)
During 1997, the Company operated in the business units indicated below.

COMMERCIAL   FINISHED
WASTE-TO-ENERGY   RECYCLING    PRODUCTS
---------------   ----------   --------

Revenues
Unaffiliated customers...................      $74,232        $17,694      $6,523
Intersegment revenues....................        2,766          1,342         636
Segment Profit.............................       19,837            490         129
Depreciation and Amortization..............        8,782            340          90
Identifiable Assets........................      207,866         36,791       1,575
Capital Expenditures.......................        4,496            198          63

During 1996, the Company only operated in the waste-to-energy business unit.

This segment reporting detailed above reconciles to consolidated revenues
and income from continuing operations before provision (benefit) for income
taxes and extraordinary item as follows:

YEAR ENDED
DECEMBER 31,
-------------------
1998       1997
--------   --------

REVENUES
Total unaffiliated customers revenue for reportable
segments...............................................  $178,947   $98,449
Holding companies revenues...............................        60       138
Intersegment revenues for reportable segments............     6,777     4,744
Elimination of intersegment revenues.....................    (6,777)   (4,744)
--------   -------
Total consolidated revenues..............................  $179,007   $98,587
--------   -------
PROFIT AND LOSS
Total segment profit.....................................  $ 19,369   $20,456
Holding companies segment loss...........................    (4,973)     (929)
--------   -------
Total segment profit.....................................    14,396    19,527
--------   -------
Unallocated amounts:
Interest expense, net..................................    10,667     5,086
Other income...........................................                (390)
Minority interest......................................     3,702     2,522
Pre-acquisition earnings...............................               4,722
--------   -------
Income from continuing operations before benefit for
income taxes and extraordinary item..................  $     27   $ 7,587
========   =======

F-37

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

19. SEGMENT REPORTING (CONTINUED)

DECEMBER 31,
-------------------
1998       1997
--------   --------

ASSETS
Total identifiable assets for reportable segments.......  $408,836   $246,232
Holding companies assets................................    27,649      6,255
--------   --------
Total consolidated assets...............................  $436,485   $252,487
========   ========

20. CONTINGENCIES

The Company is a defendant in a consolidated purported class action, which
alleges violations of certain sections of the federal securities laws. The
Company believes the allegations are without merit and intends to defend the
litigation vigorously.

Two lawsuits have been filed against a subsidiary of the Company and certain
of its officers, alleging fraud and tortious interference. The actions are based
on two contracts between the plaintiff and the subsidiary, which contracts
require all disputes to be resolved by arbitration. Arbitration proceedings have
commenced. The Company believes it has meritorious defenses to the allegations.

The former majority shareholder of a company acquired by a subsidiary of the
Company instigated arbitration proceedings against the Company and two of its
subsidiaries, alleging the subsidiaries acted to frustrate the "earn-out"
provisions of the acquisition agreement and thereby precluding him from
receiving, or alternatively, reducing the sum to which he was entitled to
receive. He also alleges his employment agreement was wrongfully terminated. The
claim for arbitration alleges direct charges in excess of $5,000 and requests
punitive damages, treble damages and attorneys fees. The Company and its
subsidiaries have responded to the demand, denying liability and filed a
counterclaim for $1,000 for misrepresentations. The Company believes it has
meritorious defenses to the claims.

The Company is involved in certain litigation arising from the normal course
of its business. In the opinion of management, the outcome of these matters
individually and in the aggregate will not have a material effect on the
Company's financial position, cash flows or results of operations.

21. SUBSEQUENT EVENTS

On September 23, 1999, the Company entered into an amended Agreement and
Plan of Merger (the "Merger Agreement") with Casella Waste Systems, Inc.,
("Casella") a publicly-owned company engaged in the waste services industry.
This Merger Agreement was an amendment to the original agreement dated
January 12, 1999. The merger will be completed through the exchange of all of
shares of the Company's common stock for shares of Casella's Class A common
stock based on an exchange ratio specified in the Merger Agreement. In addition,
all of the Company's outstanding and unexercised stock options and stock
purchase warrants will be converted into similar rights to acquire Casella's
Class A common stock under the same terms and conditions and the same exchange
ratio. Subsequent to the completion of the merger the current Casella
stockholders will own a majority of the combined company. Under the terms of the
Merger Agreement, Casella is required to file a registration statement with the
Securities and Exchange Commission to register the shares of its Class A common

F-38

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

21. SUBSEQUENT EVENTS (CONTINUED)
stock to be issued in the Merger. The merger is subject to, among other things,
approval of the Company's and Casella's stockholders. No assurances can be given
that the remaining conditions of the merger will be satisfied and that the
merger will be consummated. In connection with the merger, Casella has agreed to
reimburse the Company for its investment banking fees and other merger related
costs and as of December 31, 1998, approximately $1,160 of merger related costs
have been deferred.

During January 1999, the Company completed the acquisition of AFA
Group, Inc. and subsidiaries, an integrated wood waste processing and hauling
business. The purchase price was approximately $9.0 million.

During March 1999, the Company signed a definitive agreement to acquire a
company which operates a material recovery facility. The acquisition is expected
to close on June 30, 1999 upon the resolution of a contingency, as outlined in
the purchase agreement. The purchase price is expected to be approximately
$5,600 of which $250 was paid at the signing of the definitive agreement.

F-39

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

22. QUARTERLY DATA (UNAUDITED)

1998
-----------------------------------------
FIRST      SECOND     THIRD      FOURTH
--------   --------   --------   --------

Revenues...............................................  $37,876    $ 34,790   $44,987    $ 61,354
Gross Profit...........................................    7,163       1,810     9,056       4,314
Income (loss) from continuing operations before
extraordinary item...................................    2,038      (1,008)    4,804      (2,784)
Net income (loss)......................................  $ 2,038    $ (1,503)  $ 4,804    $ (2,640)
Earnings per share:
Basic:
Income (loss) from continuing operations before
extraordinary item...................................  $  0.17    $  (0.16)  $  0.44       (0.21)
Net income (loss)......................................  $  0.17    $  (0.21)  $  0.44    $  (0.20)
Diluted:
Income (loss) from continuing operations before
extraordinary item...................................  $  0.15    $  (0.16)  $  0.36    $  (0.21)
Net income (loss)......................................  $  0.15    $  (0.21)  $  0.36    $  (0.20)

1997
-----------------------------------------
FIRST      SECOND     THIRD      FOURTH
--------   --------   --------   --------

Revenues................................................  $19,313    $20,137    $28,020    $31,117
Gross Profit............................................    5,461      4,817      7,411      5,034
Income from continuing operations before
extraordinary item..................................    1,879        386      3,131      4,777
Net income............................................  $ 1,879    $   386    $ 3,131    $ 4,777
Earnings per share:
Basic:
Income from continuing operations before
extraordinary item..................................  $  0.27    $ (0.02)   $  0.39    $  0.46
Net income............................................  $  0.27    $ (0.02)   $  0.39    $  0.46
Diluted:
Income from continuing operations before
extraordinary item..................................  $  0.25    $ (0.02)   $  0.34    $  0.40
Net income............................................  $  0.25    $ (0.02)   $  0.34    $  0.40

F-40

REPORT OF INDEPENDENT AUDITORS

Partners
Penobscot Energy Recovery Company

We have audited the accompanying statements of income, changes in partners'
capital and cash flows of Penobscot Energy Recovery Company, Limited Partnership
for the year ended December 31, 1996. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Penobscot
Energy Recovery Company for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.

Ernst & Young LLP

Hackensack, New Jersey
February 7, 1997

F-41

PENOBSCOT ENERGY RECOVERY COMPANY, LIMITED PARTNERSHIP

STATEMENT OF INCOME

YEAR ENDED DECEMBER 31, 1996

(IN THOUSANDS)

REVENUES:
Electric power revenues.....................................  $17,868
Waste processing revenues...................................   11,807
-------
Total.......................................................   29,675

Operating expenses:
Supplemental fuels........................................    1,026
Electric power purchases..................................      124
Disposal costs............................................    4,880
Operating and management fees.............................    5,353
Equipment and maintenance costs...........................    3,196
Depreciation..............................................    3,680
Real estate taxes.........................................      556
Insurance.................................................      350
Other.....................................................    1,230
-------
Total.......................................................   20,395
-------
Operating income............................................    9,280
Interest and other financing costs, net.....................   (3,170)
-------
Net income..................................................  $ 6,110
=======

See accompanying notes.

F-42

PENOBSCOT ENERGY RECOVERY COMPANY, LIMITED PARTNERSHIP

STATEMENT OF CHANGES IN PARTNERS' CAPITAL

YEAR ENDED DECEMBER 31, 1996

(IN THOUSANDS)

GENERAL PARTNERS          LIMITED PARTNERS                TOTAL
-----------------------   -----------------------   -----------------------
RETAINED                  RETAINED                  RETAINED
CONTRIBUTED   EARNINGS    CONTRIBUTED   EARNINGS    CONTRIBUTED   EARNINGS
CAPITAL     (DEFICIT)     CAPITAL     (DEFICIT)     CAPITAL     (DEFICIT)
-----------   ---------   -----------   ---------   -----------   ---------

Balance, January 1, 1996.........     $2,908       $238        $23,031      $2,139       $25,939      $2,377
Distributions..................       (193)                   (2,141)                   (2,334)
Net income.....................                   611                      5,499                     6,110
------       ----        -------      ------       -------      ------
Balance, December 31, 1996.......     $2,715       $849        $20,890      $7,638       $23,605      $8,487
======       ====        =======      ======       =======      ======

See accompanying notes.

F-43

PENOBSCOT ENERGY RECOVERY COMPANY, LIMITED PARTNERSHIP

STATEMENT OF CASH FLOWS

YEAR ENDED DECEMBER 31, 1996

(IN THOUSANDS)

Operating activities
Net income..................................................  $ 6,110
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................    4,085
Changes in asset and liability accounts:
Increasing (decreasing) cash:
Accounts receivable.....................................     (729)
Prepaid expenses and other assets.......................      (91)
Accounts payable........................................      327
Accrued expenses and other liabilities..................   (1,010)
Management and development fees payable.................     (199)
-------
Net cash provided by operating activities...................    8,493

Investing activities
Additions to property, plant and equipment..................   (1,192)
Net change in restricted funds..............................     (117)
Proceeds from sale of property, plant and equipment.........       25
-------
Net cash used in investing activities.......................   (1,284)

Financing activities
Payment of bond principal...................................   (5,900)
Distributions...............................................   (2,334)
-------
Net cash used in financing activities.......................   (8,234)
-------
(Decrease) increase in cash and cash equivalents............   (1,025)
Cash and cash equivalents at beginning of year..............    6,465
-------
Cash and cash equivalents at end of year....................  $ 5,440
=======
Supplemental disclosure of cash flow information Interest
paid......................................................  $ 2,426
=======

See accompanying notes.

F-44

PENOBSCOT ENERGY RECOVERY COMPANY, LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996

1. ORGANIZATION AND DESCRIPTION OF OPERATIONS

Penobscot Energy Recovery Company, Limited Partnership ("PERC") is a limited
partnership formed on December 28, 1983 and organized to design, construct,
operate, own and manage a facility located in Orrington, Maine for the
conversion of solid waste and supplemental fuel to electric power (the
"Project"). Certain contractual agreements relating to this facility have been
entered into, including agreements with respect to the supply of solid waste,
the sale of electric power, and operation and maintenance of the facility.

PERC Management Company ("PMC"), which is ultimately owned by KTI, Inc.
("KTI"), and Energy National, Inc. ("ENI") are general partners. As of
December 31, 1996, ENI and another entity were limited partners. As of
December 31, 1996, the ownership interests of the partners were as follows:

A. OWNERSHIP
INTERESTS
-------------------
GENERAL    LIMITED
PARTNERS   PARTNERS
--------   --------

PMC........................................................     7%
ENI........................................................      3       25.7%
Other limited partner......................................              64.3%
---       -----
10%       90.0%
===       =====

Profits and losses are to be allocated 10% to the general partners and 90%
to the limited partners until such time that the return on equity, as defined in
the Partnership Agreement, of the limited partners exceeds their aggregate
capital contributions. Commencing on that date and continuing through the
remaining term of the Partnership, such allocations, including gains and losses
upon net sale or refinancing, shall be 40% to the general partners and 60% to
the limited partners.

According to the Partnership agreement, the Partnership has a limited life
extending to December 31, 2018, unless further extended by a vote of all of the
partners.

The Project is subject to the provisions of various federal and state energy
laws and regulations including the Public Utility Regulatory Policies Act of
1978, as amended. In addition, federal, state and local environmental laws
establish standards governing certain aspects of the Project's operations. The
Company believes it has all permits, licenses and approvals necessary to operate
the facility.

2. SIGNIFICANT ACCOUNTING POLICIES

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost, less accumulated
depreciation. All costs incurred for additions and improvements to the facility,
including interest during construction, are capitalized.

Depreciation is provided on the straight-line method over estimated useful
lives.

F-45

PENOBSCOT ENERGY RECOVERY COMPANY, LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED COSTS

Costs incurred by PERC in connection with permanent financings have been
deferred and are being amortized over the life of the related debt issues using
the interest method.

During 1991, PERC finalized negotiations with municipalities and entered
into new long-term waste handling agreements which resulted in higher waste
handling fees. Costs associated with the renegotiation were deferred and
amortized over 60 months which represented the minimum period covered by the new
agreements.

REVENUES

Electric power revenues are earned from the sale of electricity to Bangor
Hydro-Electric Company ("BHE"), a utility serving a portion of the State of
Maine, under a Power Purchase Agreement (the "Agreement"). Revenue is recorded
at the contract rate specified in the Agreement as the electricity is delivered.

Waste processing revenues consist principally of fees charged to customers
for waste disposal. Substantially all waste processing revenues are earned from
customers located in a geographic region proximate to the facility. Revenue is
generally recorded upon delivery based on rates specified in the applicable
long-term contracts. Certain of these contract rates are adjusted quarterly
based on actual costs incurred in the prior quarter.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

INCOME TAXES

There is no provision in the financial statements for income taxes as the
income or loss is included in the income tax returns of the partners.

STATEMENTS OF CASH FLOWS

For purposes of the statements of cash flows, PERC considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.

RECLASSIFICATIONS

Certain amounts have been reclassified to conform with the 1998 presentation
of KTI.

F-46

PENOBSCOT ENERGY RECOVERY COMPANY, LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

3. INTEREST AND OTHER FINANCING COSTS--NET

Interest and other financing costs for the year ended December 31, 1996
consists of:

Interest expense............................................   $2,263
Letter of credit fees.......................................      976
Amortization of deferred bond financing costs...............      351
Remarketing and bank fees...................................      288
Interest income.............................................     (708)
------
Interest and other financing costs--net.....................   $3,170
======

4. RELATED PARTY TRANSACTIONS

PERC incurred management fees payable to the general partners of $595 in
1996, in accordance with the Partnership Agreement. PERC purchases a portion of
its supplemental fuel (wood chips) from KTI BioFuels, L.P., an affiliate of PMC.
During 1996, these purchases totaled approximately $279.

Effective May 1, 1989, PERC entered into an Operation and Maintenance
Agreement with ESOCO Orrington, Inc., an affiliate of ENI. For the year ended
December 31, 1996, PERC paid operating and maintenance fees to ESOCO of
approximately $4,500, plus additional approved pass through operating costs.

PERC had waste processing revenue of approximately $615 from Orrington
Waste Ltd. (a limited partnership including certain general and limited partners
of PERC) (OWL) in 1996. OWL and PERC have a long-term put-pay agreement under
which OWL pays waste disposal fees to PERC equivalent to those charged to other
municipalities.

5. WASTE HANDLING AGREEMENTS

Certain of PERC's long-term, put-pay contracts with municipalities for
disposal of solid waste contain provisions which, at the date the bonds are
fully paid, allow the municipalities to purchase the facility or terminate or
extend the contracts.

Certain of the long-term, put-pay contracts with municipalities contain
provisions which allow the municipalities to receive a portion of PERC's annual
cash flows, as defined.

F-47

REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULES

The Board of Directors
KTI, Inc.

We have audited the consolidated financial statements of KTI, Inc. as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998, and have issued our report thereon dated March 30, 1999,
except for the second paragraph of Note 9 as to which the date is August 27,
1999, Note 2 as to which the date is August 30, 1999 and the first paragraph of
Note 21 as to which the date is September 23, 1999 (included elsewhere in this
Registration Statement). Our audits also included the financial statement
schedules listed in Item 21(b) of this Registration Statement. These schedules
are the responsibility of KTI's management. Our responsibility is to express an
opinion based on our audits.

In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.

As discussed in Note 2, the previously issued Schedule I--Condensed Financial
Information of KTI, Inc. for each of the three years in the period ended
December 31, 1998 has been restated to reflect the deferral of revenue related
to certain proceeds received in connection with the restructuring of a power
purchase agreement and the sale of electric generating capacity with two
utilities.

ERNST & YOUNG LLP

Hackensack, New Jersey
March 30, 1999 except for the first paragraph of
Note 3 to Schedule I as to which the
date is August 27, 1999, Note 2 to Schedule I
as to which the date is August 30, 1999 and
Note 5 to Schedule I as to which the date is
September 23, 1999

S-1

SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF KTI, INC.

KTI, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS

DECEMBER 31,   DECEMBER 31,
1998           1997
------------   ------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)

ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................    $    397        $   688
Restricted funds..........................................                         61
Accounts receivable.......................................         233             53
--------        -------
Total current assets..................................         630            802
Investments in and amounts due from subsidiaries............     240,463         69,657
Other assets................................................          65             20
Deferred costs, net.........................................       2,867            210
Intangible assets, net......................................       1,834          2,052
--------        -------
Total assets..........................................    $245,859        $72,741
========        =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities.........................................    $  2,274        $   548
Debt........................................................     138,628         12,477
Convertible subordinated debt...............................       6,770

Stockholders' equity
Preferred stock
Series A..................................................                      3,732
Series B..................................................                     21,400
Common stock................................................         133             89
Additional paid-in capital..................................     115,026         52,762
Accumulated deficit.........................................     (16,972)       (18,267)
--------        -------
Total stockholders' equity..................................      98,187         59,716
--------        -------
Total liabilities and stockholders' equity............    $245,859        $72,741
========        =======

See accompanying notes to condensed financial statements.

S-2

SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF KTI, INC.--(CONTINUED)

KTI, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS

YEAR ENDED
DECEMBER 31,
------------------------------
1998       1997       1996
--------   --------   --------
(IN THOUSANDS)

Revenues....................................................  $    60    $   138    $    10
Management fees.............................................                            387
-------    -------    -------
60        138        397
Selling, general and administrative.........................    2,397      1,067        370
-------    -------    -------
Income (loss) from operations.............................   (2,337)      (929)        27
Interest expense, net.......................................    6,879        416        425
Other expense, net..........................................                            517
-------    -------    -------
Loss before benefit for income taxes and equity in net
income of subsidiaries..................................   (9,216)    (1,345)      (915)
Benefit for income taxes....................................   (3,133)      (457)
-------    -------    -------
Loss before equity in net income of subsidiaries..........   (6,083)      (888)      (915)
Equity (loss) in net income of subsidiaries.................    8,782     11,061       (524)
-------    -------    -------
Net income (loss).........................................  $ 2,699    $10,173    $(1,439)
=======    =======    =======

See accompanying notes to condensed financial statements.

S-3

SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF KTI, INC.--(CONTINUED)

KTI, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
------------------------------
1998       1997       1996
--------   --------   --------
(IN THOUSANDS)

NET CASH USED IN OPERATING ACTIVITIES.......................  $(66,447)  $(13,786)   $ (603)

INVESTING ACTIVITIES
Net change in restricted funds..............................        61      1,978    (1,858)
Investment in unconsolidated affiliate......................      (865)
Notes receivable-officers/shareholders and affiliates.......    (1,500)
Purchase of businesses and additional partnership interest,
net of cash acquired......................................   (57,909)   (26,705)   (3,749)
--------   --------    ------
Net cash used in investing activities.......................   (60,213)   (24,727)   (5,607)

FINANCING ACTIVITIES
Deferred financing costs....................................    (1,828)                (223)
Net borrowings on lines of credit...........................   133,628     11,667     5,857
Additional preferred stock issuance costs...................       (98)
Proceeds from sale of common stock..........................     3,548      4,121       506
Proceeds from sale of preferred stock.......................               23,782
Dividends paid..............................................    (1,404)      (395)
Principal payments on debt..................................    (7,477)
--------   --------    ------
Net cash provided by financing activities...................   126,369     39,175     6,140
--------   --------    ------
Increase (decrease) in cash and cash equivalents............      (291)       662       (70)
Cash and cash equivalents at beginning of period............       688         26        96
--------   --------    ------
Cash and cash equivalents at end of period..................  $    397   $    688    $   26
========   ========    ======

See accompanying notes to condensed financial statements

S-4

SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF KTI, INC.--(CONTINUED)

1. BASIS OF PRESENTATION

In the parent-company-only financial statements, KTI, Inc. (the "Company")
investment in subsidiaries is stated at cost plus equity in undistributed
earnings of subsidiaries since date of acquisition. Parent-company-only
financial statements should be read in conjunction with the Company's
consolidated financial statements

2. RESTATEMENT

The Company's balance sheets as of December 31, 1998 and 1997 and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998 have been restated. The
restatement is a result of the Securities and Exchange Commission's review of
the Company's proxy materials related to the prospective merger with Casella
Waste Systems (See Note 5). The restatement relates to revenue recognized as a
result of the restructuring of a power purchase agreement and the sale of
electric generating capacity by two of the Company's majority-owned subsidiaries
with its customers, BHE and CMP, which were completed in 1998 and 1996,
respectively (See notes 4 and 5 to the consolidated financial statements). At
the time of these transactions, the Company had recognized revenues representing
a portion of the cash received in 1996 and the total consideration received in
1998. After discussions with the staff of the Securities and Exchange
Commission, the Company agreed to defer these amounts and recognize them over
the term of the respective power purchase and capacity purchase agreements to
comply with generally accepted accounting principles. The impact of the
restatement on the Company's consolidated financial results as originally
reported is summarized as follows:

AS REPORTED                        RESTATED
------------------------------   ------------------------------
1998       1997       1996       1998       1997       1996
--------   --------   --------   --------   --------   --------

Net income (loss)...................  $  6,718   $ 8,092    $13,666    $  2,699   $10,173    $(1,439)

3. DEBT

The Company's debt consists of the following:

DECEMBER 31,
-------------------
1998       1997
--------   --------

Revolving credit agreement...............................  $138,628
Convertible subordinated debt............................     6,770
Revolving and term loan payable..........................             $12,411
Other....................................................                  66
--------   -------
$145,398   $12,477
========   =======

At December 31, 1998, the Company was in default of a debt covenant
contained in it's Revolving Credit Agreement and received a waiver from the bank
for this default. On May 12, 1999, the Company executed an amendment to the
Revolving Credit Agreement (the "Amended Agreement") modifying certain financial
covenants and requiring bank approval for all acquisitions. The Amended
Agreement requires that the Company and certain subsidiaries, as defined,
maintain certain specified financial covenants, including, a minimum interest
coverage ratio, a maximum funded debt to EBITDA ratio, a minimum fixed charge
coverage ratio, and a maximum debt to capitalization ratio, each as defined in
the Amended Agreement. The Company's ability to satisfy these covenants is
dependent on its ability to substantially achieve its operating plan. As of
June 30, 1999, the Company was in default

S-5

3. DEBT (CONTINUED)
of certain of these covenants and received a waiver from the bank for this
default through January 1, 2000. See Note 9 to the consolidated financial
statements for additional discussion.

4. GUARANTEE

As a result of a limited partnership interest in Penobscot Energy Recovery
Company ("PERC"), a majority-owned consolidated subsidiary, the Company had a
contingent obligation to make additional capital contributions to PERC of
approximately $3,710. The Company had an irrevocable letter of credit from a
bank securing this commitment. This contingent obligation expired during 1998.

During 1998, certain bonds payable at the Company's majority-owned
consolidated subsidiary, Penobscot Energy Recovery Company ("PERC") were
refinanced. In conjunction with this refinancing, the Company issued a $3,000
limited guarantee of PERC's payment obligation under the refinanced bonds
payable in favor of the issuer and trustees of the bonds payable. See Note 9 to
the consolidated financial statements for additional discussion.

5. SUBSEQUENT EVENT

On September 23, 1999, the Company entered into an amended Agreement and
Plan of Merger (the "Merger Agreement") with Casella Waste Systems, Inc.,
("Casella") a publicly-owned company engaged in the waste services industry.
This Merger Agreement was an amendment to the original agreement dated
January 12, 1999. The merger will be completed through the exchange of all of
shares of the Company's common stock for shares of Casella's Class A common
stock based on an exchange ratio specified in the Merger Agreement. In addition,
all of the Company's outstanding and unexercised stock options and stock
purchase warrants will be converted into similar rights to acquire Casella's
Class A common stock under the same terms and conditions and the same exchange
ratio. Subsequent to the completion of the merger, the current Casella
stockholders will own a majority of the combined company. Under the terms of the
Merger Agreement, Casella is required to file a registration statement with the
Securities and Exchange Commission to register the shares of its Class A common
stock to be issued in the Merger. The merger is subject to, among other things,
approval of the Company's and Casella's stockholders. No assurances can be given
that the remaining conditions of the Merger will be satisfied and that the
merger will be consummated. In connection with the merger, Casella has agreed to
reimburse the Company for its investment banking fees and other merger related
costs and as of December 31, 1998, approximately $1,160 of merger related costs
have been deferred.

S-6

SCHEDULE II

KTI, INC.
VALUATION AND QUALIFYING ACCOUNTS

COLUMN A                  COLUMN B        COLUMN C          COLUMN D    COLUMN E
----------------------------------------  --------   -------------------   ----------   --------

ADDITIONS
-------------------

CHARGED TO
BALANCE AT   CHARGED TO     OTHER                     BALANCE AT
BEGINNING    COSTS AND    ACCOUNTS--   DEDUCTIONS--     END OF
DESCRIPTION                 OF PERIOD     EXPENSES     DESCRIBE      DESCRIBE       PERIOD
----------------------------------------  ----------   ----------   ----------   ------------   ----------
(IN THOUSANDS)

YEAR ENDED DECEMBER 31, 1998
Deducted from asset amounts:
Allowance for doubtful accounts.........     $294        $1,289                     $ 270(1)      $1,313

YEAR ENDED DECEMBER 31, 1997
Deducted from asset amounts:
Allowance for doubtful accounts.........      242           193                       141(1)         294

YEAR ENDED DECEMBER 31, 1996
Deducted from asset amounts:
Allowance for doubtful accounts.........      481            24                       263(1)         242

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

(1) Uncollected accounts written off, net of recoveries.

S-7

KTI, INC.

CONSOLIDATED BALANCE SHEET

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

JUNE 30,
1999
---------

ASSETS
Current Assets

Cash and cash equivalents.................................  $  5,391
Restricted funds..........................................    21,053
Accounts receivable, net of allowances of $1,343..........    38,754
Consumables and spare parts...............................     5,012
Inventory.................................................     8,011
Notes receivable--officers/shareholders and affiliates....       115
Other receivables.........................................     2,836
Deferred taxes............................................     3,483
Other current assets......................................     5,163
--------
Total current assets....................................    89,818
Restricted funds............................................     4,177
Notes receivable--officers/shareholders and affiliates......     6,469
Other receivables...........................................     2,476
Other assets................................................     7,275
Deferred taxes..............................................     5,322
Deferred costs, net of accumulated amortization of $1,623...     4,300
Goodwill and other intangibles, net of accumulated
amortization of $7,027....................................   126,420
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $35,655......   216,777
--------
Total assets..............................................  $463,034
========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities

Accounts payable..........................................  $ 19,109
Accrued expenses..........................................    16,389
Debt, current portion.....................................   161,436
Other current liabilities.................................       224
--------
Total current liabilities...............................   197,158
Other liabilities...........................................     1,382
Debt, less current portion..................................    69,869
Minority interest...........................................    14,037
Deferred revenue............................................    57,756
Customer advance............................................    12,438
Convertible subordinated notes..............................     6,770
Commitments and contingencies...............................
Stockholders' equity........................................
Preferred stock; 10,000,000 shares authorized; none
outstanding
Common stock, no par value (stated value $.01 per share);
authorized 40,000,000; issued and outstanding:
13,916,238................................................       139
Additional paid-in capital..................................   126,396
Accumulated deficit.........................................   (22,911)
--------
Total stockholders' equity..................................   103,624
--------
Total liabilities and stockholders' equity..............  $463,034
========

SEE ACCOMPANYING NOTES.

F-48

KTI, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)

THREE MONTHS ENDED JUNE 30,    SIX MONTHS ENDED JUNE 30,
----------------------------   --------------------------
1999            1998           1999          1998
-------------   ------------   ------------   -----------

Revenues....................................   $    64,793     $   34,790    $   130,921    $   72,666
Cost of operations..........................        56,188         32,980        109,246        63,693
-----------     ----------    -----------    ----------
Gross Profit............................         8,605          1,810         21,675         8,973

Selling, general and administrative.........         6,285          2,086         12,181         3,222
Restructuring charge........................         2,971                         3,719
Asset impairment charge.....................         3,000                         3,000
-----------     ----------    -----------    ----------
Income (loss) from operations...........        (3,651)          (276)         2,775         5,751
Interest expense, net.......................         5,319          1,550          9,053         3,060
Loss on sale of business....................           444                           444
Equity loss in subsidiary...................           214                           294
Other charges...............................           131                           131
Other expense, net..........................            72                           123
-----------     ----------    -----------    ----------
Income (loss) before minority interest,
provision (benefit) for income taxes,
extraordinary item and cumulative effect
of change in accounting principle.......        (9,831)        (1,826)        (7,270)        2,691
Minority interest...........................           490            (86)         1,176         1,046
-----------     ----------    -----------    ----------
Income (loss) before provision (benefit)
for income taxes, extraordinary item and
cumulative effect of change in
accounting principle....................       (10,321)        (1,740)        (8,446)        1,645
Provision (benefit) for income taxes........        (3,417)          (732)        (2,565)          614
-----------     ----------    -----------    ----------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle....................        (6,904)        (1,008)        (5,881)        1,031
Extraordinary item..........................                          495                          495
-----------     ----------    -----------    ----------
Income (loss) before cumulative effect
in change in accounting principle.......        (6,904)        (1,503)        (5,881)          536
Cumulative effect of change in accounting
principle.................................                                          58
-----------     ----------    -----------    ----------
Net income (loss).......................        (6,904)        (1,503)        (5,939)          536
Accretion and accrued and paid dividends on
preferred stock...........................                          469                          978
-----------     ----------    -----------    ----------
Loss available to common shareholders...   $    (6,904)    $   (1,972)   $    (5,939)   $     (442)
===========     ==========    ===========    ==========

See accompanying notes.

F-49

KTI, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)

THREE MONTHS ENDED JUNE 30,    SIX MONTHS ENDED JUNE 30,
----------------------------   --------------------------
1999            1998           1999          1998
-------------   ------------   ------------   -----------

Earnings per common share:
Basic:
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle....................   $     (0.50)    $    (0.16)   $     (0.42)   $     0.01
Extraordinary item......................                        (0.05)                       (0.05)
Cumulative effect of change in
accounting principle....................                                       (0.01)
-----------     ----------    -----------    ----------
Net loss................................   $     (0.50)    $    (0.21)   $     (0.43)   $    (0.04)
===========     ==========    ===========    ==========
Weighted average number of shares used
in computation..........................    13,916,238      9,614,163     13,818,290     9,424,451
===========     ==========    ===========    ==========
Diluted:
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle....................   $     (0.50)    $    (0.16)   $     (0.42)   $     0.01
Extraordinary item......................                        (0.05)                       (0.05)
Cumulative effect of change in
accounting principle....................                                       (0.01)
-----------     ----------    -----------    ----------
Net loss................................   $     (0.50)    $    (0.21)   $     (0.43)   $    (0.04)
===========     ==========    ===========    ==========
Weighted average number of shares used
in computation..........................    13,916,238      9,614,163     13,818,290     9,424,451
===========     ==========    ===========    ==========

See accompanying notes.

F-50

KTI, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

COMMON STOCK        ADDITIONAL
---------------------    PAID-IN     ACCUMULATED
SHARES      AMOUNT     CAPITAL       DEFICIT      TOTAL
----------   --------   ----------   -----------   --------

Balance at December 31, 1998...................  13,266,204     $133      $115,026      $(16,972)   $ 98,187
Net loss.....................................                                           (5,939)     (5,939)
Issuance of common stock for:
Exercise of options........................      20,552                    161                       161
Exercise of warrants.......................      19,482                    193                       193
Business combinations......................     610,000        6        11,016                    11,022
----------     ----      --------      --------    --------
Balance at June 30, 1999.......................  13,916,238     $139      $126,396      $(22,911)   $103,624
==========     ====      ========      ========    ========

See accompanying notes.

F-51

KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

SIX MONTHS
ENDED JUNE 30,
-------------------
1999       1998
--------   --------

OPERATING ACTIVITIES
Net income (loss)...........................................  $ (5,939)  $    536
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Asset impairment charge...................................     3,000
Extraordinary item........................................                  495
Cumulative effect of change in accounting principle.......        58
Depreciation and amortization.............................    10,770      5,334
Minority interest, net of distributions...................     1,600       (461)
Loss on sale of business..................................       444
Equity loss in subsidiary.................................       294
Deferred revenue and customer advance.....................    (3,992)    (3,815)
Deferred income taxes.....................................    (2,777)    (1,464)
Provision for losses on accounts receivable...............        45        570
Interest accrued and capitalized on debt..................       114        701
Other non-cash charges....................................       910         11
Changes in operating assets and liabilities:
Accounts receivable.....................................    (8,828)       879
Consumables, spare parts and inventory..................    (1,508)      (712)
Other receivables.......................................       914       (320)
Other assets............................................    (4,600)       286
Accounts payable and accrued expenses...................     8,563     (3,854)
Other liabilities.......................................    (5,620)     4,078
--------   --------
Net cash provided by (used in) operating activities.........    (6,552)     2,264
INVESTING ACTIVITIES
Additions to property, equipment and leasehold
improvements..............................................    (6,379)    (4,183)
Proceeds from sale of assets................................        27         33
Net change in restricted funds..............................    (1,792)    (1,031)
Proceeds from sale of business..............................     1,757
Purchase of businesses, net of cash acquired................      (150)   (15,289)
Notes receivable--officers/shareholders and affiliates......    (2,936)      (492)

--------   --------
Net cash used in investing activities.......................    (9,473)   (20,962)
FINANCING ACTIVITIES
Deferred financing costs....................................               (2,995)
Proceeds from issuance of debt..............................               46,995
Net borrowings on lines of credit...........................    12,414     19,267
Proceeds from other borrowings..............................     3,259
Proceeds from amendment of power purchase agreement, net of
transaction costs.........................................                5,900
Proceeds from sale of common stock..........................       354      2,359
Dividends paid..............................................                 (936)
Principal payments on debt..................................    (4,037)   (53,046)
--------   --------
Net cash provided by financing activities...................    11,990     17,544
--------   --------
Decrease in cash and cash equivalents.......................    (4,035)    (1,154)
Cash and cash equivalents at beginning of period............     9,426     11,181
--------   --------
Cash and cash equivalents at end of period..................  $  5,391   $ 10,027
========   ========

F-52

KTI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

SIX MONTHS ENDED
JUNE 30,
-------------------
1999       1998
--------   --------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid...............................................  $10,909     $2,563
Taxes paid..................................................    1,128

NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligation entered into for lease of
equipment.................................................      241
Purchase of businesses and additional partnership interest,
net of cash acquired:
Working capital, net of cash acquired.....................      111        101
Property, equipment and leasehold improvements............    8,621     11,528
Purchase price in excess of net assets acquired...........    7,863      6,873
Other assets..............................................                 104
Non-current liabilities...................................    5,423      3,317
Common stock issued.......................................   11,022

See accompanying notes

F-53

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)

JUNE 30, 1999

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. The municipal solid waste ("MSW") market in Maine, which
provides material to the waste-to-energy segment, is seasonal, with one-third
more MSW generated in the summer months than is generated during the rest of the
year. The Residential and Commercial Recycling segments experience increased
volumes of newspaper in November and December due to increased newspaper
advertising and retail activity during the holiday season. Additionally, the
Residential Recycling segment operates facilities in Florida which experience
increased volumes of recyclable materials during the winter months followed by
decreases in the summer months in connection with seasonal changes in
population. Operating results for the three and six month periods ended
June 30, 1999 and 1998 are not necessarily indicative of the results that may be
expected for the full year. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 1998. Certain 1998 financial
information contained herein has been reclassified to conform with the 1999
presentation.

2. RESTATEMENT

The Company's balance sheet as of June 30, 1999 and the related statements
of operations, stockholders' equity and cash flows for each of the three and six
month periods ended June 30, 1999 and 1998 have been restated. The restatement
is a result of the Securities Exchange Commission's review of the Company's
proxy materials related to the prospective merger with Casella Waste Systems
(See Note 3). The restatement relates to revenue recognized as a result of the
restructuring of a power purchase agreement and the sale of electric generating
capacity by two of the Company's majority-owned subsidiaries with it's
customers, BHE and CMP, which were completed in 1998 and 1996. At the time of
these transactions, the Company had recognized revenues representing a portion
of the cash received in 1996 and the total consideration received in 1998. After
discussions with the staff of the Securities and Exchange Commission, the
Company agreed to defer these amounts and recognize them over the term of the
respective power purchase and capacity purchase agreements to comply with
generally accepted accounting principles. In addition, performance credits
previously reported as expense have been reclassified as a reduction of
revenues. The impact of the restatement on the Company's consolidated financial
results as originally reported is summarized as follows:

AS REPORTED                   RESTATED
THREE MONTHS ENDED          THREE MONTHS ENDED
JUNE 30                     JUNE 30
----------------------      ----------------------
1999          1998          1999          1998
--------      --------      --------      --------

Revenues............................................  $66,218       $49,458       $64,793       $34,790
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle.........................................   (7,131)        5,222        (6,904)       (1,008)

F-54

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)

JUNE 30, 1999

2. RESTATEMENT (CONTINUED)

AS REPORTED                   RESTATED
THREE MONTHS ENDED          THREE MONTHS ENDED
JUNE 30                     JUNE 30
----------------------      ----------------------
1999          1998          1999          1998
--------      --------      --------      --------

Net income (loss)...................................   (7,131)        4,727        (6,904)       (1,503)
Net income (loss) available to common
shareholders......................................   (7,131)        4,258        (6,904)       (1,972)
Net income (loss) per share:
Basic.............................................  $ (0.51)      $  0.44       $ (0.50)      $ (0.21)
Diluted...........................................  $ (0.51)      $  0.38       $ (0.50)      $ (0.21)

AS REPORTED                   RESTATED
SIX MONTHS ENDED            SIX MONTHS ENDED
JUNE 30                     JUNE 30
----------------------      ----------------------
1999          1998          1999          1998
--------      --------      --------      --------

Revenues..........................................  $133,195      $87,090       $130,921      $72,666
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle.......................................    (6,206)       7,214         (5,881)       1,031
Net income (loss).................................    (6,264)       6,719         (5,939)         536
Net income (loss) available to common
shareholders....................................    (6,264)       5,741         (5,939)        (442)
Net income (loss) per share:
Basic...........................................  $  (0.46)     $  0.61       $  (0.43)     $ (0.04)
Diluted.........................................  $  (0.46)     $  0.51       $  (0.43)     $ (0.04)

3. MERGER AND ACQUISITIONS

On September 23, 1999, KTI, Inc. (the "Company") entered into an Agreement
and Plan of Merger (the "Merger Agreement") with Casella Waste Systems, Inc.,
("Casella") a publicly-owned company engaged in the waste services industry. The
merger will be completed through the exchange of all of the shares of the
Company's common stock for shares of Casella's Class A common stock based on an
exchange ratio specified in the Amended Merger Agreement. In addition, all of
the Company's outstanding and unexercised stock options and stock purchase
warrants will be converted into similar rights to acquire Casella's Class A
common stock under the same terms and conditions and the same exchange ratio.
Subsequent to the completion of the merger the current Casella stockholders will
own a majority of the combined company. Under the terms of the Merger Agreement,
Casella is required to file a registration statement with the Securities and
Exchange Commission to register the shares of its Class A common stock to be
issued in the merger. The merger is subject to, among other things, approval of
the Company's and Casella's stockholders. No assurance can be given that the
conditions of the merger will be satisfied or that the merger will be
consummated. In connection with the merger, Casella has agreed to reimburse the
Company for its investment banking fees and other merger related costs and as of
June 30, 1999, approximately $1,482 of merger related costs have been deferred.

F-55

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)

JUNE 30, 1999

3. MERGER AND ACQUISITIONS (CONTINUED)
On March 31, 1999 and May 19, 1999, pursuant to the Second Amended, Restated
and Extended Waste Disposal Agreement among PERC and the municipalities named
therein, the municipalities made capital contributions to Penobscot Energy
Recovery Company, Limited Partnership ("PERC"), which were recorded as
additional minority interest, totaling $730 and $240, respectively, in exchange
for 1.31% and 0.43%, respectively, of limited partnership interest in PERC.

On January 27, 1999 the Company completed its acquisition of AFA
Group, Inc. and subsidiaries ("AFA"), an integrated wood waste processing and
hauling business located in Newark, New Jersey. Payment of the aggregate
purchase price, including all direct costs, of $9,682 consisted of (i) 460,000
shares of the Company's common stock valued at $20.70 per share (based on the
closing price of the common stock on the date of announcement) and (ii) $150 in
cash. This acquisition was accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at their estimated fair value at the
date of acquisition. The excess of the purchase price over the fair value of the
acquired net assets of $6,363 has been recorded as goodwill and is being
amortized on a straight-line basis over 30 years.

F-56

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)

JUNE 30, 1999

4. EARNINGS PER SHARE

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

THREE MONTHS ENDED           SIX MONTHS ENDED
JUNE 30,                    JUNE 30,
-------------------------   -------------------------
1999          1998          1999          1998
-----------   -----------   -----------   -----------

Numerator:
Net income (loss).......................  $    (6,904)  $    (1,503)  $    (5,939)  $       536
Preferred stock dividends...............                        469                         936
Accretion of preferred stock............                                                     42
-----------   -----------   -----------   -----------
Numerator for basic earnings per
share-net loss available to common
stockholders..........................       (6,904)       (1,972)       (5,939)         (442)
Effective of dilutive securities:
Preferred stock dividends.............
Accretion of preferred stock..........
-----------   -----------   -----------   -----------
Numerator for diluted earnings per
share-net income (loss) available to
common stockholders after assumed
conversions...........................  $    (6,904)  $    (1,972)  $    (5,939)  $      (442)
===========   ===========   ===========   ===========

Denominator:
Denominator for basic earnings per
share-weighted average shares.........   13,916,238     9,614,163    13,818,290     9,424,451
Effect of dilutive securities:
Employee stock options (1)..............
Warrants (1)............................
Convertible preferred stock (1).........
Convertible subordinated notes (1)......
Dilutive potential common shares
Denominator for diluted earnings per
share-adjusted weighted-average shares
and assumed conversions...............   13,916,238     9,614,163    13,818,290     9,424,451
-----------   -----------   -----------   -----------
Net income (loss) per share-Basic.........       $(0.50)       $(0.21)       $(0.43)       $(0.04)
-----------   -----------   -----------   -----------
Net income (loss) per share-Diluted.......       $(0.50)       $(0.21)       $(0.43)       $(0.04)
-----------   -----------   -----------   -----------

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

(1) The employee stock options and warrants outstanding during the periods and
the convertible preferred stock and subordinated notes payable are
anti-dilutive.

F-57

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)

JUNE 30, 1999

5. CONTINGENCIES

The Company is a defendant in a consolidated purported class action, which
alleges violations of certain sections of the federal securities laws. The
Company believes the allegations are without merit and intends to defend the
litigation vigorously.

Two lawsuits have been filed against a subsidiary of the Company alleging
fraud and tortious interference. The actions are based on two contracts between
the plaintiff and the subsidiary, which contracts require all disputes to be
resolved by arbitration. Arbitration proceedings have commenced. The Company
believes it has meritorious defenses to the allegations.

The majority shareholder of a company acquired by a subsidiary of the
Company instigated arbitration proceedings against the Company and two of its
subsidiaries, alleging the subsidiaries acted to frustrate the "earn-out"
provisions of the acquisition agreement and thereby precluding him from
receiving, or alternatively, reducing the sum to which he was entitled to
receive. He also alleges his employment agreement was wrongfully terminated. The
claim for arbitration alleges direct charges in excess of $5,000 and requests
punitive damages, treble damages and attorneys fees. The Company and its
subsidiaries have responded to the demand, denying liability and filed a
counterclaim for $1,000 for misrepresentations. The Company believes it has
meritorious defenses to the claims.

The Company is a defendant in certain lawsuits 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.

6. SEGMENT REPORTING

The Company operated in the business segments as indicated below.

THREE MONTHS ENDED JUNE 30, 1999

WASTE-TO-   COMMERCIAL   FINISHED   RESIDENTIAL
ENERGY     RECYCLING    PRODUCTS    RECYCLING
---------   ----------   --------   -----------

Revenues
Unaffiliated customers............................  $ 25,433     $19,290     $14,061      $ 5,994
Intersegment revenues.............................        56                      52        3,888
Segment Profit (Loss)...............................     4,650      (3,937)     (1,049)        (325)
Depreciation and Amortization.......................     2,771         502         876        1,066
Capital Expenditures................................     1,615         347         982          168

F-58

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)

JUNE 30, 1999

6. SEGMENT REPORTING (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999

WASTE-TO-   COMMERCIAL   FINISHED   RESIDENTIAL
ENERGY     RECYCLING    PRODUCTS    RECYCLING
---------   ----------   --------   -----------

Revenues
Unaffiliated customers............................  $ 48,958     $40,428     $26,406      $15,081
Intersegment revenues.............................        89                      83        4,636
Segment Profit (Loss)...............................    11,221      (3,622)       (263)         234
Depreciation and Amortization.......................     5,370       1,110       1,697        1,978
Identifiable Assets.................................   258,218      48,070      62,827       70,729
Capital Expenditures................................     2,744         662       2,385          552

THREE MONTHS ENDED JUNE 30, 1998

WASTE-TO-   COMMERCIAL   FINISHED   RESIDENTIAL
ENERGY     RECYCLING    PRODUCTS    RECYCLING
---------   ----------   --------   -----------

Revenues
Unaffiliated customers.............................   $17,272     $13,461      $2,546      $1,496
Intersegment revenues..............................     2,603          24         136       1,135
Segment Profit (Loss)................................       771        (667)        (36)        232
Depreciation and Amortization........................     2,165         255          25         224
Capital Expenditures.................................       789         526

SIX MONTHS ENDED JUNE 30, 1998

WASTE-TO-   COMMERCIAL   FINISHED   RESIDENTIAL
ENERGY     RECYCLING    PRODUCTS    RECYCLING
---------   ----------   --------   -----------

Revenues
Unaffiliated customers............................  $ 35,809     $29,493      $4,172      $3,162
Intersegment revenues.............................     5,187          24         244       2,102
Segment Profit (Loss)...............................     6,577        (348)        223         628
Depreciation and Amortization.......................     4,199         506          50         431
Identifiable Assets.................................   227,726      30,785       1,883      10,783
Capital Expenditures................................     2,415       1,751           2

F-59

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)

JUNE 30, 1999

6. SEGMENT REPORTING (CONTINUED)
The segment reporting detailed above reconciles to consolidated revenues and
income (loss) before provision (benefit) for income taxes, extraordinary item
and cumulative effect of a change in accounting principal as follows:

THREE MONTHS ENDED JUNE 30,   SIX MONTHS ENDED JUNE 30,
---------------------------   -------------------------
1999           1998          1999          1998
------------   ------------   -----------   -----------

REVENUES
Total unaffiliated customers revenue for
reportable segments.....................    $ 64,778       $34,775       $130,873       $72,636
Holding company revenues..................          15            15             48            30
Intersegment revenues for reportable
segments................................       3,996         3,898          4,808         7,557
Elimination of intersegment revenues......      (3,996)       (3,898)        (4,808)       (7,557)
--------       -------       --------       -------
Total consolidated revenues...............      64,793        34,790        130,921        72,666
========       =======       ========       =======

PROFIT AND LOSS
Total segment profit (loss) for reportable
segments................................    $   (661)      $   300       $  7,570       $ 7,080
Holding company segment profit (loss).....      (2,990)         (576)        (4,795)       (1,329)
--------       -------       --------       -------
Total segment profit (loss)...............      (3,651)         (276)         2,775         5,751
Unallocated amounts:
Interest expense, net...................       5,319         1,550          9,053         3,060
Other expenses, net.....................         861                          992
Minority interest.......................         490           (86)         1,176         1,046
--------       -------       --------       -------
Income (loss) before provision (benefit)
for income taxes, extraordinary item
and cumulative effect of change in
accounting principle..................    $(10,321)      $(1,740)      $ (8,446)      $ 1,645
========       =======       ========       =======

JUNE 30,
1999
--------

ASSETS
Total identifiable assets for reportable segments...........  $439,844
Holding company assets......................................    23,190
--------
Total consolidated assets...................................  $463,034
========

7. IMPAIRMENT OF COMMERCIAL RECYCLING LONG-LIVED ASSETS

On June 1, 1999, the Company completed the sale of its commercial recycling
facility located in Franklin Park, Illinois and recorded a loss of approximately
$444.

F-60

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)

JUNE 30, 1999

7. IMPAIRMENT OF COMMERCIAL RECYCLING LONG-LIVED ASSETS (CONTINUED)
As a result of this loss and the continued poor operating performance of
this segment, the Company initiated an impairment review of the long-lived
assets, including goodwill, in the Commercial Recycling segment. A revised
operating plan for each of the remaining facilities in the Commercial Recycling
segment was developed. While revenues are stable, the Commercial Recycling
segment continues to operate at levels of profitability, which are significantly
below the levels anticipated when the acquisitions were completed. In addition,
with the continued consolidation of the solid waste industry and the continued
focus on the disposal aspects of this industry, the possibility of selling these
facilities for amounts approximating their carrying value is remote.

The Company determined that the estimated future undiscounted cash flows for
the KTI Recycling of New Jersey ("Newark Plant") facility were below the
carrying value of the related equipment and leasehold improvements. The Company
adjusted the carrying value of the related equipment and leasehold improvements
of the Newark Plant by approximately $3,000 to their estimated fair value of
approximately $1,142. The fair value of the long-lived assets was based on the
expected cash flows discounted at a rate commensurate with the risk involved.

8. PLANT CONSOLIDATION, RESTRUCTURING AND OTHER UNUSUAL ITEMS

In April 1999, FCR, Inc., a subsidiary of the Company, signed a new
agreement with a municipality to operate a material recovery facility in
Charlotte, North Carolina. As part of this agreement, the Company committed to
relocate the cellulose insulation plant located in Ronda, North Carolina to the
material recovery facility in Charlotte. This secures the supply of raw material
for the cellulose insulation plant and provides additional cost savings from the
integration of recycling and the manufacturing of cellulose insulation into one
facility. As a result, the Company developed an exit plan for the closing of the
plant in Ronda, North Carolina and began the construction of the new cellulose
insulation plant during the second quarter. The Company recorded a restructuring
charge of approximately $1,205, which consisted primarily of the write-down of
equipment and leasehold improvements and an accrual for the remaining payments
under the noncancelable lease of the Ronda facility, in the second quarter.

During the second quarter, the Company reached agreement with an employee to
restructure the amounts paid under an employment contract. The Company recorded
a restructuring charge of approximately $320 relating to amounts due under the
revised contract.

In June 1999, the Company initiated a plan to close the Residential
Recycling Segment's material recovery facility located in Howes Cave, New York
and process the materials from this facility at another Residential Recycling
Segment facility. The Company recorded a restructuring charge of $514, which
consisted primarily of the remaining payments under noncancelable leases of the
building and equipment, in the second quarter.

Included in restructuring charges is $433 of deferred acquisition costs
related to acquisitions that were terminated during the second quarter.

F-61

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)

JUNE 30, 1999

8. PLANT CONSOLIDATION, RESTRUCTURING AND OTHER UNUSUAL ITEMS (CONTINUED)
In April 1998, a subsidiary of the Company, FCR, Inc. ("FCR"), entered into
an amended agreement to operate a material recovery facility in Stratford,
Connecticut. This agreement requires FCR to add additional processing equipment
to this facility within a certain period of time as defined in the amended
agreement or pay the municipality $100 per year over the next five years. In
April 1999, FCR determined that this processing equipment was not cost effective
due to other alternative methods of processing and, thus, will not install the
equipment. As a result, the Company recorded the penalty included in the
agreement of $500 for the payments to be made to the municipality. The amount is
accrued and classified as other liabilities as of June 30, 1999.

Other charges of $131 represents an accrual for penalties assessed by the
Florida Department of Environmental Protection related to the temperature of the
discharge water at the TERI Telogia Facility.

In the first quarter of 1999, the Company recorded a $748 restructuring
charge. The restructuring initiatives primarily involve the Company's Commercial
Recycling segment and represent primarily severance and other costs related to
employee reductions. In connection with the restructuring, the Company
terminated ten employees. The restructuring charges relate to integration of the
brokerage operation acquired as part of the New Jersey Fibers acquisition and
elimination of costs as a result of streamlining the operations of acquisitions
completed in 1998. The Company recorded $374 against this reserve during 1999.

9. INCOME TAXES

The income tax benefit was approximately $2,565 for the six months ended
June 30, 1999 compared to an income tax provision of approximately $614 during
the same period in 1998. During 1999, the effective tax rate utilized by the
Company of 30.4% represents the estimated annual effective rate based on the
total estimated pretax income of the Company for the year ended December 31,
1999. The effective rate in 1998 was 37.3% and the decrease in the effective
rate in 1999 is primarily due to an increase in nondeductible goodwill.

10. REVOLVING LINE OF CREDIT AGREEMENT

On May 12, 1999, the Company's Revolving Line of Credit Agreement with a
bank (the "Credit Agreement") was amended (the "Amended Agreement") modifying
certain financial covenants and requiring bank approval for all acquisitions.
The Amended Agreement requires that the Company and certain subsidiaries, as
defined, maintain certain specified financial covenants, including, a minimum
interest coverage ratio, a maximum funded debt to EBITDA ratio, a minimum fixed
charge coverage ratio, and a maximum debt to capitalization ratio, each as
defined in the Amended Agreement. The Company recorded a charge of $835 in
connection with the amendment. This charge was recorded in interest expense
during the second quarter.

As of June 30, 1999, the Company was in default of the financial covenants
of its $150.0 million line of credit. The Company's lender has waived the
violation of the financial covenants through

F-62

KTI, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)

JUNE 30, 1999

10. REVOLVING LINE OF CREDIT AGREEMENT (CONTINUED)
January 1, 2000. As a result, the outstanding amount under the line of credit
has been classified as a current liability. Upon the consummation of the merger,
this line of credit will be replaced by the credit facility of the merged
company. However, no assurances can be given that the conditions of the merger
will be satisfied or that the merger will be consummated.

The Company will continue to select interest rates on the outstanding
borrowings based on the bank's prime rate or LIBOR rates, however, the interest
rates range from the bank's prime rate to the bank's prime rate plus 1.50% or
LIBOR plus 1.88% to LIBOR plus 3.25% depending on the attainment of a financial
covenant, as defined, in the Amended Agreement.

As of June 30, 1999, one of the Company's subsidiaries was in violation of
one of the financial covenants of its revolving line of credit. Borrowings under
this line of credit are classified as a current liability at June 30, 1999. Upon
consummation of the merger, this line of credit will be replaced by the credit
facility of the merged company.

F-63

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
FCR, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of FCR, Inc. (a
Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of FCR, Inc. and
subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.

/s/ Arthur Andersen LLP

Charlotte, North Carolina,

February 27, 1998 (except with
respect to the matters discussed
in Note 13, as to which the date is
September 30, 1998 and Note 14, as to which the
date is November 11, 1999).

F-64

FCR, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 1997 AND 1996

1997          1996
-----------   -----------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................  $ 2,777,365   $    25,028
Accounts receivable, net....................................    5,002,418     2,576,079
Inventory...................................................    1,768,274       179,089
Receivable from shareholder.................................    1,294,280             0
Other assets................................................    1,312,754       278,547
Deferred tax assets.........................................      101,000       286,000
Net assets of discontinued operations.......................            0     1,043,472
-----------   -----------
Total current assets........................................   12,256,091     4,388,215
-----------   -----------
PROPERTY, PLANT AND EQUIPMENT:
Machinery and equipment.....................................   19,118,367     9,485,933
Building and leasehold improvements.........................    2,872,029     2,021,377
Office furniture and fixtures...............................      535,456       281,834
Construction in progress....................................    2,287,689       763,916
-----------   -----------
24,813,541    12,553,060
Less--Accumulated depreciation..............................   (4,834,186)   (3,103,076)
-----------   -----------
19,979,355     9,449,984
-----------   -----------
OTHER ASSETS................................................    1,224,621       377,440
GOODWILL, net...............................................    8,120,898             0
-----------   -----------
9,345,519       377,440
-----------   -----------
Total assets................................................  $41,580,915   $14,215,639
===========   ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit..............................................  $ 1,801,666   $         0
Current portion of obligations under capital leases.........      291,982       508,561
Current portion of long-term debt...........................    1,894,169       789,784
Note payable to shareholder.................................    2,500,000             0
Accounts payable............................................    4,582,891     1,910,589
Accrued liabilities.........................................    1,744,269       730,742
-----------   -----------
Total current liabilities...................................   12,814,977     3,939,676
-----------   -----------
OTHER LONG-TERM OBLIGATIONS.................................      683,720       967,093
LONG-TERM DEBT..............................................   11,431,346     3,559,140
SUBORDINATED DEBT...........................................    5,910,000             0
DEFERRED TAX LIABILITIES....................................    1,251,000       869,000
-----------   -----------
32,091,043     9,334,909
-----------   -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $.01 par value;
1,500,000 shares authorized, 1,149,842 and 1,008,000
shares issued and outstanding at December 31, 1997 and
1996, respectively........................................    2,230,648     5,877,631
Series B convertible preferred stock, $.01 par value; 75,000
shares authorized, issued and outstanding.................      300,000       300,000
Series C convertible preferred stock, $.01 par value;
600,000 shares authorized, 488,625 shares issued and
outstanding...............................................    1,817,784     1,817,784
Common stock, $.01 par value, 3,262,500 shares authorized,
1,540,562 and 949,245 shares issued and outstanding at
December 31, 1997 and 1996, respectively..................       15,405         9,492
Additional paid-in capital..................................    4,243,314        67,682
Retained earnings (deficit).................................      882,771    (3,191,859)
-----------   -----------
Total stockholders' equity..................................    9,489,922     4,880,730
-----------   -----------
$41,580,965   $14,215,639
===========   ===========

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

F-65

FCR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

1997          1996
-----------   -----------

NET REVENUES................................................  $36,654,254   $15,023,535
PROCESSING AND MANUFACTURING COSTS..........................   28,484,273    12,498,895
-----------   -----------
Gross margin................................................    8,169,981     2,524,640
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................    4,164,186     1,968,460
-----------   -----------
Operating income............................................    4,005,795       556,180
INTEREST AND OTHER EXPENSE..................................   (1,369,241)     (455,611)
-----------   -----------
Income before provision for income taxes....................    2,636,554       100,569
PROVISION FOR INCOME TAXES..................................    1,099,000        22,000
-----------   -----------
INCOME FROM CONTINUING OPERATIONS...........................    1,537,554        78,569
DISCONTINUED OPERATIONS:
Loss from operations of discontinued commercial office
recycling (less applicable credit for income taxes of
$272,000).................................................            0      (762,834)
Loss on disposal of commercial office recycling including a
provision of $118,000 for operating losses during the
phaseout period...........................................            0      (133,000)
-----------   -----------
Net income (loss)...........................................  $ 1,537,554   $  (817,265)
===========   ===========

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

F-66

FCR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

PREFERRED STOCK         PREFERRED STOCK        PREFERRED STOCK
SERIES A               SERIES B               SERIES C
----------------------   -------------------   ---------------------
SHARES       AMOUNT      SHARES     AMOUNT     SHARES      AMOUNT
---------   ----------   --------   --------   --------   ----------

BALANCE, December 31, 1995......................  1,008,000   $5,060,751    75,000    $300,000   488,625    $1,817,784
Reflect 15 for 1 stock split....................          0            0         0           0         0             0
Exercise of common stock options................          0            0         0           0         0             0
Accretion to redemption value of preferred
stock.........................................          0      816,880         0           0         0             0
Dividends paid..................................          0            0         0           0         0             0
Net loss........................................          0            0         0           0         0             0
---------   ----------    ------    --------   -------    ----------
BALANCE, December 31, 1996......................  1,008,000    5,877,631    75,000     300,000   488,625     1,817,784
Accretion to redemption value of preferred
stock.........................................          0      217,269         0           0         0             0
Elimination of mandatory redemption provision of
preferred stock...............................          0   (3,865,670)        0           0         0             0
Issuance of preferred stock.....................    141,842        1,418         0           0         0             0
Issuance of common stock........................          0            0         0           0         0             0
Exercise of common stock warrants...............          0            0         0           0         0             0
Exercise of common stock options................          0            0         0           0         0             0
Issuance and accretion to redemption value of
common stock warrants.........................          0            0         0           0         0             0
Dividends paid..................................          0            0         0           0         0             0
Net income......................................          0            0         0           0         0             0
---------   ----------    ------    --------   -------    ----------
BALANCE, December 31, 1997......................  1,149,842   $2,230,648    75,000    $300,000   488,625    $1,817,784
=========   ==========    ======    ========   =======    ==========

COMMON STOCK       ADDITIONAL    RETAINED         TOTAL
--------------------    PAID-IN      EARNINGS     STOCKHOLDERS'
SHARES      AMOUNT     CAPITAL      (DEFICIT)       EQUITY
---------   --------   ----------   -----------   -------------

BALANCE, December 31, 1995...................    820,245   $   546    $   69,128   $(1,367,714)    $5,880,495
Reflect 15 for 1 stock split.................          0     7,656        (7,656)            0              0
Exercise of common stock options.............    129,000     1,290         6,210             0          7,500
Accretion to redemption value of preferred
stock......................................          0         0             0      (816,880)             0
Dividends paid...............................          0         0             0      (190,000)      (190,000)
Net loss.....................................          0         0             0      (817,265)      (817,265)
---------   -------    ----------   -----------     ----------
BALANCE, December 31, 1996...................    949,245     9,492        67,682    (3,191,859)     4,880,730
Accretion to redemption value of preferred
stock......................................          0         0             0      (217,269)             0
Elimination of mandatory redemption provision
of preferred stock.........................          0         0             0     3,865,670              0
Issuance of preferred stock..................          0         0     1,062,407    (1,063,825)             0
Issuance of common stock.....................    421,207     4,212     2,858,936             0      2,863,148
Exercise of common stock warrants............    140,110     1,401       138,610             0        140,011
Exercise of common stock options.............     30,000       300          (300)            0              0
Issuance and accretion to redemption value of
common stock warrants......................          0         0       115,979             0        115,979
Dividends paid...............................          0         0             0       (47,500)       (47,500)
Net income...................................          0         0             0     1,537,554      1,537,554
---------   -------    ----------   -----------     ----------
BALANCE, December 31, 1997...................  1,540,562   $15,405    $4,243,314   $   882,771     $9,489,922
=========   =======    ==========   ===========     ==========

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

F-67

FCR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

1997          1996
-----------   ----------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...........................................  $ 1,537,554   $ (817,265)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation and amortization...............................    2,150,381    1,059,087
Accretion of common stock warrants..........................       25,980            0
Gain (loss) on disposal of fixed assets.....................        2,896      (25,973)
Deferred income taxes.......................................      567,000      (68,000)
Loss on disposal of discontinued operations.................            0     (133,000)
Loss from discontinued operations...........................            0     (762,834)
Changes in operating assets and liabilities-
Increase in accounts receivable, net........................     (773,163)    (800,254)
Increase in inventory.......................................     (641,754)      (3,521)
Increase in other assets....................................   (1,301,290)    (123,989)
Increase (decrease) in accounts payable.....................     (805,697)     668,702
Decrease in other liabilities...............................     (202,991)  (1,128,410)
-----------   ----------
Net cash provided by (used in) continuing operations........      558,916   (2,135,457)
-----------   ----------
Decrease in net assets of discontinued operations...........    1,043,472      917,763
-----------   ----------
Net cash provided by (used in) operating activities.........    1,602,388   (1,217,694)
-----------   ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired............   (9,253,480)           0
Purchases of property and equipment.........................   (4,682,468)  (2,625,677)
Capital expenditures of discontinued operations.............            0      (12,313)
Proceeds from sale of fixed assets..........................        4,500       48,437
-----------   ----------
Net cash used in investing activities.......................  (13,931,448)  (2,589,553)
===========   ==========
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt....................  $16,603,334   $3,631,937
Proceeds from issuance of subordinated debt.................    6,000,000            0
Net borrowings under line of credit.........................    1,589,728            0
Principal payments under capital lease obligations..........     (583,797)    (439,792)
Principal payments under long-term debt.....................   (7,626,743)    (644,654)
Principal payments of discontinued operations...............            0     (100,165)
Increase in receivable from shareholder.....................   (1,294,280)           0
Proceeds from exercise of stock options.....................            0        7,500
Proceeds from exercise of common stock warrants.............      140,011            0
Issuance of common stock....................................      300,644            0
Dividends paid--Series C preferred stock....................      (47,500)    (190,000)
-----------   ----------
Net cash provided by financing activities...................   15,081,397    2,264,826
-----------   ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................    2,752,337   (1,542,421)
CASH AND CASH EQUIVALENTS, beginning of year................       25,028    1,567,449
-----------   ----------
CASH AND CASH EQUIVALENTS, end of year......................  $ 2,777,365   $   25,028
===========   ==========
SUPPLEMENT DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year-
Interest....................................................  $ 1,160,369   $  449,999
Taxes on income.............................................      709,157            0
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligation entered into for lease of new
equipment.................................................            0      439,733
Issuance of common stock with acquisitions..................    2,562,503            0
Issuance of Series A preferred stock........................    1,063,825            0
ACQUISITIONS OF BUSINESSES, net of cash acquired:
Working capital, other than cash............................    1,041,578            0
Property, plant and equipment...............................   (8,136,793)           0
Costs in excess of net assets of companies acquired.........   (8,231,547)           0
Other noncurrent assets.....................................      (54,123)           0
Long-term debt..............................................    2,711,938            0
Noncurrent liabilities......................................      852,964            0
Issuance of common stock....................................    2,562,503            0
===========   ==========

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

F-68

FCR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997 AND 1996

1. DESCRIPTION OF THE BUSINESS AND ACCOUNTING POLICIES:

DESCRIPTION OF BUSINESS

FCR, Inc. (the Company), through its subsidiaries, is a diversified
recycling company engaged in residential recycling and the manufacturing of
products using recycled materials. The Company consists of three business
segments: Recycling Division, Insulation Division and Plastics Division.

The Recycling Division is engaged in the design and operations of facilities
which sort, process, and market recyclable materials delivered to the facilities
either by municipalities under long-term contracts as part of their overall
recycling programs or contract haulers under various commercial recycling
programs. The Recycling Division operates facilities in Connecticut, New Jersey,
Virginia, North Carolina, South Carolina, Florida and Tennessee. The Recycling
Division sells primarily recyclable material to entities who manufacture
recycled-paper or containers, constructed from newspaper, corrugated cardboard,
aluminum, plastic or glass. Recyclable materials are considered commodities and
are subject to fluctuations beyond contractual price agreements. The Recycling
Division represented 61% of the Company's 1997 consolidated net revenues.

The Insulation Division began in May 1997 with the purchase of Suncoast
(Note 2). The Insulation Division produces cellulose insulation which is
primarily used in the construction of manufactured and single family residential
homes. The primary raw material for cellulose insulation is newspaper collected
from residential recycling programs. The cellulose insulation is sold to the
manufacturers of manufactured homes and insulation contractors throughout the
United States and thus the results of the Insulation Division are impacted by
the sales of new homes which is cyclical in nature. The Insulation Division
operates facilities in North Carolina, Florida, Arizona, Oregon and Ohio. Sales
of cellulose insulation represented 31% of the Company's 1997 consolidated net
revenues.

The Plastics Division began in September 1997 with the purchase of Resource
Recycling, Inc. (Note 2). The Plastics Division is a reprocessor of high density
polyethylene (HDPE) plastics collected from residential recycling programs and
industrial customers. The plastics are ground, washed and repellatized. The
recycled plastics are sold primarily to manufacturers of nursery supplies and
packaging materials for household and automotive products. The Plastics Division
operates three facilities in North Carolina. Sales of recycled plastics
represented 8% of the Company's 1997 consolidated net revenues. The majority of
the Plastics Division's raw materials are obtained from the Recycling Division.

In November 1996, the Company discontinued the operations of the commercial
office recycling line of business (Note 12).

ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

REVENUE RECOGNITION

Revenue from tipping fees is recognized upon delivery of the recyclable
materials to the Company. Revenue from the sale of recyclable materials,
insulation and plastic is recognized upon shipment. The

F-69

FCR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

1. DESCRIPTION OF THE BUSINESS AND ACCOUNTING POLICIES: (CONTINUED)
Recycling Division shares a portion of its revenue from the sale of recyclable
materials with certain of those municipalities it serves.

COMMODITY CONTRACTS

The Company engages in long-term contracts with various customers to sell
recyclable materials at a negotiated price in relationship to market price with
a contractual floor. These contracts range in term from one to nine years and
expire at various dates through 2006.

CASH EQUIVALENTS

The Company considers unrestricted interest-bearing deposits with financial
institutions with original maturities of three months or less to be cash
equivalents.

ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK

The Company extends credit based on an evaluation of customers' financial
condition, generally without requiring collateral. Exposure to losses on
receivables is principally dependent on each customer's financial condition. The
Company monitors its exposure for credit losses by providing allowances for
anticipated losses.

At December 31, 1997 and 1996, the Company's accounts receivable balance
represents amounts due primarily from purchasers of recyclable materials,
insulation, plastic and fees from municipalities, net of an allowance for
doubtful accounts of approximately $253,000 and $30,000 at December 31, 1997 and
1996, respectively.

INVENTORIES

Inventories are valued at the lower of cost or market, with cost being
determined on the basis of the first-in, first-out (FIFO) method. Inventories
consist of the following at December 31, 1997 and 1996:

1997        1996
----------   --------

Raw materials...............................................  $  568,646   $      0
Finished goods..............................................   1,199,628    179,089
----------   --------
$1,768,274   $179,089
==========   ========

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation has been computed
using the straight-line method over the estimated lives of the various asset
groups as follows: building--10 years; machinery and equipment--3 to 10 years;
and office furniture and fixtures--3 to 7 years. Leasehold improvements are
amortized over the lesser of the life of the lease or the estimated useful life
of the improvement.

F-70

FCR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

1. DESCRIPTION OF THE BUSINESS AND ACCOUNTING POLICIES: (CONTINUED)
GOODWILL

Goodwill is the excess of the cost of net assets acquired in business
combinations over their fair value. Goodwill of $8,232,000 is being amortized on
a straight-line basis over 40 years. The accumulated amortization of intangible
assets is approximately $111,000 as of December 31, 1997.

The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the undiscounted net cash
flows of the related businesses over the remaining life of the goodwill in
measuring whether the goodwill is recoverable.

LOAN ACQUISITION COSTS

The Company amortizes loan acquisition costs over the term of the related
loan agreements. As of December 31, 1997 and 1996, loan acquisition costs of
$541,000 and $38,000, respectively, were included in other assets.

DEFERRED INCOME TAXES

Deferred tax assets and liabilities reflect the impact of temporary
differences between the financial reporting basis and the tax basis of assets
and liabilities. Such amounts are recorded using presently enacted tax rates and
regulations.

LONG-TERM CONTRACT COSTS

The Company defers certain direct incremental costs to secure successful
long-term contracts with municipalities for the design and operation of
materials recovery facilities. These costs for successful efforts are amortized
over the life of the contract which range from three to ten years. During 1997
and 1996, the Company incurred approximately $60,000 and $57,000, respectively,
of direct incremental long-term contract costs and approximately $286,000 and
$288,000, respectively, are deferred at December 31, 1997 and 1996.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities are reflected in approximate fair value
because of the short-term maturity of these financial instruments. The carrying
amount of long-term debt approximates fair value at December 31, 1997 and 1996.

MANAGEMENT ESTIMATES

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

F-71

FCR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

1. DESCRIPTION OF THE BUSINESS AND ACCOUNTING POLICIES: (CONTINUED)
RECLASSIFICATIONS

Certain balances in the accompanying prior years consolidated financial
statements have been reclassified to conform with current year presentation.

2. ACQUISITIONS:

SUNCOAST MFG. CO.

On May 7, 1997, the Company acquired all of the outstanding shares of common
stock of Suncoast Insulation MFG. Co., N.C. and Suncoast MFG. Co., N.C.
(collectively, Suncoast). Suncoast is a manufacturer of cellulose insulation and
other related products. The acquisition has been accounted for as a purchase and
the results of the operations of Suncoast have been included in the consolidated
financial statements since the date of acquisition. The excess of the purchase
price over the fair value of the net assets acquired was approximately
$6,708,000 and has been recorded as goodwill, which will be amortized on a
straight-line basis over 40 years. The aggregate purchase price for the stock
acquired was approximately $10,013,000 which is comprised of cash and shares of
the Company's common stock.

During the next two years, the former shareholder of Suncoast may receive up
to $2,000,000 of additional consideration. The amount of the additional
consideration will be based on the earnings of Suncoast for the 12 months ended
April 30, 1998 and 1999, as defined in the purchase agreement. Of this amount,
$924,000 was advanced at closing and is recorded as a note receivable from the
former shareholder. Upon reaching the earnings targets discussed above, this
amount will be reclassified to goodwill. If earned, the remaining additional
consideration will be in the form of cash, note payable to the former
shareholder, or the Company's common stock and the form of the additional
consideration is at the election of both the Company and the former shareholder.
Any additional consideration will be recorded as an addition to goodwill.

In conjunction with the purchase of Suncoast, the Company and the former
shareholder of Suncoast entered into an employment agreement through
April 2004. In addition, the former shareholder signed a noncompete agreement
commencing on the date of acquisition and continuing for five years after the
former shareholder's termination from the Company. The Company has an additional
$370,000 note receivable from this shareholder.

RESOURCE RECYCLING, INC.

On September 2, 1997, the Company acquired substantially all the assets of
Resource Recycling, Inc. (Resource). Resource is a reprocessor of post-consumer
and post-industrial plastics. The acquisition has been accounted for as a
purchase and the results of the operations of Resource have been included in the
consolidated financial statements since the date of acquisition. The aggregate
purchase price for the assets acquired was $4,100,000 which is comprised of cash
and the assumption of certain liabilities.

On March 31, 1999, the former shareholders of Resource may receive
additional consideration. The amount of the additional consideration will be
based on the earnings of Resource for the 12 months ending March 31, 1999, as
defined in the purchase agreement. If earned, the remaining additional
consideration will be in the form of stock and will be recorded as goodwill.

F-72

FCR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

2. ACQUISITIONS: (CONTINUED)
In conjunction with the purchase of Resource, the Company and the former
majority shareholder of Resource entered into an employment agreement through
August 2000. In addition, the former majority shareholder signed a noncompete
agreement commencing on the date of acquisition and continuing for two years
after the former majority shareholder's termination from the Company.

USF INSULATION

On December 1, 1997, the Company acquired all of the outstanding shares of
stock of USF Insulation, Inc. and T.J. Miller Research and Technology, Inc.
(collectively, USF). USF is a manufacturer of cellulose insulation and other
related products. The acquisition has been accounted for as a purchase and the
results of the operations of USF have been included in the consolidated
financial statements since the date of acquisition. The excess of the purchase
paid price over the fair value of the net assets acquired was approximately
$1,524,000 and has been recorded as goodwill, which will be amortized on a
straight-line basis over 40 years. The aggregate purchase price for the stock
acquired was approximately $2,700,000 which is comprised of a note payable to
the former owner and shares of the Company's common stock. The note payable to
shareholder owner was paid in full on January 5, 1998, and has been included in
current liabilities as of December 31, 1997.

In conjunction with the acquisition of USF, the Company and former
shareholder of USF entered into a consulting agreement through November 1999. In
addition, the former shareholder of USF signed a noncompete agreement commencing
on the date of acquisition and continuing for five years after termination of
the consulting agreement.

The Company's consolidated results of operations will incorporate the
acquisitions discussed above commencing on the acquisition date. The unaudited
pro forma combined information below presents combined results of operations as
if the acquisitions had occurred at the beginning of each year presented, after
giving effect to certain adjustments, including the amortization of intangible
assets, increased interest expense on the acquisition debt and related income
tax effects.

The following unaudited pro forma information is not necessarily indicative
of the results of operations of the combined company had the acquisitions
occurred at the beginning of each year presented, nor is it indicative of future
results.

YEAR ENDED
DECEMBER 31,
-------------------------
1997          1996
-----------   -----------

Net revenues................................................  $48,897,000   $41,662,000
Operating income............................................    5,382,000     3,185,000
Income from continuing operations...........................    2,198,000       979,000
===========   ===========

F-73

FCR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

3. LONG-TERM DEBT AND LINES OF CREDIT:

LONG-TERM DEBT

Long-term debt consists of the following at December 31, 1997 and 1996:

1997          1996
-----------   ----------

Term loan A.................................................  $12,000,000   $        0
Revolving loan B............................................    1,000,000            0
Various equipment notes payable.............................      325,515      412,554
Various notes payable repaid during 1997....................            0    3,936,370
-----------   ----------
13,325,515    4,348,924
Current portion of long-term debt...........................    1,894,169      789,784
-----------   ----------
$11,431,346   $3,559,140
===========   ==========

In 1997, the Company entered into two new term loan agreements with a bank.
Under the term loan A agreement, the Company borrowed $12,000,000 to refinance
its existing term debt and finance the acquisition of Suncoast, Resource and
USF. The term loan A agreement requires quarterly payments of $400,000 to
$700,000, plus interest, through December 31, 2000, with the remaining
outstanding principal due at maturity on March 31, 2001. The term loan B
commences on December 31, 1998, with the conversion of all outstanding
borrowings under the B revolving credit agreement (see discussion below). Under
the term loan B agreement, principal payments which begin on March 31, 1999,
will be based on a six-year amortization with quarterly payments of principal
and interest through December 31, 2000, with the remaining outstanding principal
due on March 31, 2001. The interest rates for both term loans are based on prime
rates that range from prime to prime plus 1.50% depending on the performance of
the Company.

Subsequent to year-end, approximately $1,000,000 of borrowings under the A
revolving line of credit that related to the purchase of new equipment was
refinanced and is classified as long-term debt in the accompanying consolidated
balance sheet and as borrowings under revolving loan B in the table above. These
borrowings will convert to the term loan B at December 31, 1998.

Maturities of long-term debt with banks are as follows:

1998............        $ 1,894,169
1999............          2,668,551
2000............          3,076,898
2001............          5,685,897
-----------
$13,325,515
===========

LINES OF CREDIT

In 1997, the Company entered into two new revolving line-of-credit
agreements with a bank. The A revolving line of credit (A Revolver) agreement
provides the Company loans or letters of credit of up to $5,000,000. Amounts may
be borrowed on a revolving basis and are limited to 85% of eligible receivables,
as defined. The A Revolver expires on March 31, 2001. At December 31, 1997, the

F-74

FCR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

3. LONG-TERM DEBT AND LINES OF CREDIT: (CONTINUED)
Company had approximately $1,802,000 outstanding on the A Revolver. In addition,
the Company had $535,000 in outstanding letters of credit as security for
performance on long-term contracts with municipalities which reduced the
availability under the A Revolver. Under the B revolving line-of-credit (B
Revolver) agreement the Company may borrow up to $3,000,000. Borrowings under
this agreement are limited to 80% of the cost of new equipment, as defined. On
December 31, 1998, the outstanding portion of the B revolving credit agreement
converts to the term loan B. There were no borrowings on the B Revolver at
December 31, 1997. The Company may select interest rates for both revolving
line-of-credit agreements based on prime or LIBOR rates. The interest rates
range from prime to prime plus 1.25% or LIBOR plus 125 basis points to LIBOR
plus 300 basis points depending on the performance of the Company. The interest
rate on the line of credit outstanding at December 31, 1997, was 8.75%. A fee of
.25% per annum is charged on the unused portions of these revolving credit
agreements.

The revolving line-of-credit agreements and the term loan agreements contain
covenants, which among other things, require the maintenance of certain
financial ratios. The credit agreements also limit the maximum amount of
indebtedness and requires lender approval for certain significant mergers and
acquisitions, dividends and asset sales, as defined in the loan agreement.
Borrowings under the revolving credit and term loan agreements are secured by
substantially all assets of the Company.

4. SUBORDINATED DEBENTURES:

Concurrent with the Suncoast acquisition discussed above, the Company
completed a private placement of $6,000,000 in subordinated debentures which
were used to finance the acquisition of Suncoast. The subordinated debentures
have a maturity date of April 1, 2001, and interest at 14.25% is paid quarterly.

The purchasers of the subordinated debentures were also issued warrants to
purchase 227,044 shares of the Company's common stock at $.01 per share. These
warrants were valued at $90,000 at May 7, 1997, and are included as a part of
additional paid-in capital as of December 31, 1997. Beginning on May 7, 2005, at
the election of the purchasers of the subordinated debentures, the Company is
required to repurchase the warrants (Put Agreement) at a price determined by a
formula that is defined in the subordinated debenture agreements. This formula
is based on the results of operations in the year ending December 31, 2004. The
Company has accreted approximately $26,000 of interest expense in relation to
the Put Agreement with a corresponding increase in additional paid-in capital.

The subordinated debenture agreements contain covenants, which among other
things, require the maintenance of certain financial ratios similar to the
Company's senior debt agreements. These agreements also limit the maximum amount
of indebtedness and requires lender approval for certain significant mergers and
acquisitions, dividends and asset sales, as defined in the debenture agreement.

5. CAPITAL AND OPERATING LEASES:

The Company leases certain facilities under operating leases with various
terms expiring through 2003. Certain of these facilities are leased from certain
shareholders of the Company's common stock.

F-75

FCR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

5. CAPITAL AND OPERATING LEASES: (CONTINUED)
The Company leases certain machinery, office furniture, and equipment under
operating leases expiring through 2000.

The Company also leases certain machinery, office furniture and equipment
under capital leases expiring through 2001. In 1997 and 1996, $0 and $439,733,
respectively, of property or equipment was acquired under capital leases. The
net book value of all equipment under capital leases was approximately $838,000
at December 31, 1997.

The following is a schedule of future minimum lease payments for capital and
operating leases as of December 31, 1997:

RELATED-PARTY
CAPITAL     OPERATING      OPERATING
YEAR ENDING DECEMBER 31                                      LEASES      LEASES         LEASES
-----------------------                                     --------   -----------   -------------

1998......................................................  $346,187   $ 2,457,000    $  301,000
1999......................................................    78,572     2,231,000       301,000
2000......................................................    69,365     1,926,000       301,000
2001......................................................    26,162     1,857,000       301,000
2002......................................................         0     1,393,000       251,000
Thereafter................................................         0     4,039,000             0
--------   -----------    ----------
Total minimum lease payments..............................   520,286    13,903,000     1,455,000
Less--Amount representing interest........................    69,797             0             0
--------   -----------    ----------
$450,489   $13,903,000    $1,455,000
========   ===========    ==========

Rental expense relating to operating leases amounted to approximately
$2,172,000 and $1,905,000 for 1997 and 1996, respectively. Rental expense
relating to operating leases with shareholders of common stock was approximately
$201,000 for the year ending December 31, 1997.

6. RELATED-PARTY SALES TRANSACTIONS:

The Company has engaged in sales transactions with the Series B preferred
stockholder. During 1996, the Company had sales to this stockholder of
approximately $1,247,000. At December 31, 1996, the Company had outstanding
accounts receivable of $223,000 with this stockholder. This stockholder sold the
Series B preferred stock during 1997.

7. STOCKHOLDERS' EQUITY AND STOCK BASED COMPENSATION:

STOCKHOLDERS' EQUITY

During 1997, 376,667 shares of the Company's common stock were issued in
conjunction with the acquisitions discussed in Note 2. In addition, 44,540
shares of the Company's common stock were sold to certain key management
personnel for $6.75 per share.

Concurrent with the Suncoast acquisition discussed in Note 2, the
Stockholders of the series A, series B and series C preferred stock agreed to
eliminate the dividend provisions. The Company issued

F-76

FCR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

7. STOCKHOLDERS' EQUITY AND STOCK BASED COMPENSATION: (CONTINUED)
141,842 shares of series A preferred stock to the existing holders of series A
preferred stock in satisfaction of accrued cumulative dividends of approximately
$1,064,000 at May 7, 1997.

The mandatory redemption provision for all series of preferred stock were
eliminated and the cumulative return provisions for series A and C were also
eliminated. As a result, the cumulative accretion to redemption value for the
series A preferred stock of approximately $3,866,000 ($3,649,000 at
December 31, 1996) was eliminated and added back to retained earnings.

On September 30, 1996, the board of directors approved a 15-to-1 stock
split. All per share amounts in this report have been restated to reflect this
stock split.

STOCK-BASED COMPENSATION

In 1997, the Company granted non-qualified stock options to employees to
purchase 395,000 shares of common stock at prices ranging from $6.75 to $13.00.
Options representing 155,000 shares permit the holder to purchase one-third of
the number of shares of common stock subject to the option, each year beginning
on the anniversary date of grant. Options representing 240,000 shares permit the
holder to purchase one-fourth of the number of shares of common stock subject to
the option each year beginning on the anniversary date of grant. Nonvested
shares are subject to forfeiture if the employee ceases to be employed by the
Company.

In 1996, the Company granted to a business advisor of the board of directors
an option to purchase 2,500 shares of common stock. These options have a
five-year term and may be exercised at any time during such term.

Information with respect to stock options is as follows:

STOCK
OPTIONS
--------

Outstanding at December 31, 1995............................   264,000
Granted...................................................     2,500
Exercised.................................................  (129,000)
--------
Outstanding at December 31, 1996............................   137,500
Granted...................................................   395,000
Exercised.................................................   (30,000)
--------
Outstanding at December 31, 1997............................   502,500
========

F-77

FCR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

7. STOCKHOLDERS' EQUITY AND STOCK BASED COMPENSATION: (CONTINUED)
The following table summarizes information about stock options outstanding
at

December 31, 1997:

EXERCISABLE
WEIGHTED                -------------------
AVERAGE      WEIGHTED              WEIGHTED
RANGE OF           NUMBER OF     REMAINING     AVERAGE     NUMBER    AVERAGE
EXERCISE            OPTIONS     CONTRACTUAL    EXERCISE      OF      EXERCISE
PRICES           OUTSTANDING   LIFE (YEARS)    PRICE     OPTIONS     PRICE
---------------------   -----------   ------------   --------   --------   --------

$ 4.33              90,000         3.0         $ 4.33     90,000     $ 4.33
$ 5.00              17,500         3.1         $ 5.00     17,500     $ 5.00
$ 6.75             145,000         4.4         $ 6.75          0     $ 6.75
$10.00             220,000         9.6         $10.00          0     $10.00
$12.50              20,000         9.8         $12.50          0     $12.50
$13.00              10,000         9.8          13.00          0     $13.00

During 1997, 30,000 options were exercised at a price of $.667 per share and
129,000 options were exercised at a price of $1 per share in 1996. Of this
amount, $141,500 of the exercise value represented notes receivable from
stockholders and was recorded as a reduction to additional paid-in capital. At
December 31, 1997, 107,500 options were exercisable.

The Company has stock purchase agreements with certain employees which
restrict the transfer of certain of the Company's common stock subject thereto.
Under the agreements, in the event a stockholder desires to sell, assign,
transfer, pledge, hypothecate or otherwise dispose of any such shares, the
Company shall have the right of first refusal to acquire the shares at a price
determined in accordance with the agreements. In the event the Company does not
exercise this right, the stockholder has the right to transfer the shares.

8. PENSION PLAN:

The Company sponsors a 401(K) plan that provides all employees of the
Company an opportunity to accumulate funds for their retirement. The Company
matches contributions of participation employees on the basis of the percentages
specified in the plan. Company matching contributions to the plan were
approximately $16,000 and $4,000 in 1997 and 1996, respectively.

F-78

FCR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

9. INCOME TAXES:

The total provision (credit) for income taxes for the years ended
December 31, 1997 and 1996, consists of the following:

1997        1996
----------   ---------

Current taxes (refundable) payable-
Federal...................................................  $  392,000   $(242,000)
State.....................................................     140,000      60,000
----------   ---------
532,000    (182,000)
----------   ---------
Deferred taxes-
Federal...................................................     620,000     (70,000)
State (benefit)...........................................     (53,000)      2,000
----------   ---------
567,000     (68,000)
----------   ---------
Total provision (credit) for income taxes...................  $1,099,000   $(250,000)
==========   =========

The components of the net deferred tax asset (liability) as of December 31,
1997 and 1996, are as follows:

1997         1996
-----------   ---------

Deferred tax assets-
State NOL carryforwards...................................  $   143,000   $  64,000
AMT credit carryforwards..................................            0     168,000
Other.....................................................       16,000      54,000
-----------   ---------
Total deferred tax assets...............................      159,000     286,000
Deferred tax liabilities-
Depreciation..............................................   (1,201,000)   (778,000)
Long-term contract costs..................................      (66,000)    (91,000)
Other.....................................................      (42,000)          0
-----------   ---------
Total deferred tax liabilities..........................   (1,309,000)   (869,000)
-----------   ---------
Net deferred tax liability..............................  $(1,150,000)  $(583,000)
===========   =========

The classification of the net deferred tax liability as of December 31, 1997
and 1996, are as follows:

1997         1996
-----------   ---------

Current deferred tax asset..................................  $   101,000   $ 286,000
Long-term deferred tax liability............................   (1,251,000)   (869,000)
-----------   ---------
Net deferred tax liability..................................  $(1,150,000)  $(583,000)
===========   =========

F-79

FCR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

9. INCOME TAXES: (CONTINUED)
The provision for income taxes differs from the amounts computed by applying
the federal statutory rate to income before provision for income taxes on income
for the years ended December 31, 1997 and 1996, as follows:

1997        1996
----------   ---------

Federal provision at statutory rate.........................  $  896,000   $(318,000)
Increase in provision resulting from-
State income taxes, net of federal tax benefit..............     154,000      31,000
Goodwill....................................................      45,000           0
Items not deductible for tax purposes.......................       4,000      27,000
Other.......................................................           0      10,000
----------   ---------
$1,099,000   $(250,000)
==========   =========

10. COMMITMENTS AND CONTINGENCIES:

The Company may be subject to lawsuits, tax examinations or other claims
arising out of the normal course of business. While the ultimate result of any
unasserted claim cannot be determined, management does not expect that the
disposition of any such matters would have a material adverse effect on the
financial position or results of operations of the Company.

On October 1, 1997, the Company was engaged to procure the design of and be
responsible for the construction of a recycling facility. The Company has
subcontracted most of the construction of the facility which is estimated to be
completed during 1998. The total contract price is approximately $2,800,000.
Income from this contract is recognized using the percentage of completion
method. As of December 31, 1997, the contract is approximately 7% complete.

When current estimates indicate that a loss will result from a contract,
provision is made for the entire amount of the estimated loss. Revisions to
estimates are reflected in the period in which the events giving rise to the
revision become known.

F-80

FCR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

11. BUSINESS SEGMENTS AND MAJOR CUSTOMERS:

BUSINESS SEGMENTS

During 1997, the Company operated in three divisions as indicated below.
Corporate administrative expenses are allocated to segments based on the net
revenues for each division.

RECYCLING    INSULATION     PLASTICS    ELIMINATIONS   CONSOLIDATED
-----------   -----------   ----------   ------------   ------------

Net revenues-
Unaffiliated customers..........  $22,258,000   $11,373,000   $3,023,000    $        0    $36,654,000
Intersegment revenues...........    1,206,000             0            0    (1,206,000)             0
-----------   -----------   ----------    ----------    -----------
Total net revenues..............   23,464,000    11,373,000    3,023,000    (1,206,000)    36,654,000
-----------   -----------   ----------    ----------    -----------
Operating income................    2,637,000     1,334,000       34,000             0      4,005,000
Depreciation and amortization...    1,620,000       410,000      120,000             0      2,150,000
Capital expenditures............    1,533,000     2,846,000      303,000             0      4,682,000
Identifiable assets.............   16,353,000    19,742,000    5,486,000             0     41,581,000
===========   ===========   ==========    ==========    ===========

12. DISCONTINUED OPERATIONS:

In November 1996, the Company developed a plan to discontinue the operations
of the commercial office recycling line of business as a result of the decline
in demand for high grade scrap paper during 1996 and a refocusing of the
Company's resources on its residential recycling operations. The operations of
this line of business consisted of three facilities located in Atlanta, Georgia;
Alexandria, Virginia; and Stratford, Connecticut. The operations of the
commercial office recycling line of business have been accounted for as
discontinued operations. In 1996, the Company provided for estimated losses on
disposal of the discontinued operations of approximately $118,000 which included
a provision for anticipated operating losses prior to disposal and an estimated
loss on the disposal. The actual losses incurred during the phase-out period and
the actual cost of disposal approximated the estimates established during 1996.
No additional amounts relating to discontinued operations were recorded in 1997.

13. SUBSEQUENT EVENTS:

ACQUISITION OF RESOURCE RECOVERY SYSTEMS, INC.

On July 1, 1998, FCR acquired all the outstanding shares of stock of
Resource Recovery System, Inc. (RRS). RRS provides residential and commercial
recycling processing and marketing services with plants located in Berlin,
Connecticut, Howes Cave, New York, Claverack, New York, Saginaw, Michigan, Ann
Arbor, Michigan, Athens, Georgia and Sarasota, Florida. The aggregate purchase
price for the stock of approximately $4,409,000 was paid in cash. In connection
with this transaction, certain debt of RRS totaling approximately $3,960,000 was
refinanced under FCR's existing credit agreement and approximately $2,131,000 of
debt of RRS remained outstanding. In addition, two former shareholders of RRS
signed a five year covenant-not-to-compete for $500,000. The acquisition was
financed with a $10,000,000 term note with LaSalle National Bank.

F-81

FCR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

13. SUBSEQUENT EVENTS: (CONTINUED)
MERGER WITH KTI, INC.

On August 28, 1998, the Company was merged (the Merger) with and into KTI
Acquisition Sub, Inc. (Merger Sub), a wholly owned subsidiary of KTI, Inc.
(KTI), pursuant to an agreement and Plan of Merger, dated July 22, 1998, (the
Merger Agreement), by and among KTI, Merger Sub, the Company and the
securityholders of the Company. Pursuant to the Merger Agreement, at the closing
of the Merger, the securities of the Company held by the securityholders of the
Company were converted into the right to receive an aggregate of
(i) $30,000,000 in cash, (ii) 1,714,285 shares of no par value common stock of
KTI and (iii) an additional payment of up to $30,000,000 based upon the earnings
from the operation of the Company for the period from July 1, 1998, through
December 31, 1998, payable in a combination of cash and common stock of KTI. As
a result of the Merger, the Company became a wholly owned subsidiary of KTI.

14. OTHER CONTINGENCIES

The former majority shareholder of Resource instigated arbitration
proceedings against the Company, alleging the Company acted to frustrate the
"earn-out" provisions of the acquisition agreement and thereby precluding him
from receiving, or alternatively, reducing the sum to which he was entitled to
receive. He also alleges his employment agreement was wrongfully terminated. The
claim for arbitration alleges direct charges in excess of $5,000,000 and
requests punitive damages, treble damages and attorneys fees. The Company and
its subsidiaries have responded to the demand, denying liability and filed a
counterclaim for $1,000,000 for misrepresentations. The Company believes it has
meritorious defenses to the claims.

F-82

CASELLA WASTE SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS

PAGE
--------

The following consolidated financial statements and schedule of
Casella Waste Systems, Inc.:
Consolidated Financial Statements of Casella Waste
Systems, Inc.:

Report of Independent Public Accountants..................    F-84
Consolidated Balance Sheets at April 30, 1999 and 1998....    F-85
Consolidated Statements of Operations for each of the
three years in the period ended April 30, 1999..........    F-87
Consolidated Statements of Redeemable Preferred Stock,
Redeemable Put Warrants and Stockholders Equity
(Deficit) for each of the three years in the period
ended April 30, 1999....................................    F-88
Consolidated Statements of Cash Flows for each of the
three years in the period ended April 30, 1999..........    F-90
Notes to Consolidated Financial Statements................    F-91
The following Consolidated Financial Statement Schedule of
Casella Waste Systems, Inc.:
Report of Independent Public Accountants on Schedule......   F-109
II. Valuation Accounts....................................   F-110
Condensed Consolidated Financial Statements of Casella Waste
Systems, Inc.:
Condensed Consolidated Balance Sheets at April 30, 1999
and July 31, 1999.......................................   F-111
Consolidated Statement of Operations for each of the three
months ended July 31, 1998 and 1999.....................   F-113
Consolidated Statements of Cash Flows for each of the
three months ended July 31, 1999 and 1998...............   F-114
Notes to Consolidated Financial Statements................   F-116

F-83

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Casella Waste Systems, Inc.:

We have audited the accompanying consolidated balance sheets of Casella
Waste Systems, Inc. (a Delaware corporation) and subsidiaries as of April 30,
1998 and 1999, and the related consolidated statements of operations, redeemable
preferred stock, redeemable put warrants and stockholders' equity (deficit) and
cash flows for each of the three years in the period ended April 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Casella Waste Systems, Inc.
and subsidiaries as of April 30, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
April 30, 1999, in conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP
-------------------------------------------
Arthur Andersen LLP

Boston, Massachusetts

July 1, 1999

F-84

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

APRIL 30,    APRIL 30,
1998         1999
----------   ----------
(RESTATED)

ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents.................................   $  3,327     $  4,232
Restricted Cash--Closure Fund Escrow......................        304          625
Accounts Receivable-trade, less allowance for doubtful
accounts of $1,283 and $1,445...........................     20,484       23,081
Refundable Income Taxes...................................        921           --
Prepaid Income Taxes......................................        866        1,016
Prepaid Expenses..........................................      1,337        3,536
Other Current Assets......................................        931        1,144
--------     --------
Total Current Assets....................................     28,170       33,634

PROPERTY AND EQUIPMENT, at Cost:
Land and Land Held for Investment.........................      8,108        6,993
Landfills.................................................     34,276       50,736
Landfill Development......................................      3,319        7,559
Buildings and Improvements................................     15,019       24,992
Machinery and Equipment...................................     12,837       24,172
Rolling Stock.............................................     47,575       57,422
Containers................................................     16,972       26,680
--------     --------
138,106      198,554

Less--Accumulated Depreciation and Amortization.............     46,655       67,123
--------     --------
Property and Equipment, net.............................     91,451      131,431
--------     --------

OTHER ASSETS:
Intangible Assets, net....................................     80,071      106,678
Restricted Funds--Closure Fund Escrow.....................      3,865        4,834
Other Assets..............................................      1,952        5,725
--------     --------
85,888      117,237
--------     --------
$205,509     $282,302
========     ========

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

F-85

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

APRIL 30,   APRIL 30,
1998        1999
---------   ---------
(RESTATED)

LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt......................  $  4,249    $  5,488
Current Maturities of Capital Lease Obligations...........       481         402
Accounts Payable..........................................    13,158      17,904
Accrued Payroll and Related Expenses......................       632         865
Accrued Closure and Postclosure Costs, Current Portion....       374         330
Deferred Revenue..........................................     2,087       2,648
Other Accrued Expenses....................................     2,979       2,713
--------    --------
Total Current Liabilities...............................    23,960      30,350
Long-Term Debt, Less Current Maturities.....................    82,596      86,739
--------    --------
Capital Lease Obligations, Less Current Maturities..........     1,085       1,454
--------    --------
Deferred Income Taxes.......................................     3,913       5,710
--------    --------
Accrued Closure and Postclosure Costs, less Current
Portion...................................................     6,731       9,677
--------    --------
Other Long-Term Liabilities.................................     3,460         394
--------    --------

COMMITMENTS AND CONTINGENCIES (Note 6)

STOCKHOLDERS' EQUITY:
Preferred Stock -
Authorized--1,000,000 Shares............................
Issued and Outstanding--No shares as of April 30, 1998
and 1999, respectively................................        --          --
Class A Common Stock -
Authorized--100,000,000 Shares, $.01 par value Issued
and Outstanding--12,158,000 and 14,869,000 shares, as
of April 30, 1998 and 1999, respectively..............       122         149
Class B Common Stock -
Authorized--1,000,000 Shares, $.01 par value; 10 Votes
per Share.............................................
Issued and Outstanding--988,000 shares, as of April 30,
1998 and 1999, respectively...........................        10          10
Additional Paid-In Capital................................    96,398     154,733
Accumulated Deficit.......................................   (12,766)     (6,914)
--------    --------
Total Stockholders' Equity..................................    83,764     147,978
--------    --------
$205,509    $282,302
========    ========

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

F-86

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

FISCAL YEAR ENDED APRIL 30,
--------------------------------
1997        1998        1999
--------   ----------   --------
(RESTATED)

Revenues....................................................  $103,520    $143,710    $184,246
--------    --------    --------
Operating Expenses:
Cost of Operations..........................................    65,460      89,581     110,008
General and Administrative..................................    16,139      20,926      27,043
Merger-Related Costs........................................        --         290       1,951
Depreciation and Amortization...............................    15,371      19,959      25,899
Loss on Impairment of Long-Lived Assets.....................        --       1,571          --
--------    --------    --------
96,970     132,327     164,901
--------    --------    --------
Operating Income............................................     6,550      11,383      19,345
Other (Income) Expenses:
Interest Income.............................................      (286)       (265)        (77)
Interest Expense............................................     5,226       7,638       5,651
Other Expense (Income), net.................................       846        (337)       (353)
--------    --------    --------
Other Expense, net..........................................     5,786       7,036       5,221
--------    --------    --------
Income Before Provision for Income Taxes....................       764       4,347      14,124
Provision for Income Taxes..................................       681       2,512       7,509
--------    --------    --------
Net Income..................................................        83       1,835       6,615
Accretion of Preferred Stock and Put Warrants...............    (8,530)     (5,738)         --
--------    --------    --------
Net Income (Loss) Applicable to Common
Stockholders..............................................  $ (8,447)   $ (3,903)   $  6,615
========    ========    ========
Basic net income (loss) per Common Share....................  $  (1.52)   $  (0.41)   $   0.44
========    ========    ========
Basic weighted average Common Shares outstanding............     5,548       9,547      15,145
========    ========    ========
Diluted net income (loss) per Common Share..................  $  (1.52)   $  (0.41)   $   0.41
========    ========    ========
Diluted weighted average Common Shares outstanding..........     5,548       9,547      16,019
========    ========    ========

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

F-87

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED STOCK, REDEEMABLE PUT

WARRANTS AND STOCKHOLDERS EQUITY (DEFICIT)

(IN THOUSANDS)

REDEEMABLE PREFERRED STOCK
-----------------------------------------------------------------------------------------------------
SERIES A                  SERIES B                  SERIES C                  SERIES D
-----------------------   -----------------------   -----------------------   -----------------------
NUMBER     REDEMPTION     NUMBER     REDEMPTION     NUMBER     REDEMPTION     NUMBER     REDEMPTION
OF SHARES      VALUE      OF SHARES      VALUE      OF SHARES      VALUE      OF SHARES      VALUE
---------   -----------   ---------   -----------   ---------   -----------   ---------   -----------

Balance, April 30, 1996...     517        $2,376        1,295       $ 5,956        424        $2,017        1,922       $12,547
----        ------       ------       -------       ----        ------       ------       -------
Adjusted Balance, April
30, 1996................     517        $2,376        1,295       $ 5,956        424        $2,017        1,922       $12,547
Issuance of Class A Common
Stock in various
acquisitions
Accretion of preferred
stock...................                 1,262                      3,162                      204                      3,902
Equity Transactions/
Adjustments to
Poolings................
Net Income................
----        ------       ------       -------       ----        ------       ------       -------
Balance, April 30, 1997...     517         3,638        1,295         9,118        424         2,221        1,922        16,449
Issuance of Class A Common
Stock-Net of Issuance
Costs
Issuance of Class A Common
Stock in Various
Acquisitions, Net of
Retirements.............
Issuance of Class A Common
Stock in Connection with
Exercise of Warrants/
Options.................
Exercise and Call of Put
Warrants................
Accretion of Preferred
Stock and Issuance
Costs...................                   707                      1,770                      749                      2,287
Conversion of Convertible
Preferred Stock.........    (517)       (4,345)      (1,295)      (10,888)                               (1,922)      (18,736)
Redemption of Mandatorily
Redeemable Preferred
Stock...................                                                        (424)       (2,970)
Conversion of Class B
common into Class A.....
Equity Transactions/
Adjustments to
Poolings................
Net Income................
----        ------       ------       -------       ----        ------       ------       -------
Balance, April 30, 1998...       0        $    0            0       $     0          0        $    0            0       $     0
----        ------       ------       -------       ----        ------       ------       -------
Issuance of Class A
Common..................
Stock-Net of Issuance
Costs...................
Issuance of Class A Common
Stock in Connection with
Exercise of Warrants/
Options.................
Tax Benefit of Stock
Options Exercised.......
Equity Transactions/
Adjustments to
Poolings................
Net Income................
----        ------       ------       -------       ----        ------       ------       -------
Balance, April 30, 1999...       0        $    0            0       $     0          0        $    0            0       $     0
====        ======       ======       =======       ====        ======       ======       =======

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

F-88

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED STOCK, REDEEMABLE PUT
WARRANTS AND STOCKHOLDERS EQUITY (DEFICIT)

(IN THOUSANDS)

STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------
CLASS A COMMON            CLASS B COMMON
STOCK                     STOCK
REDEEMABLE    -----------------------   -----------------------
PUT WARRANTS   # OF SHARES   PAR VALUE   # OF SHARES   PAR VALUE
------------   -----------   ---------   -----------   ---------

Balance, April 30, 1996........     $  400         2,398       $   24        1,000        $  10
Adjustments in Connection with
Poolings of Interests........                    1,331           13
------        ------       ------       ------        -----
Adjusted Balance, April 30,
1996.........................        400         3,729           37        1,000           10
Issuance of Class A Common
Stock in various
acquisitions.................                      756            7
Accretion of preferred stock...
Equity Transactions/
Adjustments to Poolings......                      608            6
Net Income.....................
------        ------       ------       ------        -----
Balance, April 30, 1997........        400         5,093           51        1,000           10
Issuance of Class A Common
Stock-Net of Issuance
Costs......................                    3,000           30
Issuance of Class A Common
Stock-in Various.............                      103            1
Acquisitions, Net of
Retirements
Issuance of Class A Common
Stock in Connection with
Exercise of
Warrants/Options.............                      192            2
Exercise and Call of Redeemable
Put Warrants.................       (400)           25
Accretion of Preferred
Stock and Issuance Costs.......
Conversion of Convertible
Preferred Stock..............                    3,733           38
Redemption of Mandatorily
Redeemable Preferred Stock
Conversion of Class B common
into Class A.................                       12                       (12)
Equity Transactions/
Adjustments to Poolings......
Net Income.....................
------        ------       ------       ------        -----
Balance, April 30, 1998........     $    0        12,158       $  122          988        $  10
------        ------       ------       ------        -----
Issuance of Common A
Stock-Publicly Traded-Net of
Issuance Costs.............                    2,061           20
Issuance of Class A Common
Stock in Connection with
Exercise of Warrants/
Options......................                      582            6
Tax Benefit of Stock Options
Exercised....................
Equity Transactions/Adjustments
to Poolings..................                       68            1
Net Income.....................
------        ------       ------       ------        -----
Balance, April 30, 1999........     $    0        14,869       $  149          988        $  10
======        ======       ======       ======        =====

STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------------------
RETAINED
ADDITIONAL     EARNINGS      TOTAL STOCK-
PAID-IN     (ACCUMULATED   HOLDERS EQUITY
CAPITAL       DEFICIT)       (DEFICIT)
----------   ------------   --------------

Balance, April 30, 1996........   $  1,087      $ (1,996)       $   (875)
Adjustments in Connection with
Poolings of Interests........        488         2,529           3,030
--------      --------        --------
Adjusted Balance, April 30,
1996.........................      1,575           533           2,155
Issuance of Class A Common
Stock in various
acquisitions.................      9,367                         9,375
Accretion of preferred stock...                   (8,530)         (8,530)
Equity Transactions/
Adjustments to Poolings......        719          (185)            541
Net Income.....................                       83              83
--------      --------        --------
Balance, April 30, 1997........     11,661        (8,099)          3,623
Issuance of Class A Common
Stock-Net of Issuance
Costs......................     48,428                        48,458
Issuance of Class A Common
Stock-in Various.............      1,599                         1,600
Acquisitions, Net of
Retirements
Issuance of Class A Common
Stock in Connection with
Exercise of
Warrants/Options.............        716                           718
Exercise and Call of Redeemable
Put Warrants.................        250          (225)             25
Accretion of Preferred
Stock and Issuance Costs.......                   (5,513)         (5,513)
Conversion of Convertible
Preferred Stock..............     33,932                        33,970
Redemption of Mandatorily
Redeemable Preferred Stock
Conversion of Class B common
into Class A.................                                        0
Equity Transactions/
Adjustments to Poolings......       (188)         (764)           (952)
Net Income.....................                    1,835           1,835
--------      --------        --------
Balance, April 30, 1998........   $ 96,398      ($12,766)       $ 83,764
--------      --------        --------
Issuance of Common A
Stock-Publicly Traded-Net of
Issuance Costs.............     52,211                        52,231
Issuance of Class A Common
Stock in Connection with
Exercise of Warrants/
Options......................      3,805                         3,811
Tax Benefit of Stock Options
Exercised....................      2,220                         2,220
Equity Transactions/Adjustments
to Poolings..................         99          (763)           (663)
Net Income.....................                    6,615           6,615
--------      --------        --------
Balance, April 30, 1999........   $154,733      $ (6,914)       $147,978
========      ========        ========

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

F-89

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

FISCAL YEAR ENDED APRIL 30,
-------------------------------
1997       1998
RESTATED   RESTATED      1999
--------   ---------   --------

Cash Flows from Operating Activities:
Net income................................................  $    83    $   1,835   $  6,615
--------   ---------   --------
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation and amortization...........................   15,371       19,959     25,900
Loss on impairment of long-lived assets.................        0        1,571          0
(Gain) loss on sale of assets...........................      313         (335)         3
Provision for deferred income taxes.....................      139        2,237      1,647
Non-cash employee compensation..........................        0           60          0
Changes in assets and liabilities, net of effects of
acquisitions--
Accounts receivable.....................................   (4,176)      (1,819)    (2,018)
Refundable income taxes.................................     (189)        (474)    (1,089)
Accounts payable........................................    6,156        1,487      4,368
Accrued closure and postclosure costs...................      336       (1,763)     2,099
Other current assets and liabilities....................     (753)      (1,678)     2,049
--------   ---------   --------
17,197       19,245     32,959
--------   ---------   --------
Net cash provided by operating activities.............   17,280       21,080     39,573
--------   ---------   --------
Cash Flows from Investing Activities:
Acquisitions, net of cash acquired........................  (35,225)     (35,793)   (33,336)
Additions to property and equipment.......................  (20,825)     (29,416)   (57,126)
Proceeds from sale of equipment...........................      166        1,182        587
Restricted funds--closure fund escrow.....................     (625)         698     (1,291)
Other.....................................................       14        2,066     (6,802)
--------   ---------   --------
Net cash used in investing activities.................  (56,495)     (61,263)   (97,968)
--------   ---------   --------
Cash Flows from Financing Activities:
Deferred debt acquisition costs...........................     (400)           0          0
Proceeds from issuance of common stock....................      525       48,455     52,231
Proceeds from exercise of stock warrants/options..........        0          869      3,811
Equity Transactions of pooled Entities....................      (33)        (888)       193
Call of redeemable put warrants...........................        0         (525)         0
Redemption of Series C Preferred Stock....................        0       (2,970)         0
Proceeds from long-term borrowings........................   48,622      162,356     73,874
Principal payments on long-term debt......................   (8,598)    (166,625)   (70,809)
--------   ---------   --------
Net cash provided by financing activities.............   40,116       40,672     59,300
--------   ---------   --------
Net increase in cash and cash equivalents...................      901          489        905
Cash and cash equivalents, beginning of year................    1,937        2,838      3,327
--------   ---------   --------
Cash and cash equivalents, end of year......................  $ 2,838    $   3,327   $  4,232
========   =========   ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for--
Interest................................................  $ 4,902    $   7,985   $  6,284
========   =========   ========
Income taxes............................................  $   826    $     674   $  6,952
========   =========   ========
Supplemental Disclosures of Non Cash Investing And Financing
Activities:
Summary of entities acquired--
Fair market value of assets acquired....................  $67,106    $  42,554   $ 36,210
Common stock issued.....................................   (9,374)      (1,603)         0
Cash paid, Net..........................................  (35,225)     (35,793)   (33,336)
--------   ---------   --------
Liabilities assumed and notes payable to sellers......  $22,507    $   5,158   $  2,874
========   =========   ========

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

F-90

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

Casella Waste Systems, Inc. (the Company or Casella), a Delaware
corporation, is a regional, integrated, non-hazardous solid waste services
company that provides collection, transfer, disposal and recycling services in
Vermont, New Hampshire, Maine, upstate New York, northern Pennsylvania and
Massachusetts.

As of June 18, 1999, the Company owned and/or operated five subtitle D
landfills, two landfills permitted to accept construction and demolition
materials, 51 transfer stations, 16 recycling processing facilities, and 41
solid and liquid waste collection divisions, which collectively serve over
500,000 commercial, industrial and residential customers.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

(A) PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.

(B) USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.

(C) REVENUE RECOGNITION

The Company recognizes revenues as the services are provided. Certain
customers are billed in advance and, accordingly, recognition of the related
revenues is deferred until the services are provided.

(D) FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, investments in closure trust funds, trade
payables and debt instruments. The book values of cash and cash equivalents,
trade receivables, investments in closure trust funds and trade payables
approximate their respective fair values. The Company's debt instruments that
are outstanding as of April 30, 1999 have carrying values that approximate their
respective fair values. See Note 4 for the terms and carrying values of the
Company's various debt instruments.

(E) CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with
maturities of three months or less to be cash equivalents.

(F) CLOSURE FUND ESCROW

Restricted funds held in trust consist of amounts on deposit with various
banks that support the Company's financial assurance obligations for its
facilities' closure and postclosure costs.

F-91

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, less accumulated depreciation and
amortization. The Company provides for depreciation using the straight-line
method by charges to operations in amounts that allocate the cost of the assets
over their estimated useful lives as follows:

ESTIMATED
ASSET CLASSIFICATION                                          USEFUL LIFE
--------------------                                          -----------

Buildings and improvements..................................  10-35 years
Machinery and equipment.....................................   2-15 years
Rolling stock...............................................   1-12 years
Containers..................................................   2-12 years

The cost of maintenance and repairs is charged to operations as incurred.
Depreciation expense for the years ended April 30, 1997, 1998 and 1999 was
$8,604,000, $12,195,000 and $14,208,000 respectively.

Capitalized landfill costs include expenditures for land and related
airspace, permitting costs and preparation costs. Landfill permitting and
preparation costs represent only direct costs related to these activities,
including legal, engineering and construction. Interest is capitalized on
landfill permitting and construction projects and other projects under
development while the assets are undergoing activities to ready them for their
intended use. The interest capitalization rate is based on the Company's
weighted average cost of indebtedness. Interest capitalized for the years ended
April 30, 1997, 1998 and 1999 was $182,000, $136,000 and $530,000 respectively.
Management routinely reviews its investment in operating landfills, transfer
stations and other significant facilities to determine whether the costs of
these investments are realizable.

Landfill permitting, acquisition and preparation costs, excluding the
estimated residual value of land, are amortized as permitted airspace of the
landfill is consumed. Landfill preparation costs include the costs of
construction associated with excavation, liners, site berms and the installation
of leak detection and leachate collection systems. In determining the
amortization rate for these landfills, preparation costs include the total
estimated costs to complete construction of the landfills' permitted and
probable to be permitted capacity. Units-of-production amortization rates are
determined annually for each of the Company's operating landfills. The rates are
based on estimates provided by the Company's engineers and accounting personnel
and consider the information provided by surveys which are performed at least
annually.

(H) ACCRUED CLOSURE AND POSTCLOSURE COSTS

Accrued closure and postclosure costs include the current and noncurrent
portion of accruals associated with obligations for closure and postclosure of
the Company's operating and closed landfills. The Company, based on input from
its engineers and accounting personnel, estimates its future cost requirements
for closure and postclosure monitoring and maintenance for solid waste landfills
based on its interpretation of the technical standards of the U.S. Environmental
Protection Agency's Subtitle D regulations and the air emissions standards under
the Clean Air Act as they are being applied on a state-by-state basis. Closure
and postclosure monitoring and maintenance costs represent the costs related to
cash expenditures yet to be incurred when a landfill facility ceases to accept
waste and closes.

F-92

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accruals for closure and postclosure monitoring and maintenance requirements
in the U.S. consider final capping of the site, site inspection, groundwater
monitoring, leachate management, methane gas control and recovery, and operation
and maintenance costs to be incurred during the period after the facility
closes. Certain of these environmental costs, principally capping and methane
gas control costs, are also incurred during the operating life of the site in
accordance with the landfill operation requirements of Subtitle D and the air
emissions standards. Reviews of the future cost requirements for closure and
postclosure monitoring and maintenance for the Company's operating landfills by
the Company's engineers and accounting personnel are performed at least annually
and are the basis upon which the Company's estimates of these future costs and
the related accrual rates are revised. The Company provides accruals for these
estimated costs as the remaining permitted airspace of such facilities is
consumed.

The states in which the Company operates require a certain portion of these
accrued closure and postclosure obligations to be funded at any point in time.
Accordingly, the Company has placed $4,170,000 and $5,459,000 at April 30, 1998
and 1999, respectively, in restricted investment accounts to fund these future
obligations.

In addition, the Company has been required to post a surety bond or bank
letter of credit to secure its obligations to close its landfills in accordance
with environmental regulations. At April 30, 1999, the Company had provided one
letter of credit totaling $1,307,000, expiring on April 15, 2000, to secure the
Company's landfill closure obligations.

(I) INTANGIBLE ASSETS

Intangible assets at April 30, 1998 and 1999 consist of the following (in
thousands):

APRIL 30,
-------------------
1998       1999
--------   --------

Goodwill.................................................  $74,692    $101,387
Covenants not to compete.................................    8,941      13,956
Customer lists...........................................      420         594
Deferred debt acquisition costs and other................    1,879       2,125
-------    --------
85,932     118,062
Less--accumulated amortization...........................    5,861      11,384
-------    --------
$80,071    $106,678
=======    ========

Goodwill is the cost in excess of fair value of identifiable assets of
acquired businesses and is amortized using the straight-line method over periods
not exceeding 40 years. Covenants not to compete and customer lists are
amortized using the straight-line method over their estimated useful lives,
typically no more than 10 years.

Deferred debt acquisition costs are capitalized and amortized over the life
of the related debt using the effective interest method.

F-93

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(J) IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," the Company
evaluates the recoverability of its carrying value of the Company's long-lived
assets and certain intangible assets when events and circumstances have occurred
that indicate potential impairment of such assets. The assessment is based on
estimated undiscounted cash flows to be generated from each asset as compared to
its carrying value. To the extent impairment is identified, the Company reduces
the carrying value of such impaired assets to their fair market value.

The Casella T.I.R.E.S. plant in Eliot, Maine was established by purchasing
the waste tire processing assets of the Seaward companies in June, 1996. The
ongoing profitability of this location is dependent on a continuing secondary
market for the product of its tire shredding operations, primarily as tire
derived fuel (TDF). Due to pressures on the Company's TDF customers to meet
requirements of the Clean Air Act, management projects that over the next few
years these customers will replace TDF with natural gas as a fuel, and that the
future undiscounted cash flows will be less than the current carrying value of
the assets associated with this site.

The primary assets associated with this site include real estate, tire
processing and other equipment, and goodwill. The Company recognized a $971,000
non-cash pre-tax charge related to the impairment of these assets during fiscal
1998. The impairment charge was computed as the difference between the
April 30, 1998 carrying value of the affected assets, and their fair market
value as of that date. The fair market value of the affected assets is computed
in accordance with SFAS No. 121 as the discounted projected future net cash
inflows.

In addition, during fiscal 1998, Waste Stream recognized a $600,000 non-cash
pretax charge related to the impairment of certain assets located at its
Grasslands facility. The impairment charge was computed as the difference
between the April 30, 1998 carrying value of the affected assets, and the fair
value at that time. Generally, fair value represents the Company's discounted
projected future cash inflows from the use of the asset or group of assets.

(K) INCOME TAXES

The Company records income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, deferred income taxes are
recognized based on the expected future tax consequences of differences between
the financial statement basis and the tax basis of assets and liabilities,
calculated using currently enacted tax rates.

(L) EARNINGS PER SHARE

During 1997, the Company adopted the provisions of SFAS No. 128 "Earnings
Per Share" and retroactively restated all prior periods in accordance with SFAS
No. 128. In accordance with SFAS No. 128, basic earnings per share is computed
by dividing net income (loss) by the weighted average number of shares of Common
Stock outstanding during the year. The computation of diluted earnings per share
is similar to the computation of basic earnings per share, except that the
denominator is increased for the assumed exercise of dilutive options using the
treasury stock method and other

F-94

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
dilutive securities unless the effect is antidilutive. The following is a
reconciliation of shares outstanding used to compute basic and diluted earnings
(loss) per share (in thousands):

YEAR ENDED APRIL 30,
------------------------------
1997       1998       1999
--------   --------   --------

Number of shares outstanding, end of period:
Class A Common Stock......................................   5,092      12,158     14,869
Class B Common Stock......................................   1,000         988        988
Effect of weighting the average shares outstanding during
the period................................................    (544)     (3,599)      (712)
-----      ------     ------
Basic shares outstanding....................................   5,548       9,547     15,145
Potentially dilutive shares.................................      --          --        874
-----      ------     ------
Diluted shares outstanding..................................   5,548       9,547     16,019
=====      ======     ======

Potentially dilutive shares are excluded from diluted shares outstanding for
the years ended April 30, 1997 and 1998 because their impact is anti-dilutive.
The number of potentially dilutive shares excluded from the earnings per share
calculation was 4,480,000 and 3,045,000 for the years ended April 30, 1997 and
1998, respectively. Additionally, for the year ended April 30, 1999, options to
purchase 211,000 common shares were excluded from the calculation of potentially
dilutive shares because their impact was antidilutive.

(M) RECENT ACCOUNTING PRONOUNCEMENTS

In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". Statement 130 establishes standards for
reporting and presentation of comprehensive income and its components.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources and includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The
Company adopted Statement 130 effective May 1, 1998 and there was no effect on
the Company's financial statements upon adoption.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. A company may also implement SFAS No. 133 as of
the beginning of any fiscal quarter after issuance (that is, fiscal quarters
beginning June 16, 1998 and thereafter). The Company does not believe this
statement will have a material impact on the consolidated balance sheet or
statement of operations.

F-95

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. BUSINESS COMBINATIONS

(A) TRANSACTIONS RECORDED AS POOLINGS OF INTERESTS

During 1999, the Company completed several mergers in business combinations
recorded as pooling of interests. Accordingly, the accompanying financial
statements have been restated to include these businesses for all periods
presented. The Company issued the following shares of Class A Common Stock in
connection with the mergers:

MERGER                                                            DATE          SHARES ISSUED
------                                                      -----------------   -------------

Waste Stream..............................................  October 29, 1998        701,461
Northern Sanitation.......................................  December 23, 1998       220,964
NEI.......................................................  April 30, 1999          105,052(1)
Westfield.................................................  April 30, 1999          244,082
Corning Community Disposal................................  June 4, 1999             59,375
Resource Waste Systems....................................  July 1, 1999            303,598

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

(1) Shares issued are exclusive of up to 59,450 shares issuable following an
indemnification period, as defined.

Revenues and net income have been restated for these acquisitions accounted
for as poolings of interests, as presented in the following table (in
thousands):

CASELLA                CASELLA,
BEFORE    1999/2000      AS
POOLINGS   POOLINGS    RESTATED
--------   ---------   --------

Year ended April 30, 1997
Revenues..................................................  $ 79,532    $23,988    $103,520
Net income (loss).........................................      (419)       502          83
Year ended April 30, 1998
Revenues..................................................   118,067     25,643     143,710
Net income (loss).........................................     2,657       (822)      1,835
Year ended April 30, 1999
Revenues..................................................   156,133     28,113     184,246
Net income (loss).........................................    10,199     (3,584)      6,615

All of the pooled entities had fiscal year ends of December 31 and,
subsequent to the poolings, changed their year ends to conform with that of the
Company. For the calendar quarter ended March 31, 1997, $480,524 in revenues and
$47,034 in net income were excluded from results of operations in order to
conform the accounting period of the pooled companies with that of the Company.
For the month ended January 31, 1998 $717,767 in revenues and $66,485 in net
income were excluded from results of operations. For the month ended
January 31, 1999 $312,752 in revenues and $20,674 in net loss were excluded from
results of operations. Retained earnings was increased by $47,034 and $66,485 in
the fiscal years ended April 30, 1997 and 1998 respectively and decreased by
$20,674 during the year ended April 30, 1999 in order to effect these changes.
Cash flows resulting from the periods excluded from results of operation
discussed above are immaterial and have been included in the Statement of Cash
Flows.

F-96

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. BUSINESS COMBINATIONS (CONTINUED)
On September 4, 1998 the Company completed its merger with Hakes C & D
Disposal, Inc. (Hakes) in a business combination recorded as a pooling of
interests. The Company issued 67,617 shares of its class A common stock for all
of the outstanding stock of Hakes. This transaction has been accounted for as an
immaterial pooling. Accordingly, retained earnings has been adjusted to reflect
the accumulated deficit of Hakes on the acquisition date, and prior periods have
not been restated.

(B) TRANSACTIONS RECORDED AS PURCHASES

During fiscal 1997, the Company completed 25 acquisitions, including the
25-year capital lease of a landfill. During fiscal 1998, the Company acquired 33
solid waste hauling operations, exclusive of the All Cycle merger accounted for
as a pooling of interests. During fiscal 1999, the Company acquired 50 solid
waste hauling operations, exclusive of the pooling transactions discussed above.
These transactions were accounted for as purchases. Accordingly, the operating
results of these businesses are included in the Consolidated Statements of
Operations from the dates of acquisition, and the purchase prices have been
allocated to the net assets acquired based on fair values at the dates of
acquisition with the residual amounts allocated to goodwill.

The purchase prices allocated to the net assets acquired were as follows (in
thousands):

FISCAL YEAR ENDED APRIL 30,
------------------------------
1997       1998       1999
--------   --------   --------

Accounts receivable and prepaid expenses....................  $  4,127   $ 2,923    $   613
Investments--restricted.....................................       450         0          0
Landfills...................................................     8,013         0          0
Property and equipment......................................    17,378     9,105     10,768
Covenants not to compete and customer lists.................     2,445     2,498      2,681
Goodwill....................................................    34,694    28,028     22,148
Deferred taxes..............................................       (73)      (75)         0
Debt and notes payable......................................    (6,709)   (2,650)    (2,607)
Other liabilities assumed...................................   (15,726)   (2,433)      (267)
--------   -------    -------
Total consideration.........................................  $ 44,599   $37,396    $33,336
========   =======    =======

The following unaudited pro forma combined information (in thousands except
for per share information) shows the results of the Company's operations for the
years ended April 30, 1998 and 1999 as if all of the companies acquired in 1998
and 1999 accounted for using the purchase method were acquired as of May 1,
1997.

YEAR ENDED
-------------------
4/30/98    4/30/99
--------   --------

Revenues................................................  $182,671   $194,974
Operating Income........................................    13,090     20,099
Net Income (Loss).......................................    (3,903)     6,511
Diluted income (loss) per common share..................  $  (0.41)  $    .41
Weighted average diluted shares outstanding.............     9,547     16,019

F-97

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. BUSINESS COMBINATIONS (CONTINUED)
The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations had the
acquisitions taken place as of May 1, 1997 or the results of future operations
of the Company. Furthermore, the pro forma results do not give effect to all
cost savings or incremental costs that may occur as a result of the integration
and consolidation of the completed acquisitions.

4. LONG-TERM DEBT

Long-term debt as of April 30, 1998 and 1999 consists of the following (in
thousands):

APRIL 30,
-------------------
1998       1999
--------   --------

Advances on revolving credit facility, which provides for
advances of up to $150,000,000, due January 12, 2003.
Interest on outstanding advances accrues at the election
of the Company at either the bank's base rate (7.75% at
April 30, 1999), or LIBOR plus a percentage (6.03% at
April 30, 1999), based on a pricing grid, payable monthly
in arrears. The interest rate is subject to adjustment
under the Swap Agreement described below. The debt is
collateralized by all assets of the Company, whether now
owned or hereafter acquired. .............................  $64,150    $72,365
Notes payable in connection with businesses acquired,
bearing interest at rates of 6% to 10% (weighted-average
interest at 6.3% and 5.7%, respectively), due in monthly
installments ranging from $882 to $17,500, expiring May
1999 through November 2004................................    5,548      3,361
Payments due to Clinton County, discounted at 4.75%, due in
quarterly installments of $375,046 through March 2003.....    6,645      5,438
Notes payable, secured by assets purchased..................   10,502     11,063
-------    -------
86,845     92,227
Less--current portion.......................................    4,249      5,488
-------    -------
$82,596    $86,739
=======    =======

On January 21, 1998 the Company entered into a three-year interest rate swap
agreement (the Swap Agreement) with a bank. The purpose was to effectively
convert a portion of the Company's interest rate exposure on advances under its
revolving credit facility from a floating rate to a fixed rate until the
expiration of the Swap Agreement. The Swap Agreement effectively fixes the
Company's interest rate on the notional amount of $45,000,000 to 5.8% per annum.
Net monthly payments or monthly receipts under the Swap Agreement are recorded
as adjustments to interest expense. The Company paid $163,000 and $174,000 under
this agreement during the years ended April 30, 1998 and 1999, respectively. The
fair market value of the the Company's interest rate swap, based on the
estimated termination value at April 30, 1998 and 1999 was $1.1 million and $0.7
million, respectively. In the event of nonperformance by the counterparty, the
Company would be exposed to interest rate risk on the entire amount outstanding.

The revolving credit facility contains certain covenants that, among other
things, restrict dividends or stock repurchases, limit capital expenditures and
annual operating lease payments, and set minimum

F-98

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. LONG-TERM DEBT (CONTINUED)
fixed charges, interest coverage and leverage ratios and minimum consolidated
adjusted net worth requirements. As of April 30, 1999, the Company was in
compliance with all covenants.

As of April 30, 1999, debt matures as follows (Amounts in thousands):

YEAR ENDING APRIL 30,
---------------------

2000...............................................  $ 5,488
2001...............................................   10,508
2002...............................................    1,767
2003...............................................   74,148
2004...............................................      264
Thereafter.........................................       52
-------
$92,227
=======

5. COMMITMENTS AND CONTINGENCIES

(A) LEASES

The following is a schedule of future minimum lease payments (in thousands),
together with the present value of the net minimum lease payments under capital
leases, as of April 30, 1999.

OPERATING   CAPITAL
LEASES      LEASES
---------   --------

Year Ended April 30,
2000......................................................   $1,041      $  728
2001......................................................      907         727
2002......................................................      795         709
2003......................................................      510         552
2004......................................................      514         167
Thereafter................................................    1,182          --
------      ------
Total minimum lease payments..............................    4,949       2,883
======      ======
Less--amount representing interest........................                 (186)
------
2,697
Current maturities of capital lease obligations...........                  402
------
Present value of long-term capital lease obligations......               $2,295
======

The Company leases real estate, compactors and hauling vehicles under leases
that qualify for treatment as capital leases. The assets related to these leases
have been capitalized and are included in property and equipment at April 30,
1998 and 1999.

The Company leases operating facilities and equipment under operating leases
with monthly payments ranging from $5 to $11,000.

Total rent expense under operating leases charged to operations was
$1,298,000, $1,500,000 and $1,873,000 for each of the three years ended
April 30, 1997, 1998 and 1999 respectively.

F-99

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(B) LEGAL PROCEEDINGS

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

(C) ENVIRONMENTAL LIABILITY

The Company is subject to liability for any environmental damage, including
personal injury and property damage, that its solid waste facilities may cause
to neighboring property owners, particularly as a result of the contamination of
drinking water sources or soil, possibly including damage resulting from
conditions existing before the Company acquired the facilities. The Company may
also be subject to liability for similar claims arising from off-site
environmental contamination caused by pollutants or hazardous substances if the
Company or its predecessors arrange to transport, treat or dispose of those
materials. Any substantial liability incurred by the Company arising from
environmental damage could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company is not
presently aware of any situations that may have a material adverse impact.

(D) SAWYER LANDFILL ROYALTY PAYMENTS

In connection with an acquisition, the Company agreed to pay to the seller a
royalty for certain additional permitted landfill capacity. The royalty due is
equal to $2.50 per ton for the first 400,280 tons of such additional capacity
and $3.50 per ton thereafter. The payments are generally due as the landfill is
utilized except that at the time of the successful permitting, the first 51
million of royalties becomes immediately due and payable. This amount may be
taken in cash or stock or an equivalent per share price of $6.55. This option is
at the election of the seller and is only available for the first royalty
payment.

As of April 30, 1999, all permits required for expansion of the site have
been obtained from the appropriate State of Maine authorities. The required
permits and licenses have not been obtained from the Town of Hampden, Maine.
Therefore, the initial Royalty Payment is not due as of April 30, 1999.

6. STOCKHOLDERS' EQUITY

(A) PUBLIC OFFERINGS

In November 1997, the Company completed an initial public offering of
3,000,000 shares of its Class A Common Stock (the "IPO") for proceeds of
42,428,000, net of underwriters discount and offering expenses. In accordance
with the terms of the Company's agreements: (i) the Series A and Series B
Redeemable Preferred Stock with warrants exercisable for Class A Common Stock
(Series A and Series B, respectively) were automatically redeemed and the
redemption price was applied to the exercise price of the warrants; (ii) the
Series D Convertible Preferred Stock (Series D) was converted

F-100

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY (CONTINUED)
automatically into shares of Class A Common Stock; and (iii) the Series C
Mandatorily Redeemable Preferred Stock (Series C) was redeemed at its stated
redemption price of $7.00 per share.

Up to the date of the IPO, the Company had been accreting the difference
between the carrying value and the redemption value using the effective interest
method through the earliest redemption date for the Series A, B, C and D
Preferred Stock.

In July 1998 the Company completed a public offering of 2,060,587 shares of
its Class A Common Stock at $27.25 per share. In addition, as part of this same
offering, 1,470,580 shares of the Company's Class A Common Stock were sold by
certain selling shareholders at $27.25 per share. The Company's proceeds of the
offering, net of underwriter's discount and issuance costs were $52,232,000.

(B) PREFERRED STOCK

The Company is authorized, with stockholder approval, to issue up to
1,000,000 shares of preferred stock in one or more series. As of April 30, 1999
and 1998, respectively, no shares of Preferred Stock are outstanding.

(C) COMMON STOCK

The holders of the Class A Common Stock are entitled to one vote for each
share held. The holders of the Class B Common Stock are entitled to ten votes
for each share held, except for the election of one director, who is elected by
the holders of the Class A Common Stock exclusively. The Class B Common Stock is
convertible into Class A Common Stock on a share-for-share basis at the option
of the shareholder.

(D) STOCK WARRANTS

At April 30, 1999, the Company had issued and outstanding warrants to
purchase 100,300 shares of the Company's Class A Common Stock at exercise prices
between $0.01 and $7.25 per share, based on the fair market value of the
underlying common stock at the time of the warrants' issuance. The warrants
become exercisable upon vesting and notification and expire between July 1998
and October 2003.

(E) PUT WARRANTS

In connection with an acquisition in April 1995, the Company issued 100,000
warrants to purchase one share each of Class A Common Stock exercisable at $6.00
per share. These warrants were putable to the Company at $4.00 per share or
callable by the Company at $7.00 per share beginning in April 1997 and were
initially recorded at their put price. These warrants were stated at their put
price per share in the accompanying balance sheet as of April 30, 1998. During
fiscal 1998 (but prior to the IPO), warrants to acquire 25,000 shares of
Class A Common Stock for cash proceeds of $150,000 were exercised. During the
same period the Company called the remaining 75,000 warrants in exchange for
total cash consideration of $525,000. The difference between the put price and
the call price was accreted through a charge to accumulated deficit at the time
of the call.

(F) STOCK OPTION PLANS

During 1993, the Company adopted an incentive stock option plan for officers
and other key employees. The 1993 Incentive Stock Option Plan (the "1993 Option
Plan") provided for the issuance of a maximum of 300,000 shares of Class A
Common Stock. As of April 30, 1999, options to purchase

F-101

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY (CONTINUED)
169,500 shares of Class A Common Stock at an average exercise price of $1.18
were outstanding under the 1993 Option Plan. No further options may be granted
under this plan.

During 1994, the Company adopted a nonstatutory stock option plan for
officers and other key employees. The 1994 Stock Option Plan (the "1994 Option
Plan") provided for the issuance of a maximum of 150,000 shares of Class A
Common Stock. Options to purchase 15,000 shares of Class A Common Stock at an
average exercise price of $0.60 were outstanding under the 1994 Option Plan as
of April 30, 1999. No further options may be granted under this plan.

In connection with the May 1994 Senior Note and Warrant Purchase Agreement
(the "Purchase Agreement"), the Company established a nonqualified stock option
pool for certain key employees. The purchase agreement established 338,000 stock
options to purchase Class A Common Stock. Options to purchase 302,656 shares of
Class A Common Stock at an average exercise price of $2.00 were outstanding
under the Purchase Agreement as of April 30, 1999. No further options may be
granted under this Agreement.

During 1996, the Company adopted a stock option plan for employees, officers
and directors of, and consultants and advisors to, the Company. The 1996 Stock
Option Plan (the "1996 Option Plan") provided for the issuance of a maximum of
918,135 shares of Class A Common Stock pursuant to the grant of either incentive
stock options or nonstatutory options. As of April 30, 1999, a total of 392,443
options to purchase Class A Common Stock were outstanding at an average exercise
price of $12.23. No further options may be granted under this plan.

On July 31, 1997, the Company adopted a stock option plan for employees,
officers and directors of, and consultants and advisors to the Company. The
Board of Directors has the authority to select the optionees and determine the
terms of the options granted. The 1997 Stock Option Plan (the "1997 Option
Plan") provides for the issuance of 2,000,000 shares of Class A Common Stock
pursuant to the grant of either incentive stock options or nonstatutory options.
Under the terms of the 1997 Option Plan, all authorized but unissued options
under previous plans are added to the shares available under this plan. A total
of 321,501 authorized but unissued shares under the 1996 Option Plan have been
transferred to the 1997 Option Plan under this provision. As of April 30, 1999,
options to purchase 1,081,960 shares of Class A Common Stock at an average
exercise price of $26.72 were outstanding under the 1997 Option Plan.

On July 31, 1997, the Company adopted a stock option plan for non-employee
directors of the Company. The 1997 Non-Employee Director Stock Option Plan
provides for the issuance of a maximum of 50,000 shares of Class A Common Stock
pursuant to the grant of non-statutory options. As of April 30, 1999, options to
purchase 8,000 shares of Class A Common Stock at an average exercise price of
$31.25 were outstanding under the Directors' Option Plan.

F-102

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY (CONTINUED)
Stock option activity for each of the three years ended April 30, 1997, 1998
and 1999 is as follows:

NUMBER     WEIGHTED AVERAGE
OF SHARES    EXERCISE PRICE
---------   ----------------

Outstanding, April 30, 1996.................................    788,000        $ 1.63
Granted.....................................................    463,135         10.52
Terminated..................................................         --            --
Exercised...................................................         --            --
--            --
---------        ------
Outstanding, April 30, 1997.................................  1,251,135          4.92
Granted.....................................................    419,500         19.90
Terminated..................................................    (31,000)       (15.19)
Exercised...................................................    (44,333)        (1.49)
---------        ------
Outstanding, April 30, 1998.................................  1,595,302          8.75
Granted.....................................................    870,000         27.68
Terminated..................................................     (9,033)       (11.17)
Exercised...................................................   (486,710)        (6.43)
---------        ------
Outstanding, April 30, 1999.................................  1,969,559        $17.65
=========        ======
Exercisable, April 30, 1998.................................    985,710        $ 4.26
=========        ======
Exercisable, April 30, 1999.................................  1,346,557        $13.67
=========        ======

Set forth is a summary of options outstanding and exercisable as of
April 30, 1999:

OPTIONS OUTSTANDING                    OPTIONS EXERCISABLE
----------------------------              ----------------------
WEIGHTED
AVERAGE      WEIGHTED                 WEIGHTED
NUMBER OF      REMAINING     AVERAGE     NUMBER OF    AVERAGE
RANGE OF                   OUTSTANDING    CONTRACTUAL    EXERCISE   EXERCISABLE   EXERCISE
EXERCISE                     SHARES       LIFE (YEARS)    PRICE       OPTIONS      PRICE
--------                  -------------   ------------   --------   -----------   --------

$0.60- $2.00...........................        462,656        4.87       $ 1.52       462,656    $  1.52
$4.61-$7.00............................        103,836        6.91         4.61       103,836       4.61
$12.00-$16.00..........................        313,107        7.57        14.16       283,772      14.11
$18.00-$27.00..........................        878,960        8.98        26.02       392,626      25.83
OVER $27.00............................        211,000        4.86        29.81       103,667      29.79
-------------     -------       ------     ---------    -------
All..................................      1,969,559        6.77       $17.65     1,346,557    $ 13.67
=============     =======       ======     =========    =======

During fiscal 1996, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation", which defines a fair value based method of accounting
for stock-based employee compensation and encourages all entities to adopt that
method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation costs for
those plans using the intrinsic method of accounting prescribed by APB Opinion
No. 25. Entities electing to remain with the accounting in APB Opinion No. 25
must make pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting defined in SFAS No. 123 had been applied.

F-103

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY (CONTINUED)
The Company has elected to account for its stock-based compensation plans
under APB Opinion No. 25. However, the Company has computed, for pro forma
disclosure purposes, the value of all options granted during the years ended
April 30, 1997, 1998 and 1999 using the Black-Scholes option pricing model as
prescribed by SFAS No. 123, using the following weighted average assumptions for
grants in the years ended April 30, 1997, 1998 and 1999.

APRIL 30,
-------------------------------------
1997         1998          1999
--------   ------------   -----------

Risk-free interest rate................................  6.84%      5.78%-6.49%    4.6%-5.68%
Expected dividend yield................................  N/A        N/A            N/A
Expected life..........................................  10 Years   9 years        5 years
Expected volatility....................................  N/A        40.39%         52.40%

The total value of options granted during the years ended April 30, 1997,
1998 and 1999 would be amortized on a pro forma basis over the vesting period of
the options. Options generally vest over a one to three year period. Because the
method of accounting prescribed by SFAS No. 123 has not been applied to options
granted prior to May 1, 1995, the resulting pro forma compensation costs may not
be representative of that to be expected in future years. If the Company had
accounted for these plans in accordance with SFAS No. 123, the Company's net
income (loss) and net income (loss) per share would have decreased (increased)
as reflected in the following pro forma amounts (in thousands, except for per
share amounts):

APRIL 30,
------------------------------
1997       1998       1999
--------   --------   --------

Net income (loss)
As reported...............................................  $(8,447)   $(3,903)    $6,615
Pro forma.................................................  $(8,603)   $(4,674)    $2,534
Diluted net income (loss) per common share
As reported...............................................  $ (1.52)   $ (0.41)    $ 0.41
Pro forma.................................................  $ (1.55)   $ (0.49)    $ 0.16

The weighted-average grant-date fair value of options granted during the
years ended April 30, 1997, 1998 and 1999 is $4.56, $11.94 and $14.35,
respectively.

F-104

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAXES

The provision (benefit) for income taxes for the years ended April 30, 1997,
1998 and 1999 consists of the following (in thousands):

APRIL 30,
------------------------------
1997       1998       1999
--------   --------   --------

Federal--
Current...................................................    $307      $  233     $4,983
Deferred..................................................     330       1,901      1,400
----      ------     ------
637       2,134      6,383
----      ------     ------
State--
Current...................................................       7          42        879
Deferred..................................................      37         336        247
----      ------     ------
44         378      1,126
----      ------     ------
Total.......................................................    $681      $2,512     $7,509
====      ======     ======

The differences in the provisions for income taxes and the amounts
determined by applying the Federal statutory rate of 34% to income before
provision for income taxes for the years ended April 30, 1997, 1998 and 1999 are
as follows (in thousands):

FISCAL YEAR ENDED APRIL 30,
------------------------------
1997       1998       1999
--------   --------   --------

Tax at statutory rate.......................................    $260      $1,478     $4,802
State income taxes, net of federal benefit..................      42         248        894
Meals and entertainment disallowance........................      18          23         85
Nondeductible goodwill......................................     134         114        590
Other, net..................................................     227         649      1,138
----      ------     ------
$681      $2,512     $7,509
====      ======     ======

Deferred income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for income tax purposes.

F-105

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities consist of the following at April 30,
1998 and 1999 (in thousands):

APRIL 30,
-------------------
1998       1999
--------   --------

Deferred tax assets--
Allowance for doubtful accounts...........................  $   449    $   703
Treatment of lease obligations............................       64         59
Accrued expenses..........................................      490        964
Net operating loss carryforwards..........................      679        367
Alternative minimum tax credit carryforwards..............      494        510
Other tax carryforwards...................................      150       -0 -
Other.....................................................      526        575
-------    -------
Total deferred tax assets...............................    2,852      3,178
-------    -------
Deferred tax liabilities--
Accelerated depreciation of property and Equipment........   (3,245)    (5,014)
Amortization of intangibles...............................     (543)    (1,165)
Other.....................................................   (2,111)    (1,693)
-------    -------
Total deferred tax liabilities..........................   (5,899)    (7,872)
-------    -------
Net deferred tax liability................................  $(3,047)   $(4,694)
=======    =======

At April 30, 1999, the Company has net operating loss carryforwards for
income tax purposes of approximately $894,000 that expire through 2010. At
April 30, 1999, the Company also has $510,000 of alternative minimum tax credit
carryforwards available indefinitely to reduce any further federal income taxes
payable.

8. EMPLOYEE BENEFIT PLANS

On May 1, 1996, the Company adopted the Casella Waste Systems, Inc. 401(k)
Plan and appointed the First National Bank of Boston as trustee of the plan. The
plan went into effect on July 1, 1996 and has a December 31 year end. Pending
board approval, the Company may contribute up to $500 per individual per
calendar year. Participants vest in employer contributions ratably over a
three-year period. Employer contributions for the years ended April 30, 1997,
1998 and 1999 amounted to $146,000, $176,000 and $275,000 respectively.

In January, 1998 the Company implemented its Employee Stock Purchase Plan.
Under this plan, qualified employees may purchase shares of Class A Common Stock
by payroll deduction at a 15% discount from the market price. 300,000 shares of
Class A Common Stock have been reserved for this purpose. At April 30, 1998, no
shares of Class A Common Stock have been issued under this plan. During the year
ended April 30, 1999 5,812 shares of Class A Common Stock were issued under this
plan.

F-106

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. RELATED PARTY TRANSACTIONS

(A) MANAGEMENT SERVICES AGREEMENT

As part of the Series D Preferred Stock transaction described in Note 7(a),
the Company entered into a Management Services Agreement with certain
shareholders of the Series A, Series B and Series C Preferred Stock. In
consideration for certain advisory services to the Company, as defined, a
management fee of approximately $22,300 per month was due. At the closing of the
IPO, the agreement terminated and the total accrued management fees paid to the
shareholders was $495,000.

(B) SERVICES

During 1997, 1998 and 1999, the Company retained the services of a related
party, a company wholly owned by two of the Company's stockholders, as a
contractor in closing certain landfills owned by the Company. Total purchased
services charged to operations for each of the three years ended April 30, 1997,
1998 and 1999 were $2,126,000, $4,202,000 and $5,198,000 respectively, of which
$0 and $50,302 were outstanding and included in accounts payable at April 30,
1998 and 1999, respectively. In 1997, the Company entered into agreements with
this company, totaling $4,065,000, to close the unlined municipal landfill which
is adjacent to the Subtitle D Clinton County landfill and to close a portion of
another of the Company's lined landfills. In 1998, the Company entered into
agreements with this company, totaling approximately $3,000,000, to construct a
portion of a landfill. In 1999, the Company entered into agreements with this
company, totaling approximately $4,808,000, to construct improvements or
expansions at three of its landfills.

(C) LEASES AND LAND PURCHASE

On August 1, 1993, the Company entered into three leases for operating
facilities with a related party, a partnership including two of the Company's
stockholders. During 1997, one of the leases was terminated early for $192,000.
The remaining leases are classified as capital leases in the accompanying
consolidated balance sheets. The leases call for monthly payments ranging from
$8,800 and $9,000 and expire in April 2003. Total interest and amortization
expense charged to operations for the years ended April 30, 1997, 1998 and 1999
under these agreements was $249,000, $245,000 and $237,000 respectively.

On November 8, 1996, the Company purchased a certain plot of land from the
same related party for $122,000.

(D) POSTCLOSURE LANDFILL

The Company has agreed to pay the cost of postclosure on a landfill owned by
certain principal stockholders. The Company paid the cost of closing this
landfill in 1992, and the postclosure maintenance obligations are expected to
last until 2012. In each of the three years ended April 30, 1997, 1998 and 1999,
the Company paid $9,605, $3,019 and $3,161 respectively, pursuant to this
agreement. As of April 30, 1999, the Company has accrued $102,000 for costs
associated with its postclosure obligations.

10. SEGMENT REPORTING

In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS 131
establishes standards for reporting information about operating segments in
financial statements. In general, SFAS 131 requires that business entities
report selected information about operating segments in a manner consistent with
that used for internal management reporting.

F-107

10. SEGMENT REPORTING (CONTINUED)
The Company classifies its operations into three geographical regions:
Eastern, Central and Western. The Company's revenues are derived from one
industry segment, which includes the collection, transfer, recycling and
disposal of non-hazardous solid waste. The table below reflects certain
geographic information relating to the Company's operations (in thousands): (In
thousands)

EASTERN    CENTRAL    WESTERN     CORP.       ELIM      TOTAL
--------   --------   --------   --------   --------   --------

YEAR ENDED 4/30/97:
Outside Revenue......................  $16,659    $61,411    $25,290    $   160    $   -0 -   $103,520
Interco. Revenue.....................    1,994     16,779        453         (1)    (19,225)      -0 -
Net Income(Loss).....................     (808)     1,091        860     (1,060)       -0 -         83
Depreciation & Amortization..........    2,847     10,589      1,635        300        -0 -     15,371
Interest Expense, Net................    1,011      3,204      1,018       (293)       -0 -      4,940
Capital Expenditures.................    4,787     13,511      2,263        264        -0 -     20,825
Total Assets.........................   23,928     82,622     43,555      3,261        -0 -    153,366

YEAR ENDED 4/30/98:
Outside Revenue......................  $23,443    $72,763    $47,266    $   238    $   -0 -   $143,710
Interco. Revenue.....................    2,241     22,490      3,206        (14)    (27,923)      -0 -
Net Income(Loss).....................   (1,697)     4,015        697     (1,180)       -0 -      1,835
Depreciation & Amortization..........    3,740     11,981      3,774        464        -0 -     19,959
Merger Costs.........................     -0 -        290       -0 -       -0 -        -0 -        290
Impairment Charge....................      971       -0 -        600       -0 -        -0 -      1,571
Interest Expense, Net................    1,287      3,603      3,100       (617)       -0 -      7,373
Capital Expenditures.................    5,515     15,152      7,648      1,101        -0 -     29,416
Total Assets.........................   29,739    102,115     67,120      6,535        -0 -    205,509

YEAR ENDED 4/30/99:
Outside Revenue......................  $29,272    $91,368    $62,920    $   686    $   -0 -   $184,246
Interco. Revenue.....................    2,218     28,397      6,711         (1)    (37,325)      -0 -
Net Income(Loss).....................    1,644      5,831      2,386     (3,246)       -0 -      6,615
Depreciation & Amortization..........    4,665     13,487      6,916        831        -0 -     25,899
Merger Costs.........................     -0 -        332        546      1,073        -0 -      1,951
Interest Expense, Net................    1,412      4,588      4,050     (4,476)       -0 -      5,574
Capital Expenditures.................    7,704     26,161     20,482      2,779        -0 -     57,126
Total Assets.........................   40,134    127,078     99,634     15,456        -0 -    282,302

11. SUBSEQUENT EVENTS

On September 9, 1999, the Company and KTI, Inc. (KTI) agreed to merge
subject to a revised definitive merger agreement, originally signed on
January 12, 1999, as amended, in a transaction to be accounted for under the
purchase method of accounting for business combinations. Under the terms of the
revised agreement, each share of KTI will be exchanged for 0.51 shares of
Casella Class A common stock. KTI specializes in solid waste disposal and
recycling, and operates manufacturing facilities utilizing recycled materials.

F-108

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Valuation Accounts Schedule (Schedule
II), is presented for purposes of additional analysis and are not a required
part of the basic financial statements. This information has been subjected to
the auditing procedures applied in our audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.

Arthur Andersen LLP

/s/ ARTHUR ANDERSEN

Boston, Massachusetts
July 1, 1999

F-109

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

SCHEDULE II

VALUATION ACCOUNTS

ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS OF DOLLARS)

YEAR ENDED APRIL 30,
------------------------------
1997       1998       1999
--------   --------   --------

Balance at beginning of period..............................   $ 353     $   722    $ 1,283

Additions--Charged to expense...............................     332         951      1,655
Acquisition related...............................     494         697        273

Deductions-- Bad debts written off, net of Recoveries.......    (457)     (1,087)    (1,766)
-----     -------    -------
Balance at end of period....................................   $ 722     $ 1,283    $ 1,445

F-110

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

(IN THOUSANDS)

APRIL 30,     JULY 31,
1999         1999
(RESTATED)   (UNAUDITED)
----------   -----------

CURRENT ASSETS:
Cash and Cash Equivalents.................................   $  4,232      $  4,918
Restricted Cash--Closure Fund Escrow......................        625           629
Accounts Receivable-trade, net of allowance for doubtful
accounts of $1,429 and $1,977...........................     23,081        29,463
Other Current Assets......................................      5,696         4,688
--------      --------
Total Current Assets....................................     33,634        39,698
--------      --------
Property, Plant and Equipment, net of accumulated
depreciation and amortization of $67,123 and $73,190......    131,431       140,581
Intangible Assets, net......................................    106,678       107,443
Restricted Funds--Closure Fund Escrow.......................      4,834         5,015
Other Assets................................................      5,725         7,902
--------      --------
$282,302      $300,639
========      ========

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

F-111

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS EQUITY

(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

APRIL 30,     JULY 31,
1999         1999
(RESTATED)   (UNAUDITED)
----------   -----------

CURRENT LIABILITIES:
Current Maturities of Long-Term Debt......................   $  5,488      $  2,591
Current Maturities of Capital Lease Obligations...........        402           407
Accounts Payable..........................................     17,904        17,944
Other Accrued Liabilities.................................      6,556         9,260
--------      --------
Total Current Liabilities...............................     30,350        30,202
--------      --------
Long-Term Debt, Less Current Maturities.....................     86,739       100,652
--------      --------
Capital Lease Obligations, Less Current Maturities..........      1,454         1,350
--------      --------
Other Long-Term Liabilities.................................     15,781        16,768
--------      --------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY
Class A Common Stock--
Authorized--100,000,000 Shares, $.01 par value Issued
and Outstanding--14,868,739 and 15,039,441 shares.....        149           150
Class B Common Stock--                                             10            10
Authorized--1,000,000 Shares, $.01 par value; 10 Votes
per Share. Issued and Outstanding--988,200 shares.....
Additional Paid-In Capital................................    154,733       155,379
Accumulated Deficit.......................................     (6,914)       (3,872)
--------      --------
147,978       151,667
--------      --------
$282,302      $300,639
========      ========

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

F-112

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

THREE MONTHS ENDED
----------------------
JULY 31,
1998      JULY 31,
(RESTATED)     1999
----------   ---------

Revenues....................................................   $45,084      $55,036
-------      -------
Operating Expenses:
Cost of Operations........................................    27,336       30,946
General and Administrative................................     6,416        7,798
Depreciation and Amortization.............................     5,897        7,622
Merger Costs (Pooling)....................................         0        1,490
-------      -------
39,649       47,856
-------      -------
Operating Income............................................     5,435        7,180
-------      -------
Other (Income) Expenses
Interest Income...........................................       (41)         (73)
Interest Expense..........................................     1,937        1,678
Other Expense (Income), net...............................      (257)         (57)
-------      -------
1,639        1,548
-------      -------
Income Before Provision for Income Taxes....................     3,796        5,632
Provision for Income Taxes..................................     1,675        2,591
-------      -------
Net Income..................................................   $ 2,121      $ 3,041
=======      =======
Basic Earnings per Share of Common Stock....................   $  0.16      $  0.19
=======      =======
Basic Weighted Average Common Stock Shares Outstanding......    13,287       15,979
=======      =======
Diluted Earnings per Share..................................   $  0.15      $  0.18
=======      =======
Diluted Weighted Average Common Stock and Common Stock
Equivalent Shares Outstanding.............................    14,410       16,539
=======      =======

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

F-113

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED JULY 31, 1998 AND 1999

(UNAUDITED)

(IN THOUSANDS)

1998
(RESTATED)     1999
----------   ---------

Cash Flows from Operating Activities:
Net Income................................................  $   2,121    $   3,041
---------    ---------
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities--Depreciation and
Amortization............................................      5,897        7,622
Loss (Gain) on Sale of Equipment..........................          7           (8)
Changes in Assets and Liabilities, net of Effects of
Acquisitions--
Accounts Receivable.....................................     (2,776)      (6,383)
Accounts Payable........................................      4,009           40
Other Current Assets/Liabilities........................      4,072        4,841
---------    ---------
11,209        6,112
---------    ---------
Net Cash Provided by Operating Activities...............     13,330        9,153
---------    ---------
Cash Flows from Investing Activities:
Acquisitions, net of Cash Acquired........................    (10,088)      (1,611)
Additions to Property and Equipment.......................    (10,180)     (16,069)
Proceeds from Sale of Equipment...........................        134           21
Other Assets/Liabilities..................................        374       (2,043)
---------    ---------
Net Cash Used in Investing Activities...................    (19,760)     (19,702)
---------    ---------
Cash Flows from Financing Activities:
Proceeds from Issuance of Common Stock....................     54,209            0
Proceeds from Long-Term Borrowings........................     11,565       22,600
Principal Payments on Long-Term Debt......................    (58,580)     (11,584)
Proceeds from exercise of stock options...................          0          219
---------    ---------
Net Cash Provided by Financing Activities...............      7,194       11,235
---------    ---------
Net Increase (Decrease) in Cash and Cash Equivalents........        764          686
Cash and Cash Equivalents, Beginning of Period..............      3,327        4,232
---------    ---------
Cash and Cash Equivalents, End of Period....................  $   4,091    $   4,918
=========    =========

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

F-114

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED JULY 31, 1998 AND 1999

(UNAUDITED)

(IN THOUSANDS)

1998
(RESTATED)     1999
----------   --------

Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for--
Interest................................................  $   1,734    $  1,605
=========    ========
Income Taxes............................................  $      59    $      0
=========    ========
Supplemental Disclosures of Noncash Investing and Financing
Activities:
Summary of Entities Acquired--
Fair Market Value of Assets Acquired....................  $  10,856    $  1,611
Cash Paid...............................................    (10,088)     (1,611)
---------    --------
Liabilities Assumed and Notes Payable to Sellers......  $     768    $      0
=========    ========

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

F-115

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The condensed consolidated balance sheets of Casella Waste Systems, Inc. and
Subsidiaries (the "Company") as of April 30, 1999 and July 31, 1999, the
consolidated statements of operations for the three months ended July 31, 1998
and 1999, and the consolidated statements of cash flows for the three months
ended July 31, 1998 and 1999 are unaudited. In the opinion of management, such
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of financial position,
results of operations, and cash flows for the periods presented. The Company has
restated the previously issued audited balance sheet dated April 30, 1999 to
reflect the mergers with Resource Waste Systems, Inc. and Corning Community
Disposal Services, Inc. (see note 1) consummated on July 3, 1999 and June 4,
1999, respectively, accounted for using the pooling of interests method of
accounting. The Company has also restated the previously issued consolidated
statements of operations for the three months ended July 31, 1998 and
consolidated statement of cash flows for the three months ended July 31, 1998 to
reflect the mergers with Waste Stream, Northern Sanitation, NEI, Westfield
Disposal, Resource Recovery Systems, Inc.and Corning Community Disposal, Inc.
(see note 1). The consolidated financial statements presented herein should be
read in connection with the Company's audited consolidated financial statements
as of and for the twelve months ended April 30, 1999. These were included as
part of the Company's Annual Report on Form 10-K (the "Annual Report").

1.  BUSINESS COMBINATIONS

TRANSACTIONS RECORDED AS POOLINGS OF INTERESTS

During fiscal year 1999, and during the first quarter of fiscal year 2000,
the Company completed several mergers in business combinations recorded as
poolings of interests. Accordingly, the accompanying financial statements have
been restated to include these businesses for all periods presented. The Company
issued the following shares of Class A Common Stock in connection with the
mergers:

MERGER                                                DATE           SHARES ISSUED
------                                        --------------------   -------------

Waste Stream................................  October 29, 1998          701,461
Northern Sanitation.........................  December 23, 1998         220,964
NEI.........................................  April 30, 1999            105,052(1)
Westfield...................................  April 30, 1999            244,082
Corning Community Disposal..................  June 4, 1999               59,375
Resource Waste Systems......................  July 1, 1999              303,598

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

(1) Shares issued are exclusive of up to 59,450 shares issuable following an
idemnification period, as defined.

F-116

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

1.  BUSINESS COMBINATIONS (CONTINUED)

The following is a reconciliation of the amounts (in thousands) of revenues
and net income previously reported for the three months ended July 31, 1998:

CASELLA    FISCAL YEAR   CASELLA,
BEFORE     1999/2000       AS
POOLINGS    POOLINGS     RESTATED
--------   -----------   --------

Three Months Ended July 31, 1998
Revenues......................................  $36,717      $8,367      $45,084
Net income (loss).............................    2,133         (11)       2,122
Three Months Ended July 31, 1999
Revenues......................................  $52,996      $2,040      $55,036
Net income (loss).............................    3,248        (207)       3,041

All of the pooled entities had fiscal year ends of December 31 and,
subsequent to the poolings, changed their year ends to conform with that of the
Company. For the calendar quarters ended July 31, 1998 and July 31, 1999, $0 in
revenues and $0 in net income were excluded from results of operations in order
to conform the accounting periods of the pooled companies with that of the
Company.

TRANSACTIONS RECORDED AS PURCHASES

During the three months ended July 31, 1999, the Company acquired 11 solid
and liquid waste hauling operations in transactions accounted for as purchases.
These transactions were in exchange for consideration of approximately $1.7
million in cash to sellers. The operating results of these businesses are
included in the Consolidated Statement of Operations from the dates of
acquisition. The purchase prices have been allocated to the net assets acquired
based on fair values at the dates of acquisition with the residual amounts
allocated to goodwill.

The following unaudited pro forma combined information (rounded to thousands
except for per share data) shows the results of the Company's operations as
though each of the completed acquisitions had occurred as of May 1, 1998:

THREE MONTHS ENDED   THREE MONTHS ENDED
JULY 31, 1998        JULY 31, 1999
------------------   ------------------

Revenues.................................       $52,971              $55,276
Operating Income.........................         6,204                7,196
Net Income...............................         2,083                3,041
Diluted income per share.................       $  0.14              $  0.18
Weighted average diluted shares
outstanding............................        14,410               16,539

The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations had the
acquisitions taken place as of May 1, 1998 or the results of future operations
of the Company. Furthermore, the pro forma results do not give effect to all
cost savings or incremental costs that may occur as a result of the integration
and consolidation of the completed acquisitions.

F-117

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

2.  COMMITMENTS AND CONTINGENCIES

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

3.  ENVIRONMENTAL LIABILITIES

The continuing business in which the Company is engaged is intrinsically
connected with the protection of the environment. As such, a significant portion
of the Company's operating costs and capital expenditures could be characterized
as costs of environmental protection. While the Company is faced, in the normal
course of business, with the need to expend funds for environmental protection
and remediation, it does not expect such expenditures to have a material adverse
effect on its financial condition or results of operations because its business
is based upon compliance with environmental laws and regulations and its
services are priced accordingly. In addition, as part of its ongoing operations,
the Company provides for estimated closure and post-closure monitoring costs
over the life of disposal sites as airspace is consumed. While all these costs
may increase in the future as a result of legislation or regulation, the Company
believes that in general it tends to benefit when government regulation
increases, since this may increase the demand for its services. Furthermore, the
Company believes it has the resources and experience to manage environmental
risk.

4.  EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" which
supercedes Accounting Principal Board opinion No. 15 and establishes new
accounting standards for the presentation of earnings per share. Primary EPS is
replaced by Basic EPS, which is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Fully Diluted EPS is replaced with Diluted EPS, which gives effect to
all common shares that would have been outstanding if all dilutive potential
common shares (relating to such things as the exercise of stock warrants and
convertible preferred stock) had been issued. The treasury stock method used to
compute the number of potentially-dilutive shares that would be repurchased with
the proceeds of potential stock issuances has been changed. The treasury stock
method now requires use of the average share price for the period instead of the
greater of the ending share price or the average share price.

F-118

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

4.  EARNINGS PER SHARE (CONTINUED)
The following is a reconciliation of the ending number of shares outstanding
with the number of shares used in the calculation of basic and diluted earnings
per share (in thousands):

THREE MONTHS    THREE MONTHS
ENDED 7/31/98   ENDED 7/31/99
-------------   -------------

Number of shares outstanding, end of period:
Class A common stock.............................       14,542        15,039
Class B common stock.............................          988           988
Effect of weighting the average shares outstanding
during the period................................       (2,243)          (48)
Basic shares outstanding...........................       13,287        15,979
Impact of potentially dilutive securities..........        1,123           560
Diluted shares outstanding.........................       14,410        16,539

For the three months ended 7/31/99, options to purchase 866,000 common
shares were excluded from the calculation of potential dilutive shares because
their impact was anti-dilutive.

5.  SEGMENT REPORTING

In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("Statement 131"). Statement 131 establishes
standards for reporting information about operating segments in financial
statements. In general, Statement 131 requires that business entities report
selected information about operating segments in a manner consistent with that
used for internal management reporting.

The Company classifies its operations into three geographical regions:
Eastern, Central and Western. The Company's revenues are derived mainly from one
industry segment, which includes the collection, transfer, recycling and
disposal of non-hazardous solid waste. Any other activities in which the Company
is engaged are not material to the total results of operations of the Company;
these activities are reflected in with the geographic reporting structure
outlined above.

EASTERN    CENTRAL    WESTERN     CORP.       ELIM      TOTAL
--------   --------   --------   --------   --------   --------
(IN THOUSANDS)

QTR ENDED 7/31/98:
Outside Revenue.....................  $ 7,091    $ 22,994   $ 14,950   $    49       -0 -    $ 45,084
Interco. Revenue....................      627       7,464        959      -0 -     (9,050)       -0 -
Net Income(Loss)....................      865       1,878        389    (1,011)      -0 -       2,121
Total Assets........................   30,250     113,570     78,596     9,322       -0 -     231,738

QTR ENDED 7/31/99:
Outside Revenue.....................  $ 9,550    $ 26,574   $ 18,819   $    93       -0 -    $ 55,036
Interco. Revenue....................      794       8,854      3,505      -0 -    (13,153)       -0 -
Net Income (Loss)...................    1,074       2,420      1,251    (1,704)      -0 -       3,041
Total Assets........................   42,562     132,639    104,751    20,687       -0 -     300,639

F-119

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

5.  SEGMENT REPORTING (CONTINUED)
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The Company is a regional, integrated solid waste services company that
provides collection, transfer, disposal and recycling services in Vermont, New
Hampshire, Maine, Massachusetts, upstate New York and northern Pennsylvania. The
Company's objective is to continue to grow by expanding its services in markets
where it can be one of the largest and most profitable fully-integrated solid
waste services companies.

On January 12, 1999 the Company signed a definitive merger agreement with
KTI, a publicly traded solid waste handling company operating in 21 states
throughout the United States. KTI specializes in solid waste disposal and
recycling, and operates manufacturing facilities utilizing recycled materials.
The Company believes the merger will give it additional growth opportunities in
its existing and adjacent markets, and the ability to enter new markets, as well
as achieve operational efficiencies as a result of the combination. On
September 9, 1999, the Company announced that it and KTI had revised and amended
the terms of the merger agreement. Pursuant to the amended merger agreement,
each share of KTI common stock will be exchanged for 0.51 shares of the
Company's class A common stock. The companies anticipate that the merger should
close during the fourth calendar quarter of 1999. Total merger transactional
costs deferred on the balance sheet (under the asset section as a deferred cost)
related to the KTI merger were $4.7 million through 7/31/99. Total estimated
merger costs are approximately $26 to $28 million dollars. All of these merger
costs will be expensed upon the consummation of the Pooling Transaction.

The Company's revenues have increased from $45.1 million for the three
months ended July 31, 1998 to $55.0 million for the three months ended July 31,
1999. From May 1, 1998 through April 30, 1999, the Company acquired 55 solid
waste collection, transfer and disposal operations. Between May 1, 1999 and
July 31, 1999, the Company acquired an additional 13 such businesses. All but
two of these acquisitions were accounted for under the purchase method of
accounting for business combinations. Under the rules of purchase accounting,
the acquired companies' revenues and results of operations have been included
together with those of Casella Waste Systems, Inc. from the actual dates of the
acquisitions and will materially affect the period-to-period comparisons of the
Company's historical results of operations.

This Quarterly Report and other reports, proxy statements, and other
communications to stockholders, as well as oral statements by the Company's
officers or its agents, may contain forward-looking statements within the
meaning of Section 27A of the Securities Act, with respect to, among other
things, the Company's future revenues, operating income, or earnings per share.
Without limiting the foregoing, any statements contained in this Quarterly
Report that are not statements of historical fact may be deemed to be
forward-looking statements, and the words "believes", "anticipates", "plans",
"expects", and similar expressions are intended to identify forward-looking
statements. There are a number of factors of which the Company is aware that may
cause the Company's actual results to vary materially from those forecast or
projected in any such forward-looking statement, certain of which are beyond the
Company's control. These factors include, without limitation, those outlined
below in the section entitled "Certain Factors That May Affect Future Results'.
The Company's failure to

F-120

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

5.  SEGMENT REPORTING (CONTINUED)
successfully address any of these factors could have a material adverse effect
on the Company's results of operations.

GENERAL

The Company's revenues are attributable primarily to fees charged to
customers for solid and liquid waste collection, landfill, transfer and
recycling services. The Company derives a substantial portion of its collection
revenues from commercial, industrial and municipal services that are generally
performed under service agreements or pursuant to contracts with municipalities.
The majority of the Company's residential collection services are performed on a
subscription basis with individual households. Landfill and transfer customers
are charged a tipping fee on a per ton basis for disposing of their solid waste
at the Company's disposal facilities and transfer stations. The majority of the
Company's landfill and transfer customers are under one-year to ten-year
disposal contracts, with most having clauses for annual cost of living
increases. Recycling revenues consist of revenues from the sale of recyclable
commodities and from the sale of tire derived fuel. Other revenues consist
primarily of revenue from septic/liquid waste operations and other sources. The
Company's revenues are shown net of intercompany eliminations. The Company
typically establishes its intercompany transfer pricing based upon prevailing
market rates.

The table below shows, for the periods indicated, the percentage of the
Company's revenues attributable to services provided. The decrease in the
Company's collection revenues as a percentage of revenues and the increase of
the Company's landfill revenues as a percentage of revenues in the current
fiscal year is primarily attributable to the impact of the Company's acquisition
of Hyland Landfill during the first quarter fiscal 1999 plus the increased
utilization of our North Country Landfill in Bethlehem, New Hampshire during the
first quarter of fiscal 2000. The increase in transfer revenues as a percentage
of revenues in the current fiscal year is mainly due to the acquisition of
transfer station operations in the prior fiscal year. The increase in recycling
revenues is due primarily to increased volumes with additional increased prices
received from the sale of recycled commodities. The increase in liquid waste and
other revenues as a percentage of revenues in the current fiscal year is
primarily due to the impact of acquisitions of septic/liquid waste operations
since the first quarter of fiscal 1999.

% OF REVENUE
THREE MONTHS
ENDED
-------------------
7/31/98    7/31/99
--------   --------

Collection..................................................    77.6%      71.2%
Landfill....................................................     7.6        9.5
Transfer....................................................     6.3        8.7
Recycling...................................................     5.3        6.1
Liquid Waste & Other........................................     3.2        4.5
-----      -----
Total Revenue...............................................   100.0%     100.0%

Cost of operations includes labor, tipping fees paid to third party disposal
facilities, fuel, maintenance and repair of vehicles and equipment, worker's
compensation and vehicle insurance, the cost of purchasing materials to be
recycled, third party transportation expense, district and state taxes,

F-121

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

5.  SEGMENT REPORTING (CONTINUED)
host community fees and royalties. Landfill operating expenses also include a
provision for closure and post-closure expenditures anticipated to be incurred
in the future, and leachate treatment and disposal costs.

General and administrative expenses include management, clerical and
administrative compensation and overhead, professional services and costs
associated with the Company's marketing and sales force and community relations
expense.

Depreciation and amortization expense includes depreciation of fixed assets
over the estimated useful life of the assets using the straight line method,
amortization of landfill airspace assets under the units-of-production method,
and the amortization of goodwill and other intangible assets using the straight
line method. The amount of landfill amortization expense related to airspace
consumption can vary materially from landfill to landfill depending upon the
purchase price and landfill site and cell development costs. The Company
depreciates all fixed and intangible assets, excluding non-depreciable land,
down to a $0 net book value, and does not apply a salvage value to any of its
fixed assets.

Certain direct landfill development costs, such as engineering, permitting,
legal, construction and other costs directly associated with expansion of
existing landfills, are capitalized by the Company. Additionally, the Company
also capitalizes certain third party expenditures related to pending
acquisitions, such as legal and engineering. The Company will have material
financial obligations relating to closure and post-closure costs of its existing
landfills and any disposal facilities which it may own or operate in the future.
The Company has provided and will in the future provide accruals for future
financial obligations relating to closure and post-closure costs of its
landfills (generally for a term of 30 years after final closure of a landfill)
based on engineering estimates of consumption of permitted landfill airspace
over the useful life of any such landfill. There can be no assurance that the
Company's financial obligations for closure or post-closure costs will not
exceed the amount accrued and reserved or amounts otherwise receivable pursuant
to trust funds. The Company routinely evaluates all such capitalized costs, and
expenses those costs related to projects not likely to be successful. Internal
and indirect landfill development and acquisition costs, such as executive and
corporate overhead, public relations and other corporate services, are expensed
as incurred.

F-122

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

5.  SEGMENT REPORTING (CONTINUED)
RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage
relationship that certain items from the Company's Consolidated Financial
Statements bear in relation to revenues.

% OF REVENUE
THREE MONTHS
ENDED
-------------------
7/31/98    7/31/99
--------   --------

Revenues....................................................   100.0%     100.0%
Cost of operations..........................................    60.6       56.2
General and administrative..................................    14.2       14.2
Depreciation and amortization...............................    13.1       13.9
Merger-related costs........................................     0.0        2.7
Operating income............................................    12.1       13.0
Interest expense, net.......................................     4.2        2.9
Other (income) expense......................................    (0.6)      (0.1)
Provision for income taxes..................................     3.7        4.7
Net income..................................................     4.8        5.5
EBITDA*.....................................................    25.1       26.9

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

*   See discussion and computation of EBITDA below

REVENUES.  Revenues increased $10.0 million, or 22.1%, to $55.0 million in
the quarter ended July 31, 1999 from $45.1 in the quarter ended July 31, 1998.
Of this increase, $5.7 million of the growth was due to the impact of businesses
acquired during fiscal year 1999 and during the first quarter of the current
fiscal year. The balance of the increase was due to internal volume and price
growth.

COST OF OPERATIONS.  Cost of operations increased approximately $3.6
million, or 13.2%, to $30.9 million in the quarter ended July 31, 1999 from
$27.3 million in the same quarter of the prior fiscal year. Cost of operations
as a percentage of revenues decreased to 56.2% in the quarter ended July 31,
1999 from 60.6% in the same quarter of the prior fiscal year. The decrease was
primarily the result of: (i) productivity improvements in the Company's
collection operations as a result of better route density from acquisitions,
routing efficiencies through route audits and front-end loader vehicle
conversions completed throughout fiscal 1999; and (ii) margin improvements
because of price increases in fiscal 1999 and the first quarter of fiscal year
2000.

GENERAL AND ADMINISTRATIVE.  General and administrative expenses increased
approximately $1.4 million, or 21.9%, to $7.8 million in the quarter ended
January 31, 1999 from $6.4 million in the same quarter of the prior fiscal year.
General and Administrative expenses as a percentage of revenues have remained
approximately level in the periods under discussion.

DEPRECIATION AND AMORTIZATION.  Depreciation and amortization expense
increased $1.7 million, or 29.3%, to $7.6 million in the quarter ended July 31,
1999 from $5.9 million in the same quarter of the prior fiscal year.
Depreciation and amortization as a percentage of revenues increased to 13.9% in
the quarter ended July 31, 1999 from 13.1% in the same quarter of the prior
fiscal year. The increase in

F-123

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

5.  SEGMENT REPORTING (CONTINUED)
depreciation and amortization is due to the increased concentration of revenues
in landfill activities, which typically have higher depreciation and
amortization charges relative to revenues compared to hauling revenues.

MERGER COSTS.  The merger related costs of $1.5 million recorded in the
quarter ended July 31, 1999 were incurred in association with the Resource Waste
Systems, Inc. and Corning Community Disposal, Inc. mergers accounted for as
poolings of interests. The transactions are discussed above under 'Notes to
Consolidated Financial Statements'.

INTEREST EXPENSE, NET.  Net interest expense decreased approximately $0.3
million, or 15.3% to $1.6 million in the quarter ended July 31, 1999 from $1.9
million in the same quarter of the prior fiscal year. This decrease primarily
reflects the reduction of the outstanding balance under the Company's
acquisition line of credit and other notes payable from the proceeds of the
Company's public stock offering in July, 1998.

OTHER (INCOME) EXPENSE, NET.  Net other (income) expense has not
historically been material to the Company's results of operations.

PROVISION FOR INCOME TAXES.  Provision for income taxes increased
approximately $0.9 million to $2.6 million in the quarter ended July 31, 1999
from $1.7 million in the same quarter of the prior fiscal year. This increase
reflects the Company's increase in profits in the quarter ended July 31, 1999
over the same quarter in the prior fiscal year. The combined effective tax rate
used by the Company in recording taxes for interim periods has been increased
from 44.1% in the quarter ended July 31, 1998 to 46.0% in the same quarter of
the current fiscal year. This increase reflects the non-deductible merger
expenses incurred during the quarter ended July 31, 1999.

LIQUIDITY AND CAPITAL RESOURCES

The Company's business is capital intensive. The Company's capital
requirements include acquisitions, fixed asset purchases and capital
expenditures for landfill development, cell construction, and site and cell
closure. The Company had positive net working capital of $3.3 million at
April 30, 1999 and positive net working capital of $9.5 million at July 31,
1999.

The Company has a $150 million revolving line of credit with a group of
banks for which BankBoston, N.A. is acting as agent. This line of credit is
secured by all assets of the Company, including the Company's interest in the
equity securities of its subsidiaries. This revolving line of credit matures in
January, 2003. Funds available to the Company under this line of credit were
$54.3 million at July 31, 1999. In connection with the proposed merger with KTI,
the Company will be required to replace its existing credit facility. The
Company is currently negotiating a new credit facility with a number of banks.

Net cash provided by operating activities was $9.2 million for the three
months ended July 31, 1999 compared to $13.3 million for the same period of the
prior fiscal year. The decrease was primarily due to the decrease in accounts
payable and the increase in accounts receivable due to the extensive growth,
partially offset by the increase in the Company's net income for the three
months ended

F-124

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

5.  SEGMENT REPORTING (CONTINUED)
July 31, 1999 over the prior fiscal year, increased depreciation and
amortization and increased closure/ post closure accruals.

Cash used in investing activities decreased $0.2 million from $19.8 million
to $19.6 million in the three months ended July 31, 1999 over the same period of
the prior fiscal year. The decrease in investing activities reflects fewer
acquisitions for the quarter ended July 31, 1999 accounted for as purchases,
offset by capital expenditures. The Company's cash needs to fund investing
activities are expected to increase further as the Company continues to complete
acquisitions, and continues to expend capital in order to service internal
growth.

Net cash provided by financing activities was $11.3 million in the three
months ended July 31, 1999 compared to $7.2 million for the same period of the
prior year. The net cash provided by financing activities in the current fiscal
year reflects the borrowings on the Company's credit facility, offset by
repayments. Net cash provided by financing activities in the comparable period
of the prior year reflects the net proceeds of the follow-on offering and
borrowings on the Company's credit facility, offset by repayments.

SEASONALITY

The Company's revenues have historically been lower during the months of
November through March. This seasonality reflects the lower volume of waste
during the late fall, winter and early spring months primarily because: (i) the
volume of waste relating to construction and demolition activities decreases
substantially during the winter months in the northeastern United States; and
(ii) decreased tourism in Vermont, Maine and eastern New York during the winter
months tends to lower the volume of waste generated by commercial and restaurant
customers, which is partially offset by the winter ski industry. Since certain
of the Company's operating and fixed costs remain constant throughout the fiscal
year, operating income results are therefore impacted by a similar seasonality.
addition, particularly harsh weather conditions could result in increased
operating costs to certain of the Company's operations.

The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. The Company establishes its expenditure levels based on
its expectations as to future revenues, and, if revenue levels are below
expectations, expenses can be disproportionately high. Due to a variety of
factors including general economic conditions, governmental regulatory action,
acquisitions, capital expenditures and other costs related to the expansion of
operations and services and pricing changes, it is possible that in some future
quarter, the Company's operating results will be below the expectations of
public market analysts and investors. In such events, the Company's Class A
Common Stock price would likely be materially and adversely affected.

INFLATION AND PREVAILING ECONOMIC CONDITIONS

To date, inflation has not had a significant impact on the Company's
operations. Consistent with industry practice, most of the Company's contracts
provide for a pass through of certain costs, including increases in landfill
tipping fees and, in some cases, fuel costs. The Company therefore believes it
should be able to implement price increases sufficient to offset most cost
increases resulting from

F-125

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

5.  SEGMENT REPORTING (CONTINUED)
inflation. However, competitive factors may require the Company to absorb at
least a portion of these cost increases, particularly during periods of high
inflation.

The Company's business is located in the northeastern United States.
Therefore, the Company's business, financial condition and results of operations
are susceptible to downturns in the general economy in this geographic region
and other factors affecting the region such as state regulations and severe
weather conditions. The Company is unable to forecast or determine the timing
and/or the future impact of a sustained economic slowdown.

YEAR 2000 ISSUES

The approach of the year 2000 has raised concerns about the ability of
information technology systems and non-information technology systems, primarily
computer software programs, to properly recognize and process date-sensitive
information with respect to the Year 2000.

The Company has undertaken a Year 2000 project, comprised of four phases, to
address these concerns. Phase one, which has been completed, consisted of
awareness, Year 2000 planning, preparing a written plan, management approval and
support. Phase two involved the evaluation of all systems and equipment,
including hardware, software, security and voice mail, with respect to Year 2000
compliance. The completion date for phase two was June 30, 1999. Phase three
involved addressing any deficiencies identified in Phase two. The completion
date for Phase three was July 31, 1999. Phase four involves the validation and
testing of all systems and equipment, and the anticipated completion date is
September 30, 1999. Casella has performed, and continues to perform routine
updates of all software and hardware systems to facilitate Year 2000 compliance.

The Company has completed numerous acquisitions in recent months, and the
information systems of a limited number of these acquired operations have not
yet been fully integrated with Casella's information systems. This integration
of the completed acquisitions is expected to occur by October 31, 1999. Casella
continues to make acquisitions as an integral component of its growth strategy.
There is no assurance that the information systems of all acquired operations,
particularly those acquisitions completed in the latter portion of calendar
1999, will be Year 2000 compliant by December 31, 1999.

Casella uses well-regarded nationally known software vendors for both its
general accounting applications and industry-specific customer information and
billing systems, and all internal productivity software. Casella has been
informed by the respective vendors that all application software is fully Year
2000 compliant.

Casella's banking arrangement is with an international banking institution
which has informed Casella that it is taking all necessary steps to insure its
customers uninterrupted service throughout applicable Year 2000 time frames.
Casella's payroll is out-sourced by the largest provider of third-party payroll
services in the country, which has made a commitment of uninterrupted service to
their customers throughout applicable Year 2000 time

Casella is currently in the process of replacing all older personal
computers and servers. There are two servers and 25 additional personal
computers that will be replaced, 16 of which will be for the weight-measurement
systems. The two servers were replaced during the first quarter of fiscal 2000
(ending July 31, 1999). Casella has acquired a Year 2000 compliant
weight-measurement system. Currently two beta sites are operational and Casella
is in the process of defining the implementation

F-126

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

5.  SEGMENT REPORTING (CONTINUED)
plan for the remaining sites. During the implementation, all non Year 2000
compliant hardware will be replaced.

Casella currently plans a final testing of all systems in the second quarter
of fiscal 2000 (ending October 31, 1999) and expects to be fully Year 2000
compliant by the end of that fiscal quarter.

Casella has expended approximately $1.5 million dollars over the last
eighteen months to address hardware and software-related Year 2000 compliance
issues, principally through the implementation of a new frame network system. A
portion of this investment is attributable to integrating information systems of
companies that the Company has acquired. Casella will use funds from current
operations or Casella's line of credit to meet Year 2000 remediation expenses.

No single customer represents more than one percent of Casella's revenues,
and we do not expect any material adverse effect on Casella's revenues in the
event an individual customer experiences Year 2000 problems.

In addition, Casella does not believe the Year 2000 noncompliance of the
Company's suppliers of goods and services, other than as specifically discussed
above, would have a material adverse effect on Casella's revenues and results of
operations. Accordingly, Casella's has not sought assurances of Year 2000
compliance from these other vendors.

Casella expects to begin its evaluation of its most reasonably likely worst
case scenarios with respect to the Year 2000 in the third calendar quarter of
1999. Based upon the results of that evaluation Casella may develop an
appropriate contingency plan.

EBITDA

EBITDA represents operating income (earnings before interest and taxes, or
"EBIT") plus depreciation and amortization expense. EBITDA is not a measure of
financial performance under generally accepted accounting principles, but is
provided because the Company understands that certain investors use this
information when analyzing the financial position and performance of the
Company.

THREE MONTHS ENDED
-------------------
7/31/98    7/31/99
--------   --------
(IN THOUSANDS)

Operating income..........................................  $ 5,435    $ 7,180
Depreciation and amortization.............................    5,897      7,622
EBITDA....................................................  $11,332    $14,802
EBITDA as a percentage of revenue.........................    25.1%      26.9%

Analysis of the factors contributing to the change in EBITDA is included in
the discussions above.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Quarterly Report and presented elsewhere by management from time to time.

The Company is party to an Agreement and Plan of Merger with KTI, Inc. There
can be no assurance that the merger will take place on the anticipated
timetable, if at all, or if it does, that it will

F-127

CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

5.  SEGMENT REPORTING (CONTINUED)
result in the synergies and other benefits anticipated by the two companies. The
benefits of the merger could be impacted by KTI's operating results, which have
been below expectations in recent quarters.

In connection with the merger with KTI, the Company will be required to
replace its existing credit facility. Although the Company is in the process of
negotiating a new credit facility, there can be no assurance that it will obtain
such a credit facility in the amount, or on the timetable, sought by the
Company. In the event that it is unable to obtain a sufficient credit facility,
the Company's acquisition program, results of operations and financial condition
could be materially and adversely affected. If the Company were unable to obtain
a new credit facility, it will be unable to repay its existing credit facility
and will be in default.

The Company's objective is to continue to grow by expanding its services in
markets where it can be one of the largest and most profitable fully-integrated
solid waste services companies. Such growth, if it were to occur, could place a
significant strain on the Company's management and operational, financial and
other resources.

The Company has incurred net losses in the past. There can be no assurance
that the Company will be profitable in the future.

The Company's strategy envisions that a substantial part of the Company's
future growth will come from making acquisitions consistent with its strategy.
There can be no assurance that the Company will be able to identify suitable
acquisition candidates and, once identified, to negotiate successfully their
acquisition at a price or on terms and conditions favorable to the Company, or
to integrate the operations of such acquired businesses with the Company.
Certain of these acquisitions may be of significant size and may include assets
that are outside the Company's geographic territories or are ancillary to the
Company's core business strategy.

The Company is highly dependent upon the services of the members of its
senior management team, the loss of any of whom may have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company's future success depends on its continuing ability to
identify, hire, train, motivate and retain highly trained personnel.

The Company anticipates that any future business acquisitions will be
financed through cash from operations, borrowings under its bank line of credit,
the issuance of shares of the Company's Class A Common Stock and/or seller
financing. There can be no assurance that the Company will have sufficient
existing capital resources or will be able to raise sufficient additional
capital resources on terms satisfactory to the Company, if at all, in order to
meet its capital requirements.

The Company's operating program depends on its ability to operate and expand
the landfills it owns and leases and to develop new landfill sites. Several of
the Company's landfills are subject to local laws purporting to regulate their
expansion and other aspects of their operations. There can be no assurance that
the laws adopted by municipalities in which the Company's landfills are located
will not have a material adverse effect on the Company's utilization of its
landfills or that the Company will be successful in obtaining new landfill sites
or expanding the permitted capacity of any of its current landfills once its
remaining disposal capacity has been consumed.

The Company may be adversely affected by changes in the commodity pricing of
recycled materials.

F-128

ANNEX A

AGREEMENT AND PLAN OF MERGER
AMONG
CASELLA WASTE SYSTEMS, INC.
RUTLAND ACQUISITION SUB, INC.
AND
KTI, INC.
JANUARY 12, 1999

TABLE OF CONTENTS

PAGE
--------

ARTICLE I
THE MERGER..............................................     A-1
Section 1.01 Effective Time of the Merger...............     A-1
Section 1.02 Closing....................................     A-1
Section 1.03 Effects of the Merger......................     A-1
Section 1.04 Directors and Officers.....................     A-2

ARTICLE II
CONVERSION OF SECURITIES................................     A-2
Section 2.01 Conversion of Capital Stock................     A-2
Section 2.02 Exchange of Certificates...................     A-2

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER................     A-5
Section 3.01 Organization of Seller.....................     A-5
Section 3.02 Seller Capital Structure...................     A-5
Section 3.03 Authority; No Conflict; Required Filings
and Consents...........................................     A-6
Section 3.04 SEC Filings; Financial Statements..........     A-7
Section 3.05 No Undisclosed Liabilities.................     A-8
Section 3.06 Absence of Certain Changes or Events.......     A-8
Section 3.07 Taxes......................................     A-8
Section 3.08 Properties.................................     A-9
Section 3.09 Agreements, Contracts and Commitments......    A-10
Section 3.10 Litigation.................................    A-10
Section 3.11 Environmental Matters......................    A-10
Section 3.12 Employee Benefit Plans.....................    A-11
Section 3.13 Compliance With Laws.......................    A-12
Section 3.14 Accounting and Tax Matters.................    A-12
Section 3.15 Registration Statement; Proxy
Statement/Prospectus...................................    A-12
Section 3.16 Labor Matters..............................    A-13
Section 3.17 No Existing Discussions....................    A-13
Section 3.18 Opinion of Financial Advisor...............    A-13
Section 3.19 Anti-Takeover Laws.........................    A-13

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER AND SUB.........    A-13
Section 4.01 Organization of Buyer and Sub..............    A-13
Section 4.02 Buyer Capital Structure....................    A-14
Section 4.03 Authority; No Conflict; Required Filings
and Consents...........................................    A-14
Section 4.04 SEC Filings; Financial Statements..........    A-15
Section 4.05 No Undisclosed Liabilities.................    A-16
Section 4.06 Absence of Certain Changes or Events.......    A-16
Section 4.07 Taxes......................................    A-16
Section 4.08 Properties.................................    A-17
Section 4.09 Agreements, Contracts and Commitments......    A-18
Section 4.10 Litigation.................................    A-18
Section 4.11 Environmental Matters......................    A-18
Section 4.12 Employee Benefit Plans.....................    A-18
Section 4.13 Compliance With Laws.......................    A-19

ii

PAGE
--------

Section 4.14 Accounting and Tax Matters.................    A-19
Section 4.15 Registration Statement; Proxy
Statement/Prospectus...................................    A-20
Section 4.16 Labor Matters..............................    A-20
Section 4.17 Opinion of Financial Advisor...............    A-20
Section 4.18 Interim Operations of Sub..................    A-20
Section 4.19 No Seller Stock............................    A-20

ARTICLE V
CONDUCT OF BUSINESS.....................................    A-20
Section 5.01 Covenants of Seller........................    A-20
Section 5.02 Covenants of Buyer.........................    A-22
Section 5.03 Cooperation................................    A-24
Section 5.04 Confidentiality............................    A-24
Section 5.05 Notices of Certain Events..................    A-24

ARTICLE VI
ADDITIONAL AGREEMENTS...................................    A-24
Section 6.01 No Solicitation............................    A-24
Section 6.02 Proxy Statement/Prospectus; Registration
Statement..............................................    A-25
Section 6.03 Nasdaq Quotation...........................    A-25
Section 6.04 Access to Information......................    A-25
Section 6.05 Stockholders Meetings......................    A-25
Section 6.06 Legal Conditions to Merger.................    A-26
Section 6.07 Public Disclosure..........................    A-27
Section 6.08 Reorganization.............................    A-27
Section 6.09 Pooling Accounting.........................    A-27
Section 6.10 Affiliate Agreements.......................    A-27
Section 6.11 Nasdaq National Market Listing.............    A-27
Section 6.12 Stock Plans; Warrants......................    A-27
Section 6.13 Brokers or Finders.........................    A-28
Section 6.14 Voting Agreements..........................    A-28
Section 6.15 Headquarters; Officers and Directors.......    A-28
Section 6.16 Comfort Letters from Seller's
Accountants............................................    A-28
Section 6.17 Comfort Letter from Buyer's Accountants....    A-28
Section 6.18 Stock Option Agreement.....................    A-29
Section 6.19 Indemnification............................    A-29
Section 6.20 Control of Operations......................    A-29

ARTICLE VII
CONDITIONS TO MERGER....................................    A-29
Section 7.01 Conditions to Each Party's Obligation To
Effect the Merger......................................    A-29
Section 7.02 Additional Conditions to Obligations of
Buyer and Sub..........................................    A-30
Section 7.03 Additional Conditions to Obligations of
Seller.................................................    A-31

ARTICLE VIII
TERMINATION AND AMENDMENT...............................    A-32
Section 8.01 Termination................................    A-32
Section 8.02 Effect of Termination......................    A-33
Section 8.03 Fees and Expenses..........................    A-33
Section 8.04 Amendment..................................    A-34
Section 8.05 Extension; Waiver..........................    A-34

iii

PAGE
--------

ARTICLE IX
MISCELLANEOUS...........................................    A-34
Section 9.01 Nonsurvival of Representations, Warranties
and Agreements.........................................    A-34
Section 9.02 Notices....................................    A-34
Section 9.03 Interpretation.............................    A-35
Section 9.04 Counterparts...............................    A-35
Section 9.05 Entire Agreement; No Third Party
Beneficiaries..........................................    A-35
Section 9.06 Governing Law..............................    A-35
Section 9.07 Jurisdiction...............................    A-35
Section 9.08 Assignment.................................    A-35
Section 9.09 Severability...............................    A-36

Exhibit A     Form of Seller Stock Option Agreement
Exhibit B-1    Form of Seller Voting Agreement
Exhibit B-2    Form of Buyer Voting Agreement
Exhibit C-1    Form of Seller Affiliate Agreement
Exhibit C-2    Form of Buyer Affiliate Agreement
Exhibit D     Form of Employment Agreement

TABLES OF DEFINED TERMS

CROSS REFERENCE
TERMS                                                                 IN AGREEMENT
-----                                                         ----------------------------

Acquisition Proposal........................................  Section 6.01(a)

Affiliate...................................................  Section 6.10

Affiliate Agreements........................................  Section 6.10

Agreement...................................................  Preamble

Alternative Transaction.....................................  Section 8.03(f)

Antitrust Laws..............................................  Section 6.06(b)

Bankruptcy and Equity Exception.............................  Section 3.03(a)

Buyer Balance Sheet.........................................  Section 4.04(b)

Buyer Class B common Stock..................................  Section 4.02(a)

Buyer Common Stock..........................................  Section 2.01(b)

Buyer Disclosure Schedule...................................  Article IV

Buyer Employee Plans........................................  Section 4.12(a)

Buyer Material Adverse Effect...............................  Section 4.01

Buyer Material Contracts....................................  Section 4.09

Buyer Meeting...............................................  Section 3.15

Buyer Preferred Stock.......................................  Section 4.02(a)

Buyer SEC Reports...........................................  Section 4.04(a)

Buyer Stock Plans...........................................  Section 4.02(a)

Buyer Voting Agreements.....................................  Preamble

Buyer Voting Proposal.......................................  Section 6.05(b)

iv

CROSS REFERENCE
TERMS                                                                 IN AGREEMENT
-----                                                         ----------------------------

Certificates................................................  Section 2.02(b)

Certificate of Merger.......................................  Section 1.01

Closing.....................................................  Section 1.02

Closing Date................................................  Section 1.02

Code........................................................  Preamble

Confidentiality Agreements..................................  Section 5.04

Constituent Corporations....................................  Section 1.03

Effective Time..............................................  Section 1.01

Environmental Law...........................................  Section 3.11(b)

ERISA.......................................................  Section 3.12(a)

Exchange Act................................................  Section 3.03(c)

Exchange Agent..............................................  Section 2.02(a)

Exchange Fund...............................................  Section 2.02(a)

Exchange Ratio..............................................  Section 2.01(c)

Governmental Entity.........................................  Section 3.03(c)

Hazardous Substance.........................................  Section 3.11(c)

HSR Act.....................................................  Section 3.03(c)

Indemnified Parties.........................................  Section 6.19(a)

IRS.........................................................  Section 3.07(b)

Joint Proxy Statement.......................................  Section 3.15

Material Leases.............................................  Section 3.08(a)

Merger......................................................  Preamble

NJBCA.......................................................  Preamble

Order.......................................................  Section 6.06(b)

Outside Date................................................  Section 8.01(b)

Owned Real Property.........................................  Section 3.08(b)

Permitted Acquisitions......................................  Sections 5.01(d) and 5.02(d)

Registration Statement......................................  Section 3.15

Rule 145....................................................  Section 6.10

SEC.........................................................  Section 3.03(c)

Securities Act..............................................  Section 3.04(a)

Seller Balance Sheet........................................  Section 3.04(b)

Seller Common Stock.........................................  Section 2.01

Seller Disclosure Schedule..................................  Article III

Seller Employee Plans.......................................  Section 3.12(a)

Seller Material Adverse Effect..............................  Section 3.01

Seller Material Contracts...................................  Section 3.09

v

CROSS REFERENCE
TERMS                                                                 IN AGREEMENT
-----                                                         ----------------------------

Seller Meeting..............................................  Section 3.15

Seller Preferred Stock......................................  Section 3.02(a)

Seller SEC Reports..........................................  Section 3.04(a)

Seller Stock Option.........................................  Section 6.12(a)

Seller Stock Option Agreement...............................  Preamble

Seller Stock Plans..........................................  Section 3.02(a)

Seller Voting Agreements....................................  Preamble

Seller Voting Proposal......................................  Section 6.05(a)

Subsidiary..................................................  Section 3.01

Superior Proposal...........................................  Section 6.01(a)

Surviving Corporation.......................................  Section 1.03(i)

Tax.........................................................  Section 3.07(a)

Tax Returns.................................................  Section 3.07(a)

Taxes.......................................................  Section 3.07(a)

Third Party.................................................  Section 8.03(f)

vi

AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of January 12,
1999, by and among Casella Waste Systems, Inc., a Delaware corporation
("Buyer"), Rutland Acquisition Sub, Inc., a New Jersey corporation and a direct,
wholly-owned subsidiary of Buyer ("Sub"), and KTI, Inc., a New Jersey
corporation ("Seller").

WHEREAS, the Boards of Directors of Buyer and Seller deem it advisable and
in the best interests of each corporation and its respective stockholders that
Buyer and Seller combine in order to advance the long-term business interests of
Buyer and Seller;

WHEREAS, the combination of Buyer and Seller shall be effected by the terms
of this Agreement and in accordance with the New Jersey Business Corporation Act
(the "NJBCA") through a merger of Sub into Seller, as a result of which the
stockholders of Seller will become stockholders of Buyer (the "Merger");

WHEREAS, concurrently with the execution of this Agreement, and as a
condition and inducement of the willingness of Buyer to enter into this
Agreement, Seller will execute a Stock Option Agreement in favor of Buyer in the
form attached hereto as Exhibit A (the "Seller Stock Option Agreement");

WHEREAS, concurrently with the execution of this Agreement, and as a
condition and inducement of the willingness of each of Buyer and Seller to enter
into this Agreement, certain affiliates of each of Buyer and Seller will execute
Voting Agreements in the form attached hereto as Exhibits B-1 and B-2,
respectively (the "Seller Voting Agreements" and the "Buyer Voting Agreements");

WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and

WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a pooling of interests.

NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties agree as follows:

ARTICLE I
THE MERGER

SECTION 1.01 EFFECTIVE TIME OF THE MERGER.  Subject to the provisions of
this Agreement, a certificate of merger in such form as is required by the
relevant provisions of the NJBCA (the "Certificate of Merger") shall be duly
executed and acknowledged by the Surviving Corporation (as defined below) and
thereafter delivered to the Treasurer of the State of New Jersey for filing, as
soon as practicable on the Closing Date (as defined in Section 1.02). The Merger
shall become effective upon the filing of the Certificate of Merger with the
Treasurer of the State of New Jersey (the "Effective Time").

SECTION 1.02 CLOSING.  The closing of the Merger (the "Closing") will take
place at 10:00 a.m., E.S.T., on a date to be specified by Buyer and Seller (the
"Closing Date"), which shall be no later than the second business day after
satisfaction or waiver of the conditions set forth in Article VII, at the
offices of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts, unless
another date, place or time is agreed to in writing by Buyer and Seller.

SECTION 1.03 EFFECTS OF THE MERGER.  At the Effective Time (i) the separate
existence of Sub shall cease and Sub shall be merged with and into Seller (Sub
and Seller are sometimes referred to below as the "Constituent Corporations" and
Seller following the Merger is sometimes referred to below as the "Surviving
Corporation"), (ii) the Certificate of Incorporation of Seller shall be amended
so that Article Three of such Certificate of Incorporation reads in its entirety
as follows: "The total number of

shares of all classes of stock which the Corporation shall have authority to
issue is 1,000, all of which shall consist of Common Stock, $.01 par value per
share", and, as so amended, such Certificate of Incorporation shall be the
Certificate of Incorporation of the Surviving Corporation, and (iii) the Bylaws
of Sub as in effect immediately prior to the Effective Time shall be the Bylaws
of the Surviving Corporation. The Merger shall have the effects set forth in
Section 14 A: 10-6 of the NJBCA.

SECTION 1.04 DIRECTORS AND OFFICERS.  The directors and officers of Sub
immediately prior to the Effective Time shall become the directors and officers
of the Surviving Corporation, each to hold office in accordance with the
Certificate of Incorporation and Bylaws of the Surviving Corporation. Martin
Sergi will also be a director and an officer of the Surviving Corporation.

ARTICLE II
CONVERSION OF SECURITIES

SECTION 2.01 CONVERSION OF CAPITAL STOCK.  As of the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
shares of the common stock, no par value per share, of Seller ("Seller Common
Stock"), or capital stock of Sub:

(a) Capital Stock of Sub. Each issued and outstanding share of the
capital stock of Sub shall be converted into and become one fully paid and
nonassessable share of common stock of the Surviving Corporation.

(b) Cancellation of Treasury Stock and Buyer-Owned Stock. All shares of
Seller Common Stock that are owned by Seller as treasury stock and any
shares of Seller Common Stock owned by Buyer, Sub or any other wholly-owned
Subsidiary (as defined in Section 3.01) of Buyer shall be cancelled and
retired and shall cease to exist and no stock of Buyer or other
consideration shall be delivered in exchange therefor. All shares of
Class A Common Stock, $.01 par value per share, of Buyer ("Buyer Common
Stock") owned by Seller shall be unaffected by the Merger.

(c) Exchange Ratio for Seller Common Stock. Subject to Section 2.02,
each issued and outstanding share of Seller Common Stock (other than shares
to be cancelled in accordance with Section 2.01(b) and any shares of Seller
Common Stock which are held by shareholders who are dissenting shareholders
pursuant to Section 14 A: 11-3 of the NJBCA), shall be converted into the
right to receive .91 shares (the "Exchange Ratio") of Buyer Common Stock.
All such shares of Seller Common Stock when so converted, shall no longer be
outstanding and shall automatically be cancelled and retired and shall cease
to exist, and each holder of a certificate representing any such shares
shall cease to have any rights with respect thereto, except the right to
receive the shares of Buyer Common Stock and any cash in lieu of fractional
shares of Buyer Common Stock to be issued or paid in consideration therefor
upon the surrender of such certificate in accordance with Section 2.02,
without interest.

(d) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted
to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible
into Buyer Common Stock or Seller Common Stock), reorganization,
recapitalization or other like change with respect to Buyer Common Stock or
Seller Common Stock occurring after the date hereof and prior to the
Effective Time.

SECTION 2.02 EXCHANGE OF CERTIFICATES.  The procedures for exchanging
outstanding shares of Seller Common Stock for Buyer Common Stock pursuant to the
Merger are as follows:

(a) Exchange Agent. As of the Effective Time, Buyer shall deposit with a
bank or trust company designated by Buyer and Seller (the "Exchange Agent"),
for the benefit of the holders of shares of Seller Common Stock, for
exchange in accordance with this Section 2.02, through the Exchange Agent,
(i) certificates representing the shares of Buyer Common Stock (such shares
of

A-2

Buyer Common Stock, together with cash in lieu of fractional shares and any
dividends or distributions with respect thereto, being hereinafter referred
to as the "Exchange Fund") issuable pursuant to Section 2.01 in exchange for
outstanding shares of Seller Common Stock, and (ii) cash in an amount
sufficient to make payments of cash in lieu of fractional shares, if any,
required pursuant to Section 2.02(e).

(b) Exchange Procedures. Promptly after the Effective Time, Buyer shall
instruct the Exchange Agent and the Exchange Agent shall mail to each holder
of record of a certificate or certificates which immediately prior to the
Effective Time represented outstanding shares of Seller Common Stock (the
"Certificates") whose shares were converted pursuant to Section 2.01 into
the right to receive shares of Buyer Common Stock (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent, and shall be in such form and have such
other provisions as Buyer and Seller may reasonably specify) and
(ii) instructions for effecting the surrender of the Certificates in
exchange for certificates representing shares of Buyer Common Stock (plus
cash in lieu of fractional shares, if any, of Buyer Common Stock as provided
below). Upon surrender of a Certificate for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by Buyer,
together with such letter of transmittal, duly executed, the holder of such
Certificate shall be entitled to receive in exchange therefor a certificate
representing that number of whole shares of Buyer Common Stock which such
holder has the right to receive pursuant to the provisions of this
Article II, and the Certificate so surrendered shall immediately be
cancelled. In the event of a transfer of ownership of Seller Common Stock
which is not registered in the transfer records of Seller, a certificate
representing the proper number of shares of Buyer Common Stock may be issued
to a transferee if the Certificate representing such Seller Common Stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this
Section 2.02, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender
the certificate representing shares of Buyer Common Stock and cash in lieu
of any fractional shares of Buyer Common Stock as contemplated by this
Section 2.02.

(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect
to Buyer Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Certificate with respect to the
shares of Buyer Common Stock represented thereby and no cash payment in lieu
of fractional shares shall be paid to any such holder pursuant to subsection
(e) below until the holder of record of such Certificate shall surrender
such Certificate. Subject to the effect of applicable laws, following
surrender of any such Certificate, there shall be paid to the record holder
of the certificates representing whole shares of Buyer Common Stock issued
in exchange therefor, without interest, (i) at the time of such surrender,
the amount of any cash payable in lieu of a fractional share of Buyer Common
Stock to which such holder is entitled pursuant to subsection (e) below and
the amount of dividends or other distributions with a record date after the
Effective Time previously paid with respect to such whole shares of Buyer
Common Stock, and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time
but prior to surrender and a payment date subsequent to surrender payable
with respect to such whole shares of Buyer Common Stock.

(d) No Further Ownership Rights in Seller Common Stock. All shares of
Buyer Common Stock issued upon the surrender for exchange of Certificates in
accordance with the terms hereof (including any cash paid pursuant to
subsection (c) or (e) of this Section 2.02) shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of
Seller Common Stock, subject, however, to the Surviving Corporation's
obligation to pay any dividends or make any other

A-3

distributions with a record date prior to the Effective Time which may have
been declared or made by Seller on such shares of Seller Common Stock in
accordance with the terms of this Agreement (to the extent permitted under
Section 5.01) prior to the date hereof and which remain unpaid at the
Effective Time, and from and after the Effective Time there shall be no
further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of Seller Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be cancelled and exchanged as provided in this Section
2.02.

(e) No Fractional Shares. No certificate or scrip representing
fractional shares of Buyer Common Stock shall be issued upon the surrender
for exchange of Certificates, and such fractional share interests will not
entitle the owner thereof to vote or to any other rights of a stockholder of
Buyer. Notwithstanding any other provision of this Agreement, each holder of
shares of Seller Common Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of Buyer
Common Stock (after taking into account all Certificates delivered by such
holder) shall receive, in lieu thereof, cash (without interest) in an amount
equal to such fractional part of a share of Buyer Common Stock multiplied by
the average of the last reported sales prices of Buyer Common Stock, as
reported on the Nasdaq National Market, on each of the ten trading days
immediately preceding the Closing Date.

(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the stockholders of Seller for 180 days after the
Effective Time shall be delivered to Buyer, upon demand, and any
stockholders of Seller who have not previously complied with this Section
2.02 shall thereafter look only to Buyer for payment of their claim for
Buyer Common Stock, any cash in lieu of fractional shares of Buyer Common
Stock and any dividends or distributions with respect to Buyer Common Stock.

(g) No Liability. To the extent permitted by applicable law, neither
Buyer nor Seller shall be liable to any holder of shares of Seller Common
Stock or Buyer Common Stock, as the case may be, for such shares (or
dividends or distributions with respect thereto) delivered to a public
official pursuant to any applicable abandoned property, escheat or similar
law.

(h) Withholding Rights. Each of Buyer and the Surviving Corporation
shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any holder of shares of Seller Common
Stock such amounts as it is required to deduct and withhold with respect to
the making of such payment under the Code, or any provision of state, local
or foreign tax law. To the extent that amounts are so withheld by Surviving
Corporation or Buyer, as the case may be, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the holder
of the shares of Seller Common Stock in respect of which such deduction and
withholding was made by Surviving Corporation or Buyer, as the case may be.

(i) Lost Certificates. If any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required
by the Surviving Corporation, the posting by such person of a bond in such
reasonable amount as the Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen
or destroyed Certificate the shares of Buyer Common Stock and any cash in
lieu of fractional shares, and unpaid dividends and distributions on shares
of Buyer Common Stock deliverable in respect thereof pursuant to this
Agreement.

A-4

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER

Seller represents and warrants to Buyer and Sub that the statements
contained in this Article III are true and correct, except as set forth herein
and in the disclosure schedule delivered by Seller to Buyer on or before the
date of this Agreement (the "Seller Disclosure Schedule"). The Seller Disclosure
Schedule shall be arranged in paragraphs corresponding to the numbered and
lettered paragraphs contained in this Article III and the disclosure in any
paragraph shall qualify other paragraphs in this Article III only to the extent
that it is reasonably apparent from a reading of such disclosure that it also
qualifies or applies to such other paragraphs.

SECTION 3.01 ORGANIZATION OF SELLER.  Seller and each of its Subsidiaries
(as defined below) which is a corporation is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, has all requisite corporate power to own, lease and operate its
property and to carry on its business as now being conducted and as proposed to
be conducted, and is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which the failure to be so qualified
would have a material adverse effect on the business, properties, financial
condition or results of operations of Seller and its Subsidiaries, taken as a
whole (a "Seller Material Adverse Effect"); provided, however, that for purposes
of this Agreement, any adverse change in the stock price of Seller, as quoted on
the Nasdaq National Market, shall not be taken into account in determining
whether there has been or would be a "Seller Material Adverse Effect" on or with
respect to Seller and its Subsidiaries, taken as a whole. Each of Seller's
Subsidiaries which is a limited partnership or a limited liability company is
validly existing and in good standing under the laws of the jurisdiction of its
formation, has all requisite statutory power to own, lease and operate its
property and to carry on its business as now being conducted and as proposed to
be conducted, and is duly qualified to do business and is in good standing as a
foreign limited partnership or foreign limited liability company, as the case
may be, in each jurisdiction in which the failure to be so qualified would have
a Seller Material Adverse Effect. Except as set forth in the Seller SEC Reports
(as defined in Section 3.04(a)) filed on or prior to the date hereof and except
for inactive Subsidiaries, neither Seller nor any of its Subsidiaries directly
or indirectly owns any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for, any corporation,
partnership, joint venture or other business association or entity, excluding
securities in any publicly traded company held for investment by Seller and
comprising less than five percent (5%) of the outstanding stock of such company.
As used in this Agreement, the word "Subsidiary" means, with respect to any
party, any corporation or other organization, whether incorporated or
unincorporated, of which (i) such party or any other Subsidiary of such party is
a general partner or member (excluding partnerships and limited liability
companies, the general partnership or membership interests of which held by such
party or any Subsidiary of such party do not have a majority of the voting
interest in such partnership or limited liability company liability company or
veto rights with respect to decisions made by or on behalf of such partnership
or limited liability company), or (ii) at least a majority of the securities or
other interests having by their terms ordinary voting power to elect a majority
of the Board of Directors or others performing similar functions with respect to
such corporation or other organization is directly or indirectly owned or
controlled by such party or by any one or more of its Subsidiaries, or by such
party and one or more of its Subsidiaries.

SECTION 3.02 SELLER CAPITAL STRUCTURE.

(a) The authorized capital stock of Seller consists of 40,000,000 shares of
Common Stock ("Seller Common Stock") and 10,000,000 shares of Preferred Stock,
("Seller Preferred Stock"). As of November 30, 1998, (i) 13,263,960 shares of
Seller Common Stock were issued and outstanding, all of which are validly
issued, fully paid and nonassessable, (ii) no shares of Seller Common Stock were
held in the treasury of Seller or by Subsidiaries of Seller, and (iii) no shares
of Seller Preferred Stock were

A-5

issued and outstanding. The Seller Disclosure Schedule shows the number of
shares of Seller Common Stock reserved for future issuance pursuant to stock
options and warrants granted and outstanding as of November 30, 1998 and the
plans under which such options were granted, if applicable (collectively, the
"Seller Stock Plans"). No material change in such capitalization has occurred
between November 30, 1998 and the date of this Agreement. All shares of Seller
Common Stock subject to issuance as specified above are duly authorized and,
upon issuance on the terms and conditions specified in the instruments pursuant
to which they are issuable, shall be validly issued, fully paid and
nonassessable. There are no obligations, contingent or otherwise, of Seller or
any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of
Seller Common Stock, Seller Preferred Stock, or the capital stock of any
Subsidiary or to provide funds to or make any material investment (in the form
of a loan, capital contribution or otherwise) in any such Subsidiary or any
other entity other than guarantees of bank obligations of Subsidiaries entered
into in the ordinary course of business. All of the outstanding shares of
capital stock or other equity interests of or in each of Seller's Subsidiaries
are duly authorized, validly issued, fully paid and nonassessable and all such
shares (other than directors' qualifying shares in the case of foreign
Subsidiaries) and other equity interests are owned by Seller or another
Subsidiary free and clear of all security interests, liens, claims, pledges,
agreements, limitations in Seller's voting rights, charges or other encumbrances
of any nature.

(b) Except as set forth in this Section 3.02 or as reserved for future
grants of options and warrants under the Seller Stock Plans, there are no equity
securities of any class of Seller or any of its Subsidiaries, or any security
exchangeable into or exercisable for such equity securities, issued, reserved
for issuance or outstanding, and there are no options, warrants, equity
securities, calls, rights, commitments or agreements of any character to which
Seller or any of its Subsidiaries is a party or by which such entity is bound
(including under letters of intent, whether binding or nonbinding) obligating
Seller or any of its Subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock or other equity
interests of Seller or any of its Subsidiaries or obligating Seller or any of
its Subsidiaries to grant, extend, accelerate the vesting of, otherwise modify
or amend or enter into any such option, warrant, equity security, call, right,
commitment or agreement. To the best knowledge of Seller, there are no voting
trusts, proxies or other voting agreements or understandings with respect to the
shares of capital stock or other equity interests of Seller or any Subsidiary
other than the Seller Voting Agreements.

(c) No consent of the holders of the Seller Stock Options or Warrants (as
defined in Section 6.12) is required in connection with the conversion of the
Seller Stock Options or Warrants into options or warrants, as the case may be,
to acquire Buyer Common Stock in accordance with Section 6.12.

SECTION 3.03 AUTHORITY; NO CONFLICT; REQUIRED FILINGS AND CONSENTS.

(a) Seller has all requisite corporate power and authority to enter into
this Agreement and the Seller Stock Option Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and the Seller Stock Option Agreement and the consummation of the
transactions contemplated hereby and thereby by Seller have been duly authorized
by all necessary corporate action on the part of Seller, subject only to the
approval of the Merger by Seller's stockholders under the NJBCA. Assuming the
Buyer's representations and warranties contained in Article IV hereof are true,
the vote of Seller's stockholders required to approve this Agreement and the
Merger is a majority of the votes cast by the holders of Seller Common Stock on
the record date for the Seller Meeting (as defined in Section 3.15), at which a
quorum is present. This Agreement and the Seller Stock Option Agreement have
been duly executed and delivered by Seller and constitute the valid and binding
obligations of Seller, enforceable against Seller in accordance with their
terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles (the "Bankruptcy and Equity
Exception").

A-6

(b) The execution and delivery of this Agreement and the Seller Stock Option
Agreement by Seller does not, and the consummation of the transactions
contemplated hereby and thereby will not, (i) conflict with, or result in any
violation or breach of, any provision of the Certificate of Incorporation or
Bylaws of Seller, (ii) result in any violation or breach of, or constitute (with
or without notice or lapse of time, or both) a default (or give rise to a right
of termination, cancellation or acceleration of any obligation or loss of any
material benefit) under, or require a consent or waiver under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, lease, contract
or other agreement, instrument or obligation to which Seller or any of its
Subsidiaries is a party or by which any of them or any of their properties or
assets may be bound, or (iii) conflict with, violate, or cause the termination
of any permit, concession, franchise, license, judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to Seller or any of its
Subsidiaries or any of its or their properties or assets, except in the case of
(ii) and (iii) for any such conflicts, violations, defaults, terminations,
cancellations or accelerations which are not, individually or in the aggregate,
reasonably likely to have a Seller Material Adverse Effect.

(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality ("Governmental Entity") is
required by or with respect to Seller or any of its Subsidiaries in connection
with the execution and delivery of this Agreement or the Seller Stock Option
Agreement or the consummation of the transactions contemplated hereby or
thereby, except for (i) the filing of the pre-merger notification report under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, ("HSR
Act"), (ii) the filing of the Certificate of Merger with the New Jersey
Treasurer, (iii) the filing of the Joint Proxy Statement (as defined in Section
3.15 below) with the Securities and Exchange Commission (the "SEC") in
accordance with the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), (iv) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable state securities
laws and the laws of any foreign country and (v) such other consents,
authorizations, filings, approvals and registrations which, if not obtained or
made, would not materially interfere with the operations of any material
facility of Seller or otherwise be reasonably likely to have a Seller Material
Adverse Effect.

SECTION 3.04 SEC FILINGS; FINANCIAL STATEMENTS.

(a) Seller has filed and made available to Buyer all forms, reports and
documents required to be filed by Seller with the SEC since January 1, 1996
other than registration statements on Form S-8 (collectively, the "Seller SEC
Reports"). The Seller SEC Reports (i) at the time filed, complied in all
material respects with the applicable requirements of the Securities Act of
1933, as amended (the "Securities Act"), and the Exchange Act, as the case may
be, and (ii) did not at the time they were filed (or if amended or superseded by
a filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated in such Seller SEC Reports or necessary in order to make
the statements in such Seller SEC Reports, in the light of the circumstances
under which they were made, not misleading. None of Seller's Subsidiaries is
required to file any forms, reports or other documents with the SEC.

(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the Seller SEC Reports complied as to form in
all material respects with the applicable published rules and regulations of the
SEC with respect thereto, was prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes to such financial statements
or, in the case of unaudited statements, as permitted by Form 10-Q of the SEC)
and fairly presented the consolidated financial position of Seller and its
Subsidiaries as of the dates and the consolidated results of its operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be

A-7

material in amount. The unaudited balance sheet of Seller as of September 30,
1998 is referred to herein as the "Seller Balance Sheet."

SECTION 3.05 NO UNDISCLOSED LIABILITIES.  Except as disclosed in the Seller
SEC Reports filed prior to the date hereof, and except for normal or recurring
liabilities incurred since September 30, 1998 in the ordinary course of business
consistent with past practices, Seller and its Subsidiaries do not have any
liabilities, either accrued, contingent or otherwise (whether or not required to
be reflected in financial statements in accordance with generally accepted
accounting principles), and whether due or to become due, which individually or
in the aggregate are reasonably likely to have a Seller Material Adverse Effect.

SECTION 3.06 ABSENCE OF CERTAIN CHANGES OR EVENTS.  Except as disclosed in
the Seller SEC Reports filed prior to the date hereof, since the date of the
Seller Balance Sheet, Seller and its Subsidiaries have conducted their
businesses only in the ordinary course and in a manner consistent with past
practice and, since such date, there has not been (i) any change in the
financial condition, results of operations, business or properties of Seller and
its Subsidiaries, taken as a whole that has had, or is reasonably likely to
have, a Seller Material Adverse Effect; (ii) any damage, destruction or loss
(whether or not covered by insurance) with respect to Seller or any of its
Subsidiaries having a Seller Material Adverse Effect; (iii) any material change
by Seller in its accounting methods, principles or practices to which Buyer has
not previously consented in writing; (iv) any revaluation by Seller of any of
its assets having a Seller Material Adverse Effect; or (v) any other action or
event that would have required the consent of Buyer pursuant to Section 5.01 of
this Agreement had such action or event occurred after the date of this
Agreement.

SECTION 3.07 TAXES.

(a) For the purposes of this Agreement, a "Tax" or, collectively, "Taxes,"
means any and all federal, state, local and foreign taxes, assessments and other
governmental charges, duties, fees, levies, impositions and liabilities,
including without limitation, income, gross receipts, profits, sales, use and
occupation, and value added, ad valorem, transfer, gains, franchise,
withholding, payroll, recapture, employment, excise, unemployment insurance,
social security, business license, occupation, business organization, stamp,
environmental, personal property, real property, worker's compensation, license,
lease, service, service use, severance, windfall profits, customs and other
taxes, together with all interest, fines, penalties and additions imposed with
respect to such amounts and any obligations under any agreements or arrangements
with any other person with respect to such amounts and including any liability
for taxes of a predecessor entity. For purposes of this Agreement, "Tax Returns"
means all reports, returns, declarations, statements or other information
required to be supplied to a taxing authority in connection with Taxes.

(b) Seller and each of its Subsidiaries have (i) filed all federal, state,
local and foreign Tax Returns required to be filed by them prior to the date of
this Agreement (taking into account extensions), (ii) paid or accrued all Taxes
due and payable, and (iii) paid or accrued all Taxes for which a notice of
assessment or collection has been received (other than amounts being contested
in good faith by appropriate proceedings), except in the case of clause (i),
(ii) or (iii) for any such filings, payments or accruals which are not
reasonably likely, individually or in the aggregate, to have a Seller Material
Adverse Effect. The unpaid Taxes of the Seller and each of its Subsidiaries for
tax periods through the Seller Balance Sheet date do not exceed the accruals and
reserves for Taxes (excluding reserves for deferred Taxes) set forth on the
Seller Balance Sheet by an amount that would have a Seller Material Adverse
Effect. Neither the Internal Revenue Service (the "IRS") nor any other taxing
authority has asserted any claim for Taxes, or to the actual knowledge of the
executive officers of Seller, is threatening to assert any claims for Taxes,
which claims, individually or in the aggregate, are reasonably likely to have a
Seller Material Adverse Effect. Seller and each of its Subsidiaries have
withheld or collected and paid over to the appropriate governmental authorities
(or are properly holding for such

A-8

payment) all Taxes required by law to be withheld or collected, except for
amounts which are not reasonably likely, individually or in the aggregate, to
have a Seller Material Adverse Effect. There are no liens for Taxes upon the
assets of Seller or any of its Subsidiaries (other than liens for taxes that are
not yet due or that are being contested in good faith by appropriate
proceedings), except for liens which are not reasonably likely, individually or
in the aggregate, to have a Seller Material Adverse Effect.

(c) Seller is not and never has been a party to or bound by any Tax
indemnity, Tax sharing or Tax allocation agreement (whether written or unwritten
or arising under operation of federal law as a result of being a member of a
group filing consolidated or combined Tax Returns, under operation of certain
state laws as a result of being a member of a combined, consolidated or unitary
group, or under comparable laws of other states or foreign jurisdictions) which
includes a party other than Seller and its Subsidiaries nor does Seller owe any
amount under any such agreement.

(d) Neither Seller nor any of its Subsidiaries is a "consenting corporation"
within the meaning of Section 341(f) of the Code, and none of the assets of
Seller or the Subsidiaries are subject to an election under Section 341(f) of
the Code.

(e) Neither Seller nor any of its Subsidiaries has been a United States real
property holding corporation with the meaning of Section 897(c)(2) of the Code
during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.

(f) Neither Seller nor any of its Subsidiaries has made any payments, is
obligated to make any payments, or is a party to any agreement that could
obligate it to make any payments that will be an "excess parachute payment"
under Section 280G of the Code as a result of the transactions contemplated by
this Agreement.

SECTION 3.08 PROPERTIES.

(a) Seller has provided to Buyer a true and complete list of all real
property leased by Seller or its Subsidiaries pursuant to leases providing for
the occupancy of facilities in excess of 10,000 square feet (collectively
"Material Lease(s)") and the location of the premises. With respect to each such
Material Lease: (i) the lease is legal, valid, binding, enforceable against
Seller subject to the Bankruptcy and Equity Exception, and in full force and
effect; (ii) the lease will continue to be legal, valid, binding, enforceable
and in full force and effect immediately following the Closing in accordance
with the terms thereof as in effect prior to the Closing; (iii) neither Seller
nor, to the Seller's knowledge, any other party to the lease or sublease is in
breach or default, and no event has occurred which, with notice or lapse of
time, would constitute a breach or default or permit termination, modification
or acceleration thereunder; and (iv) Seller has not assigned, transferred,
conveyed, mortgaged, deeded in trust or encumbered any interest in the leasehold
or subleasehold; except, in the case of clauses (i) through (iv) that the same
is not reasonably likely to have a Seller Material Adverse Effect.

(b) Seller has provided to Buyer a true and complete list of all real
property that Seller or any of its Subsidiaries owns (the "Owned Real
Property"). With respect to each such parcel of Owned Real Property (a) Seller
or the identified Subsidiary has good and clear record and marketable title to
such property, insurable by a recognized national title insurance company at
standard rates, free and clear of any security interest, easement, covenant or
other restriction, except for recorded easements, covenants and other
restrictions which do not materially impair the current uses or occupancy of
such property; (b) there are no (i) condemnation proceedings pending or, to
Seller's knowledge, threatened relating to such parcel or (ii) litigation or
administrative actions pending or, to Seller's knowledge, threatened relating to
such parcel; (c) the legal description for such parcel contained in the deed
thereof describes such parcel fully and adequately; the buildings and
improvements located thereon are located within the boundary lines of the
described parcels of land, are not in violation of current setback requirements,
zoning laws and ordinances and do not encroach on any easement which may burden
the

A-9

land; the land does not serve any adjoining property for any purpose
inconsistent with the use of the land as heretofore used; and such parcel is not
subject to any restriction for which any permits or licenses necessary to the
use thereof as heretofore used have not been obtained; (d) there are no leases,
subleases or agreements granting to any party or parties the right of use or
occupancy of any portion of such parcel; and (e) to Seller's knowledge, each
parcel is an independent unit which does not rely on any facilities (other than
the facilities of public utility and water companies) located on any other
property (i) to fulfill any zoning, building code or other municipal or
governmental requirement; (ii) for structural support or the furnishing of any
essential building systems or utilities, including but not limited to electric,
plumbing, mechanical, heating, ventilating and air conditioning systems; or
(iii) to fulfill the requirements of any lease. To Seller's knowledge, no
building or other improvement not included in the parcel relies on any part of
the parcel to fulfill any zoning, building code or other municipal or
governmental requirement or for structural support or the furnishing of any
essential building systems or utilities. Such parcel is assessed by local
property assessors as a tax parcel or parcels separate from all other tax
parcels.

SECTION 3.09 AGREEMENTS, CONTRACTS AND COMMITMENTS.  Seller has not
breached, or received in writing any claim or notice that it has breached, any
of the terms or conditions of any material agreement, contract or commitment
filed as an exhibit to the Seller SEC Reports or any other agreement, contract
or commitment, the termination of which would have a Seller Material Adverse
Effect ("Seller Material Contracts") in such a manner as, individually or in the
aggregate, are reasonably likely to have a Seller Material Adverse Effect. Each
Seller Material Contract that has not expired by its terms is in full force and
effect, and no party to any of the Seller Material Contracts will have the right
to terminate such contract as a result of the transactions contemplated by this
Agreement. None of the Seller Material Contracts is currently being
renegotiated, and Seller has no knowledge that any Seller Material Contract will
be the subject of a voluntary or regulatory ordered renegotiation within 12
months after the date of this Agreement.

SECTION 3.10 LITIGATION.  Except as described in the Seller SEC Reports
filed prior to the date hereof, there is no action, suit or proceeding, claim,
arbitration or investigation against Seller pending or as to which Seller has
received any written notice of assertion, which, individually or in the
aggregate, is reasonably likely to have a Seller Material Adverse Effect or a
material adverse effect on the ability of Seller to consummate the transactions
contemplated by this Agreement.

SECTION 3.11 ENVIRONMENTAL MATTERS.

(a) Except as disclosed in the Seller SEC Reports filed prior to the date
hereof and except for such matters that, individually or in the aggregate, are
not reasonably likely to have a Seller Material Adverse Effect: (i) Seller and
its Subsidiaries have complied and are currently in compliance with all
applicable Environmental Laws (as defined in Section 3.11(b)); (ii) the
properties currently owned or operated by Seller and its Subsidiaries (including
soils, groundwater, surface water, buildings or other structures) are not
contaminated with any Hazardous Substances (as defined in Section 3.11(c));
(iii) the properties formerly owned or operated by Seller or any of its
Subsidiaries were not contaminated with Hazardous Substances during the period
of ownership or operation by Seller or any of its Subsidiaries; (iv) neither
Seller nor its Subsidiaries are subject to liability for any Hazardous Substance
disposal or contamination on any third party property; (v) neither Seller nor
any of its Subsidiaries has been associated with any release or threat of
release of any Hazardous Substance; (vi) neither Seller nor any of its
Subsidiaries has received any notice, demand, letter, claim or request for
information alleging that Seller or any of its Subsidiaries may be in violation
of or liable under any Environmental Law; (vii) neither Seller nor any of its
Subsidiaries is subject to any orders, decrees, injunctions or other
arrangements with any Governmental Entity or is subject to any indemnity or
other agreement with any third party relating to liability under any
Environmental Law or relating to Hazardous Substances; and (viii) there are no
circumstances or conditions involving Seller or any of its

A-10

Subsidiaries that could reasonably be expected to result in any claims,
liability, investigations, costs or restrictions on the ownership, use,
operation or transfer of any property or facility of Seller pursuant to any
Environmental Law.

(b) As used herein, the term "Environmental Law" means any federal, state,
local or foreign law, regulation, order, decree, permit, authorization, opinion,
common law or agency requirement relating to: (A) the protection, investigation
or restoration of the environment, health and safety, or natural resources,
(B) the handling, use, presence, disposal, release or threatened release of any
Hazardous Substance or (C) noise, odor, wetlands, pollution, contamination or
any injury or threat of injury to persons, property or the environment.

(c) As used herein, the term "Hazardous Substance" means any substance that
is: (A) listed, classified or regulated pursuant to any Environmental Law;
(B) any petroleum product or by-product, asbestos-containing material,
lead-containing paint or plumbing, polychlorinated biphenyls, radioactive
materials or radon; or (C) any other substance which is the subject of
regulatory action by any Governmental Entity pursuant to any Environmental Law.

SECTION 3.12 EMPLOYEE BENEFIT PLANS.

(a) Seller has listed in Section 3.12 of the Seller Disclosure Schedule all
employee benefit plans (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) and all bonus, stock option,
stock purchase, incentive, deferred compensation, supplemental retirement,
severance, welfare, fringe benefit and other similar employee benefit plans, and
all unexpired severance agreements, written or otherwise, for the benefit of, or
relating to, any current or former employee, director or independent contractor
providing services to Seller, any Subsidiary, or any entity which is a member
(an "ERISA Affiliate") of (i) a controlled group of corporations, (ii) a group
of trades or businesses (whether or not incorporated) under common control with
Seller, or (iii) an affiliated service group, all within the meaning of Section
414 of the Code, of which includes the Seller, or any Subsidiary of Seller
(together, the "Seller Employee Plans").

(b) With respect to each Seller Employee Plan, Seller has made available to
Buyer, a true and correct copy of (i) the most recent annual report (Form 5500)
filed with the IRS (and the related financial statement), (ii) such Seller
Employee Plan, (iii) each trust agreement and group annuity contract, if any,
relating to such Seller Employee Plan and (iv) the most recent actuarial report
or valuation relating to a Seller Employee Plan subject to Title IV of ERISA.

(c) With respect to the Seller Employee Plans, individually and in the
aggregate, no event has occurred, and to the knowledge of Seller, there exists
no condition or set of circumstances in connection with which Seller could be
subject to any liability that is reasonably likely to have a Seller Material
Adverse Effect under ERISA, the Code or any other applicable law.

(d) With respect to the Seller Employee Plans, individually and in the
aggregate, there are no funded benefit obligations for which contributions have
not been made or properly accrued and there are no unfunded benefit obligations
which have not been accounted for by reserves, or otherwise properly footnoted
in accordance with generally accepted accounting principles, on the financial
statements of Seller, which obligations are reasonably likely to have a Seller
Material Adverse Effect.

(e) Except as disclosed in Seller SEC Reports filed prior to the date of
this Agreement, and except as provided for in this Agreement, neither Seller nor
any of its Subsidiaries is a party to any oral or written (i) agreement with any
current or former officer or other key employee of Seller or any of its
Subsidiaries, the benefits of which are contingent, or the terms of which are
materially altered, upon the occurrence of a transaction involving Seller of the
nature contemplated by this Agreement, (ii) agreement with any current or former
officer of Seller providing any term of employment or compensation guarantee
extending for a period longer than one year from the date hereof and for the

A-11

payment of compensation in excess of $100,000 per annum, or (iii) agreement or
plan, including any stock option plan, stock appreciation right plan, restricted
stock plan or stock purchase plan, any of the benefits of which will be
increased, or the vesting or funding of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement.

(f) There are no pending, or threatened claims, actions, suits, termination
proceedings, or investigations by any Governmental Entity, against or involving
any Seller Benefit Plan; any Seller Benefit Plan intended to be qualified under
Section 401(a) of the Code has received a determination letter from the Internal
Revenue Service to that effect, which has not been revoked, and nothing has
occurred since the date of the most recent determination letter that would
adversely affect such qualification.

SECTION 3.13 COMPLIANCE WITH LAWS.  Seller has complied with, is not in
violation of, and has not received any notices of violation with respect to, any
federal, state or local statute, law or regulation with respect to the conduct
of its business, or the ownership or operation of its business, except for
failures to comply or violations which, individually or in the aggregate, have
not had and are not reasonably likely to have a Seller Material Adverse Effect.
No officer or director of Seller or any of its Subsidiaries or holder of greater
than 5% of the outstanding capital stock of Seller would disqualify Buyer from
obtaining any permits necessary for the business of Buyer or disqualify Seller
or Buyer from bidding on or being awarded any government contract.

SECTION 3.14 ACCOUNTING AND TAX MATTERS.  To its knowledge, after consulting
with its independent auditors, neither Seller nor any of its Affiliates (as
defined in Section 6.10) has taken or agreed to take any action which would
(i) prevent Buyer from accounting for the business combination to be effected by
the Merger as a pooling of interests or (ii) prevent the Merger from
constituting a transaction qualifying as a reorganization under 368(a) of the
Code.

SECTION 3.15 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS.  The
information to be supplied by Seller for inclusion in the registration statement
on Form S-4 pursuant to which shares of Buyer Common Stock issued in the Merger
will be registered under the Securities Act (the "Registration Statement"),
shall not at the time the Registration Statement is declared effective by the
SEC contain any untrue statement of a material fact or omit to state any
material fact required to be stated in the Registration Statement or necessary
in order to make the statements in the Registration Statement, in light of the
circumstances under which they were made, not misleading. The information
supplied by Seller for inclusion in the joint proxy statement/prospectus to be
sent to the stockholders of Buyer and Seller in connection with the meeting of
Seller's stockholders to consider this Agreement and the Merger (the "Seller
Meeting") and in connection with the meeting of Buyer's stockholders (the "Buyer
Meeting") to consider the issuance of shares of Buyer Common Stock pursuant to
the Merger (the "Joint Proxy Statement") shall not, on the date the Joint Proxy
Statement is first mailed to stockholders of Seller or Buyer, at the time of the
Seller Meeting and the Buyer Meeting and at the Effective Time, contain any
statement which, at such time and in light of the circumstances under which it
shall be made, is false or misleading with respect to any material fact, or omit
to state any material fact necessary in order to make the statements made in the
Joint Proxy Statement not false or misleading; or omit to state any material
fact necessary to correct any statement in any earlier communication with
respect to the solicitation of proxies for the Seller Meeting or the Buyer
Meeting which has become false or misleading. If at any time prior to the
Effective Time any event relating to Seller or any of its Affiliates, officers
or directors should be discovered by Seller which should be set forth in an
amendment to the Registration Statement or a supplement to the Joint Proxy
Statement, Seller shall promptly inform Buyer.

A-12

SECTION 3.16 LABOR MATTERS.  Neither Seller nor any of its Subsidiaries is a
party to or otherwise bound by any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization, nor,
as of the date hereof, is Seller or any of its Subsidiaries the subject of any
material proceeding asserting that Seller or any of its Subsidiaries has
committed an unfair labor practice or is seeking to compel it to bargain with
any labor union or labor organization nor, as of the date of this Agreement, is
there pending or, to the knowledge of the executive officers of Seller,
threatened, any material labor strike, dispute, walkout, work stoppage,
slow-down or lockout involving Seller or any of its Subsidiaries.

SECTION 3.17 NO EXISTING DISCUSSIONS.  As of the date hereof, Seller is not
engaged, directly or indirectly, in any discussions or negotiations with any
other party with respect to an Acquisition Proposal (as defined in Section
6.01(a)).

SECTION 3.18 OPINION OF FINANCIAL ADVISOR.  The financial advisors of
Seller, Credit Suisse First Boston Corporation and CIBC World Markets Corp.,
have each delivered to the Board of Directors of Seller an opinion dated the
date of this Agreement to the effect that the Exchange Ratio in the Merger is
fair to the holders of Seller Common Stock from a financial point of view.

SECTION 3.19 ANTI-TAKEOVER LAWS.  Assuming the accuracy of the
representations and warranties set forth in Article IV hereto, Seller has taken
all actions necessary such that no "fair price", "business combination",
"control share acquisition", or similar statute will be applicable to the
transactions contemplated by this Agreement.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER AND SUB

Buyer and Sub jointly and severally represent and warrant to Seller that the
statements contained in this Article IV are true and correct, except as set
forth herein in the disclosure schedule delivered by Buyer and Sub to Seller on
or before the date of this Agreement (the "Buyer Disclosure Schedule"). The
Buyer Disclosure Schedule shall be arranged in paragraphs corresponding to the
numbered and lettered paragraphs contained in this Article IV and the disclosure
in any paragraph shall qualify other paragraphs in this Article IV only to the
extent that it is reasonably apparent from a reading of such disclosure that it
also qualifies or applies to such other paragraphs.

SECTION 4.01 ORGANIZATION OF BUYER AND SUB.  Buyer and Sub and each of
Buyer's other Subsidiaries which is a corporation is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, has all requisite corporate power to own,
lease and operate its property and to carry on its business as now being
conducted and as proposed to be conducted, and is duly qualified to do business
and is in good standing as a foreign corporation in each jurisdiction in which
the failure to be so qualified would have a material adverse effect on the
business, properties, financial condition or results of operations of Buyer and
its Subsidiaries, taken as a whole (a "Buyer Material Adverse Effect");
provided, however, that for purposes of this Agreement, any adverse change in
the stock price of Buyer, as quoted on the Nasdaq National Market, shall not be
taken into account in determining whether there has been or would be an "Buyer
Material Adverse Effect" on or with respect to Buyer and its Subsidiaries, taken
as a whole. Each of Buyer's Subsidiaries which is a limited partnership or a
limited liability company is validly existing and in good standing under the
laws of the jurisdiction of its formation, has all requisite statutory power to
own, lease and operate its property and to carry on its business as now being
conducted and as proposed to be conducted, and is duly qualified to do business
and is in good standing as a foreign limited partnership or foreign limited
liability company, as the case may be, in each jurisdiction in which the failure
to be so qualified would have a Buyer's Material Adverse Effect. Except as set
forth in the Buyer SEC Reports (as defined in Section 4.04(a)) filed prior to
the date hereof, neither Buyer nor any of its Subsidiaries directly or
indirectly owns any equity or similar

A-13

interest in, or any interest convertible into or exchangeable or exercisable
for, any corporation, partnership, joint venture or other business association
or entity, excluding securities in any publicly traded company held for
investment by Buyer and comprising less than five percent (5%) of the
outstanding stock of such company.

SECTION 4.02 BUYER CAPITAL STRUCTURE.

(a) The authorized capital stock of Buyer consists of (i) 100,000,000 shares
of Buyer Common Stock, (ii) 1,000,000 shares of Class B Common Stock, $.01 par
value ("Buyer Class B Common Stock"), and (iii) 1,000,000 shares of Preferred
Stock, $.01 par value (the "Buyer Preferred Stock"). As of November 30, 1998,
there were outstanding 13,819,473 shares of Buyer Common Stock, 988,200 shares
of Buyer Class B Common Stock, and no shares of Buyer Preferred Stock. The Buyer
Disclosure Schedule shows the number of shares of Buyer Common Stock reserved
for future issuance pursuant to stock options granted and outstanding as of
October 31, 1998, and the plans under which such options were granted
(collectively, the "Buyer Stock Plans"). There are no shares of Buyer Class B
Common Stock reserved for future issuance. Except for the issuance of additional
shares of Buyer Common Stock in acquisitions as set forth in the Buyer
Disclosure Schedule, no material change in such capitalization has occurred
between November 30, 1998 and the date of this Agreement. All shares of Buyer
Common Stock subject to issuance as specified above are duly authorized and,
upon issuance on the terms and conditions specified in the instruments pursuant
to which they are issuable, shall be validly issued, fully paid and
nonassessable. The shares of Buyer Common Stock to be issued in the Merger will,
when issued in accordance with the terms of this Agreement, be validly issued,
fully paid and nonassessable. There are no obligations, contingent or otherwise,
of Buyer or any of its Subsidiaries to repurchase, redeem or otherwise acquire
any shares of Buyer Common Stock, Buyer Class B Common Stock, Buyer Preferred
Stock or the capital stock of any Subsidiary or to provide funds to or make any
material investment (in the form of a loan, capital contribution or otherwise)
in any such Subsidiary or any other entity other than guarantees of bank
obligations of Subsidiaries entered into in the ordinary course of business. All
of the outstanding shares of capital stock of each of Buyer's Subsidiaries are
duly authorized, validly issued, fully paid and nonassessable and all such
shares (other than directors' qualifying shares in the case of foreign
Subsidiaries) are owned by Buyer or another Subsidiary free and clear of all
security interests, liens, claims, pledges, agreements, limitations in Buyer'
voting rights, charges or other encumbrances of any nature.

(b) Except as set forth in this Section 4.02 or as reserved for future
grants of options under the Buyer Stock Plans, there are no equity securities of
any class of Buyer or any of its Subsidiaries, or any security exchangeable into
or exercisable for such equity securities, issued, reserved for issuance or
outstanding. There are no options, warrants, equity securities, calls, rights,
commitments or agreements of any character to which Buyer or any of its
Subsidiaries is a party or by which such entity is bound (including under
letters of intent, whether binding or nonbinding) obligating Buyer or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of Buyer or any of its Subsidiaries or
obligating Buyer or any of its Subsidiaries to grant, extend, accelerate the
vesting of, otherwise modify or amend or enter into any such option, warrant,
equity security, call, right, commitment or agreement. To the best knowledge of
Buyer, there are no voting trusts, proxies or other voting agreements or
understandings with respect to the shares of capital stock of Buyer.

SECTION 4.03 AUTHORITY; NO CONFLICT; REQUIRED FILINGS AND CONSENTS.

(a) Each of Buyer and the Sub has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated by this Agreement. The execution and delivery of this Agreement and
the consummation of the transactions contemplated by this Agreement have been
duly authorized by all necessary corporate action on the part of each of Buyer
and Sub

A-14

(including the approval of the Merger by Buyer as the sole stockholder of Sub),
subject only to the approval of the Buyer Voting Proposal (as defined in Section
6.05(b)) by Buyer's stockholders. The vote of Buyer's stockholders required to
approve the Buyer Voting Proposal is a majority of the total votes cast on the
proposal in person or by proxy. This Agreement has been duly executed and
delivered by each of Buyer and Sub and constitutes the valid and binding
obligation of each of Buyer and Sub, enforceable in accordance with its terms,
subject to the Bankruptcy and Equity Exception.

(b) The execution and delivery of this Agreement by each of Buyer and Sub
does not, and the consummation of the transactions contemplated by this
Agreement will not, (i) conflict with, or result in any violation or breach of,
any provision of the Certificate of Incorporation or Bylaws of Buyer or Sub,
(ii) result in any violation or breach of, or constitute (with or without notice
or lapse of time, or both) a default (or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of any material benefit)
under, or require a consent or waiver under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, lease, contract or other
agreement, instrument or obligation to which Buyer or any of its Subsidiaries is
a party or by which any of them or any of their properties or assets may be
bound, or (iii) conflict with, violate, or cause the termination of any permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Buyer or any of its Subsidiaries or
any of its or their properties or assets, except in the case of (ii) and
(iii) for any such conflicts, violations, defaults, terminations, cancellations
or accelerations which are not, individually or in the aggregate, reasonably
likely to have a Buyer Material Adverse Effect.

(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Buyer or any of its Subsidiaries in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby, except for (i) the filing of the pre-merger notification report under
the HSR Act, (ii) the filing of the Registration Statement with the SEC in
accordance with the Securities Act, (iii) the filing of the Certificate of
Merger with the New Jersey Treasurer, (iv) the filing of the Joint Proxy
Statement with the SEC in accordance with the Exchange Act, (v) such consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable state securities laws and the laws of any
foreign country, (vi) the approval by the Nasdaq National Market of the listing
of the shares of Buyer Common Stock to be issued in the transactions
contemplated by this Agreement, and (vii) such other consents, authorizations,
filings, approvals and registrations which, if not obtained or made, would not
interfere with the operation of any facility of Buyer or otherwise be reasonably
likely to have a Buyer Material Adverse Effect.

SECTION 4.04 SEC FILINGS; FINANCIAL STATEMENTS.

(a) Buyer has filed and made available to Seller all forms, reports and
documents required to be filed by Buyer with the SEC since January 1, 1996 other
than registration statements on Form S-8 (collectively, the "Buyer SEC
Reports"). The Buyer SEC Reports (i) at the time filed, complied in all material
respects with the applicable requirements of the Securities Act and the Exchange
Act, as the case may be, and (ii) did not at the time they were filed (or if
amended or superseded by a filing prior to the date of this Agreement, then on
the date of such filing) contain any untrue statement of a material fact or omit
to state a material fact required to be stated in such Buyer SEC Reports or
necessary in order to make the statements in such Buyer SEC Reports, in the
light of the circumstances under which they were made, not misleading. None of
Buyer's Subsidiaries is required to file any forms, reports or other documents
with the SEC.

(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the Buyer SEC Reports complied as to form in all
material respects with the applicable published rules and regulations of the SEC
with respect thereto, was prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved

A-15

(except as may be indicated in the notes to such financial statements or, in the
case of unaudited statements, as permitted by Form 10-Q of the SEC) and fairly
presented the consolidated financial position of Buyer and its Subsidiaries as
of the dates and the consolidated results of its operations and cash flows for
the periods indicated, except that the unaudited interim financial statements
were or are subject to normal and recurring year-end adjustments which were not
or are not expected to be material in amount. The unaudited balance sheet of
Buyer as of October 31, 1998 is referred to herein as the "Buyer Balance Sheet."

SECTION 4.05 NO UNDISCLOSED LIABILITIES.  Except as disclosed in the Buyer
SEC Reports filed prior to the date hereof, and except for normal or recurring
liabilities incurred since October 31, 1998 in the ordinary course of business
consistent with past practices, Buyer and its Subsidiaries do not have any
liabilities, either accrued, contingent or otherwise (whether or not required to
be reflected in financial statements in accordance with generally accepted
accounting principles), and whether due or to become due, which individually or
in the aggregate, are reasonably likely to have a Buyer Material Adverse Effect.

SECTION 4.06 ABSENCE OF CERTAIN CHANGES OR EVENTS.  Except as disclosed in
the Buyer SEC Reports filed prior to the date hereof, since the date of the
Buyer Balance Sheet, Buyer and its Subsidiaries have conducted their businesses
only in the ordinary course and in a manner consistent with past practice and,
since such date, there has not been (i) any change in the financial condition,
results of operations, business or properties of Buyer and its Subsidiaries,
taken as a whole, that has had, or is reasonably likely to have, a Buyer
Material Adverse Effect; (ii) any damage, destruction or loss (whether or not
covered by insurance) with respect to Buyer or any of its Subsidiaries having a
Buyer Material Adverse Effect; (iii) any material change by Buyer in its
accounting methods, principles or practices to which Seller has not previously
consented in writing; (iv) any revaluation by Buyer of any of its assets having
a Buyer Material Adverse Effect; or (v) any other action or event that would
have required the consent of Seller pursuant to Section 5.02 of this Agreement
had such action or event occurred after the date of this Agreement.

SECTION 4.07 TAXES.

(a) Buyer and each of its Subsidiaries have (i) filed all federal, state,
local and foreign Tax Returns required to be filed by them prior to the date of
this Agreement (taking into account extensions), (ii) paid or accrued all Taxes
due and payable, and (iii) paid or accrued all Taxes for which a notice of
assessment or collection has been received (other than amounts being contested
in good faith by appropriate proceedings), except in the case of clause (i),
(ii) or (iii) for any such filings, payments or accruals which are not
reasonably likely, individually or in the aggregate, to have a Buyer Material
Adverse Effect. The unpaid Taxes of the Buyer and each of its Subsidiaries for
tax periods through the Buyer Balance Sheet date do not exceed the accruals and
reserves for Taxes (excluding reserves for deferred Taxes) set forth on the
Buyer Balance Sheet by an amount that would have a Buyer Material Adverse
Effect. Neither the IRS nor any other taxing authority has asserted any claim
for Taxes, or to the actual knowledge of the executive officers of Buyer, is
threatening to assert any claims for Taxes, which claims, individually or in the
aggregate, are reasonably likely to have a Buyer Material Adverse Effect. Buyer
and each of its Subsidiaries have withheld or collected and paid over to the
appropriate governmental authorities (or are properly holding for such payment)
all Taxes required by law to be withheld or collected, except for amounts which
are not reasonably likely, individually or in the aggregate, to have a Buyer
Material Adverse Effect. There are no liens for Taxes upon the assets of Buyer
or any of its Subsidiaries (other than liens for taxes that are not yet due or
that are being contested in good faith by appropriate proceedings), except for
liens which are not reasonably likely, individually or in the aggregate, to have
a Buyer Material Adverse Effect.

(b) Buyer is not and never has been a party to or bound by any Tax
indemnity, Tax sharing or Tax allocation agreement (whether written or unwritten
or arising under operation of federal law as a result

A-16

of being a member of a group filing consolidated or combined Tax Returns, under
operation of certain state laws as a result of being a member of a combined,
consolidated or unitary group, or under comparable laws of other states or
foreign jurisdictions) which includes a party other than Buyer and its
Subsidiaries nor does Buyer owe any amount under any such agreement.

(c) Neither Buyer nor any of its Subsidiaries is a "consenting corporation"
within the meaning of Section 341(f) of the Code, and none of the assets of
Buyer or the Subsidiaries are subject to an election under Section 341(f) of the
Code.

(d) Neither Buyer nor any of its Subsidiaries has been a United States real
property holding corporation with the meaning of Section 897(c)(2) of the Code
during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.

(e) Neither Buyer nor any of its Subsidiaries has made any payments, is
obligated to make any payments, or is a party to any agreement that could
obligate it to make any payments that will be an "excess parachute payment"
under Section 280G of the Code as a result of the transactions contemplated by
this Agreement.

SECTION 4.08 PROPERTIES.

(a) Buyer has provided to Seller a true and complete list of all Material
Leases of Buyer and its Subsidiaries and the location of the premises. With
respect to each Material Lease of Buyer: (i) the lease is legal, valid, binding,
enforceable and in full force and effect; (ii) the lease will continue to be
legal, valid, binding, enforceable against Buyer subject to the Bankruptcy and
Equity exception, and in full force and effect immediately following the Closing
in accordance with the terms thereof as in effect prior to the Closing;
(iii) neither Buyer nor, to the Buyer's knowledge, any other party to the lease
or sublease is in breach or default, and no event has occurred which, with
notice or lapse of time, would constitute a breach or default or permit
termination, modification or acceleration thereunder; and (iv) Buyer has not
assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any
interest in the leasehold or subleasehold; except, in the case of clauses
(i) through (iv) that the same is not reasonably likely to have a Seller
Material Adverse Effect.

(b) Buyer has provided to Seller a true and complete list of all Owned Real
Property owned by Buyer and its Subsidiaries. With respect to any item of real
property owned by Buyer: (a) Buyer or the identified Subsidiary has good and
clear record and marketable title to such property, insurable by a recognized
national title insurance company at standard rates, free and clear of any
security interest, easement, covenant or other restriction, except for recorded
easements, covenants and other restrictions which do not materially impair the
current uses or occupancy of such property; (b) there are no (i) condemnation
proceedings pending or, to Buyer's knowledge, threatened relating to such parcel
or (ii) litigation or administrative actions pending or, to Buyer's knowledge,
threatened relating to such parcel; (c) the legal description for such parcel
contained in the deed thereof describes such parcel fully and adequately; the
buildings and improvements located thereon are located within the boundary lines
of the described parcels of land, are not in violation of current setback
requirements, zoning laws and ordinances and do not encroach on any easement
which may burden the land; the land does not serve any adjoining property for
any purpose inconsistent with the use of the land as heretofore used; and such
parcel is not subject to any restriction for which any permits or licenses
necessary to use thereof as heretofore used have not been obtained; (d) there
are no leases, subleases or agreements granting to any party or parties the
right of use or occupancy of any portion of such parcel; and (e) to Buyer's
knowledge, each parcel is an independent unit which does not rely on any
facilities (other than the facilities of public utility and water companies)
located on any other property (i) to fulfill any zoning, building code or other
municipal or governmental requirement; (ii) for structural support or the
furnishing of any essential building systems or utilities, including but not
limited to electric, plumbing, mechanical, heating, ventilating and air
conditioning systems; or (iii) to fulfill the requirements of any

A-17

lease. To Buyer's knowledge, no building or other improvement not included in
the parcel relies on any part of the parcel to fulfill any zoning, building code
or other municipal or governmental requirement or for structural support or the
furnishing of any essential building systems or utilities. Such parcel is
assessed by local property assessors as a tax parcel or parcels separate from
all other tax parcels.

SECTION 4.09 AGREEMENTS, CONTRACTS AND COMMITMENTS.  Buyer has not breached,
or received in writing any claim or notice that it has breached, any of the
terms or conditions of any material agreement, contract or commitment filed as
an exhibit to the Buyer SEC Reports or any other agreement, contract or
commitment the termination of which would have a Buyer Material Adverse Effect
("Buyer Material Contracts") in such a manner as, individually or in the
aggregate, are reasonably likely to have a Buyer Material Adverse Effect. Each
Buyer Material Contract that has not expired by its terms is in full force and
effect, and no party to any of the Buyer Material Contracts will have the right
to terminate such contract as a result of the transactions contemplated by this
Agreement. None of the Buyer Material Contracts is currently being renegotiated,
and Buyer has no knowledge that any Buyer Material Contract will be subject of a
voluntary or regulatory ordered renegotiation within 12 months after the date of
this Agreement.

SECTION 4.10 LITIGATION.  Except as described in the Buyer SEC Reports filed
prior to the date hereof, there is no action, suit or proceeding, claim,
arbitration or investigation against Buyer pending or as to which Buyer has
received any written notice of assertion, which, individually or in the
aggregate, is reasonably likely to have a Buyer Material Adverse Effect or a
material adverse effect on the ability of Buyer to consummate the transactions
contemplated by this Agreement.

SECTION 4.11 ENVIRONMENTAL MATTERS.  Except as disclosed in the Buyer SEC
Reports filed prior to the date hereof and except for such matters that,
individually or in the aggregate, are not reasonably likely to have a Buyer
Material Adverse Effect: (i) Buyer and its Subsidiaries have complied and are
currently in compliance with all applicable Environmental Laws; (ii) the
properties currently owned or operated by Buyer and its Subsidiaries (including
soils, groundwater, surface water, buildings or other structures) are not
contaminated with any Hazardous Substances; (iii) the properties formerly owned
or operated by Buyer or any of its Subsidiaries were not contaminated with
Hazardous Substances during the period of ownership or operation by Buyer or any
of its Subsidiaries; (iv) neither Buyer nor its Subsidiaries are subject to
liability for any Hazardous Substance disposal or contamination on any third
party property; (v) neither Buyer nor any of its Subsidiaries has been
associated with any release or threat of release of any Hazardous Substance;
(vi) neither Buyer nor any of its Subsidiaries has received any notice, demand,
letter, claim or request for information alleging that Buyer or any of its
Subsidiaries may be in violation of or liable under any Environmental Law;
(vii) neither Buyer nor any of its Subsidiaries is subject to any orders,
decrees, injunctions or other arrangements with any Governmental Entity or is
subject to any indemnity or other agreement with any third party relating to
liability under any Environmental Law or relating to Hazardous Substances; and
(viii) there are no circumstances or conditions involving Buyer or any of its
Subsidiaries that could reasonably be expected to result in any claims,
liability, investigations, costs or restrictions on the ownership, use,
operation or transfer of any property or facility of Buyer pursuant to any
Environmental Law.

SECTION 4.12 EMPLOYEE BENEFIT PLANS.

(a) Buyer has listed in Section 4.12 of the Buyer Disclosure Schedule all
employee benefit plans (as defined in Section 3(3) of ERISA) and all bonus,
stock option, stock purchase, incentive, deferred compensation, supplemental
retirement, severance, welfare, fringe benefit and other similar employee
benefit plans, and all unexpired severance agreements, written or otherwise, for
the benefit of, or relating to, any current or former employee, director or
independent contractor providing services to Buyer, any Subsidiary of Buyer, or
any ERISA Affiliate of Buyer (together, the "Buyer Employee Plans"). With
respect to each Buyer Employee Plan, Buyer has made available to Seller, a true
and

A-18

correct copy of (i) the most recent annual report (Form 5500) filed with the IRS
(and the related financial statement), (ii) such Buyer Employee Plan,
(iii) each trust agreement and group annuity contract, if any, relating to such
Buyer Employee Plan and (iv) the most recent actuarial report or valuation
relating to a Buyer Employee Plan subject to Title IV of ERISA.

(b) With respect to the Buyer Employee Plans, individually and in the
aggregate, no event has occurred, and to the knowledge of Buyer, there exists no
condition or set of circumstances in connection with which Buyer could be
subject to any liability that is reasonably likely to have a Buyer Material
Adverse Effect under ERISA, the Code or any other applicable law.

(c) With respect to the Buyer Employee Plans, individually and in the
aggregate, there are no funded benefit obligations for which contributions have
not been made or properly accrued and there are no unfunded benefit obligations
which have not been accounted for by reserves, or otherwise properly footnoted
in accordance with generally accepted accounting principles, on the financial
statements of Buyer, which obligations are reasonably likely to have a Buyer
Material Adverse Effect.

(d) There are no pending, or threatened claims, actions, suits, termination
proceedings, or investigations by any Governmental Entity, against or involving
any Buyer Benefit Plan; any Buyer Benefit Plan intended to be qualified under
Section 401(a) of the Code has received a determination letter from the Internal
Revenue Service to that effect, which has not been revoked, and nothing has
occurred since the date of the most recent determination letter that would
adversely affect such qualification.

(e) Except as disclosed in Buyer SEC Reports filed prior to the date of this
Agreement, and except as provided for in this Agreement, neither Buyer nor any
of its Subsidiaries is a party to any oral or written (i) agreement with any
current or former officer or other key employee of Buyer or any of its
Subsidiaries, the benefits of which are contingent, or the terms of which are
materially altered, upon the occurrence of a transaction involving Buyer of the
nature contemplated by this Agreement, (ii) agreement with any current or former
officer of Buyer providing any term of employment or compensation guarantee
extending for a period longer than one year from the date hereof and for the
payment of compensation in excess of $100,000 per annum, or (iii) agreement or
plan, including any stock option plan, stock appreciation right plan, restricted
stock plan or stock purchase plan, any of the benefits of which will be
increased, or the vesting or funding of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement.

(f) At no time has the Buyer or any Subsidiary of Buyer been obligated to
contribute to any "multiemployer plan" (as defined in Section 4001 or ERISA).

SECTION 4.13 COMPLIANCE WITH LAWS.  Buyer has complied with, is not in
violation of, and has not received any notices of violation with respect to, any
federal, state or local statute, law or regulation with respect to the conduct
of its business, or the ownership or operation of its business, except for
failures to comply or violations which, individually or in the aggregate, have
not had and are not reasonably likely to have a Buyer Material Adverse Effect.
No officer or director of Buyer or any of its Subsidiaries or holder of greater
than 5% of the outstanding capital stock of Buyer would disqualify Seller from
obtaining any permits necessary for the business of Seller or disqualify Buyer
or Seller from bidding on or being awarded any government contract.

SECTION 4.14 ACCOUNTING AND TAX MATTERS.  To its knowledge, after consulting
with its independent auditors, neither Buyer nor any of its Affiliates has taken
or agreed to take any action which would (i) prevent Buyer from accounting for
the business combination to be effected by the Merger as a pooling of interests,
or (ii) prevent the Merger from constituting a transaction qualifying as a
reorganization under Section 368(a) of the Code.

A-19

SECTION 4.15 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS.  The
information in the Registration Statement (except for information supplied by
Seller for inclusion in the Registration Statement, as to which Buyer makes no
representation) shall not at the time the Registration Statement is declared
effective by the SEC contain any untrue statement of a material fact or omit to
state any material fact required to be stated in the Registration Statement or
necessary in order to make the statements in the Registration Statement, in
light of the circumstances under which they were made, not misleading. The
information (except for information supplied by Seller for inclusion in the
Joint Proxy Statement, as to which Buyer makes no representation) in the Joint
Proxy Statement shall not, on the date the Joint Proxy Statement is first mailed
to stockholders of Buyer or Seller, at the time of the Buyer Meeting and the
Seller Meeting and at the Effective Time, contain any statement which, at such
time and in light of the circumstances under which it shall be made, is false or
misleading with respect to any material fact, or omit to state any material fact
necessary in order to make the statements made in the Joint Proxy Statement not
false or misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the Buyer Meeting or the Seller Meeting which has become false or
misleading. If at any time prior to the Effective Time any event relating to
Buyer or any of its Affiliates, officers or directors should be discovered by
Buyer which should be set forth in an amendment to the Registration Statement or
a supplement to the Joint Proxy Statement, Buyer shall promptly inform Seller.

SECTION 4.16 LABOR MATTERS.  Neither Buyer nor any of its Subsidiaries is a
party to or otherwise bound by any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization, nor,
as of the date hereof, is Buyer or any of its Subsidiaries the subject of any
material proceeding asserting that Buyer or any of its Subsidiaries has
committed an unfair labor practice or is seeking to compel it to bargain with
any labor union or labor organization nor, as of the date of this Agreement, is
there pending or, to the knowledge of the executive officers of Buyer,
threatened, any material labor strike, dispute, walkout, work stoppage,
slow-down or lockout involving Buyer or any of its Subsidiaries.

SECTION 4.17 OPINION OF FINANCIAL ADVISOR.  The financial advisor of Buyer,
Donaldson, Lufkin & Jenrette Securities Corporation has delivered to Buyer an
opinion dated the date of this Agreement, to the effect that the, Exchange Ratio
is fair to Buyer and its stockholders from a financial point of view.

SECTION 4.18 INTERIM OPERATIONS OF SUB.  Sub was formed solely for the
purpose of engaging in the transactions contemplated by this Agreement, has
engaged in no other business activities and has conducted its operations only as
contemplated by this Agreement.

SECTION 4.19 NO SELLER STOCK.  Neither the Buyer nor any of its affiliates
or Subsidiaries directly or indirectly beneficially owns any Seller Common
Stock.

ARTICLE V
CONDUCT OF BUSINESS

SECTION 5.01 COVENANTS OF SELLER.  During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, Seller agrees as to itself and its respective
Subsidiaries (except to the extent that Buyer shall otherwise consent in
writing), to carry on its business in the usual, regular and ordinary course in
substantially the same manner as previously conducted, to pay its debts and
taxes when due subject to good faith disputes over such debts or taxes, to pay
or perform its other obligations when due, and, to the extent consistent with
such business, use all reasonable efforts consistent with past practices and
policies to preserve intact its present business organization, keep available
the services of its present officers and key employees and preserve its
relationships with customers, suppliers, distributors, and others having

A-20

business dealings with it. Except as expressly contemplated by this Agreement,
Seller shall not (and shall not permit any of its respective Subsidiaries to),
without the written consent of Buyer:

(a) Accelerate, amend or change the period of exercisability of options or
restricted stock or authorize cash payments in exchange for any such options
except as required by the terms of any employee stock plans or any related
agreements in effect as of the date of this Agreement;

(b) Declare or pay any dividends on or make any other distributions (whether
in cash, stock or property) in respect of any of its capital stock, or split,
combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or purchase or otherwise acquire, directly or
indirectly, any shares of its capital stock except from former employees,
directors and consultants in accordance with agreements providing for the
repurchase of shares in connection with any termination of service to such
party;

(c) Issue, deliver or sell, or authorize or propose the issuance, delivery
or sale of, any shares of its capital stock or securities convertible into
shares of its capital stock, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities, other than (i) the grant
of options consistent with past practices to existing or new employees, which
options represent in the aggregate the right to acquire no more than 100,000
shares (net of cancellations) of Seller Common Stock, (ii) the issuance of
shares of Seller Common Stock pursuant to the exercise of options and warrants
outstanding on the date of this Agreement, (iii) the issuance of shares of
Seller Common Stock pursuant to the conversion of debt securities outstanding on
the date of this Agreement, or (iv) to the sellers of businesses acquired by
Seller in Seller Permitted Acquisitions (as defined below);

(d) Acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership or
other business organization or division, or otherwise acquire or agree to
acquire any assets (other than inventory and other items in the ordinary course
of business) other than (i) acquisitions of businesses in the Seller's existing
lines of business, individually having annual revenues of not greater than $10
million, and collectively having revenues not greater than $20 million, or (ii)
acquisitions set forth on the list given by Seller to Buyer in writing on or
prior to the date hereof (such acquisitions described in clauses (i) or (ii)
being referred to as "Seller Permitted Acquisitions");

(e) Sell, lease, license or otherwise dispose of any of its material
properties or assets, except for sales of inventory in the ordinary course of
business;

(f) (i) Except to the extent required under applicable law or the terms of a
collective bargaining agreement, increase or agree to increase the compensation
payable or to become payable to its officers or employees, except for increases
in salary or wages of employees (other than officers) in accordance with past
practices, (ii) grant any additional severance or termination pay to, or enter
into any employment or severance agreements with, any employees or officers,
(iii) enter into any collective bargaining agreement, or (iv) establish, adopt,
enter into or amend any bonus, profit sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, deferred compensation,
employment, termination, severance or other plan, trust, fund, policy or
arrangement for the benefit of any directors, officers or employees or pay any
bonuses except for bonuses based on the performance of Seller and its employees
during the Seller's 1998 fiscal year which are consistent in nature and amount
with Seller's bonus payments for its prior year or in accordance with contracts
in effect on the date hereof (except that any bonus to Martin Sergi shall not be
based on a percentage of income or similar arrangement);

(g) Amend or propose to amend its charter or bylaws, except as contemplated
by this Agreement;

(h) Incur any indebtedness for borrowed money other than pursuant to credit
agreements in effect as of the date hereof or indebtedness in the form of
deferred purchase price or payments for non-

A-21

competition covenants to sellers of acquired businesses in connection with the
Seller Permitted Acquisitions; or

(i) Initiate, compromise, or settle any material litigation or arbitration
proceeding;

(j) Except in the ordinary course of business, modify, amend or terminate
any Seller Material Contract or waive, release or assign any material rights or
claims;

(k) Make any Tax election, settle or compromise any Tax liability or amend
any Tax return;

(l) Change its methods of accounting as in effect at September 30, 1998;

(m) Make or commit to make any capital expenditures that exceed the capital
budget furnished by Seller to Buyer;

(n) Make any cash disbursement exceeding $1 million for any single item or
related series of items except as expressly set forth in the Seller Disclosure
Schedule or except as consistent with the capital budget furnished by Seller to
Buyer;

(o) Invest funds in debt securities or other instruments maturing more than
90 days after the date of investment;

(p) Adopt or implement any stockholder rights plan that could have the
effect of impeding or restricting the consummation of the transactions
contemplated hereby; or

(q) Take, or agree in writing or otherwise to take, any of the actions
described in Sections (a) through (p) above.

SECTION 5.02 COVENANTS OF BUYER.  During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, Buyer agrees as to itself and its respective Subsidiaries
(except to the extent that Seller shall otherwise consent in writing), to carry
on its business in the usual, regular and ordinary course in substantially the
same manner as previously conducted, to pay its debts and taxes when due subject
to good faith disputes over such debts or taxes, to pay or perform its other
obligations when due, and, to the extent consistent with such business, use all
reasonable efforts consistent with past practices and policies to preserve
intact its present business organization, keep available the services of its
present officers and key employees and preserve its relationships with
customers, suppliers, distributors, and others having business dealings with it.
Except as expressly contemplated by this Agreement, Buyer shall not (and shall
not permit any of its respective Subsidiaries to), without the written consent
of Seller:

(a) Accelerate, amend or change the period of exercisability of options or
restricted stock or authorize cash payments in exchange for any options granted
under any of such plans except as required by the terms of any employee stock
plans or any related agreements in effect as of the date of this Agreement;

(b) Declare or pay any dividends on or make any other distributions (whether
in cash, stock or property) in respect of any of its capital stock, or split,
combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or purchase or otherwise acquire, directly or
indirectly, any shares of its capital stock, except from former employees,
directors and consultants in accordance with agreements providing for the
repurchase of shares in connection with any termination of service by such
party;

(c) Issue, deliver or sell, or authorize or propose the issuance, delivery
or sale of, any shares of its capital stock or securities convertible into
shares of its capital stock, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities, other than (i) the grant
of options consistent with past practices to existing or new employees, which
options represent in the aggregate the right to acquire no more

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than 100,000 shares (net of cancellations) of Buyer Common Stock, (ii) the
issuance of shares of Buyer Common Stock pursuant to the exercise of options and
warrants outstanding on the date of this Agreement, or (iii) to the sellers of
businesses acquired by Buyer in Buyer Permitted Acquisitions (as defined below);

(d) Acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership or
other business organization or division, or otherwise acquire or agree to
acquire any assets (other than inventory and other items in the ordinary course
of business) other than (i) acquisitions of businesses in the Buyer's existing
lines of business, individually having annual revenues of not greater than $10
million, and collectively having revenues not greater than $20 million, or (ii)
acquisitions set forth on the list given by Buyer to Seller in writing on or
prior to the date hereof (such acquisitions described in clauses (i) or (ii)
being referred to as "Buyer Permitted Acquisitions");

(e) Sell, lease, license or otherwise dispose of any of its material
properties or assets, except for sales of inventory in the ordinary course of
business;

(f) (i) Except to the extent required under applicable law or the terms of a
collective bargaining agreement, increase or agree to increase the compensation
payable or to become payable to its officers or employees, except for increases
in salary or wages of employees (other than officers) in accordance with past
practices, (ii) grant any additional severance or termination pay to, or enter
into any employment or severance agreements with, any employees or officers,
(iii) enter into any collective bargaining agreement, or (iv) establish, adopt,
enter into or amend any bonus, profit sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, deferred compensation,
employment, termination, severance or other plan, trust, fund, policy or
arrangement for the benefit of any directors, officers or employees or pay any
bonuses;

(g) Amend or propose to amend its charter or bylaws, except as contemplated
by this Agreement;

(h) Incur any indebtedness for borrowed money other than pursuant to credit
agreements in effect as of the date hereof or indebtedness in the form of
deferred purchase price or payments for non-competition covenants to sellers of
acquired businesses in connection with the Buyer Permitted Acquisitions; or

(i) Initiate, compromise, or settle any material litigation or arbitration
proceeding;

(j) Except in the ordinary course of business, modify, amend or terminate
any Buyer Material Contract or waive, release or assign any material rights or
claims;

(k) Make any Tax election, settle or compromise any Tax liability or amend
any Tax return;

(l) Change its methods of accounting as in effect at October 31, 1998;

(m) Make or commit to make any capital expenditures that exceed the capital
budget furnished by Buyer to Seller;

(n) Make any cash disbursement exceeding $1 million for any single item or
related series of items, except as expressly set forth in the Buyer Disclosure
Schedule or except as consistent with the capital budget furnished by Buyer to
Seller;

(o) Invest funds in debt securities or other instruments maturing more than
90 days after the date of investment;

(p) Adopt or implement any stockholder rights plan that could have the
effect of impeding or restricting the consummation of the transactions
contemplated hereby; or

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(q) Take, or agree in writing or otherwise to take, any of the actions
described in Sections (a) through (p) above.

SECTION 5.03 COOPERATION.  Subject to compliance with applicable law, from
the date hereof until the Effective Time, each of Buyer and Seller shall confer
on a regular and frequent basis with one or more representatives of the other
party to report on the general status of ongoing operations and shall promptly
provide the other party or its counsel with copies of all filings made by such
party with any Governmental Entity in connection with this Agreement, the Merger
and the transactions contemplated hereby and thereby.

SECTION 5.04 CONFIDENTIALITY.  The parties acknowledge that Buyer and Seller
have previously executed Confidentiality Agreements dated as of May 13, 1998 and
November 19, 1998, respectively (the "Confidentiality Agreements"), which
Confidentiality Agreements will continue in full force and effect in accordance
with their terms, except as expressly modified herein.

SECTION 5.05 NOTICES OF CERTAIN EVENTS.  Each of Buyer and Seller shall give
prompt notice to the other of (i) any notice or other communication from any
person alleging that the consent of such person is or may be required in
connection with the Merger; (ii) any notice of other communication from any
Governmental Entity in connection with the Merger; and (iii) any actions, suits,
claims, investigations or proceedings commenced or, to its knowledge, threatened
against, relating to or involving or otherwise affecting the Buyer or Seller or
their respective Subsidiaries that relate to the consummation of the Merger.

ARTICLE VI
ADDITIONAL AGREEMENTS

SECTION 6.01 NO SOLICITATION.

(a) Seller shall not, directly or indirectly, through any officer, director,
employee, financial advisor, representative or agent of such party solicit,
initiate, or encourage (including by the way of furnishing non-public
information) any inquiries or proposals that constitute, or could reasonably be
expected to lead to, a proposal or offer to acquire all or any substantial part
of the business or properties of the Seller or any capital stock of the Seller,
whether by merger, consolidation, business combination, purchase of substantial
assets, tender offer or otherwise, whether for cash, securities or any other
consideration or combination thereof, other than the transactions contemplated
by this Agreement (any of the foregoing inquiries or proposals being referred to
in this Agreement as an "Acquisition Proposal"); provided, however, that if the
Board of Directors of Seller determines in good faith, based on the advice of
outside counsel, that failure to do so would be reasonably likely to constitute
a breach of its fiduciary duties to Seller's stockholders under applicable law,
Seller, in response to a written Acquisition Proposal that (i) was unsolicited
or that did not otherwise result from a breach of this section, and (ii) is more
favorable than the transaction contemplated by this Agreement (a "Superior
Proposal"), may (x) furnish non-public information with respect to Seller to the
person who made such Acquisition Proposal pursuant to a customary
confidentiality agreement and (y) participate in negotiations regarding such
Acquisition Proposal.

The Board of Directors of Seller shall not (1) withdraw or modify, in a
manner adverse to Buyer, its approval or recommendation of this Agreement or the
Merger unless there is a Superior Proposal outstanding, (2) approve or
recommend, or propose to approve or recommend, an Acquisition Proposal that is
not a Superior Proposal or (3) cause Seller to enter into any letter of intent,
agreement in principle or other agreement with respect to an Acquisition
Proposal unless the Board of Directors of Seller shall have (x) determined in
good faith, based on the advice of outside counsel, that failure to do so would
be reasonably likely to constitute a breach of its fiduciary duties to Seller's
stockholders under applicable law, and (y) terminated this Agreement pursuant to
the termination provisions.

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Nothing contained in this Section shall prohibit Seller from at any time
taking and disclosing to its stockholders a position contemplated by Rule
14e-2(a) of the Exchange Act with regard to an Acquisition Proposal.

(b) Seller shall notify Buyer immediately after receipt by Seller (or its
advisors) of any Acquisition Proposal or any request for nonpublic information
in connection with an Acquisition Proposal or for access to the properties,
books or records of Seller by any person or entity that informs Seller that it
is considering making, or has made, an Acquisition Proposal. Such notice shall
be made orally and in writing and shall indicate in reasonable detail the
identity of the offeror and the terms and conditions of such proposal, inquiry
or contact. Seller shall continue to keep Buyer informed, on a current basis, of
the status of any such discussions or negotiations and the terms being discussed
or negotiated.

SECTION 6.02 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT.

(a) As promptly as practical after the execution of this Agreement, Buyer
and Seller shall prepare and file with the SEC the Joint Proxy Statement, and
Buyer shall prepare and file with the SEC the Registration Statement, in which
the Joint Proxy Statement will be included as a prospectus, provided that Buyer
may delay the filing of the Registration Statement until the Joint Proxy
Statement is cleared by the SEC. Buyer and Seller shall use all reasonable
efforts to cause the Registration Statement to become effective as soon after
such filing as practicable.

(b) Buyer and Seller shall make all necessary filings with respect to the
Merger under the Securities Act, the Exchange Act, applicable state blue sky
laws and the rules and regulations thereunder.

SECTION 6.03 NASDAQ QUOTATION.  Seller agrees to use reasonable efforts to
continue the quotation of Seller Common Stock on the Nasdaq National Market
during the term of this Agreement.

SECTION 6.04 ACCESS TO INFORMATION.  Upon reasonable notice, Seller and
Buyer shall each (and shall cause each of their respective Subsidiaries to)
afford to the officers, employees, accountants, counsel and other
representatives of the other, access, during normal business hours during the
period prior to the Effective Time, to all its properties, books, contracts,
commitments and records and, during such period, each of Seller and Buyer shall
(and shall cause each of their respective Subsidiaries to) furnish promptly to
the other (a) a copy of each report, schedule, registration statement and other
document filed or received by it during such period pursuant to the requirements
of federal securities laws and (b) all other information concerning its
business, properties and personnel as such other party may reasonably request.
Unless otherwise required by law, the parties will hold any such information
which is nonpublic in confidence in accordance with the Confidentiality
Agreements. No information or knowledge obtained in any investigation pursuant
to this Section 6.04 or otherwise shall affect or be deemed to modify any
representation or warranty contained in this Agreement or the conditions to the
obligations of the parties to consummate the Merger.

SECTION 6.05 STOCKHOLDERS MEETINGS.

(a) The Seller, acting through its Board of Directors, shall, subject to and
according to applicable law and its Certificate of Incorporation and Bylaws,
promptly and duly call, give notice of, convene and hold as soon as practicable
following the date on which the Registration Statement becomes effective the
Seller Meeting for the purpose of voting to approve and adopt this Agreement and
the Merger (the "Seller Voting Proposal"). The Board of Directors of the Seller
shall (i) recommend approval and adoption of the Seller Voting Proposal by the
stockholders of the Seller and include in the Joint Proxy Statement such
recommendation and (ii) take all reasonable and lawful action to solicit and
obtain such approval; provided, however, that the Board of Directors of Seller
may withdraw such recommendation if (but only if) (i) the Board of Directors of
Seller has received a Superior Proposal and (ii) such Board of Directors
determines in good faith, based upon the advice of outside legal

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counsel, that it is required, in order to comply with its fiduciary duties under
applicable law, to recommend such Superior Proposal to the stockholders of
Seller.

(b) Buyer, acting through its Board of Directors, shall, subject to and in
accordance with applicable law and its Certificate of Incorporation and Bylaws,
promptly and duly call, give notice of, convene and hold as soon as practicable
following the date on which the Registration Statement becomes effective, the
Buyer Meeting for the purpose of voting to approve the issuance of the shares of
Buyer Common Stock to be issued in the Merger (the "Buyer Voting Proposal"). The
Board of Directors of Buyer shall (i) recommend approval of the Buyer Voting
Proposal and include in the Joint Proxy Statement such recommendation and
(ii) take all reasonable and lawful action to solicit and obtain such approval.

SECTION 6.06 LEGAL CONDITIONS TO MERGER.

(a) Seller and Buyer shall use their respective reasonable best efforts to
(i) take, or cause to be taken, all appropriate action, and do, or cause to be
done, all things necessary and proper under applicable law to consummate and
make effective the transactions contemplated hereby as promptly as practicable,
(ii) obtain from any Governmental Entity or any other third party any consents,
licenses, permits, waivers, approvals, authorizations, or orders required to be
obtained or made by Seller or Buyer or any of their Subsidiaries in connection
with the authorization, execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby including, without
limitation, the Merger, and (iii) as promptly as practicable, make all necessary
filings, and thereafter make any other required submissions, with respect to
this Agreement and the Merger required under (A) the Securities Act and the
Exchange Act, and any other applicable federal or state securities laws,
(B) the HSR Act and any related governmental request thereunder, and (C) any
other applicable law. Seller and Buyer shall cooperate with each other in
connection with the making of all such filings, including providing copies of
all such documents to the non-filing party and its advisors prior to filing and,
if requested, to accept all reasonable additions, deletions or changes suggested
in connection therewith. Seller and Buyer shall use their respective best
efforts to furnish to each other all information required for any application or
other filing to be made pursuant to the rules and regulations of any applicable
law (including all information required to be included in the Joint Proxy
Statement and the Registration Statement) in connection with the transactions
contemplated by this Agreement.

(b) Buyer and Seller agree, and shall cause each of their respective
Subsidiaries, to cooperate and to use their respective best efforts to obtain
any government clearances or approvals required for Closing under the HSR Act,
the Sherman Act, as amended, the Clayton Act, as amended, the Federal Trade
Commission Act, as amended, and any other Federal, state or foreign law or,
regulation or decree designed to prohibit, restrict or regulate actions for the
purpose or effect of monopolization or restraint of trade (collectively
"Antitrust Laws"), to respond to any government requests for information under
any Antitrust Law, and to contest and resist any action, including any
legislative, administrative or judicial action, and to have vacated, lifted,
reversed or overturned any decree, judgment, injunction or other order (whether
temporary, preliminary or permanent) (an "Order") that restricts, prevents or
prohibits the consummation of the Merger or any other transactions contemplated
by this Agreement under any Antitrust Law. The parties hereto will consult and
cooperate with one another, and consider in good faith the views of one another,
in connection with any analyses, appearances, presentations, memoranda, briefs,
arguments, opinions and proposals made or submitted by or on behalf of any party
hereto in connection with proceedings under or relating to any Antitrust Law.
Buyer and Seller shall mutually direct any proceedings or negotiations with any
Governmental Entity relating to any of the foregoing, and shall afford each
other a reasonable opportunity to participate therein. Notwithstanding anything
to the contrary in this Section 6.06, neither Seller, Buyer nor any of their
respective Subsidiaries shall be required to (i) divest any of their respective
businesses,

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product lines or assets, or to take or agree to take any other action or agree
to any limitation, or (ii) take any action under this Section 6.06 if the United
States Department of Justice or the United States Federal Trade Commission
authorizes its staff to seek a preliminary injunction or restraining order to
enjoin consummation of the Merger.

(c) Each of Seller and Buyer shall give (or shall cause their respective
Subsidiaries to give) any notices to third parties, and use, and cause their
respective Subsidiaries to use, their best efforts to obtain any third party
consents related to or required in connection with the Merger that are (A)
necessary to consummate the transactions contemplated hereby, (B) disclosed or
required to be disclosed in the Seller Disclosure Schedule or the Buyer
Disclosure Schedule, as the case may be, or (C) required to prevent a Seller
Material Adverse Effect or a Buyer Material Adverse Effect from occurring prior
to or after the Effective Time.

SECTION 6.07 PUBLIC DISCLOSURE.  Buyer and Seller shall consult with each
other before issuing any press release or otherwise making any public statement
with respect to the Merger or this Agreement and shall not issue any such press
release or make any such public statement prior to such consultation, except as
may be required by law.

SECTION 6.08 REORGANIZATION.  Buyer and Seller shall each use its best
efforts to cause the Merger to be treated as a reorganization within the meaning
of Section 368(a) of the Code.

SECTION 6.09 POOLING ACCOUNTING.  From and after the date hereof and until
the Effective Time, neither Seller nor Buyer, nor any of their respective
Subsidiaries, shall knowingly take any action, or knowingly fail to take any
action, that is reasonably likely to jeopardize the treatment of the Merger as a
pooling of interests for accounting purposes.

SECTION 6.10 AFFILIATE AGREEMENTS.  Upon the execution of this Agreement,
Buyer and Seller will provide each other with a list of those persons who are,
in Buyer's or Seller's respective reasonable judgment, "affiliates" of Buyer or
Seller, respectively, within the meaning of Rule 145 (each such person who is an
"affiliate" of Buyer or Seller within the meaning of Rule 145 is referred to as
an "Affiliate") promulgated under the Securities Act ("Rule 145"). Buyer and
Seller shall provide each other such information and documents as Seller or
Buyer shall reasonably request for purposes of reviewing such list and shall
notify the other party in writing regarding any change in the identity of its
Affiliates prior to the Closing Date. Seller and Buyer have each delivered or
caused to be delivered to each other, prior to the execution of this Agreement,
from each of its Affiliates, an executed Affiliate Agreement, in substantially
the form appended hereto as Exhibit C-1 (in the case of Seller Affiliates) and
Exhibit C-2 (in the case of Buyer Affiliates) (collectively, the "Affiliate
Agreements"). Buyer shall be entitled to place appropriate legends on the
certificates evidencing any Buyer Common Stock to be received by such Affiliates
of Seller pursuant to the terms of this Agreement, and to issue appropriate stop
transfer instructions to the transfer agent for the Buyer Common Stock,
consistent with the terms of the Affiliate Agreements (provided that such
legends or stop transfer instructions shall be removed, two years after the
Effective Date, upon the request of any stockholder that is not then an
Affiliate of Buyer).

SECTION 6.11 NASDAQ NATIONAL MARKET LISTING.  Buyer shall use its best
efforts to cause the shares of Buyer Common Stock to be issued in the Merger to
be listed on the Nasdaq National Market, subject to official notice of issuance,
on or prior to the Closing Date.

SECTION 6.12 STOCK PLANS; WARRANTS.

(a) Except to the extent that such terms, conditions and restrictions may be
altered in accordance with their terms as a result of the Merger, at the
Effective Time, each outstanding option to purchase shares of Seller Common
Stock (or "Seller Stock Option") under the Seller Stock Plans, whether vested or
unvested, and each warrant to purchase shares of Seller Common Stock ("Warrant")
shall be

A-27

deemed to constitute an option or warrant to acquire, on the same terms and
conditions as were applicable under such Seller Stock Option or Warrant, the
same number of shares of Buyer Common Stock as the holder of such Seller Stock
Option or Warrant would have been entitled to receive pursuant to the Merger had
such holder exercised such option or warrant in full immediately prior to the
Effective Time, at a price per share of Buyer Common Stock equal to (y) the
exercise price for the shares of Seller Common Stock purchasable pursuant to
such Seller Stock Option or Warrant immediately prior to the Effective Time
divided by (z) the Exchange Ratio in accordance with the foregoing.

(b) As soon as practicable after the Effective Time, Buyer shall deliver to
the participants in the Seller Stock Plans appropriate notice setting forth such
participants' rights pursuant thereto and the grants pursuant to the Seller
Stock Plans shall continue in effect on the same terms and conditions (subject
to the adjustments required by this Section 6.12 after giving effect to the
Merger).

(c) Buyer shall take all corporate action necessary to reserve for issuance
a sufficient number of shares of Buyer Common Stock for delivery under Seller
Stock Plans assumed in accordance with this Section 6.12. As soon as practicable
after the Effective Time, Buyer shall file a registration statement on Form S-8
(or any successor or other appropriate forms), or another appropriate form with
respect to the shares of Buyer Common Stock subject to such options and shall
use its best efforts to maintain the effectiveness of such registration
statement or registration statements (and maintain the current status of the
prospectus or prospectuses contained therein) for so long as such options remain
outstanding.

SECTION 6.13 BROKERS OR FINDERS.  Each of Buyer and Seller represents, as to
itself, its Subsidiaries and its Affiliates, that no agent, broker, investment
banker, financial advisor or other firm or person is or will be entitled to any
broker's or finder's fee or any other commission or similar fee in connection
with any of the transactions contemplated by this Agreement except for Credit
Suisse First Boston Corporation and CIBC World Markets Corp., whose fees and
expenses will be paid by Seller in accordance with Seller's agreements with such
firms (copies of which have been delivered by Seller to Buyer prior to the date
of this Agreement), and Donaldson, Lufkin & Jenrette, whose fees and expenses
will be paid by Buyer in accordance with Buyer's agreement with such firm (a
copy of which has been delivered by Buyer to Seller prior to the date of this
Agreement).

SECTION 6.14 VOTING AGREEMENTS.  Prior to the execution of this Agreement,
each of the individuals and entities listed on Schedule 6.14 shall have executed
a voting agreement in the forms attached as Exhibits B-1 and B-2 and such
agreement shall be in full force and effect.

SECTION 6.15 HEADQUARTERS; OFFICERS AND DIRECTORS.  Buyer's headquarters
following the Merger shall remain in Rutland, Vermont. Buyer shall take such
action so that the officers and directors of Buyer following the Effective Time
shall be as listed on Schedule 6.15.

SECTION 6.16 COMFORT LETTERS FROM SELLER'S ACCOUNTANTS.  Seller shall use
reasonable efforts to cause to be delivered to Buyer and Seller a letter of
Ernst & Young, LLP, Seller's independent auditors, dated a date within two
business days before the date on which the Registration Statement shall become
effective and addressed to Buyer, in form reasonably satisfactory to Buyer and
customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the
Registration Statement.

SECTION 6.17 COMFORT LETTER FROM BUYER'S ACCOUNTANTS.  Buyer shall use
reasonable efforts to cause to be delivered to Seller and Buyer a letter of
Arthur Andersen LLP, Buyer's independent auditors, dated a date within two
business days before the date on which the Registration Statement shall become
effective and addressed to Seller, in form reasonably satisfactory to Seller and
customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the
Registration Statement.

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SECTION 6.18 STOCK OPTION AGREEMENT.  Seller agrees to fully perform its
obligations under the Seller Stock Option Agreement.

SECTION 6.19 INDEMNIFICATION.

(a) From and after the Effective Time, Buyer agrees that it will, and will
cause the Surviving Corporation to, indemnify and hold harmless each present and
former director, officer, trustee, fiduciary, employee or agent of Seller and
each Subsidiary of Seller and each such person who served at the request of the
Seller or any Seller Subsidiary as a director, officer, trustee, partner,
fiduciary, employee or agent of another corporation, partnership, joint venture,
trust, pension or other employee benefit plan or enterprise (collectively, the
"Indemnified Parties"), against any costs or expenses (including attorneys'
fees), judgments, fines, losses, claims, damages, liabilities or amounts paid in
settlement incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of or pertaining to matters existing or occurring at or prior to the
Effective Time, whether asserted or claimed prior to, at or after the Effective
Time, to the fullest extent that Seller would have been permitted under New
Jersey law including, without limitation, the indemnification provisions
permitted under Section 14A: 3-5(8) of the NJBCA and its certificate of
incorporation or bylaws in effect on the date hereof to indemnify such
Indemnified Party (and Buyer and the Surviving Corporation shall also advance
expenses as incurred to the fullest extent permitted under applicable law,
provided the Indemnified Party to whom expenses are advanced provides a written
undertaking to repay such advances if it is ultimately determined that such
Indemnified Party is not entitled to indemnification).

(b) For a period of six years after the Effective Time, Buyer shall cause
the Surviving Corporation to maintain (to the extent available in the market) in
effect a directors' and officers' liability insurance policy covering those
persons who are currently covered by Seller's directors' and officers' liability
insurance policy (a copy of which has been heretofore delivered to Buyer) with
coverage in amount and scope at least as favorable to such persons as Seller's
existing coverage.

(c) The provisions of this Section 6.19 are intended to be an addition to
the rights otherwise available to the current officers and directors of Seller
by law, charter, statute, bylaw or agreement, and shall operate for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, their heirs
and their representatives (it being expressly agreed that each such party shall
be a third party beneficiary of this Section 6.19.

SECTION 6.20 CONTROL OF OPERATIONS.  Nothing contained in this Agreement
shall give Buyer, directly or indirectly, the right to control or direct the
operations of the Seller or its Subsidiaries prior to the Effective Time.
Nothing contained in this Agreement shall give Seller, directly or indirectly,
the right to control or direct the operations of Buyer or its Subsidiaries prior
to the Effective Time. Prior to the Effective Time, each of Buyer and Seller
shall exercise, consistent with the terms and conditions of this Agreement,
complete control and supervision over its respective operations.

ARTICLE VII
CONDITIONS TO MERGER

SECTION 7.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER.  The respective obligations of each party to this Agreement to effect
the Merger shall be subject to the satisfaction prior to the Closing Date of the
following conditions:

(a) Stockholder Approval. The Seller Voting Proposal shall have been
approved and adopted by the affirmative vote of the holders of a majority of
the votes cast by the holders of Seller Common Stock outstanding on the
record date for the Seller Meeting, at which a quorum is present; and the
Buyer Voting Proposal shall have been approved by the affirmative vote of
the

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holders of a majority of the votes cast by the holders of Buyer Common Stock
present or represented at the Buyer Meeting at which a quorum is present.

(b) HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.

(c) Approvals. Other than the filing provided for by Section 1.01, all
authorizations, consents, orders or approvals of, or declarations or filings
with, or expirations of waiting periods imposed by, any Governmental Entity,
the failure of which to file, obtain or occur is reasonably likely to have a
Buyer Material Adverse Effect or Seller Material Adverse Effect shall have
been filed, been obtained or occurred.

(d) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order.

(e) No Injunctions. No Governmental Entity or federal, state or foreign
court of competent jurisdiction shall have enacted, issued, promulgated,
enforced or entered any order, executive order, stay, decree, judgment or
injunction (each an "Order) or statute, rule, regulation which is in effect
and which has the effect of making the Merger illegal or otherwise
prohibiting consummation of the Merger.

(f) Pooling Letters. Buyer and Seller shall have received letters from
Ernst & Young LLP, and Arthur Andersen LLP, regarding the concurrence of
such accountants with Buyer's and Seller's management's conclusions, as to
the appropriateness of the pooling of interests accounting, under Accounting
Principles Board Opinion No. 16 for the Merger, as contemplated to be
effected as of the date of the letters, it being agreed that Buyer and
Seller shall each provide reasonable cooperation to Ernst & Young LLP and
Arthur Andersen LLP to enable them to issue such letters.

(g) Nasdaq National Market Listing. The shares of Buyer Common Stock to
be issued in the Merger shall have been approved for listing on the Nasdaq
National Market, subject only to official notice of issuance.

SECTION 7.02 ADDITIONAL CONDITIONS TO OBLIGATIONS OF BUYER AND SUB.  The
obligations of Buyer and Sub to effect the Merger are subject to the
satisfaction of each of the following conditions, any of which may be waived in
writing exclusively by Buyer and Sub:

(a) Representations and Warranties. The representations and warranties
of Seller set forth in this Agreement shall be true and correct as of the
date of this Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as though
made on and as of the Closing Date, except for, (i) changes contemplated by
this Agreement and (ii) where the failures to be true and correct,
individually or in the aggregate, have not had and are not reasonably likely
to have a Seller Material Adverse Effect or a material adverse effect upon
the consummation of the transactions contemplated hereby; and Buyer shall
have received a certificate signed on behalf of Seller by the President and
the Chief Financial Officer of Seller to such effect.

(b) Performance of Obligations of Seller. Seller shall have performed in
all material respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date; and Buyer shall have
received a certificate signed on behalf of Seller by the chief executive
officer and the chief financial officer of Seller to such effect.

(c) Permits and Licenses. All material permits, licenses and other
governmental authorizations required for Buyer to conduct Seller's business
in the same manner as conducted prior to the Effective Time and as
contemplated to be conducted subsequent to the Merger shall be in full

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force and effect, and any necessary approvals for the continued
effectiveness of such permits, licenses and authorizations subsequent to the
Effective Time shall have been obtained.

(d) Termination of Seller's 401(k) Plans. Except as set forth in the
last sentence of this paragraph (d), Seller and all its Subsidiaries will
have taken all action necessary to terminate any Seller Employee Plan which
was ever intended to meet the requirements of Section 401(k) of the Code and
which has not been previously terminated (all such Seller Employee Plans,
whether or not previously terminated to be referred to as the "401(k)
Plans") and to distribute as soon as administratively possible, the assets
of such 401(k) Plans in accordance with the terms of applicable law and such
401(k) Plans; provided that no such distribution shall be made prior to
(i) obtaining an affirmative ruling from the Internal Revenue Service with
respect to each such 401(k) Plan, in response to a filing on Form 5310,
concerning the qualified status of each such 401(k) Plan at the time of such
termination, (ii) filing any required reports and paying any penalties or
excise taxes with respect to such 401(k) Plans, and (iii) correcting any
administrative or documentary problem with respect to any 401(k) Plan in
accordance with the provisions of Internal Revenue Service Revenue Procedure
98-22. Notwithstanding the foregoing, (i) no distribution of any plan assets
is required to be made which would result in any early distribution
penalties, and (ii) the KTI 401(k) Savings and Investment Plan, the Timber
Energy Investments 401(k) Plan and the Total Waste Management 401(k) Plan
shall not be terminated prior to the Closing Date.

(e) Dissenting Shareholders. The shares of Seller Common Stock held by
dissenting shareholders shall not exceed 10% of the shares of Seller Common
Stock issued and outstanding on the Closing Date.

(f) Sergi Bonus Arrangement. Seller shall have amended any agreement
with Martin Sergi to delete a bonus arrangement based on percentage of
income or any similar arrangement, which amendment shall be reasonably
satisfactory to Buyer.

(g) Employment Agreements. The officers of Seller who will serve from
and after the Effective time as officers of Buyer shall have entered into
Employment Agreements with Buyer in the form set forth as Exhibit D at
compensation levels comparable to their existing compensation.

SECTION 7.03 ADDITIONAL CONDITIONS TO OBLIGATIONS OF SELLER.  The obligation
of Seller to effect the Merger is subject to the satisfaction of each of the
following conditions, any of which may be waived, in writing, exclusively by
Seller:

(a) Representations and Warranties. The representations and warranties
of Buyer and Sub set forth in this Agreement shall be true and correct as of
the date of this Agreement and (except to the extent such representations
speak as of an earlier date) as of the Closing Date as though made on and as
of the Closing Date, except for, (i) changes contemplated by this Agreement
and (ii) where the failures to be true and correct, individually or in the
aggregate, have not had and are not reasonably likely to have a Buyer
Material Adverse Effect or a material adverse effect upon the consummation
of the transactions contemplated hereby; and Seller shall have received a
certificate signed on behalf of Buyer by the chief executive officer and the
chief financial officer of Buyer to such effect.

(b) Performance of Obligations of Buyer and Sub. Buyer and Sub shall
have performed in all material respects all obligations required to be
performed by them under this Agreement at or prior to the Closing Date, and
Seller shall have received a certificate signed on behalf of Buyer by the
chief executive officer and the chief financial officer of Buyer to such
effect.

(c) Tax Opinion. Seller shall have received the opinion of McDermott
Will & Emery, counsel to Seller, to the effect that the Merger will be
treated for Federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code; provided that if McDermott Will &
Emery does not render such opinion, this condition shall nonetheless be
deemed satisfied if

A-31

Hale and Dorr LLP renders such opinion to Seller (it being agreed that Buyer
and Seller shall each provide reasonable cooperation to McDermott Will &
Emery or Hale and Dorr LLP, as the case may be, to enable them to render
such opinion).

(d) Employment Agreements. The executive officers of Buyer shall have
entered into Employment Agreements with Buyer in the form set forth as
Exhibit D at compensation levels comparable to their existing compensation.

ARTICLE VIII
TERMINATION AND AMENDMENT

SECTION 8.01 TERMINATION.  This Agreement may be terminated at any time
prior to the Effective Time (with respect to Sections 8.01(b) through 8.01(f),
by written notice by the terminating party to the other party), whether before
or after approval of the matters presented in connection with the Merger by the
stockholders of Seller or Buyer:

(a) by mutual written consent of Buyer and Seller; or

(b) by either Buyer or Seller if the Merger shall not have been
consummated by September 30, 1999 (the "Outside Date") (provided that the
right to terminate this Agreement under this Section 8.01(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the Merger to
occur on or before such date); or

(c) by either Buyer or Seller if a court of competent jurisdiction or
other Governmental Entity shall have issued a nonappealable final order,
decree or ruling or taken any other nonappealable final action, in each case
having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger; or

(d) by either Buyer or Seller, if (x) at the Seller Meeting (including
any adjournment or postponement), the requisite vote of the stockholders of
Seller in favor of the Seller Voting Proposal shall not have been obtained;
or if (y) at the Buyer Meeting (including any adjournment or postponement),
the requisite vote of the stockholders of Buyer in favor of the Buyer Voting
Proposal shall not have been obtained (provided that the right to terminate
this Agreement under this Section 8.01(d) shall not be available to any
party seeking termination who at the time is in breach of or has failed to
fulfill its obligations under this Agreement); or

(e) by Buyer, if (i) the Board of Directors of Seller shall have
withdrawn or modified its recommendation of this Agreement or the Merger;
(ii) after the receipt by Seller of an Acquisition Proposal, Buyer requests
in writing that the Board of Directors of Seller reconfirm its
recommendation of this Agreement or the Merger and the Board of Directors of
Seller fails to do so within 10 business days after its receipt of Buyer'
request; (iii) the Board of Directors of Seller shall have recommended to
the stockholders of Seller an Alternative Transaction (as defined in Section
8.03(f)); (iv) a tender offer or exchange offer for 25% or more of the
outstanding shares of Seller Common Stock is commenced (other than by Buyer
or an Affiliate of Buyer) and the Board of Directors of Seller recommends
that the stockholders of Seller tender their shares in such tender or
exchange offer; or (v) for any reason Seller fails to call and hold the
Seller Meeting by the Outside Date; or

(f) by Buyer or Seller, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the other
party set forth in this Agreement, which breach (i) causes the conditions
set forth in Section 7.02(a) or (b) (in the case of termination by Buyer) or
7.03(a) or (b) (in the case of termination by Seller) not to be satisfied,
and (ii) shall not have been cured

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within 30 days following receipt by the breaching party of written notice of
such breach from the other party.

SECTION 8.02 EFFECT OF TERMINATION.  In the event of termination of this
Agreement as provided in Section 8.01, this Agreement shall immediately become
void and there shall be no liability or obligation on the part of Buyer, Seller,
Sub or their respective officers, directors, stockholders or Affiliates, except
as set forth in Sections 5.04 and 8.03; provided that any such termination shall
not limit liability for any wilful breach of this Agreement and the provisions
of Sections 5.04 and 8.03 of this Agreement and the Confidentiality Agreements
shall remain in full force and effect and survive any termination of this
Agreement.

SECTION 8.03 FEES AND EXPENSES.

(a) Except as set forth in this Section 8.03, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated hereby shall
be paid by the party incurring such expenses, whether or not the Merger is
consummated; provided, however, that Seller and Buyer shall share equally all
fees and expenses, other than attorneys' fees, incurred with respect to the
printing and filing of the Joint Proxy Statement (including any related
preliminary materials) and the Registration Statement (including financial
statements and exhibits) and any amendments or supplements.

(b) Seller shall pay Buyer up to $3,000,000 as reimbursement for expenses of
Buyer actually incurred relating to the transactions contemplated by this
Agreement prior to termination (including, but not limited to, fees and expenses
of Buyer's counsel, accountants and financial advisors, but excluding any
discretionary fees paid to such financial advisors), upon the termination of
this Agreement by Buyer pursuant to (i) Section 8.01(d)(x); (ii) Section
8.01(e), (iii) Section 8.01(b) as a result of the failure to satisfy the
condition set forth in Section 7.02(a); or (iv) Section 8.01(f).

(c) Seller shall pay Buyer a termination fee of $10,000,000 upon the
earliest to occur of the following events:

(i) the termination of this Agreement by Buyer pursuant to Section
8.01(e); or

(ii) the termination of this Agreement by Buyer pursuant to Section
8.01(f) after a willful breach by Seller of this Agreement, provided at the
time of such breach, Seller shall have received an Acquisition Proposal; or

(iii) the termination of the Agreement by Buyer pursuant to Section
8.01(d) as a result of the failure to receive the requisite vote for
approval of the Seller Voting Proposal by the stockholders of Seller at the
Seller Meeting if, at the time of such failure, there shall have been
announced an Alternative Transaction relating to Seller which shall not have
been absolutely and unconditionally withdrawn and abandoned.

(d) Buyer shall pay Seller up to $3,000,000 as reimbursement for expenses of
Seller actually incurred relating to the transactions contemplated by this
Agreement prior to termination (including, but not limited to fees and expenses
of Seller's counsel, accountants and financial advisors, but excluding any
discretionary fees paid to such financial advisors), upon the termination of
this Agreement by Seller pursuant to (i) Section 8.01(d)(y), (ii) Section
8.01(b) as a result of the failure to satisfy the condition set forth in Section
7.03(a), or (iii) Section 8.01(f).

(e) The expenses and fees, if applicable, payable pursuant to
Section 8.03(b), 8.03(c) and 8.03(d) shall be paid within one business day after
the first to occur of the events described in Section 8.03(b), 8.03(c)(i),
(ii) or (iii), or 8.03(d); provided that in no event shall Buyer or Seller, as
the case may be, be required to pay the expenses and fees, if applicable, to the
other, if, immediately prior to the termination of this Agreement, the party to
receive the expenses and fees, if applicable, was in material breach of its
obligations under this Agreement.

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(f) As used in this Agreement, "Alternative Transaction" means either (i) a
transaction pursuant to which any person (or group of persons) other than Buyer
or its affiliates (a "Third Party"), acquires more than 25% of the outstanding
shares of Seller Common Stock pursuant to a tender offer or exchange offer or
otherwise, (ii) a merger or other business combination involving Seller pursuant
to which any Third Party acquires more than 25% of the outstanding shares of
Seller Common Stock, or the entity surviving such merger or business
combination, (iii) any other transaction pursuant to which any Third Party
acquires control of assets (including for this purpose the outstanding equity
securities of Subsidiaries of Seller, and the entity surviving any merger or
business combination including any of them) of Seller having a fair market value
equal to more than 20% of the fair market value of all the assets of Seller
immediately prior to such transaction, or (iv) any public announcement by a
Third Party of a proposal, plan or intention to do any of the foregoing or any
agreement to engage in any of the foregoing.

SECTION 8.04 AMENDMENT.  This Agreement may be amended by the parties
hereto, by action taken or authorized by their respective Boards of Directors,
at any time before or after approval of the matters presented in connection with
the Merger by the stockholders of Seller or of Buyer, but, after any such
approval, no amendment shall be made which by law requires further approval by
such stockholders without such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.

SECTION 8.05 EXTENSION; WAIVER.  At any time prior to the Effective Time,
the parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.

ARTICLE IX
MISCELLANEOUS

SECTION 9.01 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS.  None of the representations, warranties and agreements in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time, except for the agreements contained in Sections
2.01, 2.02, 6.19 and Article IX, and the agreements of the Affiliates delivered
pursuant to Section 6.10. The Confidentiality Agreements shall survive the
execution and delivery of this Agreement.

SECTION 9.02 NOTICES.  All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, telecopied
(which is confirmed) or mailed by registered or certified mail (return receipt
requested) or by Federal Express to the parties at the following addresses (or
at such other address for a party as shall be specified by like notice):

(a)  if to Buyer or Sub, to

Casella Waste Systems, Inc.
25 Green Hills Lane
Rutland, VT 05701
Attention: Chief Executive Officer

with a copy to:

Hale and Dorr LLP 60 State Street
Boston, MA 02109
Attn: Jeffrey A. Stein, Esq.
Telecopy: (617) 526-5000

A-34

(b)  if to Seller, to

KTI, Inc.
7000 Boulevard East
Guttenberg, NJ 07093
Attention: Chairman of the Board of Directors

with a copy to:

McDermott, Will & Emery
50 Rockefeller Plaza
New York, NY 10020-1605
Attn: Brian Hoffmann, Esq.
Telecopy: (212) 547-5444

SECTION 9.03 INTERPRETATION.  When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. The phrases "the date of this
Agreement", "the date hereof," and terms of similar import, unless the context
otherwise requires, shall be deemed to refer to January 12, 1999.

SECTION 9.04 COUNTERPARTS.  This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.

SECTION 9.05 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES.  This Agreement
(including the documents and the instruments referred to herein) (a) constitutes
the entire agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, and (b) except as provided in Sections 6.12 and 6.20 are not intended to
confer upon any person other than the parties hereto any rights or remedies
hereunder; provided that the Confidentiality Agreements shall remain in full
force and effect until the Effective Time. Each party hereto agrees that, except
for the representations and warranties contained in this Agreement, neither
Seller nor Buyer makes any other representations or warranties, and each hereby
disclaims any other representations and warranties made by itself or any of its
officers, directors, employees, agents, financial and legal advisors or other
representatives, with respect to the execution and delivery of this Agreement or
the transactions contemplated hereby, notwithstanding the delivery or disclosure
to the other or the other's representatives of any documentation or other
information with respect to any one or more of the foregoing.

SECTION 9.06 GOVERNING LAW.  THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW JERSEY WITHOUT REGARD TO ANY
APPLICABLE CONFLICTS OF LAW.

SECTION 9.07 JURISDICTION.  Each of the parties hereto (i) consents to
submit itself to the personal jurisdiction of any Federal court located in the
State of Delaware or any Delaware state court in the event any dispute arises
out of this Agreement or any of the transactions contemplated by this Agreement,
(ii) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court, and
(iii) agrees that it will not bring any action relating to this Agreement or any
of the transactions contemplated by this agreement in any court other than a
Federal court sitting in the State of Delaware or a Delaware state court.

SECTION 9.08 ASSIGNMENT.  Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise)

A-35

without the prior written consent of the other parties. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns.

SECTION 9.09 SEVERABILITY.  In the event that any provision of this
Agreement or the application thereof, becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of
this Agreement will continue in full force and effect and the application of
such provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further agree
to replace such void or unenforceable provision of this Agreement with a valid
and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.

IN WITNESS WHEREOF, Buyer, Sub and Seller have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.

CASELLA WASTE SYSTEMS, INC.

By:             /s/ JOHN W. CASELLA
-----------------------------------------
John W. Casella
TITLE: CHAIRMAN AND CEO

RUTLAND ACQUISITION SUB, INC.

By:             /s/ JOHN W. CASELLA
-----------------------------------------
John W. Casella
TITLE: PRESIDENT

KTI, INC.

By:              /s/ ROSS PIRASTEH
-----------------------------------------
Ross Pirasteh
TITLE: CHAIRMAN

[Signature page to Agreement and Plan of Merger]

A-36

AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER

The Agreement and Plan of Merger dated as of January 12, 1999 (the
"Agreement"), by and among Casella Waste Systems, Inc., a Delaware corporation
("Buyer"), Rutland Acquisition Sub, Inc., a New Jersey corporation and a direct,
wholly-owned subsidiary of Buyer ("Sub") and KTI, Inc., a New Jersey corporation
("Seller") is hereby amended as follows as of this 12th day of May, 1999.
Capitalized terms not otherwise defined herein shall have the meanings set forth
in the Agreement.

1.  Section 2.01(c) is hereby amended by deleting the first sentence thereof and
substituting the following in lieu thereof:

"Subject to Section 2.02, each issued and outstanding share of Seller Common
Stock (other than shares to be canceled in accordance with Section 2.01(b) and
any shares of Seller Common Stock which are held by shareholders who are
dissenting shareholders pursuant to Section 14A:11-3 of the NJBCA), shall be
converted into the right to receive 0.59 shares (the "Exchange Ratio") of Buyer
Common Stock."

2.  The references to "November 30, 1998" in Section 3.02(a) are hereby deleted
and "May 11, 1999" is hereby substituted in lieu thereof, and the reference
to "13,263,960" in clause (i) of the second sentence of Section 3.02(a) is
hereby deleted and "13,916,238" is hereby substituted in lieu thereof.

3.  Section 3.04(a) is hereby amended by adding the following sentence after the
first sentence thereof: "Without limiting the foregoing, the Seller's Annual
Report on Form 10-K for the year ended December 31, 1998, required to be
filed on or prior to March 31, 1999, shall be deemed to be a Seller SEC
Report, whether or not the same has been filed on or prior to the date
hereof.

4.  Section 3.04(b) is hereby amended by deleting the last sentence thereof and
inserting the following in lieu thereof: "The audited balance sheet of
Seller as of December 31, 1998, in the form of the balance sheet attached
hereto as Exhibit A, is referred to herein as the "Seller Balance Sheet".
The financial statements included in Seller's Annual Report on Form 10-K for
the year ended December 31, 1998 (including the notes thereto) shall be
identical in all respects to Exhibit A."

5.  The reference in Section 3.05 to "September 30, 1998" is hereby deleted and
"December 31, 1998" is hereby substituted in lieu thereof.

6.  Section 3.18 is hereby deleted and the following shall be inserted in lieu
thereof:

"Section 3.18 Opinion of Financial Advisor. The financial advisors of
Seller, Credit Suisse First Boston Corporation and CIBC Oppenheimer Corp.,
have each delivered to the Board of Directors of Seller an opinion dated the
date of this Amendment No. 1 to the effect that the Exchange Ratio (as
amended by this Amendment No. 1) is fair to the holders of Seller Common
Stock from a financial point of view."

7.  The references to "November 30, 1998" in Section 4.02(a) are hereby deleted
and "April 30, 1999" is hereby substituted in lieu thereof, and the
reference to "13,819,473" in the second sentence of Section 3.02(a) is
hereby deleted and "14,504,011" is hereby substituted in lieu thereof. The
reference to October 31, 1998 is hereby deleted and January 31, 1999 is
hereby substituted in lieu thereof.

8.  Section 4.04(b) is hereby amended by deleting the last sentence thereof and
inserting the following in lieu thereof: "The unaudited balance sheet of
Seller as of January 31, 1999 is referred to herein as the "Seller Balance
Sheet".

9.  The reference in Section 4.05 to "October 31, 1998" is hereby deleted and
"January 31, 1999" is hereby substituted in lieu thereof.

A-37

10. Section 4.17 is hereby deleted and the following shall be inserted in lieu
thereof:

"Section 4.17 Opinion of Financial Advisor. The financial advisor of
Buyer, Donaldson, Lufkin & Jenrette Securities Corporation, has delivered to
Buyer an opinion dated the date of this Amendment No. 1, to the effect that
the Exchange Ratio (as amended by this Amendment No. 1) is fair to Buyer and
its stockholders from a financial point of view.

11. Section 5.01 is hereby amended by adding the following sentence immediately
following the first sentence thereof: "Unless filed on or prior to the date
hereof, Seller shall promptly (and in any event within five business days
after the date hereof) file its Annual Report on Form 10-K for the year
ended December 31, 1998."

12. Section 5.02(f) is hereby deleted and the following shall be inserted in
lieu thereof:

(f) (i) Except to the extent required under applicable law or the terms of a
collective bargaining agreement, increase or agree to increase the
compensation payable or to become payable to its officers or employees,
except for increases in salary or wages of employees in accordance with past
practices, (ii) grant any additional severance or termination pay to, or
enter into any employment or severance agreements with, any employees or
officers, (iii) enter into any collective bargaining agreement, or (iv)
establish, adopt, enter into or amend any bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, trust, fund,
policy or arrangement for the benefit of any directors, officers or
employees or pay any bonuses except for bonuses based on the performance of
Buyer and its employees during Buyer's 1999 fiscal year which are consistent
in nature and amount with Buyer's bonus payments for its prior year or in
accordance with contracts in effect on the date hereof.

13. Section 5.02(d) is hereby amended by deleting the reference to "$20 million"
and inserting "$30 million" in lieu thereof.

14. Section 5.03 is hereby amended by adding the following sentence to the end
thereof: "Without limiting the foregoing, the Seller shall confer on a
regular and frequent basis with the Buyer with respect to any and all
litigation brought or pending against it by shareholders or former
shareholders of the Seller as to appropriate defense and other strategies in
connection with such litigation, including without limitation the litigation
brought by Salvatore Russo, individually and on behalf of a class of persons
similarly situated pending in the United States Court for the District of
New Jersey.

15. A new Section 7.02(h) shall be added, which shall read as follows;

"(h) TERI Environmental Matters. The violations at the Timber Energy
Resources, Inc. biomass-to-energy facility in Telogia, Florida shall not
have resulted in, and are not likely, in the reasonable judgment of Buyer,
to result in, (i) the conviction of Seller or any subsidiary thereof or any
officer or director of any such entity of, or the entry of a pleading of
guilty or nolo contendere by any such person or entity to, any criminal
charge relating thereto, or (ii) fines, penalties or other financial
liability to Seller or any of its subsidiaries of more than $500,000."

16. Section 7.03(d) is hereby deleted and the following shall be inserted in
lieu thereof:

"(d) Employment Agreements. The executive officers of Buyer shall have
entered into Employment Agreements with Buyer in the form set forth as
Exhibit D at compensation levels approved by the Board of Directors of the
Buyer, which such compensation shall be consistent with the compensation
payable to the officers of Seller entering into Employment Agreements with
Buyer as contemplated by Section 7.02(g) above."

A-38

17. Section 9.02(b) is hereby amended by deleting the party which is to receive
a copy of notices to Seller, and inserting the following in lieu thereof:

Cadwalader, Wickersham & Taft
100 Maiden Lane
New York NY 10038
Attention: Brian Hoffmann, Esq.
Telecopy: (212) 504-5541

18. The Seller Disclosure Schedule attached to the Agreement is hereby deleted
and the Seller Disclosure Schedule attached hereto shall be inserted in lieu
thereof.

19. The Buyer Disclosure Schedule attached to the Agreement is hereby deleted
and the Buyer Disclosure Schedule attached hereto shall be inserted in lieu
thereof.

20. Schedule 6.15 is hereby deleted and Schedule 6.15 attached hereto shall be
substituted in lieu thereof.

21. The last sentence of Section 9.03 is hereby deleted, and the following shall
be inserted in lieu thereof: "All references to 'the date of this
Agreement', 'the date hereof', and terms of similar import, other than with
respect to the provisions of Sections 5.01 and 5.02, shall mean the date of
this Amendment No. 1. For purposes of Sections 5.01 and 5.02, such words
shall mean January 12, 1999." Each party hereby agrees that no action taken
by the other or its employees or other representatives prior to the date of
this Amendment No. 1 constituted a violation of the provisions of Sections
6.02, 6.06 or 6.07 of the Agreement, and releases the other from and against
any claim that any such violation occurred.

22. In all other respects, the Agreement shall remain in full force and effect,
and all references in the Agreement to "this Agreement" shall mean the
Agreement as amended hereby.

IN WITNESS WHEREOF, Buyer, Sub and Seller have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.

CASELLA WASTE SYSTEMS, INC.

By:             /s/ JOHN W. CASELLA
-----------------------------------------
John W. Casella, Chairman and CEO

RUTLAND ACQUISITION SUB, INC.

By:             /s/ JOHN W. CASELLA
-----------------------------------------
John W. Casella, President

KTI, INC.

By:              /s/ ROSS PIRASTEH
-----------------------------------------
Ross Pirasteh, Chairman

A-39

SCHEDULE 6.15
LIST OF BUYER'S DIRECTORS AND OFFICERS
AS OF THE EFFECTIVE TIME

President and Chief Executive Officer: John Casella
Senior Vice President--Chief Operating Officer: James Bohlig
Executive Vice President--Business Development: Martin Sergi
Chief Financial Officer: Jerry Cifor

Directors:

3 - Buyer                                      3 - Seller

1. John Casella                                1. Martin Sergi
2. James Bohlig                                2. Ross Pirasteh (Chairman of the Board)
3. Douglas Casella                             3. Paul Garrett

5 - Independent

Three - designated by buyer
Two - designated by Seller

CLASS II (EXPIRES 1999)       CLASS III (EXPIRES 2000)        CLASS I (EXPIRES 2001)
James Bohlig                   John Casella                  Douglas Casella

Martin Sergi                   Paul Garrett                   Ross Pirasteh
To be designated by Buyer      To be designated by Buyer      To be designated by Buyer
To be designated by Seller                                    To be designated by Seller

A-40

AMENDMENT NO. 2
TO
AGREEMENT AND PLAN OF MERGER

The Agreement and Plan of Merger dated as of January 12, 1999 (the
"Agreement"), by and among Casella Waste Systems, Inc., a Delaware corporation
("Buyer"), Rutland Acquisition Sub, Inc., a New Jersey corporation and a direct,
wholly-owned subsidiary of Buyer ("Sub") and KTI, Inc., a New Jersey corporation
("Seller"), as amended by Amendment No. 1 to Agreement and Plan of Merger dated
May 12, 1999 ("Amendment No. 1"), is hereby amended as follows as of this 9th
day of September, 1999. Capitalized terms not otherwise defined herein shall
have the meanings set forth in the Agreement.

1.  The reference to "0.59 shares" in Section 2.01(c) is hereby deleted and
"0.51 shares" is hereby substituted in lieu thereof.

2.  Section 3.06 is hereby deleted, and the following shall be inserted in lieu
thereof:

"Section 3.06 Absence of Certain Changes or Events. Except as disclosed in
the Seller SEC Reports filed prior to the date hereof, since the date of the
Seller Balance Sheet, Seller and its Subsidiaries have conducted their business
only in the ordinary course and in a manner consistent with past practice and,
since such date, there has not been (i) any damage, destruction or loss (whether
or not covered by insurance) with respect to Seller's or any of its
Subsidiaries' assets having a Seller Material Adverse Effect, or (ii) any other
action or event that would have required the consent of Buyer pursuant to
Section 5.01 of this Agreement had such action or event occurred after the date
of this Agreement."

3.  Section 3.18 is hereby deleted, and the following shall be inserted in lieu
thereof: "Intentionally omitted."

4.  Section 4.17 is hereby deleted, and the following shall be inserted in lieu
thereof: "Intentionally omitted."

5.  Section 7.01(c) is hereby deleted, and the following shall be inserted in
lieu thereof: "Intentionally omitted."

6.  Section 7.02(c) is hereby deleted, and the following shall be inserted in
lieu thereof:

"(c)    LOCK-UP AGREEMENTS. Each of Messrs. Ross Pirasteh, Martin Sergi and
Paul Garrett shall have entered into an agreement with the Buyer pursuant to
which they agree that, during the period beginning on the Closing Date and
continuing to and including the date 365 days after the Closing Date, they will
not offer, sell or contract to sell or otherwise dispose of any of the shares of
Buyer Common Stock received by them pursuant to the Agreement (provided that the
same shall not preclude any such person from borrowing against any such shares,
and following the Closing Date, any such restriction may be waived by the board
of directors of the Buyer)."

7.  Section 7.02(h) is hereby deleted, and the following shall be inserted in
lieu thereof: "Intentionally omitted."

8.  A new Section 7.03(e) shall be added, which shall read as follows:

"(e)    LOCK-UP AGREEMENTS. Each of Messrs. John Casella, Jim Bohlig and
Jerry Cifor shall have entered into an agreement with the Buyer pursuant to
which they agree that, during the period beginning on the Closing Date and
continuing to and including the date 365 days after the Closing Date, they will
not offer, sell or contract to sell or otherwise dispose of any of their shares
of Buyer Common Stock (provided that the same shall not preclude any such person
from borrowing against any such shares, and following the Closing Date, any such
restriction may be waived by the board of directors of the Buyer)."

A-41

9.  The reference to "September 30, 1999" in Section 8.01(b) is hereby deleted
and "December 15, 1999" is hereby substituted in lieu thereof.

10. A new Section 8.01(g) shall be added, which shall read as follows:

(g)    by Seller, if on or prior to September 30, 1999, it has not received
an opinion, satisfactory in form and substance to Seller in its reasonable
judgment, from a financial advisor to the effect that the Exchange Ratio is fair
to the holders of Seller Common Stock from a financial point of view.

11. Schedule 6.15 is hereby deleted and Schedule 6.15 attached hereto shall be
substituted in lieu thereof.

12. The Seller Disclosure Schedule attached to Amendment No. 1 is hereby deleted
and the Seller Disclosure Schedule attached hereto shall be inserted in lieu
thereof.

13. The Buyer Disclosure Schedule attached to Amendment No. 1 is hereby deleted
and the Buyer Disclosure Schedule attached hereto shall be inserted in lieu
thereof.

14. The form of employment agreement referenced in Section 7.02(g) and attached
as Exhibit D to the Agreement is hereby amended by adding the following
sentence to the end of Section 16 thereof: "Without limiting the generality
of the foregoing, any employment agreement or other arrangement between the
Employee and KTI, Inc. or any subsidiary thereof is hereby terminated and
neither party shall have any further obligation on account thereof."

15. In all other respects, the Agreement shall remain in full force and effect,
and all references in the Agreement to "this Agreement" shall mean the
Agreement as amended hereby.

[Remainder of page intentionally left blank.]

A-42

IN WITNESS WHEREOF, Buyer, Sub and Seller have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.

CASELLA WASTE SYSTEMS, INC.

By:             /s/ JOHN W. CASELLA
-----------------------------------------
John W. Casella, Chairman and CEO

RUTLAND ACQUISITION SUB, INC.

By:             /s/ JOHN W. CASELLA
-----------------------------------------
John W. Casella, President

KTI, INC.

By:              /s/ ROSS PIRASTEH
-----------------------------------------
Ross Pirasteh, Chairman

[Signature page to Amendment No. 2 to Agreement and Plan of Merger]

A-43

SCHEDULE 6.15
LIST OF BUYER'S DIRECTORS AND OFFICERS
AS OF THE EFFECTIVE TIME

President and Chief Executive Officer: John Casella
Senior Vice President - Chief Operating Officer: James Bohlig
Executive Vice President - Business Development: Martin Sergi
Chief Financial Officer: Jerry Cifor

Directors:

3 -- Buyer:                                       2 -- Seller:
1.   John Casella                                 1.  Martin Sergi
2.   James Bohlig                                 2.  Ross Pirasteh (Chairman of the Board)
3.   Douglas Casella

6 -- Independent:

Four -- designated by Buyer
Two -- designated by Seller
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

CLASS II (EXPIRES 1999)       CLASS III (EXPIRES 2000)        CLASS I (EXPIRES 2001)
-------------------------------------------------------------------------------------------

James Bohlig                   John Casella                   Douglas Casella
-------------------------------------------------------------------------------------------
Martin Sergi                   To be designated by Buyer      Ross Pirasteh
-------------------------------------------------------------------------------------------
To be designated by Buyer      To be designated by Buyer      To be designated by Buyer
-------------------------------------------------------------------------------------------
To be designated by Seller                                    To be designated by Seller
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------

A-44

AMENDMENT NO. 3
TO
AGREEMENT AND PLAN OF MERGER

The Agreement and Plan of Merger dated as of January 12, 1999 (the
"Agreement"), by and among Casella Waste Systems, Inc., a Delaware corporation
("Buyer"), Rutland Acquisition Sub, Inc., a New Jersey corporation and a direct,
wholly-owned subsidiary of Buyer ("Sub") and KTI, Inc., a New Jersey corporation
("Seller"), as amended by Amendment No. 1 to Agreement and Plan of Merger dated
May 12, 1999 ("Amendment No. 1") and by Amendment No. 2 to Agreement and Plan of
Merger dated September 9, 1999 ("Amendment No. 2"), is hereby amended as follows
as of this 23rd day of September, 1999. Capitalized terms not otherwise defined
herein shall have the meanings set forth in the Agreement.

1.  The sixth "WHEREAS" clause of the Agreement, which refers to the pooling of
interests accounting of the Merger, is hereby deleted.

2.  Section 3.14 is hereby deleted, and the following shall be inserted in lieu
thereof:

"Section 3.14 Tax Matters. To its knowledge, after consulting with its legal
counsel, neither Seller nor any of its Affiliates (as defined in Section 6.10)
has taken or agreed to take any action which would prevent the Merger from
constituting a transaction qualifying as a reorganization under 368(a) of the
Code."

3.  Section 4.14 is hereby deleted, and the following shall be inserted in lieu
thereof:

"Section 4.14 Tax Matters. To its knowledge, after consulting with its legal
counsel, neither Buyer nor any of its Affiliates has taken or agreed to take any
action which would prevent the Merger from constituting a transaction qualifying
as a reorganization under 368(a) of the Code."

4.  Section 6.09 is hereby deleted, and the following shall be inserted in lieu
thereof: "Intentionally omitted."

5.  Section 6.10 is hereby deleted, and the following shall be inserted in lieu
thereof:

'Section 6.10 Affiliate Agreements. Upon the execution of this Agreement,
Seller will provide Buyer with a list of those persons who are, in Seller's
reasonable judgment, "affiliates" of Seller within the meaning of Rule 145 (each
such person who is an "affiliate" of Seller within the meaning of Rule 145 is
referred to as an "Affiliate") promulgated under the Securities Act ("Rule
145"). Seller shall provide Buyer such information and documents as Buyer shall
reasonably request for purposes of reviewing such list and shall notify Buyer in
writing regarding any change in the identity of its Affiliates prior to the
Closing Date. Seller has delivered or caused to be delivered to Buyer, prior to
the execution of this Agreement, from each of its Affiliates, an executed
Affiliate Agreement, in substantially the form appended hereto as Exhibit C-3
(in the case of Seller Affiliates) (collectively, the "Affiliate Agreements").
Buyer shall be entitled to place appropriate legends on the certificates
evidencing any Buyer Common Stock to be received by such Affiliates of Seller
pursuant to the terms of this Agreement, and to issue appropriate stop transfer
instructions to the transfer agent for the Buyer Common Stock, consistent with
the terms of the Affiliate Agreements (provided that such legends or stop
transfer instructions shall be removed, two years after the Effective Date, upon
the request of any stockholder that is not then an Affiliate of Buyer). Seller
agrees that any Affiliate Agreements signed by affiliates of Buyer in connection
with the Agreement are hereby terminated.

6.  Section 7.01(f) is hereby deleted, and the following shall be inserted in
lieu thereof: "Intentionally omitted."

A-45

7.  Section 8.03(a) is hereby deleted, and the following shall be inserted in
lieu thereof:

"(a)    If the Merger is consummated as provided for herein, all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the Buyer. Except as set forth in this
Section 8.03, in the event that the Merger is not consummated as provided for
herein, all fees and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses; provided, however, Seller and Buyer shall share equally all fees and
expenses, other than attorneys' fees, incurred with respect to the printing and
filing of the Joint Proxy Statement (including any related preliminary
materials) and the Registration Statement (including financial statements and
exhibits) and any amendments or supplements."

8.  In all other respects, the Agreement shall remain in full force and effect,
and all references in the Agreement to "this Agreement" shall mean the
Agreement as amended hereby.

[Remainder of page intentionally left blank.]

A-46

IN WITNESS WHEREOF, Buyer, Sub and Seller have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.

CASELLA WASTE SYSTEMS, INC.

By:             /s/ JOHN W. CASELLA
-----------------------------------------
John W. Casella, Chairman and CEO

RUTLAND ACQUISITION SUB, INC.

By:             /s/ JOHN W. CASELLA
-----------------------------------------
John W. Casella, President

KTI, INC.

By:              /s/ ROSS PIRASTEH
-----------------------------------------
Ross Pirasteh, Chairman

[Signature page to Amendment No. 3 to Agreement and Plan of Merger]

A-47

ANNEX B-1

[LOGO]

September 15, 1999

PERSONAL AND CONFIDENTIAL

The Board of Directors
KTI, Inc.
7000 Boulevard East
Guttenberg, New Jersey 07093

Gentlemen:

You have asked CIBC World Markets Corp. ("CIBC World Markets") to render a
written opinion ("Fairness Opinion") to the Board of Directors as to the
fairness to the shareholders of KTI, Inc. ("KTI" or the "Company"), from a
financial point of view, of the Exchange Ratio (as defined below) provided for
in Amendment No. 2 (Amendment No. 2) to the Agreement and Plan of Merger (the
"Merger Agreement") by and among Casella Waste Systems, Inc. ("Casella"),
Rutland Acquisition, Inc. ("Newco"), a wholly owned subsidiary of Casella, and
KTI, pursuant to which Newco will be merged with and into KTI (the "Merger"). We
did not, at your request, participate in the negotiation of Amendment No. 1 to
the Merger Agreement ("Amendment No. 1"), Amendment No. 2 or the Merger
Agreement.

Pursuant to Amendment No. 2, each share of common stock of KTI will be converted
into the right to receive 0.51 shares of Class A Common Stock, $.01 par value
per share, of Casella (the "Exchange Ratio").

In arriving at our Fairness Opinion we: (i) reviewed the Merger Agreement,
Amendment No. 1 and Amendment No. 2; (ii) reviewed drafts of the Seller Stock
Option Agreement, Affiliate Agreements, Stockholder Voting Agreements and
Employment Agreements (together with the Merger Agreement, Amendment No. 1 and
Amendment No. 2, the "Transaction Agreements"); (iii) reviewed the historical
financial statements and financial forecasts and other information prepared by
representatives of KTI and Casella; (iv) reviewed certain publicly available
information for KTI and Casella, including periodic and other reports filed with
the Securities and Exchange Commission; (v) reviewed the reported market prices
and trading volumes for KTI and Casella shares; (vi) held discussions with the
senior management and representatives of KTI and Casella concerning each
company's historical and current operations, financial condition and prospects;
and (vii) reviewed such other documents and financial, economic and market
information and made such other investigations as we deemed appropriate for the
purposes of such opinion.

We have assumed that the Merger will be consummated upon the terms set forth in
the Merger Agreement, Amendment No. 1, and Amendment No. 2. We have further
assumed that the Merger will comply with applicable United States, foreign,
federal and state laws.

We also considered certain publicly available financial data for certain
companies we deemed comparable to KTI and Casella. We considered, to the extent
publicly available, the financial terms of certain business combinations that
have recently been effected in similar mergers and acquisitions. We performed
discounted cash flow analyses on the projections furnished to us by KTI and
Casella.

In rendering our Fairness Opinion we relied upon and assumed, without
independent verification or investigation, the accuracy and completeness of all
of the financial and other information provided to us or prepared by KTI and
Casella and their respective employees, representatives and affiliates. With

The Board of Directors
KTI, Inc.
September 15, 1999
Page 2

respect to forecasts of future financial condition and operating results of KTI
and Casella and estimates of the operating synergies achievable as a result of
the Merger provided to us, we assumed at the direction of each company's
management, without independent verification or investigation, that such
forecasts and estimates were reasonably prepared on bases reflecting the best
available information, estimates and judgement of each company's respective
management. We have neither made nor obtained any independent evaluations or
appraisals of the assets or the liabilities of KTI, Casella or other affiliated
entities. We have assumed, without independent verification, the accuracy of the
advice and conclusions of the parties' legal counsel and accountants with
respect to legal, accounting and tax matters. In this regard, we note that we
assume that the Merger will qualify for pooling-of-interests accounting
treatment in accordance with United States generally accepted accounting
principles and will qualify as a tax free reorganization under the Internal
Revenue Code of 1986, as amended. We have also assumed that obtaining any
necessary regulatory or third-party approvals for the Merger will not have an
adverse effect on KTI or Casella. We are not expressing any opinion as to the
underlying valuation, future performance or long term viability of KTI or
Casella following the Merger, or the price at which Casella common stock will
trade subsequent to the Merger. We express no opinion as to the actual number of
shares of Casella Class A Common Stock to be issued to the shareholders of KTI
in the Merger. Our opinion is necessarily based on the information available to
us and general economic, financial and stock market conditions and circumstances
as they exist and can be evaluated by us on the date hereof. It should be
understood that, although subsequent developments may affect this opinion, we do
not have any obligation to update, revise or reaffirm the opinion.

As part of our investment banking business, we are regularly engaged in
valuations of businesses and securities in connection with acquisitions and
mergers, underwritings, the secondary distributions of securities, private
placements and valuations for other purposes.

We were engaged to render this fairness opinion to the Board of Directors of KTI
and will receive a fee for our services. CIBC World Markets has also acted as
co-managing underwriter for Casella in prior financing transactions for which we
have received fees for our services. In the ordinary course of its business,
CIBC World Markets and its affiliates may actively trade securities of KTI and
Casella for their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.

Based upon, and subject to the foregoing, and such other factors as we deem
relevant, it is our opinion that, as of the date hereof, the Exchange Ratio set
forth in Amendment No. 2 is fair to the shareholders of KTI from a financial
point of view. Neither this Fairness Opinion nor the services provided by CIBC
World Markets in connection herewith may be publicly disclosed or referred to in
any manner by KTI without the prior written approval of CIBC World Markets. CIBC
World Markets consents to the inclusion of this opinion in its entirety and any
reference to this opinion in any prospectus, proxy statement or
solicitation/recommendation statement, as the case may be, required to be
distributed to the Company's shareholders in connection with the Merger.

Very truly yours,

[SIGNATURE]

CIBC World Markets Corp.

ANNEX B-2

[LOGO]

September 23, 1999

PERSONAL AND CONFIDENTIAL

The Board of Directors
KTI, Inc.
7000 Boulevard East
Guttenberg, NJ 07093

Gentlemen:

Reference is made to our letter to you dated September 15, 1999 (the "Prior
Letter"). Capitalized terms used herein and not otherwise defined have the same
meaning as in the Prior Letter.

On September 23, 1999, we were advised that the Merger is anticipated to be
accounted for as a purchase transaction. Accordingly, at your request, we
reviewed the analyses performed in connection with our rendering the Prior
Letter.

Subject to the qualifications and limitations contained in the Prior Letter, we
reaffirm our conclusion stated therein.

Very truly yours,

[SIGNATURE]

CIBC World Markets Corp.

ANNEX C

CHAPTER 11. RIGHTS OF DISSENTING SHAREHOLDERS

14A:11-1 RIGHT OF SHAREHOLDERS TO DISSENT.--(1) Any shareholder of a
domestic corporation shall have the right to dissent from any of the following
corporate actions

(a) Any plan of merger or consolidation to which the corporation is a party,
provided that, unless the certificate of incorporation otherwise provides

(i) a shareholder shall not have the right to dissent from any plan of
merger or consolidation with respect to shares

(A) of a class or series which is listed on a national securities exchange
or is held of record by not less than 1,000 holders on the record date fixed to
determine the shareholders entitled to vote upon the plan of merger or
consolidation; or

(B) for which, pursuant to the plan of merger or consolidation, he will
receive (x) cash, (y) shares, obligations or other securities which, upon
consummation of the merger or consolidation, will either be listed on a national
securities exchange or held of record by not less than 1,000 holders, or (z)
cash and such securities;

(ii) a shareholder of a surviving corporation shall not have the right to
dissent from a plan of merger, if the merger did not require for its approval
the vote of such shareholders as provided in section 14A:10-5.1 or in
subsections 14A:10-3(4), 14A:10-7(2) or 14A:10-7(4); or

(b) Any sale, lease, exchange or other disposition of all or substantially
all of the assets of a corporation not in the usual or regular course of
business as conducted by such corporation, other than a transfer pursuant to
subsection (4) of N.J.S. 14A:10-11, provided that, unless the certificate of
incorporation otherwise provides, the shareholder shall not have the right to
dissent

(i) with respect to shares of a class or series which, at the record date
fixed to determine the shareholders entitled to vote upon such transaction, is
listed on a national securities exchange or is held of record by not less than
1,000 holders; or

(ii) from a transaction pursuant to a plan of dissolution of the corporation
which provides for distribution of substantially all of its net assets to
shareholders in accordance with their respective interests within one year after
the date of such transaction, where such transaction is wholly for

(A) cash; or

(B) shares, obligations or other securities which, upon consummation or the
plan of dissolution will either be listed on a national securities exchange or
held of record by not less than 1,000 holders; or

(C) cash and such securities; or

(iii) from a sale pursuant to an order of a court having jurisdiction.

(2) Any shareholder of a domestic corporation shall have the right to
dissent with respect to any shares owned by him which are to be acquired
pursuant to section 14A:10-9.

(3) A shareholder may not dissent as to less than all of the shares owned
beneficially by him and with respect to which a right of dissent exists. A
nominee or fiduciary may not dissent on behalf of any beneficial owner as to
less than all of the shares of such owner with respect to which the right of
dissent exists.

(4) A corporation may provide in its certificate of incorporation that
holders of all its shares, or of a particular class or series thereof, shall
have the right to dissent from specified corporate actions in addition to those
enumerated in subsection 14A:11-1(1), in which case the exercise of such right
of dissent shall be governed by the provisions of this Chapter.

14A:11-2 NOTICE OF DISSENT; DEMAND FOR PAYMENT; ENDORSEMENT OF
CERTIFICATES.--(1) Whenever a vote is to be taken, either at a meeting of
shareholders or upon written consents in lieu of a meeting pursuant to section
14A:5-6, upon a proposed corporate action from which a shareholder may dissent
under section 14A:11-1, any shareholder electing to dissent from such action
shall file with the corporation before the taking of the vote of the
shareholders on such corporate action, or within the time specified in
paragraphs 14A:5-6(2)(b) or 14A:5-6(2)(c), as the case may be, if no meeting of
shareholders is to be held, a written notice of such dissent stating that he
intends to demand payment for his shares if the action is taken.

(2) Within 10 days after the date on which such corporate action takes
effect, the corporation, or, in the case of a merger or consolidation, the
surviving or new corporation, shall given written notice of the effective date
of such corporate action, by certified mail to each shareholder who filed
written notice of dissent pursuant to subsection 14A:11-2(1), except any who
voted for or consented in writing to the proposed action.

(3) Within 20 days after the mailing of such notice, any shareholder to whom
the corporation was required to give such notice and who has filed a written
notice of dissent pursuant to this section may make written demand on the
corporation, or, in the case of a merger or consolidation, on the surviving or
new corporation, for the payment of the fair value of his shares.

(4) Whenever a corporation is to be merged pursuant to section 14A:10-5.1 or
subsection 14A:10-7(4) and shareholder approval is not required under
subsections 14A:10-5.1(5) and 14A:10-5.1(6), a shareholder who has the right to
dissent pursuant to section 14A:11-1 may, not later than 20 days after a copy or
summary of the plan of such merger and the statement required by subsection
14A:10-5.1(2) is mailed to such shareholder, make written demand on the
corporation or on the surviving corporation, for the payment of the fair value
of his shares.

(5) Whenever all the shares, or all the shares of a class or series, are to
be acquired by another corporation pursuant to section 14A:10-9, a shareholder
of the corporation whose shares are to be acquired may, not later than 20 days
after the mailing of notice by the acquiring corporation pursuant to paragraph
14A:10-9(3)(b), make written demand on the acquiring corporation for the payment
of the fair value of his shares.

(6) Not later than 20 days after demanding payment for his shares pursuant
to this section, the shareholder shall submit the certificate or certificates
representing his shares to the corporation upon which such demand has been made
for notation thereon that such demand has been made, whereupon such certificate
or certificates shall be returned to him. If shares represented by a certificate
on which notation has been made shall be transferred, each new certificate
issued therefor shall bear similar notation, together with the name of the
original dissenting holder of such shares, and a transferee of such shares shall
acquire by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making a demand for payment of the
fair value thereof.

(7) Every notice or other communication required to be given or made by a
corporation to any shareholder pursuant to this Chapter shall inform such
shareholder of all dates prior to which action must be taken by such shareholder
in order to perfect his rights as a dissenting shareholder under this Chapter.

14A:11-3 "DISSENTING SHAREHOLDER" DEFINED; DATE FOR DETERMINATION OF FAIR
VALUE.--(1) A shareholder who has made demand for the payment of his shares in
the manner prescribed by subsections 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) is
hereafter in this Chapter referred to as a "dissenting shareholder".

(2) Upon making such demand, the dissenting shareholder shall cease to have
any of the rights of a shareholder except the right to be paid the fair value of
his shares and any other rights of a dissenting shareholder under this Chapter.

C-2

(3) "Fair value" as used in this Chapter shall be determined

(a) As of the day prior to the day of the meeting of shareholders at which
the proposed action was approved or as of the day prior to the day specified by
the corporation for the tabulation of consents to such action if no meeting of
shareholders was held; or

(b) In the case of a merger pursuant to section 14A:10-5.1 or subsection
14A:10-7(4) in which shareholder approval is not required, as of the day prior
to the day on which the board of directors approved the plan of merger; or

(c) In the case of an acquisition of all the shares or all the shares of a
class or series by another corporation pursuant to section 14A:10-9, as of the
day prior to the day on which the board of directors of the acquiring
corporation authorized the acquisition, or, if a shareholder vote was taken
pursuant to section 14A:10-12, as of the day provided in paragraph
14A:11-3(3)(a).

In all cases, "fair value" shall exclude any appreciation or depreciation
resulting from the proposed action.

14A:11-4 TERMINATION OF RIGHT OF SHAREHOLDER TO BE PAID THE FAIR VALUE OF
HIS SHARES.--(1) The right of a dissenting shareholder to be paid the fair value
of his shares under this Chapter shall cease if

(a) he has failed to present his certificates for notation as provided by
subsection 14A:11-2(6), unless a court having jurisdiction, for good and
sufficient cause shown, shall otherwise direct;

(b) his demand for payment is withdrawn with the written consent of the
corporation;

(c) the fair value of the shares is not agreed upon as provided in this
Chapter and no action for the determination of fair value by the Superior Court
is commenced within the time provided in this Chapter;

(d) the Superior Court determines that the shareholder is not entitled to
payment for his shares;

(e) the proposed corporate action is abandoned or rescinded; or

(f) a court having jurisdiction permanently enjoins or sets aside the
corporate action.

(2) In any case provided for in subsection 14A:11-4(1), the rights of the
dissenting shareholder as a shareholder shall be reinstated as of the date of
the making of a demand for payment pursuant to subsections 14A:11-2(3),
14A:11-2(4) or 14A:11-2(5) without prejudice to any corporate action which has
taken place during the interim period. In such event, he shall be entitled to
any intervening preemptive rights and the right to payment of any intervening
dividend or other distribution, or, if any such rights have expired or any such
dividend or distribution other than in cash has been completed, in lieu thereof,
at the election of the board, the fair value thereof in cash as of the time of
such expiration or completion.

14A:11-5 RIGHTS OF DISSENTING SHAREHOLDER.--(1) A dissenting shareholder may
not withdraw his demand for payment of the fair value of his shares without the
written consent of the corporation.

(2) The enforcement by a dissenting shareholder of his right to receive
payment for his shares shall exclude the enforcement by such dissenting
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in subsection 14A:11-4(2) and except that
this subsection shall not exclude the right of such dissenting shareholder to
bring or maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is ultra vires, unlawful or fraudulent as to such
dissenting shareholder.

C-3

14A:11-6 DETERMINATION OF FAIR VALUE BY AGREEMENT.--(1) Not later than 10
days after the expiration of the period within which such shareholders may make
written demand to be paid the fair value of their shares, the corporation upon
which such demand has been made pursuant to subsections 14A:11-2(3),
14A:11-2(4) or 14A:11-2(5) shall mail to each dissenting shareholder the balance
sheet and the surplus statement of the corporation whose shares he holds, as of
the latest available date which shall not be earlier than 12 months prior to the
making of such offer and a profit and loss statement or statements for not less
than a 12-month period ended on the date of such balance sheet or, if the
corporation was not in existence for such 12-month period, for the portion
thereof during which it was in existence. The corporation may accompany such
mailing with a written offer to pay each dissenting shareholder for his shares
at a specified price deemed by such corporation to be the fair value thereof.
Such offer shall be made at the same price per share to all dissenting
shareholders of the same class, or, if divided into series, of the same series.

(2) If, not later than 30 days after the expiration of the 10-day period
limited by subsection 14A:11-6(1), the fair value of the shares is agreed upon
between any dissenting shareholder and the corporation, payment therefor shall
be made upon surrender of the certificate or certificates representing such
shares.

14A:11-7 PROCEDURE ON FAILURE TO AGREE UPON FAIR VALUE; COMMENCEMENT OF
ACTION TO DETERMINE FAIR VALUE.--(1) If the fair value of the shares is not
agreed upon within the 30-day period limited by subsection 14A:11-6(2), the
dissenting shareholder may serve upon the corporation upon which such demand has
been made pursuant to subsections 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) a
written demand that it commence an action in the Superior Court for the
determination of the fair value of the shares. Such demand shall be served not
later than 30 days after the expiration of the 30-day period so limited and such
action shall be commenced by the corporation not later than 30 days after
receipt by the corporation of such demand, but nothing herein shall prevent the
corporation from commencing such action at any earlier time.

(2) If a corporation fails to commence the action as provided in subsection
14A:11-7(1), a dissenting shareholder may do so in the name of the corporation,
not later than 60 days after the expiration of the time limited by subsection
14A:11-7(1) in which the corporation may commence such an action.

14A:11-8 ACTION TO DETERMINE FAIR VALUE; JURISDICTION OF COURT; APPOINTMENT
OF APPRAISER.--In any action to determine the fair value of shares pursuant to
this Chapter:

(a) The Superior Court shall have jurisdiction and may proceed in the action
in a summary manner or otherwise;

(b) All dissenting shareholders, wherever residing, except those who have
agreed with the corporation upon the price to be paid for their shares, shall be
made parties thereto as an action against their shares quasi in rem;

(c) The court in its discretion may appoint an appraiser to receive evidence
and report to the court on the question of fair value, who shall have such power
and authority as shall be specified in the order of his appointment; and

(d) The court shall render judgment against the corporation and in favor of
each shareholder who is a party to the action for the amount of the fair value
of his shares.

14A:11-9 JUDGMENT IN ACTION TO DETERMINE FAIR VALUE.--(1) A judgment for the
payment of the fair value of shares shall be payable upon surrender to the
corporation of the certificate or certificates representing such shares.

C-4

(2) The judgment shall include an allowance for interest at such rate as the
court finds to be equitable, from the date of the dissenting shareholder's
demand for payment under subsections 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) to
the day of payment. If the court finds that the refusal of any dissenting
shareholder to accept any offer of payment, made by the corporation under
section 14A:11-6, was arbitrary, vexatious or otherwise not in good faith, no
interest shall be allowed to him.

14A:11-10 COSTS AND EXPENSES OF ACTION.--The costs and expenses of bringing
an action pursuant to section 14A:11-8 shall be determined by the court and
shall be apportioned and assessed as the court may find equitable upon the
parties or any of them. Such expenses shall include reasonable compensation for
and reasonable expenses of the appraiser, if any, but shall exclude the fees and
expenses of counsel for and experts employed by any party; but if the court
finds that the offer of payment made by the corporation under section 14A:11-6
was not made in good faith, or if no such offer was made, the court in its
discretion may award to any dissenting shareholder who is a party to the action
reasonable fees and expenses of his counsel and of any experts employed by the
dissenting shareholder.

14A:11-11 DISPOSITION OF SHARES ACQUIRED BY CORPORATION.--(1) The shares of
a dissenting shareholder in a transaction described in subsection
14A:11-1(1) shall become reacquired by the corporation which issued them or by
the surviving corporation, as the case may be, upon the payment of the fair
value of shares.

(2) (Deleted by amendment, P.L. 1995, c.279.)

(3) In an acquisition of shares pursuant to section 14A:10-9 or section
14A:10-13, the shares of a dissenting shareholder shall become the property of
the acquiring corporation upon the payment by the acquiring corporation of the
fair value of such shares. Such payment may be made, with the consent of the
acquiring corporation, by the corporation which issued the shares, in which case
the shares so paid for shall become reacquired by the corporation which issued
them and shall be cancelled.

C-5

ANNEX D-1

CASELLA WASTE SYSTEMS, INC.

AMENDED AND RESTATED
1997 STOCK INCENTIVE PLAN

TABLE OF CONTENTS

1.  Purpose.....................................................   D-1-1
2.  Eligibility.................................................   D-1-1
3.  Administration, Delegation..................................   D-1-1
4.  Stock Available for Awards..................................   D-1-2
5.  Stock Options...............................................   D-1-2
6.  Restricted Stock............................................   D-1-3
7.  Other Stock-Based Awards....................................   D-1-3
8.  General Provisions Applicable to Awards.....................   D-1-4
9.  Miscellaneous...............................................   D-1-5

i

CASELLA WASTE SYSTEMS, INC.
AMENDED AND RESTATED
1997 STOCK INCENTIVE PLAN

1. PURPOSE

The purpose of this Amended and Restated 1997 Stock Incentive Plan (the
"Plan") of Casella Waste Systems, Inc., a Delaware corporation (the "Company"),
is to advance the interests of the Company's stockholders by enhancing the
Company's ability to attract, retain and motivate persons who make (or are
expected to make) important contributions to the Company by providing such
persons with equity ownership opportunities and performance-based incentives and
thereby better aligning the interests of such persons with those of the
Company's stockholders. Except where the context otherwise requires, the term
"Company" shall include any present or future subsidiary corporations of Casella
Waste Systems, Inc. as defined in Section 424(f) of the Internal Revenue Code of
1986, as amended, and any regulations promulgated thereunder (the "Code").

2. ELIGIBILITY

All of the Company's employees, officers, directors, consultants and
advisors are eligible to be granted options, restricted stock, or other
stock-based awards (each, an "Award") under the Plan. Any person who has been
granted an Award under the Plan shall be deemed a "Participant".

3. ADMINISTRATION, DELEGATION

(a) ADMINISTRATION BY BOARD OF DIRECTORS. The Plan will be administered by
the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Award. No director or person acting
pursuant to the authority delegated by the Board shall be liable for any action
or determination relating to or under the Plan made in good faith.

(b) DELEGATION TO EXECUTIVE OFFICERS. To the extent permitted by applicable
law, the Board may delegate to one or more executive officers of the Company the
power to make Awards and exercise such other powers under the Plan as the Board
may determine, provided that the Board shall fix the maximum number of shares
subject to Awards and the maximum number of shares for any one Participant to be
made by such executive officers.

(c) APPOINTMENT OF COMMITTEES. To the extent permitted by applicable law,
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). If and when the Class
A Common Stock, $.01 par value per share, of the Company (the "Common Stock") is
registered under the Securities Exchange Act of 1934 (the "Exchange Act"), the
Board shall appoint one such Committee of not less than two members, each member
of which shall be an "outside director" within the meaning of Section 162(m) of
the Code and a "non-employee director" as defined in Rule 16b-3 promulgated
under the Exchange Act." All references in the Plan to the "Board" shall mean
the Board or a Committee of the Board or the executive officer referred to in
Section 3(b) to the extent that the Board's powers or authority under the Plan
have been delegated to such Committee or executive officer.

D-1-1

4. STOCK AVAILABLE FOR AWARDS

(a) NUMBER OF SHARES. Subject to adjustment under Section 4(c), Awards may
be made under the Plan for up to such number of shares of Common Stock as is
equal to the sum of (i) 4,308,500 shares of Common Stock, plus (ii) such
additional number of shares of Common Stock as is equal to the aggregate number
of shares subject to Awards granted under the Company's 1993 Incentive Stock
Option Plan, 1994 Nonstatutory Stock Option Plan and 1996 Stock Option Plan
which are not actually issued because such Awards expire or otherwise result in
shares not being issued. If any Award expires or is terminated, surrendered or
canceled without having been fully exercised or is forfeited in whole or in part
or results in any Common Stock not being issued, the unused Common Stock covered
by such Award shall again be available for the grant of Awards under the Plan,
subject, however, in the case of Incentive Stock Options (as hereinafter
defined), to any limitation required under the Code. Shares issued under the
Plan may consist in whole or in part of authorized but unissued shares or
treasury shares.

(b) PER-PARTICIPANT LIMIT. Subject to adjustment under Section 4(c), for
Awards granted after the Common Stock is registered under the Exchange Act, the
maximum number of shares with respect to which an Award may be granted to any
Participant under the Plan shall be 200,000 per calendar year. The
per-participant limit described in this Section 4(b) shall be construed and
applied consistently with Section 162(m) of the Code.

(c) ADJUSTMENT TO COMMON STOCK. In the event of any stock split, stock
dividend, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, liquidation, spin-off or other similar change in
capitalization or event, or any distribution to holders of Common Stock other
than a normal cash dividend, (i) the number and class of securities available
under this Plan, (ii) the number and class of security and exercise price per
share subject to each outstanding Option, (iii) the repurchase price per
security subject to each outstanding Restricted Stock Award, and (iv) the terms
of each other outstanding stock-based Award shall be appropriately adjusted by
the Company (or substituted Awards may be made, if applicable) to the extent the
Board shall determine, in good faith, that such an adjustment (or substitution)
is necessary and appropriate. If this Section 4(c) applies and Section
8(e)(1) also applies to any event, Section 8(e)(1) shall be applicable to such
event, and this Section 4(c) shall not be applicable.

5. STOCK OPTIONS

(a) GENERAL. The Board may grant options to purchase Common Stock (each, an
"Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive Stock
Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option".

(b) INCENTIVE STOCK OPTIONS. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.

(c) EXERCISE PRICE. The Board shall establish the exercise price at the time
each Option is granted and specify it in the applicable option agreement;
provided, however, that no Options will be granted at an exercise price which is
below the fair market value of the Common Stock covered thereby.

D-1-2

(d) DURATION OF OPTIONS. Each Option shall be exercisable at such times and
subject to such terms and conditions as the Board may specify in the applicable
option agreement; provided, however, that no option shall be exercisable more
than ten years after the date of grant thereof.

(e) EXERCISE OF OPTION. Options may be exercised only by delivery to the
Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 5(f) for the number of shares for
which the Option is exercised.

(f) PAYMENT UPON EXERCISE. Common Stock purchased upon the exercise of an
Option granted under the Plan shall be paid for as follows:

(1) in cash or by check, payable to the order of the Company;

(2) except as the Board may otherwise provide in an Option Agreement, (i)
by delivery of an irrevocable and unconditional undertaking by a
creditworthy broker to deliver promptly to the Company sufficient funds
to pay the exercise price, or delivery by the Participant to the Company
of a copy of irrevocable and unconditional instructions to a creditworthy
broker to deliver promptly to the Company cash or a check sufficient to
pay the exercise price, or (ii) by delivery of shares of Common Stock
owned by the Participant valued at their fair market value as determined
by the Board in good faith ("Fair Market Value"), which Common Stock was
owned by the Participant at least six months prior to such delivery;

(3) to the extent permitted by the Board and explicitly provided in an
Option Agreement (i) by delivery of a promissory note of the Participant
to the Company on terms determined by the Board, or (ii) by payment of
such other lawful consideration as the Board may determine; or

(4) any combination of the above permitted forms of payment.

6. RESTRICTED STOCK

(a) GRANTS. The Board may grant Awards entitling recipients to acquire
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price (or to
require forfeiture of such shares if issued at no cost) from the recipient in
the event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable restriction period or periods
established by the Board for such Award (each, "Restricted Stock Award").

(b) TERMS AND CONDITIONS. The Board shall determine the terms and conditions
of any such Restricted Stock Award, including the conditions for repurchase (or
forfeiture) and the issue price, if any. Any stock certificates issued in
respect of a Restricted Stock Award shall be registered in the name of the
Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). At the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or if the Participant has died, to the
beneficiary designated, in a manner determined by the Board, by a Participant to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.

7. OTHER STOCK-BASED AWARDS

The Board shall have the right to grant other Awards based upon the Common
Stock having such terms and conditions as the Board may determine, including the
grant of shares based upon certain conditions, the grant of securities
convertible into Common Stock and the grant of stock appreciation rights.

D-1-3

8. GENERAL PROVISIONS APPLICABLE TO AWARDS

(a) TRANSFERABILITY OF AWARDS. Except as the Board may otherwise determine
or provide in an Award, Awards shall not be sold, assigned, transferred, pledged
or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be exercisable only
by the Participant. References to a Participant, to the extent relevant in the
context, shall include references to authorized transferees.

(b) DOCUMENTATION. Each Award under the Plan shall be evidenced by a written
instrument in such form as the Board shall determine. Each Award may contain
terms and conditions in addition to those set forth in the Plan.

(c) BOARD DISCRETION. Except as otherwise provided by the Plan, each type of
Award may be made alone or in addition or in relation to any other type of
Award. The terms of each type of Award need not be identical, and the Board need
not treat Participants uniformly.

(d) TERMINATION OF STATUS. The Board shall determine the effect on an Award
of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.

(e) ACQUISITION EVENTS

(1) CONSEQUENCES OF ACQUISITION EVENTS. Upon the occurrence of an
Acquisition Event (as defined below), or the execution by the Company of
any agreement with respect to an Acquisition Event, the Board shall
provide that outstanding Options shall be assumed, or equivalent Options
shall be substituted, by the acquiring or succeeding corporation (or an
affiliate thereof), provided that any such Options substituted for
Incentive Stock Options shall satisfy, in the determination of the Board,
the requirements of Section 424(a) of the Code; provided, however, that
in the event the acquiring or succeeding corporation does not agree to
assume all such Options or other Awards, the Board shall take any one or
more of the following actions with respect to then outstanding Options or
other Awards not so assumed: (i) upon written notice to the Participants,
provide that all then unexercised Options will become exercisable in full
as of a specified time (the "Acceleration Time") prior to the Acquisition
Event and will terminate immediately prior to the consummation of such
Acquisition Event, except to the extent exercised by the Participants
between the Acceleration Time and the consummation of such Acquisition
Event; (ii) in the event of an Acquisition Event under the terms of which
holders of Common Stock will receive upon consummation thereof a cash
payment for each share of Common Stock surrendered pursuant to such
Acquisition Event (the "Acquisition Price"), provide that all outstanding
Options shall terminate upon consummation of such Acquisition Event and
each Participant shall receive, in exchange therefor, a cash payment
equal to the amount (if any) by which (A) the Acquisition Price
multiplied by the number of shares of Common Stock subject to such
outstanding Options (whether or not then exercisable), exceeds (B) the
aggregate exercise price of such Options; (iii) provide that all
Restricted Stock Awards then outstanding shall become free of all
restrictions prior to the consummation of the Acquisition Event; and
(iv) provide that any other stock-based Awards outstanding (A) shall
become exercisable, realizable or vested in full, or shall be free of all
conditions or restrictions, as applicable to each such Award, prior to
the consummation of the Acquisition Event, or (B), if applicable, shall
be assumed, or equivalent Awards shall be substituted, by the acquiring
or succeeding corporation (or an affiliate thereof).

D-1-4

An "Acquisition Event" shall mean: (a) any merger or consolidation which
results in the voting securities of the Company outstanding immediately prior
thereto representing immediately thereafter (either by remaining outstanding or
by being converted into voting securities of the surviving or acquiring entity)
less than 50% of the combined voting power of the voting securities of the
Company or such surviving or acquiring entity outstanding immediately after such
merger or consolidation; (b) any sale of all or substantially all of the assets
of the Company; or (c) the complete liquidation of the Company.

(2) ASSUMPTION OF OPTIONS UPON CERTAIN EVENTS. The Board may grant Awards
under the Plan in substitution for stock and stock-based awards held by
employees of another corporation who become employees of the Company as a
result of a merger or consolidation of the employing corporation with the
Company or the acquisition by the Company of property or stock of the
employing corporation. The substitute Awards shall be granted on such
terms and conditions as the Board considers appropriate in the
circumstances.

(f) WITHHOLDING. Each Participant shall pay to the Company, or make
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. The Board may allow Participants to
satisfy such tax obligations in whole or in part in shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued at
their Fair Market Value. The Company may, to the extent permitted by law, deduct
any such tax obligations from any payment of any kind otherwise due to a
Participant.

(g) AMENDMENT OF AWARD. The Board may amend, modify or terminate any
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.

(h) CONDITIONS ON DELIVERY OF STOCK. The Company will not be obligated to
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws,
rules or regulations.

(i) ACCELERATION. The Board may at any time provide that any Options shall
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of all restrictions or that any other stock-based Awards
may become exercisable in full or in part or free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may be.

9. MISCELLANEOUS

(a) NO RIGHT TO EMPLOYMENT OR OTHER STATUS. No person shall have any claim
or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.

(b) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the applicable
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder of such shares.

D-1-5

(c) EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective on the
date on which it is adopted by the Board (the "Effective Date"), but no Award
granted to a Participant designated as subject to Section 162(m) by the Board
shall become exercisable, vested or realizable, as applicable to such Award,
unless and until the Plan has been approved by the Company's stockholders to the
extent Section 162(m) requires stockholder approval. No Awards shall be granted
under the Plan after the completion of ten years from the earlier of (i) the
date on which the Plan was adopted by the Board or (ii) the date the Plan was
approved by the Company's stockholders, but Awards previously granted may extend
beyond that date.

(d) AMENDMENT OF PLAN. The Board may amend, suspend or terminate the Plan or
any portion thereof at any time, provided that no Award granted to a Participant
designated as subject to Section 162(m) by the Board after the date of such
amendment shall become exercisable, realizable or vested, as applicable to such
Award (to the extent that such amendment to the Plan was required to grant such
Award to a particular Participant), unless and until such amendment shall have
been approved by the Company's stockholders.

(e) GOVERNING LAW. The provisions of the Plan and all Awards made hereunder
shall be governed by and interpreted in accordance with the laws of the State of
Delaware, without regard to any applicable conflicts of law.

Initially Adopted by the Board of
Directors on July 31, 1997, as Amended
and Restated, on August 13, 1998 and
Amendment No. 1 (increasing the number
of shares of Common Stock subject to the
plan) on March 3, 1999.

Initially Approved by the Stockholders
on September 29, 1997, as Amended and
Restated, on October 14, 1998 and
Amendment No. 1 on             , 1999.

D-1-6

ANNEX D-2

CASELLA WASTE SYSTEMS, INC.

AMENDED 1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

TABLE OF CONTENTS

PAGE
--------

1.   Purpose.....................................................   D-2-1
2.   Administration..............................................   D-2-1
3.   Participation in the Plan...................................   D-2-1
4.   Stock Subject to the Plan...................................   D-2-1
5.   Terms, Conditions and Form of Options.......................   D-2-1
6.   Limitation of Rights........................................   D-2-3
Adjustment Provisions for Mergers, Recapitalizations and
7.   Related Transactions........................................   D-2-3
8.   Change in Control...........................................   D-2-3
9.   Termination and Amendment of the Plan.......................   D-2-4
10.  Notice......................................................   D-2-4
11.  Governing Law...............................................   D-2-4
12.  Effective Date..............................................   D-2-4

i

CASELLA WASTE SYSTEMS, INC.

1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

1. PURPOSE.

The purpose of this Amended 1997 Non-Employee Director Stock Option Plan
(the "Plan") of Casella Waste Systems, Inc. (the "Company") is to encourage
ownership in the Company by non-employee directors of the Company whose
continued services are considered essential to the Company's future progress and
to provide them with a further incentive to remain as directors of the Company.

2. ADMINISTRATION.

The Board of Directors shall supervise and administer the Plan. Grants of
stock options under the Plan and the amount and nature of the awards to be
granted shall be automatic in accordance with Section 5. However, all questions
concerning interpretation of the Plan or any options granted under it shall be
resolved by the Board of Directors and such resolution shall be final and
binding upon all persons having an interest in the Plan. The Board of Directors
may, to the full extent permitted by or consistent with applicable laws or
regulations, delegate any or all of its powers under the Plan to a committee
appointed by the Board of Directors, and if a committee is so appointed, all
references to the Board of Directors in the Plan shall mean and relate to such
committee.

3. PARTICIPATION IN THE PLAN.

Directors of the Company who are not employees of the Company or any
subsidiary of the Company ("non-employee directors") shall be eligible to
receive options under the Plan.

4. STOCK SUBJECT TO THE PLAN.

(a)  The maximum number of shares of the Company's Class A Common Stock, par
value $.01 per share ("Common Stock"), which may be issued under the Plan shall
be 100,000 shares, subject to adjustment as provided in Section 7.

(b)  If any outstanding option under the Plan for any reason expires or is
terminated without having been exercised in full, the shares covered by the
unexercised portion of such option shall again become available for issuance
pursuant to the Plan.

(c)  All options granted under the Plan shall be non-statutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").

(d)  Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.

5. TERMS, CONDITIONS AND FORM OF OPTIONS.

Each option granted under the Plan shall be evidenced by a written agreement
in such form as the Board of Directors shall from time to time approve, which
agreements shall comply with and be subject to the following terms and
conditions:

(a) OPTION GRANT DATES. Options shall automatically be granted to all
non-employee directors as follows:

(i) each person who first becomes a non-employee director after the
closing date (the "Closing Date") of the Company's initial public offering
of Common Stock pursuant to an effective registration statement under the
Securities Act of 1933, as amended, shall be granted an

D-2-1

option to purchase 7,500 shares of Common Stock on the date of his or her
initial election to the Board of Directors; and

(ii) each non-employee director shall be granted an option to purchase
7,500 shares of Common Stock on the date of each Annual Meeting of
Stockholders of the Company commencing with the 1998 Annual Meeting of
Stockholders (other than a director who was initially elected to the Board
of Directors at any such Annual Meeting or, if previously, at any time after
the prior year's Annual Meeting of Stockholders), provided that he or she is
serving as a director immediately following such Annual Meeting.

(b) OPTION EXERCISE PRICE. The option exercise price per share for each
option granted under the Plan shall equal (i) the last reported sales price per
share of the Company's Common Stock on the Nasdaq National Market (or if the
Common Stock is traded on a national securities exchange on the date of grant,
the reported closing sales price per share of the Company's Common Stock on such
exchange) on the date of grant (or if no such price is reported on such date
such price as reported on the nearest preceding day) or (ii) if the Common Stock
is not traded on the Nasdaq National Market or a national securities exchange,
the fair market value per share on the date of grant as most recently determined
by the Board of Directors.

(c) TRANSFERABILITY OF OPTIONS. Except as the Board may otherwise determine
or provide in an option granted under the Plan, any option granted under the
Plan to an optionee shall not be transferable by the optionee other than by will
or the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code or Title I of the Employee Retirement
Income Security Act, or the rules thereunder, and shall be exercisable during
the optionee's lifetime only by the optionee or the optionee's guardian or legal
representative. References to an optionee, to the extent relevant in the
context, shall include references to authorized transferees.

(d) Vesting Period.

(i) GENERAL. Each option granted under the Plan shall become exercisable
in three equal annual installments beginning on the first anniversary of the
Option Grant Date; provided, however, that the optionee has continued to
serve as a director until at least the Annual Meeting of Stockholders
immediately preceding such vesting date.

(ii) ACCELERATION UPON CHANGE IN CONTROL. Notwithstanding the foregoing,
each outstanding option granted under the Plan shall immediately become
exercisable in full in the event a Change in Control (as defined in Section
8) of the Company occurs.

(e) TERMINATION. Each option shall terminate, and may no longer be
exercised, on the earlier of the (i) the date ten years after the grant date of
such option or (ii) the date 90 days after the optionee ceases to serve as a
director of the Company; provided that, in the event an optionee ceases to serve
as a director due to his or her death or disability (within the meaning of
Section 22(e)(3) of the Code or any successor provision), then the exercisable
portion of the option may be exercised, within the period of 180 days following
the date the optionee ceases to serve as a director (but in no event later than
ten years after the Option Grant Date), by the optionee or by the person to whom
the option is transferred in accordance with the terms of this Plan and the
applicable option agreement, or by written notice pursuant to Section 5(g).

(f) EXERCISE PROCEDURE. An option may be exercised only by written notice to
the Company at its principal office accompanied by (i) payment in cash or by
certified or bank check of the full consideration for the shares as to which
they are exercised, (ii) delivery of outstanding shares of Common Stock (which,
in the case of shares acquired from the Company, have been outstanding for at
least six months) having a fair market value on the last business day preceding
the date of exercise equal to the option exercise price, or (iii) an irrevocable
undertaking by a broker (who is a member of the New York Stock Exchange) to
deliver promptly to the Company sufficient funds to pay the exercise

D-2-2

price or delivery of irrevocable instructions to a broker (who is a member of
the New York Stock Exchange) to deliver promptly to the Company cash or a check
sufficient to pay the exercise price.

(g) EXERCISE BY REPRESENTATIVE FOLLOWING DEATH OF DIRECTOR. An optionee, by
written notice to the Company, may designate one or more persons (and from time
to time change such designation), including his or her legal representative,
who, by reason of the optionee's death, shall acquire the right to exercise all
or a portion of the option. If the person or persons so designated wish to
exercise any portion of the option, they must do so within the term of the
option as provided herein. Any exercise by a representative shall be subject to
the provisions of the Plan.

6. LIMITATION OF RIGHTS.

(a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan, nor the granting
of an option nor any other action taken pursuant to the Plan, shall constitute
or be evidence of any agreement or understanding, express or implied, that the
Company will retain the optionee as a director for any period of time.

(b) NO STOCKHOLDERS' RIGHTS FOR OPTIONS. An optionee shall have no rights as
a stockholder with respect to the shares covered by his or her option until the
date of the issuance to him or her of a stock certificate therefor, and no
adjustment will be made for dividends or other rights (except as provided in
Section 7) for which the record date is prior to the date such certificate is
issued.

(c) COMPLIANCE WITH SECURITIES LAWS. Each option shall be subject to the
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
upon any securities exchange or under any state or federal law, or the consent
or approval of any governmental or regulatory body, or the disclosure of
non-public information or the satisfaction of any other condition is necessary
as a condition of, or in connection with, the issuance or purchase of shares
thereunder, such option may not be exercised, in whole or in part, unless such
listing, registration, qualification, consent or approval, or satisfaction of
such condition shall have been effected or obtained on conditions acceptable to
the Board of Directors. Nothing herein shall be deemed to require the Company to
apply for or to obtain such listing, registration or qualification, or to
satisfy such condition.

7. ADJUSTMENT PROVISIONS FOR MERGERS, RECAPITALIZATIONS AND RELATED
TRANSACTIONS.

If, through or as a result of any merger, consolidation, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split, or other similar transaction, (i) the outstanding shares of Common Stock
are exchanged for a different number or kind of securities of the Company or of
another entity, or (ii) additional shares or new or different shares or other
securities of the Company or of another entity are distributed with respect to
such shares of Common Stock, the Board of Directors shall make an appropriate
and proportionate adjustment in (x) the maximum number and kind of shares
reserved for issuance under the Plan, (y) the number and kind of shares or other
securities subject to then outstanding options under the Plan, and (z) the price
for each share subject to any then outstanding options under the Plan (without
changing the aggregate purchase price for such options), to the end that each
option shall be exercisable, for the same aggregate exercise price, for such
securities as such optionholder would have held immediately following such event
if he had exercised such option immediately prior to such event. No fractional
shares will be issued under the Plan on account of any such adjustments.

8. CHANGE IN CONTROL.

For purposes of the Plan, a "Change in Control" shall be deemed to have
occurred only if any of the following events occurs: (i) any "person", as such
term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the
Company, any trustee or other fiduciary holding securities under an

D-2-3

employee benefit plan of the Company, or any corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportion as their ownership of stock of the Company), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company (other than by virtue of ownership
of the Company's Class B Common Stock) representing 50% or more of the combined
voting power of the Company's then outstanding securities; (ii) the stockholders
of the Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; (iii) the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets; or (iv) individuals who, on the date
on which the Plan was adopted by the Board of Directors, constituted the Board
of Directors of the Company, together with any new director whose election by
the Board of Directors or nomination for election by the Company's stockholders
was approved by a vote of at least a majority of the directors then still in
office who were directors on the date on which the Plan was adopted by the Board
of Directors or whose election or nomination was previously so approved (except
for any individual whose election as a director occurs as a result of an actual
or threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a person other than the Board of Directors), cease for any
reason to constitute at least a majority of the Board of Directors.

9. TERMINATION AND AMENDMENT OF THE PLAN.

The Board of Directors may suspend or terminate the Plan or amend it in any
respect whatsoever.

10. NOTICE.

Any written notice to the Company required by any of the provisions of the
Plan shall be addressed to the Treasurer of the Company and shall become
effective when it is received.

11. GOVERNING LAW.

The Plan and all determinations made and actions taken pursuant hereto shall
be governed by the internal laws of the State of Delaware (without regard to any
applicable conflicts of laws or principles).

12. EFFECTIVE DATE.

The Plan shall become effective on the Closing Date.

Initially adopted by the Board of
Directors on
July 31, 1997 and Amendment No. 1
(increasing
the number of shares of Common Stock
subject
to the plan and options automatically
issued to
directors) adopted on March 3, 1999.

Initially approved by the stockholders
as of
September 29, 1997 and Amendment No. 1
on
, 1999.

D-2-4

ANNEX D-3

CASELLA WASTE SYSTEMS, INC.

AMENDED AND RESTATED
1997 EMPLOYEE STOCK PURCHASE PLAN

TABLE OF CONTENTS

1.  Administration..............................................   D-3-1
2.  Eligibility.................................................   D-3-1
3.  Offerings...................................................   D-3-1
4.  Participation...............................................   D-3-1
5.  Deductions..................................................   D-3-2
6.  Deduction Changes...........................................   D-3-2
7.  Interest....................................................   D-3-2
8.  Withdrawal of Funds.........................................   D-3-2
9.  Purchase of Shares..........................................   D-3-2
10.  Issuance of Certificates....................................   D-3-3
11.  Rights on Retirement, Death or Termination of Employment....   D-3-3
12.  Optionees Not Stockholders..................................   D-3-3
13.  Rights Not Transferable.....................................   D-3-3
14.  Application of Funds........................................   D-3-3
15.  Adjustment in Case of Changes Affecting Common Stock........   D-3-3
16.  Merger......................................................   D-3-4
17.  Amendment of the Plan.......................................   D-3-4
18.  Insufficient Shares.........................................   D-3-4
19.  Termination of the Plan.....................................   D-3-4
20.  Governmental Regulations....................................   D-3-4
21.  Issuance of Shares..........................................   D-3-4
22.  Notification upon Sale of Shares............................   D-3-4
23.  Effective Date and Approval of Stockholders.................   D-3-5

i

CASELLA WASTE SYSTEMS, INC.

AMENDED AND RESTATED
1997 EMPLOYEE STOCK PURCHASE PLAN

The purpose of this Plan is to provide eligible employees of Casella Waste
Systems, Inc. (the "Company") and certain of its subsidiaries with opportunities
to purchase shares of the Company's Class A Common Stock, $0.01 par value (the
"Common Stock"), commencing on January 9, 1998. Six Hundred Thousand (600,000)
shares of Common Stock in the aggregate have been approved for this purpose.

1.  ADMINISTRATION. The Plan will be administered by the Company's Board of
Directors (the "Board") or by a Committee appointed by the Board (the
"Committee"). The Board or the Committee has authority to make rules and
regulations for the administration of the Plan and its interpretation and
decisions with regard thereto shall be final and conclusive.

2.  ELIGIBILITY. Participation in the Plan will neither be permitted nor
denied contrary to the requirements of Section 423 of the Internal
Revenue Code of 1986, as amended (the "Code"), and regulations
promulgated thereunder. All employees of the Company, including Directors
who are employees, and all employees of any subsidiary of the Company (as
defined in Section 424(f) of the Code) designated by the Board or the
Committee from time to time (a "Designated Subsidiary"), are eligible to
participate in any one or more of the offerings of Options (as defined in
Section 9) to purchase Common Stock under the Plan provided that:

a. they are customarily employed by the Company or a Designated
Subsidiary for more than 20 hours a week and for more than five months in
a calendar year; and

b. they have been employed by the Company or a Designated Subsidiary for
at least six months prior to enrolling in the Plan; and

c. they are employees of the Company or a Designated Subsidiary on the
first day of the applicable Plan Period (as defined below).

No employee may be granted an option hereunder if such employee, immediately
after the option is granted, owns 5% or more of the total combined voting power
or value of the stock of the Company or any subsidiary. For purposes of the
preceding sentence, the attribution rules of Section 424(d) of the Code shall
apply in determining the stock ownership of an employee, and all stock which the
employee has a contractual right to purchase shall be treated as stock owned by
the employee.

3.  OFFERINGS. The Company will make one or more offerings ("Offerings") to
employees to purchase Common Stock under this Plan. The first Offering
will begin on January 9, 1998, and, thereafter, will occur each
January 1 and July 1, or the first business day thereafter (the "Offering
Commencement Dates"). Each Offering Commencement Date will begin a six
(6) month period (a "Plan Period") during which payroll deductions will
be made and held for the purchase of Common Stock at the end of the Plan
Period (except that the first Plan Period will end on April 30, 1998).
The Board or the Committee may, at its discretion, choose a different
Plan Period of twelve (12) months or less for subsequent Offerings. No
more than 50,000 shares of Common Stock shall be eligible for purchase in
any Plan Period.

4.  PARTICIPATION. An employee eligible on the Offering Commencement Date of
any Offering may participate in such Offering by completing and
forwarding a payroll deduction authorization form to the employee's
appropriate payroll office at least 14 days prior to the applicable
Offering Commencement Date (five days in the case of the first Plan
Period). The form will authorize a regular payroll deduction from the
Compensation received by the employee during the Plan Period. Unless an
employee files a new form or withdraws from the Plan, his

D-3-1

deductions and purchases will continue at the same rate for future
Offerings under the Plan as long as the Plan remains in effect. The term
"Compensation" means the amount of money reportable on the employee's
Federal Income Tax Withholding Statement, excluding overtime, shift
premium, incentive or bonus awards, allowances and reimbursements for
expenses such as relocation allowances for travel expenses, income or
gains on the exercise of Company stock options or stock appreciation
rights, and similar items, whether or not shown on the employee's Federal
Income Tax Withholding Statement, but including, in the case of
salespersons, sales commissions to the extent determined by the Board or
the Committee.

5.  DEDUCTIONS. The Company will maintain payroll deduction accounts for all
participating employees. With respect to any Offering made under this
Plan, an employee may authorize a payroll deduction in any dollar amount
up to a maximum of 10% of the Compensation he or she receives during the
Plan Period or such shorter period during which deductions from payroll
are made.

No employee may be granted an Option (as defined in Section 9) which permits
his rights to purchase Common Stock under this Plan and any other employee stock
purchase plan (as defined in Section 423(b) of the Code) of the Company and its
subsidiaries, to accrue at a rate which exceeds $25,000 of the fair market value
of such Common Stock (determined at the Offering Commencement Date of the Plan
Period) for each calendar year in which the Option is outstanding at any time.

6.  DEDUCTION CHANGES. An employee may decrease or discontinue his payroll
deduction once during any Plan Period, by filing a new payroll deduction
authorization form. However, an employee may not increase his payroll
deduction during a Plan Period. If an employee elects to discontinue his
payroll deductions during a Plan Period, but does not elect to withdraw
his funds pursuant to Section 8 hereof, funds deducted prior to his
election to discontinue will be applied to the purchase of Common Stock
on the Exercise Date (as defined below).

7.  INTEREST. Interest will not be paid on any employee accounts, except to
the extent that the Board or the Committee, in its sole discretion,
elects to credit employee accounts with interest at such per annum rate
as it may from time to time determine.

8.  WITHDRAWAL OF FUNDS. An employee may at any time prior to the close of
business on the last business day in a Plan Period and for any reason
permanently draw out the balance accumulated in the employee's account
and thereby withdraw from participation in an Offering. Partial
withdrawals are not permitted. The employee may not begin participation
again during the remainder of the Plan Period. The employee may
participate in any subsequent Offering in accordance with terms and
conditions established by the Board or the Committee.

9.  PURCHASE OF SHARES. On the Offering Commencement Date of each Plan
Period, the Company will grant to each eligible employee who is then a
participant in the Plan an option ("Option") to purchase on the last
business day of such Plan Period (the "Exercise Date"), at the Option
Price hereinafter provided for, the largest number of whole shares of
Common Stock of the Company as does not exceed the number of shares
determined by dividing $12,500 by the closing price (as defined below) on
the Offering Commencement Date of such Plan Period.

The purchase price for each share purchased will be 85% of the closing price
of the Common Stock on (i) the first business day of such Plan Period or
(ii) the Exercise Date, whichever closing price shall be less. Such closing
price shall be (a) the closing price on any national securities exchange on
which the Common Stock is listed, (b) the closing price of the Common Stock on
the Nasdaq National Market or (c) the average of the closing bid and asked
prices in the over-the-counter-market, whichever is applicable, as published in
The Wall Street Journal. If no sales of Common Stock were made on such

D-3-2

a day, the price of the Common Stock for purposes of clauses (a) and (b) above
shall be the reported price for the next preceding day on which sales were made.

Each employee who continues to be a participant in the Plan on the Exercise
Date shall be deemed to have exercised his Option at the Option Price on such
date and shall be deemed to have purchased from the Company the number of full
shares of Common Stock reserved for the purpose of the Plan that his accumulated
payroll deductions on such date will pay for, but not in excess of the maximum
number determined in the manner set forth above.

Any balance remaining in an employee's payroll deduction account at the end
of a Plan Period will be automatically refunded to the employee, except that any
balance which is less than the purchase price of one share of Common Stock will
be carried forward into the employee's payroll deduction account for the
following Offering, unless the employee elects not to participate in the
following Offering under the Plan, in which case the balance in the employee's
account shall be refunded.

10. ISSUANCE OF CERTIFICATES. Certificates representing shares of Common
Stock purchased under the Plan may be issued only in the name of the
employee, in the name of the employee and another person of legal age as
joint tenants with rights of survivorship, or (in the Company's sole
discretion) in the name of a brokerage firm, bank or other nominee holder
designated by the employee. The Company may, in its sole discretion and
in compliance with applicable laws, authorize the use of book entry
registration of shares in lieu of issuing stock certificates.

11. RIGHTS ON RETIREMENT, DEATH OR TERMINATION OF EMPLOYMENT. In the event
of a participating employee's termination of employment prior to the last
business day of a Plan Period, no payroll deduction shall be taken from
any pay due and owing to an employee and the balance in the employee's
account shall be paid to the employee or, in the event of the employee's
death, (a) to a beneficiary previously designated in a revocable notice
signed by the employee (with any spousal consent required under state
law) or (b) in the absence of such a designated beneficiary, to the
executor or administrator of the employee's estate or (c) if no such
executor or administrator has been appointed to the knowledge of the
Company, to such other person(s) as the Company may, in its discretion,
designate. If, prior to the last business day of the Plan Period, the
Designated Subsidiary by which an employee is employed shall cease to be
a subsidiary of the Company, or if the employee is transferred to a
subsidiary of the Company that is not a Designated Subsidiary, the
employee shall be deemed to have terminated employment for the purposes
of this Plan.

12. OPTIONEES NOT STOCKHOLDERS. Neither the granting of an Option to an
employee nor the deductions from his pay shall constitute such employee a
stockholder of the shares of Common Stock covered by an Option under this
Plan until such shares have been purchased by and issued to him.

13. RIGHTS NOT TRANSFERABLE. Rights under this Plan are not transferable by
a participating employee other than by will or the laws of descent and
distribution, and are exercisable during the employee's lifetime only by
the employee.

14. APPLICATION OF FUNDS. All funds received or held by the Company under
this Plan may be combined with other corporate funds and may be used for
any corporate purpose.

15. ADJUSTMENT IN CASE OF CHANGES AFFECTING COMMON STOCK. In the event of a
subdivision of outstanding shares of Common Stock, or the payment of a
dividend in Common Stock, the number of shares approved for this Plan,
and the share limitation set forth in Section 9, shall be increased
proportionately, and such other adjustment shall be made as may be deemed
equitable by the Board or the Committee. In the event of any other change
affecting the Common Stock, such adjustment shall be made as may be
deemed equitable by the Board or the Committee to give proper effect to
such event.

D-3-3

16. MERGER. If the Company shall at any time merge or consolidate with
another corporation and the holders of the capital stock of the Company
immediately prior to such merger or consolidation continue to hold at
least 80% by voting power of the capital stock of the surviving
corporation ("Continuity of Control"), the holder of each Option then
outstanding will thereafter be entitled to receive at the next Exercise
Date upon the exercise of such Option for each share as to which such
Option shall be exercised the securities or property which a holder of
one share of the Common Stock was entitled to upon and at the time of
such merger or consolidation, and the Committee shall take such steps in
connection with such merger or consolidation as the Board or the
Committee shall deem necessary to assure that the provisions of Section
15 shall thereafter be applicable, as nearly as reasonably may be, in
relation to the said securities or property as to which such holder of
such Option might thereafter be entitled to receive thereunder.

In the event of a merger or consolidation of the Company with or into
another corporation which does not involve Continuity of Control, or of a sale
of all or substantially all of the assets of the Company while unexercised
Options remain outstanding under the Plan, all outstanding Options shall be
cancelled by the Board or the Committee as of the effective date of any such
transaction, provided that notice of such cancellation shall be given to each
holder of an Option, and each holder of an Option shall have the right to
exercise such Option in full based on payroll deductions then credited to his
account as of a date determined by the Board or the Committee, which date shall
not be less than ten (10) days preceding the effective date of such transaction.

17. AMENDMENT OF THE PLAN. The Board may at any time, and from time to time,
amend this Plan in any respect, except that (a) if the approval of any
such amendment by the shareholders of the Company is required by Section
423 of the Code, such amendment shall not be effected without such
approval, and (b) in no event may any amendment be made which would cause
the Plan to fail to comply with Section 423 of the Code.

18. INSUFFICIENT SHARES. In the event that the total number of shares of
Common Stock specified in elections to be purchased under any Offering
plus the number of shares purchased under previous Offerings under this
Plan exceeds the maximum number of shares issuable under this Plan, the
Board or the Committee will allot the shares then available on a pro rata
basis.

19. TERMINATION OF THE PLAN. This Plan may be terminated at any time by the
Board. Upon termination of this Plan all amounts in the accounts of
participating employees shall be promptly refunded.

20. GOVERNMENTAL REGULATIONS. The Company's obligation to sell and deliver
Common Stock under this Plan is subject to listing on a national stock
exchange or quotation on the Nasdaq National Market and the approval of
all governmental authorities required in connection with the
authorization, issuance or sale of such stock.

The Plan shall be governed by Delaware law except to the extent that such
law is preempted by federal law.

21. ISSUANCE OF SHARES. Shares may be issued upon exercise of an Option from
authorized but unissued Common Stock, from shares held in the treasury of
the Company, or from any other proper source.

22. NOTIFICATION UPON SALE OF SHARES. Each employee agrees, by entering the
Plan, to promptly give the Company notice of any disposition of shares
purchased under the Plan where such disposition occurs within two years
after the date of grant of the Option pursuant to which such shares were
purchased.

D-3-4

23. EFFECTIVE DATE AND APPROVAL OF STOCKHOLDERS. The Plan shall take effect
on July 31, 1997 subject to approval by the stockholders of the Company
as required by Section 423 of the Code, which approval must occur within
twelve months of the adoption of the Plan by the Board.

Initially adopted by the Board of
Directors on July 31, 1997

Amendment No. 1 (changing date of
commencement of first Offering) approved
by the Board of Directors on
November 14, 1997 and Amendment No. 2
(increasing the number of shares of
Common Stock subject to the plan)
approved by the Board of Directors on
March 3, 1999

Initially approved by the stockholders
on September 29, 1997 and Amendment No.
2 on             , 1999

D-3-5

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the Delaware General Corporation Law statute permits a
Delaware corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against expenses (including attorneys'
fees), judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with the action, suit, or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.

In the case of an action by or in the right of the corporation, Section 145
permits the corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee, or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of the action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation. No indemnification may be made in respect of any claim, issue, or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which the action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to be indemnified for
such expenses which the Court of Chancery or such other court shall deem proper.

To the extent that a director, officer, employee, or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit,
or proceeding referred to in the preceding two paragraphs, Section 145 requires
that he be indemnified against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection therewith.

Section 145 provides that expenses, including attorneys' fees, incurred by
an officer or director in defending any civil, criminal, administrative, or
investigative action, suit, or proceeding may be paid by the corporation in
advance of the final disposition of the action, suit, or proceeding upon receipt
of an undertaking by or on behalf of the director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation as authorized in Section 145.

Article Sixth of Casella's Amended and Restated Certificate of Incorporation
eliminates the personal liability of the directors of Casella to Casella or its
stockholders for monetary damages for breach of fiduciary duty as directors,
with certain exceptions, and Article Seventh requires indemnification of
directors and officers of Casella, and for advancement of litigation expenses to
the fullest extent permitted by Section 145.

II-1

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) The following documents are exhibits to this registration statement.

EXHIBIT
NUMBER                             DESCRIPTION OF DOCUMENT
---------------------   ------------------------------------------------------------

2.1(1)          Agreement and Plan of Merger dated as of January 12, 1999
and as amended by Amendments No. 1, 2 and 3 thereto, among
Casella Waste Systems, Inc. ("Casella"), KTI, Inc. ("KTI")
and Rutland Acquisition Sub, Inc. (included as Annex A to
the proxy statement/prospectus which is a part of this
registration statement).

3.1             Amended and Restated Certificate of Incorporation of Casella
(incorporated herein by reference to Exhibit 4.1 to the
registration statement on Form S-8 of Casella as filed
November 18, 1998).

3.3             Second Amended and Restated By-Laws of Casella (incorporated
herein by reference to Exhibit 3.4 to the registration
statement on Form S-1 of Casella as filed September 24,
1997 (file no. 333-33135)).

4.1             Form of stock certificate of Casella Class A common stock
(incorporated herein by reference to Exhibit 4 to Amendment
No. 2 to the registration statement on Form S-1 of Casella
as filed October 9, 1997 (file no. 333-33135)).

5.1             Opinion of Hale and Dorr LLP as to the legality of Casella
Class A common stock being registered.

8.1             Opinion of McDermott, Will & Emery as to the material United
States federal income tax consequences of the merger.

8.2             Opinion of McDermott, Will & Emery confirming its opinion as
to the material United States federal income tax
consequences of the merger.

10.1             1993 Incentive Stock Option Plan (incorporated herein by
reference to Exhibit 10.1 to the registration statement on
Form S-1 of Casella as filed August 7, 1997 (file no.
333-33135)).

10.2             1994 Nonstatutory Stock Option Plan (incorporated herein by
reference to Exhibit 10.2 to the registration statement on
Form S-1 of Casella as filed August 7, 1997 (file no.
333-33135)).

10.3             1996 Stock Option Plan (incorporated herein by reference to
Exhibit 10.3 to the registration statement on Form S-1 of
Casella as filed August 7, 1997 (file no. 333-33135)).

10.4             1997 Non-Employee Director Stock Option Plan (incorporated
herein by reference to Exhibit 10.5 to Amendment No. 1 to
the registration statement on Form S-1 of Casella as filed
September 24, 1997 (file no. 333-33135)).

10.5             Amended and Restated 1997 Stock Incentive Plan (incorporated
herein by reference to the Definitive Proxy Statement on
Schedule 14A of Casella as filed September 21, 1998).

10.6             Registration Rights Agreement between Casella and Susan
Olivieri and Robert MacNeil, dated January 3, 1996
(incorporated herein by reference to Exhibit 10.6 to
Amendment No. 1 to the registration statement on Form S-1 of
Casella as filed September 24, 1997 (file no. 333-33135)).

II-2

EXHIBIT
NUMBER                             DESCRIPTION OF DOCUMENT
---------------------   ------------------------------------------------------------

10.7             1995 Stockholders Agreement between Casella and the
stockholders who are a party thereto, dated as of December
22, 1995 (incorporated herein by reference to Exhibit 10.7
to the registration statement on Form S-1 of Casella as
filed August 7, 1997 (file no. 333-33135)).

10.8             1995 Registration Rights Agreement between Casella and the
stockholders who are a party thereto, dated as of December
22, 1995 (incorporated herein by reference to Exhibit 10.8
to the registration statement on Form S-1 of Casella as
filed August 7, 1997 (file no. 333-33135)).

10.9             1995 Repurchase Agreement between Casella and the
stockholders who are a party thereto, dated as of December
22, 1995 (incorporated herein by reference to Exhibit 10.9
to the registration statement on Form S-1 of Casella as
filed August 7, 1997 (file no. 333-33135)).

10.10            Management Services Agreement between Casella, BCI Growth
III, L.P., North Atlantic Venture Fund, L.P., and Vermont
Venture Capital Fund, L.P., dated as of December 22, 1995
(incorporated herein by reference to Exhibit 10.10 to the
registration statement on Form S-1 of Casella as filed
August 7, 1997 (file no. 333-33135)).

10.11            Warrant to Purchase Common Stock of Casella granted to John
W. Casella, dated as of July 26, 1993 (incorporated herein
by reference to Exhibit 10.11 to Amendment No. 1 to the
registration statement on Form S-1 of Casella as filed
September 24, 1997 (file no. 333-33135)).

10.12            Warrant to Purchase Common Stock of Casella granted to
Douglas R. Casella, dated as of July 26, 1993 (incorporated
herein by reference to Exhibit 10.12 to Amendment No. 1 to
the registration statement on Form S-1 of Casella as filed
September 24, 1997 (file no. 333-33135)).

10.13            Asset Purchase Agreement by and among Kenneth H. Mead,
Kerkim, Inc. and Casella Waste Management of N.Y., dated as
of January 17, 1997 (incorporated herein by reference to
Exhibit 10.13 to the registration statement on Form S-1 of
Casella as filed August 7, 1997 (file no. 333-33135)).

10.14            Reorganization Agreement by and among Kenneth H. Mead,
Superior Disposal Services, Inc., Kensue, Inc., S.D.S. at
PA, Inc. and Claws Refuse, Inc., dated as of January 17,
1997 (incorporated herein by reference to Exhibit 10.14 to
the registration statement on Form S-1 of Casella as filed
August 7, 1997 (file no. 333-33135)).

10.15            Termination of Lease Agreement by and between Casella
Associates and Casella Waste Management, Inc. dated
September 25, 1996 (incorporated herein by reference to
Exhibit 10.15 to the registration statement on Form S-1 of
Casella as filed August 7, 1997 (file no. 333-33135)).

10.16            Amended and Restated Revolving Credit and Term Loan
Agreement between the Registrant and BankBoston, dated as of
January 12, 1998 (incorporated herein by reference to
Exhibit 10.13 to the registration statement on Form S-1 of
Casella as filed June 3, 1998 (file no. 333-55879)).

10.17            Lease Agreement, as Amended, between Casella Associates and
Casella Waste Management, Inc., dated December 9, 1994
(Rutland lease) (incorporated herein by reference to
Exhibit 10.17 to the registration statement on Form S-1 of
Casella as filed August 7, 1997 (file no. 333-33135)).

II-3

EXHIBIT
NUMBER                             DESCRIPTION OF DOCUMENT
---------------------   ------------------------------------------------------------

10.18            Lease Agreement, as Amended, between Casella Associates and
Casella Waste Management, Inc., dated December 9, 1994
(Montpelier lease) (incorporated herein by reference to
Exhibit 10.18 to the registration statement on Form S-1 of
Casella as filed August 7, 1997 (file no. 333-33135)).

10.19            Furniture and Fixtures Lease Renewal Agreement between
Casella Associates and Casella Waste Management, Inc., dated
May 1, 1994 (incorporated herein by reference to
Exhibit 10.19 to the registration statement on Form S-1 of
Casella as filed August 7, 1997 (file no. 333-33135)).

10.20            Lease, Operations and Maintenance Agreement between CV
Landfill, Inc. and the Registrant dated June 30, 1994
(incorporated herein by reference to Exhibit 10.20 to the
registration statement on Form S-1 of Casella as filed
August 7, 1997 (file no. 333-33135)).

10.21            Restated Operation and Management Agreement by and between
Clinton County (N.Y.) and the Registrant dated September 9,
1996 (incorporated herein by reference to Exhibit 10.21 to
the registration statement on Form S-1 of Casella as filed
August 7, 1997 (file no. 333-33135)).

10.22            Labor Utilization Agreement by and between Clinton County
(N.Y.) and the Registrant dated August 7, 1996 (incorporated
herein by reference to Exhibit 10.22 to the registration
statement on Form S-1 of Casella as filed August 7, 1997
(file no. 333-33135)).

10.23            Lease and Option Agreement by and between Waste U.S.A., Inc.
and New England Waste Services of Vermont, Inc., dated
December 14, 1995 (incorporated herein by reference to
Exhibit 10.23 to the registration statement on Form S-1 of
Casella as filed August 7, 1997 (file no. 333-33135)).

10.24            Consulting and Non-Competition Agreement between Casella and
Kenneth H. Mead, dated January 23, 1997 (incorporated herein
by reference to Exhibit 10.24 to the registration statement
on Form S-1 of Casella as filed August 7, 1997 (file no.
333-33135)).

10.25            Issuance of Shares by Casella to National Waste Industries,
Inc., dated October 19, 1994 (incorporated herein by
reference to Exhibit 10.25 to the registration statement on
Form S-1 of Casella as filed August 7, 1997 (file
no. 333-33135)).

10.26            Registration Rights Agreement by and among Casella, Joseph
M. Winters, Andrew B. Winters, Brigid Winters, Sean Winters
and Maureen Winters (the "All Cycle Stockholders"), dated as
of December 19, 1997. (incorporated herein by reference to
Exhibit 10.23 to the registration statement filed on Form
S-1 of Casella as filed June 3, 1998 (file
no. 333-55879)).

10.27            Amendment No. 1 to Registration Rights Agreement by and
among the Registrant, the All Cycle Stockholders, Winters
Family Partnership and Goldman, Sachs & Co., dated as of
June 3, 1998. (incorporated herein by reference to
Exhibit 10.24 to the registration statement on Form S-1 of
Casella as filed June 3, 1998 (file no. 333-55879)).

10.28            Amendment No. 2 to Lease Agreement, by and between Casella
Associates and Casella Waste Management, Inc., dated as of
November 20, 1997 (Rutland lease). (incorporated herein by
reference to Exhibit 10.25 to the registration statement on
Form S-1 of Casella as filed on June 25, 1998 (file
no. 333-57745)).

10.29            Amendment No. 1 to Stock Option Agreement (incorporated
herein by reference to the Current Report on Form 8-K of
Casella as filed May 13, 1999).

II-4

EXHIBIT
NUMBER                             DESCRIPTION OF DOCUMENT
---------------------   ------------------------------------------------------------

10.30            Agreement between Penobscot Energy Recovery Company and
Bangor Hydro-Electric Company dated June 21, 1984, as
amended (incorporated herein by reference to Exhibit 10.2 to
the registration statement on Form S-4 of KTI as filed
October 18, 1994 (file no. 33-85234)).

10.31            Agreement between Timber Energy Resources, Inc. and Florida
Power Corporation dated December 31, 1984.

10.32            Steam Agreement between Multitrade Group, Inc. and Tultex
Corporation dated August 11, 1987, as amended.

10.33            Form of Penobscot Energy Recovery Company Waste Disposal
Agreement (City of Bangor) dated April 1, 1991 and Schedule
of Substantially Identical Waste Disposal Agreements
(incorporated herein by reference to Exhibit 10.3 to the
registration statement on Form S-4 of KTI as filed October
18, 1994 (file no. 33-85234)).

10.34            Steam Agreement between Multitrade Group, Inc. and
Bassett-Walker, Inc. dated March 1, 1993, as amended.

10.35            Power Purchase Agreement between Maine Energy Recovery
Company and Central Maine Power Company dated January 12,
1984, as amended (incorporated herein by reference to
Exhibit 10.8 to the registration statement on Form S-4 of
KTI as filed October 18, 1994 (file no. 33-85234)).

10.36            Host Municipalities' Waste Handling Agreement among
Biddeford-Saco Solid Waste Committee, City of Biddeford,
City of Saco and Maine Energy Recovery Company dated June 7,
1991 (incorporated herein by reference to Exhibit 10.10 to
the registration statement on Form S-4 of KTI as filed
October 18, 1994 (file no. 33-85234)).

10.37            Form of Maine Energy Recovery Company Waste Handling
Agreement (Town of North Berwick) dated June 7, 1991 and
Schedule of Substantially Identical Waste Disposal
Agreements (incorporated herein by reference to Exhibit
10.11 to the registration statement on Form S-4 of KTI as
filed October 18, 1994 (file no. 33-85234)).

10.38            Third Amendment to Power Purchase Agreement between Maine
Energy Recovery Company, L.P. and Central Maine Power
Company dated November 6, 1995.

10.39            Steam Supply and Operating Agreement between Multitrade
Group, Inc. and E.I. DuPont De Nemours & Co. dated February
11, 1998, as amended.

10.40            Amendment No. 2 to Power Purchase Agreement between
Penobscot Energy Recovery Company, L.P. and Bangor-Hydro
Electric Company dated June 26, 1998 (incorporated herein by
reference to Exhibit 4.1 to the Current Report on Form 8-K
of KTI as filed July 8, 1998).

10.41            Second Amended and Restated Waste Disposal Agreements
between Penobscot Energy Recovery Company and the Municipal
Review Committee, Inc. dated June 26, 1998 (incorporated
herein by reference to Exhibit 4.2 to the Current Report on
Form 8-K of KTI as filed July 8, 1998).

10.42            Non-Exclusive License to Use Technology between KTI and
Oakhurst Technology, Inc. dated December 29, 1998
(incorporated herein by reference to Exhibit 4.5 to the
Current Report on Form 8-K of KTI as filed January 15,
1999).

21.1             Subsidiaries of Casella.

II-5

EXHIBIT
NUMBER                             DESCRIPTION OF DOCUMENT
---------------------   ------------------------------------------------------------

23.1             Consent of Arthur Andersen LLP.

23.2             Consent of Ernst & Young LLP.

23.3             Consent of Hale and Dorr LLP (included in Exhibit 5.1 of
this registration statement).

23.4             Consent of McDermott, Will & Emery (included in Exhibit 8.1
of this registration statement).

23.5             Consent of McDermott, Will & Emery (included in Exhibit 8.2
of this registration statement).

24.1             Powers of Attorney (included in the signature pages of this
registration statement).

99.1             Form of KTI's proxy card for the Special Meeting of
Shareholders.

99.2             Form of Casella's proxy card for the Annual Meeting of
Stockholders.

99.3             Form of KTI's Notice of Special Meeting of Shareholders.

99.4             Consents of persons named to become directors of Casella who
have not signed this registration statement.

99.5             Consent of CIBC World Markets Corp. (included in Annex B-1
to the proxy statement/ prospectus which is a part of this
registration statement).

99.6             Consent of CIBC World Markets Corp.

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

(1) Schedules referred to in the merger agreement are omitted from this filing.
The registrant agrees to furnish supplementally a copy of any omitted
schedule to the Securities and Exchange Commission upon request, in
accordance with Item 601(b)(2) of Regulation S-K.

(b) FINANCIAL STATEMENT SCHEDULES. Not applicable.

(c) REPORTS, OPINIONS, ETC. The opinion of CIBC World Markets Corp. is
included as Annex B-1 to the proxy statement/prospectus which is a part
of this registration statement and CIBC World Markets Corp.'s letter
dated September 23, 1999 reaffirming its opinion is included as
Annex B-2 to the proxy statement/prospectus which is part of this
registration statement.

ITEM 22. UNDERTAKINGS.

(a) The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar amount of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change
in the

II-6

maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

(b)
(1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c), the issuer undertakes that such
reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.

(2) The registrant undertakes that every prospectus (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that
purports to meet the requirements of section 10(a)(3) of the
Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining
any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.

(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

(e) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the proxy
statement/prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form S-4, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent
to the effective date of the registration statement through the date of
responding to the request.

(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.

II-7

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Rutland, State of
Vermont, on this 12th day of November, 1999.

CASELLA WASTE SYSTEMS, INC.

By:             /s/ JOHN W. CASELLA
-----------------------------------------
John W. Casella
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John W. Casella and James W. Bohlig, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (including his capacity as a director and/or officer of
Casella Waste Systems, Inc.) to sign any or all amendments (including
pre-effective and post-effective amendments) to this registration statement, and
to file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

NAME                                      TITLE                    DATE
----                                      -----                    ----

President, Chief Executive
/s/ JOHN W. CASELLA                     Officer and Chairman
-------------------------------------------         (Principal Executive       November 12, 1999
John W. Casella                       Officer)

/s/ JAMES W. BOHLIG                   Senior Vice President,
-------------------------------------------         Chief Operating Officer    November 12, 1999
James W. Bohlig                       and Director

Vice President and Chief
/s/ JERRY S. CIFOR                      Financial Officer
-------------------------------------------         (Principal Accounting and  November 12, 1999
Jerry S. Cifor                        Financial Officer)

/s/ DOUGLAS R. CASELLA
-------------------------------------------       Director                     November 12, 1999
Douglas R. Casella

/s/ JOHN F. CHAPPLE III
-------------------------------------------       Director                     November 12, 1999
John F. Chapple III

/s/ GREGORY B. PETERS
-------------------------------------------       Director                     November 12, 1999
Gregory B. Peters

II-8

EXHIBIT INDEX

EXHIBIT
NUMBER                             DESCRIPTION OF DOCUMENT
---------------------   ------------------------------------------------------------

2.1(1)          Agreement and Plan of Merger dated as of January 12, 1999
and as amended by Amendments No. 1, 2 and 3 thereto, among
Casella Waste Systems, Inc. ("Casella"), KTI, Inc. ("KTI")
and Rutland Acquisition Sub, Inc. (included as Annex A to
the proxy statement/ prospectus which is a part of this
registration statement).

3.1             Amended and Restated Certificate of Incorporation of Casella
(incorporated herein by reference to Exhibit 4.1 to the
registration statement on Form S-8 of Casella as filed
November 18, 1998).

3.3             Second Amended and Restated By-Laws of Casella (incorporated
herein by reference to Exhibit 3.4 to the registration
statement on Form S-1 of Casella as filed September 24,
1997 (file no. 333-33135)).

4.1             Form of stock certificate of Casella Class A common stock
(incorporated herein by reference to Exhibit 4 to Amendment
No. 2 to the registration statement on Form S-1 of Casella
as filed October 9, 1997 (file no. 333-33135)).

5.1             Opinion of Hale and Dorr LLP as to the legality of Casella
Class A common stock being registered.

8.1             Opinion of McDermott, Will & Emery as to the material United
States federal income tax consequences of the merger.

8.2             Opinion of McDermott, Will & Emery confirming its opinion as
to the material United States federal income tax
consequences of the merger.

10.1             1993 Incentive Stock Option Plan (incorporated herein by
reference to Exhibit 10.1 to the registration statement on
Form S-1 of Casella as filed August 7, 1997 (file no.
333-33135)).

10.2             1994 Nonstatutory Stock Option Plan (incorporated herein by
reference to Exhibit 10.2 to the registration statement on
Form S-1 of Casella as filed August 7, 1997 (file no.
333-33135)).

10.3             1996 Stock Option Plan (incorporated herein by reference to
Exhibit 10.3 to the registration statement on Form S-1 of
Casella as filed August 7, 1997 (file no. 333-33135)).

10.4             1997 Non-Employee Director Stock Option Plan (incorporated
herein by reference to Exhibit 10.5 to Amendment No. 1 to
the registration statement on Form S-1 of Casella as filed
September 24, 1997 (file no. 333-33135)).

10.5             Amended and Restated 1997 Stock Incentive Plan (incorporated
herein by reference to the Definitive Proxy Statement on
Schedule 14A of Casella as filed September 21, 1998).

10.6             Registration Rights Agreement between Casella and Susan
Olivieri and Robert MacNeil, dated January 3, 1996
(incorporated herein by reference to Exhibit 10.6 to
Amendment No. 1 to the registration statement on Form S-1 of
Casella as filed September 24, 1997 (file no. 333-33135)).

10.7             1995 Stockholders Agreement between Casella and the
stockholders who are a party thereto, dated as of December
22, 1995 (incorporated herein by reference to Exhibit 10.7
to the registration statement on Form S-1 of Casella as
filed August 7, 1997 (file no. 333-33135)).

II-9

EXHIBIT
NUMBER                             DESCRIPTION OF DOCUMENT
---------------------   ------------------------------------------------------------

10.8             1995 Registration Rights Agreement between Casella and the
stockholders who are a party thereto, dated as of December
22, 1995 (incorporated herein by reference to Exhibit 10.8
to the registration statement on Form S-1 of Casella as
filed August 7, 1997 (file no. 333-33135)).

10.9             1995 Repurchase Agreement between Casella and the
stockholders who are a party thereto, dated as of December
22, 1995 (incorporated herein by reference to Exhibit 10.9
to the registration statement on Form S-1 of Casella as
filed August 7, 1997 (file no. 333-33135)).

10.10            Management Services Agreement between Casella, BCI Growth
III, L.P., North Atlantic Venture Fund, L.P., and Vermont
Venture Capital Fund, L.P., dated as of December 22, 1995
(incorporated herein by reference to Exhibit 10.10 to the
registration statement on Form S-1 of Casella as filed
August 7, 1997 (file no. 333-33135)).

10.11            Warrant to Purchase Common Stock of Casella granted to John
W. Casella, dated as of July 26, 1993 (incorporated herein
by reference to Exhibit 10.11 to Amendment No. 1 to the
registration statement on Form S-1 of Casella as filed
September 24, 1997 (file no. 333-33135)).

10.12            Warrant to Purchase Common Stock of Casella granted to
Douglas R. Casella, dated as of July 26, 1993 (incorporated
herein by reference to Exhibit 10.12 to Amendment No. 1 to
the registration statement on Form S-1 of Casella as filed
September 24, 1997 (file no. 333-33135)).

10.13            Asset Purchase Agreement by and among Kenneth H. Mead,
Kerkim, Inc. and Casella Waste Management of N.Y., dated as
of January 17, 1997 (incorporated herein by reference to
Exhibit 10.13 to the registration statement on Form S-1 of
Casella as filed August 7, 1997 (file no. 333-33135)).

10.14            Reorganization Agreement by and among Kenneth H. Mead,
Superior Disposal Services, Inc., Kensue, Inc., S.D.S. at
PA, Inc. and Claws Refuse, Inc., dated as of January 17,
1997 (incorporated herein by reference to Exhibit 10.14 to
the registration statement on Form S-1 of Casella as filed
August 7, 1997 (file no. 333-33135)).

10.15            Termination of Lease Agreement by and between Casella
Associates and Casella Waste Management, Inc. dated
September 25, 1996 (incorporated herein by reference to
Exhibit 10.15 to the registration statement on Form S-1 of
Casella as filed August 7, 1997 (file no. 333-33135)).

10.16            Amended and Restated Revolving Credit and Term Loan
Agreement between the Registrant and BankBoston, dated as of
January 12, 1998 (incorporated herein by reference to
Exhibit 10.13 to the registration statement on Form S-1 of
Casella as filed June 3, 1998 (file no. 333-55879)).

10.17            Lease Agreement, as Amended, between Casella Associates and
Casella Waste Management, Inc., dated December 9, 1994
(Rutland lease) (incorporated herein by reference to
Exhibit 10.17 to the registration statement on Form S-1 of
Casella as filed August 7, 1997 (file no. 333-33135)).

10.18            Lease Agreement, as Amended, between Casella Associates and
Casella Waste Management, Inc., dated December 9, 1994
(Montpelier lease) (incorporated herein by reference to
Exhibit 10.18 to the registration statement on Form S-1 of
Casella as filed August 7, 1997 (file no. 333-33135)).

II-10

EXHIBIT
NUMBER                             DESCRIPTION OF DOCUMENT
---------------------   ------------------------------------------------------------

10.19            Furniture and Fixtures Lease Renewal Agreement between
Casella Associates and Casella Waste Management, Inc., dated
May 1, 1994 (incorporated herein by reference to
Exhibit 10.19 to the registration statement on Form S-1 of
Casella as filed August 7, 1997 (file no. 333-33135)).

10.20            Lease, Operations and Maintenance Agreement between CV
Landfill, Inc. and the Registrant dated June 30, 1994
(incorporated herein by reference to Exhibit 10.20 to the
registration statement on Form S-1 of Casella as filed
August 7, 1997 (file no. 333-33135)).

10.21            Restated Operation and Management Agreement by and between
Clinton County (N.Y.) and the Registrant dated September 9,
1996 (incorporated herein by reference to Exhibit 10.21 to
the registration statement on Form S-1 of Casella as filed
August 7, 1997 (file no. 333-33135)).

10.22            Labor Utilization Agreement by and between Clinton County
(N.Y.) and the Registrant dated August 7, 1996 (incorporated
herein by reference to Exhibit 10.22 to the registration
statement on Form S-1 of Casella as filed August 7, 1997
(file no. 333-33135)).

10.23            Lease and Option Agreement by and between Waste U.S.A., Inc.
and New England Waste Services of Vermont, Inc., dated
December 14, 1995 (incorporated herein by reference to
Exhibit 10.23 to the registration statement on Form S-1 of
Casella as filed August 7, 1997 (file no. 333-33135)).

10.24            Consulting and Non-Competition Agreement between Casella and
Kenneth H. Mead, dated January 23, 1997 (incorporated herein
by reference to Exhibit 10.24 to the registration statement
on Form S-1 of Casella as filed August 7, 1997 (file no.
333-33135)).

10.25            Issuance of Shares by Casella to National Waste Industries,
Inc., dated October 19, 1994 (incorporated herein by
reference to Exhibit 10.25 to the registration statement on
Form S-1 of Casella as filed August 7, 1997 (file
no. 333-33135)).

10.26            Registration Rights Agreement by and among Casella, Joseph
M. Winters, Andrew B. Winters, Brigid Winters, Sean Winters
and Maureen Winters (the "All Cycle Stockholders"), dated as
of December 19, 1997. (incorporated herein by reference to
Exhibit 10.23 to the registration statement filed on Form
S-1 of Casella as filed June 3, 1998 (file no. 333-55879)).

10.27            Amendment No. 1 to Registration Rights Agreement by and
among the Registrant, the All Cycle Stockholders, Winters
Family Partnership and Goldman, Sachs & Co., dated as of
June 3, 1998. (incorporated herein by reference to
Exhibit 10.24 to the registration statement on Form S-1 of
Casella as filed June 3, 1998 (file no. 333-55879)).

10.28            Amendment No. 2 to Lease Agreement, by and between Casella
Associates and Casella Waste Management, Inc., dated as of
November 20, 1997 (Rutland lease). (incorporated herein by
reference to Exhibit 10.25 to the registration statement on
Form S-1 of Casella as filed on June 25, 1998 (file
no. 333-57745)).

10.29            Amendment No. 1 to Stock Option Agreement (incorporated
herein by reference to the Current Report on Form 8-K of
Casella as filed May 13, 1999).

10.30            Agreement between Penobscot Energy Recovery Company and
Bangor Hydro-Electric Company dated June 21, 1984, as
amended (incorporated herein by reference to Exhibit 10.2 to
the registration statement on Form S-4 of KTI as filed
October 18, 1994 (file no. 33-85234)).

II-11

EXHIBIT
NUMBER                             DESCRIPTION OF DOCUMENT
---------------------   ------------------------------------------------------------

10.31            Agreement between Timber Energy Resources, Inc. and Florida
Power Corporation dated December 31, 1984.

10.32            Steam Agreement between Multitrade Group, Inc. and Tultex
Corporation dated August 11, 1987, as amended.

10.33            Form of Penobscot Energy Recovery Company Waste Disposal
Agreement (City of Bangor) dated April 1, 1991 and Schedule
of Substantially Identical Waste Disposal Agreements
(incorporated herein by reference to Exhibit 10.3 to the
registration statement on Form S-4 of KTI as filed October
18, 1994 (file no. 33-85234)).

10.34            Steam Agreement between Multitrade Group, Inc. and
Bassett-Walker, Inc. dated March 1, 1993, as amended.

10.35            Power Purchase Agreement between Maine Energy Recovery
Company and Central Maine Power Company dated January 12,
1984, as amended (incorporated herein by reference to
Exhibit 10.8 to the registration statement on Form S-4 of
KTI as filed October 18, 1994 (file no. 33-85234)).

10.36            Host Municipalities' Waste Handling Agreement among
Biddeford-Saco Solid Waste Committee, City of Biddeford,
City of Saco and Maine Energy Recovery Company dated June 7,
1991 (incorporated herein by reference to Exhibit 10.10 to
the registration statement on Form S-4 of KTI as filed
October 18, 1994 (file no. 33-85234)).

10.37            Form of Maine Energy Recovery Company Waste Handling
Agreement (Town of North Berwick) dated June 7, 1991 and
Schedule of Substantially Identical Waste Disposal
Agreements (incorporated herein by reference to Exhibit
10.11 to the registration statement on Form S-4 of KTI as
filed October 18, 1994 (file no. 33-85234)).

10.38            Third Amendment to Power Purchase Agreement between Maine
Energy Recovery Company, L.P. and Central Maine Power
Company dated November 6, 1995.

10.39            Steam Supply and Operating Agreement between Multitrade
Group, Inc. and E.I. DuPont De Nemours & Co. dated February
11, 1998, as amended.

10.40            Amendment No. 2 to Power Purchase Agreement between
Penobscot Energy Recovery Company, L.P. and Bangor-Hydro
Electric Company dated June 26, 1998 (incorporated herein by
reference to Exhibit 4.1 to the Current Report on Form 8-K
of KTI as filed July 8, 1998).

10.41            Second Amended and Restated Waste Disposal Agreements
between Penobscot Energy Recovery Company and the Municipal
Review Committee, Inc. dated June 26, 1998 (incorporated
herein by reference to Exhibit 4.2 to the Current Report on
Form 8-K of KTI as filed July 8, 1998).

10.42            Non-Exclusive License to Use Technology between KTI and
Oakhurst Technology, Inc. dated December 29, 1998
(incorporated herein by reference to Exhibit 4.5 to the
Current Report on Form 8-K of KTI as filed January 15,
1999).

21.1             Subsidiaries of Casella.

23.1             Consent of Arthur Andersen LLP.

23.2             Consent of Ernst & Young LLP.

23.3             Consent of Hale and Dorr LLP (included in Exhibit 5.1 of
this registration statement).

II-12

EXHIBIT
NUMBER                             DESCRIPTION OF DOCUMENT
---------------------   ------------------------------------------------------------

23.4             Consent of McDermott, Will & Emery (included in Exhibit 8.1
of this registration statement).

23.5             Consent of McDermott, Will & Emery (included in Exhibit 8.2
of this registration statement).

24.1             Powers of Attorney (included in the signature pages of this
registration statement).

99.1             Form of KTI's proxy card for the Special Meeting of
Shareholders.

99.2             Form of Casella's proxy card for the Annual Meeting of
Stockholders.

99.3             Form of KTI's Notice of Special Meeting of Shareholders.

99.4             Consents of persons named to become directors of Casella who
have not signed this registration statement.

99.5             Consent of CIBC World Markets Corp. (included in Annex B-1
to the proxy statement/ prospectus which is a part of this
registration statement).

99.6             Consent of CIBC World Markets Corp.

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

(1) Schedules referred to in the merger agreement are omitted from this filing.
The registrant agrees to furnish supplementally a copy of any omitted
schedule to the Securities and Exchange Commission upon request, in
accordance with Item 601(b)(2) of Regulation S-K.

II-13

EXHIBIT 5.1

[HALE AND DORR LETTERHEAD]

November 8, 1999

Casella Waste Systems, Inc.
25 Greens Hill Lane
Rutland, Vermont  05701

Ladies and Gentlemen:

This opinion is furnished to you in connection with a Registration
Statement on Form S-4 (the "Registration Statement"), filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended, for the registration of 8,599,899 shares of the Class A Common Stock,
$.01 par value per share (the "Common Stock"), of Casella Waste Systems, Inc.
(the "Company") issuable in connection with the merger of KTI, Inc. and Rutland
Acquisition Sub, Inc., the Company's wholly-owned subsidiary.

We have acted as counsel for the Company in connection with the
proposed issuance of shares of Common Stock pursuant to an Agreement and Plan of
Merger (the "Merger Agreement"), dated as of January 12, 1999, as amended, by
and among the Company, KTI, Inc. and Rutland Acquisition Sub, Inc. We have
examined signed copies of the Registration Statement and all exhibits thereto
(including, but not limited to, the Merger Agreement), all as filed with the
Commission. We have also examined and relied upon the original or copies of
minutes of meetings of the stockholders and Board of Directors of the Company,
the stock record books of the Company, copies of the charter and by-laws of the
Company, as amended and restated, and such other documents as we have deemed
material to the opinion set forth below.

Based upon the foregoing, we are of the opinion that, subject to
stockholder approval of the issuance of shares of Common Stock pursuant to the
Merger Agreement, the shares of Common Stock will be duly authorized by the
Company

Casella Waste Systems, Inc.
November 8, 1999
Page 2

and, when issued in accordance with the terms of the Merger Agreement, will be
validly issued, fully paid and non-assessable.

We hereby consent to the filing of this opinion in connection with the
Registration Statement.

Very truly yours,

/s/ HALE AND DORR LLP

HALE AND DORR LLP

Exhibit 8.1

[McDermott, Will & Emery letterhead]

October 15, 1999

KTI, Inc.
7000 Boulevard East
Guttenberg, New Jersey 07093

Attn:  Robert Wetzel, Esq.
General Counsel

Re: REORGANIZATION

Ladies and Gentlemen:

You have asked for our opinion concerning whether the merger of Rutland 
Acquisition Sub, Inc. ("Sub") with and into KTI, Inc., a New Jersey 
corporation ("KTI") (the "Merger"), will qualify as a reorganization under 
section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). 
We have reviewed the Agreement and Plan of Merger among Casella Waste 
Systems, Inc., a Delaware corporation ("Casella"), Sub and KTI dated January 
12, 1999, as amended May 12, 1999, September 8, 1999, and September 23, 1999 
(the "Agreement"), and such other materials as we have deemed to be 
appropriate.

We have assumed that (i) the Merger will be consummated in the manner 
contemplated by, and in accordance with the provisions of, the Agreement and 
(ii) the representations made to us by Casella and KTI in connection with the 
Merger (in the form of officers' certificates dated September 22, 1999, and 
September 30, 1999, respectively) are accurate.

Based upon the foregoing, we are of the opinion that the Merger will 
constitute a reorganization within the meaning of section 368(a) of the Code.

We hereby consent to the filing of this opinion with the Securities and 
Exchange Commission as an exhibit to the Registration Statement on Form S-4 
filed by Casella under the Securities Act of 1933, as amended.

Very truly yours, 

/s/ McDermott, Will & Emery

[LETTERHEAD]

EXHIBIT 8.2

November 8, 1999

KTI, Inc.
7000 Boulevard East
Guttenberg, NJ 07093

Attention:   Robert Wetzel, Esq.
General Counsel

Re:   REORGANIZATION

Ladies and Gentlemen:

We have given you our opinion dated October 15, 1999, that the merger 
of Rutland Acquisition Sub, Inc. ("Sub") with and into KTI, Inc., a New 
Jersey corporation ("KTI") (the "Merger") will qualify as a reorganization 
under section 368(a) of the Internal Revenue Code of 1986, as amended.

We hereby confirm that the discussion under the caption "Material 
federal income tax consequences" in the proxy statement filed with the 
Securities and Exchange Commission with respect to the Merger, as it relates 
to matters of United States federal income tax law constitutes our opinion. 
The discussion does not purport to cover all United States tax consequences 
of the Merger, and this opinion is limited to those United States tax 
consequences specifically discussed therein. 

We hereby consent to the filing of this opinion with the Securities 
and Exchange Commission as an exhibit to the Registration Statement on 
Form S-4 filed by Casella under the Securities Act of 1933, as amended.

Very truly yours,

/s/ McDermott, Will & Emery

MCDERMOTT, WILL & EMERY

EXHIBIT  10.31

STANDARD OFFER CONTRACT FOR THE PURCHASE OF
FIRM ENERGY AND CAPACITY FROM A QUALIFYING FACILITY

THIS  AGREEMENT  is made and entered into this 31st day of December,
1984 by and between Timber Energy Resources,  Inc.,  hereinafter  referred to as
"QF", and Florida Power Corporation, hereinafter referred to as "the Company", a
private  utility  corporation  organized under the laws of the State of Florida.
The QF  and  the  Company  shall  collectively  be  referred  to  herein  as the
"Parties".

W I T N E S S E T H:

WHEREAS,  QF desires to sell, and the Company desires to purchase,
electricity  to be generated by the QF consistent  with Florida Public Service
Commission  (FPSC)  Rules  25-17.80  through  25-17.89  adopted  in Order  No.
12443, Docket No.  820406-EU; and

WHEREAS, QF has signed an Interconnection Agreement with the utility
in whose service territory the point of interconnection with the QF's generating
facility is located, attached hereto as Appendix A; and

WHEREAS,  the terms and conditions of this  Agreement  substantially
conform with the standard form terms and conditions approved by the FPSC for the
purchase of Firm Energy and  Capacity  from a  Qualifying  Facility,  except for
certain  revisions  agreed to by the Parties set forth in  paragraphs  2 and 9.4
hereof.

NOW  THEREFORE,  for  mutual  consideration  the  Parties  agree  as
follows:

1.    FACILITY

QF  contemplates  installing  and  operating a 16,482 KVA  generator
located at Telogia,  Florida.  The generator is designed to produce a maximum of
14.01  megawatts  (MW),  or 14,010  kilowatts  (KW) of electric  power at an 85%
lagging  power  factor,   such  equipment  being  hereinafter   referred  to  as
"Facility".

2.    TERM OF THE AGREEMENT

This  Agreement  shall begin  immediately  upon its execution by the
parties and shall end at 12:01 a.m. April 1, 2002; provided,  however,  that the
parties  agree that upon the demand of either  party  they will  undertake  good
faith  negotiations  with  respect  to  extended  terms and  conditions  of this
Agreement.  It is agreed that the schedule of capacity  payments attached hereto
as Exhibit "A" shall govern the obligations of the Company to make such capacity
payments  during  the  initial  term  of this  contract;  subject,  however,  to
modification as provided in paragraph 9.3 hereof.

Notwithstanding   the  foregoing  if  construction   and  commercial
operation of the Facility are not  accomplished by QF before April 1, 1992, this
Agreement shall be rendered of no force and effect.

3.    SALE OF ELECTRICITY BY QF

The Company agrees to purchase all of the electric  power  generated
at the Facility and  transmitted  to the Company by QF. The purchase and sale of
electricity  pursuant  to this  Agreement  shall be  construed  as a Net Billing
Arrangement.  The billing methodology may be changed to a Simultaneous  Purchase
and  Sale  Arrangement  at  the  option  of the  QF,  subject  to the  following
provisions:

(a)   not more frequently than once every twelve months;

(b) to coincide with the next Fuel and Purchased Power Cost Recovery
Factor billing period;

(c) upon at least thirty days advance written notice to the Company;

(d) upon  the  installation  of any  additional  metering  equipment
reasonably  required to effect the change in billing and upon  payment by the QF
for such metering equipment and its installation;

(e)  upon   completion  and  approval  of  any  alterations  to  the
interconnection  reasonably  required  to effect the change in billing  and upon
payment by the QF for such alterations; and

(f) where the election to change billing methods will not contravene
the  provisions  of the tariff  under  which the  Facility  receives  electrical
service, or any previously agreed upon contractual  provision between the QF and
the Company.

4.    PAYMENT FOR ELECTRICITY PRODUCED BY QF

4.1   Energy

The  Company  agrees to pay the QF for energy  produced by the
Facility  and  delivered  to the  Company  in  accordance  with  the  rates  and
procedures  contained in Rate Schedule COG-2 attached  hereto as Appendix B, and
as may be  amended  from time to time.  Prior to April 1,  1992 QF will  receive
energy payments based on the Company's actual avoided energy costs.  After April
1, 1992 QF's energy payments will be based on the lesser of the Company's actual
avoided  energy costs or the fuel cost of the Statewide  Avoided Unit as defined
in COG-2, such comparison to be made hourly.

4.2   Capacity

4.2.1  Anticipated  Committed  Capacity.  QF  expects  to sell
approximately 13.466 MW or 13,466 KW of capacity,  beginning on or about July 1,
1986.

-2-

QF may finalize its Committed  Capacity after initial Facility
testing,  and  specify  when  capacity  payments  are to  begin,  by  completing
paragraph 4.2.2 at a later time.  However,  QF must complete  Paragraph 4.2.2 by
April 1, 1990 in order to be entitled to any capacity  payments pursuant to this
Agreement.

4.2.2 Actual Committed Capacity.  The capacity committed by QF
for the  purposes  of this  Agreement  is 12.765  MW or 12,765  KW. QF elects to
receive,  and the Company agrees to commence  calculating,  capacity payments in
accordance  with this Agreement  starting with the first billing month following
April 1 ,1992

4.2.3  Capacity  Payments.  QF  chooses  to  receive  capacity
payments from the Company under Option A of Rate Schedule COG-2.

At the end of each billing  month,  beginning with the billing
month specified in Paragraph  4.2.2,  the Company will calculate the most recent
twelve  month  rolling  average  capacity  factor for such  month  based on QF's
Committed Capacity.  If the capacity factor thus calculated is 70% or more, then
the  Company  agrees to pay QF a capacity  payment  that is the  product of QF's
Committed  Capacity and the applicable  rate from QF's chosen  capacity  payment
Option.

The  capacity  payment  for a given month will be added to the
energy  payment  for such month and  tendered  by the  Company to QF as a single
payment  as  promptly  as  possible,  normally  by the  twentieth  business  day
following the day the meter is read.

5.    ELECTRICITY PRODUCTION SCHEDULE

During the term of this Agreement, QF agrees to:

(a) Provide the Company  prior to October 1 of each calendar year an
estimate  of the amount of  electricity  to be  generated  by the  Facility  and
delivered  to the  Company  for  each  month  of the  following  calendar  year,
including the time,  duration and magnitude of any planned outages or reductions
in capacity;

(b) Promptly update the yearly  generation  schedule and maintenance
schedule as and when any changes may be determined necessary;

(c) Coordinate its scheduled Facility outages with the Company;

(d) Comply with  reasonable  requirements  of the Company  regarding
day-to-day or hour-by-hour  communications  between the parties  relative to the
performance of this Agreement; and

(e) Adjust  reactive power flow at the point of  interconnection  as
may be reasonably  required by the Company within the range of an 85% leading to
an 85% lagging power factor.

-3-

6.    QF'S OBLIGATION IF QF RECEIVES EARLY CAPACITY PAYMENTS

The QF's  payment  option  choice  pursuant to  paragraph  4.2.3 may
result in payment by the Company for capacity  delivered prior to April 1, 1992.
The Parties recognize that capacity payments paid through March 31, 1992, are in
the nature of an "early payment" for a future  capacity  benefit to the Company.
To ensure  that the  Company  will  receive a capacity  benefit  for which early
capacity payments have been made, or  alternatively,  that the QF will repay the
amount of early  payments  received to the extent the  capacity  benefit has not
been conferred, the following provisions will apply:

The Company  shall  establish a Capacity  Account.  Amounts shall be
credited to the Capacity  Account each month through March,  1992, in the amount
of the  Company's  capacity  payments  made to the QF  pursuant  to QF's  chosen
payment  option from Rate Schedule  COG-2.  The monthly  balance in the Capacity
Account shall accrue interest at an annual rate of 10.5%. Commencing on April 1,
1992,  there shall be debited from the Capacity  Account an Early Payment Offset
Amount to reduce the balance in the Capacity Account.  Such Early Payment Offset
Amount  shall be equal to that  amount  which the  Company  would  have paid for
capacity in that month if the capacity  payment had been calculated  pursuant to
Option A in Rate  Schedule  COG-2  and the QF had  elected  to  begin  receiving
payment on April 1, 1992,  minus the monthly  capacity payment the Company makes
to QF pursuant to the capacity payment option chosen by QF in paragraph 4.2.3.

The QF shall owe the Company and be liable for the credit balance in
the Capacity Account.  The Company agrees to notify QF monthly as to the current
Capacity Account balance.  Prior to, receipt of advance capacity payments the QF
shall execute a promise to repay any credit  balance in the Capacity  Account in
the event the QF defaults  pursuant to this  Agreement.  Such  promise  shall be
secured by means mutually  acceptable to the Parties and in accordance  with the
provisions of Rate Schedule COG-2. The specific  repayment  assurances  selected
for purposes of this Agreement are an irrevocable letter of credit, surety bond,
or other means of assurance  mutually  acceptable to both parties and determined
prior to first  capacity  payments.  The total  Capacity  Account credit balance
shall immediately  become due and payable in the event of default by the QF. The
QF's obligation to pay the credit balance in the Capacity  Account shall survive
termination of this Agreement.

7.    NON-PERFORMANCE PROVISIONS

QF shall not  receive a capacity  payment  during any month in which
the twelve months rolling  average of the QF's capacity factor does not equal or
exceed 70% as defined in Rate  Schedule  COG-2.  In  addition,  if for any month
after April 1, 1992, the QF fails to achieve a 70% capacity factor on a 12 month
rolling average basis and the QF has received  capacity  payments prior to April
1, 1992, the QF shall be liable for and shall pay the Company an amount equal to
the Early Payment  Offset  Amount for the month;  provided,  however,  that such
calculation  shall  assume  that the QF  achieved  a 70%  capacity  factor.  Any
payments thus  required of QF shall be separately  invoiced by the Company to QF
after each month for which such payment is due and shall be paid by QF within 20
days after receipt of such invoice by QF. Such payment shall be debited from the
Capacity Account as an Early Payment Offset Amount.

-4-

In no event shall the QF pay to the Company for non-performance such
amounts which exceed the current credit balance in the Capacity Account.

8.    DEFAULT

8.1  Mandatory  Default.  The QF  shall  be in  default  under  this
Agreement if: (1) the QF voluntarily declares  bankruptcy,  or (2) the QF ceases
all electric generation from the Facility for 12 consecutive months.

8.2  Optional  Default.  The  Company  may  declare  the QF to be in
default:  (1) if at any time prior to April 1, 1992 and after capacity  payments
have begun the Company has sufficient reason to believe that the QF is unable to
deliver  its  Committed  Capacity,  or (2)  after  April 1, 1992 the QF fails to
maintain a 70% capacity  factor on a twelve month  rolling  average basis for 24
consecutive months, or (3) because of a QF's refusal,  inability or anticipatory
breach of obligation to deliver its Committed Capacity after April 1, 1992.

8.3 Default Remedy. Once this contract is declared to be in default,
upon written notice to the QF, the  then-current  credit balance of the Capacity
Account shall be paid to the Company.

9.    GENERAL PROVISIONS

9.1  Permits.  QF  hereby  agrees  to  seek  to  obtain  any and all
governmental  permits,  certifications,  or other  authority  QF is  required to
obtain as a  prerequisite  to engaging in the  activities  provided  for in this
Agreement. The Company hereby agrees, at QF's expense, to seek to obtain any and
all  governmental  permits,  certifications  or other  authority  the Company is
required to obtain as a prerequisite to engaging in the activities  provided for
in this Agreement.

9.2  Indemnification.  QF agrees to indemnify  and save harmless the
Company,  its  subsidiaries  and  affiliates,  and their  respective  employees,
officers,  and directors against any and all liability,  loss, damage,  costs or
expense which the Company, its subsidiaries and affiliates, and their respective
employees,  officers and directors may hereafter incur, suffer or be required to
pay by reason of  negligence  on the part of QF in  performing  its  obligations
pursuant to this  Agreement or QF's failure to abide by the  provisions  of this
Agreement.  The Company agrees to indemnify and save harmless QF against any and
all  liability,  loss,  damage,  cost or expense which QF may  hereafter  incur,
suffer, or be required to pay by reason of negligence on the part of the Company
in  performing  its  obligations  pursuant to this  Agreement  or the  Company's
failure to abide by the provisions of this  Agreement.  QF agrees to include the
Company as an additional  insured in any liability  insurance policy or policies
QF obtains to protect QF's  interests  with respect to QF's  indemnity  and hold
harmless assurances to the Company contained in this Section.

9.3  Renegotiations  Due to  Regulatory  Changes.  Anything  in this
Agreement to the contrary notwithstanding, should the Company at any time during
the term of this Agreement fail to obtain or be denied the FPSC's authorization,
or the authorization of any other regulatory body which now has or in the future
may have jurisdiction over the Company's rates and charges,  to recover from its
customers all of the payments  required to be made to QF under

-5-

the terms of this Agreement or any subsequent  amendment to this Agreement,  the
parties  agree  that,  at the  Company's  option,  they shall  renegotiate  this
Agreement or any applicable  amendment.  If the Company exercises such option to
renegotiate,  the Company shall not thereafter be required to make such payments
to the extent the Company's  authorization to recover them from its customers is
not obtained or is denied.  The Company's  exercise of its option to renegotiate
shall not  relieve  the QF of its  obligation  to pay the credit  balance in the
Capacity  Account.  It is the intent of the parties that the  Company's  payment
obligations  under this Agreement or any amendment  hereto are conditioned  upon
the Company's  being fully  reimbursed  for such  payments  through the Fuel and
Purchased Power Cost Recovery Clause or other authorized  rates or charges.  Any
such  payments  initially  recovered by the Company from its  customers  but for
which  recovery is  subsequently  disallowed by the FPSC and charged back to the
Company  may be set off or  credited  against  subsequent  payments  made by the
Company for purchases from the QF, or alternatively, shall be repaid by the QF.

9.4 Agreement to  Renegotiate.  The Parties hereby agree to commence
renegotiation  of this  Agreement  in good  faith  within 45 days after the date
hereof with a view toward achieving agreement upon improved terms and conditions
hereof to the mutual  benefit of both parties;  provided,  however,  that in the
event the Parties fail to reach agreement,  or in the event any amendment hereto
does not receive approval by the Florida Public Service Commission,  the parties
will comply with the provisions of this Agreement as presently set forth.

9.5 Force  Majeure.  If either  party shall be unable,  by reason of
force majeure, to carry out its obligations under this Agreement,  either wholly
or in part, the party so failing shall give written notice and full  particulars
of such  cause or  causes  to the  other  party as soon as  possible  after  the
occurrence of any such cause; and such obligations shall be suspended during the
continuance  of such  hindrance,  which,  however,  shall be  remedied  with all
possible dispatch;  and the obligations,  terms and conditions of this Agreement
shall be extended for such period as may be necessary  for the purpose of making
good any suspension so caused.  The term "force  majeure" shall be taken to mean
acts  of  God,  strikes,  lockouts  or  other  industrial  disturbances,   wars,
blockades,  insurrections,  riots,  arrests and  restraints of rules and people,
environmental constraints lawfully imposed by federal, state or local government
bodies, explosions, fires, floods, lightning, wind, perils of the sea, accidents
to equipment or machinery or similar  occurrences;  provided,  however,  that no
occurrences  may be claimed to be a force majeure  occurrence if it is caused by
the  negligence or lack of due diligence on the part of the party  attempting to
make such claim. QF agrees to pay the costs necessary to reactivate the Facility
and/or the  interconnection  with the Company's  system if the same are rendered
inoperable due to actions of QF, its agents,  or force majeure events  affecting
the  Facility or the  interconnection  with the Company.  The Company  agrees to
reactivate   at  its  own  cost  the   interconnection   with  the  Facility  in
circumstances where any interruptions to such interconnections are caused by the
Company or its agents.

9.6  Assignment.  The QF shall have the right to assign its benefits
under  this  Agreement,  but the QF  shall  not have the  right  to  assign  its
obligations and duties without the Company's prior written approval.

-6-

9.7 Disclaimer.  In executing this Agreement,  the Company does not,
nor should it be construed  to,  extend its credit or financial  support for the
benefit of any third parties lending money to or having other  transactions with
QF or any assignee of this Agreement.

9.8  Notification.  For purposes of making any and all non-emergency
oral and written notices,  payments or the like required under the provisions of
this  Agreement,  the Parties  designate the following to be notified or to whom
payment shall be sent until such time as either party  furnishes the other party
written instructions to contact another individual.

For QF:

Gary H. Kappler
c/o Timber Energy Resources, Inc.
5433 Westheimer, Suite 1106
Houston, Texas 77056

Phone: (713) 626-5691

For the Company:

W.H. Howell, Vice President
Florida Power Corporation
1021 S.W. Tenth Street
Ocala, Florida 32670

Phone: (904) 732-7521

9.9  Applicable  Law.  This  Agreement  shall  be  governed  by  and
construed in accordance with the laws of the State of Florida.

9.10  Severability.  If any part of this Agreement,  for any reason,
shall be declared invalid, or unenforceable by a public authority of appropriate
jurisdiction,  then such decision shall not affect the validity of the remainder
of the Agreement,  which  remainder  shall remain in force and effect as if this
Agreement had been executed without the invalid or unenforceable portion.

9.11 Complete Agreement and Amendments.  All previous communications
or agreements between the Parties,  whether verbal or written, with reference to
the subject  matter of this  Agreement  are hereby  abrogated.  No  amendment or
modification  to this Agreement shall be binding unless it shall be set forth in
writing and duly executed by both parties to this Agreement.

9.12  Incorporation  of Rate  Schedule.  The parties agree that this
Agreement  shall be subject to all of the provisions  contained in The Company's
published  Rate Schedule  COG-2 as approved and on file with the FPSC.  The Rate
Schedule is incorporated herein by reference.

-7-

9.13  Survival of Agreement.  This  Agreement as may be amended from
time to  time,  shall  be  binding  and  inure to the  benefit  of the  Parties'
respective successors-in-interest and legal representatives.

IN WITNESS WHEREOF,  QF and The Company have executed this Agreement
the day and year first above written.

Timber Energy Resources, Inc.

/s/                                      /s/ Gary H. Kappler
-------------------------------------    -------------------------------------
Witness                                  Gary H. Kappler, President

/s/ 
-------------------------------------
Witness

Florida Power Corporation

/s/                                      /s/ Joseph F. Cronin
-------------------------------------    -------------------------------------
Witness                                  Joseph F. Cronin, Vice President

/s/ 
-------------------------------------
Witness

-8-

EXHIBIT A

Standard 10 Yr. Deferral
-------------------------------------------
Capacity Cost      O&M Cost      Total Cost
Year                   $/kw-mo         $/kw-mo        $/kw-mo
----                   -------         -------        -------

4/1986 - 3/1987               5.60              --            5.60
4/1987 - 3/1988               5.90              --            5.90
4/1988 - 3/1989               6.22              --            6.22
4/1989 - 3/1990               6.56              --            6.56
4/1990 - 3/1991               6.91              --            6.91
4/1991 - 3/1992               7.29              --            7.29
4/1992 - 3/1993               7.68             4.21          11.89
4/1993 - 3/1994               8.10             4.44          12.54
4/1994 - 3/1995               8.53             4.68          13.21
4/1995 - 3/1996               9.00             4.93          13.93
4/1996 - 3/1997               9.48             5.20          14.68
4/1997 - 3/1998               9.99             5.48          15.47
4/1998 - 3/1999              10.53             5.78          16.31
4/1999 - 3/2000              11.10             6.09          17.19
4/2000 - 3/2001              11.70             6.42          18.12
4/2001 - 3/2002              12.32             6.77          19.09

Page 1 of 8

RATE SCHEDULE COG-2
STANDARD OFFER CONTRACT RATE FOR PURCHASE OF FIRM CAPACITY AND ENERGY
FROM QUALIFYING COGENERATION AND SMALL POWER PRODUCTION FACILITIES
(QUALIFYING FACILITIES)

AVAILABILITY:

Florida Power  Corporation will purchase Firm Capacity and Energy offered by any
Qualifying Facility,  irrespective of its location,  which is either directly or
indirectly  interconnected  with  the  Company  under  the  provisions  of  this
schedule.  Florida Power  Corporation  will  negotiate and may contract with any
Qualifying Facility,  irrespective at its location,  which is either directly or
indirectly interconnected with the Company for the purchase at Firm Capacity and
Energy  pursuant to terms and conditions  which deviate from this schedule where
such negotiated contracts are in the best interest of the Company's ratepayers.

APPLICABLE:

To any cogeneration or small power production Qualifying Facility,  irrespective
of its location, producing capacity and energy for sale to the Company on a firm
basis  pursuant to the terms and  conditions  of this schedule and the Company's
"Standard Offer Contract" or a separately negotiated contract. Firm Capacity and
Energy are  described  by the Florida  Public  Service  Commission  (FPSC) Rules
25-17.83,  F.A.C., and are capacity and energy produced and sold by a Qualifying
Facility pursuant to a negotiated or standard Company contract offer and subject
to certain  contractual  provisions as to quantity,  time,  and  reliability  of
delivery.  Criteria for achieving  Qualifying Facility status shall be those set
out in FPSC Rule 25-17.80, F.A.C.

CHARACTER OF SERVICES:

Purchases  within the territory served by the Company shall be, at the option of
the  Company,  single or three  phase,  60  hertz,  alternating  current  at any
available standard Company voltage.  Purchases from outside the territory served
by the  Company  shall be three  phase,  60 hertz,  alternating  current  at the
voltage  level  available at the  interchange  point between the Company and the
entity delivering Firm Capacity and Energy from the Qualifying Facility.

LIMITATION OF SERVICE:

Purchases  under this schedule are subject to the Company's  "General  Standards
for  Safety and  Interconnection  of  Cogeneration  and Small  Power  Production
Facilities to the Electric  Utility  System" and to FPSC Rules 25-17.80  through
25-17.87, F.A.C., and are limited to those Qualifying Facilities which:

A.    Execute  a Company  "Standard  Offer  Contract"  prior to April 1,
1990 for the Company's purchase of Finn Capacity and Energy; and

B.    Commit to commence  deliveries  of Firm Capacity and Energy no later
than April 1, 1992, and to continue such deliveries through at least
March 31, 2002.

RATES FOR PURCHASES BY THE COMPANY:

Firm  Capacity and Energy are  purchased at a unit cost, in dollars per kilowatt
per  month  and cents per  kilowatt  hour,  respectively,  based on the value of
deferring  additional  generating  capacity in Florida.  For the purpose of this
schedule,  a  Statewide  Avoided  Unit  has been  designated  by the FPSC and is
considered to be a jointly owned,  peninsular Florida base load generating plant
consisting  of two (2), 700 MW coal fired  generating  units with an  in-service
date of April 1, 1992.  Appendix A of this schedule  describes  the  methodology
used to calculate payment schedules, general terms, and conditions applicable to
the Company's  "Standard Offer Contract" pursuant to FPSC Rules 25-17.80 through
25-17.87, F.A.C.

(Continued on Page No. 2)

Page 2 of 8

RATE SCHEDULE COG-2
STANDARD OFFER CONTRACT RATE FOR PURCHASE OF FIRM CAPACITY AND ENERGY
FROM QUALIFYING COGENERATION AND SMALL POWER PRODUCTION FACILITIES
(QUALIFYING FACILITIES)
(Continued from Page No. 1)

A.    Firm Capacity Rates

Three options,  A through C, as set forth below, are available for payment
for Firm  Capacity  which  is  produced  by the  Qualifying  Facility  and
delivered to the Company.  Once selected, an option shall remain in effect
for  the  term  of  the  contract  with  the  Company.  Exemplary  payment
schedules,  shown  below,  contain the monthly  rate per  kilowatt of Firm
Capacity the Qualifying Facility has contractually committed to deliver to
the Company  and are based on a minimum  contract  term which  extends ten
(10) years beyond the anticipated in-service date of the Statewide Avoided
Unit (i.e., through March 31, 2002). Payment schedules for longer contract
terms will be made available to a Qualifying Facility upon request and may
be calculated based on the methodologies described in Appendix A.

Option A - Fixed Value of Deferral

Payment  schedules  under  this  option  are  based  on  the  value  of  a
year-by-year  deferral of the  Statewide  Avoided Unit with an  in-service
date of April 1, 1992;  calculated in accordance  with FPSC Rule 25-17.83,
F.A.C.,  as  described  in Appendix A. Once this option is  selected,  the
current  schedule of payments shall remain fixed and in effect  throughout
the term of the "Standard Offer Contract".

The  Qualifying  Facility  shall  select  the  month and year in which the
delivery of Firm  Capacity  and Energy to the  Company is to commence  and
capacity  payments are to start.  The Company will provide the  Qualifying
Facility with a schedule of capacity  payment rates based on the month and
year in which the delivery of Firm Capacity and Energy are to commence and
the term of the contract.  The  following  exemplary  payment  schedule is
based on the minimum required contract term which must extend at least ten
(10) years beyond the anticipated in-service date of the Statewide Avoided
Unit. The currently  approved  parameters  used to calculate the following
schedule of payments are found in Appendix B of this schedule.

MONTHLY CAPACITY PAYMENT RATE $/KW/MONTH

Normal
Payment
Option
Contract Year  Starting               Early Payment Option Starting:
-------------  --------  ------------------------------------------------------------------------
FROM     TO     4/1/92   4/1/91   4/1/90    4/1/89   4/1/88   4/1/87   4/1/86    4/1/85   4/1/84
----     ---    ------  -------  -------    ------  -------  -------  -------    ------  -------

*4/1/84  3/31/85    -        -         -        -        -        -         -        -        4.25
4/1/85   3/31/86    -        -         -        -        -        -         -        4.87     4.48
4/1/86   3/31/87    -        -         -        -        -        -        5.60      5.13     4.72
4/1/87   3/31/88    -        -         -        -        -        6.47     5.90      5.41     4.97
4/1/88   3/31/89    -        -         -        -        7.50     6.82     6.22      5.70     5.24
4/1/89   3/31/90    -        -         -        8.74     7.90     7.18     6.56      6.01     5.53
4/1/90   3/31/91    -        -       10.24      9.21     8.33     7.57     6.91      6.34     5.82
4/1/91   3/31/92    -       12.08    10.79      9.70     8.78     7.98     7.29      6.68     6.14
4/1/92   3/31/93   18.58    16.94    15.59     14.44    13.47    12.63    11.89     11.25    10.68
4/1/93   3/31/94   19.58    17.86    16.43     15.22    14.19    13.31    12.54     11.86    11.26
4/1/94   3/31/95   20.64    18.82    17.31     16.04    14.96    14.03    13.21     12.50    11.87
4/1/95   3/31/96   21.75    19.84    18.25     16.91    15.77    14.78    13.93     13.18    12.51
4/1/96   3/31/97   22.93    20.91    19.24     17.82    16.62    15.58    14.68     13.89    13.19
4/1/97   3/31/98   24.17    22.04    20.27     18.79    17.52    16.42    15.47     14.64    13.90
4/1/98   3/31/99   25.47    23.23    21.37     19.80    18.46    17.31    16.31     15.43    14.65
4/1/99   3/31/00   26.85    24.48    22.52     20.87    19.46    18.24    17.19     16.26    15.44
4/1/00   3/31/01   28.30    25.81    23.74     22.00    20.51    19.23    18.12     17.14    16.27
4/1/01   3/31/02   29.83    27.20    25.02     23.18    21.62    20.27    19.09     18.06    17.15

----------------------
*  Payments  commencing  in 1984  are  available  only for  existing  Qualifying
Facilities not currently under contract.

(Continued on Page No. 3)

Page 3 of 8

RATE SCHEDULE COG-2
STANDARD OFFER CONTRACT RATE FOR PURCHASE OF FIRM CAPACITY AND ENERGY
FROM QUALIFYING COGENERATION AND SMALL POWER PRODUCTION FACILITIES
(QUALIFYING FACILITIES)
(Continued from Page No. 2)

Option B - Variable Value of Deferral

Payment  schedules  under  this  option  are  based  on  the  value  of  a
year-by-year  deferral of the  Statewide  Avoided Unit with an  in-service
date of April 1, 1992. Once this option is selected, the Statewide Avoided
Unit  designation  and its in-service date shall remain fixed for the term
of true "Standard Offer Contract".  The value of deferral,  however, shall
be recalculated annually and the payment schedule shall be adjusted,  upon
approval by the FPSC,  to reflect the most recent  factors  affecting  the
cost of constructing the Statewide  Avoided Unit. The Qualifying  Facility
shall select the month and year in which the delivery of Firm Capacity and
Energy to the Company is to commence  and  capacity  payments are to start
pursuant to this option.

The  methodology  used to determine  the level of payment each year is the
same as that  used  in  Option  A of this  schedule  and is  described  in
Appendix A. For  informational  purposes only,  the current  projection of
payments are those contained in Option A on the previous page.

Option C - Average  Embedded  Book Cost of Fossil Steam  Production  Plant
Monthly capacity payments are made under this option shall be based on the
Company's  current average  embedded book cost of fossil steam  production
plant  approved by the FPSC and in effect in the year in which  payment is
made.

The  following  monthly  payment  schedule is provided  for  informational
purposes only. It reflects the Company's current projection of payments.

Projected Monthly Capacity Payment Rate - $/KW/Month

*1984   1985   1986   1987   1988   1989    1990   1991   1992   1993   1994    1995   1996   1997  1998  1999   2000   2001   2002
-----   ----   ----   ----   ----   ----    ----   ----   ----   ----   ----    ----   ----   ----  ----  ----   ----   ----   ----

3.84    4.61   4.66   4.69   4.72   4.75    4.78   4.81   4.84   4.87   7.65    7.11   7.75   9.69  9.83  9.88   11.8   11.9   12.16

---------
*  Payments  commencing  in 1984  are  available  only for  existing  Qualifying
Facilities not currently under contract.

B.    Energy Rates

1.    Payments Prior to April 1, 1992

The energy  rate in cents per  kilowatt-hour  ((cent)/KWH)  shall be
based on the Company's  actual hourly avoided energy costs which are
calculated  by the Company in accordance  with FPSC Rule  25-17.825,
F.A.C.  Avoided energy costs include incremental fuel,  identifiable
operation  and  maintenance  expenses,  and an  adjustment  for line
losses reflecting delivery voltage.  When economy  transactions take
place,  the incremental  costs are calculated  after the purchase or
before the sale of the economy energy.

The  calculation  of payments to the  Qualifying  Facility  shall be
based on the sum,  over all  hours  of the  billing  period,  of the
product of each hour's  avoided  energy cost times the  purchases by
the  Company for that hour.  All  purchases  shall be  adjusted  for
losses from the point of metering to the point of interconnection.

2. Payments Starting on April 1, 1992

The energy rate in cents per  kilowatt-hour  ((cent)/KWH),  shall be
the lesser of an hour-by-hour  comparison of: (1) the fuel component
of the Company's  avoided energy costs calculated in accordance with
rule  25-17.825,  F.A.C.;  and (b) the  Statewide  Avoided Unit Fuel
Cost.   The   Statewide   Avoided  Unit  Fuel  Cost,  in  cents  per
kilowatt-hour  ((cent)/KWH)  shall be defined as the product of: (a)
the  average  monthly  inventory  charge out price of coal burned at
Tampa  Electric  Company's Big Unit No. 4, in cents per million Btu;
and (b) an average annual heat rate of 10.5 million Btu per megawatt
hours.

(Continued on Page No. 4)

Page 4 of 8

RATE SCHEDULE COG-2
STANDARD OFFER CONTRACT RATE FOR PURCHASE OF FIRM CAPACITY AND ENERGY
FROM QUALIFYING COGENERATION AND SMALL POWER PRODUCTION FACILITIES
(QUALIFYING FACILITIES)
(Continued from Page No. 3)

Calculation of payments to the Qualifying Facility shall be based on
the sum,  over all hours of the  billing  period,  of the product of
each hour's  avoided  energy cost times the purchases by the Company
for that hour.  All purchases  shall be adjusted for losses from the
point of metering to the point of interconnection.

ESTIMATED FIRM ENERGY COST:

For informational  purposes only, the estimated incremental avoided energy costs
for the next four semi-annual periods are as follows.  These estimates include a
credit  for  estimated  variable  operating  and  maintenance  expense  of 0.056
(cent)/KWH.  The variable O&M credit will be  recomputed  monthly in  accordance
with the Company's methodology.

On-Peak          Off-Peak       Average
Applicable Period       (cent)/KWH      (cent)/KWH     (cent)/KWH
-----------------       ----------      ----------     ----------

April, 1986-September, 1986           3.106           2.589          2.831
October, 1986-March, 1987             3.072           2.838          2.935
April, 1987-September, 1987           3.961           3.112          3.506
October, 1987-March, 1988             3.298           2.846          3.079

A 100 MW block has been used to calculate the estimated avoided energy cost.

PERFORMANCE CRITERIA:

Payments for firm capacity are conditioned on the Qualifying  Facility's ability
to maintain the following performance criteria:

A.    Commercial In-Service Date

Capacity  payments shall not commence  until the  Qualifying  Facility has
attained and demonstrated,  commercial  in-service  status. The commercial
in-service date of a Qualifying Facility shall be defined as the first day
of the  month  following  the  successful  completion  of  the  Qualifying
Facility  maintaining  an hourly  kilowatt (KW) output,  as metered at the
point of  interconnection  with the Company,  equal to or greater than the
Qualifying  Facility's  "Standard Offer Contract" committed capacity for a
24 hour period.  A Qualifying  Facility shall  coordinate the selection of
and operation of its facility  during this test period with the Company to
insure that the  performance of its facility during this 24-hour period is
reflective  of the  anticipated  day to day  operation  of the  Qualifying
Facility.

B.    Capacity Factor

Upon achieving  commercial  in-service status,  payments for Firm Capacity
shall be made monthly in accordance with the capacity  payment rate option
selected by the Qualifying  Facility and subject to the provision that the
Qualifying  Facility maintains a 70% capacity factor on a 12 month rolling
average  basis as defined in Appendix A. Failure to achieve this  capacity
factor shall result in true Qualifying  Facility's  forfeiture of payments
for Firm  Capacity  during the month in which such failure  occurs.  Where
early  capacity  payments have been elected and starting with the month of
April, 1992,  failure of a Qualifying  Facility to maintain a 70% capacity
factor an a 12 month  rolling  average basis shall also result in payments
by the  Qualifying  Facility to the Company.  The amount of such  payments
shall be equal to the difference between: (1) what the Qualifying Facility
would have been paid had it elected  the normal  payment  option  starting
April 1, 1992;  and (2) what it would have been paid pursuant to the early
payment option had it maintained the capacity factor performance criteria.

(Continued on Page No. 5)

Page 5 of 8

RATE SCHEDULE COG-2
STANDARD OFFER CONTRACT RATE FOR PURCHASE OF FIRM CAPACITY AND ENERGY
FROM QUALIFYING COGENERATION AND SMALL POWER PRODUCTION FACILITIES
(QUALIFYING FACILITIES)
(Continued from Page No. 4)

All  capacity  payments  made by the  Company  prior to April 1,  1992 are
considered  "early  payments".  The owner or  operator  of the  Qualifying
Facility,  as  designated by the Company,  shall secure its  obligation to
repay, with interest,  the cumulative amount of early capacity payments in
the  event  the  Qualifying  Facility  defaults  under  the  terms  of its
"Standard  Offer  Contract"  with the  Company.  The Company  will provide
monthly  summaries  of the  total  outstanding  balance  of such  security
obligations.  A summary  of the types of  security  instruments  which are
generally acceptable to the Company is discussed in Appendix A.

C.    Additional Criteria

1.    The Qualifying  Facility shall provide monthly generation  estimates
by October 1 for the next calendar year; and

2.    The Qualifying  Facility shall promptly update its yearly generation
schedule when any changes are determined necessary; and

3.    The  Qualifying  Facility  shall agree to reduce  generation or take
other  appropriate  action as  requested  by the  Company for safety
reasons or to preserve system integrity; and

4.    The Qualifying  Facility shall coordinate  schedule outages with the
Company; and

5.    The Qualifying Facility shall comply with the reasonable requests of
the Company regarding daily or hourly communications.

DELIVERY VOLTAGE ADJUSTMENTS:

Energy payments to Qualifying  Facilities  within he Company's service territory
shall  be  adjusted   according  to  the  delivery   voltage  by  the  following
multipliers:

Qualifying Facility Delivery Voltage                Adjustment Factor
------------------------------------                -----------------
69 KV or Greater                                           1.038
4 KV, 12 KV, 25 KV @ Substation Bus                        1.047
4 KV, 12 KV, 25 KV @ Primary Bus                           1.058
600 Volts or Lower                                         1.076

METERING REQUIREMENTS:

Qualifying  Facilities  within  the  territory  served by the  Company  shall be
required to purchase from the Company hourly  recording  meters to measure their
energy  production.  Energy  purchases from  Qualifying  Facilities  outside the
territory served by the Company shall be measured as the quantities schedule for
interchange to the Company by the entity  delivering firm capacity and energy to
the Company.

For the purpose of this schedule,  the on-peak hours occur Monday through Friday
except holiday, April 1 - October 31 from 12 noon to 9:00 P.M., and November 1 -
March 31 from 6:00 A.M. to 10:00 A.M.  and 6:00 P.M. to 10:00 P.M. All hours not
mentioned  above and all hours of the holidays of New Year's Day,  Memorial Day,
Independence  Day, Labor Day,  Thanksgiving  Day, and Christmas Day are off-peak
hours.

BILLING OPTIONS:

The  Qualifying  Facility may elect to make either  simultaneous  purchases  and
sales or net sales.  The  decision  to change  billing  methods can be made once
every twelve (12) months  coinciding with the next Fuel and Purchased Power Cost
Recovery  Factor  billing  period  provided the Company is given at least thirty
(30) days  written  notice  before the  change is to take  place.  In  addition,
allowance must be made for the  installation or alteration of needed metering or
interconnection  equipment for which the qualifying  facility must pay; and such
purchases  and/or  sales  must not  abrogate  any  provisions  of the  tariff or
contract with the Company.

(Continued on Page No. 6)

Page 6 of 8

RATE SCHEDULE COG-2
STANDARD OFFER CONTRACT RATE FOR PURCHASE OF FIRM CAPACITY AND ENERGY
FROM QUALIFYING COGENERATION AND SMALL POWER PRODUCTION FACILITIES
(QUALIFYING FACILITIES)

(Continued from Page No. 5)

A statement  covering the charges and payments  due the  Qualifying  Facility is
rendered  monthly,  and payment  normally is made by the twentieth  business day
following the end of the billing period.

CHARGES TO QUALIFYING FACILITY:

A.    Customers Charges

Monthly customer  charges for meter reading,  billing and other applicable
administrative costs by Rate Schedule are:

RS-1                    $   6.10
RST-1                      11.28
GS-1                        6.10
GST-1                      11.28
GSD-1                      17.75
GSDT-1                     22.93
GSLD-1                     91.00
GSLDT-1                    96.18
GSLDT-2                   265.00
GSLD-2                    265.00
CS-1                      175.00
CST-1                     175.00
IS-1                      475.00
IST-1                     475.00
MS-1                        6.10

B.    Interconnection  Charge for  Non-Variable  Utility Expenses

The Qualifying  Facility shall bear the cost required for interconnection
including the metering.  The Qualifying Facility shall have the option of
payment in full for  interconnection or making equal monthly  installment
payments  over a thirty-six  (36) month period  together with interest at
the rate then  prevailing  for thirty (30) days prior to the date of each
payment.

C.    Interconnection  Charge  for  Variable  Utility  Expenses

The Qualifying  Facility shall be billed monthly for the cost of variable
utility  expenses  associated  with the operation and  maintenance of the
interconnection.  These  include  (a) the  Company's  inspections  of the
interconnection  and (b) maintenance of any equipments  beyond that which
would be required to provide  normal  electric  service to the Qualifying
Facility if no sales to the Company were involved.

In lieu of payments for actual charges,  the Qualifying Facility may pay a
monthly charge equal to 0.57% of the installed cost of the interconnection
facilities.

D.    Taxes and Assessments

The  Qualifying  Facility  shall be billed  monthly an amount equal to the
taxes, assessments, or other impositions, if any, for which the Company is
liable as a result of its purchases of Firm  Capacity and Energy  produced
by the Qualifying Facility.

TERMS OF SERVICE:

1.    It shall be the Qualifying Facility's responsibility to inform the Company
of any change in its electric generating ability.

(Continued on Page No. 7

Page 7 of 8

RATE SCHEDULE COG-2
STANDARD OFFER CONTRACT RATE FOR PURCHASE OF FIRM CAPACITY AND ENERGY
FROM QUALIFYING COGENERATION AND SMALL POWER PRODUCTION FACILITIES
(QUALIFYING FACILITIES)
(Continued from Page No. 6)

2.    Any electric service  delivered by the Company to the Qualifying  Facility
shall be metered  separately and billed under the  applicable  retail rate
schedule and the terms and  conditions  of the  applicable  rate  schedule
shall pertain.

3.    A  security  deposit  will be  required  in  accordance  with  FPSC  Rules
25-17.82(5) and 25-6.97, F.A.C. and the following:

a.    In the first year of operation, the security deposit should be based
upon the singular month in which the QF's  projected  purchases from
the utility exceed, by the greatest amount, the utility's  estimated
purchases from the QF. The security deposit should be equal to twice
the amount of the difference  estimated for that month.  The deposit
should be required upon interconnection.

b.    For each year thereafter, a review of the actual sales and purchases
between the QF and the utility  should be conducted to determine the
actual month of maximum  difference.  The security deposit should be
adjusted  to equal  twice the  greatest  amount by which the  actual
monthly  purchases  by the QF exceed the actual sales to the utility
in that month.

4.    The Company shall specify the point of interconnection and voltage level.

5.    The Company  will,  under the  provisions of this  Schedule,  require an
agreement  with  the  Qualifying   Facility  upon  the  Company's  filed
Standard  Offer Contract and Standard  Agreement for Parallel  Operation
between  the  Qualifying  Facility  and  the  Company.   The  Qualifying
Facility  shall  recognize  that its  generation  facility  may  exhibit
unique interconnection  requirements which will be separately evaluated,
modifying the Company's General Standard for Safety and  interconnection
where applicable.

6.    Service under this rate  schedule is subject to the rules and  regulations
of the Company and the Florida Public Service Commission.

SPECIAL PROVISION:

1.    Special  contracts  deviating  from the above  standard  rate schedule are
allowable  provided  they are agreed to by the Company and approved by the
Florida Public Service Commission.

2.    A Qualifying  Facility located within the Company's  service territory may
sell Firm Capacity and Energy to a utility  other than the Company.  Where
such agreements exist and existing transmission capacity is available, the
Company  will  provide  transmission   wheeling  service  to  deliver  the
Qualifying   Facility's   power  to  the  purchasing   utility  or  to  an
intermediate utility.

When a  Qualifying  Facility  located  within the  Company's  service  territory
exercises  its option to sell  As-Available  Energy to a utility  other than the
Company prior to the  in-service  date (April 1, 1992) of the Statewide  Avoided
Unit and  existing  transmission  capacity is  available,  the Company will also
provide transmission wheeling service to deliver the Qualifying Facility's power
to the  purchasing  utility or to an  intermediate  utility.  In  addition,  the
Company will provide  transmission  wheeling service through its territory for a
Qualifying  Facility  located  outside  the  Company's  service  territory,  for
delivery of the Qualifying  Facility's power to the purchasing  utility or to an
intermediate  utility.   Transmission  service  that  is  determined  to  be  an
intrastate  transaction  will be provided,  subject to  availability,  under the
rates, terms and conditions set forth in Rate Schedule COG-3 or, as provided for
therein, under a separate,  compensatory contract.  Transmission service that is
determined  to be  an  interstate  transaction  will  be  provided,  subject  to
availability,  under rates,  terms and  conditions  filed with, and accepted for
filing by, the Federal  Energy  Regulatory  Commission  (a copy of the Company's
currently  effective  wholesale tariff rate schedule  applicable to transmission
service is on file with the Public Service  Commission and is available from the
Company upon request).

(Continued on Page No. 8)

Page 8 of 8

RATE SCHEDULE COG-2
STANDARD OFFER CONTRACT RATE FOR PURCHASE OF FIRM CAPACITY AND ENERGY
FROM QUALIFYING COGENERATION AND SMALL POWER PRODUCTION FACILITIES
(QUALIFYING FACILITIES)
(Continued from Page No. 7)

Interstate  transactions are defined as those determined to be jurisdictional by
the Federal Energy Regulatory Commission. Intrastate transactions are defined as
all other transactions.

The Qualifying  Facility shall be responsible for all costs associated with such
wheeling including:

A.    Wheeling charges
B.    Line losses incurred by the Company
C.    Inadvertent energy flows resulting from such wheeling.

Energy  delivered to the Company  shall be adjusted  before  delivery to another
utility as follows:

Qualifying Facility Delivery Voltage                Adjustment Factor
------------------------------------                -----------------
69 KV or Greater                                           0.963
4 KV, 12 KV, 25 KV @ Substation Bus                        0.955*
4 KV, 12 KV, 25 KV @ Primary Bus                           0.945*
600 Volts or Lower                                         0.929*

*     The 69 KV or greater  adjustment factor shall apply if the following
conditions are met for Qualifying Facility power and energy input to
the Company's distribution facilities:

(1)   The input power and energy fully  displace power and energy that the
Company would  otherwise be required to supply to other customers on
the same distribution facility, and

(2)   The delivery  voltage to the receiving  utility system is 69 KV or
greater.

The Company may deny,  curtail or  discontinue  providing  transmission  service
under this special  provision if the provision of such service  would  adversely
affect the adequacy,  reliability or cost of providing  electric  service to its
general body of retail and wholesale customers.

For a more complete  description of the rates,  terms and conditions under which
intrastate  transmission  service may be offered,  refer to Rate Schedule  COG-3
commencing  on sheet  9.700 of this  tariff  section.  For  similar  information
related to interstate  transmission  service,  refer to the Company's  currently
effective wholesale tariff rate schedule  applicable to transmission  service, a
copy of  which  is on file  with  the  Florida  Public  Service  commission  and
available from the Company upon request.

Page 1 of 4

RATE SCHEDULE COG-2
APPENDIX A
STANDARD OFFER CONTRACT RATE FOR PURCHASE OF FIRM CAPACITY AND ENERGY
FROM QUALIFYING COGENERATION AND SMALL POWER PRODUCTION FACILITIES
(QUALIFYING FACILITIES)

APPLICABILITY:

Appendix  A  provides  a detailed  description  of the  methodology  used by the
Company to calculate the monthly values of deferring the Statewide  Avoided Unit
referred to in Schedule  COG-2.  When used in conjunction  with the current FPSC
approved cost parameters associated with the Statewide Avoided Unit contained in
Appendix B, a Qualifying Facility may determine the applicable value of deferral
capacity payment rate associated with the timing and operation of its particular
facility  should the Qualifying  Facility enter into a "Standard Offer Contract"
with the utility.

Also contained in Appendix A is the methodology used by the Company to calculate
the 12 month  rolling  average  capacity  factor of a Qualifying  Facility and a
discussion  of the types and forms of surety  bond  requirements  or  equivalent
assurance of repayment of early capacity  payments  acceptable to the Company in
the event of contractual default by a Qualifying Facility.

CALCULATION OF VALUE OF DEFERRAL:

FPSC Rules  25-17.83(7)  specifies that avoided  capacity  costs, in dollars per
kilowatt  per  month,  associated  with firm  capacity  sold to a  utility  by a
Qualifying Facility pursuant to the utility's standard offer shall be defined as
the value of a year-by-year  deferral of the Statewide Avoided Unit and shall be
calculated as follows:

(1 + ip)
1 -   ---------
C                    (1 - r)                   1 + i
VACm  = --   (  KIn (  --------------------  ) +  Dn ( -------- ) )
12                            L                 1 + r
(1 + ip)
1 -   ---------
(1 + r)

Where, for a one year deferral:

VACm  =     utility's  value  of  avoided   capacity,   in  dollars  per
kilowatt per month, during month m;

C     =     a constant risk  multiplier  equal to 0.8 for the purpose of
the utility's standard offer agreement;

K     =     present  value  of  carrying   charge  for  one  dollar  of
investment  over L years with carrying  charges  assumed to be
paid at the end of each year;

In    =     total  direct and  indirect  cost,  in dollars per  kilowatt
including AFUDC but excluding  CWIP, of the statewide  avoided
unit with an in-service date of year n;

Dn    =     total  first  year's  fixed  and  variable   operating  and
maintenance expense, less fuel and in dollars per kilowatt per
year, of the statewide avoided  unit deflated to the beginning
of year n by io;

ip    =     annual  escalation  rate  associated  with the plant cost of
the statewide avoided unit;

(Continued on Page No. 2)

Page 2 of 4

RATE SCHEDULE COG-2
APPENDIX A
STANDARD OFFER CONTRACT RATE FOR PURCHASE OF FIRM CAPACITY AND ENERGY
FROM QUALIFYING COGENERATION AND SMALL POWER PRODUCTION FACILITIES
(QUALIFYING FACILITIES)
(Continued from Page No. 1)

r     =     annual discount rate,  defined as the utility's  incremental
after tax cost of capital;

L     =     expected life of the statewide avoided unit; and

n     =     year  for  which  the  statewide  avoided  unit is  deferred
starting  with its original  anticipated  in-service  date and
ending with the  termination  of the contract for the purchase
of firm energy and capacity.

Normally, payment for firm capacity shall not commence until the in-service date
of the  statewide  avoided  unit.  At the  options of the  Qualifying  Facility,
however,  the utility may begin making early capacity payments consisting of the
capital cost component of the value of a year-by-year  deferral of the statewide
avoided  unit  starting  as  early  as  seven  years  prior  to the  anticipated
in-service date of the statewide avoided unit. When such early capacity payments
are elected,  the avoided  capital cost component of capacity  payments shall be
paid monthly  commencing no earlier than the Commercial  In-Service  date of the
Qualifying Facility, and shall be calculated as follows:

n
A (1 + ip)   ; for n = o, n
Am =    ----------
12

Where:

Am    =     monthly avoided capital cost component of capacity  payments
to be made to the  Qualifying  Facility  starting  as early as
seven years prior to the  anticipated  in-service  date of the
statewide avoided unit, in dollars per kilowatt per month;

ip    =     annual  escalation rate associated with the plant cost of me
statewide avoided unit;

n     =     year for  which  early  capacity  payments  to a  Qualifying
Facility are made;

(1 + ip)
1 - (        )
A = F                 (1 + r)
( ---------------  )
t
(1 + ip)
1 - (         )
(1 + r)

Where:

F     =     the  cumulative  present  value of the avoided  capital cost
component of capacity  payments which would have been made had
capacity  payments  commenced with the anticipated  in-service
date of the statewide avoided unit;

r     =     annual discount rate,  defined as the utility's  incremental
after tax cost of capital; and

(Continued on Page No. 3)

Page 3 of 4

RATE SCHEDULE COG-2
APPENDIX A
STANDARD OFFER CONTRACT RATE FOR PURCHASE OF FIRM CAPACITY AND ENERGY
FROM QUALIFYING COGENERATION AND SMALL POWER PRODUCTION FACILITIES
(QUALIFYING FACILITIES)
(Continued from Page No. 2)

t    =      the term, in years, of the contract for the purchase of firm
capacity  commencing  prior  to  the  in-service  date  of the
statewide  avoided unit, and commencing with the year in which
the  Qualifying  Facility  elects to  receive  early  capacity
payments.

Currently approved  parameters  applicable to the formulas above are found
in Appendix B.

CALCULATION OF 12 MONTH ROLLING AVERAGE CAPACITY FACTOR:

Pursuant to FPSC Rule  25-17.83(3)(a)(ii),  F.A.C., and Order 13247,  Docket No.
830377-EU, a Qualifying Facility must maintain a 70% capacity factor in order to
receive capacity payments. For the purpose of this schedule, the capacity factor
of the  Qualifying  Facility  shall be defined as: the total  kilowatt-hours  of
energy  delivered to the utility during the preceding 12 months,  divided by the
product  of: (1) the  maximum  kilowatt  capacity  contractually  committed  for
delivery to the  Company by the  Qualifying  Facility  during the  preceding  12
months;  and (2) the sum of the total hours during the  preceding 12 months less
those hours  during  which the Company was unable to accept  energy and capacity
deliveries  from the Qualifying  Facility.  The Company shall be relieved of its
obligation  under FPSC Rule  25-17.82  F.A.C.  to  purchase  electricity  from a
Qualifying  Facility when  purchases  result in higher costs to the Company than
without such  purchases,  and where service to the Company's other customers may
be  impaired  by  such  purchases.  The  Company  shall  notify  the  Qualifying
Facilities  as soon as  possible  or  practical,  and the  FPSC of the  problems
leading to the need for such relief.

During the first 12 months in which the 70% capacity factor performance criteria
is imposed,  the Qualifying  Facility's  capacity  factor shall be calculated by
dividing  the  sum  of the  kilowatt  hours  delivered  to  the  Company  by the
Qualifying  Facility  for the number of months  since the  performance  criteria
became applicable by the product of: (1) the number of hours in the months which
have transpired and in which  deliveries  were accepted by the Company;  and (2)
the  maximum  kilowatt  capacity  contractually   committed  by  the  Qualifying
Facility.  This  calculation  shall be performed  each month until enough months
have transpired to calculate a true 12 month rolling average capacity factor.

SURETY BOND REQUIREMENTS

FPSC Rule 25-17.83(3)(c), F.A.C., requires that when early capacity payments are
elected,  the  Qualifying  Facility  must  provide a surety  bond or  equivalent
assurance of repayment of early  capacity  payments in the event the  Qualifying
Facility is unable to meet the terms and  conditions of its contract.  Depending
on the  nature of the  Qualifying  Facility's  operation,  financial  health and
solvency,  and its  ability to meet the terms and  conditions  of the  Company's
"Standard  Offer  Contract" one of the  following  may  constitute an equivalent
assurance of repayment:

(1)   Surety bond;
(2)   Escrow;
(3)   Irrevocable letter of credit;
(4)   Unsecured  promise by a municipal,  county,  or state  government to
repay early company  payments in the event of default in conjunction
with a legally binding commitment from such government  allowing the
utility  to levy a  surcharge  on either the  electric  bills of the
government's  electricity  consuming  facilities or the  constituent
electric  customers of such government to assure that early capacity
payments are repaid;

(Continued on Page No. 4)

Page 4 of 4

RATE SCHEDULE COG-2
APPENDIX A
STANDARD OFFER CONTRACT RATE FOR PURCHASE OF FIRM CAPACITY AND ENERGY
FROM QUALIFYING COGENERATION AND SMALL POWER PRODUCTION FACILITIES
(QUALIFYING FACILITIES)
(Continued from Page No. 3)

(5)   Unsecured promise by a privately owned Qualifying  Facility to repay
early capacity  payments in the event of default in conjunction with
a legally  binding  commitment  from the owner(s) of the  Qualifying
Facility,  parent company,  and/or subsidiary companies allowing the
utility to levy a surcharge on the electric  bills of the  owner(s),
parent company,  and/or  subsidiary  companies located in Florida to
assure that early capacity payments are repaid; or

(6)   Other guarantee acceptable to the Company.

The Company will  cooperate  with each  Qualifying  Facility  applying for early
capacity  payments to determine  the exact form of an  "equivalent  assurance of
repayment"  to be required  based on the  particular  aspects of the  Qualifying
Facility.  The Company will endeavor to accommodate  an equivalent  assurance of
repayment which is in the best interests of both the Qualifying Facility and the
Company's ratepayers.

Page 1 of 1

RATE SCHEDULE COG-2

APPENDIX B

STANDARD OFFER CONTRACT RATE FOR PURCHASE OF FIRM CAPACITY AND ENERGY
FROM QUALIFYING COGENERATION AND SMALL POWER PRODUCTION FACILITIES

(QUALIFYING FACILITIES)

NORMAL PAYMENT OPTION PARAMETERS

Where, for a one year deferral:

Value

VACm         =    utility's  value of avoided  capacity,  in  dollars  per 18.58
kilowatt per month, during month m;

C            =    a constant  risk  multiplier  for the purpose of the utility's
0.8 standard contract offer;

K            =    present  value of  carrying  charge  for one dollar of 1.75616
investment  over L years with carrying  charges  assumed to be
paid at the end of each year;

In           =    total direct and indirect  cost,  in dollars per kilowatt 2044
including AFUDC but excluding  CWIP, of the statewide  avoided
unit with an in-service date of year n;

Dn           =    total first  year's  fixed and  variable  operating  and 66.27
maintenance expense, less fuel and in dollars per kilowatt per
year, of the statewide  avoided unit deflated to the beginning
of the year n by io;

lp           =    annual  escalation rate associated with the plant cost of 5.4%
the statewide avoided unit;

io           =    annual  escalation rate associated with the operation and 5.4%
maintenance expense of the statewide avoided unit;

r            =    annual  discount  rate,  defined as the utility's  incremental
10.50% after tax cost capital;

l            =    expected life of the statewide avoided unit; 31

n            =    year for which the  statewide  avoided  unit is deferred  1992
starting  with its original  anticipated  in-service  date and
ending with the  termination  of the contract for the purchase
of firm energy and capacity;

EARLY PAYMENT OPTION PARAMETERS

Am           =    monthly  avoided  capital cost component of capacity  payments
4.87 to be made to the Qualifying  Facility  starting as early
as seven years prior to the anticipated in-service date of the
statewide avoided unit, in dollars per kilowatt per month;

ip           =    annual  escalation rate associated with the plant cost of 5.4%
the statewide avoided unit;

n            =    year for which early  capacity  payments to a Qualifying  1985
Facility are made;

F            =    the  cumulative  present  value of the  avoided  capital  cost
699.1%  component of capacity  payments  which would have been
made had  capacity  payments  commenced  with the  anticipated
in-service  date of the  statewide  avoided unit and continued
for a period of 10 years;

r            =    annual  discount  rate,  defined as the utility's  incremental
10.5% after tax cost capital;

t            =    the term,  in years,  of the  contract  for the purchase of 17
firm capacity  commencing  prior to the in-service date of the
statewide avoided unit.

EXHIBIT  10.32

MULTITRADE GROUP AND TULTEX CORPORATION

STEAM AGREEMENT

AGREEMENT   between   Multitrade   Group,   Inc.,  a  Virginia
corporation  organized  and  existing  under  the  laws of the  Commonwealth  of
Virginia  (hereinafter  referred to as "Multitrade") and Tultex  Corporation,  a
Virginia  corporation with its principal office in Martinsville,  Virginia,  and
also  having a  manufacturing  facility  located on  Commonwealth  Boulevard  in
Martinsville, Virginia (hereinafter referred to as "Purchaser").

WHEREAS,  Multitrade  is in  the  process  of  constructing  a
topping cycle co-generation  facility capable of generating a minimum of 250,000
pounds of steam per hour for twenty-four  hours per day and 15,000  kilowatts of
electrical power for delivery to the City of Martinsville, Virginia.

WHEREAS,  in addition to the  aforementioned  steam generating
facility,  Multitrade  is in the process of  constructing  a steam  distribution
system capable of supplying certain steam,  water and water energy  requirements
of the Purchaser at its  manufacturing  facilities which are located in the City
of Martinsville, Virginia.

WHEREAS,  Multitrade's "topping cycle" co-generation  facility
will require  certain  volumes of water to operate the steam turbine  condenser,
and  Multitrade  will  purchase  necessary  volume  of  water  from  the City of
Martinsville  for  use  in  the  co-generation  cooling  process.  Operation  of
Multitrade's turbine generator cooling cycle will produce a by-product of heated
water.

WHEREAS,  the  Purchaser  uses hot  water  in its dye  process
division  and is  desirous of  purchasing  from  Multitrade  and  Multitrade  is
desirous of selling to the Purchaser the aforementioned  steam energy, hot water
liquid and energy in the process hot water for use at the  Purchaser's  facility
located in the City of Martinsville, Virginia.

WHEREAS,   the  Purchaser  is  desirous  of  purchasing   from
Multitrade and Multitrade is desirous of producing,  transporting and selling to
the Purchaser the  aforementioned  steam,  water and water energy for use at the
Purchaser's fabric  manufacturing  facility located in the City of Martinsville,
Virginia.

NOW, THEREFORE, in consideration of the foregoing premises and
the  mutual  agreements  hereinafter  set  forth to be kept and  performed,  the
parties hereto do agree as follows:

1.1  BTUs   Produced.   The  BTU  content  in  Steam  measured
immediately upon the Steam leaving the Multitrade boilers (1460 BTU per pound at
1500 PSI and 950 degrees Fahrenheit).

1.2  BTUs  Delivered.   The  BTU  content  in  Steam  measured
immediately  upon Steam passing through the Point of Delivery at the Purchaser's
fabric manufacturing facility.

1.3  Process  Hot  Water.  Water  purchased  from  the City of
Martinsville  which  is used in the  turbine  generator  condenser  for  cooling
purposes.  Process hot water  normally  will be supplied to the  Purchaser  at a
maximum of 117 degrees  Fahrenheit,  however, if the turbine generator is not in
service,  such water may be supplied  at ambient  City water  temperature.  Such
water has been used in  production  process and is not suitable or fit for human
consumption.

1.4  Co-Generation Facility. The real property as described in
Exhibit A attached, along with any improvements, fixtures, and equipment located
thereon.

1.5 Condensate.  All the non-contaminated  water obtained from
condensation of the Steam used by the Purchaser.

1.6 Condensate  Meter. The continuous  Condensate flow, volume
and  temperature  measuring  device and recorder  located at a point between the
Purchaser's Condensate return system and the Facility.

1.7  Contaminated  Water.  Water  or  Steam  returned  by  the
Purchaser  to  Multitrade,   the  chemical   quality  and  purity  of  which  is
unacceptable  to  Multitrade,  or  which  would  adversely  affect  Multitrade's
intended use of the water or Steam. Water which exceeds the following parameters
will not be acceptable for use in the Facility:

Parameter                   Maximum Limit
---------                   -------------
Total Hardness              Non Detectable
Sodium                      .1 part per million
Silica                      .2 parts per million
Conductivity                25 Micromos
Total Iron                  .05 parts per million
Total Copper                .02 parts per million
Total Organic Carbon        Non Detectable
pH                          8.3 - 9.5 range

1.8 First  Delivery.  The first time at least 20,000 pounds of
Steam per hour produced by the  Co-Generation  Facility passes through the Point
of Delivery for one (1) continuous hour.

1.9 Fuel.  Any  substance  with BTU  content  used to  produce
energy to produce Steam.

1.10 Fuel Meter. The continuous Fuel weight measuring  devices
and recorders  located on the belts and pipes conveying or transporting  Fuel to
the boiler.

1.11 Fuel Used.  The amount of Fuel  crossing  the Fuel Meters
and other Fuel used in the production of Steam and electricity.

1.12 Month.  The period  between  Meter  readings  which shall
approximate a thirty (30) day period.

-2-

1.13 Operating and Maintenance Costs.  All direct and indirect
costs associated with the operation and maintenance of the boiler, co-generation
equipment and related support equipment and facilities.

1.14 Operating  Year.  One-year  periods which commence on the
month and day of the First Delivery and each anniversary thereof.

1.15 Point of Delivery.  The point on the Purchaser's  side of
the Steam Meter at which Steam leaves the Steam Meter.

1.16 Point of Return. The point at which the Condensate leaves
the Condensate Meter and is returned to the Facility.

1.17 Pound of Steam.  That  amount of Steam  derived  from one
pound of water.

1.18 Steam.  Steam  produced  by  Multitrade  for  delivery to
Purchaser at the Point of Delivery.

1.19 Steam  Meter.  The  continuous  Steam flow,  pressure and
recording  meter  located  on the low  pressure  side of the  pressure  reducing
station located near the Purchaser's existing steam system.

SECTION 2: CONSTRUCTION OF SYSTEM

2.1 By separate  land  purchase  and right of way  agreements,
Multitrade will purchase and/or lease on mutually agreeable terms  approximately
eight (8) acres of land to be used as the plant  site for the  aforesaid  boiler
plant.  In  addition,  Multitrade  will  obtain  right  of  way  agreements  for
construction  of a  steam  distribution  system  capable  of  delivering  to the
Purchaser  150,000  pounds  of Steam  per hour and a  Condensate  Return  System
capable of returning to Multitrade  all Steam  delivered to the Purchaser in the
form of Condensate.

2.2  Multitrade  agrees  that  upon  receipt  by  it  of a bid
acceptable to it for the construction and installation of the aforesaid  system,
favorable  receipt of permits,  and  arrangement of financing,  it will promptly
notify the  Purchaser,  in writing,  and will  purchase,  construct  and install
necessary improvements including buildings, co-generation facility, distribution
systems  and  associated  facilities  at no cost to the  Purchaser  in  order to
produce and  deliver  Steam  energy to the Point of Delivery on the  Purchaser's
existing steam header.

2.3 The  Purchaser  will receive and  transport the Steam from
the Point of Delivery  and shall  purchase,  construct,  install,  maintain  and
operate at its own cost and in a timely fashion,  all appropriate pipes,  lines,
returns,  wiring and related appurtenances  required for such transport from the
Point of Delivery through Purchaser's fabric  manufacturing  facility.  All such
pipes,  lines,  returns,  wiring  and  related  appurtenances  shall  remain the
property of Purchaser even after the termination of this  Agreement.  Multitrade
shall have no ownership interest in and no responsibility to maintain or operate
any of the purchaser's  equipment or any equipment  beyond the Point of Delivery
and prior to the Point of Return.

-3-

2.4 Multitrade  agrees to construct or to have constructed and
to operate said co-generation  production system up to the Point of Delivery and
from the Point of Return in accordance  with the  requirements of all applicable
municipal,   state  and/or   Federal  laws,   ordinances,   regulations   and/or
requirements.

2.5 Multitrade  will complete the purchase,  construction  and
installation of the  aforementioned  co-generation  system and place the same in
operation  with  due  diligence,  subject  only to  delays  caused  by  labor or
materials   shortages,   governmental   regulations,   strikes   and  any  other
circumstances beyond the reasonable control of Multitrade.

2.6  Multitrade  agrees to  provide  the  Purchaser  with high
quality  Steam (pH 9, plus or minus  0.5,  and three  parts per  million or less
suspended solid carryover) and maintain a suitable totalizing meter showing flow
and pressure (hereinafter the "Steam Meter") located on the low pressure side of
the pressure  reducing  station.  Multitrade agrees to inject into the Steam, to
the reasonable satisfaction of the Purchaser,  neutralizing and/or filming amine
to reduce corrosion in the Condensate Return System.

2.7  Multitrade  agrees  to  provide  a major  portion  of the
Purchaser's  requirements  for process hot water and maintain a suitable  meter,
showing both flow and  temperature,  located within fifty (50) feet of the point
at which  Multitrade's  process hot water  system  connects  to the  Purchaser's
existing process water system.

2.8  Multitrade's  use of the Steam produced by it may require
the use of additives in the boiler  feedwater  or Steam.  Multitrade  recognizes
that the  Steam  delivered  to the  Purchaser  will be used in a  fabric  dyeing
process.  Accordingly,  Multitrade  shall inject only the additives set forth on
Exhibit F into the boiler  feedwater,  Steam and Condensate.  Exhibit F shall be
amended from time to time, upon the agreement of the parties, to reflect changes
in  technology,  economics  and the  availability  of  chemicals.  In the  event
additives  are found in the Steam  produced  by  Multitrade  which have not been
approved by the Purchaser,  the Purchaser shall promptly  notify  Multitrade and
request  the  removal of the  additives  and  Multitrade  will be  obligated  to
discontinue  use of such additives  within eight (8) hours.  The Purchaser shall
have the  option to  operate  its  boilers  until  Steam  quality  is within the
standards  established  herein.  Nothing  herein  shall  relieve  Multitrade  of
liability for damages the Purchaser may sustain if Multitrade  injects additives
which were not previously approved by the Purchaser.

2.9 Multitrade  shall calculate the Purchaser's  monthly Steam
and water usage, based on Steam and Water meter readings.  The Purchaser will be
entitled to adequate notice and opportunity to have its  representative  present
at any time the Meter is read,  and may inspect  the Steam  Meter  charts at any
time.  If there is any dispute as to the Steam  Meter's  accuracy or  condition,
either  party may, at its own  expense,  engage the  services of an  independent
technician, acceptable to all parties and which acceptance will not unreasonably
be withheld, to test the Steam Meter, and the technician's determination will be
binding on all parties. If the technician  determines that the Steam Meter is in
need of repair or replacements,  such repair or replacement will be made as soon
as practical at Multitrade's  expense.  Local  representatives of Multitrade and
the Purchaser, by mutual agreement, will determine the amount of Steam furnished
by  Multitrade  to the  Purchaser for any period during which the Steam Meter is
malfunctioning, and

-4-

invoices will be adjusted accordingly.  (See Exhibit B - Adjusted Billing Method
for Malfunctioning Steam Meter.)

2.10 Multitrade agrees, at no expense to the Purchaser to have
the  Steam,  Condensate  and  Water  Meters  calibrated  by such an  independent
technician each 180 calendar days,  commencing 180 days from the First Delivery.
A written report of the technician's findings and calibrations will be submitted
to the Purchaser. The initial calibration will be accomplished,  at Multitrade's
expense, within ten (10) days of First Delivery.

SECTION 3: TERMS OF PURCHASE AND SALE OF STEAM ENERGY

3.1  The  Purchaser  agrees  to  purchase  Steam  energy  from
Multitrade  for  a  period  of  ten  (10)  years,  commencing  on  the  date  of
Multitrade's  First  Delivery of Steam  through the Point of Delivery and ending
ten (10) years thereafter.

3.2  Multitrade  will make  available to the  Purchaser at the
aforementioned  Point of  Delivery  on a daily  24-hour  basis at least  150,000
pounds per hour of dry saturated Steam at a maximum of 150 PSIG and a minimum of
125 PSIG (pounds per square inch gauge) during the period of this Agreement.  In
the event, during the term of this Agreement, the Purchaser's Steam requirements
exceed  the  original  150,000  pound per hour  capacity,  Multitrade  agrees to
install additional boiler capacity to provide the additional Steam requirements.
The  Purchaser  and  Multitrade  mutually  agree to  negotiate  in good faith to
establish  Steam rates which reflect  changes in capital,  fuel and  operational
cost.

3.3  Notwithstanding  the other  provisions of this Agreement,
the  Purchaser  will  have the  right at any time to  operate  its own  boilers;
however,  if  Purchaser's  operation of its own boilers  interferes  in any way,
directly  or  indirectly,  with  Multitrade's  ability to  deliver  Steam to the
Purchaser as provided for in this Agreement,  the Purchaser  shall  nevertheless
remain  subject to the  minimum  purchase  requirement  set out in  Section  4.8
hereof.  Notwithstanding the provisions of Section 2.8, Multitrade shall bear no
liability  for its  failure to deliver  any  quantity  or quality of Steam which
failure results directly or indirectly from the Purchaser's operation of its own
boilers.  Further,  in the event that the  Purchaser  operates  its own boilers,
Multitrade  shall purchase and give credit for  Condensate  being returned up to
the maximum requirements of the Facility.

3.4 Multitrade reserves the right to sell to others any excess
Steam capacity produced by its initial boiler and by the co-generation  Facility
which is over and above the amounts set forth in Section 3.2.

SECTION 4: PAYMENT RATES AND TERMS

4.1 The Purchaser  will pay for the Steam energy  delivered to
it by  Multitrade  based on a  delivered,  unit  price per  1,000  pounds of dry
saturated Steam, as set forth in Exhibit C. All Steam costs will be based on the
Steam actually delivered to the Point of Delivery.

-5-

4.2 The monthly  rate price which the  Purchaser  will pay for
Steam  energy  and Water and water  energy  will be as  indicated  in  Exhibit C
attached hereto and in paragraph 6.2 hereinafter.

4.3  Multitrade  will  not  purchase  any  fuels  from (a) any
officer or employee of Multitrade or (b) any supplier  which is either wholly or
partly  owned  by  any  officer  or  employee  of  Multitrade   without  written
authorization signed by a representative of the Purchaser.

4.4 Multitrade  agrees to use the most economical mix of fuels
subject to state and Federal air pollution requirements.  Multitrade also agrees
to make a good faith and diligent effort to purchase Fuel at competitive  prices
and will make  available  to the  Purchaser  its records  concerning  Fuel costs
immediately upon request from the Purchaser.  If there is a subsequent  increase
or decrease in any of the Fuel prices, the aforementioned rate will be increased
or decreased  proportionately  to reflect  such change at the annual  adjustment
spelled  out in  Exhibit  C. Fuel  cost is based on input  fuel cost at Point of
Delivery.

4.5 The Purchaser  agrees to negotiate with  Multitrade in the
anniversary  month of the First  Delivery of each year hereafter for the purpose
of either  increasing  or  decreasing  the rate  charged for Steam  energy in an
effort to  recognize  any  reasonable  changes  in  Multitrade's  Operating  and
Maintenance Costs. Multitrade agrees to make a good faith and diligent effort to
minimize  all such costs.  Any new rate agreed  upon will become  effective  the
first  of  the  month  subsequent  to the  day  of  agreement  and  will  not be
retroactive.  Multitrade shall allow Purchaser's personnel access to all records
pertaining to any of its Operating and Maintenance Costs. If no agreement can be
reached  within  thirty  (30) days,  differences  will be  submitted  to binding
arbitration per Section 13.

4.6 The Purchaser  agrees to negotiate with  Multitrade in the
anniversary month of the First Delivery of each year hereafter in the event that
Multitrade's  capacity  costs  increase  as a result of  changes  in  government
regulations,  rules, tax laws, equipment replacement or specifications and other
items  which  may  result  in  direct  or  indirect  increased  Steam  cost  for
Multitrade.  If no agreement can be reached within thirty (30) days, differences
will be submitted to binding arbitration per Section 13.

4.7 The rate  schedule  in  Exhibit C is based on the  premise
that the Purchaser will purchase 510,000,000 Pounds of Steam during an operating
year.  Purchases by the Purchaser which exceed  60,000,000  Pounds of Steam in a
Month will be subject to reduced  capacity and Operating and  Maintenance  Costs
per Exhibit C price.

4.8  Except  as  provided  in  paragraphs  8.1  and  8.2,  the
Purchaser agrees that during the period of this Agreement, it will purchase from
Multitrade the minimum amount of 510,000,000  Pounds of dry saturated  Steam per
operating  year,  so long as such annual  quantity of Steam is  available to the
Purchaser from  Multitrade.  If the Purchaser's  actual Steam purchases are less
than the minimum amount set forth above and such minimum amount was available, a
capacity  charge of $2.20 per  thousand  Pounds of Steam  will be  computed  and
billed per Exhibit E.

-6-

4.9 The charges for Steam  energy,  water liquid and energy in
water  consumed by Purchaser  will be billed  monthly to Tultex  Corporation  by
Multitrade and payments will be due within  twenty-five  (25) days after receipt
of an invoice  substantially  in the form of Exhibit D.  Multitrade may charge a
three  percent  (3%) late  charge on any bill not paid within  thirty-five  (35)
days.  If any bill is not paid,  including  the late  charge,  within sixty (60)
days,  in addition to other  remedies  which may be  available,  Multitrade  may
discontinue  service  upon not less  than  five (5) days  written  notice to the
Purchaser.  No such discontinuance of service shall render Multitrade liable for
damages or relieve the Purchaser from  performance of its obligations  hereunder
as long as  Multitrade is not in material  default  under this  Agreement at the
time service is discontinued and the Purchaser is not reasonably  contesting any
unpaid invoice.

SECTION 5: OPERATION OF THE FACILITY

5.1 Multitrade agrees to use diligence to maintain and operate
the co-generation  Facility and distribution system in such a manner as to avoid
any unnecessary interruption of service to the Purchaser.

5.2  Multitrade  agrees to notify the  Purchaser in writing of
its normal  operating  schedule,  start-up  and  shutdown  times and any changes
thereto.

5.3 The Purchaser agrees, at no expense to Multitrade, to make
the  necessary   provisions  within  its  Steam  system  to  accept  Steam  from
Multitrade.

SECTION 6: PURCHASE OF WATER AND ENERGY IN HOT WATER

6.1 Multitrade  agrees to provide the Purchaser with a maximum
of 2,000,000  gallons per  twenty-four  hour day of process hot water  extracted
from the condenser  cooling cycle of the co-generation  operation.  In the event
the co-generation condenser is not in operation,  Multitrade may provide process
water to the Purchaser at ambient City water  temperature.  Multitrade  shall be
relieved of any  obligation  to provide  process  water to the  Purchaser in the
event of force majeure causes, such as non-availability of water or other events
which prevent or restrict Multitrade's ability to deliver City process water.

6.2 The  Purchaser  agrees to receive  process water on an "as
needed"  basis at its sole  discretion.  The  Purchaser  will be charged for the
liquid  volume of water  delivered  through  the Point of Delivery at a rate per
thousand  gallons  equal  to  the  rate  charged   Multitrade  by  the  City  of
Martinsville. In addition, the Purchaser will be charged for the heat content of
water delivered  based on BTU content on temperature 80 degrees  Fahrenheit at a
rate of $2.20 per million BTUs firm price until anniversary  annual  adjustment.
Subsequent  rates will be equal to the "Input Fuel" component rate,  established
annually, required to produce 1,000 Pounds of Steam.

SECTION 7: STEAM CONDENSATE RETURN

7.1 Multitrade  agrees to install and maintain,  at no expense
to the  Purchaser,  a condensate  return  system,  including but not limited to,
piping, insulation, pump system and

-7-

flow/temperature  recorder.  The condensate  return system and  flow/temperature
recorder shall connect to the Purchaser's  existing condensate system located in
the Purchaser's existing boiler room at the Point of Return.

7.2 The Purchaser agrees to furnish, at no cost to Multitrade,
adequate  electricity to operate a condensate  return pump which will be located
on the premises in or near the existing boiler room.

7.3 The  Purchaser  will be given  credit  for all  Condensate
returned to Multitrade as follows:  (a) seventy (70) cents per thousand  gallons
of liquid returned in the form of Condensate to remain firm for first year until
anniversary adjustment. Subsequent rates shall be equal to the rate in effect by
the City of  Martinsville  per thousand  gallons of water.  (b) Thermal value of
Condensate  will be equal to the fuel  component of Steam and will be subject to
annual  adjustment.  Example:  1,000,000 BTUs returned in Condensate  will equal
1,000,000 BTUs of Input Fuel. BTUs returned will be calculated using temperature
above 80 degrees Fahrenheit.

SECTION 8: INTERRUPTION OF SERVICE OR OPERATIONS

8.1 Multitrade  agrees to give the Purchaser  immediate notice
by the fastest means possible of any unplanned  interruption of the Steam supply
and to give as much written notice as possible of all planned  interruptions  of
the  Steam  supply.  Any  planned  interruption  of the  Steam  supply  will  be
coordinated  with the Purchaser.  An annual  shutdown is required to comply with
Virginia  pressure  vessel  inspection   requirements.   In  the  event  of  any
interruption of service, planned or otherwise, the annual minimum Steam purchase
required of the Purchaser  under  paragraph 4.8 will be reduced based on a daily
average minimum usage of 1,397,260  (510,000,000 divided by 365) Pounds of Steam
energy for any day or part of a day Multitrade's  Steam  generating  facility is
not in operation.  Should the Steam supply to the Purchaser be  interrupted  for
any cause beyond Multitrade's  control,  such interruption will not constitute a
breach of this  Agreement,  and  Multitrade  will not be liable to Purchaser for
damages by reasons  of any such  failure,  provided  Multitrade  makes  diligent
efforts  to  restore  normal  operation  as soon as  possible.  If  Multitrade's
operations are disrupted for 180  consecutive  days and Multitrade has failed to
exercise  diligent  efforts to restore  normal  operations,  the  Purchaser  may
terminate this Agreement.

8.2  In  the  event  that  the   Purchaser's   operations  are
interrupted by fire, acts of God, riots,  civil disorders,  war,  curtailment of
primary utilities, work stoppages, or other similar events beyond the control of
the  Purchaser,  the Purchaser  shall be liable to  Multitrade  for those losses
sustained  by  Multitrade  in  excess  of monies  received  under  its  Business
Interruption  Insurance  policy.  The Purchaser  agrees to make diligent efforts
within its means to restore normal operations as swiftly as possible.

8.3 In the event  either  party  desires  to  obtain  business
interruption insurance for its respective facility, each agrees, upon reasonable
written notice, to permit inspection of its facilities by representatives of the
insurance company during reasonable working hours.

-8-

SECTION 9: OBLIGATION FOR PERFORMANCE UNDER THIS AGREEMENT

Multitrade  shall remain  responsible to the Purchaser for the
performance of its obligations  under this Agreement even though  Multitrade may
have  contracted  with a  third  party  for  performance  of all or  part of its
obligations.

SECTION 10: COMPLIANCE WITH LAWS, ORDINANCES OR REGULATIONS

Compliance with all present and future local, state or Federal
laws, ordinances or regulations related to air quality, odor, noise, waste water
disposal, solid waste disposal,  boiler inspection,  or other conditions for the
protection of the  environment,  or otherwise,  which may apply to  Multitrade's
boiler plant operations remain the sole responsibility of Multitrade.

Multitrade will indemnify and save Tultex harmless against any
loss or liability it may incur by reason of the failure or refusal of Multitrade
to comply with all such laws, ordinances or regulations.

SECTION 11: AMENDMENT OF AGREEMENT

This  Agreement  contains  the  entire  understanding  of  the
Parties and supersedes all prior negotiations and oral  understandings,  if any,
and may not be amended,  supplemented or modified  except by written  instrument
signed by both parties hereto.

SECTION 12: RENEWAL

12.1 Either party  wishing to negotiate  for a renewal of this
Agreement  must notify the other in writing of its desire to so  negotiate on or
before the completion of the eighth (8th) operating year.

12.2 Upon  receipt of notice as set forth in  paragraph  12.1,
Multitrade and Purchaser  mutually agree to negotiate in good faith with respect
to contract renewal.  Multitrade agrees to give fair and equitable consideration
to any  operating and  maintenance,  input fuel or other direct or indirect cost
items  which  result  in  decreasing  the  cost to it of  producing  Steam.  The
Purchaser and Multitrade agree to give fair and equitable  consideration to cost
increases and decreases resulting from changes in government regulations, rules,
tax laws,  equipment  replacement  or  specifications  and other items which may
result in direct or indirect increased Steam cost for Multitrade.

12.3 Neither  party will be obligated to renew this  Agreement
beyond the initial ten (10) year period,  except upon mutually agreed upon terms
and conditions in writing with respect to any such additional  period.  Provided
neither party is in default,  and both parties  indicate in writing their desire
to continue,  this Agreement  shall remain in effect beyond the initial ten (10)
year period with either party having the right to terminate the  Agreement  upon
two years' written notice.

12.4 Should  Multitrade  desire to terminate this Agreement at
any time after the initial ten year period,  then Multitrade grants to Purchaser
an option to purchase the original

-9-

Steam  producing  facility  and Steam  distribution  system  and any  applicable
operating permits and similar documents pertaining to the operation of the Steam
production and distribution  facility. The sale price for this purchase shall be
mutually agreed upon between Tultex Corporation and Multitrade.

12.5 If the  parties  are unable to agree upon the sale price,
both parties shall at their own cost secure the services of an  independent  and
qualified  appraiser.  If,  within  thirty (30) days,  subsequent  to receipt of
appraisal,  the  parties  are unable to reach  agreement,  differences  shall be
submitted to binding arbitration per Section 13.

SECTION 13: ARBITRATION

Any  controversy  or claim  arising out of or relating to this
Agreement or the breach  thereof shall be settled by  arbitration  in accordance
with the Rules of American  Arbitration  Association and judgment upon the award
rendered by the  arbitration  may be entered in any court  having  jurisdiction.
Such arbitration shall be held in Martinsville,  Virginia,  or other city in the
Commonwealth of Virginia.

SECTION 14: ASSIGNMENT

This  Agreement  will be binding upon and inure to the benefit
of the parties hereto and their respective  successors and assigns to which this
Agreement relates.

SECTION 15: NOTICE

Wherever in this  Agreement  it shall be required or permitted
that notice be given in writing,  such notice shall be served by mail  addressed
as follows:

To Multitrade:          B. Edward Brammer, President
Multitrade Group, Inc.
P.O. Box 717
Ridgeway, VA 24148

To Tultex Corporation:  Alvin Ratliff
Vice President
Tultex Corporation
P.O. Box 5191
Martinsville, VA 24115

Such addresses and personnel  designations may be changed from
time to time by either party by serving written notice as provided above.

-10-

IN WITNESS  WHEREOF,  the  parties  hereto  have  caused  this
Agreement to be duly executed as of the 11th day of August 1987.

MULTITRADE GROUP, INC.
ATTEST:
By: /s/ B. E. Brammer
/s/                                        ---------------------------
-----------------------------------        Its President
Secretary

MULTITRADE GROUP, INC.
ATTEST:

By: /s/ B.A. Ratliff
/s/                                        ----------------------------
------------------------------------       Its Vice President
Secretary

-11-

EXHIBIT A

Facility Description

The facility  will consist of one 250,000 pound per hour Riley
boiler with a traveling grate stoker.  Power will be generated by a steam driven
turbine generator set capable of producing a minimum of 15 megawatts per hour.

Necessary electrical  switchgear,  wiring, and piping shall be
provided to interconnect equipment as required to make the equipment function.

The Facility shall include air  compressors,  water  treatment
equipment,   pollution   control   equipment   in  the  form  of   electrostatic
precipitators and SO2 scrubber,  pumps, and ash removal equipment as required to
operate in accordance with applicable regulations now in force.

The Facility  shall have a wood fuel storage and handling area
consisting of truck scales, trailer dump, live bottom wood bin, wood day bin and
necessary wood conveyors and screws to inject the wood fuel into the boiler.

A coal fuel  handling  system  shall be  provided  including a
700-ton storage silo, coal belt and bucket elevator and coal day bunker.

The  boiler  and  turbine  generator  shall  be  housed  in  a
metal-sided steel structure set on concrete  foundation  designed to support the
weight of the equipment and structure.

Necessary steam and condensate piping shall be maintained with
energy  efficient  insulation  to  deliver  steam to the Point of  Delivery  and
receive  condensate  and transport  condensate  from  Purchaser to the Facility.
Necessary  equipment  such as switchgear and  transformers  shall be provided to
deliver  power  produced at the  Facility  to the  electric  customer's  service
connection.

Necessary  pumps,  piping and  vessels  shall be  provided  to
deliver  2,000,000  gallons  of hot  process  water per day  extracted  from the
cooling cycle of the turbine generator condenser.

EXHIBIT B

Method of Adjusting Steam Invoice
To Compensate for Malfunctioning Steam Meter

(No Adjustment for one percent plus or minus of correct reading.)

STEP 1.           Determine  percentage meter error,  either plus or minus, from
calibration by independent technician.

STEP 2.           Total the volume of steam  purchased by the Purchaser from the
time  of  previous  calibration  to the  time  the  meter  was
determined   to  be   inaccurate.   Example:   If  an  October
calibration  indicated meter was 2% in error-total steam usage
from previous calibration through the month of October.

STEP 3.           Multiply the total steam consumed by the Purchaser (the sum of
STEP 2) by the percentage of meter error, less the one percent
plus or minus dead band.

STEP 4.           Determine the average sale price of steam to Purchaser  during
the period in question.

STEP 5.           Multiply the product of STEP 3 by the average price determined
in STEP 4.

STEP 6.           Multiply  the  product of STEP 5 by 50% and the result  equals
the total credit or debit.

EXAMPLE:

September,  1985,  calibration  indicated  three percent  "plus" steam  reading.
Previous calibration accomplished March, 1985.

STEP 1.           Plus three percent (3%) meter reading

STEP 2.           34,495,000        Sept. 1985
36,257,200        Aug. 1985
27,172,400        July, 1985
35,243,659        June, 1985
39,148,699        May, 1985
35,248,489        April, 1985
-----------
207,665,647        Total Lbs.

STEP 3.           Sum of STEP 2:      207,665,647
Total from STEP 1
Less 1% Dead Band:     x      2% (3% error - 1% Dead)
-----------
4,153,313 Lbs.

STEP 4.           Average Price for Steam:

$ 5.40      Sept. 1985
5.49      Aug. 1985
5.55      July 1985
5.47      June 1985
5.37      May 1985
5.43      April 1985
------
$32.71      divided by 6 = $5.45 avg. price per 1000 lbs.

STEP 5.           Product of STEP 3:           4,153,313 Lbs.
Total from STEP 4:            x  $5.45 per MLbs.
----------
$22,635.56

STEP 6.           Product of STEP 5:          $22,635.56
x     50%
-----------
($11,317.78) Net (credit) or debit

EXHIBIT C

TULTEX MONTHLY STEAM VOLUME DISCOUNT RATES

Gross Pounds             20,000,001  25,000,001   30,000,001   35,000,001     
Monthly Steam    0-20        to          to           to           to         
Delivered       Mil Lbs  25,000,000  30,000,000   35,000,000   40,000,000     
---------       -------  ----------  ----------   ----------   ----------     

Fuel              $2.32     $2.32        $2.32        $2.32        $2.32      

O&M                4.13      1.84         1.50         1.27         1.10      

Capacity           2.20      2.20         2.20         2.20         2.20      
-----     -----        -----        -----        -----      

Total Steam
Billing Rate      $5.65     $6.36        $6.02        $5.79        $5.62      

Gross Pounds    40,000,001   45,000,001   50,000,001   55,000,001   60,000,001
Monthly Steam       to           to           to           to          and    
Delivered       45,000,000   50,000,000   55,000,000   60,000,000     Above   
---------       ----------   ----------   ----------   ----------     -----   

Fuel               $2.32         $2.32        $2.32       $2.32       $2.32  

O&M                  .97           .87          .79         .72         .59  

Capacity            2.20          2.20         2.20        2.20        2.20* 
-----         -----        -----       -----       ------ 

Total Steam
Billing Rate       $5.49         $5.39        $5.31       $5.31       $5.11  

*Capacity charge on the portion of steam used in excess of 60,000,000  pounds in
a single month will be $1.10.

ESCALATION OF STEAM RATE

1.  Capacity Cost:                   Fixed  10  operating  years  at  $2.20  per
thousand  pounds  for  steam  delivered  in
excess of 60,000,000 pounds.

2.  Operating and Maintenance Cost:  Fixed  one  year  re-negotiable   based  on
reality cost  changes.  Negotiations  to be
held in the anniversary  month of the first
steam  delivery to Tultex.  If no agreement
is  reached  within 30 days,  submitted  to
binding arbitration.

3.  Fuel  Cost:                      Fixed  one  year.  Re-negotiable  based  on
relative cost changes.  Negotiations  to be
held in the anniversary  month of the first
steam  delivery to Tultex.  If no agreement
is  reached  within 30 days,  submitted  to
binding arbitration.

EXHIBIT D

Multitrade Group, Inc.

Tultex Corporation
P.O. Box 5191
Martinsville, VA 24115

Invoice No.:      001 - Sample

Billing Period:  December, 1986 - Sample

Steam Delivered less than 60,000,000 lbs.    =  59,999,999 x 5.11 = $306,599.99

Steam Delivered in excess of 60,000,000 lbs. =  10,000,000 x 4.11 =   41,100.00

Gross Steam Delivered                        =  69,999,999        = $347,699.99

Condensate Returned Credits:
4,000,000 gal liquid @ .75/MGal                              =  ($3,000.00)

33,320,000 lbs @ 200 F = 3,998,400,000 BTU @ 2.20/MBTU       =  ($8,795.60)

NET DUE                                                           = $335,904.39

Terms:  Net Due 25th

EXHIBIT E

Sample Annual Invoice

Tultex Corporation
P.O. Box 5191
Martinsville, VA 24115

Invoice No.:  _____

From                      to

Minimum Gross Lbs. Steam Contract:                                  510,000,000

Gross Steam Delivered:                                              500,000,000

Sub-Total:                                                           10,000,000

Credit 3
down days (if any) @ 1,397,200/ day:                               (4,191,780)

Sub-Total:                                                            5,808,220

Fixed Capacity Charge Rate:                                            x   2.20

Net Due                                                              $12,778.08

Terms:  Net Due Upon Receipt

EXHIBIT F

The following are mutually  accepted  additives to be injected in Steam
or Condensate produced in Multitrade's energy conversion facility:

Cooling Tower:      Nalco #8367       Scale Control
Nalco #7343       Bacteria Control
Nalco #7348       Dispersant

To Boiler:          Nalco Sungard     1700 Oxygen Control Feedwater
Nalco #7209       Scale Control
Nalco #7200       Dispersant

Steam Main:         Nalco #1810       to Condensate for pH control

Components  listed  may  be  changed,  added,  or  deleted  as
desirable  by  mutually  accepted  written  agreement  signed by an  officer  of
Multitrade and Tultex Corporation's Division Engineer.

AMENDMENT TO AGREEMENT

AMENDMENT  TO  AGREEMENT  made  and  executed  as of the 17th day of
August, 1987, by and between MULTITRADE GROUP, INC., a corporation organized and
existing under the laws of the Commonwealth of Virginia (hereinafter referred to
as "Multitrade"),  and TULTEX CORPORATION,  a corporation organized and existing
under the laws of the Commonwealth of Virginia,  having a manufacturing facility
located  on  Commonwealth  Boulevard  in  Martinsville,   Virginia  (hereinafter
referred to as "Purchaser"), and MULTITRADE OF MARTINSVILLE, INC., a corporation
organized  and  existing  under  the  laws  of  the   Commonwealth  of  Virginia
(hereinafter referred to as "Assignee").

WHEREAS,   Multitrade  and  Purchaser   entered  into  an  Agreement
pertaining  to the  construction  and operation by Multitrade of a topping cycle
cogeneration  facility (the "Project") producing certain quantities of steam and
electrical  power,  and the distribution and sale of certain steam and hot water
to the Purchaser; and

WHEREAS, Multitrade anticipates the receipt of a permit to construct
and  operate  that  portion of the  Project  comprised  of the steam  generating
facility  and  distribution  system by August 1, 1987,  but it appears  that the
regulatory  agency's  approval  process and the subsequent  construction  of the
electrical  generation facility may be delayed or even prevented in its entirety
thus also delaying or preventing  the production of hot water as a by-product of
the electrical generation process; and

WHEREAS,  the parties hereto desire to amend the original  Agreement
in anticipation  of the probable delay and possible  abandonment of that portion
of the Project resulting in the production of process hot water; and

WHEREAS, Multitrade wishes to assign its rights and responsibilities
to Assignee,  and Assignee  wishes to accept and assume the same,  and Purchaser
has no objection thereto;

NOW,  THEREFORE,  WITNESSETH:  That for and in  consideration of the
foregoing  premises and mutual  agreements  hereinafter set forth to be kept and
performed,  the parties  hereto do agree that the aforesaid  Agreement  shall be
amended as follows:

1. That it is  understood  and agreed that the sale to the Purchaser
of Process Hot Water and the energy contained therein produced by the Multitrade
turbine  generator  will be  delayed  until such time as  Multitrade  is able to
obtain the necessary permits and thereafter construct the electrical  generating
portion of the Project,  and in the event that  Multitrade,  in its  discretion,
deems it  economically  or otherwise  infeasible to complete that portion of the
Project, then it shall so notify the Purchaser.

Multitrade,  until such time as the electrical generation portion of
the Facility is placed in service,  or during the full term of this Agreement in
the event Multitrade is unable to place the turbine generator in service,  shall
supply the  Purchaser  the volume of  process  hot water and at the  temperature
spelled out in Paragraphs 1.3 and 6.1. Multitrade will use Steam discharged from
turbine  driven  fans and pumps used in the  facility  operation  as the primary

source of energy to increase the  temperature of the water.  In the event energy
in the  Steam  discharged  from the fan and pump  turbines  is not  adequate  to
increase the water  temperature to 117 degrees  Fahrenheit,  Multitrade will use
Steam from the boiler steam header to bring the water temperature to 117 degrees
Fahrenheit.

Multitrade  also agrees,  at its  expense,  to install and operate a
heat  exchanger  that is  capable of  providing  water to the  Purchaser  at the
Delivery Point at 180 degrees Fahrenheit.

The Purchaser  agrees to pay Multitrade  monthly for all Process Hot
Water  delivered  and metered  through  the Point of  Delivery by the  following
schedule:

A. Liquid Value:  equal to the rate in effect charged  Multitrade by
the City of  Martinsville,  Virginia.  The rate  may be  changed  any time
during the term of this Agreement to remain  commensurate with the City of
Martinsville's water and sewer rate.

B. Thermal Value of first 117 degrees Fahrenheit at 3.20 per million
BTU delivered and metered through the Point of Delivery. The thermal value
will be subject to annual adjustment and will remain $1.00 per million BTU
higher than the Energy Rate in effect for Steam.  In the event the turbine
generator  is placed in service,  the  thermal  value will be equal to the
Energy Rate in effect for Steam.

C. Thermal Value for  temperature in process hot water which exceeds
117 degrees  Fahrenheit:  will be invoiced by determining Steam equivalent
and adding the Steam  equivalent to the total Steam  purchased  during the
Month,  measured  through  the  Point  of  Delivery,  as in the  following
example:

EXAMPLE - ESTIMATED MONTHLY BILL
--------------------------------

Steam:       50,000,000 Lbs/Month
Water:       30,000,000  Gal.  x 8.33  Gal.  per Lb =  249,900,000 Lb/Mo
Water Temp:  180(0) F

LIQUID VALUE OF WATER:

30,000,000 Gal. x $1.50/1000 Gal. water sewer = $45,000.00

THERMAL VALUE OF WATER TO 117 DEGREES FAHRENHEIT:

249,900,000 Lb/Mo x 37 BTU/Lb = 9,246,300,000 BTU/Mo
9,246,300,000 ($3.20/10 BTU/Lb) = $29,588.16

STEAM EQUIVALENT OF HOT WATER ABOVE 117 DEGREES FAHRENHEIT:

249,900,000 Lb/Mo x 63 BTU/Lb = 15,743,700,000 BTUs
15,743,700,000 + 1200 BTU/Lb Steam = 13,119,750 Lb Steam

50,000,000 + 13,119,750 = 63,119,750 Lb Steam/Mo times

2

63,119,750 x $5.11/1000 Lb Steam =                  $322,541.92
+ 29,588.16
-----------
$352,130.08
less $1.00 per thousand lbs capacity credit                 
for                                                         
Steam purchases over 60 Million Lb/Mo            -  3,119.75
-----------
$349,010.33
less credit for Thermal and Liquid Value                    
of Condensate                                    -(         )
-----------

2.  Multitrade  hereby  assigns and  transfers  and Assignee  hereby
accepts and assumes all rights and  responsibilities of Multitrade in connection
with or related to the Agreement with Purchaser,  and Purchaser hereby indicates
its  approval  of such  assignment  and  releases  Multitrade  from  any and all
responsibilities or liabilities which have now or might in the future arise as a
direct or indirect result of said Agreement.

3.  Except to the extent  set forth  hereinabove,  all other  terms,
conditions and provisions of the aforesaid  Agreement shall remain in full force
and effect.

3

IN WITNESS  WHEREOF,  the parties hereto have hereunto  caused these
presents to be duly executed as of the day and year first above written.

ATTEST:                                  MULTITRADE GROUP, INC.

/s/                                     By:  /s/ B.E. Brammer
------------------------------------        ----------------------------------
Secretary                                President

ATTEST:                                  TULTEX CORPORATION

/s/                                     By:  /s/ Benton A. Ratliff
------------------------------------        ----------------------------------
Secretary                       Vice President- Operations

ATTEST:                                  MULTITRADE OF MARTINSVILLE, INC.

/s/                                     By:  /s/ B.E. Brammer
------------------------------------        ----------------------------------
Secretary                                President

4

SECOND  AMENDMENT  TO  AGREEMENT,  made  and  executed  in  multiple
counterparts  as of the 28th day of February,  1989,  by and between  MULTITRADE
GROUP,  INC.,  a  corporation  organized  and  existing  under  the  laws of the
Commonwealth  of  Virginia  (hereinafter  referred to as  "Multitrade"),  TULTEX
CORPORATION,  a  corporation  organized  and  existing  under  the  laws  of the
Commonwealth   of  Virginia,   having  a  manufacturing   facility   located  on
Commonwealth  Boulevard in Martinsville,  Virginia  (hereinafter  referred to as
"Purchaser") and MULTITRADE OF MARTINSVILLE,  INC., a corporation  organized and
existing under the laws of the Commonwealth of Virginia (hereinafter referred to
as "Assignee").

WHEREAS,   Multitrade  and  Purchaser   entered  into  an  Agreement
pertaining  to the  construction  and operation by Multitrade of a topping cycle
cogeneration  facility  producing  certain  quantities  of steam and  electrical
power,  and the  distribution  and sale of  certain  steam  and hot water to the
Purchaser; and

WHEREAS,  on  August  17,  1987,  the  parties  hereto  executed  an
Amendment to Agreement and by this Second  Supplement wish to amend the original
Agreement again;

NOW,  THEREFORE,   WITNESSETH:  For  and  in  consideration  of  the
foregoing  premises and mutual  agreements  hereinafter  set forth,  the parties
hereto do agree that the aforesaid Agreement shall be amended as follows:

1. That Exhibit C to the original  Agreement between  Multitrade and
Purchaser be amended in accordance with "Exhibit C, Rev. #3,  Effective March 1,
1989," a copy of which is attached  hereto as Exhibit C. This amended  Exhibit C
shall have become  effective  March 1, 1989, and remain in full force and effect
for a period of one year, or until February 28, 1990.

2.  Except to the extent  set forth  hereinabove,  all other  terms,
conditions and provisions of the aforesaid  Agreement and Amendment to Agreement
shall remain in full force and effect.

2

IN WITNESS  WHEREOF,  the parties hereto have hereunto  caused these
presents to be duly executed as of the day and year first above written.

ATTEST:                                  MULTITRADE GROUP, INC.

/s/                                     By:  /s/ B.E. Brammer
------------------------------------        ----------------------------------
Secretary                                President

ATTEST:                                  TULTEX CORPORATION

/s/                                     By:  /s/ 
------------------------------------        ----------------------------------
Secretary                                President

ATTEST:                                  MULTITRADE OF MARTINSVILLE, INC.

/s/                                     By:  /s/ B.E. Brammer
------------------------------------        ----------------------------------
Secretary                                President

3

THIRD  AMENDMENT  TO  AGREEMENT,   made  and  executed  in  multiple
counterparts as of the 15th day of May, 1990, by and between  MULTITRADE  GROUP,
INC., a corporation organized and existing under the laws of the Commonwealth of
Virginia  (hereinafter  referred  to as  "Multitrade"),  TULTEX  CORPORATION,  a
corporation  organized  and  existing  under  the  laws of the  Commonwealth  of
Virginia,  having a manufacturing  facility located on Commonwealth Boulevard in
Martinsville,  Virginia  (hereinafter referred to as "Purchaser") and MULTITRADE
OF  MARTINSVILLE,  INC., a corporation  organized and existing under the laws of
the Commonwealth of Virginia (hereinafter referred to as "Assignee").

WHEREAS,   Multitrade  and  Purchaser   entered  into  an  Agreement
pertaining  to the  construction  and operation by Multitrade of a topping cycle
cogeneration  facility  producing  certain  quantities  of steam and  electrical
power,  and the  distribution  and sale of  certain  steam  and hot water to the
Purchaser; and

WHEREAS,  on August 17, 1987,  and  February  28, 1989,  the parties
hereto  executed an Amendment to Agreement and by this Third  Supplement wish to
amend the original Agreement again;

NOW,  THEREFORE,   WITNESSETH:  For  and  in  consideration  of  the
foregoing  premises and mutual  agreements  hereinafter  set forth,  the parties
hereto do agree that the aforesaid Agreement shall be amended as follows:

1. That Exhibit C to the original  Agreement between  Multitrade and
Purchaser be amended in accordance with "Exhibit C, Rev. #4,  Effective March 1,
1990," a copy of which

is  attached  hereto as Exhibit  C. This  amended  Exhibit C shall  have  become
effective March 1, 1990, and remain in full force and effect for a period of one
year, or until February 28, 1991.

2.  Except to the extent  set forth  hereinabove,  all other  terms,
conditions and provisions of the aforesaid  Agreement and Amendment to Agreement
shall remain in full force and effect.

2

IN WITNESS  WHEREOF,  the parties hereto have hereunto  caused these
presents to be duly executed as of the day and year first above written.

ATTEST:                                  MULTITRADE GROUP, INC.

/s/                                     By:  /s/ B.E. Brammer
------------------------------------        ----------------------------------
Secretary                                President

ATTEST:                                  TULTEX CORPORATION

/s/                                     By:  /s/ 
------------------------------------        ----------------------------------
Secretary                                President

ATTEST:                                  MULTITRADE OF MARTINSVILLE, INC.

/s/                                     By:  /s/ B.E. Brammer
------------------------------------        ----------------------------------
Secretary                                President

3

THIS FOURTH  AMENDMENT TO  AGREEMENT,  made and executed in multiple
counterparts as of the 8th day of June,  1993, by  and between MULTITRADE GROUP,
INC., a corporation organized and existing under the laws of the Commonwealth of
Virginia  (hereinafter  referred  to as  "Multitrade"),  TULTEX  CORPORATION,  a
corporation  organized  and  existing  under  the  laws of the  Commonwealth  of
Virginia,  having a manufacturing  facility located on Commonwealth Boulevard in
Martinsville,  Virginia (hereinafter referred to as "Purchaser"), and MULTITRADE
OF  MARTINSVILLE,  INC., a corporation  organized and existing under the laws of
the Commonwealth of Virginia (hereinafter referred to as "Assignee").

WHEREAS,   Multitrade  and  Purchaser   entered  into  an  agreement
pertaining  to the  construction  and operation by Multitrade of a topping cycle
cogeneration facility producing certain quantities of steam and electrical power
and the  distribution  and sale of certain  steam and hot water to the Purchaser
(hereinafter referred to as the "Agreement"); and

WHEREAS,  on August 17, 1987,  February 28, 1989,  and May 15, 1990,
the parties hereto  executed  Amendments to the aforesaid  Agreement and by this
Fourth Amendment to Agreement wish to amend the original Agreement again;

NOW,  THEREFORE,  WITNESSETH:  That for and in  consideration of the
foregoing  premises and the mutual  covenants,  promises and  agreements  herein
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby  acknowledged,  the  parties  hereto  hereby  agree that the
aforesaid Agreement shall be amended again as follows:

1. That the original term of the existing  steam  Agreement  between
the parties  shall be extended for an additional  two years,  until May 1, 2000,
with the following additional changes:

(1) The capacity  portion of the steam rate will be reduced to $1.10
per thousand  pounds for the additional  two-year term,  with the capacity
rate  remaining  fixed  at  $2.20  for the  initial  term of the  existing
Agreement;

(2) The minimum steam purchase  requirement  will be deleted for the
additional  two-year term,  although the Purchaser  agrees to purchase one
hundred  percent (100%) of its entire steam  requirement  from  Multitrade
during such additional two-year term.

2.  Except to the  extent set forth  hereinabove,  all of the terms,
conditions and  provisions of the aforesaid  Agreement,  as previously  amended,
shall remain in full force and effect.

2

IN WITNESS WHEREOF, the parties hereto have caused these presents to
be duly executed as of the day and year first above written.

MULTITRADE GROUP, INC.

By: /s/ B.E. Brammer
---------------------------------

TULTEX CORPORATION

By: /s/ C.W. Davies
---------------------------------

MULTITRADE OF MARTINSVILLE, INC.

By:  /s/ B.E. Brammer
---------------------------------

COMMONWEALTH OF VIRGINIA,
CITY OF MARTINSVILLE, TO-WIT:

The foregoing was acknowledged  before  me   this  5th  day  of May,
1993,  by  B. E. Brammer, the President of Multitrade Group, Inc.

My Commission expires: March 31, 1994

/s/
----------------------------------
NOTARY PUBLIC

3

COMMONWEALTH OF VIRGINIA,
CITY OF MARTINSVILLE, TO-WIT:

The foregoing was acknowledged  before me this 5th day of May, 1993,
by _______________________, the _________________ of Tultex Corporation.

My Commission expires: _________________

__________________________________
NOTARY PUBLIC

COMMONWEALTH OF VIRGINIA,
CITY OF MARTINSVILLE, TO-WIT:

The foregoing was acknowledged  before  me   this  5th  day  of May,
1993,  by  B. E. Brammer, the President of Multitrade of Martinsville, Inc.

My Commission expires: March 31, 1994

/s/
----------------------------------
NOTARY PUBLIC

4

THIS FIFTH  AMENDMENT  TO  AGREEMENT,  made and executed in multiple
counterparts as of the 1st day of June, 1997, by and between  MULTITRADE  GROUP,
INC., a corporation organized and existing under the laws of the Commonwealth of
Virginia  (hereinafter  referred  to as  "Multitrade"),  TULTEX  CORPORATION,  a
corporation  organized  and  existing  under  the  laws of the  Commonwealth  of
Virginia,  having a manufacturing  facility located on Commonwealth Boulevard in
Martinsville,  Virginia (hereinafter referred to as "Purchaser"), and MULTITRADE
OF  MARTINSVILLE,  INC., a corporation  organized and existing under the laws of
the Commonwealth of Virginia (hereinafter referred to as "Assignee").

WHEREAS,   Multitrade  and  Purchaser   entered  into  an  agreement
pertaining  to the  construction  and operation by Multitrade of a topping cycle
cogeneration facility producing certain quantities of steam and electrical power
and the  distribution  and sale of certain  steam and hot water to the Purchaser
(hereinafter referred to as the "Agreement"); and

WHEREAS,  on August 17, 1987,  February 28, 1989,  May 15, 1990, and
June 8, 1993, the parties hereto executed  Amendments to the aforesaid Agreement
and by this Fifth  Amendment to Agreement  wish to amend the original  Agreement
again;

NOW,  THEREFORE,  WITNESSETH:  That for and in  consideration of the
foregoing  premises and the mutual  covenants,  promises and  agreements  herein
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby  acknowledged,  the  parties  hereto  hereby  agree that the
aforesaid Agreement shall be amended again as follows:

1. That the term of the existing steam Agreement between the parties
as amended shall be extended for an additional  three (3) years,  until midnight
on April 30, 2003, with the following additional changes:

(1) The following  rates shall apply for steam purchased in the time
period indicated:

TIME PERIOD                                      RATE SCHEDULE
-----------                                      -------------

June 1, 1997 - April 30, 1998      See "Exhibit 1 - Tultex Rate Schedule" attached hereto

May 1, 1998 - April 30, 1999       See "Exhibit 2 - Tultex Rate Schedule" attached hereto

May 1, 1999 - April 30, 2000       See "Exhibit 3 - Tultex Rate Schedule" attached hereto

May 1, 2000 - April 30, 2003       See "Exhibit 4 - Tultex Rate Schedule" attached hereto

(2) Adding a new subparagraph 4.10, to read as follows:

"Other   provisions   of  this   Agreement   to  the  contrary
notwithstanding,  either Multitrade, Assignee or Tultex may at
any time  after  August  1,  2000,  give  notice  to the other
parties  of its  desire  for a review of the  steam  rates set
forth herein to determine if a gross  inequity  exists therein
with respect to either party.  In  determining  whether such a
gross inequity exists,  consideration  shall be given, but not
limited,  to the cost  reasonably  incurred by  Multitrade  or
Assignee in producing steam hereunder,  the value thereof, and
the respective financial  obligations of Tultex and Multitrade
or Assignee incurred in connection with fuel and operation and
maintenance and delivery.  If such review  demonstrates that a
gross  inequity  exists  with  respect  to either  party,  the
increases and decreases in the steam rate shall be changed for
subsequent deliveries of steam to eliminate such inequity. The
price  adjustment  to be made  pursuant  to this  section  and
become  effective  immediately and will be intended to provide
Multitrade or Assignee and Tultex,  over the remaining term of
this  Agreement,  with  protection  against  changes  in price
levels of cost and expense items which are reasonably required
for the  performance of this  Agreement  and, in addition,  to
preserve the  financial  positions of Tultex,  Multitrade  and
Assignee against  substantial  changes in the purchasing power
of the dollar or in the cost of producing and delivering steam
to Tultex."

2

2.  Except to the  extent set forth  hereinabove,  all of the terms,
conditions  and  provisions  of the aforesaid  Agreement as previously  amended,
shall remain in full force and effect.

3

IN WITNESS WHEREOF, the parties hereto have caused these presents to
be duly executed as of the day and year first above written.

MULTITRADE GROUP, INC.

By: /s/ B.E. Brammer
--------------------------------------

TULTEX CORPORATION

By: /s/ Charles W. Davies
--------------------------------------

MULTITRADE OF MARTINSVILLE, INC.

By: /s/ B.E. Brammer
--------------------------------------

4

COMMONWEALTH OF VIRGINIA,
CITY OF MARTINSVILLE, TO-WIT:

The foregoing was  acknowledged  before me this  22nd  day  of July,
1997,  by B. E. Brammer, the CEO of Multitrade Group, Inc.

My Commission expires: 3/31/98

/s/
----------------------------------
NOTARY PUBLIC

COMMONWEALTH OF VIRGINIA,
CITY OF MARTINSVILLE, TO-WIT:

The  foregoing  was  acknowledged   before  me  this 4th  day  of
August,  1997, by Charles W. Davies,  the CEO of Tultex Corporation.

My Commission expires: 07/31/98

/s/
----------------------------------
NOTARY PUBLIC

COMMONWEALTH OF VIRGINIA,
CITY OF MARTINSVILLE, TO-WIT:

The foregoing was  acknowledged  before me this  22nd  day  of July,
1997,  by B. E. Brammer, the CEO of Multitrade of Martinsville, Inc.

My Commission expires: 3/31/98

/s/
----------------------------------
NOTARY PUBLIC

5

EXHIBIT 1
TULTEX RATE SCHEDULE
MONTHLY DISCOUNT SCHEDULE

Effective Period: June 1, 1997 thru April 30, 1998

ANNUAL STEAM  12,000,000  36,000,000  60,000,000  84,000,000 108,000,000 132,000,000 156,000,000 180,000,000 204,000,000 228,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

MONTHLY STEAM     0        2,000,001   4,000,001   6,000,001   8,000,001  10,000,001  12,000,001  14,000,001  16,000,001  18,000,001
to          to          to          to          to          to          to          to          to          to
2,000,000   4,000,000   6,000,000   8,000,000  10,000,000  12,000,000  14,000,000  16,000,000  18,000,000  20,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

Fuel              $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20
O&M              $98.33      $32.78      $19.67      $14.05      $10.93       $8.94       $7.56       $6.56       $5.78       $5.18
Capacity          $1.65       $1.65       $1.65       $1.65       $1.65       $1.65       $1.65       $1.65       $1.65       $1.65
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total       $102.18      $36.63      $23.52      $17.90      $14.78      $12.79      $11.41      $10.41       $9.63       $9.03

====================================================================================================================================

ANNUAL STEAM 252,000,000 276,000,000 300,000,000 324,000,000 348,000,000 372,000,000 396,000,000 420,000,000 444,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

MONTHLY STEAM 20,000,001  22,000,001  24,000,001  26,000,001  28,000,001  30,000,001  32,000,001  34,000,001  36,000,001
to          to          to          to          to          to          to          to          to
22,000,000  24,000,000  26,000,000  28,000,000  30,000,000  32,000,000  34,000,000  36,000,000  38,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

Fuel              $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20
O&M               $4.68       $4.28       $3.93       $3.64       $3.39       $3.17       $2.98       $2.81       $2.66
Capacity          $1.65       $1.65       $1.65       $1.65       $1.65       $1.65       $1.65       $1.65       $1.65
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total         $8.53       $8.13       $7.78       $7.49       $7.24       $7.02       $6.83       $6.66       $6.51

====================================================================================================================================

ANNUAL STEAM 468,000,000 492,000,000 516,000,000 540,000,000 564,000,000 588,000,000 612,000,000 636,000,000 660,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

MONTHLY STEAM 38,000,001  40,000,001  42,000,001  44,000,001  46,000,001  48,000,001  50,000,001  52,000,001  54,000,001
to          to          to          to          to          to          to          to          to
40,000,000  42,000,000  44,000,000  46,000,000  48,000,000  50,000,000  52,000,000  54,000,000  56,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

Fuel              $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20
O&M               $2.52       $2.40       $2.29       $2.19       $2.09       $2.01       $1.93       $1.86       $2.79
Capacity          $1.65       $1.65       $1.65       $1.65       $1.65       $1.65       $1.65       $1.65       $1.65
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total         $6.37       $6.25       $6.14       $6.04       $5.94       $5.86       $5.78       $5.71       $5.64

====================================================================================================================================

Thermal Credit for Condensate:  $1.76 per Mil Btu's
Liquid Credit for Condensate:  $0.75 per thousand gallons

07/14/97

1

Effective Period: June 1, 1997 thru April 30, 1998

ANNUAL STEAM   684,000,000    708,000,000    732,000,000    756,000,000    780,000,000    804,000,000     828,000,000    852,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

MONTHLY STEAM   56,000,001     58,000,001     60,000,001     62,000,001     64,000,001     66,000,001      68,000,001    70,000,001
to             to             to             to             to             to              to            to
58,000,000     60,000,000     62,000,000     64,000,000     66,000,000     68,000,000      70,000,000    72,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

Fuel                $2.20          $2.20          $2.20          $2.20          $2.20          $2.20          $2.20          $2.20
O&M                 $1.73          $1.67          $1.61          $1.56          $1.51          $1.47          $1.43          $1.38
Capacity            $1.65          $1.65          $1.65          $1.65          $1.65          $1.65          $1.65          $1.65
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------
Total           $5.58          $5.52          $5.46          $5.41          $5.36          $5.32          $5.28          $5.23

====================================================================================================================================

ANNUAL STEAM   876,000,000    900,000,000    924,000,000    948,000,000    972,000,000    996,000,000   1,202,000,000  1,044,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

MONTHLY STEAM   72,000,001     74,000,001     76,000,001     78,000,001     80,000,001     82,000,001     84,000,001     86,000,001
to             to             to             to             to             to             to             to
74,000,000     76,000,000     78,000,000     80,000,000     82,000,000     84,000,000     86,000,000     88,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

Fuel                $2.20          $2.20          $2.20          $2.20          $2.29          $2.35          $2.40          $2.45
O&M                 $1.35          $1.31          $1.28          $1.24          $1.21          $1.18          $1.16          $1.13
Capacity            $1.65          $1.65          $1.65          $1.65          $1.65          $1.65          $1.65          $1.65
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------
Total           $5.20          $5.16          $5.13          $5.09          $5.15          $5.18          $5.21          $5.23

====================================================================================================================================

ANNUAL STEAM  1,068,000,000  1,092,000,000  1,116,000,000  1,140,000,000  1,168,000,000  1,188,000,000  1,212,000,000  1,236,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

MONTHLY STEAM   88,000,001     90,000,001     92,000,001     94,000,001     96,000,001     98,000,001     100,000,001    102,000,001
to             to             to             to             to             to              to         and above
90,000,000     92,000,000     94,000,000     96,000,000     98,000,000     100,000,000    102,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

Fuel                $2.50          $2.55          $2.60          $2.64          $2.68          $2.72          $2.76          $2.80
O&M                 $1.10          $1.08          $1.06          $1.04          $1.01          $0.99          $0.97          $0.95
Capacity            $1.65          $1.65          $1.65          $1.65          $1.65          $1.65          $1.65          $1.65
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------
Total           $5.25          $5.28          $5.31          $5.33          $5.34          $5.36          $5.38          $5.40

====================================================================================================================================

Thermal Credit for Condensate:  $1.76 per Mil Btu's
Liquid Credit for Condensate:  $0.75 per thousand gallons

07/14/97

2

EXHIBIT 2
TULTEX RATE SCHEDULE
MONTHLY DISCOUNT SCHEDULE

Effective Period: May 1, 1998 thru April 30, 1999

ANNUAL STEAM  12,000,000  36,000,000  60,000,000  84,000,000 108,000,000 132,000,000 156,000,000 180,000,000 204,000,000 228,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

MONTHLY STEAM     0        2,000,001   4,000,001   6,000,001   8,000,001  10,000,001  12,000,001  14,000,001  16,000,001  18,000,001
to          to          to          to          to          to          to          to          to          to
2,000,000   4,000,000   6,000,000   8,000,000  10,000,000  12,000,000  14,000,000  16,000,000  18,000,000  20,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

Fuel              $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20
O&M              $98.33      $32.78      $19.67      $14.05      $10.93       $8.94       $7.56       $6.56       $5.78       $5.18
Capacity          $1.40       $1.40       $1.40       $1.40       $1.40       $1.40       $1.40       $1.40       $1.40       $1.40
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total       $101.93      $36.38      $23.27      $17.65      $14.53      $12.54      $11.16      $10.16       $9.38       $8.78

====================================================================================================================================

ANNUAL STEAM 252,000,000 276,000,000 300,000,000 324,000,000 348,000,000 372,000,000 396,000,000 420,000,000 444,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

MONTHLY STEAM 20,000,001  22,000,001  24,000,001  26,000,001  28,000,001  30,000,001  32,000,001  34,000,001  36,000,001
to          to          to          to          to          to          to          to          to
22,000,000  24,000,000  26,000,000  28,000,000  30,000,000  32,000,000  34,000,000  36,000,000  38,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

Fuel              $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20
O&M               $4.68       $4.28       $3.93       $3.64       $3.39       $3.17       $2.98       $2.81       $2.66
Capacity          $1.40       $1.40       $1.40       $1.40       $1.40       $1.40       $1.40       $1.40       $1.40
Total         $8.28       $7.88       $7.53       $7.24       $6.99       $6.77       $6.58       $6.41       $6.26

====================================================================================================================================

ANNUAL STEAM 468,000,000 492,000,000 516,000,000 540,000,000 564,000,000 588,000,000 612,000,000 636,000,000 660,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

MONTHLY STEAM 38,000,001  40,000,001  42,000,001  44,000,001  46,000,001  48,000,001  50,000,001  52,000,001  54,000,001
to          to          to          to          to          to          to          to          to
40,000,000  42,000,000  44,000,000  46,000,000  48,000,000  50,000,000  52,000,000  54,000,000  56,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

Fuel              $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20
O&M               $2.52       $2.40       $2.29       $2.19       $2.09       $2.01       $1.93       $1.86       $2.79
Capacity          $1.40       $1.40       $1.40       $1.40       $1.40       $1.40       $1.40       $1.40       $1.40
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total         $6.12       $6.00       $5.89       $5.79       $5.69       $5.61       $5.53       $5.46       $5.39

====================================================================================================================================

Thermal Credit for Condensate:  $1.76 per Mil Btu's
Liquid Credit for Condensate:  $0.75 per thousand gallons

07/14/97

3

Effective Period: May 1, 1998 thru April 30, 1999

ANNUAL STEAM   684,000,000    708,000,000    732,000,000    756,000,000    780,000,000    804,000,000    828,000,000    852,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

MONTHLY STEAM   56,000,001     58,000,001     60,000,001     62,000,001     64,000,001     66,000,001     68,000,001     70,000,001
to             to             to             to             to             to             to             to
58,000,000     60,000,000     62,000,000     64,000,000     66,000,000     68,000,000     70,000,000     72,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

Fuel                $2.20          $2.20          $2.20          $2.20          $2.20          $2.20          $2.20          $2.20
O&M                 $1.73          $1.67          $1.61          $1.56          $1.51          $1.47          $1.43          $1.38
Capacity            $1.40          $1.40          $1.40          $1.40          $1.40          $1.40          $1.40          $1.40
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------
Total           $5.33          $5.27          $5.21          $5.16          $5.11          $5.07          $5.03          $4.98

====================================================================================================================================

ANNUAL STEAM   876,000,000    900,000,000    924,000,000    948,000,000    972,000,000    996,000,000   1,202,000,000  1,044,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

MONTHLY STEAM   72,000,001     74,000,001     76,000,001     78,000,001     80,000,001     82,000,001     84,000,001     86,000,001
to             to             to             to             to             to             to             to
74,000,000     76,000,000     78,000,000     80,000,000     82,000,000     84,000,000     86,000,000     88,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

Fuel                $2.20          $2.20          $2.20          $2.20          $2.29          $2.35          $2.40          $2.45
O&M                 $1.35          $1.31          $1.28          $1.24          $1.21          $1.18          $1.16          $1.13
Capacity            $1.40          $1.40          $1.40          $1.40          $1.40          $1.40          $1.40          $1.40
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------
Total           $4.95          $4.91          $4.88          $4.84          $4.90          $4.93          $4.96          $4.98

====================================================================================================================================

ANNUAL STEAM  1,068,000,000  1,092,000,000  1,116,000,000  1,140,000,000  1,168,000,000  1,188,000,000  1,212,000,000  1,236,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

MONTHLY STEAM   88,000,001     90,000,001     92,000,001     94,000,001     96,000,001     98,000,001    100,000,001    102,000,000
to             to             to             to             to             to             to         and above
90,000,000     92,000,000     94,000,000     96,000,000     98,000,000    100,000,000    102,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

Fuel                $2.50          $2.55          $2.60          $2.64          $2.68          $2.72          $2.76          $2.80
O&M                 $1.10          $1.08          $1.06          $1.04          $1.01          $0.99          $0.97          $0.95
Capacity            $1.40          $1.40          $1.40          $1.40          $1.40          $1.40          $1.40          $1.40
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------
Total           $5.00          $5.03          $5.06          $5.08          $5.09          $5.11          $5.13          $5.15

====================================================================================================================================

Thermal Credit for Condensate:  $1.76 per Mil Btu's
Liquid Credit for Condensate:  $0.75 per thousand gallons

07/14/97

4

EXHIBIT 3
TULTEX RATE SCHEDULE
MONTHLY DISCOUNT SCHEDULE

Effective Period: May 1, 1999 thru April 30, 2000

ANNUAL STEAM  12,000,000 36,000,000   60,000,000  84,000,000 108,000,000 132,000,000 156,000,000 180,000,000 204,000,000 228,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

MONTHLY STEAM     0       2,000,001    4,000,001   6,000,001   8,000,001  10,000,001  12,000,001  14,000,001  16,000,001  18,000,001
to          to          to          to          to         to          to          to          to          to
2,000,000   4,000,000    6,000,000   8,000,000  10,000,000  12,000,000  14,000,000  16,000,000  18,000,000  20,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

Fuel              $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20
O&M              $98.33      $32.78      $19.67      $14.05      $10.93       $8.94       $7.56       $6.56       $5.78       $5.18
Capacity          $1.20       $1.20       $1.20       $1.20       $1.20       $1.20       $1.20       $1.20       $1.20       $1.20
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total       $101.73      $36.18      $23.07      $17.45      $14.33      $12.34      $10.96       $9.96       $9.18       $8.58

====================================================================================================================================

ANNUAL STEAM 252,000,000 276,000,000 300,000,000 324,000,000 348,000,000 372,000,000 396,000,000  420,00,000 444,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

MONTHLY STEAM 20,000,001  22,000,001  24,000,001  26,000,001  28,000,001  30,000,001  32,000,001  34,000,001  36,000,001
to          to          to          to          to          to          to          to          to
22,000,000  24,000,000  26,000,000  28,000,000  30,000,000  32,000,000  34,000,000  36,000,000  38,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

Fuel              $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20
O&M               $4.68       $4.28       $3.93       $3.64       $3.39       $3.17       $2.98       $2.81       $2.66
Capacity          $1.20       $1.20       $1.20       $1.20       $1.20       $1.20       $1.20       $1.20       $1.20
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total         $8.08       $7.68       $7.33       $7.04       $6.79       $6.57       $6.38       $6.21       $6.06

====================================================================================================================================

ANNUAL STEAM 468,000,000 492,000,000 516,000,000 540,000,000 564,000,000 588,000,000 612,000,000 636,000,000 660,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

MONTHLY STEAM 38,000,001  40,000,001  42,000,001  44,000,001  46,000,001  48,000,001  50,000,001  52,000,001  54,000,001
to          to          to          to          to          to          to          to          to
40,000,000  42,000,000  44,000,000  46,000,000  48,000,000  50,000,000  52,000,000  54,000,000  56,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

Fuel              $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20
O&M               $2.52       $2.40       $2.29       $2.19       $2.09       $2.01       $1.93       $1.86       $2.79
Capacity          $1.20       $1.20       $1.20       $1.20       $1.20       $1.20       $1.20       $1.20       $1.20
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total         $6.92       $5.80       $5.69       $5.59       $5.49       $5.41       $5.33       $5.26       $5.19

====================================================================================================================================

Thermal Credit for Condensate:  $1.76 per Mil Btu's
Liquid Credit for Condensate:  $0.75 per thousand gallons

07/14/97

5

Effective Period:  May 1, 1999 thru April 30, 2000

ANNUAL STEAM  684,000,000    708,000,000    732,000,000    756,000,000    780,000,000    804,000,000    828,000,000    852,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

MONTHLY STEAM  56,000,001     58,000,001     60,000,001     62,000,001     64,000,001     66,000,001     68,000,001     70,000,001
to             to             to             to             to             to             to             to
58,000,000     60,000,000     62,000,000     64,000,000     66,000,000     68,000,000     70,000,000     72,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

Fuel               $2.20          $2.20          $2.20          $2.20          $2.20          $2.20          $2.20          $2.20
O&M                $1.73          $1.67          $1.61          $1.56          $1.51          $1.47          $1.43          $1.38
Capacity           $1.20          $1.20          $1.20          $1.20          $1.20          $1.20          $1.20          $1.20
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------
Total          $5.13          $5.07          $5.01          $4.96          $4.91          $4.87          $4.83          $4.78

===================================================================================================================================

ANNUAL STEAM  876,000,000    900,000,000    924,000,000    948,000,000    972,000,000    996,000,000   1,020,000,000  1,044,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

MONTHLY STEAM  72,000,001     74,000,001     76,000,001     78,000,001     80,000,001     82,000,001     84,000,001     86,000,001
to             to             to             to             to             to             to             to
74,000,000     76,000,000     78,000,000     80,000,000     82,000,000     84,000,000     86,000,000     88,000,000

Fuel               $2.20          $2.20          $2.20          $2.20          $2.20          $2.20          $2.20          $2.20
O&M                $1.35          $1.31          $1.28          $1.24          $1.21          $1.18          $1.16          $1.13
Capacity           $1.20          $1.20          $1.20          $1.20          $1.20          $1.20          $1.20          $1.20
Total          $4.75          $4.71          $4.68          $4.64          $4.70          $4.73          $4.76          $4.78

===================================================================================================================================

ANNUAL STEAM 1,068,000,000  1,092,000,000  1,116,000,000  1,140,000,000  1,168,000,000  1,188,000,000  1,212,000,000  1,236,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

MONTHLY STEAM  88,000,001     90,000,001     92,000,001     94,000,001     96,000,001     98,000,001    100,000,001    102,000,001
to             to             to             to             to             to             to         and above
90,000,000     92,000,000     94,000,000     96,000,000     98,000,000    100,000,000    102,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

Fuel               $2.50          $2.55          $2.60          $2.64          $2.68          $2.72          $2.76          $2.80
O&M                $1.10          $1.08          $1.06          $1.04          $1.01          $0.99          $0.97          $0.95
Capacity           $1.20          $1.20          $1.20          $1.20          $1.20          $1.20          $1.20          $1.20
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------
Total          $4.80          $4.83          $4.86          $4.88          $4.89          $4.91          $4.93          $4.95

===================================================================================================================================

Thermal Credit for Condensate:  $1.76 per Mil Btu's
Liquid Credit for Condensate:  $0.75 per thousand gallons

07/14/97

6

EXHIBIT 4
TULTEX RATE SCHEDULE
MONTHLY DISCOUNT SCHEDULE

Effective Period:  May 1, 2000 thru April 30, 2003

ANNUAL STEAM  12,000,000 36,000,000   60,000,000  84,000,000 108,000,000 132,000,000 156,000,000 180,000,000 204,000,000 228,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

MONTHLY STEAM     0       2,000,001    4,000,001   6,000,001   8,000,001  10,000,001  12,000,001  14,000,001  16,000,001  18,000,001
to          to          to          to          to          to          to          to          to          to
2,000,000   4,000,000    6,000,000   8,000,000  10,000,000  12,000,000  14,000,000  16,000,000  18,000,000  20,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

Fuel              $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20
O&M              $98.33      $32.78      $19.67      $14.05      $10.93       $8.94       $7.56       $6.56       $5.78       $5.18
Capacity          $1.10       $1.10       $1.10       $1.10       $1.10       $1.10       $1.10       $1.10       $1.10       $1.10
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total       $101.63      $36.08      $22.97      $17.35      $14.23      $12.24      $10.86       $9.86       $9.08       $8.48

====================================================================================================================================

ANNUAL STEAM 252,000,000 276,000,000 300,000,000 324,000,000 348,000,000 372,000,000 396,000,000  420,00,000 444,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

MONTHLY STEAM 20,000,001  22,000,001  24,000,001  26,000,001  28,000,001  30,000,001  32,000,001  34,000,001  36,000,001
to          to          to          to          to          to          to          to          to
22,000,000  24,000,000  26,000,000  28,000,000  30,000,000  32,000,000  34,000,000  36,000,000  38,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

Fuel              $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20
O&M               $4.68       $4.28       $3.93       $3.64       $3.39       $3.17       $2.98       $2.81       $2.66
Capacity          $1.10       $1.10       $1.10       $1.10       $1.10       $1.10       $1.10       $1.10       $1.10
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total         $7.98       $7.58       $7.23       $6.94       $6.69       $6.47       $6.28       $6.11       $5.96

====================================================================================================================================

ANNUAL STEAM 468,000,000 492,000,000 516,000,000 540,000,000 564,000,000 588,000,000 612,000,000 636,000,000 660,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

MONTHLY STEAM 38,000,001  40,000,001  42,000,001  44,000,001  46,000,001  48,000,001  50,000,001  52,000,001  54,000,001
to          to          to          to          to          to          to          to          to
40,000,000  42,000,000  44,000,000  46,000,000  48,000,000  50,000,000  52,000,000  54,000,000  56,000,000
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------

Fuel              $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20       $2.20
O&M               $2.52       $2.40       $2.29       $2.19       $2.09       $2.01       $1.93       $1.86       $2.79
Capacity          $1.10       $1.10       $1.10       $1.10       $1.10       $1.10       $1.10       $1.10       $1.10
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total         $5.82       $5.70       $5.59       $5.49       $5.39       $5.31       $5.23       $5.16       $5.09

====================================================================================================================================

Thermal Credit for Condensate:  $1.76 per Mil Btu's
Liquid Credit for Condensate:  $0.75 per thousand gallons

07/14/97

7

Effective Period:  May 1, 2000 thru April 30, 2003

ANNUAL STEAM   684,000,000    708,000,000    732,000,000    756,000,000    780,000,000    804,000,000    828,000,000    852,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

MONTHLY STEAM   56,000,001     58,000,001     60,000,001     62,000,001     64,000,001     66,000,001     68,000,001     70,000,001
to             to             to             to             to             to             to             to
58,000,000     60,000,000     62,000,000     64,000,000     66,000,000     68,000,000     70,000,000     72,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

Fuel                $2.20          $2.20          $2.20          $2.20          $2.20          $2.20          $2.20          $2.20
O&M                 $1.73          $1.67          $1.61          $1.56          $1.51          $1.47          $1.43          $1.38
Capacity            $1.10          $1.10          $1.10          $1.10          $1.10          $1.10          $1.10          $1.10
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------
Total           $5.03          $4.97          $4.91          $4.86          $4.81          $4.77          $4.73          $4.68

====================================================================================================================================

ANNUAL STEAM   876,000,000    900,000,000    924,000,000    948,000,000    972,000,000    996,000,000   1,020,000,000  1,044,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

MONTHLY STEAM   72,000,001     74,000,001     76,000,001     78,000,001     80,000,001     82,000,001     84,000,001     86,000,001
to             to             to             to             to             to             to             to
74,000,000     76,000,000     78,000,000     80,000,000     82,000,000     84,000,000     86,000,000     88,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

Fuel                $2.20          $2.20          $2.20          $2.20          $2.29          $2.35          $2.40          $2.45
O&M                 $1.35          $1.31          $1.28          $1.24          $1.21          $1.18          $1.16          $1.13
Capacity            $1.10          $1.10          $1.10          $1.10          $1.10          $1.10          $1.10          $1.10
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------
Total           $4.65          $4.61          $4.58          $4.54          $4.60          $4.63          $4.66          $4.68

====================================================================================================================================

ANNUAL STEAM  1,068,000,000  1,092,000,000  1,116,000,000  1,140,000,000  1,168,000,000  1,188,000,000  1,212,000,000  1,236,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

MONTHLY STEAM   88,000,001     90,000,001     92,000,001     94,000,001     96,000,001     98,000,001    100,000,001    102,000,001
to             to             to             to             to             to             to         and above
90,000,000     92,000,000     94,000,000     96,000,000     98,000,000    100,000,000    102,000,000
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------

Fuel                $2.50          $2.55          $2.60          $2.64          $2.68          $2.72          $2.76          $2.80
O&M                 $1.10          $1.08          $1.06          $1.04          $1.01          $0.99          $0.97          $0.95
Capacity            $1.10          $1.10          $1.10          $1.10          $1.10          $1.10          $1.10          $1.10
-------------  -------------  -------------  -------------  -------------  -------------  -------------  -------------
Total           $4.70          $4.73          $4.76          $4.78          $4.79          $4.81          $4.83          $4.85

====================================================================================================================================

Thermal Credit for Condensate:  $1.76 per Mil Btu's
Liquid Credit for Condensate:  $0.75 per thousand gallons

07/14/97

8

EXHIBIT  10.34

MULTITRADE GROUP, INC. AND BASSETT-WALKER, INC.

STEAM AGREEMENT

STEAM AGREEMENT dated as of March 1, 1993, between Multitrade Group,
Inc. a corporation  organized and existing under the laws of the Commonwealth of
Virginia ("Multitrade"),  and Bassett-Walker,  Inc., a corporation organized and
existing under the laws of the Commonwealth of Virginia ("Bassett-Walker").

R E C I T A L S

WHEREAS,  Multitrade is the owner of a steam production facility and
steam distribution system (collectively,  the "System") located in Henry County,
Virginia and capable of generating 100,000 pounds of steam per hour for 24 hours
per day;

WHEREAS,  Multitrade  and  Bassett-Walker  are  parties  to a  Steam
Agreement  dated  January 15, 1992 (the "Initial  Agreement")  pursuant to which
Multitrade  has  supplied  Bassett-Walker  with  Bassett-Walker's  steam  energy
requirements for its manufacturing and warehouse facilities located at Rivermont
Heights, Henry County, Virginia (the "Bassett-Walker Facilities");

WHEREAS,  the term of the  Initial  Agreement  consists  of a 1-year
period ending on February 28, 1994; and

WHEREAS,  Multitrade  and  Bassett-Walker  desire  to  continue  the
provision of steam energy services to Bassett-Walker following the expiration of
the 1-year term under the Initial Agreement,  for an additional period of 1 year
from March 1, 1994 through February 28, 1995.

NOW,  THEREFORE,  in consideration of the foregoing premises and the
mutual  agreements  hereinafter set forth to be kept and performed,  the parties
hereto agree as follows:

A G R E E M E N T

SECTION 1. DEFINITIONS.

Unless the context otherwise requires, the following terms have, for
purposes of this Agreement, the respective meanings set forth below:

"AAA" means the American  Arbitration  Association and any successor
organization.

"Adjustment  Date" has the meaning  assigned to such term in Section
5.3 of this Agreement.

"Agreement" and "this Agreement" means this Steam Agreement dated as
of March 1, 1993, between Multi-trade and Bassett-Walker.

"Applicable  Law"  means  any  law,  rule,  regulation,   ordinance,
judgment,  decree,  permit or similar  decision of any  federal,  state or local
governmental authority, agency, court or similar body having jurisdiction, which
is  applicable to or affects the  ownership,  operation,  testing,  maintenance,
leasing or use of the System,  the  Bassett-Walker  Facilities or the sites upon
which the System and Bassett-Walker Facilities are located.

"Bassett-Walker" means Bassett-Walker, Inc., a Virginia corporation.

"Bassett-Walker  Facilities"  means the  manufacturing and warehouse
facilities owned by Bassett-Walker  located at Rivermont Heights,  Henry County,
Virginia.

"Capacity  Component"  means the  component of the steam price which
takes into  account the  capacity  cost to  Multitrade  of  producing  steam for
delivery to  Bassett-Walker  under this  Agreement,  as calculated in accordance
with Exhibit 5.2 and subject to  adjustment  pursuant to Section  5.3(c) of this
Agreement.

"Commencement Date"  means March 1, 1994.

"Condensate Return" has the meaning assigned to such term in Section
7.1 of this Agreement.

"Dedicated Capacity" means 100,000 pounds of dry saturated steam per
hour at pressures up to 200 PSIG to be made available to Bassett-Walker from the
System during the Term.

"Fuel  Component" means the component of the steam price which takes
into account the cost incurred by Multitrade for wood,  coal and other fuel used
in  producing  steam for delivery to  Bassett-Walker  under this  Agreement,  as
calculated in accordance with Exhibit 5.2 and subject to adjustment  pursuant to
Section 5.3(a) of this Agreement.

"Multitrade"  means Multitrade Group, Inc., a Virginia Corporation.

"O&M  Component"  means the component of the steam price which takes
into  account the fixed and  variable  costs to  Multitrade  of  operations  and
maintenance  for the System,  as calculated in accordance  with Exhibits 5.2 and
5.3 and subject to adjustment pursuant to Section 5.3(b) of this Agreement.

"Operating  Year" means any  applicable  one-year  period during the
Term from March 1 through and including the next succeeding February 28 or 29 as
may be applicable.

"Point of Delivery"  means the discharge side of the steam meter.

"PSIG"  means pounds per square inch gauge.

"Steam  Meter"  means  the  steam  flow,   pressure   recording  and
totalizing steam meter located on the low pressure side of the pressure reducing
station in the System.

"System" means the steam production  facility and steam distribution
system, owned and operated by Multitrade and located in Henry County,  Virginia,
capable of  generating  up to 100,000  pounds per hour of steam for 24 hours per
day, subject to interruptions as contemplated by Section 9 of this Agreement.

"Technician" means an independent technician,  reasonably acceptable
to  Multitrade  and  Bassett-Walker,  who has  expertise  in the  operation  and
maintenance of steam production facilities similar to the System.

"Term" means the one-year period commencing March 1, 1994 and ending
February 28, 1995, during which Multitrade will provide steam energy services to
Bassett-Walker  in accordance  with the  provisions of this  Agreement,  and any
additional  one-year  periods which both parties  mutually  agree to extend this
Agreement in accordance with Section 13 hereof.

SECTION 2. COMMENCEMENT DATE AND TERM.

Steam  energy  services  shall  commence  under  the  terms  of this
Agreement on March 1, 1994 (the "Commencement Date"), and shall run continuously
from such date until February 28, 1995 (such one-year  period referred to herein
as the "Term"),  unless this Agreement  shall have been terminated at an earlier
date pursuant to the terms hereof.  This Agreement may be renewed by the parties
in accordance with Section 13 hereof.

SECTION 3. PURCHASE AND SALE OF STEAM ENERGY.

3.1 PURCHASE AND SALE  OBLIGATIONS.  Subject to Section 4.2, 9.1 and
9.2, Bassett-Walker agrees to purchase and pay for and Multitrade agrees to sell
steam energy  generated by the System  during the Term in an amount equal to 100
percent of the steam requirements for the Bassett-Walker  Facilities;  provided,
however,  that Multitrade shall not be obligated to sell to Bassett-Walker steam
in excess of the Dedicated  Capacity for such energy. The cost to Bassett-Walker
for steam  delivered  to it shall be  calculated  in  accordance  with Section 5
hereof.

3.2 DEDICATED  CAPACITY.  Subject to Section 9, Multitrade will make
available to Bassett-Walker at the Point of Delivery on a daily 24-hour basis at
least 100,000 pounds per hour of dry saturated steam at pressures up to 200 PSIG
(the "Dedicated Capacity") during the Term of this Agreement.

3.3 ADDITIONAL CAPACITY.  Multitrade shall have the right to sell to
others  any steam  produced  by the System  which is in excess of the  Dedicated
Capacity  and  Bassett-Walker's  steam  requirements.  If at any time during the
period  of  this  Agreement  Multitrade  installs  additional  steam  generating
capacity,  Bassett-Walker  shall have the option to  purchase  any or all of the
additional capacity at a rate and under terms similar to those set forth in this
Agreement, subject to such adjustments as may be necessary to reflect additional
costs associated with the additional capacity so purchased.

3.4 BASSETT-WALKER'S RIGHT TO PRODUCE OWN STEAM.  Bassett-Walker may
operate its own boilers for the  production  of steam  energy only (a) during an
interruption  of the steam supply as contemplated by Section 9.1, (b) during the
existence  of  incompatible  additives in the steam  supply as  contemplated  by
Section 4.2, (c) during testing, preventative maintenance and safety checks, (d)
for the purpose of testing and  maintaining  its boilers while using natural gas
as a fuel,  and (e) any time steam from  Multitrade  is not  adequate to fulfill
Bassett-Walker's steam requirements, and in each case only for so long as and to
the extent that such conditions or circumstances  continue;  provided,  however,
that in no  circumstances  shall  Bassett-Walker  operate its own boilers  while
using No. 6 fuel oil as a fuel at times when the System is in operation.

SECTION 4. METERING; INSPECTIONS AND QUALITY CONTROL.

4.1  QUALITY  OF STEAM;  METERING.  Multitrade  agrees to deliver to
Bassett-Walker  high  quality  steam,  with  standards of at least pH 9 (plus or
minus 0.5) and 3 parts per million or less carryover, and to maintain a suitable
steam flow,  pressure  recording and totalizing meter ("Steam Meter") located on
the low pressure side of the pressure  reducing  station.  Multitrade  agrees to
inject  into the steam,  to the  satisfaction  of  Bassett-Walker,  neutralizing
and/or filming amine to reduce corrosion in the Condensate Return system.

4.2 ADDITIVES.  Multitrade  recognizes that the steam purchased from
it by  Bassett-Walker  will  be  injected  into  Bassett-Walker's  dye  process.
Accordingly,  Multitrade  agrees that no  additives  shall be injected  into the
steam  which it  produces  unless  such  additives  are among those set forth on
Exhibit 4.2 or are otherwise  compatible with  Bassett-Walker's  dye process and
prior approval for such additives is received from Bassett-Walker.  If additives
are found in the steam  produced by  Multitrade  which are not  compatible  with
Bassett-Walker's dye process,  Bassett-Walker shall not be obligated to purchase
any steam  containing such additives and shall have the right to operate its own
boilers until the incompatible additives are removed.

4.3    CALCULATION;    INSPECTION.    Multitrade    will   calculate
Bassett-Walker's   monthly   steam  usage   based  on  steam   meter   readings.
Bassett-Walker  will be entitled to adequate  notice and opportunity to have its
representative  present at any time the meter is read and may  inspect the steam
meter  charts  at any time.  If there is any  dispute  as to the  steam  meter's
accuracy or condition,  the disputing party may, at its own expense,  engage the
services  of the  Technician  to test  the  Steam  Meter,  and the  Technician's
determination  will  be  binding  on  the  parties  hereto.  If  the  Technician
determines that the Steam Meter is in need of repair or replacement, such repair
or replacement will be made as soon as practicable at Multitrade's  expense. The
cost of the  Technician  will be borne by Multitrade if the meter is found to be
in need of repair.  Local  representatives of Multitrade and Bassett-Walker,  by
mutual agreement,  will determine the amount of steam furnished by Multitrade to
Bassett-Walker  for any period  during which the Steam Meter is  malfunctioning,
and invoices will be adjusted in accordance with Exhibit 4.3.

4.4 CALIBRATION. Multitrade agrees, at no expense to Bassett-Walker,
to have the Steam Meter  calibrated by the Technician at the end of 180 calendar
days. A written report of the  Technician's  findings and  calibrations  will be
submitted to Bassett-Walker.

SECTION 5. PAYMENT RATES AND TERMS.

5.1 BASIS FOR PAYMENT. Bassett-Walker will pay monthly for the steam
energy it  purchases  from  Multitrade  based on a unit  price per 1,000  pounds
of delivered, dry saturated

steam,  as hereinafter  set  forth and measured in accordance  with Section 4.3.
All steam costs will be based on the steam  actually  delivered  to the Point of
Delivery at the Steam Flow Meter  located in  Bassett-Walker's  existing  boiler
room.

5.2 RATE  SCHEDULE.  Subject to adjustment  pursuant to Sections 5.3
and 7.3,  the  monthly  rate  which  Bassett-Walker  will pay for  steam  energy
delivered by Multitrade  will be  determined in accordance  with Exhibit 5.2. To
the extent  Bassett-Walker  operates its own boilers for the production of steam
energy during an interruption of Multitrade's supply of steam as contemplated by
Section 9.1,  such monthly rate will be determined on the basis of the aggregate
amount  of  steam   supplied   during   such  month  by  both   Multitrade   and
Bassett-Walker. In all other circumstances where Bassett-Walker operates its own
boilers for the production of steam energy,  the monthly rate will be determined
on the basis of the amount of steam  supplied  during  such month by  Multitrade
alone.

5.3   ADJUSTMENT OF STEAM RATES.

(a) The rates used in Exhibit 5.2 for Fuel,  Fixed O&M, and Variable
O&M are stated in 1991 values.  These  components of the Steam Energy Price will
be adjusted March 1, 1992, and on one-year  anniversaries  thereafter during the
Term of this Agreement and any renewals thereafter. The 1992 adjustment will use
the inflation rate published in the Producers Price Index "All  Commodities" for
1991.

(b)  The  Fuel,  Fixed  O&M  and  Variable  O&M  components  will be
increased or decreased on the March 1 anniversary dates using the rate of change
in the  Producers  Price Index as published by the United  States  Department of
Labor; "All Commodities" average index shall be used as the basis for adjustment
of the Fuel and O&M  components.  Each  adjustment in the steam  component rates
will use the  inflation  rate  from  the  previous  year.  (See  example  of the
Producers Price Index in Exhibit 5.3)

Calculation Example:

Producers

PRICE INDEX   x    MULTIPLIER   =       RATE
-----------        ----------           ----

Fuel Component 1989: $2.22     112.2  (1989)  x    1.9786096    =       2.22
Fuel Component 1990:           116.3  (1990)  x    1.9786096    =       2.30
(rates rounded after three decimals, multiplier is used for example only.)

The actual  multiplier will be established  using the Fuel Component
Rate of $2.22 divided by the 1991 Producers  Index.  The multiplier  established
using the 1991 data will remain constant through the term of this Agreement.

(c) The Capacity  Component will remain firm during the Term of this
Agreement.

5.4 BILLING. The charges for steam energy consumed by Bassett-Walker
will be billed monthly to  Bassett-Walker by Multitrade and payments will be due
within 15 days after receipt of an invoice  substantially in the form of Exhibit
5.4.  Multitrade  may charge a 1.5% late  charge on any bill not paid  within 30
days of the due date. If any bill is not paid, including the late charge, within
30 days after the due date,  Multitrade  may  discontinue  service  upon written
notice to  Bassett-Walker  or exercise any other remedy  provided in  accordance
with Section 10.2(a)  hereof.  No such  discontinuation  of service shall render
Multitrade liable for damages or relieve  Bassett-Walker from performance of its
obligations  hereunder  as long  as  Multitrade  is not in  default  under  this
Agreement at the time service is discontinued.

5.5 TITLE TO STEAM.  Title to and full  responsibility for all steam
energy  sold  and  delivered  by  Multitrade  to  Bassett-Walker  shall  pass to
Bassett-Walker at the Point of Delivery.

5.6 ENERGY TAX. In the event any governmental  authority imposes any
new energy tax  following  the date of this  Agreement  that is applicable to or
increases  the cost of  Multitrade's  operation of the System or its delivery of
steam energy to Bassett-Walker  hereunder  (whether imposed on the basis of fuel
use, BTU content, energy produced or otherwise,  and whether imposed directly on
Multitrade or otherwise),  (i) Multitrade  shall absorb the cost associated with
fifteen percent (15%) of any such tax, and (ii)  Bassett-Walker  shall reimburse
Multitrade  for  the  cost to  Multitrade  of  eighty-five  percent  (85%)  (the
"Reimbursement  Portion") of any such tax so as to hold Multitrade harmless from
the imposition of the  Reimbursement  Portion of any such tax. The parties agree
to  negotiate  in good  faith,  within  30 days  following  the end of the first
calendar years in which any such tax is imposed, to determine the precise manner
in which such  Reimbursement  Portion  and amount will be  determined  and paid.
Multitrade shall be entitled to recover from  Bassett-Walker  the actual cost to
Multitrade of the Reimbursement  Portion of any such tax, without any mark-up or
gross-up  (other than any such  adjustment  that is required to hold  Multitrade
harmless  from  the  imposition  of the  Reimbursement  Portion  of  such  tax);
provided,  that  Bassett-Walker  shall be required to reimburse  Multitrade only
with respect to that portion of the  Reimbursement  Portion of any such tax that
is properly  allocable to the steam  produced by the System that is delivered to
Bassett-Walker hereunder.

SECTION 6. OPERATION OF SYSTEM.

6.1  MANNER OF  OPERATION;  NOTIFICATION.  Multitrade  agrees to use
diligence  to  maintain  and operate the System in such a manner as to avoid any
interruption   of   service   to   Bassett-Walker.   Multitrade   shall   notify
Bassett-Walker  in  writing  of its  normal  operating  schedule,  start-up  and
shut-down times and any changes thereto.

6.2  BASSETT-WALKER'S  OBLIGATIONS.   Bassett-Walker  shall,  at  no
expense to Multitrade,  ensure at all times that  Bassett-Walker's  equipment is
appropriate  for  operation  with the  System  and that a  proper  interface  is
maintained between such equipment and the System on Bassett-Walker's side of the
Point of Delivery.

SECTION 7. STEAM CONDENSATE RETURN.

7.1 STEAM CONDENSATE. Bassett-Walker agrees to return and deliver to
Multitrade  steam  condensate  ("Condensate  Return")  of a  quality  reasonably
satisfactory to Multitrade consistent with the standards of pH, hardness,  level
of dissolved solids and conductivity set forth in Exhibit 7.1. Multitrade agrees
to provide and maintain  during the Term, at no expense to  Bassett-Walker,  the
Condensate  Return  system  currently  in use in  connection  with  the  System,
including,   but  not  limited   to,   piping,   insulation,   pump  system  and
flow/temperature recorder.

7.2 PROVISION OF ELECTRICITY.  Bassett-Walker  agrees to furnish, at
no cost to Multitrade,  adequate  electricity  to operate the Condensate  Return
pump located on the premises of Bassett-Walker.

7.3 CREDIT FOR THERMAL AND LIQUID VALUE OF CONDENSATE RETURN. During
the Term, Bassett-Walker will be given credit on a monthly basis for the thermal
value  and  liquid  value  of  Condensate  Return  delivered  to  Multitrade  by
Bassett-Walker  during the month  covered by any invoice  furnished  pursuant to
Section 5.4. The amount of the thermal  value credit to  Bassett-Walker  will be
equal to the displaced fuel value  (initially  $2.22 per 1.2 million  BTUs),  as
adjusted  annually  during the Term  commensurate  with any increase in the Fuel
Component of the steam price.  The amount of liquid value of  Condensate  Return
credited  to  Bassett-Walker  will be equal to $1.00  per  thousand  gallons  of
Condensate Return and will remain fixed for the Term.

SECTION 8. PURCHASE OF MAKE-UP WATER.

8.1 TRANSPORT AND METERING.  Multitrade  agrees to purchase  make-up
water from Bassett-Walker when such water is available. Multitrade shall provide
and maintain,  at its own expense,  the piping, pumps and equipment necessary to
transport water from  Bassett-Walker  to the System's  boiler.  Multitrade shall
provide and maintain the necessary metering or

recording  instrumentation required to determine the quantity and temperature of
water furnished to Multitrade.  Bassett-Walker  agrees to provide, at no cost to
Multitrade,  the  electricity  required to operate any pumps  necessary  for the
make-up water system.

8.2 CREDIT FOR WATER. Multitrade shall credit Bassett-Walker for all
make-up water received from  Bassett-Walker  in the amount of $1.00 per thousand
gallons of water delivered. Credit for water received from Bassett-Walker during
any  one-month  period shall be included in the invoice for steam  covering such
period.  If such water is not  available,  or such water is unfit for use due to
contamination,  Multitrade shall have the right to seek other sources of make-up
water.

8.3 THERMAL  CREDIT FOR MAKE-UP  WATER.  In the event  make-up water
received by Multitrade is heated above 80 degrees  Fahrenheit,  Multitrade  will
credit  Bassett-Walker for the displaced fuel value of the BTUs contained in the
hot water. Displaced fuel value will be equal to the Fuel Component of the steam
rate in effect during the billing period. Thermal value of make-up water will be
calculated using the method shown in Exhibit 5.4.

SECTION 9. INTERRUPTION OF SERVICE OR OPERATIONS.

9.1 Multitrade agrees to give Bassett-Walker immediate notice by the
fastest means possible of any unplanned  interruption of the steam supply and to
give as much  written  notice as possible of all  planned  interruptions  of the
steam supply.  Any planned  interruption of the steam supply will be coordinated
with  Bassett-Walker.  The parties hereby  acknowledge  that, in accordance with
state regulations, service will be interrupted annually for a period of one week
to conduct a boiler  inspection.  An unplanned  interruption  of service that is
attributable  to any cause beyond  Multitrade's  control  will not  constitute a
breach of this Agreement,  and Multitrade  will not be liable to  Bassett-Walker
for any  damages  arising out of or related to any such  interruption,  provided
Multitrade  exercises  diligent efforts to restore normal  operations as soon as
possible.  The shutdown of steam services is normally  scheduled during the Week
of July 4th each year;  however,  other  periods may be used in lieu of July 4th
Week as may be mutually agreeable.

9.2 BUSINESS  INTERRUPTION  INSURANCE.  If either  party  desires to
obtain  business  interruption  insurance for its  respective  facilities,  each
agrees, upon reasonable written notice to the other, to permit inspection of its
facilities by representatives of the insurance company during reasonable working
hours.

SECTION 10.  INDEMNIFICATION AND LIMITATIONS OF LIABILITY.

10.1  RECIPROCAL  INDEMNIFICATION.  Multitrade  and  Bassett-Walker,
respectively,  as indemnitor,  will indemnify the other, as indemnitee, and hold
harmless it, its partners, officers, directors, agents and affiliates, and their
respective  successors  and  assigns,  from  and  against  any  and  all  losses
(excluding consequential losses),  damages, expenses and liabilities suffered or
paid as a result of any and all  claims,  demands,  suits,  causes  of  actions,
proceedings,  judgments  and  liabilities,  including  reasonable  counsel  fees
incurred in  litigation  or  otherwise,  assessed,  incurred or  sustained by or
against any such party with respect to or resulting from injuries to or death of
persons,  including,  but not limited to, employees of either party hereto,  and
damage to

or  destruction  of  property,  including,  but not limited to, the  property of
either party hereto,  arising out of, or in any way connected  with, the failure
to comply with any Applicable Law of any authority  having proper  jurisdiction,
or the performance or non-performance of any provision of this Agreement, or any
operations  conducted  hereunder,  by  indemnitor,   its  agents  or  employees,
excepting only such injury, death, damage or destruction as may be caused by the
gross  negligence  or  willful  misconduct  of the  indemnitee,  its  agents  or
employees.  Each indemnitee shall, upon the indemnitor's request, (a) defend any
suit  asserting  a claim  covered by this  indemnity  and (b) if the  indemnitor
elects to control the defense of such suit,  cooperate  with the  indemnitor  in
respect of any matter  related to such  defense.  The  indemnitor  shall pay all
costs that may be  incurred  by the  indemnitee  in  enforcing  this  indemnity,
including  reasonable  attorneys'  fees,  within 20 days of any written  request
therefore.

10.2 LIMITATION OF LIABILITY.  Neither  Multitrade,  Bassett-Walker,
nor their respective partners, officers, directors, employees,  representatives,
agents or independent  contractors,  because of any of their  respective acts or
omissions relating to the ownership, use, construction, operation or maintenance
of the System, or because of their respective  compliance or noncompliance  with
this Agreement, shall have any liability,  whether in contract,  warranty, tort,
strict  liability,  or other  legal  theory,  for any  indirect,  incidental  or
consequential  damages  of the  party,  including  but  not  limited  to loss of
anticipated  profits, or revenues;  loss of use of the System;  non-operation or
increased expense of operation of the System or the Condensate Return system, as
applicable;  and,  increased cost of capital or cost of purchased or replacement
steam.

SECTION 11. ADDITIONAL COVENANTS AND OBLIGATIONS.

11.1 PRIMARY  OBLIGOR.  Multitrade  shall have the right to contract
with third parties for performance of all or part of its obligations  under this
Agreement, but Multitrade shall remain primarily responsible for the performance
of its obligations thereunder.

11.2 INSURANCE.  Multitrade shall maintain in full force and effect,
at its expense,  casualty and  liability  insurance on the System and  liability
insurance for its undertakings  hereunder equal to at least the amounts required
by statute and the amounts  customarily  maintained  in the  industry  for steam
generating  facilities of similar size and type as the System.  Multitrade shall
also maintain excess liability coverage with a minimum limit of $2,000,000.

SECTION 12. ARBITRATION OF DISPUTES; ATTORNEY'S FEES.

12.1 ARBITRATION.

(a) Any dispute between Multitrade and Bassett-Walker  arising
under or out of this  Agreement  shall,  if not  resolved  amicably  between the
parties  within 30 days after  written  notice of such dispute from one party to
the other,  be  settled by  arbitration  pursuant  to the rules of the  American
Arbitration  Association  ("AAA").  After the initial  30-day  period  following
notice of a dispute, any party who has not obtained a satisfactory resolution of
such dispute may be given written notice of  arbitration  hereunder to the other
party.  Within 30 days  after the date of such  notice of  arbitration,  each of
Multitrade and Bassett-Walker shall appoint an arbitrator, which two arbitrators
shall jointly select a third arbitrator who shall serve as

chairman of the arbitration  panel. If either Multitrade or Bassett-Walker  does
not select its arbitrator  within 30 days after written notice of arbitration is
given, or if the two arbitrators  cannot agree upon a third arbitrator within 30
days after the appointment of the later of such two initial arbitrators, the AAA
shall make the  appointment or appointments  from its panel of arbitrators.  The
arbitration  proceedings shall take place in the state of Virginia or such place
as may otherwise be mutually agreed to by the parties.

(b) The decision of the  arbitrator  shall be binding upon the
parties and conclusive as to disputes relating to this Agreement. Upon rendering
a decision,  the arbitrators shall promptly execute and acknowledge the decision
and deliver a copy to each party.  A judgment  confirming  the  decision  may be
rendered by any court that has jurisdiction over the matter.

(c)  Pending   resolution  of  any   controversy  or  dispute,
performance  by each party shall continue so as to maintain the status quo as it
existed  prior to the  initial  notice  of  intention  to  request  arbitration.
Resolution of any  controversy or dispute  involving the payment of money by one
party to the other shall include payment of interest,  compounded monthly on all
outstanding  payments,  at a rate per annum equal to the "prime  interest  rate"
quoted from time to time by Chase  Manhattan Bank, N. A. , or any successor bank
thereto, plus one percent (1%).

12.2   ATTORNEY'S  FEES  AND  COST.  In  any  arbitration  or  court
proceeding  to enforce any  arbitration  award made pursuant to this Section 13,
each party shall be  responsible  for its  respective  legal costs.  The cost of
arbitration  shall be split  equally  between the parties  participating  in the
arbitration.

SECTION 13. RENEWAL.

The steam  energy  services  provided  hereunder  may be  renewed by
agreement of the parties  hereto for  successive  periods of 1-year's  duration.
Provided the  notifying  party is not in default  under any of the terms of this
Agreement,  either party  wishing to negotiate  for a renewal of this  Agreement
shall notify the other in writing of its desire to so negotiate on or before the
last day of  February,  1994 and by the last day of  February  for each  renewal
anniversary thereafter.

SECTION 14. MISCELLANEOUS.

14.1 COMPLIANCE WITH LAWS.  Multitrade  agrees to operate the System
up to  the  Point  of  Delivery  in  accordance  with  the  requirements  of all
applicable municipal, state and Federal laws, ordinances, rules and regulations.
Multitrade  shall be primarily  responsible  for compliance with all present and
future local,  state or Federal laws,  ordinances or regulations  related to air
quality,  odor,  noise,  waste water disposal,  solid waste  disposal,  or other
conditions for the protection of the environment,  or otherwise, which may apply
to the System.

14.2 AMENDMENT; ENTIRE AGREEMENT. This Agreement contains the entire
understanding  of the parties and  supersedes  all prior  negotiations  and oral
understandings,  if any, and may not be amended, supplemented or modified except
by a written instrument signed by the parties hereto.

14.3  ASSIGNMENT AND DELEGATION.

(a) Neither party may voluntarily assign all or any portion of
its rights, nor delegate its duties,  under this Agreement,  without the written
consent  of  the  other  party,  except  in  connection  with  (i)  a  mortgage,
hypothecation or pledge of a party's interest in this Agreement,  or (ii) merger
or sale of a substantial  portion of a party's  properties,  which consent shall
not be unreasonably  withheld or delayed. Any such assignment or delegation made
without such written  consent shall be null and void. The addition of additional
partners or investors to either party does not require consent  pursuant to this
Section  14.3.  For purposes of  financing,  each party  consents to the other's
assignment  to a lender or lenders of its right,  title,  interests,  powers and
benefits  under this  Agreement,  as security for a loan and the  obligations of
such party to such lender or lenders.

(b)  If  Bassett-Walker  or  its  permitted  successors  shall
transfer,  sell,  assign,  convey or  otherwise  dispose  of the site upon which
Bassett-Walker's  operations are located (the "Site"), such disposition shall be
subject to the express  condition that the  transferee,  assignee,  purchaser or
recipient of such  conveyance or  disposition  shall assume all  obligations  of
Bassett-Walker to be performed under this Agreement.

(c) The  assignor  shall be relieved of all further  liability
under this Agreement from and after the date of such transfer,  assignment, sale
or  conveyance  if the  transferee,  assignee,  purchaser  or  recipient of such
conveyance  shall  own the Site or  System,  as the case  may be,  and  shall be
successor to the obligations of the assignor.

14.4  BINDING  EFFECT;   SUCCESSORS  AND  ASSIGNS.   The  terms  and
provisions of this Agreement and the respective rights and obligations hereunder
of Multitrade and Bassett-Walker shall be binding upon, and inure to the benefit
of, their respective permitted successors and assigns.

14.5 INDEPENDENT  SELLER.  Multitrade shall perform  hereunder as an
independent seller and neither Multitrade nor Bassett-Walker  shall be deemed in
any way or for any purpose, by nature of this Agreement or otherwise, a partner,
joint venturer, agent, employer or employee of the other.

14.6 CHOICE OF LAW. This Agreement and any dispute arising  herefrom
shall be  governed  and  interpreted  in  accordance  with  laws of the State of
Virginia as applied to contracts made and wholly performed within said state.

14.7 SECTION  HEADINGS  AND  SUBHEADINGS.  All Section  headings and
subheadings  are  inserted  for  convenience  only  and  shall  not  affect  any
construction or interpretation of this Agreement.

14.8 SEVERABILITY. In the event that any provision of this Agreement
becomes or is  declared  by a court of  competent  jurisdiction  to be  illegal,
unenforceable,  or void,  this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to either party.

14.9 NOTICE.  Except as otherwise  specifically provided for in this
Agreement,  all notices or other communications  required or permitted hereunder
will be in writing and deemed given (a) if delivered personally,  (b) if sent by
facsimile copy and receipt thereof is confirmed,  or (c) if (i) deposited in the
U.S. mail,  registered mail,  postage prepaid,  return receipt requested or (ii)
delivered to a nationally  recognized  express  mail  service  which  requires a
receipt from the recipient,  and, in either case, a receipt is obtained, and (d)
in any case addressed as follows:

To Multitrade:              To Bassett-Walker:

Mr. B. E. Brammer           Mr. Stephen M. Fritz
President                   Vice President, Finance
Multitrade Group, Inc.      Bassett-Walker, Inc.
Post Office Box 717         Post Office Box 5423
Ridgeway, VA 24148          Martinsville, VA 24115

Such addresses and personnel  designations  may be changed from time
to time by either party by serving written notice as provided above.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.

MULTITRADE GROUP, INC.

By /s/ B.E. Brammer
-------------------------------
Its President

BASSETT-WALKER, INC.

By /s/ Stephen M. Fritz
-------------------------------
Its Vice President-Finance

EXHIBIT 4.2

PERMITTED ADDITIVES

To Boiler:  Nalco 1720                   Feedwater Oxygen Control
Nalco No. 7200               Scale Control
Caustic Soda Liquid          Silica Control

Steam Main: Nalco No. 354                To Condensate for pH Control

EXHIBIT 4.3

Method of Adjusting Steam Invoice
To Compensate for Malfunctioning Steam Meter

(No Adjustment for one percent plus or minus
of correct reading.)

STEP 1.     Determine  percentage  meter  error,  either  plus  or  minus,  from
calibration by independent Technician.

STEP 2.     Total the volume of steam purchased by Bassett-Walker  from the time
of previous  calibration  to the time the meter was determined to be
inaccurate.  Example: If an October calibration  indicated meter was
2% in error - total steam usage from  previous  calibration  through
the month of October.

STEP 3.     Multiply the total steam consumed by Bassett-Walker (the sum of STEP
2) by the  percentage  of meter error,  less the one percent plus or
minus dead band.

STEP 4.     Determine the average sale price of steam to  Bassett-Walker  during
the period in question.

STEP 5.     Multiply the product of STEP 3 by the average  price  determined  in
STEP 4.

STEP 6.     Multiply  the  product  of  STEP 5  by 50% and the result equals the
total credit or debit.

EXAMPLE:

September,  1984,  calibration  indicated  three percent  "plus" steam  reading.
Previous calibration accomplished in March, 1984.

STEP 1.     Plus three percent (3%) meter reading.

STEP 2.      34,495,200      September 1984
36,257,200      August 1984
27,172,400      July 1984
35,243,659      June 1984
39,248,699      May 1984
35,248,489      April 1984
----------
207,665,647     Total Pounds

STEP 3.      Sum of STEP 2:     207,665,647
Total from  STEP 1                           
less 1% Dead Band:    x      2% (3%  -  1%)
-----------
4,153,313 MLbs.

STEP 4.      Average Price for Steam:
$  5.40    September 1984
5.49    August 1984
5.55    July 1984
5.47    June 1984
5.37    May 1984
5.43    April 1984
-------
$ 32.71    divided by 6 = $5.45 avg. price per 1000 Lbs.

STEP 5.      Product of STEP 3:    4,153,313 Mlbs.
Total from STEP 4       x $5.45 per Mlb.
------------
$22,635.56

STEP 6.      Product of STEP 5:   $22,635.56 
x  50% 
------------- 
($11,317.78) Net (credit) or debit

EXHIBIT 5.2.
BASSETT WALKER MONTHLY STEAM VOLUME DISCOUNT RATES
March 1. 1993

Annual Production      10,625,000         31,450,000         53,125,000      74,375,000        95,625,000         116,875,000       

0                2,500,001          5,000,001       7,500,001        10,000,001          12,500,001       
Gross Lbs. Steam         to                  to                  to            to                to                 to              
Delivered Monthly       2,500,000          5,000,000          7,500,000      10,000,000        12,500,000          15,000,000       
---------          ---------          ---------      ----------        ----------          ----------       

Fuel                         2.23               2.23               2.23            2.23              2.23                2.23       
Fixed O&M                   49.23              16.63               9.85            7.03              5.47                4.48       
Variable O&M                 0.54               0.54               0.54            0.54              0.54                0.54       
Capacity                     0.35               0.35               0.35            0.35              0.35                0.35       
----               ----               ----            ----              ----                ----       

Total Steam                                                                                                                         
Billing Rate               $52.35             $19.75             $12.97          $10.15             $8.59               $7.60       

Table (continued)

Annual Production      138,125,000        159,375,000        180,625,000        201,875,000         223,125,000        244,375,000 

15,000,001         17,500,001         20,000,001         22,500,001          25,000,001         27,500,001 
Gross Lbs. Steam          to                 to                 to                 to                 to                  to       
Delivered Monthly       17,500,000         20,000,000         22,500,000         25,000,000          27,500,000         30,000,000 
----------         ----------         ----------         ----------          ----------         ---------- 

Fuel                          2.23               2.23               2.23               2.23                2.23               2.23 
Fixed O&M                     3.78               3.28               2.90               2.60                2.34               2.13 
Variable O&M                  0.54               0.54               0.54               0.54                0.54               0.54 
Capacity                      0.35               0.35               0.35               0.35                0.35               0.35 
----               ----               ----               ----                ----               ---- 

Total Steam                                                                                                                        
Billing Rate                 $6.90              $6.40              $6.02              $5.72               $5.46              $5.25 

==================== =================== ================== ================== 

Annual Production      265,625,000        286,875,000        308,125,000        329,375,000        350,625,000         367,526,000  

30,000,001         32,500,001         35,000,001         37,500,001         40,000,001          42,500,001  
Gross Lbs. Steam        to                  to                 to                 to                 to                 to          
Delivered Monthly       32,500,000         35,000,000         37,500,000         40,000,000         42,500,000          45,000,000  
----------         ----------         ----------         ----------         ----------          ----------  

Fuel                          2.23               2.23               2.23               2.23               2.23                2.23  
Fixed O&M                     1.97               1.82               1.70               1.59               1.49                1.42  
Variable O&M                  0.54               0.54               0.54               0.54               0.54                0.54  
Capacity                      0.35               0.35               0.35               0.35               0.35                0.35  
----               ----               ----               ----               ----                ----  

Total Steam                                                                                                                         
Billing Rate                 $5.09              $4.94              $4.82              $4.71              $4.61               $4.54  

Table (continued)

Annual Production      393,125,000        414,375,000        435,625,000        456,875,000         478,125,000        499,375,000  

45,000,001         47,500,001         50,000,001         52,500,001          55,000,001         57,500,001  
Gross Lbs. Steam         to                 to                 to                 to                 to                  to         
Delivered Monthly       47,500,000         50,000,000         52,500,000         55,000,000          57,500,000         60,000,000  
----------         ----------         ----------         ----------          ----------         ----------  

Fuel                          2.23               2.23               2.23               2.23                2.23               2.23  
Fixed O&M                     1.33               1.26               1.20               1.15                1.10               1.04  
Variable O&M                  0.54               0.54               0.54               0.54                0.54               0.54  
Capacity                      0.35               0.35               0.35               0.35                0.35               0.35  
----               ----               ----               ----                ----               ----  

Total Steam                                                                                                                         
Billing Rate                                                                                                                        
$4.45              $4.38              $4.32              $4.27               $4.22              $4.17  

CONDENSATE CREDIT:
Thermal Value:       equal to the displaced fuel value - $2.23 per 1,200,000 
BTUs in 1991 Dollars
Liquid Value:        $1.00 per thousand gallons

MAKE-UP WATER CREDIT:
Thermal Value:      equal to the displaced fuel value - $2.23 per 1,200,000 
BTUs in 1991 Dollars
Liquid Value:       $1.00 per thousand gallons

EXHIBIT 5.3

SURVEY OF CURRENT BUSINESS

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

----------------------------------------
----------------------------------------
----------------------------------------                         Average                              1990
1989     1990     Jan.     Feb.     Mar.     Apr.     May      June   
------------------------------------------------------------------------------------------------------------------------------------
COMMODITY PRICES
------------------------------------------------------------------------------------------------------------------------------------

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

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

-------- -------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------- -------
PRODUCER PRICES
(U.S. Department of Labor Indexes)
-------- -------- -------- -------- -------- -------- -------- -------

-------- -------- -------- -------- -------- -------- -------- -------
All commodities ---------------------  ------------  -----      112.2    116.3    114.9    114.4    114.2    114.1    114.6    114.3
-------- -------- -------- -------- -------- -------- -------- -------

TABLE (CONTINUED)

COMMODITY PRICES--Continued

PRODUCER PRICES                                                                                           
U.S. Department of Labor Indexes)--Continued

1990
July    Aug.     Sept.    Oct.     Nov.     Dec.     _____      
-----------------------------------------------------------------------------------------------------------------------------   

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

------- -------- -------- -------- -------- -------- --------   
All commodities ---------------------  ------------  -----       114.5    116.5    118.4    120.8    120.1    118.7             
------- -------- -------- -------- -------- -------- --------   

EXHIBIT 5.4

SAMPLE INVOICE

November 1, 1991

Bassett Walker, Inc.
P.O. Box 5423
Martinsville, Virginia 24115

INVOICE NO: Sample

BILLING PERIOD:   10-01-91 thru 10-31-91

GROSS STEAM DELIVERED                                        40,000,001 Lbs
STEAM RATE (per thousand pounds)                                     $4.59
Sub-Total                                                $183,600.00

THERMAL VALUE OF CONDENSATE CREDIT:                                         
20,000,000 Lbs metered @ 200 F - 80 F ambient = 120 Btu/Lb                  
120 Btu/Lb x 20,000,000 Lbs = 2,400,000,000 Btu                             
2,400,000,000 Btu / 1,200,000 = 2,000
2,000 x $2.22 displaced fuel rate =                             ($4,440.00)

LIQUID VALUE OF CONDENSATE                                                  
20,000,000 Lbs metered / 8.00 Lbs/Gal = 2,500,000 Gal.
2,500,000 Gal. @ $1.00 per M.Gal =                              ($2,500.00)

LIQUID VALUE OF MAKE-UP WATER                                               
20,000,000 Lbs metered / 8.33 Lbs/Gal = 2,400,960 Gal.
2,400,960 Gal. @ $1.00 per M.Gal =                              ($2,400.96)

THERMAL VALUE OF MAKE-UP WATER (if any)                                     
20,000,000 Lbs metered @ 132 F - 80 F ambient = 52 Btu/Lb                   
52 Btu/Lb x 20,000,000 Lbs = 1,040,000,000 Btu                              
1,040,000,000 Btu / 1,200,000 = 867
867 x $2.22 Displaced Fuel Rate =                               ($1,924.74)

NET AMOUNT THIS REQUEST:                                       $172,334.30

TERMS:      Net Due November 15, 1991                                       

NOTE:       The  conversion  factor of 8.00 lbs.  per gallon was used to convert
pounds of  condensate  to gallons of  condensate.  8.00  Lbs/Gal was
based on a condensate temperature of 210 degrees Fahrenheit.  In the
event actual condensate  temperatures increase or decrease more than
10% plus or minus the conversion factor will be adjusted to  reflect
the actual temperature.

EXHIBIT 7.1

CONDENSATE PARAMETERS

Parameter                                 Maximum Limit
----------------------------               ------------------------------

Total Hardness                                   1.0  parts per million
Sodium                                            .1  parts per million
Silica                                            .2  parts per million
Conductivity                                     100  micromos
Total Iron                                       .05  parts per million
Total Copper                                     .02  parts per million
Total Organic Carbon                              Non Detectable
Ph                                               6.5  - 8.0 Range

[Letterhead of Multitrade Group, Inc.]

March 24, 1994

Mr. Danny Cole
Bassett Walker, Inc.
PO Box 5423

Martinsville, VA  24115

RE:  STEAM AGREEMENT RENEWAL
MARCH 1, 1995 THRU FEBRUARY 28, 1996

******************************************************************************

Dear Danny:

Enclosed are the steam rates offered for the period  starting March 1, 1995 thru
February 28, 1996. All other provisions,  terms, and conditions contained in our
Steam Agreement dated January 15, 1992 will remain in effect.

Your  acceptance of this letter  agreement is a commitment,  on the part of both
parties,  to extend the term of the existing  Agreement  thru  February 28, 1996
except using the steam rates indicated on the attached rate schedule.

We appreciate  the business  relationship  which has been in existence  over the
past 11 years. I look forward to providing  future steam services to the Bassett
Walker organization.

Sincerely,

/s/ B. E. Brammer
---------------------------------
B. E. Brammer
President, Multitrade Group, Inc.

BEB:msm

Enclosure

[Letterhead of Bassett Walker, Inc.]

March 31, 1994

Mr. Ed Brammer

MULTITRADE GROUP, INC.
P. O. Box 717
Ridgeway, VA  24148

RE:  STEAM CONTRACT MAR 95 - FEB 96

Dear Ed:

Bassett-Walker  is in receipt of your  steam  rate  schedule  for the
period of March 1, 1995 thru  February  28,  1996.  The rate  schedule  has been
reviewed by the Facilities  Engineering  Department.  We understand  that M.T.G.
desires to not issue a new formal contract,  instead allowing acceptance of your
letter of March 24,  1994 and the steam rate  schedule  to serve as  contractual
commitment by both parties to extend our existing agreement.  Please accept this
letter as a formal  contractual  commitment  by  Bassett-Walker  to  extend  the
agreement through February 28, 1996.

Bassett-Walker  looks forward to the excellent  service in the future
that has been experienced in the past from M.T.G., Inc.

Sincerely,

/s/ Stephen M. Fritz
--------------------------
Stephen M. Fritz
Vice President-Finance

SMF:jsm

cc:  George Clark
VP Manufacturing

Danny Cole
Dir. Facilities Engineering

1993 Index: 118.9
BASSET-WALKER, INC. STEAM RATES
Effective March 1, 1995 through February 28, 1996

Annual Production          10,625,000  31,450,000  53,125,000  74,375,000  95,625,000 116,875,000 138,125,000 159,375,000 

0        2,500,001   5,000,001   7,500,001  10,000,001  12,500,001  15,000,001  17,500,001 
Gross Lbs. Steam               to           to          to         to          to          to          to          to     
Delivered Monthly           2,500,000   5,000,000   7,500,000  10,000,000  12,500,000  15,000,000  17,500,000  20,000,000 
---------   ---------   ---------  ----------  ----------  ----------  ----------  ---------- 

Fuel                          2.27         2.27        2.27       2.27        2.27        2.27        2.27        2.27    
Fixed O&M                    49.95        16.87        9.99       7.13        5.55        4.54        3.84        3.33
Variable O&M                  0.55         0.55        0.55       0.55        0.55        0.55        0.55        0.55    
Capacity                      0.35         0.35        0.35       0.35        0.35        0.35        0.35        0.35    
---------   ---------   ---------  ----------  ----------  ----------  ----------  ---------- 

Total Steam
Billing Rate                 $53.12      $20.04      $13.16     $10.30       $8.72       $7.71       $7.01       $6.50    

CALCULATION OF MULTIPLIERS
--------------------------

Fuel                        0.0190558   0.0190558   0.0190558   0.0190558   0.0190558   0.0190558   0.0190558   0.0190558 
Fixed O&M                   0.4200858   0.1418884   0.0840343   0.0600000   0.0466953   0.0381974   0.0322747   0.0279828 
Variable O&M                0.0046352   0.0046352   0.0046352   0.0046352   0.0046352   0.0046352   0.0046352   0.0046352 
Capacity                      FIXED       FIXED       FIXED       FIXED       FIXED       FIXED       FIXED       FIXED   
==========================================================================================================================

Annual Production         265,625,000 286,875,000 308,125,000 329,375,000 350,625,000 367,526,000 393,125,000 414,375,000 

30,000,001  32,500,001  35,000,001  37,500,001  40,000,001  42,500,001  45,000,001  47,500,001 
Gross Lbs. Steam               to           to          to        to           to          to          to          to     
Delivered Monthly          32,500,000  35,000,000  37,500,000  40,000,000  42,500,000  45,000,000  47,500,000  50,000,000 
----------  ----------  ----------  ----------  ----------  ----------  ----------  ---------- 

Fuel                          2.27         2.27        2.27       2.27        2.27        2.27        2.27        2.27    
Fixed O&M                     2.00         1.85        1.72       1.61        1.51        1.44        1.35        1.28
Variable O&M                  0.55         0.55        0.55       0.55        0.55        0.55        0.55        0.55    
Capacity                      0.35         0.35        0.35       0.35        0.35        0.35        0.35        0.35    
----         ----        ----       ----        ----        ----        ----        ----    

Total Steam
Billing Rate                 $5.17        $5.02       $4.89      $4.78       $4.68       $4.61       $4.52       $4.45    

CALCULATION OF MULTIPLIERS
--------------------------

Fuel                        0.0190558   0.0190558   0.0190558   0.0190558   0.0190558   0.0190558   0.0190558   0.0190558 
Fixed O&M                   0.0168240   0.0155365   0.0145064   0.0135622   0.0127039   0.0121030   0.0113305   0.0107296 
Variable O&M                0.0046352   0.0046352   0.0046352   0.0046352   0.0046352   0.0046352   0.0046352   0.0046352 
Capacity                      FIXED       FIXED       FIXED       FIXED       FIXED       FIXED       FIXED       FIXED   
==========================================================================================================================

Annual Production          180,625,000 201,875,000 223,125,000 244,375,000 

20,000,001  22,500,001  25,000,001  27,500,001   
Gross Lbs. Steam                to          to          to          to       
Delivered Monthly           22,500,000  25,000,000  27,500,000  30,000,000   
----------  ----------  ----------  ----------   

Fuel                           2.27        2.27        2.27        2.27      
Fixed O&M                      2.94        2.63        2.38        2.17
Variable O&M                   0.55        0.55        0.55        0.55      
Capacity                       0.35        0.35        0.35        0.35      
----------  ----------  ----------  ----------   

Total Steam                                                                  
Billing Rate                  $6.11       $5.80       $5.95       $5.34      

CALCULATION OF MULTIPLIERS                                                   
--------------------------                                                   

Fuel                         0.0190558   0.0190558   0.0190558   0.0190558   
Fixed O&M                    0.0247210   0.0221459   0.0200000   0.0182833   
Variable O&M                 0.0046352   0.0046352   0.0046352   0.0046352   
Capacity                       FIXED       FIXED       FIXED       FIXED     
==========================================================================   

Annual Production          435,625,000 456,875,000 478,125,000 499,375,000  

50,000,001  52,500,001  55,000,001  57,500,001   
Gross Lbs. Steam                to            to         to         to       
Delivered Monthly           52,500,000  55,000,000  57,500,000  60,000,000   
----------  ----------  ----------  ----------   

Fuel                           2.27        2.27        2.27        2.27      
Fixed O&M                      1.21        1.16        1.11        1.06
Variable O&M                   0.55        0.55        0.55        0.55      
Capacity                       0.35        0.35        0.35        0.35      
----        ----        ----        ----      

Total Steam                                                                  
Billing Rate                  $4.38       $4.33       $4.28       $4.23   

CALCULATION OF MULTIPLIERS                                                   
--------------------------                                                   

Fuel                         0.0190558   0.0190558   0.0190558   0.0190558   
Fixed O&M                    0.0102146   0.0097854   0.0093562   0.0089270   
Variable O&M                 0.0046352   0.0046352   0.0046352   0.0046352   
Capacity                       FIXED       FIXED       FIXED       FIXED     
==========================================================================   

Condensate Credit:     Thermal Value: Equal to the displaced fuel value - $2.43
per 1,200,000 BTUs in 1998 Dollars
Liquid Value: $1.00 per thousand gallons
Make-up Water Credit:  Thermal Value: Equal to the displaced fuel value - $2.43
per 1,200,000 BTUs in 1998 Dollars
Liquid Value: $1.00 per thousand gallons

[Letterhead of Multitrade Group, Inc.]

January 13, 1995

Mr. Danny Cole
Bassett Walker, Inc.
PO Box 5423
Martinsville, VA  24115

RE: Steam Rate March 1996 through February 1997

Dear Danny:

Enclosed are the proposed steam rates for the period commencing March 96 through
February 97. Rates would apply to our existing steam agreement dated January 15,
1992; all other terms and conditions would remain.

As we discussed,  the format of the  producers  price index has been changed and
escalation, using the method which was previously used, is no longer feasible. I
enclose  a  copy  of  November  1994  "Survey  of  Current  Business"  for  your
information.  Perhaps we should use the consumer  price index for future changes
(see page C-43).

Our  proposed  price  changes  are  approximately  1  1/2%  increase.  It  is my
understanding that the producer price index increased over 3% during 1994.

We appreciate your business and look forward to continuing to provide your steam
needs.

Sincerely,

/s/ B. Edward Brammer
---------------------
B. Edward Brammer
CEO-Chairman

BEB/esc

Enclosures

[Letterhead of Bassett Walker, Inc.]

March 31, 1995

Mr. B. Edward Brammer
Multitrade Group, Inc.
P. O. Box 717
Ridgeway, VA  24148

RE: Steam Contract March 1996 through February 1997

Dear Mr. Brammer:

Bassett-Walker is in receipt of your proposed steam rate schedule for
the period of March 1, 1996 through  February,  1997. We understand  that M.T.G.
desires to not issue a new formal contract,  instead allowing acceptance of your
letter of January 13, 1995 and the steam rate schedule to serve as a contractual
commitment by both parties to extend our existing agreement.  Please accept this
letter as a formal  contractual  commitment  by  Bassett-Walker  to  extend  the
agreement through February 28, 1997.

Bassett-Walker  looks forward to the excellent  service in the future
that has been experienced in the past from M.T.G.

Sincerely,

/s/ Robin H. Gehman
------------------------
Robin H. Gehman
Vice President-Finance

RHG:jsm

cc:  George Clark
Danny Cole

Effective March 1, 1996 through February 28, 1997

BASSETT-WALKER MONTHLY STEAM VOLUME DISCOUNT RATES

JANUARY 13, 1995

Annual Production    10,625,000    31,450,000    53,125,000    74,375,000    95,625,000   116,875,000   138,125,000   159,375,000  

================================================================================================================

Gross Lbs. Steam              0     2,500,001     5,000,001     7,500,001    10,000,001    12,500,001    15,000,001    17,500,001  
Delivered Monthly            to            to            to            to            to            to            to            to  
2,500,000     5,000,000     7,500,000    10,000,000    12,500,000    15,000,000    17,500,000    20,000,000  
------------  ------------  ------------  ------------  ------------  ------------  ------------  ------------  

Fuel                       2.27          2.27          2.27          2.27          2.27          2.27          2.27          2.27  
Fixed O&M                 51.76         17.49         10.35          7.39          5.75          4.71          3.98          3.45
Variable O&M               0.56          0.56          0.56          0.56          0.56          0.56          0.56          0.56  
Capacity                   0.35          0.35          0.35          0.35          0.35          0.35          0.35          0.35  
------------  ------------  ------------  ------------  ------------  ------------  ------------  ------------  

Total Steam
Billing Rate       $      54.94  $      20.67  $      13.53  $      10.57  $       8.93  $       7.89  $       7.16  $       6.63  

===================================================================================================================================

Annual Production   265,625,000   286,875,000   308,125,000   329,375,000   350,625,000   371,875,000   393,125,000   414,375,000  

================================================================================================================

Gross Lbs. Steam     30,000,001    32,500,001    35,000,001    37,500,001    40,000,001    42,500,001    45,000,001    47,500,001  
Delivered Monthly            to            to            to            to            to            to            to            to  
32,500,000    35,000,000    37,500,000    40,000,000    42,500,000    45,000,000    47,500,000    50,000,000  
------------  ------------  ------------  ------------  ------------  ------------  ------------  ------------  

Fuel                       2.27          2.27          2.27          2.27          2.27          2.27          2.27          2.27  
Fixed O&M                  2.07          1.92          1.78          1.67          1.57          1.48          1.40          1.33
Variable O&M               0.56          0.56          0.56          0.56          0.56          0.56          0.56          0.56  
Capacity                   0.35          0.35          0.35          0.35          0.35          0.35          0.35          0.35  
------------  ------------  ------------  ------------  ------------  ------------  ------------  ------------  

Total Steam
Billing Rate       $       5.25  $       5.10  $       4.96  $       4.85  $       4.75  $       4.66  $       4.58  $       4.51

===================================================================================================================================

Annual Production   180,625,000   201,875,000   223,125,000   244,375,000      

======================================================      

Gross Lbs. Steam     20,000,001    22,500,001    25,000,001    27,500,001      
Delivered Monthly            to            to            to            to      
22,500,000    25,000,000    27,500,000    30,000,000      
------------  ------------  ------------  ------------      

Fuel                       2.27          2.27          2.27          2.27      
Fixed O&M                  3.04          2.72          2.46          2.25
Variable O&M               0.56          0.56          0.56          0.56      
Capacity                   0.35          0.35          0.35          0.35      
------------  ------------  ------------  ------------      

Total Steam                                                                    
Billing Rate       $       6.22  $       5.90  $       5.64  $       5.43      

=========================================================================      

Annual Production   435,625,000   456,875,000   478,125,000   499,375,000      

======================================================      

Gross Lbs. Steam     50,000,001    52,500,001    55,000,001    57,500,001      
Delivered Monthly            to            to            to            to      
52,500,000    55,000,000    57,500,000    60,000,000      
------------  ------------  ------------  ------------      

Fuel                       2.27          2.27          2.27          2.27      
Fixed O&M                  1.26          1.20          1.15          1.10
Variable O&M               0.56          0.56          0.56          0.56      
Capacity                   0.35          0.35          0.35          0.35      
------------  ------------  ------------  ------------      

Total Steam                                                                    
Billing Rate       $       4.44  $       4.38  $       4.33  $       4.28      

=========================================================================      

CONDENSATE CREDIT:      Thermal Value: Equal to the displaced fuel value - $2.27
per 1,200,000 BTUs in 1998 Dollars
Liquid Value:  $1.00 per thousand gallons
MAKE-UP WATER CREDIT:   Thermal Value: Equal to the displaced fuel value - $2.27
per 1,200,000 BTUs in 1998 Dollars
Liquid Value:  $1.00 per thousand gallons

[Letterhead of Multitrade Group, Inc.]

August 21, 1996

Mr. Danny Cole
Bassett Walker, Inc.
PO Box 5423
Martinsville, VA  24115

RE:  Steam Rates March 1997 through February 1998

Dear Danny:

Enclosed are the proposed steam rates which would apply to steam  purchased from
March 1, 1997 through February 1998. The fuel, fixed and variable O&M components
have been adjusted to conform with the Producer's Price Index,  1995 average for
all commodities.

All other terms and conditions, as spelled in the existing steam agreement dated
January 15,  1992,  will remain in full force and effect  during the term of any
extension.

We appreciate your business and look forward to continuing to provide your steam
needs.

Sincerely,

/s/ B. E. Brammer
-----------------
B. E. Brammer
Chairman and CEO

[Letterhead of Bassett Walker, Inc.]

January 29, 1997

Mr. B. Edward Brammer
Multitrade Group, Inc.
P.O. Box 717
Ridgeway, VA  24148

RE:  STEAM CONTRACT

Dear Mr. Brammer:

Bassett-Walker,  Inc. is in receipt of your proposed steam rate schedule for the
period of March 1, 1997 through  February,  1998. We understand  that Multitrade
Group desires to not issue a new formal contract, instead allowing acceptance of
your  letter  of  August  21,  1996 and the steam  rate  schedule  to serve as a
contractual commitment by both parties to extend our existing agreement.  Please
accept this  letter as a formal  contractual  commitment  by  Bassett-Walker  to
extend the agreement through February 28, 1998.

Bassett-Walker  looks  forward to the  excellent  service in the future that has
been experienced in the past from Multitrade Group.

Sincerely,

/s/ Peter Keene
---------------
Peter Keene
Vice President
Finance

pb

c: George Clark
Danny Cole

Effective March 1, 1997 through February 28, 1998
1995 Index: 125.8
Basset-Walker, Inc. Steam Rates

BASSETT-WALKER MONTHLY STEAM VOLUME DISCOUNT RATES

RATE SHEET PRODUCED AUGUST 21, 1998

Annual Production             10,625,000    31,450,000    53,125,000    74,375,000    95,625,000   116,875,000   138,125,000

Gross Lb. Steam                        0     2,500,001     5,000,001     7,500,001    10,000,001    12,500,001    15,000,001
Delivered Monthly                     to            to            to            to            to            to            to
2,500,000     5,000,000     7,500,000    10,000,000    12,500,000    15,000,000    17,500,000
------------  ------------  ------------  ------------  ------------  ------------  ------------

Fuel                                2.40          2.40          2.40          2.40          2.40          2.40          2.40
Fixed O&M                          52.85         17.85         10.57          7.55          5.87          4.81          4.06
Variable O&M                        0.58          0.58          0.58          0.58          0.58          0.58          0.58
Capacity                            0.35          0.35          0.35          0.35          0.35          0.35          0.35
------------  ------------  ------------  ------------  ------------  ------------  ------------

Total Steam
Billing Rate                $      56.18  $      21.18  $      13.90  $      10.88  $       9.20  $       8.14  $       7.39

CALCULATION OF MULTIPLIERS
--------------------------

Fuel                           0.0190558     0.0190558     0.0190558     0.0190558     0.0190558     0.0190558     0.0190558
Fixed O&M                      0.4200858     0.1418884     0.0840343     0.0600000     0.0466953     0.0381974     0.0322747
Variable O&M                   0.0046352     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352
Capacity                           Fixed         Fixed         Fixed         Fixed         Fixed         Fixed         Fixed
============================================================================================================================

Annual Production            265,625,000   286,875,000   308,125,000   329,375,000   350,625,000   371,875,000   393,125,000

Gross Lb. Steam               30,000,001    32,500,001    35,000,001    37,500,001    40,000,001    42,500,001    45,000,001
Delivered Monthly                     to            to            to            to            to            to            to
32,500,000    35,000,000    37,500,000    40,000,000    42,500,000    45,000,000    47,500,000
------------  ------------  ------------  ------------  ------------  ------------  ------------

Fuel                                2.40          2.40          2.40          2.40          2.40          2.40          2.40
Fixed O&M                           2.12          1.95          1.82          1.71          1.60          1.52          1.43
Variable O&M                        0.58          0.58          0.58          0.58          0.58          0.58          0.58
Capacity                            0.35          0.35          0.35          0.35          0.35          0.35          0.35
------------  ------------  ------------  ------------  ------------  ------------  ------------

Total Steam
Billing Rate                $       5.45  $       5.28  $       5.16  $       5.04  $       4.93  $       4.85  $       4.76

CALCULATION OF MULTIPLIERS
--------------------------

Fuel                           0.0190558     0.0190558     0.0190558     0.0190558     0.0190558     0.0190558     0.0190558
Fixed O&M                      0.0168240     0.0155365     0.0145064     0.0135622     0.0127039     0.0121030     0.0113305
Variable O&M                   0.0046352     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352
Capacity                           Fixed         Fixed         Fixed         Fixed         Fixed         Fixed         Fixed
============================================================================================================================

Annual Production              159,375,000   180,625,000   201,875,000   223,125,000   244,375,000   

Gross Lb. Steam                 17,500,001    20,000,001    22,500,001    25,000,001    27,500,001   
Delivered Monthly                       to            to            to            to            to   
20,000,000    22,500,000    25,000,000    27,500,000    30,000,000   
------------  ------------  ------------  ------------  ------------   

Fuel                                  2.40          2.40          2.40          2.40          2.40   
Fixed O&M                             3.52          3.11          2.79          2.52          2.30
Variable O&M                          0.58          0.58          0.58          0.58          0.58   
Capacity                              0.35          0.35          0.35          0.35          0.35   
------------  ------------  ------------  ------------  ------------   

Total Steam                                                                                          
Billing Rate                  $       6.85  $       6.44  $       6.12  $       5.85  $       5.63   

CALCULATION OF MULTIPLIERS                                                                           
--------------------------                                                                           

Fuel                             0.0190558     0.0190558     0.0190558     0.0190558     0.0190558   
Fixed O&M                        0.0279828     0.0247210     0.0221459     0.0200000     0.0182833   
Variable O&M                     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352   
Capacity                             Fixed         Fixed         Fixed         Fixed         Fixed   
==================================================================================================   

Annual Production              414,375,000   435,625,000   456,875,000   478,125,000   499,375,000   

Gross Lb. Steam                 47,500,001    50,000,001    52,500,001    55,000,001    57,500,001   
Delivered Monthly                       to            to            to            to            to   
50,000,000    52,500,000    55,000,000    57,500,000    60,000,000   
------------  ------------  ------------  ------------  ------------   

Fuel                                  2.40          2.40          2.40          2.40          2.40   
Fixed O&M                             1.35          1.28          1.23          1.18          1.12   
Variable O&M                          0.58          0.58          0.58          0.58          0.58   
Capacity                              0.35          0.35          0.35          0.35          0.35   
------------  ------------  ------------  ------------  ------------   

Total Steam                                                                                          
Billing Rate                  $       4.68  $       4.62  $       4.56  $       4.51  $       4.45   

CALCULATION OF MULTIPLIERS                                                                           
--------------------------                                                                           

Fuel                             0.0190558     0.0190558     0.0190558     0.0190558     0.0190558   
Fixed O&M                        0.0107296     0.0102146     0.0097854     0.0093562     0.0089270   
Variable O&M                     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352   
Capacity                             Fixed         Fixed         Fixed         Fixed         Fixed   
==================================================================================================   

CONDENSATE CREDIT:      Thermal Value: Equal to the displaced fuel value - $2.40
per 1,200,000 BTUs in 1997 Dollars
Liquid Value:  $1.00 per thousand gallons

MAKE-UP WATER CREDIT:   Thermal Value: Equal to the displaced fuel value - $2.40
per 1,200,000 BTUs in 1997 Dollars
Liquid Value:  $1.00 per thousand gallons

[Letterhead of Multitrade Group, Inc.]

May 1, 1997

Mr. Danny Cole
Bassett Walker
Martinsville, VA  24112

RE:  Steam Rate Adjustment

Dear Danny:

Attached is the proposed steam rate schedule for steam  delivered  between March
1, 1998 and February 28, 1999.

The rates were changed based on the rate of change in the Producer's  Price "all
commodities"  index.  The index changed from 125.8 to 127.6 (1996 average).  The
change in the index means an approximate 1.4% increase in steam pricing.

Request the rates on the attached sheet be approved for steam  delivered  during
the time period indicated.

I appreciate the opportunity to serve you and the Bassett-Walker organization. I
hope the attached rates meet your early approval.

Sincerely,

/s/ B. E. Brammer
-----------------
B. E. Brammer
CEO

[Letterhead of Bassett Walker, Inc.]

May 12, 1997

Mr. B. Edward Brammer
Multitrade Group, Inc.
P.O. Box 717
Ridgeway, VA 24148

Re: Steam Contract

Dear Mr. Brammer:

Basset-Walker,  Inc. is in receipt of your proposed  steam rate schedule for the
period of March 1, 1998 through February 28, 1999. We understand that Multitrade
Group desires to not issue a new formal contract, instead allowing acceptance of
your letter of May 1, 1997 and the steam rate schedule to serve as a contractual
commitment by Bassett-Walker,  Inc, to extend the agreement through February 28,
1999.

Bassett-Walker,  Inc. looks forward to the excellent  service in the future that
has been experienced in the past from Multitrade Group, Inc.

Sincerely,

/s/ George Clark
----------------
George Clark
Vice President
Manufacturing

cc: Peter Keene
Danny Cole

Effective March 1, 1998 through February 28, 1999
1996 Index: 127.6
Basset-Walker, Inc. Steam Rates                  

BASSETT-WALKER MONTHLY STEAM VOLUME DISCOUNT RATES

RATE SHEET PRODUCED MAY 1, 1997

Annual Production             10,625,000    31,450,000    53,125,000    74,375,000    95,625,000   116,875,000   138,125,000  

Gross Lbs. Steam                       0     2,500,001     5,000,001     7,500,001    10,000,001    12,500,001    15,000,001  
Delivered Monthly                     to            to            to            to            to            to            to  
2,500,000     5,000,000     7,500,000    10,000,000    12,500,000    15,000,000    17,500,000  
------------  ------------  ------------  ------------  ------------  ------------  ------------  

Fuel                                2.43          2.43          2.43          2.43          2.43          2.43          2.43  
Fixed O&M                          53.60         18.10         10.72          7.66          5.96          4.87          4.12  
Variable O&M                        0.59          0.59          0.59          0.59          0.59          0.59          0.59  
Capacity                            0.35          0.35          0.35          0.35          0.35          0.35          0.35  
------------  ------------  ------------  ------------  ------------  ------------  ------------  

Total Steam
Billing Rate                $      56.98  $      21.48  $      14.10  $      11.03  $       9.33  $       8.25  $       7.49  

CALCULATION OF MULTIPLIERS
--------------------------

Fuel                           0.0190558     0.0190558     0.0190558     0.0190558     0.0190558     0.0190558     0.0190558  
Fixed O&M                      0.4200858     0.1418884     0.0840343     0.0600000     0.0466953     0.0381974     0.0322747  
Variable O&M                   0.0046352     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352  
Capacity                           Fixed         Fixed         Fixed         Fixed         Fixed         Fixed         Fixed  
==============================================================================================================================

Annual Production            265,625,000   286,875,000   308,125,000   329,375,000   350,625,000   371,875,000   393,125,000  

Gross Lbs. Steam              30,000,001    32,500,001    35,000,001    37,500,001    40,000,001    42,500,001    45,000,001  
Delivered Monthly                     to            to            to            to            to            to            to  
32,500,000    35,000,000    37,500,000    40,000,000    42,500,000    45,000,000    47,500,000  
------------  ------------  ------------  ------------  ------------  ------------  ------------  

Fuel                                2.43          2.43          2.43          2.43          2.43          2.43          2.43  
Fixed O&M                           2.15          1.98          1.85          1.73          1.62          1.54          1.54  
Variable O&M                        0.59          0.59          0.59          0.59          0.59          0.59          0.59  
Capacity                            0.35          0.35          0.35          0.35          0.35          0.35          0.35  
------------  ------------  ------------  ------------  ------------  ------------  ------------  

Total Steam
Billing Rate                $       5.52  $       5.36  $       5.22  $       5.10  $       4.99  $       4.92  $       4.82  

CALCULATION OF MULTIPLIERS
--------------------------

Fuel                           0.0190558     0.0190558     0.0190558     0.0190558     0.0190558     0.0190558     0.0190558  
Fixed O&M                      0.0168240     0.0155365     0.0145064     0.0135622     0.0127039     0.0121030     0.0113305  
Variable O&M                   0.0046352     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352  
Capacity                           Fixed         Fixed         Fixed         Fixed         Fixed         Fixed         Fixed  
==============================================================================================================================

Annual Production            159,375,000   180,625,000   201,875,000   223,125,000   244,375,000      

Gross Lbs. Steam              17,500,001    20,000,001    22,500,001    25,000,001    27,500,001      
Delivered Monthly                     to            to            to            to            to      
20,000,000    22,500,000    25,000,000    27,500,000    30,000,000      
------------  ------------  ------------  ------------  ------------      

Fuel                                2.43          2.43          2.43          2.43          2.43      
Fixed O&M                           3.57          3.15          2.83          2.55          2.33      
Variable O&M                        0.59          0.59          0.59          0.59          0.59      
Capacity                            0.35          0.35          0.35          0.35          0.35      
------------  ------------  ------------  ------------  ------------      

Total Steam                                                                                           
Billing Rate                $       6.94  $       6.53  $       6.20  $       5.92  $       5.71      

CALCULATION OF MULTIPLIERS                                                                            
--------------------------                                                                            

Fuel                           0.0190558     0.0190558     0.0190558     0.0190558     0.0190558      
Fixed O&M                      0.0279828     0.0247210     0.0221459     0.0200000     0.0162333      
Variable O&M                   0.0046352     0.0046352     0.0046352     0.0046352     0.0046352      
Capacity                           Fixed         Fixed         Fixed         Fixed         Fixed      
================================================================================================      

Annual Production            414,375,000   435,625,000   456,875,000   478,125,000   499,375,000      

Gross Lbs. Steam              47,500,001    50,000,001    52,500,001    55,000,001    57,500,001      
Delivered Monthly                     to            to            to            to            to      
50,000,000    52,500,000    55,000,000    57,500,000    60,000,000      
------------  ------------  ------------  ------------  ------------      

Fuel                                2.43          2.43          2.43          2.43          2.43      
Fixed O&M                           1.37          1.30          1.25          1.19          1.14      
Variable O&M                        0.59          0.59          0.59          0.59          0.59      
Capacity                            0.35          0.35          0.35          0.35          0.35      
------------  ------------  ------------  ------------  ------------      

Total Steam                                                                                           
Billing Rate                $       4.74  $       4.68  $       4.62  $       4.57  $       4.51      

CALCULATION OF MULTIPLIERS                                                                            
--------------------------                                                                            

Fuel                           0.0190558     0.0190558     0.0190558     0.0190558     0.0190558      
Fixed O&M                      0.0107296     0.0102146     0.0097854     0.0093562     0.0089270      
Variable O&M                   0.0046352     0.0046352     0.0046352     0.0046352     0.0046352      
Capacity                           Fixed         Fixed         Fixed         Fixed         Fixed      
================================================================================================      

Condensate Credit:      Thermal Value: Equal to the displaced fuel value - $2.43
per 1,200,000 BTUs in 1998 Dollars
Liquid Value:  $1.00 per thousand gallons
Make-up Water Credit:   Thermal Value: Equal to the displaced fuel value - $2.43
per 1,200,000 BTUs in 1998 Dollars
Liquid Value:  $1.00 per thousand gallons

[Letterhead of Multitrade Group, Inc.]

March 11, 1998

Mr. Danny Cole
VF Knitware, Inc.
Martinsville, VA  24112

RE:  Steam Rate Adjustment

Dear Danny:

Attached is the proposed steam rate schedule for steam  delivered  between March
1, 1999 and February 28, 2000.

There is NO change in the actual  steam  rate.  The  Producers  Price Index "All
Commodities Index" remained at 127.6 (see the attached copy).

Request the rates on the attached sheet be approved for steam  delivered  during
the time period indicated.

I will also prepare an  amendment to the steam  agreement  that  formalizes  and
binds both parties to the terms and conditions. This is necessary in view of the
name change to VF Knitware, Inc.

Sincerely,

/s/ B. E. Brammer
-----------------
B. E. Brammer
CEO

[Letterhead of VF Knitwear (formerly Bassett Walker, Inc.)]

March 13, 1998

Mr. B. Edward Brammer
Multitrade Group, Inc.
P.O. Box 717
Ridgeway, VA 24148

RE: Steam Contract
March 1, 1999 - February 28, 2000

Dear Mr. Brammer:

VF Knitwear,  Inc. is in receipt of your  proposed  steam rate schedule for
the period of March 1, 1999 through February 28, 2000. VF Knitwear,  Inc. agrees
to the steam rate schedule as submitted.

VF Knitwear, Inc. looks forward to the excellent service in the future that
has been experienced in the past from Multitrade Group.

Sincerely,

/s/ George Clark
----------------
George Clark
Vice President
Manufacturing

cc: Danny Cole

Effective March 1, 1999 through February 28, 2000
1997 Index: 127.6
Basset-Walker, Inc. Steam Rates

BASSETT-WALKER MONTHLY STEAM VOLUME DISCOUNT RATES

RATE SHEET PRODUCED MARCH 11, 1998

Annual Production             10,625,000    31,450,000    53,125,000    74,375,000    95,625,000   116,875,000   138,125,000  

0     2,500,001     5,000,001     7,500,001    10,000,001    12,500,001    15,000,001  
Gross Lbs. Steam                      to            to            to            to            to            to            to  
Delivered Monthly              2,500,000     5,000,000     7,500,000    10,000,000    12,500,000    15,000,000    17,500,000  
------------  ------------  ------------  ------------  ------------  ------------  ------------  

Fuel                                2.43          2.43          2.43          2.43          2.43          2.43          2.43  
Fixed O&M                          53.60         18.10         10.72          7.66          5.96          4.87          4.12  
Variable O&M                        0.59          0.59          0.59          0.59          0.59          0.59          0.59  
Capacity                            0.35          0.35          0.35          0.35          0.35          0.35          0.35  

Total Steam
Billing Rate                $      56.98  $      21.48  $      14.10  $      11.03  $       9.33  $       8.25  $       7.49  

CALCULATION OF MULTIPLIERS
--------------------------

Fuel                           0.0190558     0.0190558     0.0190558     0.0190558     0.0190558     0.0190558     0.0190558  
Fixed O&M                      0.4200858     0.1418884     0.0840343     0.0600000     0.0466953     0.0381974     0.0322747  
Variable O&M                   0.0046352     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352  
Capacity                           Fixed         Fixed         Fixed         Fixed         Fixed         Fixed         Fixed  
==============================================================================================================================

Annual Production            265,625,000   286,875,000   308,125,000   329,375,000   350,625,000   371,875,000   393,125,000  

Gross Lbs. Steam              30,000,001    32,500,001    35,000,001    37,500,001    40,000,001    42,500,001    45,000,001  
Delivered Monthly                     to            to            to            to            to            to            to  
32,500,000    35,000,000    37,500,000    40,000,000    42,500,000    45,000,000    47,500,000  
------------  ------------  ------------  ------------  ------------  ------------  ------------  

Fuel                                2.43          2.43          2.43          2.43          2.43          2.43          2.43  
Fixed O&M                           2.15          1.98          1.85          1.73          1.62          1.54          1.54  
Variable O&M                        0.59          0.59          0.59          0.59          0.59          0.59          0.59  
Capacity                            0.35          0.35          0.35          0.35          0.35          0.35          0.35  
------------  ------------  ------------  ------------  ------------  ------------  ------------  

Total Steam
Billing Rate                $       5.52  $       5.36  $       5.22  $       5.10  $       4.99  $       4.92  $       4.82  

CALCULATION OF MULTIPLIERS
--------------------------

Fuel                           0.0190558     0.0190558     0.0190558     0.0190558     0.0190558     0.0190558     0.0190558  
Fixed O&M                      0.0168240     0.0155365     0.0145064     0.0135622     0.0127039     0.0121030     0.0113305  
Variable O&M                   0.0046352     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352  
Capacity                           Fixed         Fixed         Fixed         Fixed         Fixed         Fixed         Fixed  
==============================================================================================================================

Annual Production            159,375,000   180,625,000   201,875,000   223,125,000   244,375,000    

17,500,001    20,000,001    22,500,001    25,000,001    27,500,001    
Gross Lbs. Steam                      to            to            to            to            to    
Delivered Monthly             20,000,000    22,500,000    25,000,000    27,500,000    30,000,000    
------------  ------------  ------------  ------------  ------------    

Fuel                                2.43          2.43          2.43          2.43          2.43    
Fixed O&M                           3.57          3.15          2.83          2.55          2.33    
Variable O&M                        0.59          0.59          0.59          0.59          0.59    
Capacity                            0.35          0.35          0.35          0.35          0.35    

Total Steam                                                                                         
Billing Rate                $       6.94  $       6.53  $       6.20  $       5.92  $       5.71    

CALCULATION OF MULTIPLIERS                                                                          
--------------------------                                                                          

Fuel                           0.0190558     0.0190558     0.0190558     0.0190558     0.0190558    
Fixed O&M                      0.0279828     0.0247210     0.0221459     0.0200000     0.0182833    
Variable O&M                   0.0046352     0.0046352     0.0046352     0.0046352     0.0046352    
Capacity                           Fixed         Fixed         Fixed         Fixed         Fixed    
================================================================================================    

Annual Production            414,375,000   435,625,000   456,875,000   478,125,000   499,375,000    

Gross Lbs. Steam              47,500,001    50,000,001    52,500,001    55,000,001    57,500,001    
Delivered Monthly                     to            to            to            to            to    
50,000,000    52,500,000    55,000,000    57,500,000    60,000,000    
------------  ------------  ------------  ------------  ------------    

Fuel                                2.43          2.43          2.43          2.43          2.43    
Fixed O&M                           1.37          1.30          1.25          1.19          1.14    
Variable O&M                        0.59          0.59          0.59          0.59          0.59    
Capacity                            0.35          0.35          0.35          0.35          0.35    
------------  ------------  ------------  ------------  ------------    

Total Steam                                                                                         
Billing Rate                $       4.74  $       4.68  $       4.62  $       4.57  $       4.51    

CALCULATION OF MULTIPLIERS                                                                          
--------------------------                                                                          

Fuel                           0.0190558     0.0190558     0.0190558     0.0190558     0.0190558    
Fixed O&M                      0.0107296     0.0102146     0.0097854     0.0093562     0.0089270    
Variable O&M                   0.0046352     0.0046352     0.0046352     0.0046352     0.0046352    
Capacity                           Fixed         Fixed         Fixed         Fixed         Fixed    
================================================================================================    

Condensate Credit:      Thermal Value: Equal to the displaced fuel value - $2.43
per 1,200,000 BTUs in 1998 Dollars
Liquid Value: $1.00 per thousand gallons
Make-up Water Credit:   Thermal Value: Equal to the displaced fuel value - $2.43
per 1,200,000 BTUs in 1998 Dollars
Liquid Value: $1.00 per thousand gallons

[Letterhead of Multitrade Group, Inc.]

February 25, 1999

Mr. Danny Cole
VF Knitwear, Inc.
P.O. Box 5423
Martinsville, VA  24114

RE: Steam Rate Adjustment

Dear Danny:

Please  find  enclosed a rate  sheet for steam  sales for the period of March 1,
2000 through  February 2001. The rates have been reduced in accordance  with the
Producer's  Price Index -- All  Commodities for 1998 as required in Section 5.3b
and 5.3c in the Steam Agreement  dated March 1, 1993. The condensate  credit was
changed to the fuel component rate in accordance with Section 7.3.

As allowed in Section 13 in the Steam  Agreement,  Multitrade  requests that the
acceptance  of  the  rate  schedule  and  this  letter  serve  as a  contractual
commitment by both parties to extend the agreement through February 2001.

Multitrade looks forward to providing your steam energy needs!

Sincerely,

-----------------------------------
John M. Helton
Vice President Virginia Operations

[Letterhead of VF Knitwear (formerly Bassett Walker, Inc.)]

February 26, 1999

Mr. John M. Helton
Multitrade Group, Inc.
P.O. Box 717
Ridgeway, VA 24148

RE: Steam Contract: March 1, 2000 - February 28, 2001

Dear Mr. Helton:

VF Knitwear,  Inc. has received your  proposed  steam rate schedule for the
period of March 1, 2000 through February 28, 2001. VF Knitwear, Inc. accepts the
rate schedule and will continue our contract for the covered period.

VF Knitwear, Inc. looks forward to the excellent service in the future that
has been experienced in the past from Multitrade Group.

Sincerely,

/s/ Wayne Hill
--------------------------
Wayne Hill
V.P. Textile Manufacturing

cc: Bob Howard
Dan Templin
Danny Cole

Effective March 1, 2000 through February 28, 2001
1998 Index:  124.4                               
Basset-Walker, Inc. Steam Rates                  

VF KNITWEAR MONTHLY STEAM VOLUME DISCOUNT RATES
STEAM PURCHASED FROM KTI ENERGY OF VIRGINIA
RATE SHEET (PRODUCED FEBRUARY 24, 1999)

Annual Production             10,625,000    31,450,000    53,125,000    74,375,000    95,625,000   116,875,000   138,125,000  

0     2,500,001     5,000,001     7,500,001    10,000,001    12,500,001    15,000,001  
Gross Lbs. Steam                      to            to            to            to            to            to            to  
Delivered Monthly              2,500,000     5,000,000     7,500,000    10,000,000    12,500,000    15,000,000    17,500,000  
------------  ------------  ------------  ------------  ------------  ------------  ------------  

Fuel                                2.37          2.37          2.37          2.37          2.37          2.37          2.37  
Fixed O&M                          52.26         17.65         10.45          7.46          5.81          4.75          4.01  
Variable O&M                        0.58          0.58          0.58          0.58          0.58          0.58          0.58  
Capacity                            0.35          0.35          0.35          0.35          0.35          0.35          0.35  

Total Steam
Billing Rate                $      55.56  $      20.95  $      13.75  $      10.76  $       9.11  $       8.05  $       7.31  

CALCULATION OF MULTIPLIERS
--------------------------

Fuel                           0.0190558     0.0190558     0.0190558     0.0190558     0.0190558     0.0190558     0.0190558  
Fixed O&M                      0.4200858     0.1418884     0.0840343     0.0600000     0.0466953     0.0381974     0.0322747  
Variable O&M                   0.0046352     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352  
Capacity                           Fixed         Fixed         Fixed         Fixed         Fixed         Fixed         Fixed  
==============================================================================================================================

Annual Production            265,625,000   286,875,000   308,125,000   329,375,000   350,625,000   371,875,000   393,125,000  

Gross Lbs. Steam              30,000,001    32,500,001    35,000,001    37,500,001    40,000,001    42,500,001    45,000,001  
Delivered Monthly                     to            to            to            to            to            to            to  
32,500,000    35,000,000    37,500,000    40,000,000    42,500,000    45,000,000    47,500,000  
------------  ------------  ------------  ------------  ------------  ------------  ------------  

Fuel                                2.37          2.37          2.37          2.37          2.37          2.37          2.37  
Fixed O&M                           2.09          1.93          1.80          1.69          1.58          1.51          1.41  
Variable O&M                        0.58          0.58          0.58          0.58          0.58          0.58          0.58  
Capacity                            0.35          0.35          0.35          0.35          0.35          0.35          0.35  

Total Steam
Billing Rate                $       5.39  $       5.23  $       5.10  $       4.98  $       4.88  $       4.81  $       4.71  

CALCULATION OF MULTIPLIERS
--------------------------

Fuel                           0.0190558     0.0190558     0.0190558     0.0190558     0.0190558     0.0190558     0.0190558  
Fixed O&M                      0.0168240     0.0155365     0.0145064     0.0135622     0.0127039     0.0121030     0.0113305  
Variable O&M                   0.0046352     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352     0.0046352  
Capacity                           Fixed         Fixed         Fixed         Fixed         Fixed         Fixed         Fixed  
==============================================================================================================================

Annual Production            159,375,000   180,625,000   201,875,000   223,125,000   244,375,000    

17,500,001    20,000,001    22,500,001    25,000,001    27,500,001    
Gross Lbs. Steam                      to            to            to            to            to    
Delivered Monthly             20,000,000    22,500,000    25,000,000    27,500,000    30,000,000    
------------  ------------  ------------  ------------  ------------    

Fuel                                2.37          2.37          2.37          2.37          2.37    
Fixed O&M                           3.48          3.08          2.75          2.49          2.27    
Variable O&M                        0.58          0.58          0.58          0.58          0.58    
Capacity                            0.35          0.35          0.35          0.35          0.35    

Total Steam                                                                                         
Billing Rate                $       6.78   $      6.37  $       6.05  $       5.79  $       5.57    

CALCULATION OF MULTIPLIERS                                                                          
--------------------------                                                                          

Fuel                           0.0190558     0.0190558     0.0190558     0.0190558     0.0190558    
Fixed O&M                      0.0279828     0.0247210     0.0221459     0.0200000     0.0182833    
Variable O&M                   0.0046352     0.0046352     0.0046352     0.0046352     0.0046352    
Capacity                           Fixed         Fixed         Fixed         Fixed         Fixed    
================================================================================================    

Annual Production            414,375,000   435,625,000   456,875,000   478,125,000   499,375,000    

Gross Lbs. Steam              47,500,001    50,000,001    52,500,001    55,000,001    57,500,001    
Delivered Monthly                     to            to            to            to            to    
50,000,000    52,500,000    55,000,000    57,500,000    60,000,000    
------------  ------------  ------------  ------------  ------------    

Fuel                                2.37          2.37          2.37          2.37          2.37    
Fixed O&M                           1.33          1.27          1.22          1.16          1.11    
Variable O&M                        0.58          0.58          0.58          0.58          0.58    
Capacity                            0.35          0.35          0.35          0.35          0.35    

Total Steam                                                                                         
Billing Rate                $       4.63  $       4.57  $       4.51  $       4.46  $       4.41    

CALCULATION OF MULTIPLIERS                                                                          
--------------------------                                                                          

Fuel                           0.0190558     0.0190558     0.0190558     0.0190558     0.0190558    
Fixed O&M                      0.0107296     0.0102146     0.0097854     0.0093562     0.0089270    
Variable O&M                   0.0046352     0.0046352     0.0046352     0.0046352     0.0046352    
Capacity                           Fixed         Fixed         Fixed         Fixed         Fixed    
================================================================================================    

Condensate Credit:      Thermal Value: Equal to the displaced fuel value - $2.37
per 1,200,000 BTUs
Liquid Value:  $1.00 per thousand gallons
Make-up Water Credit:   Thermal Value: Equal to the displaced fuel value - $2.37
per 1,200,000 BTUs
Liquid Value:  $1.00 per thousand gallons

Accepted and Approved:
/s/ Wayne Hill
------------------------------------
V.F. Knitwear, Inc.

/s/ John M. Helton
------------------------------------
KTI Energy of Virginia, Inc.

EXHIBIT  10.38

EXECUTION 5-2-96

This THIRD  AMENDMENT  TO POWER  PURCHASE  AGREEMENT,  effective  the 6th day of
November,  1995, is between MAINE ENERGY RECOVERY COMPANY,  LIMITED  PARTNERSHIP
("Seller") and CENTRAL MAINE POWER COMPANY ("Buyer").

WHEREAS,  Seller and Buyer entered into a Power Purchase Agreement dated January
12, 1984, (together with any amendments thereto, the "Agreement")  governing the
sale of electricity from Seller's Facility located in Biddeford, Maine; and

WHEREAS, the parties to the Agreement entered into a First Amendment dated April
25,  1986,  in order to  establish  an agreed upon  pricing  system for Seller's
deliveries of Firm Energy; and

WHEREAS,  the parties to the  Agreement  entered into a Second  Amendment  dated
February 21, 1991,  in order to facilitate  the  accounting of amounts owed from
Buyer to Seller and from Seller to Buyer by providing Buyer with certain set off
rights; and

WHEREAS,  CL Power  Sales One,  L.L.C.  has agreed to make  certain  payments to
Seller,  in return for which payments  Seller has agreed to enter into a certain
Capacity Purchase Agreement;

NOW,  THEREFORE,  in  consideration of the premises and the mutual covenants and
agreements set forth herein and other good valuable  consideration,  the receipt
and  adequacy  of which  are  hereby  acknowledged,  Buyer and  Seller  agree as
follows:

1. The Agreement is amended by adding to the Table of Contents the following new
Article title:

XXVI - ARBITRATION

XXVII - PREPAYMENT OF CAPACITY

2. The Agreement is amended by inserting in Article I the following definitions:

"Capacity Purchase Agreement" means the agreement between Seller and
a  third-party  Capacity  Provider  regarding the terms under which Seller
will sell the entire  capacity  of the  Facility to such  third-party,  as
permitted pursuant to Article III.

"Capacity Provider" has the meaning set forth in Article III.

"Capacity Sales Agreement"  means the agreement  between Buyer and a
third-party  Capacity Provider  regarding the terms under which Buyer will
purchase the entire  capacity of the Facility  from such  third-party,  as
permitted pursuant to Article III.

"Escrow  Agent"  means  Key  Trust  Company  of Ohio,  N.A.,  or any
successor escrow agent, under the terms of the Escrow Agreement.

"Expiration Draw" has the meaning set forth in the Escrow Agreement.

"Escrow Agreement" means that certain Escrow Agreement,  dated April
30, 1996, among Buyer, Seller,  Capacity Provider,  Issuer, and the Escrow
Agent.

"ING" has the meaning set forth in Article XIII.

"Issuer"  means the issuer of the  letter  of credit as set forth in
Article XIII.

"ON-PEAK  HOURS"  are the hours  between  8:00 a.m.  and 9:00  p.m.,
Monday through Friday,  excluding  legal holidays,  during the period from
April 1 through  October 31, and between 7:00 a.m.  and 9:00 p.m.,  Monday
through  Friday,  excluding  legal  holidays,  during the remainder of the
year. All hours during Saturday,  Sunday,  and legal holidays are Off-Peak
Hours.

"OFF-PEAK HOURS" include all hours which are not On-Peak Hours.

"SCHEDULED  STEOFF HOURS" are those hours in any Calendar Year which
occur during the following periods: (1) from April 1 through and including
May 31, any period that includes any hour between  Friday at 9:00 p.m. and
the  following  Monday  at 8:00  a.m.;  and (2) all  Holiday  Periods  for
holidays  which fall between the dates of April 1 and  September  15. If a
holiday falls on or is observed on Monday, the "Holiday Period" shall mean
the  eighty-three  (83) hour  period  that  begins at 9:00 p.m.  on Friday
before the holiday and ends at 8:00 a.m. on the Tuesday after the holiday.
If a holiday  falls on or is observed  on Friday,  then  "Holiday  Period"
shall mean the  eighty-three  (83) hour period that begins at 9:00 p.m. on
the Thursday  before the holiday and ends at 8:00 a.m. on the Monday after
the  holiday.  If a holiday  falls on or is  observed  on a day other than
Monday or Friday,  then "Holiday  Period" shall mean the thirty-five  (35)
hour  period  that  begins at 9:00 p.m.  on the day before the holiday and
ends at 8:00 a.m. on the day after the holiday.  For purposes of Scheduled
STEOFF Hours, the term "holiday" shall mean any legal holiday in the State
of Maine, as determined pursuant to 4 M.R.S.A. ss. 1051.

"SHORT-TERM ENERGY-ONLY RATE" ("STEO") is the rate per kilowatt-hour
established  by the  Commission  from time to time pursuant to Chapter 36,
Section 3, of its Rules and Regulations,  or any successor provision,  for
sales  from a  Qualifying  Facility  of  energy  only to a  utility  on an
intermittent basis and shall be expressed in cents, rounded to the nearest
hundredth.  If the Commission has not  established a STEO within  eighteen
(18) months  preceding the date or dates on which a STEO value is required
for purposes of this Agreement, Buyer shall calculate STEO consistent with
the  principles  for  the  calculation  of  such  a rate  utilized  by the
Commission in the most recent  proceedings to established STEO immediately
prior to that  eighteen-month  period  using  the most  recently-available
forecasts of fuel costs, load levels,  and other variables then being used
by  Buyer  which  variables  are  typically  used  by  the  Commission  in
determining  a value for STEO.  The  Buyer-calculated  STEO shall serve as
STEO until the  earlier of (i) the  Commission  establishing  STEO or (ii)
eighteen (18) months after Buyer's most recent calculation of STEO. If the
contingency  described in (ii) above occurs,  Buyer shall recalculate STEO
consistent  with the  methodology  described  herein.  It is the intent of
Buyer and Seller to have STEO calculated by either the Commission or Buyer
at least every eighteen months. In the event that Buyer determines a value
for STEO as provided

-2-

hereinabove  and the Commission  subsequently  determines a value for STEO
which  differs  from  the  Buyer-calculated   value,  there  shall  be  no
retroactive  adjustment  with respect to any payments made on the basis of
the Buyer-calculated STEO.

"SHORT-TERM  ENERGY-ONLY ON-PEAK RATE" (STEON") is a rate determined
in the manner described in the definition of "STEO" herein, but applicable
to deliveries of energy during  On-Peak Hours only. If the  Commission has
not  established a separate STEON rate, then the STEON rate shall be equal
to STEO x 1.10.

"SHORT-TERM   ENERGY-ONLY   OFF-PEAK  RATE"  ("STEOFF")  is  a  rate
determined in the manner described in the definition of "STEO" herein, but
applicable  to deliveries  of energy  during  Off-Peak  Hours only. If the
Commission  has not  established a separate  STEOFF rate,  then the STEOFF
rate shall be equal to STEO x 0.90.

3. The  Agreement  is amended by deleting  ARTICLE  II: TERM and a  substituting
thereof the following:

ARTICLE II: TERM

The term of this  Agreement  commenced  on January 12, 1984 and will
terminate on December 31, 2012.

Seller shall purchase Seller's Electrical Usage under one or more of
the applicable  retail tariffs filed with and approved by the Maine Public
Utilities Commission. Any reactive demand charges for such purchases shall
be based  only on the kvar  reading  associated  with the net  inflows  of
reactive power, if any, at the Point of Delivery.

4. The  Agreement  is  amended  by  deleting  ARTICLE  III:  SALE OF  POWER  and
substituting therefor the following:

ARTICLE III: SALE OF POWER

Subject to the  provisions  of the second  paragraph  of Article IX,
Seller  agrees to sell and Buyer agrees to purchase  the entire  output of
Firm Energy,  less energy used for  generator  auxiliaries,  from Seller's
Facility. Subject to the provisions of the second paragraph of Article IX,
Seller shall at all times during the term of this  Agreement  use its best
effort to generate and sell Firm Energy up to 150,000,000  kWh per year at
its  Facility   consistent  with  satisfying  proper  maintenance  of  the
Facility,  and Prudent Electrical  Practice.  Both parties agree that they
will  make  all  determinations  called  for  herein  and  carry  out  all
obligations herein, in good faith and in a reasonable manner.

Buyer shall pay for  deliveries of Firm Energy for the Calendar Year
of  generation  at the Total Rate set forth in  Attachment  II,  except as
otherwise   provided   in  this   Agreement.   However,   the   number  of
kilowatt-hours subject to Attachment II rates shall not exceed 150,000,000
in any Calendar  Year.  Once Seller has  delivered  in any  Calendar  Year
150,000,000  kWh which Buyer is obligated to purchase at the Attachment II
rates,  deliveries  to Buyer during any On-Peak Hour shall be purchased at
STEON and

-3-

deliveries to Buyer during any Off-Peak Hour shall be purchased at STEOFF.
Any  deliveries  of Firm Energy  during  Scheduled  STEOFF  Hours shall be
purchased by Buyer at the STEOFF rate.  The  150,000,000  kWh per Calendar
Year figure shall be prorated on a daily basis during any partial years.

If under  Article XI hereof Buyer elects a Special Work Period or an
Allowable  Work Time that occurs  outside of scheduled  maintenance  hours
(collectively a "Work Period Curtailment"),  Seller will be deemed to have
delivered  410,000 kWh of Firm Energy per day for the duration of the Work
Period  Curtailment,   except  for  those  days  during  the  Work  Period
Curtailment  on which Seller  actually  delivers  more than 410,000 kWh of
Firm  Energy,  in which case Seller will be credited for that day with its
actual   deliveries   for   purposes  of  meeting  its  minimum   delivery
requirements  under  this  Article  XIII.  Any Firm  Energy  deemed  to be
delivered  under  this  paragraph  will  not be paid for by  Buyer,  or be
included in the number of kilowatt  hours  subject to Attachment II rates,
but will qualify  toward meeting  Seller's  minimum  delivery  requirement
under Article XIII.

If Buyer is  obligated,  pursuant to the terms of Article XI, to pay
Seller  for  Firm  Energy  not  actually   delivered  as  a  result  of  a
curtailment, interruption or reduction period exceeding the Allowable Work
Time or, if applicable,  the Special Work Period, the Firm Energy paid for
pursuant to the terms of Article XI but not  actually  delivered  shall be
deemed  delivered both for the purpose of determining  (i) compliance with
the 100,000,000  kWh,  41,369,863 kWh, and 15,000,000 kWh minimum delivery
obligations  set forth in Article  XIII and (ii) in the number of kilowatt
hours subject to Attachment II rates.

If  written  consent  is  given  by  Buyer,  Seller  may  sell  to a
third-party  ("Capacity  Provider")  the entire  capacity of the  Facility
until May 31, 2007 ("Capacity  Sale").  If such Capacity Sale takes place,
the  Agreement  shall remain in effect  between  Buyer and Seller  without
amendment  or  modification,  except as provided  herein.  Buyer shall pay
Seller for  deliveries of energy from the  effective  date of the Capacity
Sale until May 31,  2007 at the Energy  Rate set forth in  Attachment  II,
except for  deliveries  during  Scheduled  STEOFF Hours and  deliveries in
excess of 150,000,000 kWh per Calendar Year, which will be paid for at the
rates set forth in the second paragraph of this Article. In the event of a
Capacity Sale, Buyer and Capacity Provider shall determine the terms under
which capacity  payments will be paid to Capacity Provider and Buyer shall
have no obligation,  so long as this Agreement is in effect, to pay Seller
for  capacity  until June 1, 2007.  Seller  shall not receive the Capacity
Rate for the scheduled term of any such Capacity  Sale,  regardless of the
performance  or  non-performance  of Capacity  Provider under its Capacity
Purchase Agreement. It is expressly understood that Firm Energy during the
term of such Capacity  Sale shall be provided as follows:  both energy and
capacity will be delivered to Buyer (energy pursuant to this Agreement and
capacity  pursuant to a Capacity Sales  Agreement),  but Seller shall sell
only  energy to Buyer and the  Capacity  Provider  will sell  capacity  to
Buyer.  During any Capacity Sale, Seller shall have no obligation to Buyer
to provide  the  capacity  portion of Firm  Energy.  Buyer will during any
Capacity  Sale look solely to the Capacity  Provider to provide  capacity,
and Seller shall have only the obligations regarding capacity as set forth
in the Capacity

-4-

Purchase  Agreement.  It is agreed that Buyer is expressly not an intended
third-party  beneficiary  having  any right of action  under any  Capacity
Purchase Agreement.

In the event of a Capacity Sale pursuant to the previous  paragraph,
if Buyer  subsequently  materially  breaches,  including  by  rejection in
bankruptcy,  its Capacity Sales Agreement with Capacity  Provider and such
Capacity Sales  Agreement is terminated as a result of such breach,  Buyer
shall be deemed to have  materially  breached  this  Agreement  and Seller
shall have the right,  for a period of 395 days following such termination
of the Capacity Sales Agreement, to terminate this Agreement. In the event
that Seller materially breaches, including by rejection in bankruptcy, its
Capacity Purchase Agreement with Capacity Provider, Seller shall be deemed
to have materially breached this Agreement and Buyer shall have the right,
so long as such breach is not cured,  to  terminate  this  Agreement.  For
purposes of this  paragraph,  "reject" shall mean: (a) that the applicable
agreement is rejected by or on behalf of either  Buyer or Seller  (whether
by a trustee,  the debtor in possession,  or otherwise) and such rejection
is  approved,  as  applicable,  pursuant to Section 365 of the  Bankruptcy
Code, 11 U.S.C. ss. 101, et seq., or any other provision of the Bankruptcy
Code or of any other  bankruptcy  or  insolvency  law, now or hereafter in
effect, which similarly provides for the rejection of executory contracts,
and any right of reconsideration,  review and appeal has been exhausted or
is otherwise  waived or barred or (b) if, as of the time  distribution  of
the assets of the estate of Buyer and Seller, as applicable,  whether in a
liquidation  pursuant to a confirmed  Chapter 11 plan or  otherwise,  such
agreement  has not been  assigned  to and  assumed  by a party  capable of
performing thereunder.

Buyer  hereby  consents  to  Seller's  sale to CL Power  Sales  One,
L.L.C.,  pursuant to the Capacity Purchase  Agreement dated as November 6,
1995 (the "Capacity  Purchase  Agreement"),  of the entire capacity of the
Facility until May 31, 2007, and Buyer,  without  waiving any other rights
now available or hereafter arising with respect to Seller,  agrees that it
shall  not seek to  amend,  modify  or  terminate  any of its  obligations
hereunder by virtue of a claim or assertion arising under Article XX(A) or
otherwise  that the sale of  capacity  by Seller to  Capacity  Provider is
inconsistent  with the status of the Facility as a Qualifying  Facility as
defined in 16 U.S.C. Section 796(17)(c) and 35-A MRSA Section 3303(7).

5. The Agreement is amended by deleting ARTICLE IX:  DELIVERIES and substituting
therefor the following:

ARTICLE IX: DELIVERIES

Seller  shall  deliver  all Firm  Energy in  excess of the  Seller's
Electrical Usage of the Facility at the Point of Delivery in the form of 3
phase 34,500 volts 60 Hertz electricity up to a maximum capacity of 25,000
kVA,  which  Firm  Energy  shall be  delivered  to  Buyer at the  Point of
Delivery as described in Attachment I hereof.  It is expressly  understood
and agreed that Seller  shall sell to Buyer and Buyer shall  purchase  the
Gross Generation of Firm Energy from the Facility  although Seller is only
obligated  to deliver the Net  Generation  of the  Facility.  Seller shall
enter into a separate contract to

-5-

purchase Seller's Electrical Usage.  Notwithstanding any of the foregoing,
Buyer shall have no obligation  to pay for  deliveries in excess of 25,000
kWh per hour.

Subject to its  obligation  to deliver  Firm Energy,  Seller  shall,
during the  following  time  periods,  have the right to deliver  and sell
energy from the Facility to another purchaser: (1) during Scheduled STEOFF
Hours;  and (2) at any  time  during  a  Calendar  Year  once  Seller  has
delivered to Buyer 150,000,000 kWh which Buyer is obligated to purchase at
the Attachment II rates. If Seller desires to transact  wholesale sales of
energy from the  Facility  in the  aforementioned  situations,  then Buyer
shall  accommodate  such sales by  providing  transmission  services  over
Buyer's  transmission   facilities.   The  rates,  terms,  and  conditions
pertaining to Buyer's  provision of such  transmission  services to Seller
shall be  consistent  with the final  rulings  promulgated  by the Federal
Energy  Regulatory  Commission  ("FERC")  in FERC  Docket No.  RM95-8-000,
Promoting  Wholesale  Competition  Through Open Access  Non-Discriminatory
Transmission by Public Utilities, and FERC Docket No. RM94-7-001, Recovery
of Stranded Costs by Public  Utilities and Transmitting  Utilities,  or at
Seller's  option,  Buyer's most  favorable  then  currently  available and
applicable  transmission  tariff. In consideration of Buyer's agreement to
permit sales of excess energy  during the periods set forth above,  and in
consideration  of Buyer's  agreement to provide  transmission  services to
accommodate  such sales,  Seller agrees that Buyer shall have the right of
first refusal to purchase any energy  proposed to be sold to a third party
under this paragraph for use in Buyer's  service  territory.  Seller shall
offer the  exercise  of this right to Buyer by delivery to Buyer of a copy
of a firm offer to buy energy for use in Buyer's service territory,  prior
to entry into any agreement for sale of energy for use in Buyer's  service
territory. Buyer shall have ten business days after receipt of the copy of
the firm offer to substitute itself for the proposed  purchaser under such
firm offer.  If Buyer  elects to purchase  energy,  it may do so under the
terms and conditions of the firm offer, except that the price shall be the
time-differentiated  STEO  rate  in  effect  at the  time  the  energy  is
delivered,  so that deliveries  during any On-Peak Hour shall be purchased
at STEON and  deliveries  during any  Off-Peak  Hour shall be purchased at
STEOFF.

6. The  Agreement  is amended by deleting  the first  paragraph of ARTICLE X and
substituting therefor the following:

Seller  shall  during  the  term  of  this  Agreement  maintain  the
Facility,  including  Seller's  Interconnection  Equipment and  protective
relay  equipment,  in accordance with Prudent  Electrical  Practice.  With
respect  to   scheduling   maintenance   of  the   Facility  and  Seller's
Interconnection  Equipment,  Seller  shall  provide  to Buyer on the first
business  day of  September  of each  year a list of  dates,  in  order of
priority, in which Seller would like to schedule maintenance. For purposes
of this  Agreement,  "business day" shall mean any day from Monday through
Friday,  except for any legal holiday in the State of Maine, as determined
pursuant to 4 M.R.S.A.  ss.  1051.  Within one month Seller and Buyer will
agree  on  dates   for   maintenance   of  the   Facility   and   Seller's
Interconnection  Equipment.  Seller shall  schedule all major  maintenance
projects (projects  reasonably  expected to have a duration of longer than
three (3) days)  between the dates of April 1 and June 15, and between the
dates of  September  15 and November 30. If Seller and Buyer are unable to
agree upon a date, or if the parties agree upon a date and Seller

-6-

subsequently  fails to perform on the agreed  upon date,  without  Buyer's
agreement,  Seller  shall lose the one percent  adjustment  for  scheduled
maintenance for the Calendar Year in which such  maintenance was scheduled
to  occur.  Buyer  shall  establish   reasonable   scheduled   maintenance
guidelines  that set  forth  procedures  for  matters  such as the  timely
communication  of  modification  by  Seller  of  previously   agreed  upon
scheduled  maintenance dates and operating  parameters (e.g.,  ramp-up and
ramp-down  periods) to be applied in determining  whether Seller performed
on the  agreed  upon  date.  Seller  agrees  to  accept  Buyer's  existing
scheduled maintenance guidelines for small power producers as reasonable.

7. The  Agreement is amended by adding the  following  paragraphs  to the end of
ARTICLE XIII:

Beginning  in  Calendar  Year  1996,   notwithstanding  any  of  the
foregoing,  if Seller  fails to deliver to the Point of Delivery (or to be
deemed to have delivered  under the terms hereof) at least  15,000,000 kWh
during  any  Calendar  Year,  Seller  will be  deemed  to have  materially
breached this  Agreement and Buyer may terminate  this Agreement and shall
not have any  further  liabilities  or  obligations  to Seller  under this
Agreement.  The  15,000,000 kWh per Calendar Year figure shall be prorated
on a daily  basis  during  any  partial  years.  In the  event  of a Force
Majeure,  the  15,000,000  kWh per  Calendar  Year shall be prorated on an
hourly  basis to account  for the period of time that the  Facility is not
available.

If Seller  breaches  this  Agreement by failure to deliver (or to be
deemed to have  delivered  under the terms hereof) the minimum  15,000,000
kWh per year and  Buyer  terminates  this  Agreement  on  account  of such
failure, Buyer will be injured both by loss of an expected reliable source
of energy and on account of the loss of value of a portion of the payments
made in  connection  with the Capacity  Sales  Agreement  and the Capacity
Purchase  Agreement.  The  amount  of such  injury  will be  difficult  to
calculate  with  certainty  at the time of the  breach  and  difficult  to
predict at the time of formation of this Third Amendment, given the length
of the Term. Accordingly, the parties have agreed to liquidate the loss to
Buyer arising out of such breach and  termination,  as follows:  upon such
termination,  Seller  shall  pay to  Buyer  the  difference  between:  (a)
Forty-Five  Million  Dollars  ($45,000,000),  and (b) the  product  of (i)
$3,750,000  and (ii) the  number  of  completed  Calendar  Years  from and
including 1996 to the date of termination of this Agreement.

Notwithstanding  any provision of this Agreement,  no termination of
this Agreement by Seller shall constitute a waiver or otherwise affect any
statutory right (as existing at the time of termination) of Seller to sell
or any statutory  obligation (as existing at the time of  termination)  of
Buyer to negotiate a new  agreement  to purchase  capacity and energy from
the Facility after such termination.

Buyer  anticipates  that  Seller  will  deliver  to  Buyer  at least
150,000,000  kWh of energy per Calendar year from the Facility  under this
Agreement.  If energy  delivered  falls  substantially  below that amount,
Buyer will be injured in an amount that is  difficult  to  calculate  with
certainty at the time of breach and difficult to predict, given the length

-7-

of the Term. Accordingly, the parties have agreed to liquidate the loss to
Buyer  arising  out  of  substantial  under-deliveries  of  energy  in any
Calendar  Year prior to January 1, 2007,  or during the partial  year from
January 1, 2007, through May 31, 2007, as follows: If the amount of energy
delivered  or  deemed  to be  delivered  by  Seller  to Buyer  under  this
Agreement falls below  100,000,000 kWh in any Calendar Year after 1995 and
before January 1, 2007, or if energy  delivered or deemed  delivered falls
below 41,369,863 kWh between January 1 and May 31, 2007, then Seller shall
pay  Buyer the sum of  $3,750,000.00  with  respect  to each year or final
partial year when such shortfall occurs.

Any  reference  in  this   Agreement  to  Seller's   performance  or
nonperformance of delivery  obligations  established hereby at 100,000,000
kWh and  15,000,000  kWh per Calendar  Year,  and  41,369,863  kWh between
January  1 and May 31,  2007,  shall be  deemed  to  include  and refer to
adjustments  of  such   performance   levels  by:  (a)  including  in  the
computation  of total  deliveries  the  "deemed"  deliveries  for any Work
Period  Curtailment under Article III, and (b) reducing the required level
of  performance  pro rata for each hour of Force  Majeure  excuse  validly
claimed under Article XIX. Such adjustments shall apply whether or not the
provision  in  question   specifically  refers  to  prorations  or  deemed
deliveries.

In order to secure  Seller's  obligations  under this Article to pay
liquidated  damages to Buyer,  Seller shall assure that a Qualified Letter
of Credit is issued and  outstanding,  in an amount  equal to the  damages
then  applicable on failure to deliver  15,000,000  kWh at all times until
May 31, 2007 other than  following an  Expiration  Draw,  and at all times
after  May 31,  2007  that a  dispute  exists  between  Buyer  and  Seller
regarding  an attempt by Buyer to draw under an existing  letter of credit
which attempt to draw occurred prior to May 31, 2007. For purposes of this
paragraph,  a "Qualified  Letter of Credit"  shall mean a letter of credit
issued by a financial institution meeting the following criteria:

(i) if Internationale Nederlanden (U.S.) Capital Corporation ("ING")
is the issuer, and if the Guaranty dated as of April 30, 1996 issued
by ING  Capital  Holdings  to the Escrow  Agent with  respect to the
Issuer's  obligations  remains  in  effect,  then a letter of credit
shall be a  Qualified  Letter  of  Credit  so long as an ING  Credit
Event, as hereinafter defined, has not occurred; and

(ii) If any  other  financial  institution  having  an office in the
United  States  where the letter of credit is payable is the issuer,
then a letter of credit shall be a Qualified Letter of Credit if the
long-term debt of the issuer (or of a bank holding company parent of
the issuer) is rated not less than A by both  Moody's and Standard &
Poor's.

If an issued and outstanding letter of credit ceased to be a Qualified Letter of
Credit on account of an adverse change in the financial condition of the issuer,
then Seller  shall  provide  alternative  credit  support  within 270 days after
demand by Buyer or such  shorter  time as  provided  in the  definition  of "ING
Credit  Event" set forth below.  If Seller shall fail to so provide  alternative
support,  then Buyer shall make all payments  otherwise due under this Agreement
to the Escrow Agent to be held under the same terms as  applicable  to cash held
following an Expiration Draw. If Seller subsequently provides alternative credit
support as provided  herein,  Buyer shall cease

-8-

making  payments  into escrow and any amounts held in escrow shall be dealt with
pursuant to the Escrow Agreements. Seller may provide alternative credit support
by using any of the following mechanisms:

(i) provide a replacement Qualified Letter of Credit;

(ii)  provide  a  confirming  letter  of  credit  from  a  financial
institution  from  which a  letter  of  credit  would  constitute  a
Qualified Letter of Credit; or

(iii)  deposit  cash with the Escrow Agent in an amount equal to the
outstanding letter of credit under the terms set forth in the Escrow
Agreement, but without reference to the Issuer.

In the event a replacement  Qualified Letter of Credit or other alternate credit
support  is issued by an  entity  other  than  ING,  then  such  replacement  or
alternate  entity must also enter into agreements with the Escrow Agent,  Buyer,
Seller,  Capacity  Provider,  and the Note Purchasers in substantially  the same
form and content as the  agreements  with such  parties  entered  into by ING in
connection with the Capacity Sale to CL Power Sales One contemplated hereunder.

The Escrow Agent shall surrender the outstanding letter of credit upon tender of
a replacement  Qualified  Letter of Credit or other  alternative  credit support
that satisfies the requirements set forth above.

For  purpose of this  Article,  an "ING  Credit  Event"  shall be deemed to have
occurred if any of the following occurs and is continuing:

(i)  failure by ING or  Internationale  Nederlanden  (U.S.)  Capital
Holdings  Corporation  ("ING  Capital  Holdings") to pay a letter of
credit  draft  or  guarantee   demand  in  an  amount  greater  than
$10,000,000,  unless  such draft or demand is the  subject of a bona
fide dispute (in such event, Seller shall provide alternative credit
support within 120 days after demand by Buyer);

(ii) the rating assigned to the unsecured  senior debt securities of
the  direct or  indirect  banking  institution  parent of ING having
publicly  rated debt,  exclusive of ratings  assigned to debt issues
that are based  primarily on  collateral  adequacy and not on issuer
creditworthiness   (i.e.,   non-recourse   asset-backed   securities
ratings) (the "ING Bank Debt Rating") is downgraded to A2/P2 AND has
a long-term rating less than A assigned by both Moody's and Standard
& Poor's (in such event,  Seller shall  provide  alternative  credit
support within 180 days after demand by Buyer);

(iii) the ING Bank Debt Rating is  downgraded to either A2/P2 (i.e.,
both short term ratings are reduced) OR has a long-term  rating less
than A from either Moody's or Standard & Poor's (i.e., either of the
long-term  ratings  is less  than A) (in such  event,  Seller  shall
provide  alternative  credit support within 270 days after demand by
Buyer); or

-9-

(iv) ING notifies Buyer that the Revolving Credit Facility Agreement
dated July 13, 1993 provided ING Bank N.V. to the direct or indirect
U.S.  parent ING either has a remaining  term of less than two years
or the aggregate  commitment  thereunder is reduced below $4 billion
(in such event,  Seller shall  provide  alternative  credit  support
within 270 days after demand by Buyer).

If more than one ING Credit Event has  occurred,  the shortest  applicable  time
frame for providing  alternative  credit support shall govern.  If an ING Credit
Event is triggered by an ING Bank Debt Rating  reduction  that is later restored
before the time for credit support replacement has expired,  then the ING Credit
Event shall be deemed  "cured".  If ING or ING Capital  Holdings shall receive a
long-term  debt  rating of not less  than A from both  Moody's  and  Standard  &
Poor's,  then the ING Credit  Events set forth above  shall no longer  apply and
Seller shall be required to provide  alternative  credit support within 270 days
after  either of such  ratings  is  reduced  below A. If the dual "A"  rating is
received by ING,  then the Guaranty by ING Capital  Holdings may be canceled and
the  Letter  of  Credit  issued by ING will be  deemed  Qualified  without  such
Guaranty.

If the  terms  of a  Qualified  Letter  of  Credit  require  Buyer's
certification  of annual  levels  of  electricity  production  from  Seller  (or
certification  that the  100,000,000  kWh  requirement has been met), then Buyer
agrees to review promptly a draft  certificate  prepared by Seller. In the event
that Seller  executes and delivers such a certificate but Buyer refuses to do so
for more than 30 days, the dispute will be resolved by arbitration hereunder. If
Seller  prevails  in such  arbitration  Buyer  will be liable to Seller  for the
incremental  cost of the Letter of Credit caused by Buyer's  wrongful refusal to
certify production.

In order to further  secure the payment of  liquidated  damages from
Seller to Buyer,  Seller shall grant to Buyer a junior mortgage on the Facility.
Such junior  mortgage  shall be expressly  subordinate to the liens of ING or of
any other lender which is the supplier of a Qualified Letter of Credit and liens
securing the working capital line or any other financing obtained by Seller from
time to time, up to the total  outstanding of the stated amount of the Letter of
Credit at such time, plus $15 million. Such mortgage shall include a requirement
to name Buyer as a mortgagee  under any property or casualty policy insuring the
Facility  and  shall  also  include  an  express  assignment  of any  rights  to
reimbursement  for any damage or destruction to the Facility,  whether by way of
compensation for  governmental  taking, a recovery in tort, or any other form of
such  compensation;  provided that such assignment  shall be subordinated to the
same extent as the mortgage.

8. The  Agreement  is amended by adding the  following  paragraph to then end of
Article XVIII:

Notwithstanding  any of  the  foregoing,  Seller  shall  obtain  and
maintain with respect to the Facility  insurance  against perils presently
covered  under  existing  policies  with  existing  coverage and deduction
amounts  (including,  without  limitation,   machinery  breakdown,  flood,
explosion,  fire,  lightning,  riot,  civil commotion,  smoke,  vandalism,
malicious acts,  wind or hail) in amounts  necessary to repair any insured
damage to the Facility (including complete reconstruction),  together with
such other  insurance as may reasonably be necessary in view of the nature
and business of the  Facility,  in each case,  to 

-10-

the extent available at commercially  reasonable rates. Insurance required
or acceptable to the lender under the  reimbursement  agreement related to
any Qualified Letter of Credit shall conclusively be deemed to satisfy the
foregoing  requirement.  Seller shall provide Buyer with  certificates  of
insurance  certifying the issuance of such insurance,  which  certificates
shall provide for not less than ten (10) days' notice of  cancellation  to
the  certificate  holder.  If  Seller  shall  fail to  maintain  insurance
required  under this paragraph for more than ninety (90) days after notice
from Buyer demanding the replacement of expired or canceled coverage, then
Buyer may (bur shall not have the obligation to) acquire such insurance on
its own,  and deduct the amount paid  therefor  from the amount  otherwise
payable to Seller under this Agreement.

9. The  Agreement  is  amended  by  deleting  Article  XIX in its  entirety  and
replacing it with the following new Article XIX:

ARTICLE XIX: FORCE MAJEURE

As used in this Agreement, "Force Majeure" means causes that are not
preventable by reasonable  diligence and beyond the reasonable  control of
the party claiming Force Majeure. It shall include, without limitation:

(a)   failure  or  interruption of services due to  causes  beyond a
party's control;

(b)   sabotage, acts of public enemy,  insurrections,  wars (whether
declared or otherwise), riots, vandalism;

(c)   strikes,  lockouts,  boycotts,  sit-ins,  slowdowns,  or other
labor  disturbances,  disputes or unrest (it being agreed that
labor  disturbances,  disputes  or  unrest  resulting  from an
employer's  exercise  of rights  under or in  connection  with
labor  agreement  or state or  federal  labor law shall not be
deemed to be within the reasonable control of the employer);

(d)   acts  of  God,  droughts,   floods,   hurricanes,   tornadoes,
cyclones, or other storms, earthquakes, epidemics;

(e)   accidents  not  preventable  by reasonable  diligence,  fires,
explosions,  lightning strikes, breakdowns of or damage to the
plant,  equipment or Facility (other than breakdowns or damage
caused by failure to conduct  maintenance  procedures required
under this Agreement);

(f)   damage to roadways, interruptions to transportation, embargoes
or blockades;

(g)   orders or acts of civil or military authority,  including, but
not  limited  to  law,  regulation,   rule  or  order  of  any
governmental  authority,  or other  causes of similar  nature,
which wholly or partially  prevent the delivering,  processing
or  burning  of  garbage,   the   generating   or  selling  of
electricity  or capacity to any person by the  Facility or the
disposal of ash, residue or

-11-

other by-products from the Facility (provided,  however,  that
such orders or acts shall not  constitute  a Force  Majeure to
the extent that they merely  increase the cost of  performance
or  require a change in the  method of  performance  (E.G.,  a
change of fuel mix),  but do not delay or prevent  performance
hereunder);

(h)   appropriation  or diversion of electricity by rule or order of
any governmental  authority having jurisdiction  thereof,  and
failure to deliver or accept  delivery of  electricity  during
such time as a party may be obliged to temporarily discontinue
delivering  or accepting  delivery of the  electricity  hereby
contracted  for on  account  of System  Emergencies  or System
Pre-Emergencies.

If either party is rendered  wholly or partly  unable to perform its
obligations  under  this  Agreement  because  of Force  Majeure as defined
above,  that party shall be excused from whatever  performance is affected
by the Force Majeure to the extent so affected provided that:

(A)   the  non-performing  party shall promptly give the other party
written notice  describing the  particulars of the occurrence.
If such notice is given more than ten (10)  working days after
the occurrence of Force Majeure,  then the excuse  provided by
such Force Majeure  shall not apply to the period  between the
eleventh working day following the occurrence and the date the
notice is given;

(B)   the suspension of performance be of no greater scope and of no
longer  duration  than is  reasonably  required  by the  Force
Majeure;

(C)   no   obligations  of  either  party  which  arose  before  the
occurrence causing the suspension of performance be excused as
a result of the occurrence;

(D)   the non-performing party uses reasonable efforts to remedy its
inability   to  perform.   If  Seller  fails  to  pursue  such
reasonable  efforts  within  thirty (30) days after  demand by
Buyer,  then the Force  Majeure shall be deemed to have ceased
until such time as reasonable efforts begin.

Notwithstanding  anything  contained  in  this  section,  no  excuse
arising  out of a Force  Majeure  event or series of  related  Force
Majeure  events  shall  continue  for a period  of  greater  than 18
months,  unless:  (i) prior to the end of such  18-month  period the
party claiming Force Majeure shall inform the other party whether or
not  such  Force  Majeure  is  permanent  (in  which  case  the next
paragraph  shall  apply),  and (ii) if the Force Majeure is declared
not permanent, the party claiming Force Majeure shall provide to the
other party,  concurrent with the foregoing  notice,  detailed plans
and schedules to cure the Force Majeure  event,  including,  without
limitation:  (a) any  regulatory  or  permitting  requirements,  (b)
detailed  plans and  schedules  for any  necessary  construction  or
procurements and (c) cost,  expense and financial data sufficient to
reasonably demonstrate that the cure of 

-12-

the Force  Majeure  will occur as  proposed.  If the party  claiming
Force  Majeure  fails  substantially  to  conform  to such plans and
schedules,  the other party may declare the Force Majeure  excuse to
be ended and the other  party  shall be  obligated  to  perform  all
obligations under this Agreement.

In the event Seller  declares that it has been rendered  permanently
incapable of performing  its  obligations  under this Agreement as a
result of a Force Majeure pursuant to the foregoing paragraph,  then
Buyer shall have the right  immediately to terminate this Agreement,
neither party shall have any further  liabilities  or obligations to
the other,  including any liability for liquidated  damages pursuant
to Article XIII and Buyer shall  instruct the Escrow Agent to return
any  Qualified  Letter of Credit or any  proceeds of any  Expiration
Draw to the Issuer;  PROVIDED,  HOWEVER,  that if the Force  Majeure
event in question  was or should have been  insured by Seller  under
the terms of this  Agreement  or if the event in  question  entitles
Seller to receive compensation,  then Seller shall have liability to
Buyer  for  liquidated  damages  upon  termination  pursuant  to the
provisions of Article XIII hereof to the extent of the lesser of the
amount of such liquidated  damages and the proceeds of such required
insurance or  compensation  remaining  after discharge of the senior
obligations described in the last paragraph of Article XIII.

10. The  Agreement  is amended by adding  after  ARTICLE XXV the  following  new
ARTICLE XXVI:

ARTICLE XXVI: ARBITRATION

(a) Any  controversy or claim between or among the parties  arising out of
or relating to this  Agreement or any  agreement or  instruments  relating
hereto or delivered in connection herewith,  and including but not limited
to a claim that a proposed draw under the letter of credit  referred to in
Article  XIII is  improper  and/or  a claim  based on or  arising  from an
alleged tort,  shall at the written  request of any party be determined by
arbitration  in accordance  with the Commercial  Arbitration  Rules of the
American  Arbitration  Association.  The arbitration  proceedings shall be
conducted   in   Portland,   Maine.   The   arbitrators   shall  have  the
qualifications  set forth in  subparagraph  (b)  hereto.  All  statutes of
limitations  which would  otherwise  be  applicable  in a judicial  action
brought by a party shall apply to any arbitration proceeding hereunder.

(b) The arbitrators  shall be selected in accordance with the rules of the
American   Arbitration   Association   from  panels   maintained   by  the
Association. The panel shall consist of three arbitrators, one selected by
each party and the third  selected by the two party  appointees.  At least
one of the arbitrators must have at least 15 years experience in the power
generation industry, including experience in power supply management. Each
party shall bear its own costs arising from the  arbitration,  which costs
shall include attorneys' fees, administrative fees, arbitrators' fees, and
court  costs.  The  arbitrators  also may grant  provisional  or ancillary
remedies  such as, for  example,  injunctive  relief,  attachment,  or the
appointment of a receiver,  either during the pendency of the  arbitration
or as part of the arbitration.

-13-

(c)  Notwithstanding the applicability of other law to any other provision
of this Agreement,  the Federal  Arbitration  Act, 9 U.S.C. ss. 1 ET Seq.,
shall apply to the  construction  and  interpretation  of this arbitration
paragraph.

(d) In any demand or claim for  arbitration  relating to a matter in which
an award in excess of  $100,000  is or may be  sought,  the party  seeking
arbitration  shall set forth in detail the basis of its claim in a written
demand for  arbitration.  The arbitrator shall establish a period prior to
the  arbitration  date  when  each  party  shall  have the right to obtain
discovery  from the other party that would  ordinarily be available  under
the civil rules  applicable in the Maine Superior  Court.  Similarly,  any
party  proposing to present  expert  testimony in the  arbitration  shall,
within the reasonable time period established by the arbitrators,  provide
the other party with a detailed written summary of the proposed  testimony
of such expert.

(e)  Buyer  and  Seller  each  recognize  the  benefits  of quick  dispute
resolution.  It is  the  intent  of  the  parties  that  each  arbitration
proceeding be concluded within three (3) months of the written request for
arbitration.

(f) Any award,  order or judgment  pursuant to such  arbitration  shall be
deemed final and may be entered and enforced in any state or federal court
of competent jurisdiction. Each party agrees to submit to the jurisdiction
of any such court for purposes of the enforcement of any such award, order
or judgment.

11. The Agreement is amended by adding a new Article XXVII, as follows:

ARTICLE XXVII: PREPAYMENT OF CAPACITY

In the event that Buyer exercises its rights under section 3.2(h) of
that certain  Capacity  Sales  Agreement  between buyer and CL Power Sales
One,  L.L.C.  ("CL One") dated as of November 6, 1995 (the "Capacity Sales
Agreement")  to prepay in full its  obligations  to make monthly  capacity
payments, THEN:

(a) Buyer shall  undertake to make payments to Maine Energy equal to
the Quarterly Payments and LC Fee Reimbursement Payments at the time
and in the manner required at the time of such undertaking  pursuant
to the Capacity Purchase Agreement;

(b) Seller shall deliver  Capacity for the Facility to Buyer through
May 31, 2007,  under this  Agreement,  without further charge (other
than  payment  of  the  aforesaid  Quarterly  Payments  and  LC  Fee
Reimbursement Payments);

(c) Seller  shall  negotiate  in good  faith  with  Buyer  regarding
replacement of the Letter of Credit with a mortgage and  termination
of the LC Fee Reimbursement Payments;

(d) Seller shall consent to the termination of the Capacity Purchase
Agreement by CL One;

-14-

(e) Seller shall  cooperate  with buyer in making any changes to the
Escrow  Agreement  necessary to reflect the  termination of CL One's
interest.

12. The Agreement is further  amended by replacing  Attachment II: Rate Schedule
with the Attachment II that is affixed to this Amendment.

13.  The rate per kWh  payable to Seller  is, on the date  hereof,  subject to a
scheduled  maintenance  rate  adjustment  under  Article X of the  Agreement  on
account of alleged  failure to perform  schedule  maintenance on the agreed upon
date. Seller dispute the validity of this adjustment. By execution of this Third
Amendment,  the parties agree that the one percent (1%)  adjustment  relating to
scheduled  maintenance  occurring  or  scheduled  to occur  prior to the date of
execution  hereof  shall  apply to  deliveries  occurring  from  January 1, 1995
through  November 5, 1995.  Seller waives any dispute as to the  correctness  of
such  adjustment  and Buyer waives any claim for any  additional  adjustment  on
account of  scheduled  maintenance  occurring or scheduled to occur prior to the
date of execution hereof.

14. In all other respects the Agreement shall remain in full force and effect.

-15-

IN WITNESS HEREOF, the parties hereto have executed this instrument.

WITNESS:                       CENTRAL MAINE POWER COMPANY

By: /s/ Frederick Woodruff
-----------------------------
Frederick Woodruff
Its: Managing Director, Power
Supply

Dated:____________________________

MAINE ENERGY RECOVERY COMPANY
LIMITED PARTNERSHIP
A Maine Limited Partnership
By: Kuhr Technologies, Inc.
Its   General Partner

/s/ Robert E. Wetzel           By:  /s/ Martin J. Sergi
----------------------------        ------------------------------
Witness                             Its chief Operating Officer

Dated:____________________________

-16-

ATTACHMENT II

RATE SCHEDULE

Total            Energy           Capacity
Rate             Rate              Rate

(cent)kWh       (cent)kWh        (cent)kWh

1995**          15.71           7.18              8.53
1996            16.59           7.18              9.41
1997            17.76           7.36             10.40
1998            16.63           7.54              9.09
1999            16.63           7.73              8.90
2000            16.63           7.92              8.71
2001            16.63           8.12              8.51
2002            16.63           8.32              8.31
2003            16.88           8.53              8.35
2004            17.13           8.74              8.39
2005            17.39           8.96              8.43
2006            17.65           9.18              8.47
2007*           17.92           9.41              8.51

* Rates shown for the year 2007 are for the period  January 1, 2007  through May
31, 2007. Rates for the remainder of 2007 will be calculated as set forth below.

For the period June 1, 2007 through December 31, 2007 during each Calendar
Year from 2008 through 2012, the rate paid for deliveries  shall be Market Rate,
as defined in Appendix A hereto.

All rates either listed above or  calculated  using  methodologies  listed
above are deemed to include upward  adjustments for maintenance  scheduling (1%)
and savings resulting from variations in line losses (2.89258%), as described in
ss.  4(C)(7)(d) and (e) of the Maine Public Utilities  Commission's  Chapter 360
Rules.

**Rates shown for 1995 apply from November 7, 1995, to December 31, 1995.

-17-

APPENDIX "A"

"MARKET RATE" is the average  monthly market price for capacity and energy ($/kw
or (cent)/kWh) delivered in wholesale transactions in New England for a block of
energy  and  capacity  similar  in size and  nature to a 20,000 KW  resource  or
purchase  capable of  producing  150,000,000  kWh  annually  (i.e.,  a base load
resource).  The average  monthly  market price will be determined in (cent)/kWh,
using a  methodology  that  incorporates  reference(s)  to  generally  accepted,
publicly  available   indicators  of  the  components  of  market  price.  These
components  shall  include at a minimum  both fixed and variable  operation  and
maintenance  costs  (including  all ash disposal or spent fuel  disposal  costs,
environmental  compliance costs, start up and regulatory compliance costs), fuel
costs,  capital costs, and general and administrative  costs. As necessary,  the
methodology will convert the components to (cent)/kWh.  Further, the methodology
and reference(s)  utilized in the monthly determination will be agreed on by and
be reasonably  acceptable to Buyer and Seller. The Market Rate for a month shall
to the extent  possible be the average  monthly  market price for the particular
month in which the  deliveries to be paid for occur,  but if data for that month
is not available in time for the monthly  billing  statement  preparation  under
Article IV but is expected to be available later, payment will be made using the
Market  Rate for the  previous  month,  until the  Market  Rate for the month in
question is calculated. A "true up" to adjust for any differences in the interim
Market Rate paid and the Market Rate finally calculated will be made in the next
monthly  billing  period  after the  Market  Rate for the month in  question  is
finally  calculated.  It is the intent of the parties that Seller will be timely
paid each month  even  though  some  component  of the Market  Rate has not been
determined.

If generally  accepted,  publicly  available  indicators of components of market
price become unavailable for more than three consecutive months and are expected
to continue to be  unavailable  for the  foreseeable  future,  or if the parties
cannot agree on market price information  sources,  then the attached Proxy Unit
Calculation  Methodology  will be utilized  until such time as agreeable  market
reference(s) for future months become available.

Should  any part of the  Market  Rate not be agreed to by Buyer and Seller or if
the Buyer and  Seller  cannot  agree on the Proxy  Unit  Calculation,  then such
disagreement  shall be submitted to arbitration under the provisions hereof, for
resolution in accordance  with the  standards  for  determining  Market Rate set
forth herein. It is the express intent of the parties that should they be unable
to  agree  on all or any  part of the  Market  Rate,  they  intend  that  Seller
nevertheless  be  paid a  reasonable  price  for  its  energy  and  capacity  in
accordance  with  the  concepts  set  forth  in Maine  Uniform  Commercial  Code
ss.2-305(1). The parties intend to be bound by the terms hereof even if they are
unable to reach agreement on any applicable Market Rate for any month during the
term hereof,  and desire that the Market Rate be set in the absence of agreement
by arbitration in accordance with the arbitration provisions hereof.

-18-

PROXY UNIT COST CALCULATION METHODOLOGY

Total Proxy Unit costs will be the sum of the following 3 costs:
(1)   Capital Costs
(2)   Operation & Maintenance ("O&M") Costs
(3)   Energy Costs

(1)   Capital Costs will be calculated in $/mwh by  multiplying  the total
installed  costs  of a Gas  Fired  Combined  Cycle  unit  times  the
Economic  Carrying  Charge Rate of a facility  with a 20 year Book &
Tax life and a cost of capital  equal to the U.S.  Prime Rate plus 3
percentage points, as follows:

CAPITAL COSTS           Total Unit                    Economic
in         =    Installed Cost   *          Carrying Charge
$/kWyr                in $/kW                       Rate
(Redetermined Annually for
each year when the
computation is made)

(2)(a) Fixed O&M in $/kWyr will be added to the above capital costs in
$/kWyr

For total fixed costs           Capital Costs in $/kWyr
+Fixed O&M cost in $/kWyr
----------------------------
Total fixed costs in $/kWyr

(2)(b) Variable O&M costs in $/Mwyr  will be added to fuel costs in $/Mwyr
accordingly.

(3)    Energy Price  will be  computed  by using  the  delivered  price of
Natural Gas to Maine in $/mCF  divided  by the  Heating  Content of
NaturalGas in mBTU/MCF, as follows:

Energy Price = ($/MCF) = $/mBTU
----------------------
mBTU
----
MCF

The Energy Costs will be  calculated  by  multiplying  the Energy Price in
$/mBTU by an efficiency  factor of heat rate  associated with the combined
cycle technology  appropriate at that time. As way of example, a heat rate
of 8,500 BUT/kWh is used for purpose of the example below.

6
Energy Costs = ($/mBTU)(8500 BTU/kWh)(1000 kWh/mwh)(1mBTU/10 BTU)=$/mwh

-19-

EXHIBIT  10.39

================================================================================

STEAM SUPPLY AND OPERATING AGREEMENT

between

MULTITRADE GROUP, INC.,
as Seller and Operator

and

E.I. DUPONT DE NEMOURS & CO.
as Buyer and Owner

Dated February 11, 1998

================================================================================

TABLE OF CONTENTS

PAGE

SECTION 1.  DEFINITIONS......................................................1

SECTION 2.  TERM; INITIAL DELIVERY DATE; TERMINATION GENERALLY;
DUPONT OPTION....................................................4

SECTION 3.  PURCHASE AND SALE OF STEAM ENERGY................................4

SECTION 4.  METERING; INSPECTIONS; QUALITY CONTROL...........................5

SECTION 5.  EXISTING EQUIPMENT...............................................6

SECTION 6.  CONDITIONS TO MULTITRADE'S OBLIGATIONS...........................7

SECTION 7.  OTHER COVENANTS..................................................8

SECTION 8.  PAYMENT RATES AND TERMS..........................................9

SECTION 9.  INTERRUPTION OF SERVICE OR OPERATIONS; FORCE MAJEURE.............9

SECTION 10. INDEMNIFICATION AND lIMITATIONS OF LIABILITY....................10

SECTION 11. INSURANCE.......................................................11

SECTION 12. ARBITRATION OF DISPUTES; ATTORNEY'S FEES........................12

SECTION 13. RENEWAL; TERMINATION............................................12

SECTION 14. MISCELLANEOUS...................................................15

EXHIBITS

Exhibit 4.1  - Steam Meter and System Interconnection Points Locations
Exhibit 4.2  - Malfunction Period Steam Calculation
Exhibit 6.6  - Condensate Return Parameters
Exhibit 13.3 - Termination Payment Schedule

STEAM SUPPLY and OPERATING AGREEMENT,  dated February 11, 1998 (this
"Agreement")   between   MULTITRADE   GROUP,   INC.,   a  Virginia   corporation
("Multitrade")  and  E.I.  DUPONT  DE  NEMOURS  & CO.,  a  Delaware  corporation
("DuPont").

W I T N E S S E T H:

WHEREAS,  Multitrade  wishes to  provide  steam to,  and to  perform
certain other Multitrade Services for, DuPont at its Martinsville Plant facility
in Henry County, Virginia; and

WHEREAS,  DuPont wishes to have Multitrade  provide and perform such
Multitrade Services at its Martinsville Plant facility, as specified herein;

NOW,  THEREFORE,  in consideration of the foregoing premises and the
mutual  agreements  hereinafter set forth to be kept and performed,  the parties
hereto agree as follows:

AGREEMENT

SECTION 1.    DEFINITIONS.

Unless the context otherwise requires, the following terms have, for
purposes of this Agreement, the respective meanings set forth below:

"AAA" has the meaning assigned thereto in Section 12.1(a).

"Agreement"  has the  meaning  assigned  to such term in the first
paragraph hereof.

"Air Permit" means the air permit necessary for the operation of the
System on the terms provided  herein issued to Multitrade on January 16, 1998 by
the State of Virginia Department of Environmental Quality.

"Applicable  Law"  means  any  law,  rule,  regulation,   ordinance,
judgment,  decree,  permit or similar  decision of any  federal,  state or local
governmental  authority,  agency,  court or  similar  body  having  jurisdiction
(including without limitation any Environmental Laws), which is applicable to or
affects the ownership,  operation, testing,  maintenance,  leasing or use of the
System, the Existing  Equipment,  the Martinsville Plant, the System Site or the
Martinsville Plant Site.

"Dedicated  Capacity"  has the  meaning  assigned  to  such  term in
Section 3.2 of this Agreement.

"DuPont" has the meaning assigned in the first paragraph hereof.

"Environmental Law" means all federal,  state and local laws, rules,
regulations, directives, decrees, ordinances, codes, rules, orders, approvals of
governmental authorities,  licenses or standards,  including without limitation,
the Comprehensive Environmental Response

Compensation  and  Liability Act of 1980 (42 U.S.C.  Section 9601 et seq.),  the
Resource  Conservation  and  Recovery  Act (42  U.S.C.  Section  6901 et  seq.),
relating to pollution or protection of human safety,  health or the  environment
(including  without  limitation,  ambient air, surface water,  ground water land
surface  or  subsurface  strata),   including,   without  limitation,  laws  and
regulations relating to emissions,  discharges,  releases or threatened releases
of hazardous substances,  or otherwise relating to the manufacture,  processing,
refining,   distribution,   use,  management,   treatment,   storage,  disposal,
transport, recycling, reporting or handling of hazardous substances.

"Event of Force Majeure" means any event which is beyond the control
of a party. An Event of Force Majeure shall include,  but not be limited to, any
of the  following:  (1) act of god, war or the public enemy whether  declared or
not; (2) public disorders, civil disturbance, insurrection, rebellion, sabotage,
terrorism or the threat of such acts,  riots,  violent  demonstrations;  (3) any
effect  of  unusual  natural  elements,  including  fire,  earthquakes,  floods,
lightning,  hurricanes,  or other unusual  natural  calamities;  (4)  explosion,
accident or fire;  (5) strikes or lock-outs or other  collective  or  industrial
action by workers or employees; (6) the issuance, absence,  suspension,  repeal,
amendment,  modification,   supplement,  termination,  interruption,  denial  or
failure of renewal of any permit; provided that any such event is not due to the
negligence  of the party  seeking  the  permit in  failing  to file a timely and
complete  application  therefor;  (7)  radioactive   contamination  or  ionizing
radiation;  (8)  aircrash,  shipwreck,  train  wrecks or  failures  or delays of
transportation;  (9) the  existence of Hazardous  Waste at either or both of the
Sites; and (10) orders or judgments of any governmental,  regulatory or judicial
authority.

"Existing Equipment" means,  collectively,  one steam turbine driven
chilled  water   refrigeration   machine,   one  spare  steam   turbine   driven
refrigeration  machine with  associated  chilled water pumps and spare,  and raw
water condensing system,  one raw water pump and spare, raw water/chilled  water
heat exchanger and one air compressor  rated at 1,970 CPM at 100 psi (for normal
operation)  and one spare  compressor,  each owned by DuPont and  located in the
Martinsville Plant.

"Fixed Capacity  Component" means $37,500.00  for each  Month during
the Term.

"Ground  Lease" means the Ground  Lease dated of even date  herewith
between the parties hereto  pursuant to which DuPont shall lease the System Site
to Multitrade and provide access to the Martinsville Plant to Multitrade for the
purposes provided herein.

"Hazardous  Materials"  means any chemicals  that have the potential
for adverse impact on human health or the environment, pollutants, contaminants,
wastes, toxic substances,  petroleum and petroleum products,  including, without
limitation,  "hazardous substances," "hazardous wastes," "toxic substances," and
"toxic pollutants," as defined and identified pursuant to any Environmental Law.

"Initial Delivery Date" means June 1, 1998.

"Initial Term" has the meaning assigned thereto in Section 2.1.

-2-

"Martinsville   Plant"  means  the   manufacturing   and   warehouse
facilities  used for  spinnerette  manufacturing  owned by DuPont located at One
DuPont Road, Martinsville, Henry County, Virginia 24115.

"Martinsville   Plant   Site"   means   the  site  on  which   the
Martinsville Plant is located.

"Month" means a calendar month.

"Multitrade"  has the  meaning  assigned  in the  first  paragraph
hereof

"Multitrade Services" means, collectively,  the Steam Services and
the Operating Services.

"Operating  Services" means the operating services to be provided by
Multitrade pursuant to Section 5 hereof.

"PSIG" means pounds per square inch gauge.

"Point of Delivery" means the discharge side of the Steam Meter.

"Sites" means,  collectively,  the Martinsville Plant Site and the
System Site.

"Standard  Practices"  means  practices  and  standards,  as changed
during the term of this Agreement,  that are generally accepted to test, operate
and maintain equipment such as the Existing Equipment safely and efficiently and
that  conform  to  the  manufacturer's   reasonable  operation  and  maintenance
guidelines  but, in any event,  practices and standards  that are not materially
different  from  DuPont's  practices  and  standards  for the  operation  of the
Existing  Equipment  on the date hereof (as provided to  Multitrade  pursuant to
Section 6.7).

"Steam Meter" has the meaning assigned in Section 4.1 hereof.

"Steam  Services"  means the  services to be provided by  Multitrade
pursuant to Sections 3 and 4 hereof.

"System" means a steam  production  facility and steam  distribution
system, to be constructed, owned and operated by Multitrade and to be located in
Henry County, Virginia, to provide the Steam Services to the Martinsville Plant,
as provided and on the terms contemplated by this Agreement.

"System Site" means the site on which the System is to be located.

"Technician" means an independent technician,  reasonably acceptable
to Multitrade and DuPont,  who has expertise in the operation and maintenance of
steam production facilities similar to the System.

"Term" has the meaning assigned in Section 2.1.

"Termination Payment" means, for any date of termination, the amount
set forth opposite such date in Exhibit 13.3.

-3-

"Variable O&M Component" mean $0.73 per one thousand  (1,000) pounds
of steam delivered to DuPont as provided in this Agreement.

SECTION 2.    TERM; INITIAL DELIVERY DATE; TERMINATION GENERALLY;
DUPONT OPTION

2.1 TERM. This Agreement shall be in effect for the Term, subject to
Sections  2.3 and 13 hereof.  For purposes of this  Agreement,  "Term" means the
period  commencing  on the  date of  this  Agreement  and  ending  May 30,  2003
("Initial  Term"),  together with any  additional  extensions of this  Agreement
after the Initial Term to which both parties may agree pursuant to Section 13.1.

2.2 INITIAL  DELIVERY DATE.  Subject to the terms of this Agreement,
the  Multitrade  Services to be provided by  Multitrade  under the terms of this
Agreement shall commence on the Initial Delivery Date and shall run continuously
from such date during the Term, unless this Agreement shall have been terminated
at an earlier date pursuant to the terms hereof.

2.3   TERMINATION GENERALLY; DUPONT OPTION.

(a)   DuPont  may  terminate  this  Agreement,  at any time  with or
without   cause,   on  sixty  (60)  days'  written  notice  to
Multitrade,  on the termination  date specified in such notice
(such  date to be the last day of a month and to be no earlier
than the first day following  such 60 day notice  period).  In
the  event  of  a  termination   under  this  Section  2.3(a),
Multitrade  may   discontinue   provision  of  the  Multitrade
Services  hereunder  and DuPont  shall only be required  pay a
Termination Payment as provided in Section 13.3.

(b)   In  addition  to  Section   2.3(a),   this  Agreement  may  be
terminated  as  provided  and with  the  effect  specified  In
Section 13.2.

SECTION 3.    PURCHASE AND SALE OF STEAM ENERGY

3.1  PURCHASE  AND  SALE  OBLIGATIONS.  Subject  to the term of this
Agreement,  DuPont agrees to purchase and pay for, and Multitrade agrees to sell
to DuPont,  steam energy  generated  by the System  during the Term in an amount
equal  to  one  hundred  (100)  percent  of  the  steam   requirements  for  the
Martinsville Plant; provided, however, that Multitrade shall not be obligated to
sell to DuPont steam in excess of the Dedicated Capacity. The cost to DuPont for
the Steam  Services  shall be calculated  in  accordance  with Section B hereof.
Title to and risk of loss of all such steam  provided  by  Multitrade  to DuPont
hereunder shall pass from Multitrade to DuPont at the Point of Delivery.

3.2  DEDICATED  CAPACITY.  Subject to Sections 6 and 9 and the other
terms hereof,  during the Term  Multitrade  will make available to DuPont at the
Point of Delivery on a daily  24-hour  basis at least 40,000  pounds per hour of
dry  saturated  steam at pressures to be specified by DuPont up to 150 PSIG (the
"Dedicated Capacity").

-4-

3.3  MANNER OF  OPERATION;  NOTIFICATION.  Multitrade  agrees to use
reasonable  diligence  to maintain and operate the System in such a manner as to
avoid any  interruption of service to DuPont.  Multitrade shall notify DuPont in
writing of its normal operating  schedule,  start-up and shut-down times and any
changes thereto.

3.4 COMPLIANCE WITH LAWS. Multitrade agrees to operate the System up
to the Point of Delivery in accordance  with the  requirements of all Applicable
Laws.  Except as provided in Section 6.9,  Multitrade  shall be responsible  for
compliance with all Applicable Laws related to air quality,  odor, noise,  waste
water disposal,  solid waste disposal, or other conditions for the protection of
the environment, or otherwise, which may apply to the System.

3.5 ADDITIONAL CAPACITY.  (a) DuPont shall have the right during the
term to take up to the Dedicated Capacity of steam from the System. DuPont shall
reasonably  consider any request by Multitrade to release capacity to Multitrade
if Multitrade wishes to sell steam to other customers and shall not unreasonably
withhold its consent to any such request.  If Multitrade sells steam to any such
other customers,  Multitrade shall, for the applicable period, prorate the Fixed
Capacity Component payment for all customers and shall, if necessary, adjust the
Variable O&M Component  cost  hereunder so that such charge to DuPont is no less
favorable  than  the  comparable   charge  payable  by  another  such  customer.
Multitrade  shall  compensate  DuPont  (through  offset against the Variable O&M
Component payment payable by DuPont hereunder for the applicable period) for its
out of pocket  costs for water,  gas and  electricity  used to serve  non-DuPont
customers  as  reasonably  estimated  by  DuPont  and  notified  in  writing  to
Multitrade.

(b)  Multitrade  shall have the right at any time during the Term to
request and DuPont will not unreasonably  withhold permission to add capacity to
the System.

3.6 CONDENSATE RETURN. Multitrade agrees to accept condensate return
from  DuPont  during the Term of this  Agreement.  Multitrade  will  install and
maintain a condensate  system that will connect the System to a single interface
with  DuPont's  existing  condensate  system  in the  Martinsville  Plant.  Such
connection shall be made at a mutually  agreeable point within DuPont's existing
boiler plant.

SECTION 4.    METERING; INSPECTIONS; QUALITY CONTROL

4.1  QUALITY  OF STEAM;  METERING.  Multitrade  agrees to deliver to
DuPont high quality  steam,  with standards of at least pH 9 (plus or minus 0.5)
and 3 parts per  million or less  carryover,  and to  maintain a suitable  steam
flow,  pressure recording and totalizing meter ("Steam Meter").  The Steam Meter
and other  interconnection  points shall be located as specified in Exhibit 4.1.
Multitrade  agrees to inject into the steam,  to the reasonable  satisfaction of
DuPont,  neutralizing and/or filming amine to reduce corrosion in the Condensate
Return system.

4.2 CALCULATION;  INSPECTION. (a) Multitrade will calculate DuPont's
Monthly steam usage based on readings by  Multitrade of the Steam Meter.  DuPont
will be entitled to adequate notice and  opportunity to have its  representative
present at any such  reading and may inspect the Steam Meter charts at any time.
If there is any  dispute as to the Steam  Meter's  accuracy  or  condition,  the
disputing party may, at its own expense, engage the Technician to test

-5-

the Steam  Meter,  and the  Technician's  determination  will be  binding on the
parties  hereto;  provided  that  the  cost of the  Technician  will be borne by
Multitrade  if the  Steam  Meter  is  found  to be in  need  of  repair.  If the
Technician  determines that the Steam Meter is in need of repair or replacement,
such repair or replacement  will be made as soon as practicable at  Multitrade's
expense.  Multitrade shall notify DuPont of the completion of any such repair or
replacement.

(b) The  amount  of  steam  delivered  to  DuPont  during  any  such
malfunction period shall be calculated as provided in Exhibit 4.2.

4.3 CALIBRATION. Multitrade agrees, at no expense to DuPont, to have
the  Steam  Meter  calibrated  by the  Technician  at the end of the  first  180
calendar days of the Term and at 180-day  intervals  thereafter during the Term.
DuPont  will be  entitled  to  adequate  notice  and  opportunity  to  have  its
representative present at any such calibration.  A copy of the written report of
the Technician's  findings and calibrations  shall be provided to DuPont for its
information.

SECTION 5.    EXISTING EQUIPMENT

5.1  OPERATING  AND  MAINTENANCE  OF  EXISTING  EQUIPMENT.  From the
Initial  Delivery  Date,  Multitrade  will  operate and  maintain  the  Existing
Equipment in the ordinary  course of business and in  accordance  with  Standard
Practices.  DuPont shall be fully responsible for compliance with all Applicable
Law related to air quality, odor, noise,  Hazardous Waste disposal,  waste water
disposal,  solid waste disposal,  or other  conditions for the protection of the
environment, or otherwise, which may apply to the Existing Equipment. So long as
Multitrade is operating  and  maintaining  the Existing  Equipment in accordance
with the terms of this Agreement,  and subject to DuPont's rights hereunder (and
its obligation to comply with Applicable Laws).  DuPont shall not interfere with
or seek to direct such work by Multitrade.  Multitrade  shall not be responsible
for, and DuPont  shall have sole  control  over,  DuPont's  business,  corporate
administration, accounting, legal compliance and tax matters. The cost to DuPont
of the Operating Services shall be as provided in Section 8 hereof.

5.2 SCOPE OF  MAINTENANCE.  Multitrade's  obligation to maintain the
Existing Equipment pursuant to Section 5.1 above shall be limited to routine and
not Major Maintenance of such Existing  Equipment.  For purposes hereof,  "Major
Maintenance"  means  maintenance  which,  if  performed,  would be treated under
applicable U.S.  Federal tax law and/or  regulation as a capital  improvement to
the Martinsville  Plant.  Multitrade may at its option perform Major Maintenance
on the Existing  Equipment  only at the request and expense of DuPont,  on terms
and conditions to be mutually agreed at the relevant time.

5.3 DUPONT PRODUCTS. To the extent not economically  disadvantageous
to  Multitrade,  Multitrade  shall use  reasonable  efforts to purchase  and use
DuPont  refrigerants in connection with its operation of the Existing  Equipment
hereunder,

-6-

SECTION 6.  CONDITIONS TO MULTITRADE'S OBLIGATIONS

Multitrade's  obligations  under this Agreement are conditioned upon
the  performance  by DuPont of the  following  obligations  and/or the continued
satisfaction of the following  conditions,  as the case may be, or the waiver of
any or all thereof by Multitrade:

6.1 GROUND LEASE.  DuPont shall not be in breach of its  obligations
under the Ground Lease. The Ground Lease shall be in full force and effect.

6.2 ACCESS.  Multitrade shall have access to the System Site and the
Existing  Equipment  on a  continuing  and  uninterrupted  basis,  on the  terms
provided in the Ground Lease.  DuPont shall assure that third parties' access to
the  System  Site  and the  Martinsville  Plant  is  reasonably  controlled  and
coordinated   with  Multitrade  so  as  not  to  interfere   unreasonably   with
Multitrade's  performance  of the  Multitrade  Services.  DuPont  shall make the
Existing  Equipment  available  to  Multitrade  in condition  and  circumstances
capable of being  operated in  accordance  with the  standards set forth in this
Agreement.

6.3   UTILITY   CONNECTIONS.   Multitrade   shall  be  able  to  (a)
inter-connect  the System to the  existing  natural  gas  service  line owned by
Southwestern  Virginia  Gas company at the current  rate for natural gas paid by
DuPont, (b) inter-connect the System to existing electricity,  sewage, telephone
and water lines,  and, in the case of (a) and (b), all such utility  connections
shall remain in effect.

6.4  FUEL;  WATER;   ELECTRICITY.   DuPont  shall,  at  no  cost  to
Multitrade,  provide at all times all (i) natural gas, (ii) process, make-up and
potable water and (iii) electricity necessary to perform the Multitrade Services
in accordance with this  Agreement.  DuPont also shall maintain at all times, at
no cost to Multitrade,  a supply of No. 2 fuel oil adequate to permit Multitrade
to operate the System in accordance with this Agreement on a uninterrupted basis
as back-up to the natural gas to be provided by DuPont is provided above. DuPont
shall  provide  evidence  reasonably  satisfactory  to  the  State  of  Virginia
Department  of  Environmental  Quality and  Multitrade  that such No. 2 fuel oil
provided by DuPont meets the sulphur content  requirements  set forth in the Air
Permit. It is acknowledged that all electricity  provided to Multitrade (tenant)
by DuPont  (landlord)  hereunder  is  provided  by DuPont in its  capacity  as a
landlord pursuant to the Ground Lease.

6.5 MARTINSVILLE  PLANT.  DuPont shall, at no expense to Multitrade,
ensure at all times that DuPont's  equipment is  appropriate  for operation with
the System and that a proper interface is maintained  between such equipment and
the System on DuPont's side of the Point of Delivery.

6.6  STEAM  CONDENSATE.  DuPont  agrees  to return  and  deliver  to
Multitrade steam condensate of a quality  reasonably  satisfactory to Multitrade
consistent  with the standards of pH,  hardness,  level of dissolved  solids and
conductivity set forth on Exhibit 6.6.

6.7   COOPERATION;  INFORMATION; OPERATING MATERIALS; SPARE PARTS.
DuPont shall  cooperate  with  Multitrade  and,  upon request of  Multitrade,
provide  access to  information  in  control  of DuPont  that may be  reasonably
necessary to Multitrade in performing the Multitrade Services, including but not
limited to current operation and maintenance manuals, specifications,

-7-

diagrams,   test  results,   warranties   and  other   information   ("Operating
Materials"); provided that DuPont shall provide to Multitrade promptly after its
signature  hereto its  Operating  Materials  related to the Existing  Equipment.
DuPont  shall make  available  to  Multitrade  any spare parts for the  Existing
Equipment in DuPont's  possession  on the date hereof for use by  Multitrade  in
connection with Multitrade's performance of the Operating Services.

6.8 LICENSING AND PERMITS. (a) GENERAL.  DuPont shall, at no cost to
Multitrade,  obtain and maintain in effect,  any and all  permits,  consents and
approvals  necessary  under  Applicable  Law  for  continuous  operation  of the
Existing Equipment, other than any such permits, consents and approvals required
to be  maintained  by Multitrade in order to engage in the business of providing
the Operating  Services.  DuPont shall deliver to Multitrade  copies of any such
permits,  consents and approvals to be obtained by DuPont as may be pertinent to
Multitrade's performance of such Services, promptly upon request.

(b) AIR  PERMIT.  The Air  Permit  shall  have been  issued on terms
reasonably  acceptable to Multitrade on or before February 1, 1998,  shall be in
full force and effect and not subject to revocation, amendment or modification.

6.9  DISPOSAL OF  RESIDUE.  DuPont  shall,  in  accordance  with all
Applicable  Laws,  ensure  that all  residue  (including  any  Hazardous  Waste)
generated  by the  System  and/or the  Existing  Equipment  is stored,  handled,
maintained  and/or  disposed  properly.  Multitrade  shall  perform  at its cost
appropriate tests to determine the nature of any Hazardous Waste to be delivered
to DuPont under this  Agreement and shall provide copies of such test results to
DuPont at the time of such delivery.

6.10  MULTITRADE  BOARD.  This  Agreement,  the Ground Lease and the
performance of Multitrade's  obligations under such agreements,  shall have been
approved by Multitrade's Board of Directors.

SECTION 7.    OTHER COVENANTS

7.1 NEW BUYER/CHANGE IN LOAD. In the event that DuPont or Multitrade
shall  propose  (a) that one or more third  parties  replace or join DuPont as a
purchaser of Steam  Services  hereunder,  and/or (b) any material  change in the
quantity of steam to be sold by Multitrade hereunder, it is the intention of the
parties  to  negotiate  in good  faith  changes  in the terms of this  Agreement
(including without limitation the compensation payable to Multitrade) to address
such changed circumstances on a mutually agreeable basis.

7.2 COOPERATION GENERALLY. Each party shall cooperate with the other
party to the fullest extent reasonably  practicable to enable each such party to
discharge its obligations  under this Agreement.  Multitrade  shall, at DuPont's
request,  reasonably cooperate with and provide reasonable  assistance to DuPont
in  connection  with any  safety,  health or  environmental  audits  or  related
monitoring or record keeping obligations of DuPont.

-8-

SECTION 8.  PAYMENT RATES AND TERMS

8.1 TIMING.  DuPont will pay  Monthly  for the  Multitrade  Services
provided by Multitrade, subject (as to any disputed amounts) to Section 12.

8.2  AMOUNT.  The amount  that  DuPont  will pay for the  Multitrade
Services  will be,  for any Month,  an amount  equal to the sum of (i) the Fixed
Cost Capacity  Component for such Month plus (ii) the Variable O&M Component for
such Month,  such Variable O&M Component to be based on a delivered,  unit price
per 1,000 pounds of dry  saturated  steam,  as set forth in this  Agreement  and
measured in accordance  with Section 4.3, plus (iii) if  applicable,  any amount
payable to  Multitrade  for any Major  Maintenance  performed by  Multitrade  in
accordance with and subject to the terms of Section 5.2. All steam costs will be
based on the steam  actually  delivered  to the Point of Delivery as measured by
the Steam Meter. In the event of any termination of this Agreement,  payments as
calculated  under this Section 8 shall be made through the date of effectiveness
of such termination.

8.3 BILLING.  Amounts owed by DuPont to Multitrade hereunder will be
billed  monthly to DuPont by Multitrade  and payments will be due within 30 days
after receipt by DuPont of  Multitrade's  invoice.  Multitrade may charge a 1.5%
late charge on any bill not paid within 30 days of the due date,  subject (as to
any  disputed  amounts) to Section  12;  provided,  that,  in the event that any
amount  disputed by DuPont  hereunder  is  determined  in  accordance  with this
Agreement  not to be owed by  DuPont,  no such late  charge  shall be payable by
DuPont in respect of such amount. The first such billing by Multitrade hereunder
shall be  issued  to  DuPont no later  than 30 days  subsequent  to the  Initial
Delivery Date.

SECTION 9.    INTERRUPTION OF SERVICE OR OPERATIONS; FORCE MAJEURE

9.1  MULTITRADE  INTERRUPTIONS.  Multitrade  agrees  to give  DuPont
immediate  notice of any unplanned  interruption of the steam supply and to give
as much prior  written  notice as possible of all planned  interruptions  of the
steam supply.  Any planned  interruption of the steam supply will be coordinated
with DuPont.  The parties  hereby  acknowledge  that, in  accordance  with state
regulations, service of each boiler will be interrupted annually for a period of
one week to conduct a boiler  inspection  and,  during each such period,  DuPont
shall adjust its steam requirements hereunder to accommodate each such shutdown.

9.2 FORCE MAJEURE - STEAM  SERVICES.  An unplanned  interruption  of
Steam  Services  that is  attributable  to any Event of Force  Majeure  will not
constitute a branch of this Agreement by Multitrade,  and Multitrade will not be
liable  to  DuPont  for  any  damages  arising  out of or  related  to any  such
interruption,  provided Multitrade  exercises diligent efforts to restore normal
operations as soon as possible.  During any such period of interruption,  DuPont
shall be  obligated  to make  Fixed Cost  Capacity  Component  payments  without
reduction  and shall be liable for any Variable O&M  Capacity  Payments,  all as
calculated under Section 8.

9.3 FORCE MAJEURE - OPERATING SERVICES. An unplanned interruption of
Operating  Services that is  attributable to any Event of Force Majeure will not
constitute a breach of this Agreement by Multitrade,  and Multitrade will not be
liable to DuPont for any damages

-9-

arising  out  of or  related  to  any  such  interruption,  provided  Multitrade
exercises  diligent  efforts to restore  normal  operations as soon as possible.
During any such period of interruption,  DuPont shall be obligated to make Fixed
Cost Capacity  Component  payments without reduction and shall be liable for any
Variable O&M Capacity Payments, all as calculated under Section 8.

9.4 EMERGENCY  STEP-IN  RIGHTS.  (a) In the event that any unplanned
interruption  of Steam Services  occurs for reasons other than an Event of Force
Majeure or an event which Multitrade is diligently  proceeding to cure,  DuPont,
subject to the terms and  conditions  of this  Section 9.4, and at its sole cost
and expense, shall have the right to enter and assume operational control of the
System  in  order  to  provide  steam  to the  Martinsville  Plant  to meet  its
requirements,  such  DuPont  control  to  continue  solely  until  such  time as
Multitrade or its designee shall advise DuPont that is able to re-assume control
of the System and resume steam  deliveries  pursuant to this  Agreement.  DuPont
shall immediately surrender control of the System to Multitrade upon notice from
or on behalf of Multitrade as aforesaid.  Multitrade shall reasonably  cooperate
with  DuPont in  connection  with  DuPont's  exercise  of its rights  under this
Section  9.4.  Any such period of time during  which  DuPont  shall  control the
System as  provided in this  Section 9.4 is referred to herein as an  "Emergency
Control  Period."  The  parties  acknowledge  that the  need for such  emergency
control is highly  unlikely and DuPont  agrees with  Multitrade  to exercise all
reasonable  efforts to avoid instituting an Emergency  Control Period.  Prior to
instituting any such Emergency Control Period,  DuPont shall make all reasonable
efforts to contact Multitrade to determine whether Multitrade is able to control
the System.

(b)  Notwithstanding  the  foregoing,   in  the  event  that  DuPont
exercises its rights under this Section 9.4,  during any such Emergency  Control
Period (i) DuPont shall remain  obligated to make Fixed Cost Capacity  Component
payments as provided in Section 8; (ii) DuPont  shall  maintain  and operate the
System in compliance with permits,  licenses and all Applicable Law (at its sole
expense and  liability);  and (iii) DuPont shall exercise the same standard care
in the  operation  and  maintenance  of the  System  which it  exercises  in the
operation  and  maintenance  of its own  facilities.  In addition,  DuPont shall
defend,   indemnify  and  hold  harmless  Multitrade  (including  its  officers,
employees, subcontractors,  agents and partners, and their respective successors
and assigns) from and against any and all liability,  claim,  injury  (including
death resulting therefrom), property damage loss, fine, penalty or assessment by
any agency,  suit, cause of action,  proceeding,  judgment,  and cost or expense
(including cost of defense, settlement and reasonable attorney's fees), which is
directly  or  indirectly  caused  by,  relates  to, or arises out of, any act or
omission of DuPont, its agents,  employees or subcontractors,  including without
limitation  any  failure  to comply  with any  Applicable  Law,  during any such
Emergency  Control  Period,  whether or not any such liability,  claim,  injury,
property  damage,  loss,  fine,  penalty,  assessment,  suit,  cause of  action,
proceeding,  judgment,  cost and/or expense occurs or arises during or after the
pendency of any such Emergency Control Period.

SECTION 10.   INDEMNIFICATION AND LIMITATIONS OF LIABILITY

10.1    RECIPROCAL    INDEMNIFICATION.    Multitrade   and   DuPont,
respectively,  as indemnitor,  will indemnify the other, as indemnitee, and hold
harmless it, its partners, officers, directors, agents and affiliates, and their
respective  successors  and  assigns,  from  and  against  any  and  all  losses
(excluding consequential losses),  damages, expenses and liabilities suffered or
paid

-10-

as a result  of any and all  claims,  demands,  fines,  penalties,  settlements,
suits,  causes of actions,  proceedings,  judgments and  liabilities,  including
reasonable counsel fees incurred in litigation or otherwise,  assessed, incurred
or  sustained  by or against any such party with  respect to or  resulting  from
injuries to or death of persons,  including,  but not limited to,  employees  of
either party hereto,  and damage to or  destruction  of property of either party
hereto, arising out of, or in any way connected with, the failure to comply with
any  Applicable  Law  of  any  authority  having  proper  jurisdiction,  or  the
performance or  non-performance of any provision of this Agreement or the Ground
Lease,  or any  operations  conducted  hereunder or the use and occupancy of the
System Site, by indemnitor,  its agents or employees,  which such  indemnitor is
responsible for complying with,  performing or  non-performing,  as the case may
be, excepting only such injury, death, damage or destruction as may be caused by
the gross  negligence  or willful  misconduct of the  indemnitee,  its agents or
employees.  Each indemnitee upon the indemnitee's  request, (a) shall defend any
suit asserting a claim covered by this indemnity or (b) if the indemnitor elects
to control the defense of such suit,  shall  cooperate  with the  indemnitor  in
respect of any matter  related to such  defense.  The  indemnitor  shall pay all
costs that may be incurred by the indemnitee,  including  reasonable  attorney's
fees,  within twenty (20) days of any written request  therefor,  subject (as to
any disputed amounts) to Section 12.

10.2 LIMITATION OF LIABILITY. Neither Multitrade,  DuPont, nor their
respective partners, officers, directors, employees, representatives,  agents or
independent  contractors,  because of any of their  respective acts or omissions
relating to the ownership,  use,  construction,  operation or maintenance of the
System or the Existing Equipment,  or because of their respective  compliance or
noncompliance  with  this  Agreement,  shall  have  any  liability,  whether  in
contract,  warranty,  tort,  strict  liability,  or other legal theory,  for any
indirect,  incidental or consequential damages of the other party, including but
not limited to loss of  anticipated  profits,  or  revenues;  loss of use of the
System, the Existing Equipment or the Condensate Return system; non-operation or
increased  expense of  operation of the System,  the  Existing  Equipment or the
Condensate Return system,  as applicable;  and increased cost of capital or cost
of purchased or replacement steam.

10.3  GROUND  LEASE.  The  terms of  Sections  10.1  and 10.2  shall
supplement and not limit the terms of the Ground Lease.

SECTION 11.   INSURANCE

11.1 SYSTEM  INSURANCE.  Multitrade shall maintain in full force and
effect,  at its  expense,  casualty  and  liability  insurance on the System and
liability insurance for its undertakings hereunder equal to at least the amounts
required by statute and the amounts  customarily  maintained in the industry for
steam generating  facilities of similar size and type as the System.  Multitrade
shall  also  maintain  excess  liability   coverage  with  a  minimum  limit  of
$2,000,000.

11.2  BUSINESS  INTERRUPTION  INSURANCE.  If either party desires to
obtain  business  interruption  insurance for its  respective  facilities,  each
agrees, upon reasonable written notice to the other, to permit inspection of its
facilities (in the case of DuPont, to include the Existing Equipment but not any
proprietary  equipment or process) by  representatives  of the insurance company
during reasonable working hours.

-11-

SECTION 12. Arbitration of Disputes; Attorney's Fees

12.1  ARBITRATION.  (a) Any dispute  between  Multitrade  and DuPont
arising  under,  out of or in  connection  with  this  Agreement  shall,  if not
resolved  amicably  between the parties  within 30 days after written  notice of
such  dispute  from one party to the other,  be settled by (i) if the parties so
agree within a further 5 business  day period,  by  mediation  under rules,  and
before a mediator,  each to be agreed  within such 5 business day period or (ii)
if the parties do not so agree to mediation,  a mediator and rules within such 5
business days, at the initiation of either party, by arbitration pursuant to the
rules of the American Arbitration  Association ("AAA"). Any such mediation shall
last no more  than 90 days  from  the  date on  which  the  parties  so agree to
mediate. If at the end of such 90 day period the subject dispute is not resolved
either party may institute such arbitration as aforesaid.

(b) Any arbitration of any such dispute hereunder shall be initiated
by a party by the giving of a written  notice of  arbitration  hereunder  to the
other party.  Within 30 days after the date of such notice of arbitration,  each
of Multitrade  and DuPont shall  appoint an  arbitrator,  which two  arbitrators
shall  jointly  select a third  arbitrator  who shall  serve as  chairman of the
arbitration panel. If either Multitrade or DuPont does not select its arbitrator
within 30 days  after  written  notice of  arbitration  is given,  or if the two
arbitrators  cannot  agree  upon a third  arbitrator  within  30 days  after the
appointment of the later of such two initial arbitrators, the AAA shall make the
appointment  or  appointments  from its panel of  arbitrators.  The  arbitration
proceedings  shall  take  place in the State of  Virginia  or such  place as may
otherwise be mutually agreed to by the parties.

(c) The decision of the arbitrator shall be binding upon the parties
and  conclusive  as to disputes  relating to this  Agreement.  Upon  rendering a
decision,  the arbitrators  shall promptly  execute and acknowledge the decision
and deliver a copy to each party.  A judgment  confirming  the  decision  may be
rendered by any court that has jurisdiction over the matter.

(d) Pending resolution of any controversy or dispute, performance by
each party shall  continue so as to maintain the status quo as it existed  prior
to the initial notice of a dispute  hereunder.  Resolution of any controversy or
dispute  involving  the payment of money by one party to the other shall include
payment of interest,  compounded Monthly on all outstanding  payments determined
to be payable by a party, at a rate per annum equal to the "prime interest rate"
quoted from time to time by the Chase  Manhattan  Bank,  N.A.,  or any successor
bank thereto, plus one percent (1%).

12.2   ATTORNEY'S  FEES  AND  COST.  In  any  arbitration  or  court
proceeding  to enforce any  arbitration  award made pursuant to this Section 12,
each party shall be responsible for its respective  legal costs. The cost of any
mediation  or   arbitration   shall  be  split   equally   between  the  parties
participating in the proceeding.

SECTION 13.   RENEWAL; TERMINATION

13.1  RENEWAL.  This  Agreement  my be renewed by  agreement  of the
parties hereto for such periods after the Initial Term as the parties may agree.
Provided the notifying

-12-

party is not in default under any of the terms of this  Agreement,  either party
wishing to negotiate for a renewal of this  Agreement  shall notify the other in
writing of its desire to so  negotiate on or before the last day of March in the
year in which this Agreement would otherwise  expire.  In the event of a renewal
of this Agreement beyond the Initial Term, it is the intention of the parties to
agree to a mutually acceptable reduction in the Fixed Capacity Component payable
by DuPont to Multitrade during such renewal period.

13.2  Termination

(a)   FAILURE OF CONDITIONS.  Without  limiting the obligation
of each party  hereunder  and subject to the other terms
of  this  Agreement,   this  Agreement  shall  terminate
without  further  action by the parties on February  16,
1998 if the  conditions  set forth in Sections 6.1, 6.2,
6.3,  6.4,  6.5 or 6.10 have not been  satisfied  by the
parry  obligated to satisfy such conditions or waived by
the party entitled to waive such conditions,  each party
shall have no further  duty or  obligation  to the other
hereunder.

(b)   BREACH. If DuPont or Multitrade materially breaches this
Agreement  and does not cure such breach  within  thirty
(30) days of receipt from the  non-breaching  party of a
notice of such material breach, the non-breaching  party
may terminate this  Agreement (and if the  non-breaching
party  is   Multitrade,   Multitrade   may   discontinue
provision of the Multitrade  Services  hereunder) at any
time  thereafter  upon  sixty  (60) days  prior  written
notice to the breaching party;  provided,  however, that
in the  case  of a  material  breach  that  cannot  with
reasonable  diligence  be cured within a period of sixty
(60) days, and provided further that the breaching party
shall  proceed as promptly as possible  after receipt of
such  notice  to  cure  the  breach  and  thereafter  to
prosecute  the  curing  of such  breach  diligently  and
continuously,  expeditiously  developing  and thereafter
reporting regularly to the other upon the cure plan, the
period of time after receipt of such notice within which
to cure the breach  shall be extended for such period as
may be  necessary  to cure the  breach  with  reasonable
diligence,  but in no event for a period longer than one
hundred  eighty  (180) days after  such  notice.  In the
event of a termination  under this Section  13.2(b) as a
result  of a  breach  by  DuPont,  DuPont  shall  pay  a
Termination Payment as provided in Section 13.3.

(c)   NON-PAYMENT.  If  DuPont  fails  to pay  Multitrade  any
amount due  hereunder on the date payment of such amount
is  required,  Multitrade  may,  upon  thirty  (30) days
notice to DuPont,  and in the event  payment is not made
within such thirty (30) days,  discontinue  provision of
the Multitrade Services and terminate this Agreement. In
the event of a termination under this Section

-13-

13.2(c),  DuPont  shall  pay  a  Termination  Payment as
provided in Section 13.3.

(d)   GROUND LEASE.  Multitrade may  discontinue  provision of
the  Multitrade  Services  hereunder and terminate  this
Agreement   in  the  event  of  a  material   breach  or
termination of the Ground Lease by DuPont or the failure
of the Ground  Lease to be in full force and effect.  In
the event of a termination  under this Section  13.2(d),
DuPont  shall pay a  Termination  Payment as provided in
Section 13.3.

(e)   AIR PERMIT.  If the Air Permit shall have been modified,
revoked,  canceled or suspended,  or  proceedings  shall
have been  commenced  under any  Applicable  Law for the
modification,  revocation, suspension or cancellation of
the Air  Permit,  then,  provided  that no such event is
caused by the  negligence  of  Multitrade to comply with
the terms of the Air Permit,  Multitrade may discontinue
provision  of  the  Multitrade  Services  hereunder  and
DuPont  shall pay a  Termination  Payment as provided in
Section 13.3.

(f)   CONDEMNATION.  If any event  described  in Section 17 of
the Ground Lease shall occur,  Multitrade may, on thirty
(30) days notice to DuPont, terminate this Agreement. In
such event  Multitrade may discontinue  provision of the
Multitrade  Services  hereunder  and DuPont  shall pay a
Termination Payment as provided in Section 13.3.

13.3  TERMINATION   EFFECTIVENESS;   TERMINATION  PAYMENT.  (a)  For
purposes of calculating any Termination  Payment  hereunder and the amount to be
paid pursuant to Section 8 hereof,  if not otherwise the case, all  terminations
under this Agreement shall be effective on the last calendar day of the month in
which such notice would otherwise be effective hereunder.

(b) DuPont and Multitrade acknowledge and agree that any termination
of this  Agreement or the Ground Lease shall directly cause damage to Multitrade
in an amount and to an extent as cannot be calculated  presently with reasonable
certainty. As damages for such a breach and termination, DuPont hereby agrees to
pay Multitrade,  within thirty (30) days after such a termination, as liquidated
damages and not as a penalty, an amount equal to the Termination Payment. In the
event of such  termination,  no  discontinuation  of the Multitrade  Services by
Multitrade  shall render  Multitrade  liable for damages or relieve  DuPont from
performance of its obligations hereunder.

13.4 SURVIVAL. The obligations of the parties under Sections 10, 12,
13.3,  13.4 and this 13.5 and Section 23 of the Ground  Lease shall  survive any
termination of this Agreement.

13.5 NO LIMITATION. The terms of this Section 13 shall not limit any
other remedies available to Multitrade under this Agreement, the Ground Lease or
applicable law.

-14-

SECTION 14. MISCELLANEOUS

14.1 AMENDMENT; ENTIRE AGREEMENT. This Agreement contains the entire
understanding  of the parties and  supersedes  all prior  negotiations  and oral
understandings,  if any,  including the Letter of Intent dated December 15, 1997
between the parties  (other than clause 7 thereof).  This  Agreement  may not be
amended,  supplemented or modified except by a written  instrument signed by the
parties hereto.

14.2  ASSIGNMENT AND  DELEGATION.  (a) Except as provided in Section
14.2(b),  neither party may voluntarily assign all or any portion of its rights,
nor delegate its duties,  under this  Agreement,  without the written consent of
the other party,  whose consent shall not be  unreasonably  withheld,  except in
connection  with an  assignment  to a lender or  lenders  of its  right,  title,
interests, powers and benefits under this Agreement, as security for a loan. Any
such assignment or delegation made without such written consent pursuant to this
Section 14.2 shall be void and ineffective.

(b) DuPont may assign  its  rights  and  obligations  hereunder  (i)
without  Multitrade's consent but subject to prior written notice to Multitrade,
to a subsidiary  or affiliate of DuPont,  (ii) with  Multitrade's  prior written
consent,  whose consent  shall not be  unreasonably  withheld,  to a third party
whose credit standing is reasonably acceptable to Multitrade.

(c) If DuPont or its  permitted  successors  shall  transfer,  sell,
assign,  convey  or  otherwise  dispose  of  either  or both of the Sites or the
Martinsville  Plant (including without limitation in the case of (b)(i) or (ii),
above)  such  disposition  shall be subject to the  express  condition  that the
transferee,  assignee,  purchaser or recipient of such conveyance or disposition
shall assume all  obligations of DuPont to be performed under this Agreement and
the Ground Lease. In such event, DuPont or such other assignor shall be relieved
of all further  liability  under this  Agreement from and after the date of such
transferee, assignee, purchaser or recipient's assumption of such obligations of
DuPont or such assignor, as the case may be, as provided above.

14.3 BINDING EFFECT; SUCCESSOR AND ASSIGNS. The terms and provisions
of this  Agreement  and the  respective  rights  and  obligations  hereunder  of
Multitrade  and DuPont shall be binding upon,  and inure to the benefit of their
respective permitted successors and assigns.

14.4  INDEPENDENT  CONTRACTOR.  Multitrade  is  entering  into  this
Agreement and the Ground Lease and shall perform  hereunder and thereunder as an
independent  contractor and neither Multitrade nor DuPont shall be deemed in any
way or for any  purpose,  by  nature  of this  Agreement,  the  Ground  Lease or
otherwise, a partner, joint venturer, agent, employer or employee of the other.

14.5 CHOICE OF LAW. This Agreement and any dispute arising here from
shall be  governed  and  interpreted  in  accordance  with  laws of the State of
Virginia as applied to contracts made and wholly performed within said state.

14.6 SECTION  HEADINGS  AND  SUBHEADINGS.  All Section  headings and
subheadings  are  inserted  for  convenience  only  and  shall  not  affect  any
construction or interpretation of this Agreement.

-15-

14.7 SEVERABILITY. In the event that any provision of this Agreement
becomes or is  declared  by a court of  competent  jurisdiction  to be  illegal,
unenforceable,  or void,  this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to either party.

14.8 NOTICE.  Except as otherwise  specifically provided for in this
Agreement,  all notices or other communications  required or permitted hereunder
will be in writing and deemed given (a) if delivered personally,  (b) if sent by
facsimile copy and receipt thereof is confirmed,  or (c) if (i) deposited in the
U.S. mail,  registered mail,  postage prepaid,  return receipt requested or (ii)
delivered to a nationally  recognized  express  mail  service  which  requires a
receipt from the recipient,  and, in either case, a receipt is obtained, and (d)
in any case addressed as follows:

TO MULTITRADE:                 TO DUPONT:
-------------                  ---------
Multitrade Group, Inc.         E.I. DuPont DeNemours & Co.,
Post Office Box 717            Inc.
Ridgeway, VA 24148             One DuPont Road
Attn:  Mr. B.E. Brammer        Martinsville, VA 24115
CEO and Chairman               Attn:  Plant Manager

Tel:  540-632-4071             Tel:  540-666-5391
Fax:  540-632-5150             Fax:  540-666-5111

Such  addresses and personnel  designations  may be changed from time to time by
either party by serving written notice as provided above.

-16-

IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be duly
executed as of the date first above written.

MULTITRADE GROUP, INC.

By: /s/ B.E. Brammer
-----------------------------
Name: B.E. Brammer
Title: Chairman and CEO

E.I. DUPONT DE NEMOURS & CO.

By: /s/ S.A. Hamden
-----------------------------
Name: S.A. Hamden
Title: Director - Global Servicing

EXHIBIT 4.1

STEAM METER LOCATION AND SYSTEM
INTERCONNECTION POINTS LOCATIONS

The Steam Meter shall be located within the System on the steam main
that intra-connects to the Martinsville Plant's existing steam system. The Steam
Meter shall have sufficient  straight piping,  in and out, as recommended by the
Steam Meter manufacturer.

Multitrade  shall  inter-connect  the  System  to  the  Martinsville
Plant's  existing  system at the existing 10" valve located on the 550 psi steam
header.  The  existing  10" valve and header is located on the  operating  floor
level near the shop wall to the east and the southern boiler plant wall.

EXHIBIT 4.2

METHOD OF ADJUSTING STEAM INVOICE
TO COMPENSATE FOR MALFUNCTIONING STEAM METER

(No Adjustment for one percent plus or minus of correct reading.)

STEP 1.     Determine  percentage  meter  error,  either  plus  or  minus,  from
calibration by independent technician.

STEP 2.     Total the volume of steam  purchased by the Purchaser  from the time
of previous  calibration  to the time the meter was determined to be
inaccurate.  Example: If an October calibration  indicated meter was
2% in error-total steam usage from previous  calibration through the
month of October.

STEP 3.     Multiply  the total  steam  consumed by DuPont (the sum of STEP 2)
by the  percentage  of meter  error,  less the one percent plus or
minus dead band.

STEP 4.     Determine  the  average  sale  price of steam to DuPont  during  the
period in question.

STEP 5.     Multiply the product of STEP 3 by the average  price  determined  in
STEP 4.

STEP 6.     Multiply  the  product of STEP 5 by 50% and the result  equals the
total credit or debit.

EXAMPLE:

September,  1999,  calibration  indicated  three percent  "plus" steam  reading.
Previous calibration accomplished March, 1999.

STEP 1.     Plus three percent (3%) meter reading

STEP 2.     34,495,000  Sept. 1999
36,257,200  Aug. 1999
27,172,400  July, 1999
35,243,659  June, 1999
39,148,699  May, 1999
35,248,489  April, 1999
----------
207,665,647 Total Lbs.

STEP 3.     Sum of STEP 2:    207,665,647
Total from STEP 1
Less 1% Dead Band:      x         2%  (3% error - 1% Dead)
-------------
4,153,313 MLbs.

STEP 4.     Average Price for Steam:

$    5.40  Sept. 1999
5.49  Aug. 1999
5.55  July 1999
5.47  June 1999
5.37  May 1999
5.43  April 1999
----
$32.71  divided by 6 = $5.45 avg. price per 1000 lbs.

STEP 5.     Product of STEP 3:  4,153,313  MLbs.
Total from STEP 4:  x   $5.45 per MLbs.
---------
$22,635.66

STEP 6.     Product of STEP 5: $22,635.66
x     50%
---------
($11,317.78)  Net(credit) or debit

EXHIBIT 6.6

CONDENSATE RETURN PARAMETERS

Parameter                                Maximum Limit
----------------------                     ---------------------

Total Hardness                             1.0 parts per million

Sodium                                     .1 parts per million

Silica                                     .2 parts per million

Conductivity                               100 micromos

Total Iron                                 .05 parts per million

Total Copper                               .02 parts per million

Total Organic Carbon                       Non Detectible

pH                                         6.5 - 8.0 Range

EXHIBIT 13.3

TERMINATION PAYMENT SCHEDULE

EFFECTIVE DATE OF       TERMINATION      EFFECTIVE DATE OF      TERMINATION
TERMINATION            PAYMENT           TERMINATION           PAYMENT

PRIOR TO 7-31-98       $1,287,751           1-31-2001           $879,751
7-31-98            $1,287,751           2-28-2001           $864,701
8-31-98            $1,275,420           3-31-2001           $849,550
9-30-98            $1,263,008           4-30-2001           $834,298
10-31-98           $1,250,512           5-31-2001           $818,945
11-30-98           $1,237,934           6-30-2001           $803,489
12-31-98           $1,225,271           7-31-2001           $772,268
8-31-2001           $756,501
1-31-99            $1,212,254           9-30-2001           $740,629
2-28-99            $1,199,692          10-31-2001           $724,651
3-31-99            $1,186,775          11-30-2001           $708,567
4-30-99            $1,173,771          12-31-2001           $692,375
5-31-99            $1,160,681
6-30-99            $1,147,503           1-31-2002           $676,075
7-31-99            $1,134,238           2-28-2002           $659,667
8-31-99            $1,120,884           3-31-2002           $643,149
9-30-99            $1,107,441           4-30-2002           $626,522
10-31-99           $1,093,909           5-31-2002           $609,783
11-30-99           $1,080,286           6-30-2002           $592,933
12-31-99           $1,066,573           7-31-2002           $575,970
8-31-2002           $558,895
1-31-2000           $1,052,768           9-30-2002           $541,705
2-29-2000           $1,038,871          10-31-2002           $524,401
3-31-2000           $1,024,881          11-30-2002           $506,982
4-30-2000           $1,010,798          12-31-2002           $489,446
5-31-2000            $996,621
6-30-2000            $982,350            1-31-2003           $471,794
7-31-2000            $967,984            2-28-2003           $454,024
8-31-2000            $953,522            3-31-2003           $436,135
9-30-2000            $938,963            4-30-2003           $418,127
10-31-2000           $924,307            5-31-2003           $400,000
11-30-2000           $909,554
12-31-2000           $894,702

AMENDMENT NO. 1 TO STEAM SUPPLY AND OPERATING AGREEMENT

AMENDMENT NO. 1, DATED FEBRUARY 20, 1998 (THIS "AMENDMENT") TO STEAM
SUPPLY and  OPERATING  AGREEMENT,  dated  February  11, 1998 (the  "Agreement"),
between MULTITRADE GROUP, INC., a Virginia  corporation  ("Multitrade") and E.I.
DUPONT DE NEMOURS & CO., a Delaware corporation ("DuPont").

WHEREAS,  the  parties  to this  Amendment  have  entered  into  the
Agreement and wish to amend certain terms of the Agreement, as specified herein;

NOW,  THEREFORE,  in consideration of the foregoing premises and the
mutual  agreements  hereinafter set forth to be kept and performed,  the parties
hereto agree as follows:

1.    AMENDMENT TO SECTION 1 (DEFINITIONS)

Section 1 of the Agreement is amended to include the following  text
at the end of such section:

References  to an agreement,  document or  Applicable  Law mean such
agreement,  document or  Applicable  Law as the same may be amended,
modified or supplemented from time to time.

2.    AMENDMENT TO SECTION 6.5 (MARTINSVILLE PLANT)

The  following  sentence  is added to Section  6.5 as a second
sentence:

For all  purposes  of this  Agreement  and the  Ground  Lease.
DuPont,  at all times during the Term, shall be deemed to have
and  retain  sole  control of the  Martinsville  Plant and all
equipment therein.

3.    AMENDMENT TO SECTION 10 (INDEMNIFICATION AND LIMITATIONS OF
LIABILITY)

(a) The term "System  Site" in the  thirteenth  line of Section 10.1
shall be  deleted  and  replaced  by the  phrase  "System  Site or  Leased
Premises, as the case may be,"

(b)  Each  occurrence  of the term  "Condensate  Return  System"  in
Section  10.2 shall be deleted and  replaced  by the phrase  "Martinsville
Plant".

4.    AMENDMENT TO SECTION 14 (MISCELLANEOUS)

(a)   The following sentence is added to Section 14.1 as a third
sentence;

In the event of any  conflict or  inconsistency  between  this
Agreement  and the Ground Lease,  the terms of this  Agreement
shall govern.

(b) The  following  is added to Section  14.8 below the notice
address for Multitrade:

Or, if by courier to:

Multitrade Group, Inc.
101 Evening Star Lane
Martinsville, VA 24112
Attn: Mr. B.E. Brammer
CEO and Chairman

5.    MISCELLANEOUS

(a) All  references  to the  Agreement,  whether in the Agreement or
elsewhere,  shall mean the Agreement as amended by this Amendment.  Except
as amended  hereby,  the terms and  conditions of the Agreement  remain in
full force and effect.

(b) The terms and provisions of Section 12 (Arbitration of Disputes;
Attorney's Fees), Section 14.1 (Amendment; Entire Agreement), Section 14.5
(Choice of Law),  Section 14.7  (Severability)  and Section 14.8 (Notices)
shall  each be  incorporated  into and apply to this  Amendment  as if set
forth in full herein.

IN WITNESS  WHEREOF,  the parties  hereto have caused this  Amendment to be duly
executed as of the date first above written.

MULTITRADE GROUP, INC.

By: /s/ B.E. Brammer
-------------------------------------
Name: B.E. Brammer
Title:  Chairman & CEO

E.I. DUPONT DE NEMOURS & CO.

By:  /s/ G. Kenneth Towe
------------------------------------
Name:  G. Kenneth Towe
Title:  Energy Sourcing  Manager

EXHIBIT 21.1

Subsidiaries of the Registrant                                     Exhibit 21.1

Name                                              Jurisdiction of Incorporation
----                                              -----------------------------

BBC, LLC                                          New York

Better Bedding Corp.                              New York

B & C Sanitation Corporation                      New York

All Cycle Waste, Inc.                             Vermont

Baker Trucking, Inc.                              Vermont

Blasdell Development Group, Inc.                  New York

Bristol Waste Management, Inc.                    Vermont

Casella Waste Management, Inc.                    Vermont

Casella Waste Management of Pennsylvania, Inc.    Pennsylvania

Casella Waste Management of N.Y., Inc.            New York

Casella Transportation, Inc.                      Vermont

Casella T.I.R.E.S., Inc.                          Maine

Corning Community Disposal Service, Inc.          New York

Forest Acquisitions Inc.                          New Hampshire

Grasslands, Inc.                                  New York

Hakes C&D Disposal, Inc.                          New York

Hiram Hollow Regeneration Corp.                   New York

Hyland Associates (partnership)                   New York

Maple City Refuse Corp.                           New York

Natural Environmental, Inc.                       New York

New England Waste Services of Vermont, Inc.       Vermont

New England Waste Services of N.Y., Inc.          New York

New England Waste Services, Inc.                  Vermont

Newbury Waste Management, Inc.                    Vermont

North Country Environmental Services, Inc.        Virginia

North Country Composting Services, Inc.           New Hampshire

North Country Trucking, Inc.                      New York

Northern Sanitation, Inc.                         New York

Northern Properties Corporation of Plattsburgh    New York

NTC, LLC                                          New York

Pine Tree Waste, Inc.                             Maine

Portland C & D Site, Inc.                         New York

R.A. Bronson, Inc.                                New York

ReSource Waste Systems, Inc.                      Massachusetts

ReSource Recovery of Cape Cod, Inc.               Massachusetts

ReSource Transfer Services, Inc.                  Massachusetts

Sawyer Environmental Services                     Maine

Sawyer Environmental Recovery Facilities, Inc.    Maine

Schultz Landfill, Inc.                            New York

Sunderland Waste Management, Inc.                 Vermont

Waste Stream, Inc.                                New York

Westfield Disposal Service, Inc.                  New York

Winters Brothers, Inc.                            Vermont

Exhibit 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our 
report dated July 1, 1999 and to all references to our firm included in this 
registration statement. Our report dated June 18, 1999, included in Casella 
Waste Systems, Inc.'s form 10-K for the year ended April 30, 1999 is no 
longer appropriate since restated financial statements have been presented 
giving effect to two business combinations accounted for as 
poolings-of-interests.

/s/ Arthur Andersen LLP
----------------------------
Arthur Andersen LLP

Boston, Massachusetts
November 12, 1999

Exhibit 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to 
the use of our report dated March 30, 1999 (except for the second paragraph 
of Note 9 as to which the date is August 27, 1999, Note 2 as to which the 
date is August 30, 1999 and the first paragraph of Note 21 as to which the 
date is September 23, 1999) with respect to the consolidated financial 
statements of KTI, Inc., our report dated March 30, 1999 (except for the 
first paragraph of Note 3 to Schedule I as to which the date is August 27, 
1999, Note 2 to Schedule I as to which the date is August 30, 1999 and Note 5 
to Schedule I as to which the date is September 23, 1999) with respect to the 
financial statement schedules of KTI, Inc. and our report dated February 7, 
1997 with respect to the financial statements of Penobscot Energy Recovery 
Company, Limited Partnership each included in the Joint Proxy Statement of 
Casella Waste Systems, Inc. and KTI, Inc. that is made a part of the 
Registration Statement (Form S-4) and Prospectus of Casella Waste Systems, 
Inc. for the registration of 8,599,899 shares of its common stock.

Hackensack, New Jersey
November 10, 1999

KTI, INC.
7000 BOULEVARD EAST
GUTTENBERG, NEW JERSEY 07093

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS ON WEDNESDAY, DECEMBER 8, 1999.

The undersigned hereby appoints each of Ross Pirasteh and Martin J. Sergi,
or any of them, each with full power of substitution, as proxies, to represent
the undersigned and to vote, as designated below, all shares of common stock of
KTI, Inc. (the "Company") which the undersigned is entitled to vote at the
Company's Special Meeting of Shareholders to be held on Wednesday, December 8,
1999, and at any adjournment or postponement thereof.

You are encouraged to specify your choices by marking the appropriate boxes
on this card--but you need not mark any boxes if you wish to vote in accordance
with the Board of Directors' recommendation. The proxies cannot vote your shares
unless you sign and return this card.

The signer hereby revokes all proxies heretofore given by the signer to vote
at said meeting or any adjournment or postponement thereof.

This proxy when properly executed will be voted in the manner directed
herein by the shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
"FOR" PROPOSAL 1. Please mark your votes as in this example. /X/

Please mark, sign, date and mail the proxy card promptly using the enclosed
envelope.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1.

1.  Proposal to adopt the Agreement and Plan of Merger by and among Casella
Waste Systems, Inc., Rutland Acquisition Sub, Inc. ("Sub") and the Company,
which provides for the merger of Sub with and into the Company, as described
in the accompanying proxy statement. As a result of the merger, each
shareholder of KTI will receive 0.51 of a share of Casella Class A common
stock for each share of KTI stock held by them.

/ /  For        / /  Against        / /  Abstain

2.  In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.

/ /  Yes            / /  No                         Dated:
---------------------------------------- , 1999
-------------------------------------
Signature of Shareholder
-------------------------------------
For Joint Account Each Owner Should
Sign

Please mark and date the proxy and
sign the proxy as your name appears
herein. Joint owners should each sign
personally. Trustees and others
signing in a representative capacity
should indicate the capacity in which
they sign.

PROXY                      CASELLA WASTE SYSTEMS, INC.                     PROXY

ANNUAL MEETING OF STOCKHOLDERS
WEDNESDAY, DECEMBER 8, 1999

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.

The undersigned, having received notice of the annual meeting of
stockholders and the proxy statement/prospectus therefor and revoking all prior
proxies, hereby appoints John W. Casella (with full power of substitution), as
proxy of the undersigned, to attend the annual meeting of stockholders of
Casella Waste Systems, Inc. to be held on Wednesday, December 8, 1999, and any
adjourned or postponed session thereof, and there to vote and act, as indicated,
upon the matters on the reverse side in respect of all shares of Casella
Class A common stock and Casella Class B common stock which the undersigned
would be entitled to vote or act upon, with all powers the undersigned would
possess if personally present.

Attendance of the undersigned at the annual meeting of stockholders or at
any adjourned or postponed session thereof will not be deemed to revoke this
proxy unless the undersigned affirmatively indicates thereat the intention of
the undersigned to vote said shares of Casella common stock in person. If the
undersigned hold(s) any shares of Casella common stock in a fiduciary, custodial
or joint capacity or capacities, this proxy is signed by the undersigned in
every such capacity as well as individually.

PLEASE VOTE, DATE AND SIGN ON REVERSE SIDE AND RETURN PROMPTLY IN THE ENCLOSED
POSTAGE PRE-PAID ENVELOPE.

Please sign name(s) exactly as appearing hereon. When signing as attorney,
executor, administrator or other fiduciary, please give your full title as such.
Joint owners should each sign personally. If a corporation, please sign in full
corporate name, by authorized officer. If a partnership, please sign in
partnership name, by authorized person.

HAS YOUR ADDRESS CHANGED?                                    DO YOU HAVE ANY COMMENTS?

DETACH HERE

/X/  PLEASE MARK VOTES AS IN THIS EXAMPLE

THE SHARES OF CASELLA COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED AS
DIRECTED BY THE UNDERSIGNED. IF NO DIRECTION IS GIVEN WITH RESPECT TO ANY
PROPOSAL SPECIFIED HEREIN, THIS PROXY WILL BE VOTED FOR THE PROPOSAL.

Mark box at right if an address change or comment has been noted on the reverse
side of this card. / /

PLEASE BE SURE TO SIGN AND DATE THIS PROXY BELOW.

1.  To approve the issuance of shares of Casella Class A common stock to KTI
shareholders pursuant to the Agreement and Plan of Merger, as amended, by and
among Casella Waste Systems, Inc., KTI, Inc. and Rutland Acquisition Sub, Inc.
As a result of the merger, each KTI shareholder will receive 0.51 of a share of
Casella Class A common stock for each share of KTI common stock held by them.

/ /  FOR            / /  AGAINST      / /  ABSTAIN

2.  To elect the following persons as Class II directors for the ensuing three
years:
James W. Bohlig
Gregory B. Peters

/ /  FOR ALL                          / /  FOR ALL
NOMINEES            / /  WITHHOLD     EXCEPT

NOTE: IF YOU DO NOT WISH YOUR SHARES VOTED "FOR" A PARTICULAR NOMINEE, MARK THE
"FOR ALL EXCEPT" BOX AND STRIKE A LINE THROUGH THE NAME OF THE NOMINEE. YOUR
SHARES WILL BE VOTED FOR THE REMAINING NOMINEE.

3.  To approve an amendment to the company's Amended and Restated 1997 Stock
Incentive Plan.

/ /  FOR            / /  AGAINST      / /  ABSTAIN

4.  To approve an amendment to the company's 1997 Non-Employee Director Stock
Option Plan.

/ /  FOR            / /  AGAINST      / /  ABSTAIN

5.  To approve an amendment to the company's Amended and Restated 1997 Employee
Stock Purchase Plan.

/ /  FOR            / /  AGAINST      / /  ABSTAIN

6.  To ratify the selection of Arthur Andersen LLP as the company's independent
auditors for the current fiscal year.

/ /  FOR            / /  AGAINST      / /  ABSTAIN

In his discretion, the proxy is authorized to vote upon such other business as
may properly come before the annual meeting of stockholders or any adjournment
or postponement thereof.

/ /  YES            / /  NO

STOCKHOLDER(S) SIGN HERE X         DATE

Exhibit 99.3

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 8, 1999

To the shareholders of KTI, Inc.:

A special meeting of shareholders of KTI, Inc. will be held on Wednesday,
December 8, 1999 at our corporate offices located at 7000 Boulevard East,
Guttenberg, New Jersey 07093, commencing at 10:00 am., local time, for the
following purposes:

1.  To consider and vote on the merger agreement among KTI, Casella Waste
Systems, Inc. and Casella's wholly-owned subsidiary. The merger agreement
provides that Casella's wholly-owned subsidiary will be merged into KTI.
As a result of the merger, KTI will become a wholly-owned subsidiary of
Casella, and you and each other shareholder of KTI will receive 0.51 of a
share of Casella Class A common stock for each share of KTI common stock
you hold; and

2.  Other matters incidental to the approval of the matters presented for
action at the meeting or the conduct of the meeting that may be properly
brought before the meeting or any adjournment or postponement thereof.

We have attached a copy of the merger agreement to the proxy
statement/prospectus which accompanies this notice of meeting.

If the merger agreement is approved by KTI shareholders at the meeting, and
the merger takes place, then any KTI shareholder who complies with certain
procedures under New Jersey law and whose shares are not voted in favor of the
merger may be entitled to demand payment for his or her shares and to obtain an
appraisal of the value of those shares. The procedures you must follow to have
these rights are summarized in the accompanying proxy statement/prospectus.

Those of you who were holders of record of KTI common stock at the close of
business on October 1, 1999 are entitled to receive this notice and to vote at
the shareholders meeting. We urge you to attend the meeting in person. However,
in order to make sure that you are represented at the meeting, we also urge you
to complete, sign and return the enclosed proxy card as promptly as possible in
the enclosed postage-prepaid envelope.

By the order of the board of directors
Robert E. Wetzel, Secretary

December 8, 1999
Guttenberg, New Jersey

EXHIBIT 99.4

CONSENT

Each of the undersigned hereby consents to the inclusion of his name, as 
a person to become a director of Casella Waste Systems, Inc. ("Casella"), in 
the Registration Statement on Form S-4 with respect to the proposed merger 
between KTI, Inc. and Casella.

October 25, 1999

/s/ Ross Pirasteh
---------------------------
Ross Pirasteh

/s/ Martin J. Sergi
---------------------------
Martin J. Sergi

/s/ George J. Mitchell
---------------------------
George J. Mitchell

/s/ Wilbur L. Ross, Jr.
---------------------------
Wilbur L. Ross, Jr.

Exhibit 99.6

CONSENT OF CIBC WORLD MARKETS CORP.

We hereby consent to the use of our letter in its entirety dated 
September 23, 1999 (the "Letter") to the Board of Directors of KTI, Inc. 
("KTI") contained in Annex B-2 to the Joint Proxy Statement/Prospectus 
constituting a part of the registration statement on Form S-4 relating to the 
proposed merger of a wholly owned subsidiary of Casella Waste Systems, Inc. 
with and into KTI and to the references to such Letter in the Joint Proxy 
Statement/Prospectus. In giving such consent, we do not thereby admit that we 
come within the category of persons whose consent is required under Section 7 
of the Securities Act of 1993, as amended, or the rules and regulations 
adopted by the Securities and Exchange Commission thereunder nor do we admit 
that we are experts with respect to any part of such Registration Statement 
within the meaning of the term "experts" as used in the Securities Act of 
1933, as amended, or the rules and regulations of the Securities and Exchange 
Commission thereunder.

November 9, 1999                      CIBC WORLD MARKETS CORP.

By: ________________________