STERICYCLE INC, 424B1, 1999-02-08

STERICYCLE INC
424B1, 1999-02-08
HAZARDOUS WASTE MANAGEMENT

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<PAGE> 1

PROSPECTUS February 5, 1999
- --------------------------------------------------------------------------------

3,500,000 Shares

[STERICYCLE LOGO]

Common Stock

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

The 3,500,000 shares of Common Stock, par value $.01 per share (the "Common
Stock"), offered hereby (the "Offering") are being offered by Stericycle, Inc.
("Stericycle" or the "Company").

The Common Stock is quoted on the Nasdaq National Market under the symbol
"SRCL." On February 4, 1999, the last reported sale price of the Common Stock
was $14.75 per share. See "Price Range of Common Stock."

FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON STOCK
OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 7-14.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
Price to Underwriting Discounts Proceeds to
Public and Commissions(1) Company(2)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................................... $14.50 $0.80 $13.70
- --------------------------------------------------------------------------------------------------------------
Total(3)...................................... $50,750,000 $2,791,250 $47,958,750
- --------------------------------------------------------------------------------------------------------------
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting expenses of this Offering payable by the Company estimated
at $850,000.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
525,000 shares of Common Stock on the same terms per share solely to cover
over-allotments, if any. If such option is exercised in full, the total
purchase price to the public will be $58,362,500, the total underwriting
discounts and commissions will be $3,209,937 and the total proceeds to the
Company will be $55,152,563. See "Underwriting."

The Common Stock is being offered by the Underwriters as set forth under
"Underwriting" herein. It is expected that the delivery of the certificates
therefor will be made at the offices of Warburg Dillon Read LLC, New York, New
York, on or about February 10, 1999. The Underwriters include:

WARBURG DILLON READ LLC
BT ALEX. BROWN
CREDIT SUISSE FIRST BOSTON
WILLIAM BLAIR & COMPANY
<PAGE> 2

STERICYCLE LOGO

USA MAP

Founded in 1989, Stericycle is the second largest provider of regulated
medical waste management services in the United States. Operating in 40 states,
the District of Columbia and four Canadian provinces, Stericycle and its
subsidiaries serve over 77,000 customers in the United States and Canada. The
regulated medical waste management market in the United States is estimated to
be more than $1.3 billion. Stericycle and its subsidiaries operate 12 treatment
centers, four of which utilize Stericycle's proprietary Electro-
Thermal-Deactivation treatment technology, 18 transfer stations and 19 customer
service centers.

Steri-Cement(R), Steri-Fuel(R), Steri-Plastic(R) and Steri-Tub(R) are
registered trademarks and Stericycle(R) is a registered service mark of the
Company.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN THE COMMON STOCK AND THE IMPOSITION OF A PENALTY BID, DURING AND
AFTER THE UNDERWRITING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."

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<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, Condensed Financial
Statements and related Notes thereto appearing elsewhere in this Prospectus.
Unless otherwise indicated, all information in this Prospectus assumes that the
Underwriters' over-allotment option is not exercised. See "Underwriting." Unless
the context requires otherwise, references to "Stericycle" or the "Company"
refer to Stericycle, Inc. and its subsidiaries. Prospective investors should
carefully consider the information under "Risk Factors" in evaluating an
investment in the Common Stock offered by this Prospectus.

Stericycle is the second largest provider of regulated medical waste
management services in the United States, providing regulated medical waste
collection, transportation, treatment and disposal services to over 77,000
customers in 40 states, the District of Columbia and four Canadian provinces.
Combining proprietary treatment technology with a health care orientation, the
Company believes that it is in a unique position to manage regulated medical
waste in a safe and cost-effective manner and to capitalize on the current
consolidation trend in the regulated medical waste management industry. Since
1991, the Company has completed 31 acquisitions, of which 23 were completed
since the Company's initial public offering in August 1996. These acquisitions,
combined with growth from its existing operations, have increased the Company's
revenues from $1.6 million in 1991 to $46.2 million in 1997 and to $57.5 million
for the 12 months ended September 30, 1998.

The acquisition of other regulated medical waste management businesses,
including both independent haulers and integrated competitors, is a key element
of the Company's strategy to increase its penetration of its current markets and
to expand its operations geographically. The Company believes that it is an
attractive buyer to many potential acquisition candidates because of its
exclusive focus on the regulated medical waste management industry, its
customer-service orientation and its expansion strategy. The Company's senior
management is actively involved in identifying acquisition candidates and
consummating acquisitions, and the Company has proven procedures for efficiently
integrating newly-acquired companies into its business. In October 1998, the
Company indirectly acquired approximately 52.2% of the outstanding common stock
and all of the outstanding preferred stock of 3CI Complete Compliance
Corporation ("3CI"), a publicly-traded company which provides regulated medical
waste management services in the southeastern United States. In December 1998
and January 1999, the Company acquired all of the outstanding stock of Med-Tech
Environmental Limited ("Med-Tech"), which provides regulated medical waste
management services in Canada and the northeastern United States. The Company's
revenues for the nine months ended September 30, 1998 were $44.8 million and
$64.9 million on a pro forma basis, giving effect to the acquisitions of 3CI and
Med-Tech as if the acquisitions had occurred on January 1, 1998. See
"Business -- Growth Strategy" and "Unaudited Pro Forma Consolidated Financial
Statements."

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<PAGE> 4

and blood and blood products. An independent study published in 1997 estimated
that the size of the regulated medical waste management market in the United
States in 1999 would be more than $1.3 billion.

The Company believes that its regulated medical waste management system
using its proprietary Electro-Thermal-Deactivation ("ETD") treatment process is
the only commercially-proven system that: (i) kills human pathogens in regulated
medical waste without generating liquid effluents or regulated air emissions;
(ii) affords certain operating cost advantages over the principal competing
treatment methods; (iii) reduces the volume of regulated medical waste by up to
85%; (iv) renders regulated medical waste unrecognizable; (v) permits the
recovery and recycling of usable plastics from regulated medical waste; and (vi)
enables the remaining regulated medical waste to be safely landfilled or used as
an alternative fuel in energy production.

The Company believes that its business has grown and will continue to grow
as a consequence of the following trends in the health care and regulated
medical waste industries:

- The handling and disposal of the large quantities of regulated medical
waste generated by the health care industry has attracted significant
public awareness and regulatory attention. The Occupational Safety and
Health Administration ("OSHA") has issued regulations concerning employee
exposure to bloodborne pathogens and other potentially infectious
materials that require, among other things, special procedures for
handling regulated medical waste.

- Alternate Care generators have become an increasing source of revenues in
the regulated medical waste industry. Alternate Care generators, however,
typically do not produce a sufficient volume of regulated medical waste
to justify substantial capital expenditures on their own waste treatment
facilities or the expense of hiring regulatory compliance personnel.

- Governmental clean air regulations and public opposition are combining to
increase the cost and difficulty of obtaining permits to build and
operate incinerators. This trend is expected to accelerate in response to
regulations which the U.S. Environmental Protection Agency ("EPA")
adopted in September 1997. The EPA expects that these regulations will
result in the closing of many of the hospital medical waste incinerators
currently in operation as hospitals seek alternative, less expensive
methods of regulated medical waste disposal. The Company expects to
benefit from this anticipated movement by hospitals to outsource
regulated medical waste disposal.

- The regulated medical waste management industry is rapidly consolidating.
The Company has demonstrated the ability to identify and acquire
companies that add revenues and profits to its business.

- The health care industry continues to be under pressure to reduce costs
and improve efficiency, which the Company believes that it can help to
achieve for its clients in the management of regulated medical waste.

The Company believes that it has many opportunities to grow and to increase
its profitability by improving its penetration of existing geographic service
areas, expanding into new product and service areas, acquiring selected
businesses, focusing its marketing efforts on higher-margin Alternate Care
generators and maximizing operating efficiencies. By improving its penetration
of existing geographic service areas and expanding into new areas, the Company
expects to increase both its customer density and market share. By acquiring
selected regulated medical waste management businesses, the Company expects to
augment both growth and operating efficiencies through "tuck-in" acquisitions
that can be integrated into the Company's existing operations and acquisitions
in new service areas that can be assembled in a "hub and spoke" configuration of
treatment facilities and transfer stations. By focusing its marketing efforts on
Alternate Care generators, the Company expects to benefit from the higher
margins generally available from this large and growing class of customers. By
continuing to refine its logistics through the optimization of route structures
and greater exploitation of the Company's existing infrastructure, the Company
expects to improve its operating efficiencies.

The Company also seeks to expand beyond the United States and Canada by
entering into joint ventures with foreign regulated waste management companies
and by licensing its proprietary technology to foreign companies who may also
purchase ETD processing equipment. In 1998, the Company announced the

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<PAGE> 5

formation of a joint venture in Mexico for the collection, treatment and
disposal of regulated medical waste in the Mexico City market, and also
announced a supply and license agreement with a Brazilian company for ETD
technology and equipment to use in the treatment of regulated medical waste in
the Sao Paulo, Brazil metropolitan area.

Through a strategy combining market penetration, expansion, acquisitions,
focused marketing and logistical efficiencies, the Company believes that it is
in a unique position to grow and to lead the consolidation of the fragmented
regulated medical waste management industry.

Stericycle, Inc. is a Delaware corporation with its principal executive
offices located at 28161 North Keith Drive, Lake Forest, Illinois 60045. Its
telephone number is (847) 367-5910.

THE OFFERING

Common Stock offered by the Company..... 3,500,000 shares

Common Stock to be outstanding after the
Offering................................ 14,241,603 shares (1)

Use of proceeds......................... To repay bank and other debt and
for future acquisitions and general
corporate purposes, including
working capital and capital
expenditures. See "Use of
Proceeds."

Nasdaq National Market symbol........... SRCL
- -------------------------
(1) Based on the number of shares outstanding as of September 30, 1998. This
figure excludes 406,807 shares issuable upon the exercise of outstanding
stock options exercisable as of or within 60 days after September 30, 1998,
at a weighted average exercise price of $5.09 per share, and 286,619 shares
issuable upon the exercise of outstanding warrants all of which were
exercisable as of September 30, 1998 at a weighted average exercise price of
$8.21 per share. This figure also excludes 579,939 shares issuable upon the
exercise of outstanding stock options, at a weighted average exercise price
of $10.40 per share, which were not exercisable within 60 days after
September 30, 1998.

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<PAGE> 6

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
(1):
Revenues...................... $ 9,141 $ 16,141 $21,339 $24,542 $46,166 $33,475 $44,759
Cost of revenues.............. 9,137 13,922 17,478 19,423 34,109 25,113 30,492
Selling, general and
administrative expenses..... 5,988 7,927 8,137 7,556 10,671 7,725 10,151
------- -------- ------- ------- ------- ------- -------
Income (loss) from
operations.................. (5,984) (5,708) (4,276) (2,437) 1,386 637 4,116
Interest income (expense),
net......................... (44) (104) (268) 48 190 192 66
Other income.................. -- -- -- -- -- -- 20
------- -------- ------- ------- ------- ------- -------
Income (loss) before income
taxes....................... (6,028) (5,812) (4,544) (2,389) 1,576 829 4,202
Income tax expense............ -- -- -- -- 146 18 781
------- -------- ------- ------- ------- ------- -------
Net income (loss)............. (6,028) (5,812) (4,544) (2,389) 1,430 811 3,421
Less cumulative preferred
dividends (2)............... (3,733) (4,481) -- -- -- -- --
------- -------- ------- ------- ------- ------- -------
Net income (loss) applicable
to common stock............. $(9,761) $(10,293) $(4,544) $(2,389) $ 1,430 $ 811 $ 3,421
======= ======== ======= ======= ======= ======= =======
Diluted net income (loss) per
common share (3)............ $(13.64) $ (14.38) $ (0.81) $ (0.32) $ 0.13 $ 0.08 $ 0.30
======= ======== ======= ======= ======= ======= =======
Weighted average number of
common shares and common
stock equivalent shares
outstanding................. 716 716 5,582 7,471 10,766 10,480 11,234
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------
ACTUAL AS ADJUSTED (4)
------ ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 3,110 $ 46,094
Total assets................................................ 68,183 111,167
Current portion of long-term debt........................... 6,281 2,156(5)
Long-term debt, net of current maturities................... 3,246 3,246
Shareholders' equity........................................ $50,550 $ 97,659
</TABLE>

- -------------------------
(1) See "Business -- Growth Strategy -- Pursue Selected Acquisitions," Note 5 to
the Consolidated Financial Statements and Note 3 to the Condensed
Consolidated Financial Statements for information concerning the Company's
acquisitions during the five years and the three years ended December 31,
1997 and the nine months ended September 30, 1998. The comparability of the
information for the periods presented has been affected by these
acquisitions.

(2) In August 1995 and in conjunction with a recapitalization of the Company,
the liquidation preference on the Company's preferred stock was eliminated
and the Company's preferred stock was reclassified as common stock. See Note
8 to the Consolidated Financial Statements.

(3) The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("FAS 128"), during the fourth quarter of 1997. FAS 128
replaced the calculation of primary and fully diluted net income (loss) per
common share with basic and diluted net income (loss) per common share. Net
income (loss) per common share amounts have been restated where appropriate.
See Note 2 to the Consolidated Financial Statements.

(4) Adjusted to give effect to the sale of 3,500,000 shares of Common Stock
offered by the Company hereby (at a public offering price of $14.50 per
share, and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company). See "Use of Proceeds."

(5) Both the Company's credit facility with LaSalle National Bank and its
subordinated loan agreement with certain lenders require the repayment of
the Company's indebtedness upon completion of this Offering. See "Use of
Proceeds." As of February 3, 1999, the Company's indebtedness under its
credit facility was approximately $20,357,000, and its indebtedness under
its subordinated loan agreement was approximately $5,500,000. No adjustment
has been made to give effect to the repayment of this indebtedness, which
was incurred after September 30, 1998, except for repayment of the Company's
indebtedness under its prior credit facility, which was $4,125,000 as of
September 30, 1998.

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<PAGE> 7

RISK FACTORS

In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following factors in
evaluating an investment in the Common Stock offered by this Prospectus.
Prospective investors are cautioned that the statements in this Prospectus that
are not descriptions of historical facts may be forward-looking statements that
are subject to risks and uncertainties. The Company's actual results and the
timing of events could differ materially from those contemplated by such
forward-looking statements due to a number of factors. These factors include,
but are not limited to, those discussed below and elsewhere in this Prospectus.

GROWTH STRATEGY DEPENDENT UPON ACQUISITIONS

The Company's growth strategy depends significantly upon its ability to
acquire other regulated medical waste management businesses. There can be no
assurance that the Company will be able to identify suitable businesses to
acquire, successfully negotiate their acquisition, improve the productivity of
their operations or integrate their operations into the Company's business. The
trend toward consolidation in the regulated medical waste management industry
may increase competition for the acquisition of existing businesses and result
in fewer acquisition opportunities and higher purchase prices. Some of the
Company's competitors for acquisitions continue to have greater financial
resources than the Company and may be willing to pay higher prices than the
Company is willing to pay to complete acquisitions or may be more capable of
completing larger transactions. If the Company is successful both in identifying
suitable regulated medical waste management businesses to acquire and in
negotiating terms of acquisition acceptable to the Company, the size of the
Company's acquisitions may nevertheless vary widely and the timing of their
completion may be irregular. The Company's completion of acquisitions on an
irregular basis, either because of protracted negotiations, delays in obtaining
necessary regulatory approvals or other factors, could have an adverse effect on
the Company's profits on a quarter-to-quarter basis and result in lower than
expected earnings. There can be no assurance that any debt or equity financing
which may be necessary to complete the Company's acquisitions will be able to be
obtained on terms satisfactory to the Company. Any additional equity financing
and the issuance of equity securities as purchase consideration may be dilutive
to the Company's existing stockholders. Debt financing, if available, and the
issuance of debt as purchase consideration, may significantly increase the
Company's debt and involve restrictive covenants which limit the Company's
operations. In addition, future acquisitions by the Company may result in large
one-time write-offs and the creation of goodwill or other intangible assets that
could result in significant amortization expense. The Company's failure to
implement its growth strategy successfully could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Use of Proceeds" and "Business -- Growth Strategy."

If the Company is successful in acquiring additional regulated medical
waste management businesses, the Company may continue to experience a period of
rapid growth which could place substantial additional demands on the Company's
management, resources and management information systems. To the extent that any
businesses acquired in the future operate in markets where the Company has not
previously operated, it is likely that higher initial costs will be incurred by
the Company in connection with the expansion of operations into these new
markets. The Company's failure to manage any such further rapid growth
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations.

IMPACT OF GOVERNMENT REGULATION

The regulated medical waste management industry is subject to extensive
federal, state, local and applicable foreign laws and regulations. The
collection, transportation, treatment and disposal of regulated medical waste
require applicable government permits, authorizations and approvals ("permits"),
the nature of which may vary from jurisdiction to jurisdiction, and continuing
compliance with required packaging, labeling, handling, treatment, disposal and
documentation procedures and notice and reporting obligations. In certain
states, the Company is required to obtain government approval of its pricing and
to obtain and operate in compliance with a certificate of public convenience and
necessity. The Company believes that it is currently in compliance in all
material respects with its permits and applicable laws and regulations. State
and local laws and regulations change with some frequency, and the amendment of
existing laws or regulations, the adoption

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of new laws or regulations, or the imposition of new requirements under existing
laws or regulations, could require the Company to obtain new government permits
or to modify its current methods of operation in order to comply with these
changes. There can be no assurance that the Company would be able to obtain any
such new permits or that the cost of compliance or the Company's inability to
comply with any such changes would not have a material adverse effect on the
Company's business, financial condition and results of operations. See "Business
- -- Governmental Regulation."

The Company's failure to operate in compliance with the requirements and
limitations of any permit, or with the laws and regulations pursuant to which
the permit was issued or otherwise governing the Company's operations, could
jeopardize the permit. Routine compliance inspections by regulatory agencies, as
well as complaints filed or anonymously sponsored by the Company's competitors
or others alleging that the Company is not operating in compliance with
applicable law, could result in administrative proceedings to modify, suspend or
revoke the permit. Any such modification, suspension or revocation could have a
material adverse effect on the Company's business, financial condition and
results of operations. Some permits have to be renewed periodically, and there
can be no assurance that any existing or future permit which must be renewed
will be renewed by the issuing regulatory agency or that changes in operating
methods or facilities will not be required as a condition to renewal. The
failure to obtain any such renewal or the imposition of new permit conditions
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Governmental Regulation."

The permits that the Company requires, and in particular the permits that
it requires to build and operate treatment and transfer facilities and transport
regulated medical waste, are difficult and time-consuming to obtain and, if and
when issued, may be subject to conditions or restrictions which limit the
Company's ability to operate efficiently in the applicable jurisdiction. There
can be no assurance that the Company will be successful in obtaining the permits
necessary to expand the scope of the geographic service areas in which it
operates or the products and services that it offers, or that any such permits
will be obtained when contemplated by the Company's expansion plans or under
conditions or with restrictions acceptable to the Company. The Company's
inability to expand the scope of the geographic service areas in which it
operates, or the products and services that it offers, either because it is
unable to obtain the necessary permits or because they are issued under
conditions or with restrictions that are not acceptable to the Company, could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's applications for treatment and transfer
facility permits are frequently subject to opposition by elected officials,
local residents or citizen groups, and public opposition could force the Company
to delay or withdraw its application and abandon its plans to expand into a
particular geographic service area or to locate a treatment or transfer facility
at a particular site. Even after a permit is issued, opponents may initiate
administrative proceedings or litigation to compel the applicable regulatory
agency to modify the conditions under which the permit was granted or to revoke
the issuance of the permit. The Company's withdrawal of a permit application,
after incurring substantial costs in the preparation and prosecution of the
application and underlying market studies, site selection, facility design and
pre-marketing activities, could have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company's proprietary treatment technology,
Electro-Thermal-Deactivation ("ETD"), is an alternative to the conventional
treatment technologies of incineration and autoclaving and has not been approved
in all states for the treatment of regulated medical waste. The Company has
received permits or legislative approval to operate its proprietary treatment
technology in 15 states with additional applications pending. There can be no
assurance, however, that the Company's treatment technology will be approved for
the treatment of regulated medical waste in each state or other jurisdiction
where the Company may seek regulatory approval in the future to construct and
operate a treatment facility. The Company's inability to obtain any such
regulatory approval could have a material adverse effect on the Company's
business, financial condition and results of operations. Like any technology,
the Company's treatment process may be subject to certain technological
limitations, including limits on the amount of attainable volume reduction. The
Company's ETD process involves grinding medical waste within a containment room,
which may result in the aerosolization of pathogens. While the Company believes
that its containment and other safety systems fully protect its employees
through multiple protective measures, equipment failure or human error possibly
could result in exposure of the Company's employees to pathogens that may be
present in medical waste. Although
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<PAGE> 9

the Company has never been denied regulatory approval because of any
technological limitation on its treatment process, there can be no assurance
that specific limitations will not be identified by a regulatory agency as a
sufficient reason to withhold, modify or revoke a necessary permit in a
particular jurisdiction or used by competitors to encourage customers or
potential customers to engage their services rather than those of the Company.
There can be no assurance that any such actions would not have a material
adverse effect on the Company's business, financial condition and results of
operations.

The Company currently employs autoclaving, incineration, chemclaving and
microwaving in addition to its proprietary ETD treatment process. Incineration
is subject to more stringent regulation than the ETD treatment process and may
expose the Company to greater risk of the adverse effect of government
regulation. See "Business -- Treatment Technologies" and "-- Governmental
Regulation."

As the Company expands its international operations, it will become subject
in the countries where it operates to regulation by foreign governments,
including the possibility of pricing tariffs, controls over the location and
operation of treatment facilities and various permit requirements similar to
those imposed by United States federal, state and local authorities. See
"Business -- Governmental Regulation" and "-- Growth Strategy."

GOVERNMENTAL ENFORCEMENT PROCEEDINGS

The Company has been and may continue to be subject from time to time to
governmental enforcement proceedings and has been and may be required to pay
fines and penalties or undertake remedial work at its facilities. The amount of
any such fines and penalties and the cost of any such remedial work could be
substantial and could have a material adverse effect on the Company's business,
financial condition and results of operations.

Governmental enforcement actions also may be initiated against the Company
for the purpose of revoking or modifying one of the Company's permits. The cost
of defense and the costs incurred as a result of the revocation or modification
of a permit could be substantial and could have a material adverse effect on the
Company's business, financial condition and results of operations.

In April 1997, a worker at the Company's Morton, Washington treatment
facility was diagnosed with active tuberculosis. Testing revealed two additional
cases of active tuberculosis and 15 additional workers who tested positive for
exposure to tuberculosis. Officials of the Washington Departments of Health and
of Labor and Industries have concluded that the Company's workers were probably
exposed to tuberculosis bacteria through regulated medical waste being processed
at the Company's treatment facility. The Company believes that other sources of
exposure are possible and that the actual source of exposure has yet to be
conclusively determined. However, the Company has implemented the
recommendations of all federal, state and local regulatory authorities regarding
outfitting its workers with personal protective equipment and has implemented or
is implementing additional recommendations regarding the modification of
equipment at the Morton facility. The measures taken at the Morton facility have
been extended to the Company's other treatment facilities. The safety measures
being taken include certain measures recommended by the National Institute for
Occupational Safety and Health ("NIOSH") in a report issued in December 1998.
While future claims are possible, to date the Company has not been subject to
any civil proceedings by the affected employees as a result of this incident,
which the Washington Department of Labor and Industries has determined is
covered by the state workers' compensation program. This or a similar incident
in the future at one of the Company's facilities could result in adverse
publicity and could cause governmental authorities to require the Company to
adopt additional safety measures, impose fines or other penalties, initiate
permit modification or revocation proceedings or deny future permit
applications, or could result in litigation by the affected employees. The cost
of complying with any additional measures, the payment of a significant fine or
penalty, the modification or revocation of an operating permit, adverse
publicity, or the expense of defending or settling employee litigation or paying
an adverse judgment, could have a material adverse effect on the Company's
business, financial condition and results of operations.

There can be no assurance that the Company will be successful in its
defense of any future government enforcement proceeding or in obtaining a
settlement on terms acceptable to the Company of any fines or
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<PAGE> 10

penalties sought to be imposed. The expense and time involved in defending
against any such enforcement proceeding, the cost of any fines or penalties
imposed or paid in settlement, the cost of any changes in operations that may be
necessary because of the modification, suspension or revocation of a permit, and
the adverse publicity, loss of customers and additional investigations or
inquiries associated with any proceeding, could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Legal and Other Proceedings" and "-- Governmental Regulation."

COMPETITION WITHIN INDUSTRY

The Company operates within the highly competitive regulated medical waste
management industry. Historically, competition in the industry resulted in
substantial price reductions to Large Quantity generators in virtually all
geographic areas. While prices have stabilized in most areas, there can be no
assurance that competitive pressures within the regulated medical waste
management industry will not result in further price reductions. Substantial
further price reductions would have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company faces competition from one national waste management company
and many regional and local businesses in its present locations, and will be
confronted with such competition in each location where it seeks to expand in
the future. Some of the Company's competitors have greater capital resources,
regulatory experience, sales and marketing capabilities and broader product and
service offerings than the Company and are well established in their respective
markets. The Company's primary competitor is Browning-Ferris Industries, Inc.
("BFI"). BFI and other competitors could engage in a variety of actions that
have the effect of delaying or preventing implementation of the Company's growth
strategy, including lobbying or support of legislative or regulatory initiatives
designed to impede the Company's ability to obtain or maintain necessary permits
and approvals and financial support of citizens' groups that oppose the
Company's plans to locate a treatment or transfer facility at a particular site.
There can be no assurance that the Company's competitors will not substantially
increase their commitment of resources devoted to competing aggressively with
the Company or that the Company will be able to compete profitably with BFI or
other competitors. To the extent that the Company's competitors are able to
secure significant numbers of long-term customer agreements with penalties for
early termination in geographic service areas that the Company targets for
growth, the Company may be unable to meet its growth objectives. See "Business
- -- Competition."

BROAD DISCRETION IN USE OF PROCEEDS

The Company intends to use approximately $25,857,000 of the net proceeds of
this Offering for debt repayment. The Company intends to use the remaining net
proceeds of the Offering for future acquisitions of other regulated medical
waste management businesses and for general corporate purposes, including
working capital and capital expenditures. With the exception of one letter of
intent, the Company has no pending agreements, commitments or understandings as
of the date of this Prospectus to acquire other regulated medical waste
management businesses. The Company's management will have broad discretion in
determining the amount and timing of expenditures and in allocating the net
proceeds of this Offering received by the Company. See "Use of Proceeds."

UNCERTAINTY OF CONTINUED PROFITABILITY

Until 1997, the Company incurred substantial losses each year since it
began operations in 1989, and as of December 31, 1997, had an accumulated
deficit of approximately $38,061,000. While the Company had net income of
$1,430,000 for the year ended December 31, 1997 and net income of $3,421,000 for
the nine months ended September 30, 1998, there can be no assurance that the
Company will be able to continue to operate profitably in the future. The
Company is subject to the risks and uncertainties inherent in the growth of a
developing business in the regulated medical waste management industry, and
prospective investors have only a limited history of profitability to review.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

10
<PAGE> 11

IMPORTANCE OF GOVERNMENTAL ENFORCEMENT OF ENVIRONMENTAL REGULATIONS

The Company believes that its business prospects are enhanced by the
enforcement of stringent statutory and regulatory requirements relating to the
collection, transportation, treatment and disposal of regulated medical waste.
These laws and regulations are, and will continue to be, a principal factor
affecting demand for the Company's regulated medical waste management services.
In addition, the Company views as generally advantageous to its business
prospects laws and regulations that make it more difficult or expensive to use
regulated medical waste treatment technologies that compete with the ETD
treatment process, such as incineration and autoclaving. These advantages have
diminished, however, to the extent that the Company itself has recently begun to
use incineration and autoclaving. The Company estimates that during 1997, the
Company used incineration or autoclaving at its own facilities or those of third
parties for approximately 43% of the regulated medical waste that it treated.
This percentage is likely to increase as a result of recent and future
acquisitions. See "Business -- Treatment Technologies."

The Company believes that legislative initiatives offering financial
incentives for or otherwise encouraging the recycling of treated medical waste
similarly enhance the Company's business prospects. Changes in the law or
regulations that relax the requirements governing regulated medical waste,
including changes that reduce incentives to landfill diversion and resource
recovery or that remove obstacles to the use of incineration and autoclaving for
the treatment of regulated medical waste, could have a material adverse effect
on the Company's business, financial condition and results of operations. The
level of future enforcement of existing and new laws and regulations, the scope
of future laws and regulations and the impact of technological changes on
existing or future laws and regulations cannot be predicted. The level of
enforcement in each jurisdiction is subject to changing political and budgetary
pressures. A significant reduction in government enforcement in one or more
jurisdictions could have a material adverse effect on the Company's business,
financial condition and results of operations.

DEPENDENCE ON PATENTS AND PROPRIETARY INFORMATION

The Company holds nine United States patents relating to the ETD treatment
process and other aspects of processing regulated medical waste. The Company has
filed or has been assigned counterpart patent applications in several foreign
countries and has received patents in five of them. The Company also holds one
United States patent for its reusable container, which is used under the
trademark Steri-Tub(R). The Company believes that its patents are important to
its prospects for success. There can be no assurance, however, that the
Company's patent applications will issue as patents or that any issued patents
will provide competitive advantages to the Company or will not be successfully
challenged or circumvented by competitors or other third parties. In addition,
there can be no assurance that the Company's regulated medical waste treatment
processes do not infringe the patent or other proprietary rights of third
parties. Litigation may be required to enforce the Company's patents, to defend
the Company against claims of infringement by third parties, and to determine
the enforceability, validity and scope of third parties' proprietary rights. Any
such litigation could involve a substantial expense to the Company and require
significant time and attention of the Company's management. The Company also
could be required to participate in interference proceedings declared by the
U.S. Patent and Trademark Office to determine the priority of inventions, which
also could involve a substantial expense. A determination adverse to the Company
in any such litigation or interference proceedings could result in a substantial
liability to the Company or prevent the Company from continuing to use its
regulated medical waste treatment processes. In the former event, the liability
could have a material adverse effect on the Company's business, financial
condition and results of operations. In the latter event, the Company could seek
a license from the third party or attempt to redesign its regulated medical
waste treatment processes to avoid infringement. The Company's failure to obtain
such a license on terms acceptable to the Company, or its failure to redesign
its processes to avoid infringement, similarly could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Patents and Proprietary Rights."

In addition to patent protection, the Company seeks to protect its
proprietary information through confidentiality agreements with its employees,
consultants and collaborators. There can be no assurance that such agreements
will not be breached, that the Company will have adequate remedies for any such
breach or

11
<PAGE> 12

that the Company's proprietary information will not otherwise become known to or
be independently developed by the Company's competitors. See "Business --
Patents and Proprietary Rights."

The Company holds federal registrations of the trademarks Steri-Fuel(R),
Steri-Plastic(R), Steri-Tub(R) and Steri-Cement(R), the service mark
Stericycle(R) and a service mark consisting of a graphic that the Company uses
in association with its name and services in the United States. There can be no
assurance that the registered or unregistered trademarks or service marks of the
Company will not infringe upon the rights of third parties. The requirement to
change any trademark, service mark or trade name of the Company could result in
the loss of any goodwill associated with that trademark, service mark or trade
name, could entail significant expense and could have a material adverse effect
on the Company's business, financial condition and results of operation. See
"Business -- Patents and Proprietary Rights."

POTENTIAL RISK OF LIABILITY AND POTENTIAL UNAVAILABILITY OF INSURANCE

The regulated medical waste management industry involves potentially
significant risks of statutory, contractual, tort and common law liability. The
Company's failure to comply with applicable laws and regulations or to manage
regulated medical waste or its byproducts in an environmentally safe manner
could result in environmental contamination, personal injury and property
damage. The Company maintains pollution liability, general liability and
workers' compensation insurance which the Company considers adequate to protect
its business and employees. An uninsured or partially insured claim against the
Company, however, could have a material adverse effect on the Company's
business, financial condition and results of operations.

The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), and similar state laws, impose
strict, joint and several liability on current and former owners and operators
of facilities from which releases of hazardous substances have occurred and on
generators and transporters of the hazardous substances that come to be located
at such facilities. Responsible parties may be liable for substantial site
investigation and clean-up costs and natural resource damages, regardless of
whether they exercised due care or complied with applicable laws and
regulations. If the Company were found to be a responsible party for a
particular site, it could be required to pay the entire cost of the site
investigation and clean-up, even though other parties also may be liable. The
Company's ability to obtain contribution from other responsible parties may be
limited by the Company's inability to identify those parties and by their
financial inability to contribute to investigation and clean-up costs. There can
be no assurance that the Company will not face claims under CERCLA or similar
state laws, or under other laws, resulting in a substantial liability for which
the Company is unable to obtain contribution from other responsible parties and
for which the Company is uninsured or only partially insured. The Company's
pollution liability insurance excludes liabilities under CERCLA. The Company may
experience difficulty in the future in obtaining adequate insurance coverage on
acceptable terms. A successful claim against the Company for which it is
uninsured or only partially insured, and for which it is unable to obtain
contribution from other responsible parties, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Potential Liability and Insurance."

ALTERNATIVE TECHNOLOGIES; TECHNOLOGICAL OBSOLESCENCE

The regulated medical waste management industry presents continuing
opportunities for the development of alternative treatment and disposal
technologies. These alternative technologies may emphasize operating cost
efficiencies, reductions in the volume of regulated medical waste generated or
other environmental factors. The development and commercialization of
alternative treatment or disposal technologies that are more cost-effective than
the Company's technologies or that reduce the volume of regulated medical waste
generated or afford other environmental benefits could place the Company at a
competitive disadvantage.

DEPENDENCE ON KEY PERSONNEL

The Company is dependent upon a limited number of key management, technical
and sales personnel. The Company's future success will depend, in part, upon its
ability to attract and retain highly qualified

12
<PAGE> 13

personnel. The Company faces competition for such personnel from other companies
and organizations, and there can be no assurance that the Company will be
successful in hiring or retaining qualified personnel. The Company does not have
written employment agreements with its officers providing for specific terms of
employment, and officers and other key personnel could leave the Company's
employ with little or no prior notice. The Company's loss of key personnel,
especially if the loss is without advance notice, or the Company's inability to
hire or retain key personnel, could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
does not carry any key man life insurance.

INTERNATIONAL OPERATIONS

The Company plans to grow both domestically and internationally and has
begun penetrating regulated medical waste management markets in foreign
countries. The Company's international activities may include the export of ETD
technology, associated know-how and ETD equipment. A number of risks are
inherent in international operations. International operations may be limited or
disrupted by the imposition of government controls, export license requirements,
political or economic instability, trade restrictions, changes in tariffs,
restrictions on repatriating profits, taxation, or difficulties in staffing and
managing international operations. Foreign regulatory agencies often establish
permit and compliance standards different from those in the United States, and
an inability to obtain foreign regulatory approvals on a timely basis could have
an adverse effect on the Company's international business and its financial
condition and results of operations. In addition, the Company's business,
financial condition and results of operations may be adversely affected by
fluctuations in currency exchange rates as well as increases in duty rates for
ETD equipment. There can be no assurance that the Company will be able to
successfully operate in any foreign market. See "Business -- Growth Strategy"
and "-- Marketing and Sales."

VOLATILITY OF STOCK PRICE

The market price of the Common Stock could be adversely affected by
fluctuations in the Company's operating results or the operating results of the
Company's competitors, the failure of the Company's operating results to meet
the expectations of research analysts and investors, delays in consummating
acquisitions, changes in regulated medical waste management laws and
regulations, actions by governmental authorities, developments in respect of
patents or proprietary rights, changes in research analysts' recommendations
regarding the Company or the regulated medical waste management industry
generally, general market conditions, adverse publicity, or other events and
factors. See "Price Range of Common Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial numbers of shares of Common Stock in the public market
following this Offering could adversely affect the market price of the Common
Stock.

Upon completion of this Offering, the Company will have 14,241,603 shares
of Common Stock outstanding (based upon shares outstanding as of September 30,
1998). Of these shares, approximately 11,535,496 shares, including the 3,500,000
shares offered hereby (or approximately 12,060,496 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act. The remaining
2,706,107 shares may be sold in the public market only if they are registered
under the Securities Act or if they qualify for an exemption from registration
under Rule 144. Approximately 2,585,736 of these shares will be eligible for
sale under Rule 144 on the date of this Offering.

The Company's executive officers and directors, who together hold 2,210,150
shares of Common Stock (all of which are eligible for sale under Rule 144 on the
date of this Offering), have entered into lock-up agreements with the Managing
Underwriters pursuant to which the holders have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of, directly
or indirectly, any of their shares of Common Stock, or any shares that they may
acquire through the exercise of stock options or warrants, or to exercise any of
their registration rights in respect of their shares of Common Stock, for a
period of 90 days

13
<PAGE> 14

beginning on the date of this Offering without the prior written consent of
Warburg Dillon Read LLC on behalf of the Managing Underwriters. See "Shares
Eligible for Future Sale" and "Underwriting."

As of September 30, 1998, options to purchase a total of 986,746 shares of
Common Stock were outstanding under the Company's stock option plans, of which
options for a total of 377,175 shares were then exercisable. Of the total
options exercisable, options for 286,809 shares were held by executive officers
and directors subject to the lock-up agreements described above.

As of September 30, 1998, there were outstanding warrants to purchase
286,619 shares of Common Stock, all of which were then exercisable. Holders of
warrants to purchase 178,794 shares of Common Stock are subject to the lock-up
agreements described above.

After completion of this Offering, the Company may issue unregistered
shares of Common Stock as full or partial consideration for future business
acquisitions and may grant registration rights to the holders of such shares.
See "Business -- Growth Strategy -- Pursue Selected Acquisitions."

ABSENCE OF DIVIDENDS

The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future. See "Dividend
Policy."

14
<PAGE> 15

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $47.1 million ($54.3 million if
the Underwriters' over-allotment option is exercised in full), at a public
offering price of $14.50 per share, and after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company.

The Company's outstanding indebtedness under its credit facility with
LaSalle National Bank is required to be repaid from the net proceeds of this
Offering. As of February 3, 1999, the Company's indebtedness under its credit
facility was approximately $20,357,000. The Company's indebtedness was incurred
in connection with (i) the repayment of the lender under the Company's previous
credit facility, (ii) the Company's purchase of all of the outstanding common
stock of Waste Systems, Inc. ("WSI"), (iii) the Company's purchase of the junior
secured indebtedness and all of the outstanding common stock of Med-Tech
Environmental Limited ("Med-Tech") and (iv) a loan to WSI to fund a loan by it
to its majority-owned subsidiary, 3CI Complete Compliance Corporation ("3CI").

The Company's credit facility provides for a five-year $5,000,000 revolving
line of credit for working capital purposes and a one-year $20,000,000 revolving
line of credit for acquisition purposes. Upon the maturity of this latter line
of credit, the outstanding balance, if any, will convert into a four-year term
loan repayable in quarterly installments. If the principal amount of the term
loan upon conversion is less than $15,000,000, however, a further one-year line
of credit in the amount of the difference will be available for acquisition
purposes, and upon the maturity of this further line of credit, the outstanding
balance, if any, will convert into a three-year term loan repayable in quarterly
installments. The credit facility is subject to certain limitations based on
eligible accounts receivable and had a weighted average interest rate of 7.3%
per annum at December 31, 1998.

The Company's outstanding indebtedness under a subordinated loan agreement
that the Company entered into in December 1998 to obtain short-term financing is
required to be repaid from the net proceeds of this Offering. As of February 3,
1999, the Company's indebtedness under this loan agreement was approximately
$5,500,000. The subordinated loans bear interest at 6.0% per annum and are due
within 10 days after completion of the Offering. In connection with these loans,
the Company issued warrants to the lenders to purchase, in the aggregate, 18,970
shares of Common Stock at $14.50 per share, 43,551 shares of Common Stock at
$15.50 per share and 63,637 shares of Common Stock at $16.50 per share. See
"Certain Transactions."

The Company intends to use the remainder of the net proceeds of the
Offering for potential future acquisitions of other regulated medical waste
management businesses and for general corporate purposes, including working
capital and capital expenditures. The Company is continuously evaluating
possible acquisitions candidates as part of its growth strategy. The Company has
signed a letter of intent with one company for the acquisition of its regulated
medical waste management business and is in various stages of discussion with
other companies. With the exception of this letter of intent, the Company
presently has no binding agreements or commitments to effect any mergers or
acquisitions. Pending these uses, the Company intends to invest the net proceeds
of the Offering in short-term, interest-bearing, investment grade securities.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

15
<PAGE> 16

PRICE RANGE OF COMMON STOCK

Since August 23, 1996, the Company's Common Stock has traded on the Nasdaq
National Market under the symbol "SRCL." The following table sets forth, for the
periods indicated, the high and low bid prices of the Common Stock as reported
on the Nasdaq National Market:

<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
HIGH LOW
---- ---
<S> <C> <C>
1996:
Third Quarter (1)........................................... $10.63 $ 8.50
Fourth Quarter.............................................. 11.25 7.00
1997:
First Quarter............................................... 11.38 8.00
Second Quarter.............................................. 9.00 7.00
Third Quarter............................................... 10.25 7.63
Fourth Quarter.............................................. 15.75 9.00
1998:
First Quarter............................................... 16.88 11.00
Second Quarter.............................................. 17.25 10.75
Third Quarter............................................... 19.50 12.50
Fourth Quarter.............................................. 21.25 12.63
1999:
First Quarter(2)............................................ 18.00 14.75
</TABLE>

- -------------------------
(1) From August 23 through September 30, 1996.
(2) From January 1 through February 4, 1999.

On February 4, 1999, the last reported sale price of the Common Stock on
the Nasdaq National Market was $14.75 per share.

16
<PAGE> 17

CAPITALIZATION

The following table sets forth, as of September 30, 1998, the
capitalization of the Company and the capitalization of the Company as adjusted
to give effect to the receipt and application by the Company of the estimated
net proceeds from the sale of the 3,500,000 shares of Common Stock offered by
the Company hereby (at a public offering price of $14.50 per share, and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company).

<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current portion of long-term debt......................... $ 6,281 $ 2,156(1)
Long-term debt:
Industrial development revenue bonds and other............ 1,341 1,341
Notes payable............................................. 1,905 1,905
-------- --------
Total long-term debt................................... 3,246 3,246
Shareholders' equity:
Common Stock, $.01 par value; 30,000,000 shares
authorized; 10,741,603 shares issued and outstanding,
14,241,603 shares issued and outstanding, as
adjusted............................................... 107 142
Additional paid-in capital................................ 85,087 132,161
Notes receivable for common stock purchases............... (4) (4)
Accumulated deficit....................................... (34,640) (34,640)
-------- --------
Total shareholders' equity............................. 50,550 97,659
-------- --------
Total capitalization................................. $ 60,077 $103,061
======== ========
</TABLE>

- -------------------------
(1) Both the Company's credit facility with LaSalle National Bank and its
subordinated loan agreement with certain lenders require the repayment of
the Company's indebtedness upon completion of this Offering. See "Use of
Proceeds." As of February 3, 1999, the Company's indebtedness under its
credit facility was approximately $20,357,000, and its indebtedness under
its subordinated loan agreement was approximately $5,500,000. No adjustment
has been made to give effect to the repayment of this indebtedness, which
was incurred after September 30, 1998, except for repayment of the Company's
indebtedness under its prior credit facility, which was $4,125,000 as of
September 30, 1998.

DIVIDEND POLICY

The Company has never paid cash dividends on its capital stock. The Company
currently expects that it will retain future earnings for use in the operation
and expansion of its business and does not anticipate paying any cash dividends
in the foreseeable future. The Company is prohibited from paying cash dividends
under the terms of its revolving credit facility with LaSalle National Bank and
is restricted from paying cash dividends under an agreement in connection with
the industrial development revenue bonds issued to finance the Company's
construction of its treatment facility at Woonsocket, Rhode Island. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

17
<PAGE> 18

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data of the
Company. The statements of operations data for the years ended December 31,
1995, 1996 and 1997 and the balance sheet data at December 31, 1996 and 1997
have been derived from the consolidated financial statements of the Company (the
"Consolidated Financial Statements"), which are included elsewhere in this
Prospectus and which have been audited by Ernst & Young LLP, independent
auditors. The statements of operations data for the years ended December 31,
1993 and 1994 and the balance sheet data at December 31, 1993, 1994 and 1995
have been derived from the audited consolidated financial statements of the
Company which are not included in this Prospectus. The statements of operations
data for the nine months ended September 30, 1997 and 1998 and the balance sheet
data at September 30, 1998 are derived from the unaudited condensed consolidated
financial statements of the Company (the "Condensed Consolidated Financial
Statements") included elsewhere in this Prospectus. The Condensed Consolidated
Financial Statements include all adjustments, consisting of normal recurring
adjustments, that the Company considers necessary for a fair presentation of the
financial position and results of operations for that period. Operating results
for the nine months ended September 30, 1998 are not necessarily indicative of
the results that may be expected for the entire year ending December 31, 1998.

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------------------------- ------------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA (1):
Revenues.................................... $ 9,141 $ 16,141 $21,339 $24,542 $46,166 $33,475 $44,759
Cost of revenues............................ 9,137 13,922 17,478 19,423 34,109 25,113 30,492
Selling, general and administrative
expenses.................................. 5,988 7,927 8,137 7,556 10,671 7,725 10,151
------- -------- ------- ------- ------- ------- -------
Income (loss) from operations............... (5,984) (5,708) (4,276) (2,437) 1,386 637 4,116
Interest income (expense), net.............. (44) (104) (268) 48 190 192 66
Other income................................ -- -- -- -- -- -- 20
------- -------- ------- ------- ------- ------- -------
Income (loss) before income taxes........... (6,028) (5,812) (4,544) (2,389) 1,576 829 4,202
Income tax expense.......................... -- -- -- -- 146 18 781
------- -------- ------- ------- ------- ------- -------
Net income (loss)........................... (6,028) (5,812) (4,544) (2,389) 1,430 811 3,421
Less cumulative preferred dividends (2)..... (3,733) (4,481) -- -- -- -- --
------- -------- ------- ------- ------- ------- -------
Net income (loss) applicable to common
stock..................................... $(9,761) $(10,293) $(4,544) $(2,389) $ 1,430 $ 811 $ 3,421
======= ======== ======= ======= ======= ======= =======
Diluted net income (loss) per common share
(3)....................................... $(13.64) $ (14.38) $ (0.81) $ (0.32) $ 0.13 $ 0.08 $ 0.30
======= ======== ======= ======= ======= ======= =======
Weighted average number of common shares and
common stock equivalent shares
outstanding............................... 716 716 5,582 7,471 10,766 10,480 11,234
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:

Cash, cash equivalents and short-term
investments.............................. $ 7,690 $ 1,206 $ 138 $17,749 $ 7,709 $ 3,110
Total assets............................... 21,355 27,809 23,491 55,155 61,226 68,183
Long-term debt, net of current
maturities............................... 2,293 4,838 5,622 4,591 3,475 3,246
Convertible, redeemable preferred stock
(2)...................................... 52,078 62,909 -- -- -- --
Shareholders' equity (net capital
deficiency).............................. $(35,106) $(45,363) $12,574 $40,014 $45,026 $50,550
</TABLE>

18
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements, Condensed Consolidated Financial Statements
and the related Notes included elsewhere in this Prospectus.

BACKGROUND

The Company was incorporated in March 1989. The Company provides regulated
medical waste collection, transportation, treatment, disposal, reduction, re-use
and recycling services to its customers, together with related training and
education programs and consulting services. The Company also sells ancillary
supplies and transports pharmaceuticals, photographic chemicals, lead foil and
amalgam for recycling in selected geographic service areas. The Company is also
expanding into international markets through joint ventures or by licensing its
proprietary technology and selling associated equipment.

The Company's revenues have increased from $1,563,000 in 1991 to
$46,166,000 in 1997 and to $57,450,000 for the 12 months ended September 30,
1998. The Company derives its revenues from services to two principal types of
customers: (i) long-term and sub-acute care facilities, outpatient clinics,
medical and dental offices, biomedical companies, municipal entities and other
smaller-quantity generators of regulated medical waste ("Alternate Care"
generators); and (ii) hospitals, blood banks, pharmaceutical manufacturers and
other larger-quantity generators of regulated medical waste ("Large Quantity"
generators). Substantially all of the Company's services are provided pursuant
to customer contracts specifying either scheduled or on-call regulated medical
waste management services, or both. Contracts with Alternate Care generators
generally provide for annual price increases and have an automatic renewal
provision unless the customer notifies the Company prior to completion of the
contract. Contracts with hospitals and other Large Quantity generators, which
may run for more than one year, typically include price escalator provisions
which allow for price increases generally tied to an inflation index or set at a
fixed percentage. As of September 30, 1998, the Company served over 50,000
customers.

The Company currently expenses as incurred all permitting, design and
start-up costs associated with its facilities. The Company elects to expense
rather than to capitalize the costs of obtaining permits and approvals for each
proposed facility regardless of whether the Company is ultimately successful in
obtaining the desired permits and approvals and developing the facility. The
Company currently recognizes as a current expense all legal fees and other costs
related to obtaining and maintaining permits and approvals. In addition, the
Company currently expenses all costs related to research and development as
incurred.

NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997

Revenues. Revenues increased $11,284,000, or 33.7%, to $44,759,000 during
the nine months ended September 30, 1998 from $33,475,000 during the comparable
period in 1997 as the Company continued to focus on sales to higher-margin
Alternate Care generators while simultaneously paring certain lower-margin
accounts with Large Quantity generators. The increase also reflects $3,802,000
in revenues from the sale of equipment to a Brazilian company, Companhia
Auxiliar de Viacao e Obras ("CAVO"), and to a Mexican joint venture, Medam S.A.
de C.V. ("Medam"), that the Company and others formed for the collection,
treatment and disposal of regulated medical waste in the Mexico City
metropolitan market utilizing the Company's ETD treatment technology. During the
nine months ended September 30, 1998, acquisitions contributed approximately
$6,456,000 to the increase in revenues when compared to the same period in 1997.

Cost of revenues. Cost of revenues increased $5,379,000, or 21.4%, to
$30,492,000 during the nine months ended September 30, 1998, from $25,113,000
during the comparable period in 1997. The increase was primarily due to the
substantial increase in revenues during 1998 compared to 1997 and to the cost of
equipment supplied to CAVO and Medam. The gross margin percentage increased to
31.9% during the nine months ended September 30, 1998, from 25.0% during the
comparable period in 1997 as a result of the further integration of new
acquisitions into the Company's existing infrastructure, lower costs relating to
the changing

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<PAGE> 20

mix of Alternate Care and Large Quantity generators, increased utilization of
existing treatment capacity and the sale of equipment to CAVO.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $10,151,000 during the nine months ended
September 30, 1998, from $7,725,000 during the comparable period in 1997, due to
the Company's continued progress in strengthening its sales and administrative
organizations and to the increase in the amortization of goodwill associated
with acquisitions. Selling, general and administrative expenses as a percentage
of revenues decreased to 22.7% during the nine months ended September 30, 1998
from 23.1% during the comparable period in 1997.

Interest expense and interest income. Interest expense decreased to
$242,000 during the nine months ended September 30, 1998, from $336,000 during
the comparable period in 1997, primarily due to the repayment of certain debt
issued in connection with one of the Company's acquisitions offset by borrowings
on the Company's revolving line of credit. Interest income also decreased to
$308,000 during the nine months ended September 30, 1998, from $528,000 during
the comparable period in 1997, primarily due to lower cash balances as a result
of acquisitions and the repayment of debt.

Income tax expense. The estimated effective tax rate of approximately 18.6%
for the nine months ended September 30, 1998 reflects federal taxable income
expected in excess of Internal Revenue Code Section 382 limitations on the
annual utilization of the Company's net operating loss carryforwards and state
income taxes in states where the Company has no offsetting net operating losses.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

Revenues. Revenues increased $21,624,000, or 88.1%, to $46,166,000 during
the year ended December 31, 1997 from $24,542,000 during the year ended December
31, 1996 as the Company continued to implement its strategy of focusing on
higher-margin Alternate Care generators while simultaneously paring certain
higher-revenue but lower-margin accounts with Large Quantity generators. This
increase also reflects the inclusion of a full year's revenues from the
acquisition of a major portion of the regulated medical waste business of Waste
Management, Inc. ("WMI"), which was completed in December 1996, eight months of
revenues from the Environmental Control Co., Inc. ("ECCO") acquisition completed
in May 1997, and partial years' revenues from various other smaller
acquisitions. For the year, internal sales growth for Alternate Care generators
was 13.0%, while sales to Large Quantity generators decreased by 4.0%.
Incremental revenues during 1997 attributable to acquisitions completed in 1997
and late 1996 were $20,975,000. Excluding these incremental revenues from
acquisitions, revenues increased from $24,542,000 in 1996 to $25,191,000 in
1997, or 2.6%.

Cost of revenues. Cost of revenues increased $14,686,000, or 75.6%, to
$34,109,000 during the year ended December 31, 1997 from $19,423,000 during the
year ended December 31, 1996. The principal reasons for the increase were higher
transportation, treatment and disposal costs as a result of the higher volume
attributable to the Company's acquisitions and integration expenses related to
the Company's expansion into new geographic service areas. The gross margin
percentage increased to 26.1% during 1997 from 20.9% during 1996, due to the
continuing shift to Alternate Care customers and increased utilization of the
Company's treatment capacity.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $10,671,000 during the year ended December
31, 1997 from $7,556,000 during the year ended December 31, 1996. The increase
was largely the result of increases in selling and marketing expenses as a
result of the Company's acquisitions and expansion of the sales network, and
increased administrative costs related to the higher volume. Selling, general
and administrative expenses as a percentage of revenues decreased to 23.1%
during 1997 from 30.8% during 1996 due to improved leverage of the
administrative structure versus the sales growth.

Interest expense and interest income. Interest expense increased to
$428,000 during the year ended December 31, 1997 from $373,000 during the year
ended December 31, 1996. This increase was primarily attributable to higher
indebtedness related to the WMI and ECCO acquisitions. Interest income increased
to

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<PAGE> 21

$618,000 during 1997 from $421,000 during 1996 due to interest earned on the
invested cash proceeds from the Company's initial public offering ("IPO") in
August 1996.

Income Tax Expense. The effective tax rate of 9.3% for the year ended
December 31, 1997 reflects the utilization of the Company's net operating losses
for income tax purposes, offset by alternative minimum tax and state income
taxes in states where the Company has no offsetting net operating losses. The
Company did not pay any income taxes during the year ended December 31, 1996.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Revenues. Revenues increased $3,203,000, or 15.0%, to $24,542,000 during
the year ended December 31, 1996 from $21,339,000 during the year ended December
31, 1995 as the Company continued to implement its strategy of focusing on
higher-margin Alternate Care generators while simultaneously paring certain
higher-revenue but lower-margin accounts with Large Quantity generators. This
increase also reflects the inclusion of a full year's revenues from the Safetech
Health Care, Inc. ("Safetech") acquisition, which was completed in June 1995,
eleven months of revenues from the WMI Medical Services of New England, Inc.
("WMI-NE") acquisition, which was completed in January 1996, and eight months of
revenues from the Doctors Environmental Control, Inc. ("DEC") and Sharps
Incinerator of Fort, Inc. ("Sharps") acquisitions, both of which were completed
in May 1996, and the inclusion of revenues for the last 10 days of 1996
resulting from the Company's purchase in December 1996 of a major portion of
WMI's regulated medical waste business. The increase in revenues was partially
offset by a decline in revenues attributable to a lack of any miscellaneous
product sales during 1996 and the sale in April 1995 of certain unprofitable
customer accounts and related assets obtained through acquisitions. Incremental
revenues during 1996 attributable to acquisitions completed in 1995 and 1996
were $2,332,000. Excluding these incremental revenues from acquisitions,
revenues increased from $21,339,000 in 1995 to $22,210,000 in 1996, or 4.1%.

Cost of revenues. Cost of revenues increased $1,945,000, or 11.1%, to
$19,423,000 during the year ended December 31, 1996 from $17,478,000 during the
year ended December 31, 1995. The principal reasons for the increase were higher
transportation, treatment and disposal costs as a result of the Safetech,
WMI-NE, DEC, Sharps and WMI acquisitions and start-up expenses related to the
Company's expansion into new geographic service areas. The gross margin
percentage increased to 20.9% during 1996 from 18.1% during 1995, due to the
continued increase in Alternate Care customers and increased utilization of the
Company's treatment capacity.

Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $7,556,000 during the year ended December
31, 1996 from $8,137,000 during the year ended December 31, 1995. This decrease
was primarily attributable to a reduction in expenditures to develop treated
medical waste as an alternate fuel for the production of cement and to savings
from the integration into the Company's operations of the Safe Way Disposal
Systems, Inc. ("Safe Way") acquisition in 1994. These savings resulted from the
elimination of redundant employee and staff positions and the reallocation of
resources to Alternate Care generators. In addition, corporate costs and
permitting expenses were at lower levels during 1996 than they were during 1995.
Selling, general and administrative expenses as a percentage of revenues
decreased to 30.8% during 1996 from 38.1% during 1995.

Interest expense and interest income. Interest expense increased to
$373,000 during the year ended December 31, 1996 from $277,000 during the year
ended December 31, 1995. This increase was primarily attributable to higher
indebtedness under the Company's revolving credit facility and interest expense
on notes issued for acquisitions. Interest income increased to $421,000 during
1996 from $9,000 during 1995 due to interest earned on the invested cash
proceeds from the Company's IPO in August 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company has been financed principally through the sale of stock to
investors. Prior to the Company's IPO, purchasers of stock invested more than
$50,137,000 in capital which was used to fund research and development,
acquisitions, capital expenditures, operating losses and working capital
requirements. The Company's IPO in August 1996 raised $31,050,000, excluding
offering costs, which has been used primarily to

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<PAGE> 22

fund acquisitions and for general working capital. The Company has also been
able to secure plant and equipment leasing or financing in connection with some
of its facilities. These debt facilities are secured by security interests in
the financed assets. In addition, as of September 30, 1998, the Company had
available a $7,500,000 revolving line of credit secured by the Company's
accounts receivable and all of its other assets, and at September 30, 1998, the
Company had borrowed $4,125,000 under this line of credit.

In October 1998, the Company established a new $25,000,000 credit facility
at a different bank, replacing its existing line of credit. As amended, the
Company's new credit facility provides for a five-year $5,000,000 revolving line
of credit for working capital purposes and a one-year $20,000,000 revolving line
of credit for acquisition purposes. Upon the maturity of this latter line of
credit, the outstanding balance, if any, will convert into a four-year term loan
repayable in 16 equal quarterly payments of principal. If the principal amount
of the term loan upon conversion is less than $15,000,000, however, a further
one-year line credit in the amount of the difference will be available for
acquisition purposes, and upon the maturity of this further line of credit, the
outstanding balance, if any, will convert into a three-year term loan repayable
in 12 equal quarterly payments of principal. The Company's borrowings bear
interest at either the bank's prime rate, plus 0.25%, or an adjusted LIBOR rate,
as elected by the Company at the time of each borrowing. Interest is payable
quarterly (or at the end of the interest period, if the Company selects an
interest period of less than three months in the case of a borrowing bearing
interest at the adjusted LIBOR rate). As security for the Company's borrowings,
the Company granted the bank a security interest in all of the Company's
tangible and intangible assets and pledged all of the capital stock of its
subsidiaries, and the Company's subsidiaries granted the bank a security
interest in all of their respective assets.

The Company's other financial obligations include industrial development
revenue bonds issued on behalf of and guaranteed by the Company to finance its
Woonsocket, Rhode Island treatment facility and equipment. These bonds, which
had an outstanding aggregate balance of $1,127,000 as of September 30, 1998 at
fixed interest rates ranging from 6.000% to 7.375%, are due in various amounts
through June 2017. In addition, the Company has issued various promissory notes
in connection with acquisitions during 1996, 1997 and 1998, consisting primarily
of a 10-year note for $2,300,000 as part of the ECCO acquisition and a
$1,797,000 note due (and paid) in December 1998 as part of the WMI acquisition.

At September 30, 1998, the Company's working capital was $3,298,000. At
December 31, 1997, the Company's working capital was $7,214,000 compared to
$14,617,000 and $439,000 at December 31, 1996 and 1995, respectively. The
decrease in working capital at September 30, 1998 compared to December 31, 1997
was primarily due to lower cash balances and higher current liabilities as a
result of the debt issued in connection with certain acquisitions partially
offset by higher receivables and other current assets. The decrease at December
31, 1997 compared to 1996 was primarily due to lower balances of cash, cash
equivalents and short-term investments, which decreased by $10,040,000 to
finance acquisitions partially offset by other working capital growth. The
increase in working capital in 1996 compared to 1995 was due to higher cash
balances shortly after the Company's IPO offset by an increase in debt as a
result of the WMI acquisition in December 1996.

Net cash provided by operating activities was $1,346,000 during the nine
months ended September 30, 1998 compared to $536,000 for the comparable period
in 1997. This increase primarily reflects an increase in the Company's
profitability offset by an increase in other assets and a decrease in accrued
liabilities. Cash used in operations was $100,000 during the year ended December
31, 1997, compared to cash provided by operations of $57,000 during the year
ended December 31, 1996 and cash used in operations of $871,000 during the year
ended December 31, 1995. The change primarily reflects the Company's
profitability in 1997 offset by a higher working capital investment in
receivables.

Net cash used in investing activities for the nine months ended September
30, 1998 was $8,955,000 compared to $3,364,000 for the comparable period in
1997. This increase primarily reflects an increase in cash used for acquisitions
and capital expenditures and to the maturity in 1997 of temporary investments of
the net proceeds of the Company's IPO. Capital expenditures were $1,825,000 for
the nine months ended September 30, 1998 compared to $1,124,000 for the
comparable period in 1997. The increase in capital spending is a result of
continued improvements to the Company's existing treatment facilities. Payments
for acquisitions

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<PAGE> 23

accounted for $7,130,000 of the cash used in investing activities in the first
nine months of 1998. Net cash used in investing activities was $3,323,000 during
the year ended December 31, 1997 compared to $13,310,000 during the year ended
December 31, 1996. The decrease in 1997 was the result of a $5,552,000 payment
for the acquisition of ECCO as well as several smaller acquisitions and joint
ventures, offset by net proceeds from short-term investments of $3,464,000 in
1997 versus purchases of $5,799,000 in short-term investments in 1996. Capital
expenditures for the year ended December 31, 1997 were $1,235,000, primarily for
improvements to existing facilities, containers and transportation equipment.
Capital expenditures were $995,000 in 1996 and $726,000 in 1995. The Company may
decide to build additional treatment facilities as volumes increase in the
Company's current geographic service areas or as the Company enters new areas.
The Company also may elect to increase the capacity of its existing treatment
facilities, which would require additional capital expenditures. In addition,
capital requirements for transportation equipment will continue to increase as
the Company grows. The amount and level of these expenditures cannot be
determined currently as they will depend upon the nature and extent of the
Company's growth and acquisition opportunities. The Company believes that its
cash, cash equivalents, short-term investments, bank credit facility, cash from
operations and proceeds from this Offering will fund its capital requirements
through 1999.

Net cash provided by financing activities was $3,010,000 during the nine
months ended September 30, 1998 compared to net cash used in financing
activities of $1,141,000 during the comparable period in 1997. The difference
between the two periods results primarily from additional borrowings to finance
acquisitions during the first nine months of 1998. Net cash used in financing
activities was $3,153,000 during the year ended December 31, 1997 compared to
net cash provided by financing activities of $25,065,000 during the year ended
December 31, 1996. The change was the result of $28,535,000 of proceeds received
in 1996 primarily from the Company's IPO and repayments in 1997 of $2,905,000 of
long-term debt relating primarily to a note issued in connection with the
December 1996 WMI acquisition.

In 1997, cash and cash equivalents decreased by $6,576,000 primarily due to
investment and acquisition activities of $3,323,000 and repayments of notes and
leases of $3,153,000.

As a consequence of the Offering, together with other changes in stock
ownership, it is expected that the Company's annual utilization of net operating
loss carryforwards permitted by Internal Revenue Code Section 382 will be
limited and that, as a result, the Company's effective tax rate will increase.

YEAR 2000 ISSUES

The Company has developed a plan to modify its information systems in
anticipation of the year 2000. The Company currently expects that this plan will
be substantially implemented by June 1999 at a cost not to exceed $100,000. In
light of the Company's progress to date and the fact that the Company's business
is not significantly affected by the software employed by its vendors and
customers, the Company does not anticipate that the year 2000 will present any
material problems in respect of the Company's key products and services.

The Company's plan for the year 2000 comprises both remediating the
Company's existing hardware and software and upgrading the Company's business
information systems generally. The Company initiated the upgrading process in
1998 in order to respond to the growth in size of the Company's business and the
inefficiencies caused by disparate hardware and software. Undertaken for reasons
unrelated to year 2000 issues, the Company's upgrading of its business
information systems has the benefit of enabling the Company to become year 2000
compliant in the course of the upgrade.

The Company has conducted an extensive review of potential year 2000
issues. The Company's assessment of its treatment facilities and equipment
concluded that there was no risk that the Company would be unable to treat
regulated medical waste as a result of year 2000 issues. The new software that
the Company adopted in 1998 for accounting and related purposes is already year
2000 compliant. The Company's other software and computer hardware are currently
being tested, and upgrades or appropriate adjustments have been or will be made
in accordance with the Company's upgrade plans or as required. The Company is
also in the process of reviewing the year 2000 compliance status of its
significant vendors.

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<PAGE> 24

The Company believes that it has an effective plan in place to resolve year
2000 issues in a timely manner. As of February 1999, and in the event that the
Company were unable to complete the remaining phases of its year 2000 plan, the
Company believes that, as a result of year 2000 issues solely affecting the
Company, the principal effect on the Company would be an inability to invoice a
portion of its customers for the Company's services.

The Company is also developing contingency plans to take into account any
inability of the Company itself and others to become fully year 2000 compliant
in time. These plans involve, among other actions, implementing manual systems,
increasing inventories of parts and supplies and adjusting staffing strategies.

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<PAGE> 25

BUSINESS

INTRODUCTION

Stericycle is the second largest provider of regulated medical waste
management services in the United States, providing regulated medical waste
collection, transportation, treatment and disposal services to over 77,000
customers in 40 states, the District of Columbia and four Canadian provinces.
Combining proprietary treatment technology with a health care orientation in
both the scope of its services and the experience of its management, the Company
believes that it is in a unique position to manage regulated medical waste in a
safe and cost-effective manner and to capitalize on the current consolidation
trend in the regulated medical waste management industry. Since 1991, the
Company has completed 31 acquisitions, of which 23 were completed since the
Company's initial public offering in August 1996. These acquisitions, combined
with growth from its existing operations, have increased the Company's revenues
from $1.6 million in 1991 to $46.2 million in 1997 and to $57.5 million for the
12 months ended September 30, 1998.

The Company's integrated services include regulated medical waste
collection, transportation, treatment, disposal, reduction, re-use and recycling
services, together with related training and education programs, consulting
services and product sales. The Company has historically operated in seven
geographic service areas: (i) California, Nevada and Arizona; (ii) Oregon,
Washington, Idaho and British Columbia; (iii) Illinois, Indiana, Minnesota and
Wisconsin; (iv) Ohio, Michigan, Kentucky and Tennessee; (v) Texas and New
Mexico; (vi) Connecticut, Massachusetts, Maine, New Hampshire, Rhode Island and
Vermont; and (vii) Alabama, Delaware, Georgia, Maryland, New Jersey, New York,
North Carolina, Pennsylvania, South Carolina, Virginia, West Virginia and the
District of Columbia. The Company's subsidiary, Med-Tech Environmental Limited
("Med-Tech"), operates in the Canadian provinces of Quebec, Ontario, Alberta and
British Columbia, as well as the northeast United States. The Company's
majority-owned subsidiary, 3CI Complete Compliance Corporation ("3CI"), operates
in Alabama, Arkansas, Georgia, Florida, Missouri, Kansas, Louisiana,
Mississippi, Oklahoma, Tennessee and Texas. The Company markets its services to
two principal types of customers: (i) long-term and sub-acute care facilities,
outpatient clinics, medical and dental offices, biomedical companies, municipal
entities and other smaller-quantity generators of regulated medical waste
("Alternate Care" generators); and (ii) hospitals, blood banks, pharmaceutical
manufacturers and other larger-quantity generators of regulated medical waste
("Large Quantity" generators). The Company's revenues for 1997 were divided
approximately equally between Alternate Care and Large Quantity generators, but
the Company anticipates that a greater proportion of its future revenues will be
derived from Alternate Care generators as the Company continues to focus its
marketing efforts on the rapidly growing, higher-margin Alternate Care market.

Regulated medical waste is generally described as any waste that can cause
an infectious disease or that can reasonably be suspected of harboring human
pathogenic organisms. Regulated medical waste includes single-use disposable
items such as needles, syringes, gloves and laboratory, surgical and emergency
room and other supplies which have been in contact with blood or bodily fluids;
cultures and stocks of infectious agents; and blood and blood products. An
independent study published in 1997 estimated that the size of the regulated
medical waste management market in the United States in 1999 would be more than
$1.3 billion.

TRENDS IN THE HEALTH CARE AND MEDICAL WASTE INDUSTRIES

The Company believes that its business has grown and will continue to grow
as a consequence of certain trends in the health care and regulated medical
waste industries.

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Increased Awareness of Regulated Medical Waste

The handling and disposal of the large quantities of regulated medical
waste generated by the health care industry has attracted increased public
awareness and regulatory attention. The proper management of potentially
infectious medical waste gained national attention in 1988 when disposable
syringes and other medical waste washed ashore on New Jersey and New York
coastlines.

These events raised concerns about the potential transmission of hepatitis
B, HIV and other infectious diseases. The Medical Waste Tracking Act of 1988
("MWTA") was enacted in response to this problem and established a multi-year
demonstration program for the proper tracking and treatment of medical waste.
Many states have enacted legislation modeled on MWTA's requirements.

In addition, the Occupational Safety and Health Administration ("OSHA") has
issued regulations concerning employee exposure to bloodborne pathogens and
other potentially infectious material that require, among other things, special
procedures for the handling and disposal of regulated medical waste and annual
training of all personnel who are potentially exposed to blood and other bodily
fluids. The Company believes that the scope of these regulations will help to
expand the market for the Company's services beyond traditional providers of
health care.

As a consequence of these legislative and regulatory initiatives, the
Company believes that health care providers and other generators of regulated
medical waste continue to be concerned about the handling, treatment and
disposal of regulated medical waste. These concerns are reflected by their
desire to: (i) reduce on-site handling of regulated medical waste in order to
minimize employee contact; (ii) assure safe transportation of regulated medical
waste to treatment sites; (iii) assure destruction of potentially infectious
human pathogens; (iv) render the treated regulated medical waste
non-recognizable in order to reduce liability and to increase disposal options;
and (v) minimize the impact of the treatment process on the environment and the
volume of solid waste deposited in landfills.

Growing Importance of Alternate Care Generators

The Company believes that in response to managed care and other health care
cost-containment pressures, patient care continues increasingly to shift from
higher-cost acute-care settings to less expensive off-site treatment
alternatives. Many common diseases and conditions are now being treated in
alternate-site settings. According to a report published by the U.S. Health Care
Financing Administration, total alternate-site health care expenditures in the
United States increased from approximately $6 billion in 1985 to approximately
$28 billion in 1996. The Company believes that alternate-site health care
expenditures will continue to grow in response to governmental and private
cost-containment initiatives.

Alternate Care generators are an increasingly important source of revenues
in the regulated medical waste industry. An independent report estimated that in
1990 (the most recent year for which the Company has information from published
sources) approximately 23% (by weight) of regulated medical waste was produced
by Alternate Care generators. The Company believes on the basis of its
experience both that this percentage has increased significantly and that
Alternate Care generators account for a greater percentage of regulated medical
waste treatment revenues than the percentage of regulated medical waste volume
that they generate. Individual Alternate Care generators typically do not
produce a sufficient volume of regulated medical waste to justify substantial
capital expenditures on their own waste treatment facilities or the expense of
hiring regulatory compliance personnel. The Company believes that Alternate Care
generators are accordingly extremely service-sensitive, relying on their
regulated medical waste management provider for timely waste removal, creative
solutions for safer regulated medical waste handling, establishment of regulated
medical waste management protocols, education on regulated medical waste
reduction techniques and assistance with compliance and recordkeeping. The
Company believes that growth in the number of Alternate Care generators will
generate growth in the overall regulated medical waste management market and
will continue to provide growth opportunities for the Company.

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Shift from On-Site Incineration to Off-Site Treatment

The Company believes that during the past five years, government clean air
regulations have increased both the capital costs required to bring many
existing incinerators into compliance with such regulations and the operating
costs of continued compliance. As a result, many hospitals have shut down their
incinerators. This trend is expected to accelerate in response to regulations
which the U.S. Environmental Protection Agency ("EPA") adopted in September 1997
limiting the discharge into the atmosphere of pollutants released by medical
waste incineration. The EPA estimates that of the approximately 1,100 small, 690
medium and 460 large medical waste incinerators in operation in May 1996,
approximately 93-100% of the small incinerators, 60-95% of the medium
incinerators and up to 35% of the large incinerators will be closed. The Company
believes that these closures will occur over a period of several years and
expects to benefit from this anticipated movement by hospitals to outsource
regulated medical waste disposal rather than incur the cost of installing the
air pollution control systems necessary to comply with the EPA's regulations.

Industry Consolidation

Although the regulated medical waste management industry remains
fragmented, the number of competitors is rapidly decreasing as a result of
industry consolidation. National attention on regulated medical waste in the
late 1980s led to rapid growth in the industry and a highly-fragmented
competitive structure. Entrants into the industry included several large
municipal waste companies and many independent haulers and incinerator
operators. Since 1990, however, government clean air regulations and public
concern about the environment have increased the costs and public opposition to
both on- and off-site regulated medical waste incineration. As a result, the
Company believes that independent haulers and incinerator operators have
encountered increasing difficulty competing with integrated companies like the
Company, which typically have their own low-cost treatment plants located within
the geographic areas that they serve. The Company believes that many of these
independent haulers are withdrawing from the regulated medical waste industry.
As a result of industry consolidation, the Company believes that it has
increasing opportunities to acquire medical waste management businesses.

Health Care Cost and Liability Containment Initiatives

The health care industry continues to be under pressure to reduce costs and
improve efficiency. In part, this has been accomplished through the outsourcing
of certain services, including regulated medical waste management. The Company
believes that its regulated medical waste management services facilitate cost
containment by health care providers by reducing their medical waste tracking,
handling and compliance costs, reducing their potential liability related to
employee exposure to bloodborne pathogens and other potentially infectious
material, and significantly reducing the amount of capital invested in on-site
treatment of regulated medical waste.

GROWTH STRATEGY

The Company plans to increase its revenue and profitability through
improved penetration of existing geographic service areas, expansion into new
areas and selected acquisitions.

Increase Customer Density In Existing Service Areas

The Company continues to implement a number of programs to increase
customer density, including targeted telemarketing and direct sales efforts and
alliances with entities that provide access to new customers within existing
geographic service areas. Due to the high fixed costs associated with the
collection and treatment of regulated medical waste, significant economies of
scale result from increased customer density in existing service areas, and
accordingly, the Company's telemarketing and direct sales efforts target
securing new customer agreements within its existing service areas. The Company
markets to both Large Quantity and Alternate Care generators, focusing on
Alternate Care generators. The Company also reviews potential marketing
alliances with various hospitals, health maintenance organizations, medical
suppliers and others as a way to access primarily Alternate Care customers.

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Expand Geographically

The Company estimates that its existing transportation and treatment system
enables it to serve effectively an area encompassing approximately half of the
U.S. population. In order to expand its geographic coverage, the Company plans,
among other things, to develop additional transfer stations, acquire independent
haulers and integrated competitors, expand its telemarketing and direct sales
efforts and, where appropriate, construct new treatment facilities.

The Company plans to continue to expand its "hub and spoke" transportation
strategy by acquiring or developing additional transfer stations. Channeling
waste through additional transfer stations allows the Company to maximize the
utilization of existing treatment facilities. Selective development of transfer
stations would enable the Company to serve effectively an area encompassing
approximately 60-70% of the U.S. population. The Company believes that expanded
telemarketing and direct sales efforts will help develop new geographic service
areas. As soon as contracts for managing a critical mass of regulated medical
waste are obtained, the Company reviews whether the construction of additional
treatment or transfer facilities is economically justified.

The Company is also expanding beyond the United States and Canada. In 1996,
the Company entered into an agreement with a Brazilian company to assist in
exploring opportunities for the commercialization of the Company's medical waste
management technology in certain territories in South America. This relationship
was expanded in July 1998, when the Company entered into an agreement for an
exclusive license to use the Company's ETD technology in Brazil and for the sale
to the Brazilian company, Companhia Auxiliar de Viacao e Obras -- CAVO, of two
fully-integrated ETD processing lines for use in treating medical waste in the
Sao Paulo, Brazil metropolitan market. In February 1998, the Company announced
the formation of a Mexican joint venture company, Medam S.A. de C.V. ("Medam"),
to utilize the Company's ETD technology to treat medical and infectious waste
primarily in the Mexico City market. Medam, which was formed with an established
Mexican company and an American firm of international consulting engineers, has
obtained the appropriate permits to construct and operate a treatment facility
with a 150-ton per day capacity. This facility, which is the largest medical
waste treatment facility permitted to date in Mexico, became operational in June
1998. In addition, Medam has acquired a transportation service company in
Mexico. There can be no assurance, however, that the Company will be successful
in expanding profitably into foreign markets. See "Risk Factors -- International
Operations."

Pursue Selected Acquisitions

Since the Company's initial public offering in August 1996, the Company has
completed 23 acquisitions of other regulated medical waste management
businesses. The Company's acquisitions have typically involved the purchase of
selected assets consisting principally of customer lists and contracts, vehicles
and related equipment and supplies.

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ACQUISITIONS SINCE IPO IN AUGUST 1996

<TABLE>
<CAPTION>
SELLER DATE MARKETS SERVED
------ ---- --------------
<S> <C> <C>
Environmental Transloading January 1999 California
Services, Inc.
Medical Resources Corporation January 1999 New Mexico
Med-Tech Environmental Limited January 1999 and Alberta, British Columbia,
December 1998 Ontario, Quebec, Connecticut,
Maine, Massachusetts, New
Hampshire, New York, Rhode
Island and Vermont
Mid-America Environmental, Inc. December 1998 Indiana
Waste Systems, Inc. (3CI) October 1998 Alabama, Arkansas, Florida,
Georgia, Kansas, Louisiana,
Mississippi, Missouri,
Oklahoma, Tennessee and Texas
Medical Compliance Services, Inc. August 1998 New Mexico and Texas
Regional Recycling, Inc. July 1998 New Jersey
Allegro Carting and Recycling, Inc. July 1998 New York
Mediwaste Disposal Services LLC June 1998 Texas
Superior of Wisconsin, Inc. June 1998 Wisconsin
Controlled Medical Disposal, Inc. June 1998 New Jersey
Arizona Hazardous Waste Disposal June 1998 Arizona
Medisin, Inc. April 1998 Kentucky and Ohio
Bridgeview, Inc. February 1998 Pennsylvania
Browning-Ferris Industries, Inc. December 1997 Arizona
Phoenix Services, Inc. November 1997 Maryland
Cal-Va, Inc. November 1997 Virginia and Washington, D.C.
Envirotech Enterprises, Inc. August 1997 Arizona
Rumpke Container Service, Inc. July 1997 Ohio
Regional Carting, Inc. July 1997 New Jersey
Waste Management, Inc. July 1997 Wisconsin
Environmental Control Co., Inc. May 1997 Connecticut, New Jersey and
New York
Waste Management, Inc. December 1996 Arizona, Colorado, Indiana,
Kentucky, Maryland, North
Carolina, Ohio, Pennsylvania,
South Carolina, Tennessee,
Utah, Washington and
Washington, D.C.
</TABLE>

In December 1998 and January 1999, the Company acquired all of Med-Tech's
outstanding stock and approximately 93% of its outstanding warrants. Med-Tech,
which is located in Toronto, Canada, provides medical waste management services
in Canada and the northeastern United States. The Company paid a total of
approximately $3,059,000 in cash for the Med-Tech shares and warrants that it
acquired. In October 1998, the Company had purchased Med-Tech's junior secured
indebtedness of approximately $3,576,000, paying the face value of the acquired
debt, in the form of $2,920,000 in cash and 36,940 shares of Common Stock, and
replacing a letter of credit of approximately $1,641,000.
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<PAGE> 30

In October 1998, the Company acquired all of the outstanding capital stock
of Waste Systems, Inc. ("WSI"). The purchase price was (i) $10,000,000 in cash
and (ii) the grant of certain exclusive negotiation and first refusal rights to
the sellers in respect of the purchase, for installation and operation in the
Federal Republic of Germany, of medical waste treatment units incorporating the
Company's proprietary ETD technology. WSI owns 52.2% of the common stock and all
of the preferred stock of 3CI, which provides regulated medical waste management
services in the southeastern United States. 3CI's common stock is traded on the
Nasdaq SmallCap Market under the symbol "TCCC." WSI also owns a secured
promissory note from 3CI which, as amended in December 1998, is payable to WSI
in the principal amount of approximately $6,237,000 on or before September 30,
1999.

The purchase price for the Company's 29 other acquisitions to date
(including the eight acquisitions completed in the three years prior to its
initial public offering) has been paid by a combination of cash, promissory
notes, shares of the Company's Common Stock and assumption of liabilities (or,
in one case, the forgiveness of indebtedness). The Company anticipates that its
future acquisitions of other regulated medical waste management businesses will
be made by the payment of cash, the issuance of debt or equity securities or a
combination of these methods. The Company believes that its acquisition strategy
is enhanced by the fact that the Company's Common Stock is publicly traded.

The Company believes that its management team has substantial experience in
evaluating potential acquisition candidates and determining whether a particular
medical waste management business can be successfully integrated into the
Company. In determining whether to proceed with a business acquisition, the
Company evaluates a number of factors including: (i) the effect of the proposed
acquisition on the Company's earnings per share; (ii) the composition and size
of the seller's customer base; (iii) the efficiencies that may be obtained when
the acquisition is integrated with one or more of the Company's existing
operations; (iv) the potential for enhancing or expanding the Company's
geographic service area and allowing the Company to make other acquisitions in
the same service area; (v) the seller's historical and projected financial
results; (vi) the purchase price negotiated with the seller and the Company's
expected internal rate of return; (vii) the experience, reputation and
personality of the seller's management; (viii) the seller's customer service
reputation and relationships with the communities that it serves; (ix) if the
acquisition involves the assumption of liabilities, the extent and nature of the
seller's liabilities, including environmental liabilities; and (x) whether the
acquisition gives the Company any strategic advantages over its competition.

The Company has established a procedure for efficiently integrating
newly-acquired companies into its business while minimizing disruption of the
continuing operations of both the Company and the acquired business. Once a
medical waste management business is acquired, the Company makes plans to
implement programs designed to improve customer service, sales, marketing,
routing, equipment utilization, employee productivity, operating efficiencies
and overall profitability.

Expand Range of Products and Services

The Company believes that it has the opportunity to expand its business by
increasing the range of products and services that it offers to its existing
customers and by adding new customer categories. For example, the Company may
expand its collection, treatment, disposal and recycling of regulated medical
waste generated by health care providers to include wastes that are currently
handled by the Company only on a limited basis, such as photographic chemicals,
lead foils, and amalgam used in dental and radiology laboratories. In addition,
the Company may decide to offer single-use disposable medical supplies to its
customers.

TREATMENT TECHNOLOGIES

The three most common off-site commercial technologies for treating
regulated medical waste are incineration, autoclaving and the Company's
proprietary ETD treatment process. See "Patents and Proprietary Rights."
Additional alternative technologies and methods, which have not gained wide
commercial acceptance, include chemical treatment, chemclaving (a combination of
chemical treatment and auto- claving), microwaving and certain specialized or
experimental technologies, including the development and marketing of reusable
or degradable medical products designed to reduce the generation of regulated
medical waste.
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<PAGE> 31

Historically, the Company treated all of the regulated medical waste that
it collected using its proprietary ETD treatment process. As a result of recent
acquisitions, however, the Company and its subsidiaries now operate, in addition
to four ETD treatment facilities, seven facilities that use either incineration
or autoclaving to treat regulated medical waste, as well as one chemclave and
one microwave unit. The Company estimates that during 1997, the Company used
incineration or autoclaving at its own facilities or those of third parties for
approximately 43% of the regulated medical waste that it treated. This
percentage is likely to increase as a result of recent and future acquisitions.
The Company varies its treatment of regulated medical waste among available
treatment technologies based on capacity and pricing considerations in each
service area in order to minimize operating costs.

Principal Treatment Technologies

Incineration. The Company estimates that incineration accounts for
approximately 65-70% of United States permitted off-site capacity to treat
regulated medical waste. Incineration burns regulated medical waste at elevated
temperatures and reduces it to ash. Like ETD, incineration significantly reduces
the volume of waste, and it is the recommended treatment and disposal option for
certain types of regulated medical waste such as anatomical waste or residues
from chemotherapy procedures. Incineration has come under increasing criticism
from the public and from federal, state and local regulators, however, because
of the airborne emissions that it generates. Emissions from incinerators can
contain pollutants such as dioxins, furans, carbon monoxide, mercury, cadmium,
lead and other toxins which are subject to federal, state and, in some cases,
local regulation. The ash byproduct of incineration may also constitute a
hazardous substance. As a result, there is a significant cost to construct new
incineration facilities, and there may be a substantial additional expense to
improve existing facilities, in order to insure that their operation is in
compliance with regulatory standards.

Autoclaving. The Company estimates that autoclaving accounts for
approximately 20-25% of United States permitted off-site capacity to treat
regulated medical waste. Autoclaving treats regulated medical waste with steam
at high temperature and pressure to kill pathogens. The technology is most
effective if all surfaces are uniformly exposed to the steam, but uniform
exposure may not always occur, potentially leaving some pathogens untreated. In
addition, autoclaving alone does not change the appearance of waste, and
recognizable regulated medical waste may not be accepted by landfill operators.
To compensate for this disadvantage, autoclaving may be combined with a
shredding or grinding process to render the regulated medical waste non-
recognizable. The high temperatures generated in the autoclaving process
occasionally change the physical properties of plastic waste, prohibiting its
recycling.

ETD Treatment Process. The Company estimates that its patented ETD
treatment process accounts for approximately 8% of United States permitted
off-site capacity to treat regulated medical waste. ETD also includes a system
for grinding regulated medical waste. After grinding, ETD uses an oscillating
energy field of low-frequency radio waves to heat regulated medical waste to
temperatures that destroy pathogens such as viruses, vegetative bacteria, fungi
and yeast without melting the plastic content of the waste. ETD is most
effective on materials with low electrical conductivity that contain polar
molecules, including all human pathogens. Polar molecules are molecules that
have an asymmetric electronic structure and tend to align themselves with an
imposed electric field. When the polarity of the applied field changes rapidly,
the molecules try to keep pace with the alternating field direction, thus
vibrating and in the process dissipating energy as heat. The Company believes
that, among other possible explanations for the efficacy of the ETD treatment
process, the electric field created by ETD produces high molecular agitation and
as a result rapidly generates high temperatures, and that all of the molecules
exposed to the field are agitated simultaneously, producing heat throughout the
waste instead of being imposed from the surface as in conventional heating. The
Company believes that this phenomenon, called volumetric heating, transfers
energy directly to the waste, resulting in heating throughout the entire waste
material and eliminating the inherent inefficiency of transferring heat first
from an external source to the surface of the waste and then from the surface to
the interior of the waste. ETD employs low-frequency radio waves because they
can penetrate deeper than high-frequency waves, such as microwaves, which can
penetrate regulated medical waste of a typical density only to a depth of
approximately five inches. ETD uses specific frequencies that match the physical
properties of

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<PAGE> 32

regulated medical waste, generally enabling the ETD treatment process to kill
pathogens at temperatures as low as 90 degreesC. Although ETD is effective in
destroying pathogens present in anatomical waste, the Company does not currently
treat anatomical waste using the ETD process.

Advantages of the Company's ETD Treatment Process

The Company believes that its proprietary ETD treatment process provides
certain advantages over both incineration and autoclaving.

Permitting. It is difficult and time-consuming to obtain the permits
necessary to construct and operate any regulated medical waste treatment
facility, regardless of the treatment technology to be employed at the proposed
facility. Local residents, citizen groups and elected officials frequently
object to the construction and operation of proposed regulated medical waste
treatment facilities solely because regulated medical waste will be transported
to and stored and handled at the facility. The Company believes, however, that
the fact that the ETD treatment process does not generate liquid effluents or
regulated air emissions may enable the Company to locate treatment facilities
near dense population centers, where greater numbers of potential customers are
found, with less difficulty than would be encountered by a competitor attempting
to locate an incinerator in the same area.

Cost. The Company believes that it is less expensive to construct and
operate an ETD treatment facility than to construct and operate either a
like-capacity incinerator or a like-capacity autoclave with shredding
capability, which may enable the Company to price its treatment services
competitively. The Company believes that the comparative advantage that it
possesses in its ability to locate treatment facilities near dense population
centers may also provide transportation and operating efficiencies.

Volume Reduction and Unrecognizability. The Company's regulated medical
waste management program reduces the overall volume of regulated medical waste
in several ways. The Company's patented reusable container, used under the
trademark Steri-Tub(R), replaces the use of corrugated containers for many Large
Quantity and Alternate Care generators of large amounts of regulated medical
waste, thus reducing waste volume by as much as 10-15%. Once medical waste has
undergone the ETD treatment process, the original cubic volume of the waste is
reduced by approximately 85%. This reduction in the volume of regulated medical
waste is comparable to the volume reduction obtained by incineration.
Autoclaving alone does not reduce the volume of regulated medical waste or
render it unrecognizable. To reduce waste volume and to overcome the
unwillingness of many landfill operators to accept recognizable treated
regulated medical waste, autoclaving must be combined with a shredding or
grinding operation, adding to its cost. A proprietary size reduction feature is
a component of the ETD treatment process. As a result of grinding, re-use and
recycling, the cubic volume of treated regulated medical waste disposed of by
the Company in landfills during 1997 was only approximately 8% of the original
cubic volume of the waste received by the Company for treatment. The Company
believes that the ability of its ETD treatment process both to reduce the volume
of regulated medical waste and to render it unrecognizable gives ETD an
advantage over autoclave operations that do not include shredding or grinding.

Re-use and Recycling. The Company is presently in the process of relocating
its recycling facility. Pending regulatory approval and necessary permitting,
the Company expects to reopen its recycling facility in late 1999. When the
Company reopens its recycling facility, the Company's customers will be able to
participate in a voluntary recycling program by source-segregating their
regulated medical waste. The source-segregated regulated medical waste can be
treated by the ETD treatment process and, in certain geographic service areas,
can then be processed through the Company's proprietary systems for the
automatic recovery of polypropylene plastics. The recovered polypropylene
plastics may be used by a third party to manufacture a line of "sharps"
containers which are used by health care providers to dispose of sharp objects
such as needles and blades. In addition, in three of the Company's geographic
service areas, the Company's treated regulated medical waste is transported to
resource recovery facilities owned by third parties where it is used as refuse-
derived fuel in "waste-to-energy" plants to produce electricity. The Company has
worked to develop a process in conjunction with a cement manufacturer to utilize
treated regulated medical waste as a fossil fuel substitute in cement kilns, but
this process has not been implemented by the Company on a commercial scale.

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<PAGE> 33

The Company believes that its re-use and recycling capabilities provide a
marketing advantage with customers who prefer to use a regulated medical waste
management provider with a commitment to resource conservation.

Company's Use of Other Technologies

While the Company continues to believe that ETD offers considerable
advantages over other methods of treating regulated medical waste, the Company
expects for various reasons to continue to operate facilities that use either
incineration, autoclaving, microwaving or chemclaving. For example, as part of
the terms of an acquisition, the Company may be required to continue to use the
seller's existing treatment facilities for a specified period of time. In
addition, after making an acquisition, it may not be cost-effective for the
Company to replace the current treatment method with ETD, especially if the
customers acquired are located outside of the service area of one of the
Company's ETD treatment facilities. The Company anticipates that its newly-
acquired subsidiaries, Med-Tech and 3CI, will continue to use treatment
technologies other than ETD for the foreseeable future. Finally, other treatment
methods may provide the Company with additional flexibility to treat certain
types of regulated medical waste, e.g., anatomical waste, for which incineration
is required in certain jurisdictions. Other treatment methods can also be more
cost-effective in treating small bulk regulated medical waste in less populated
areas.

MARKETING AND SALES

Marketing Strategy

The Company's marketing strategy is to provide customers with a complete
cost management and compliance program for their regulated medical waste. The
Company recognizes that its potential customers are generally health care
providers, who approach the problem of regulated medical waste management from a
different perspective than typical generators of solid or municipal waste.
Health care personnel have become increasingly sensitive to the risk of
contracting diseases such as AIDS and hepatitis through accidental contact with
infected patient blood. In addition, patients are increasingly demanding that
practitioners demonstrate continual vigilance against such risks. Regulations
which have been adopted by OSHA require annual training of all personnel who
potentially can come into contact with bloodborne pathogens and other
potentially infectious materials. These regulations also require documentation
of handling procedures and detailed clean-up plans. As a result, there is a
heightened awareness by health care providers of the need to implement
safeguards against such risks.

The Company has developed programs to help train employees of customers on
the proper methods of handling, segregating and containing regulated medical
waste in order to reduce their potential exposure. The Company also advises
health care providers on the proper methods of recording and documenting their
regulated medical waste management in order to comply with federal, state and
local regulations. In addition, the Company offers consulting and review
services to such providers regarding their internal collection and control
systems and assists them in developing systems to provide for the efficient
management of their regulated medical waste from the point of generation through
treatment and disposal. The Company also offers consulting services to its
health care customers to assist them in reducing the amount of regulated medical
waste at the point of generation.

Alternate Care Generators

The Company has specifically targeted higher-margin Alternate Care
generators as a growth area. Typical Alternate Care customers are individual or
small groups of doctors, dentists and other health care providers who are widely
dispersed and generate only a small amount of regulated medical waste. A
significant concern of these customers is having the regulated medical waste
picked up and disposed of in compliance with applicable state and federal
regulations. The Company has telemarketers who use the Company's proprietary
database to identify and qualify these Alternate Care generators and arrange
appointments for the

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<PAGE> 34

Company's trained field sales representatives. The Company believes that its
telemarketing program is a cost-effective means to reach the numerous but
diffuse Alternate Care generators.

The Company has a "mail-back" service through which the Company can reach
Alternate Care customers located in outlying areas that would be inefficient to
serve using the Company's regular route structure. In addition, the Company has
introduced a regulated medical waste management and compliance program
specifically targeted to Alternate Care customers who are required to comply
with the OSHA bloodborne pathogens regulations but who lack the internal
personnel and systems to assure compliance.

Large Quantity Generators

The Company believes that it has been successful in servicing its Large
Quantity generator customers and plans to continue to service its current
account base as long as satisfactory levels of profitability can be maintained.
The Company's marketing and sales efforts to Large Quantity generators are
conducted by account executives whose responsibilities include identifying and
attracting new customers and servicing the existing account base of
approximately 750 Large Quantity customers. In addition to securing new
contracts, the Company's marketing and sales personnel provide consulting
services to its health care customers assisting them in reducing the amount of
regulated medical waste they generate, training their employees on safety issues
and implementing programs to audit, classify and segregate regulated medical
waste in a proper manner. The Company has several strategic alliances to
supplement its marketing and sales efforts to Large Quantity generators.

Service Agreements

The Company negotiates individual service agreements with each Large
Quantity and Alternate Care generator customer. Although the Company has a
standard form of agreement, terms vary depending upon the customer's service
requirements and volume of regulated medical waste generated and, in some
jurisdictions, requirements imposed by statute or regulation. Service agreements
typically include provisions relating to types of containers, frequency of
collection, pricing, treatment, and documentation for tracking purposes. Each
agreement also specifies the customer's obligation to pack its regulated medical
waste in approved containers. Service agreements are generally for a period of
one to five years and include renewal options, although customers may terminate
on written notice and, in most service areas, upon payment of a penalty. Many
payment options are available including flat monthly or quarterly charges. The
Company may set its prices on the basis of the number of containers that it
collects, the weight of the regulated medical waste that it collects and treats,
the number of collection stops that it makes on the customer's route, the number
of collection stops that it makes for a particular multi-site customer, and
other factors.

The Company has a diverse customer base, with no single regulated medical
waste customer accounting for more than 3% of the Company's 1997 revenues. The
Company does not believe that the loss of any single customer would have a
material adverse effect on its business, financial condition or results of
operations.

LOGISTICS

An important element of the Company's business strategy is to maximize the
efficiency with which it collects and transports a large volume of regulated
medical waste and directs the deployment of many collection vehicles. This
aspect of the Company's operations -- referred to as logistics -- represents the
Company's single largest operating cost. Accordingly, the Company considers
logistics to be a critical component of its operating plan. The Company's
integrated approach to regulated medical waste management is designed to provide
it with numerous logistic advantages in the process of managing regulated
medical waste.

Pre-Collection

Before regulated medical waste is collected, the Company's integrated waste
management approach can "build in" efficiencies that will yield logistic
advantages. For example, the Company's consulting services can

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<PAGE> 35

assist its customers in minimizing their regulated medical waste volume at the
point of generation. In addition, the Company provides customers with the
documentation necessary for regulatory compliance which, if properly completed,
will minimize interruptions in the regulated medical waste treatment cycle for
verification of regulatory compliance.

Containers

A key element of the Company's pre-collection measures is the use of
specially designed containers by most of the Company's Large Quantity and
Alternate Care generators of large volumes of regulated medical waste. The
Company has developed and patented a reusable leak- and puncture-resistant
container, made from recycled plastic and used under the registered trademark
Steri-Tub(R). The plastic container enables regulated medical waste generators
to reduce costs by reducing the number of times that regulated medical waste is
handled, eliminating the cost (and weight) of corrugated boxes and potentially
reducing workers' compensation liability resulting from human contact with
regulated medical waste. The plastic containers are designed to maximize the
loads that will fit within the cargo compartments of standard trucks and
trailers. The Company believes these features to be an improvement over its
competitors' reusable "point-of-generation" containers. If a customer generates
a large volume of waste, the Company will place a large temporary storage
container or trailer on the customer's premises. In order to maximize regulatory
compliance and minimize potential liability, the Company will not accept medical
waste unless it is properly packaged by customers in Company-supplied or
- -approved containers.

Collection and Transportation

Efficiency of collection and transportation is a critical element of the
Company's logistics. The Company seeks to maximize route density and the number
of stops on each route. The Company employs a tracking system for its collection
vehicles which is designed to maximize logistic efficiency. The Company deploys
dedicated collection vehicles of different capacities depending upon the amount
of regulated medical waste to be collected at a particular stop or on a
particular route. The Company collects containers or corrugated boxes of
regulated medical waste from its customers at intervals depending upon customer
requirements, terms of the service agreement and the volume of regulated medical
waste produced. The containers or boxes are inspected at the customer's site
prior to pickup. The waste is then transported directly to one of the Company's
treatment facilities or to one of the Company's transfer stations where it is
aggregated with other regulated medical waste and then transported to a
treatment facility. In certain circumstances, the Company transports waste to
other specially-licensed regulated medical waste treatment facilities. The
Company transports small quantities of hazardous substances, such as
photographic fixer, lead foils and amalgam, from certain of its customers to a
metals recycling operation.

Transfer Stations

The use of transfer stations is another important component of the
Company's logistics. The Company utilizes transfer stations in a "hub and spoke"
configuration which allows the Company to expand its geographic service area and
increase the volume of regulated medical waste that can be treated at a
particular facility. Smaller loads of waste containers are stored at the
transfer stations until they can be consolidated into full truckloads and
transported to a treatment facility.

Inspection, Treatment and Disposal

Upon arrival at a treatment facility, containers or boxes of regulated
medical waste are scanned to verify that they do not contain any unacceptable
substances such as radioactive material. Any container or box which is
discovered to contain unacceptable waste is returned to the customer. In some
cases the Company's operating permits require that unacceptable waste be
reported to the appropriate regulatory authorities. After inspection, the
regulated medical waste is either loaded into the processing system and ground,
compacted and treated using the Company's ETD treatment process or incinerated
or autoclaved at facilities operated by the Company or third parties. Upon
completion of the particular process, the treated medical waste or incinerator

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<PAGE> 36

ash is transported for resource recovery, recycling or disposal in a
nonhazardous waste landfill. After the Steri-Tub(R) plastic containers have been
emptied, they are washed, sanitized and returned to customers for re-use.

Documentation

The Company provides complete documentation to its customers for all
regulated medical waste that it collects, including the name of the generator,
date of pick-up and date of delivery to a treatment facility. The Company
believes that its documentation system meets all applicable federal, state and
local regulations regarding the packaging and labeling of regulated medical
waste, including, but not limited to, all relevant regulations issued by the
U.S. Department of Transportation ("DOT"), OSHA and state and local authorities.

COMPETITION

The regulated medical waste services industry is highly competitive,
fragmented, and requires substantial labor and capital resources. Intense
competition exists within the industry, not only for customers but also for
businesses to acquire. The Company's largest competitor is Browning-Ferris
Industries, Inc. A large number of regional and local companies also compete in
the industry. In addition, the Company faces competition from businesses and
other organizations that are attempting to commercialize alternate treatment
technologies or products designed to reduce or eliminate the generation of
regulated medical waste, such as reusable or degradable medical products, and
from on-site treatment of regulated medical waste by certain Large Quantity
generators.

The Company competes for service agreements primarily on the basis of
cost-effectiveness, quality of service, geographic location and
generator-perceived liability risks. The Company's ability to obtain new service
agreements may be limited by the fact that a potential customer's current vendor
may have an excellent service history or a long-term service contract or may
reduce its prices to the potential customer.

GOVERNMENTAL REGULATION

The Company operates within the regulated medical waste management
industry, which is subject to extensive and frequently changing federal, state
and local laws and regulations. This statutory and regulatory framework imposes
compliance burdens and risks on the Company, including requirements to obtain
and maintain government permits. These permits grant the Company the authority,
among other things, to construct and operate treatment and transfer facilities,
to transport regulated medical waste within and between relevant jurisdictions
and to handle particular regulated substances. The Company's permits must be
periodically renewed and are subject to modification or revocation by the
issuing regulatory authority. In addition to the requirement that it obtain and
maintain permits, the Company is subject to extensive federal, state and local
laws and regulations that, among other things, govern the definition,
generation, segregation, handling, packaging, transportation, treatment, storage
and disposal of regulated medical waste. The Company is also subject to
extensive regulation designed to minimize employee exposure to regulated medical
waste. In addition, the Company is subject to certain foreign laws and
regulations. See "Risk Factors -- Impact of Government Regulation."

Federal Regulation

There are at least four federal agencies that have authority over medical
waste. These agencies are the EPA, OSHA, DOT and Postal Service. These agencies
regulate medical waste under a variety of statutory and regulatory authorities.

Medical Waste Tracking Act of 1988. In the late 1980s, the EPA outlined a
two-year demonstration program pursuant to the Medical Waste Tracking Act of
1988 ("MWTA"), which was added to the Resource Conservation and Recovery Act of
1976 ("RCRA"). The MWTA was adopted in response to health and environmental
concerns over infectious medical waste after medical waste washed ashore on
beaches, particularly in New York and New Jersey during the summer of 1988.
Public safety concerns were amplified by media reports of careless management of
medical waste. The MWTA was intended to be the first step in

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<PAGE> 37

addressing these problems. The primary objective of the MWTA was to ensure that
regulated medical wastes which were generated in a covered state and which posed
environmental (including aesthetic) problems were delivered to disposal or
treatment facilities with minimum exposure to waste management workers and the
public. The MWTA's tracking requirements included accounting for all waste
transported and imposed civil and criminal sanctions for violations.

In regulations implementing the MWTA, the EPA defined regulated medical
waste and established guidelines for its segregation, handling, containment,
labeling and transport. Under the MWTA, the EPA was to deliver three reports to
Congress on different aspects of regulated medical waste management and the
success of the demonstration program for tracking regulated medical waste. Two
of these reports were completed; the third report has not yet been issued. The
third report is expected to cover the use of alternative medical waste treatment
technologies, including the Company's ETD technology. There can be no assurance
that if and when the third report is issued, it will not contain findings or
make recommendations that are adverse to the Company's medical waste treatment
technology. Any such adverse findings or recommendations could have a material
adverse effect on the Company's business, financial condition and results of
operations.

The MWTA demonstration program expired in 1991, but the MWTA established a
model followed by many states in developing their specific medical waste
regulatory frameworks.

Clean Air Act Regulations. In September 1997, the EPA adopted regulations
under the Clean Air Act Amendments of 1990 that, among other things, limit the
discharge into the atmosphere of pollutants released by medical waste
incineration. These regulations require that by September 1998, every state must
submit to the EPA for approval a comprehensive plan to meet certain minimum
emission standards for these pollutants. In addition, each state compliance plan
will impose training and recordkeeping requirements on incinerator operators,
mandate the development of a site-specific waste management plan and require
regular monitoring and testing of emissions. See "-- State and Local
Regulations." The EPA estimates that of the approximately 1,100 small, 690
medium and 460 large medical waste incinerators in operation in May 1996,
approximately 93-100% of the small incinerators, 60-95% of the medium
incinerators and up to 35% of the large incinerators will be closed as hospitals
seek alternative, less expensive methods of regulated medical waste disposal
rather than incur the cost of installing the necessary air pollution control
systems to comply with the EPA's regulations. The Company currently operates two
incinerators and believes that it will be successful in obtaining all necessary
federal and state permits to continue operation of these incinerators without
material expenditure on emissions control systems. The Natural Resources Defense
Council, an environmental organization, has sued the EPA challenging the
validity of its regulations on the grounds that the minimum emissions standards
are too lenient. If successful, this lawsuit could result in the EPA's adoption
of stricter air emissions standards for medical waste incinerators. Stricter
emissions standards could benefit the Company to the extent that the rate of
outsourcing of regulated medical waste management by hospitals is accelerated.
Stricter emissions standards could also have an adverse effect on the Company to
the extent that the Company incurs increased costs to bring its leased
incinerators into compliance with the more stringent standards or faces a
significant price increase in the charges for treatment of regulated medical
waste that the Company delivers to third parties for incineration.

Occupational Safety and Health Act of 1970. The Occupational Safety and
Health Act of 1970 authorizes OSHA to promulgate occupational safety and health
standards. Various standards apply to certain aspects of the Company's
operations. These standards include rules governing exposure to bloodborne
pathogens and other potentially infectious materials, lock out/tag out
procedures, medical surveillance requirements, use of respirators and personal
protective equipment, emergency planning, hazard communication, noise,
ergonomics, and forklift safety, among others. OSHA regulations are designed to
minimize the exposure of employees to hazardous work environments. The Company
is subject to unannounced safety inspections at any time. Employees are required
by Company policy to receive new employee training, annual refresher training
and training in their specific tasks. As part of the Company's medical
surveillance program, employees receive pre-employment physicals, including drug
testing, annually-required medical surveillance and exit physicals. The Company
also subscribes to a drug-free workplace policy.

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<PAGE> 38

Resource Conservation and Recovery Act of 1976. In 1976, Congress passed
RCRA as a response to growing public concern about problems associated with the
handling and disposal of solid and hazardous waste. RCRA required the EPA to
promulgate regulations identifying hazardous wastes. RCRA also created standards
for the generation, transportation, treatment, storage and disposal of solid and
hazardous wastes, including a manifest program for the transportation of
hazardous wastes and a permit system for solid and hazardous waste disposal
facilities. Regulated medical wastes are currently considered non-hazardous
solid wastes under RCRA. However, certain substances collected by the Company
from some of its customers, including photographic fixer developer solutions,
lead foils and amalgam, are considered hazardous wastes, for which the Company
provides transportation services for metals recycling.

The Company utilizes landfills for the disposal of treated regulated
medical waste from two of its ETD facilities and for the disposal of incinerator
ash and autoclaved waste from its facilities using incineration or autoclaving.
Waste is not regulated as hazardous under RCRA unless it contains hazardous
substances exceeding certain quantities or concentration levels or exhibits
certain hazardous characteristics. Following treatment, waste from the Company's
ETD and autoclave facilities is disposed of as nonhazardous waste. At the
Company's incineration facilities, the Company tests ash from the incineration
process to determine whether it must be disposed of as hazardous waste and
disposes of it accordingly.

The Company employs quality control measures to check incoming regulated
medical waste for certain types of hazardous substances. Customer contracts also
require the exclusion of hazardous substances or radioactive materials from the
regulated medical waste. Separate customer contracts govern the Company's
transportation for recycling of limited quantities of its customers' hazardous
wastes.

DOT Regulations. The DOT has implemented regulations under the Hazardous
Materials Transportation Authorization Act of 1994 governing the transportation
of hazardous materials, regulated medical waste and infectious substances. Under
these regulations, the Company is required to package regulated medical waste in
compliance with the bloodborne pathogens standards issued by OSHA. Under these
standards, the Company must identify its packaging with a "biohazard" marking on
the outer packaging, and its regulated medical waste container must be rigid,
puncture-resistant, leak-resistant, properly sealed and impervious to moisture.

DOT regulations also require that a transporter of hazardous substances be
capable of responding on a 24 hour-per-day basis in the event of an accident,
spill or release to the environment of a hazardous material. The Company has
entered into an agreement with CHEMTREC, an organization that provides 24-hour
emergency spill notification in the United States and Canada, and has entered
into agreements with several emergency response organizations to provide spill
cleanup services in certain of the Company's service areas.

The Company's drivers are specifically trained on topics such as safety,
hazardous materials, specifically-regulated medical waste, hazardous chemicals
and infectious substances. Employees are trained to deal with emergency
situations including spills, accidents and releases in to the environment, and
the Company has a written contingency plan for these events. The Company's
vehicles are outfitted with spill control equipment and the drivers are trained
in its use.

The Company expects that the DOT will issue a proposed rule in 1999
regulating the transportation of infectious substances. While the Company does
not expect that the rule will impose significant costs on the Company, the
precise terms of the rule, and hence the associated costs, if any, cannot be
determined at this time.

Comprehensive Environmental Response, Compensation and Liability Act of
1980. The Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA") established a regulatory and remedial program to provide for
the investigation and clean-up of facilities from which there has been an actual
or threatened release of hazardous substances into the environment. CERCLA and
similar state laws impose strict, joint and several liability on the current and
former owners and operators of facilities from which releases of hazardous
substances have occurred and on the generators and transporters of the hazardous
substances that come to be located at such facilities. Responsible parties may
be liable for substantial site investigation and clean-up costs and natural
resource damages, regardless of whether they exercised due care

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<PAGE> 39

and complied with applicable laws and regulations. If the Company were found to
be a responsible party for a particular site, it could be required to pay the
entire cost of site investigation and clean-up, even though other parties also
may be liable. The Company's ability to obtain contribution from other
responsible parties may be limited by the Company's inability to identify those
parties and by their financial inability to contribute to investigation and
clean-up costs.

United States Postal Service. The Company has obtained a permit from the
U.S. Postal Service to conduct its "mail-back" program, pursuant to which
customers mail appropriately packaged sharps containers directly to the
Company's treatment facilities.

State and Local Regulation

The Company currently conducts some type of business activity in 40 states.
These activities include the collection, transportation, processing,
transferring or recycling of regulated medical waste and, in some cases,
hazardous substances. Each state has its own regulations related to the
handling, treatment and storage of regulated medical waste. Although there are
many differences among the various state laws and regulation, many states have
followed the regulated medical waste model under the MWTA and are implementing
programs under RCRA. Regulations cover the Company's transportation of regulated
medical waste both intrastate and interstate. In each of the states where the
Company operates a treatment facility or transfer station, it is required to
comply with numerous state and local laws and regulations as well as its
site-specific operating plan. Agencies writing regulations at the state level
typically include departments of health and state environmental protection
agencies. In addition, many local governments have ordinances, local laws and
regulations affecting the Company's operations, including but not limited to
zoning and health measures.

In recent years, a number of communities have instituted "flow control"
requirements, which typically require that waste collected within a particular
area be deposited at a designated facility. In May 1994, the U.S. Supreme Court
ruled that a flow control ordinance was inconsistent with the Commerce Clause of
the Constitution of the United States. A number of lower federal courts have
struck down similar measures. The U.S. Congress has considered, and could in the
future consider, legislation that would at least partially overturn these court
decisions and immunize particular state and local flow control requirements from
Commerce Clause scrutiny.

Similarly, the U.S. Supreme Court has consistently held that state and
local measures that seek to restrict the importation of extraterritorial waste
or tax imported waste at a higher rate are unconstitutional. To date,
congressional efforts to enable states, under certain circumstances, to impose
differential taxes on out-of-state waste or restrict waste importation have been
unsuccessful.

In the absence of federal legislation, certain local laws that direct waste
flows to designated facilities may be unenforceable, and discriminatory taxes
and waste importation restrictions should continue to be subject to judicial
invalidation. If the U.S. Congress adopts legislation allowing for certain types
of flow control or restricting the importation of waste, or if legislation
affecting interstate transportation of waste is adopted at the federal or state
level, such legislation could adversely affect the Company's medical waste
collection, transport, treatment and disposal operations and hence would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, there can be no assurance that
municipalities will not attempt to pass ordinances which effectively block or
discourage the Company from locating a treatment or transfer facility within
their limits, although the Company ultimately may prevail in challenging the
legality of such ordinances.

States predominantly regulate medical waste as a solid or "special" waste
and not as a hazardous waste under RCRA. State definitions of medical waste
include, but are not limited to: microbiological waste (cultures and stocks of
infectious agents); pathology waste (human body parts from surgical and autopsy
waste); blood and blood products; and sharps.

Most states require segregation of different types of regulated medical
waste at the point of generation. A majority of states require that the
universal biohazard symbol or related label appear on medical waste containers.
Storage regulations may apply to the generator, the treatment facility, the
transport vehicle, or all

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<PAGE> 40

three. Storage rules center on identifying and securing the storage area for
public safety as well as setting standards for the manner and length of storage.
Many states mandate employee training for safe environmental clean-up through
emergency spill and decontamination plans. Many states mandate that transporters
carry spill equipment in their vehicles. Those states whose regulatory framework
relies on the MWTA model have tracking document systems in place.

In the State of Washington, the Company is subject to regulation by the
Washington Utilities and Transportation Commission. As a regulated business, the
Company must receive approval from the Utilities and Transportation Commission
for the prices that it charges for its services in Washington.

The Company maintains numerous permits and licenses to conduct its business
from various state and local authorities. The Company's permits vary from state
to state based upon the Company's activities within that state and on the
applicable state and local laws and regulations. These permits include transport
permits for solid waste, regulated medical waste and hazardous substances,
permits to construct and operate treatment facilities, permits to construct and
operate transfer stations, permits governing discharge of sanitary water and
registration of equipment under air regulations, specific approval for the use
of ETD to treat regulated medical waste, and various business operator's
licenses. The Company believes that it is currently in compliance in all
material respects with its permits and applicable laws and regulations.

The Company has submitted an application to the New York State Department
of Environmental Conservation for a consent order that would provide the
Company's subsidiary, Environmental Control Co., Inc., with temporary authority
to operate its Bronx, New York, transfer station in place of the facility's
former owner. While the Company believes that it will receive this temporary
authority followed by an operating permit, there can be no assurance that the
Company will in fact receive temporary authority to operate or an operating
permit for the transfer station. Denial of authority to operate or an operating
permit for the transfer station could result in significant additional costs to
the Company.

Pursuant to medical waste incinerator regulations adopted by the EPA in
1997, every state was required by September 1998 to adopt a plan to comply with
federal guidelines which, among other things, limit the release of specified
airborne pollutants from medical waste incinerators to levels prescribed by the
EPA. Each state's implementation plan must be at least as restrictive as the
federal emissions standards. If a state in which the Company operates an
incinerator adopts more stringent limits than the federal emissions standards,
the Company could incur significant costs to bring its incinerator into
compliance with the state's requirements. See "-- Governmental Regulation --
Federal Regulation -- Clean Air Act Regulations."

Subsequent to the issuance of the Company's original license for its
Woonsocket, Rhode Island treatment facility, the State of Rhode Island enacted
legislation that required the Company to obtain an additional license for its
regulated medical waste management operations. The Company has applied for but
has not yet received this additional license. Until regulatory action is taken
in respect of this additional license, the Company is permitted to continue to
operate under its current license. Denial of this additional license could
result in the Company being required to cease operations in Rhode Island and
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company's ETD treatment technology is an alternative to the
conventional treatment technologies of incineration and autoclaving and has not
been approved in all states for the treatment of regulated medical waste. The
Company has received permits or been granted legislative approval to operate its
ETD treatment technology in 15 states, with additional applications pending.
There can be no assurance, however, that the Company's treatment technology will
be approved for the treatment of regulated medical waste in each state or other
jurisdiction where the Company may seek regulatory approval in the future to
construct and operate a treatment facility. The Company's inability to obtain
any such regulatory approval could have a material adverse effect on the
Company's business, financial condition and results of operations.

Foreign Regulation

The Company presently conducts business in British Columbia, Canada, where
it collects regulated medical waste in the Vancouver area and transports it to
the Company's Morton, Washington, treatment

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<PAGE> 41

facility. The Company's activities in British Columbia are governed at the
federal level by the Canadian Transportation of Dangerous Goods Act, 1992, and
the Canadian Environmental Protection Act and at the provincial level by the
British Columbia Waste Management Act. The Canadian Environmental Protection Act
regulates, among other things, the trans-border movement of medical waste and
deals primarily with notification requirements. The federal Transportation of
Dangerous Goods Act, 1992, regulates the movement of dangerous goods, including
infectious substances and other "specified dangerous goods," by all modes of
transportation, and imposes joint and several liability on all persons who are
responsible for, or who caused or contributed to, among other things, the
release of any dangerous good into the environment. Any business engaged in a
regulated activity is presumed to be liable for any such release, unless the
business can demonstrate that it acted reasonably. The provincial Waste
Management Act regulates the storage, transportation and disposal of waste,
including biomedical waste, and imposes strict, joint and several liability for
all clean-up costs associated with remediation of contaminated sites. The
Company believes that it has obtained all permits required by these acts.

The Company's subsidiary, Med-Tech, operates in the Canadian provinces of
Quebec, Ontario, Alberta and British Columbia, and is subject to the same
federal Canadian regulation and to the same or comparable provincial regulation.
The Company believes that Med-Tech has obtained all necessary permits required
by relevant federal and provincial legislation.

There can be no assurance, however, that the Company or its subsidiary will
not be required in the future to pay for waste clean-up costs incurred under
Canadian environmental laws or will not incur additional operating or capital
costs required by changes to laws, regulations or permits.

The Company also conducts business in Mexico through its joint venture,
Medam, collects regulated medical waste and transports it for treatment to a new
facility close to Mexico City. Medical waste is regulated in Mexico as a
category of waste distinct from solid or "municipal" waste. Mexican regulations
have established collection schedules that are specific to the type and size of
generator. The Secretariat of the Environment, Natural Resources and Fisheries
is responsible for the enforcement of Mexico's regulated medical waste law. The
Company believes that its joint venture operations in Mexico are in compliance
with all applicable laws, rules and regulations affecting regulated medical
waste collection, transport, treatment and disposal. See "-- Growth
Strategy -- Expand Geographically."

If the Company expands its operations into other foreign jurisdictions, it
will be required to comply with the laws and regulations of each such
jurisdiction.

Permitting Process

Each state in which the Company currently operates, and each state in which
the Company may operate in the future, has a specific permitting process. After
the Company has identified a geographic area in which it wishes to locate a
treatment or transfer facility, the Company identifies one or more locations for
a potential new site. Typically, the Company will develop a site contingent on
obtaining zoning approval and local and state operating authority. Most
communities rely on state authorities to provide operating rules and safeguards
for their community. Usually the state provides public notice of the project
and, if a sufficient threshold of public interest is shown, a public hearing may
be held. If the Company is successful in meeting all regulatory requirements,
the state may issue a permit to construct the treatment facility or transfer
station. Once the facility is constructed, the state may again issue public
notice of its intent to issue an operating permit and provide an opportunity for
public opposition or other action that may impede the Company's ability to
construct or operate the planned facility. Permitting for transportation
operations frequently involves registration of vehicles, inspection of equipment
and background investigations on the Company's officers and directors.

The Company has been successful in obtaining permits for its current
regulated medical waste transfer, treatment and processing facilities and for
its transportation operations. Several of the Company's past attempts to
construct and operate regulated medical waste treatment facilities, however,
have met with significant community opposition. In some of these cases, the
Company has withdrawn from the permitting process.

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<PAGE> 42

POTENTIAL LIABILITY AND INSURANCE

The regulated medical waste management industry involves potentially
significant risks of statutory, contractual, tort and common law liability.
Potential liability could involve, for example, claims for clean-up costs,
personal injury or damage to the environment, claims of employees, customers or
third parties for personal injury or property damages occurring in the course of
the Company's operations, or claims alleging negligence or professional errors
or omissions in the planning or performance of work. The Company could also be
subject to fines or penalties in connection with violations of regulatory
requirements.

The Company carries $7,000,000 of liability insurance (including umbrella
coverage), which it considers sufficient to meet regulatory and customer
requirements and to protect the Company's employees, assets and operations. The
availability of liability insurance within the regulated medical waste industry
has been adversely affected by the constrained market for environmental
liability and other insurance. More aggressive enforcement of environmental and
management regulations, as well as legal decisions and judgments adverse to
companies exposed to pollution damage claims, could lead to a substantial
reduction in the availability and extent of insurance coverage. In the future,
insurance may be available only at significantly increased premiums with less
extensive coverage. If the Company is unable to obtain adequate insurance
coverage at a reasonable cost, it may become exposed to potential liability
claims. In this event, a successful claim of sufficient magnitude could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company's pollution liability insurance excludes liabilities under
CERCLA. There can be no assurance that the Company will not face claims under
CERCLA or similar state laws resulting in substantial liability for which the
Company is uninsured and which could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Potential Risk of Liability and Potential Unavailability of
Insurance."

PATENTS AND PROPRIETARY RIGHTS

The Company considers the protection of its technology relating to the
processing of regulated medical waste to be material to its business. The
Company's policy is to protect its technology by a variety of means, including
applying for patents in the United States and in appropriate foreign countries.

In November 1995, the Company entered into a cross-license agreement with
IIT Research Institute ("IITRI"). Under this agreement, IITRI granted to the
Company a royalty-free exclusive license in North America, portions of Europe
(including all 15 member countries of the European Union), Japan and other
industrialized countries throughout the world to use and commercialize certain
patent rights and know-how held by IITRI relating to the use of radio-frequency
technology in the treatment of medical waste, and the Company granted to IITRI a
royalty-free exclusive license in the remaining countries of the world to use
and commercialize certain corresponding patent rights and know-how held by the
Company. The agreement continues until the expiration of the last-to-expire of
any of the subject patents held by either IITRI or the Company.

An issued United States patent grants to the owner the right to exclude
others from making, using, offering to sell or selling within the United States
or importing into the United States the inventions claimed in the patent. In the
United States, a patent filed before June 8, 1995 is enforceable for 17 years
from the date of issuance or 20 years from the effective date of filing,
whichever is longer. Patents issued on applications filed on or after June 8,
1995 have a term which ends 20 years from the effective date of filing. The term
of the first-to-end of the Company's existing United States patents relating to
its ETD treatment process will end in

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<PAGE> 43

October 2009 at the earliest or in September 2010 at the latest, and the term of
the last-to-end of such patents will end in January 2015.

In addition, the Company has additional proprietary technology relating to
the processing of regulated medical waste and other health care waste that the
Company believes is patentable. The Company is evaluating the technology to
determine whether to file for patent protection for this technology in the
future.

There can be no assurance that any claims which are included in pending or
future patent applications will be issued, that any issued patents will provide
the Company with competitive advantages or will not be challenged by third
parties or that the existing or future patents of third parties will not have an
adverse effect on the ability of the Company to carry out its business. In
addition, there can be no assurance that other companies will not independently
develop similar processes or engineer around patents that may have been issued
to the Company. Litigation or administrative proceedings may be necessary to
enforce the patents issued to the Company or to determine the scope and validity
of others' proprietary rights. Any litigation or administrative proceeding could
result in substantial cost to the Company and distraction of the Company's
management. An adverse ruling in any litigation or administrative proceeding
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The commercial success of the Company will also depend in part upon the
Company's not infringing patents issued to third parties. There can be no
assurance that patents belonging to third parties will not require the Company
to alter its processes, pay licensing fees or cease development of its current
or future processes. Litigation or administrative proceedings may be necessary
to enforce the patents issued to the Company or to determine the scope and
validity of others' proprietary rights. Any litigation or administrative
proceeding could result in substantial cost to the Company and distraction of
the Company's management. An adverse ruling in any litigation or administrative
proceeding could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that the Company would be able to license the technology rights that
it may require at a reasonable cost or at all. Failure by the Company to obtain
a license to any technology that the Company currently uses to process regulated
medical waste would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, to determine the
priority of inventions or patent applications the Company may have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office or in proceedings before foreign agencies, any of which would
result in substantial costs to the Company and distraction of the Company's
management.

The Company also relies on unpatented and unregistered trade secrets,
trademarks, proprietary know-how and continuing technological innovation that it
seeks to protect, in part, by confidentiality agreements with its employees,
vendors and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any breach or
that the Company's trade secrets or know-how will not otherwise become known or
independently discovered by third parties.

EMPLOYEES

At September 30, 1998, the Company employed 551 full-time employees and, in
addition, 94 part-time employees engaged primarily in sales and marketing. At
September 30, 1998, 3CI and Med-Tech employed 213 and 66 full-time employees,
respectively.

Drivers and transportation helpers at the Company's New York City
facilities and drivers at Med-Tech's Montreal, Quebec facility are covered by
collective bargaining agreements between the Company and Med-

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<PAGE> 44

Tech, respectively, and the International Brotherhood of Teamsters. The
Company's production and maintenance employees at its Morton, Washington
facility were previously represented by the International Brotherhood of
Teamsters, AFL-CIO, but voted in April 1998 to decertify the union. None of the
Company's other employees is covered by a collective bargaining agreement. The
Company considers its employee relations generally to be satisfactory.

FACILITIES

The Company leases office space for its corporate offices in Lake Forest,
Illinois. The Company owns and operates ETD treatment facilities in Morton,
Washington and Yorkville, Wisconsin. It leases sites in Woonsocket, Rhode Island
and Loma Linda, California which it operates as ETD treatment facilities, and
leases or subleases treatment facilities using other technologies in Chandler,
Arizona, Baltimore, Maryland, Albuquerque, New Mexico and Terrell, Texas.

The Company leases transfer stations in: Anaheim, Los Angeles, San Leandro
and Valencia, California; Stickney, Illinois; Valparaiso, Indiana; Albuquerque,
New Mexico; New York, New York; Columbus and Middletown, Ohio; and El Paso,
Texas. In Prestonburg, Kentucky, Haverhill, Massachusetts and Vancouver, British
Columbia, the Company utilizes facilities owned by third parties licensed to
operate transfer stations. In addition, all of the Company's treatment
facilities are authorized to transfer regulated medical waste. The Company also
leases sales and customer service centers in: Middletown, Connecticut;
Deerfield, Illinois; Salem, New Hampshire; Garden City, New York; Charlotte,
North Carolina; and Kirkland, Washington. The Company also utilizes several
truck domiciles in Pennsylvania and Washington.

The Company's lease of its treatment facility at Woonsocket, Rhode Island
expires in June 2017 upon the maturity of the last to mature of the industrial
development revenue bonds which were issued to finance the acquisition and
equipping of the facility. The Company's leasehold interest in the facility and
the Company's machinery and equipment at the facility are pledged as collateral
to secure the Company's obligations in connection with these bonds. The Company
has an option to purchase the facility for $2,000 upon the repayment of all of
the bonds. The Company's machinery and equipment at its Yorkville, Wisconsin
treatment facility are leased under an equipment lease expiring in February 1999
and are pledged as collateral to secure the Company's obligations under the
lease. Substantially all of the Company's property and equipment provide
collateral for the Company's obligations under its revolving credit facility
with Silicon Valley Bank. The Company believes that its existing facilities are
generally adequate for its current needs.

The Company's subsidiary, Med-Tech, leases a treatment facility and sales
office in Brampton, Ontario; transfer stations and sales offices in Montreal,
Quebec and Haverhill, Massachusetts; and a truck domicile in Calgary, Alberta.

The Company's majority-owned subsidiary, 3CI, leases sales offices and
truck domiciles in Shreveport and Kenner, Louisiana; Carthage, Grand Prarie and
San Marcos, Texas; Birmingham, Alabama; and Bismark, Arkansas. 3CI owns sales
offices and truck domiciles in Springhill, Louisiana, Fresno, Texas and Jackson,
Mississippi, the latter two of which also serve as transfer stations. It owns
treatment facilities in Springhill, Louisiana and Birmingham, Alabama, and
operates an incinerator in Carthage, Texas.

LEGAL AND OTHER PROCEEDINGS

The Company operates in a highly regulated industry and is exposed to
regulatory inquiries or investigations from time to time. Investigations can be
initiated for a variety of reasons. The Company has been involved in several
legal and administrative proceedings that have been settled or otherwise
resolved on terms acceptable to the Company, without having a material adverse
effect on the Company's business, financial condition or results of operations.
From time to time, the Company may consider it more cost-effective to settle
such proceedings than to involve itself in costly and time-consuming
administrative actions or litigation. The Company is also a party to various
legal proceedings arising in the ordinary course of its business. The Company
believes that the resolution of these other matters will not have a material
adverse effect on the Company's business, financial condition or results of
operations.

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<PAGE> 45

As a result of the incident in Morton, Washington, the State of California
has recently requested NIOSH's assistance in conducting an assessment of health
and safety at the Company's Loma Linda treatment facility. While the Company
believes that it is currently in compliance with applicable health and safety
requirements, there can be no assurance that this assessment will not result in
the imposition of additional safety precautions requiring associated
expenditures.

In August 1995, the Company entered into a voluntary settlement with the
Rhode Island Department of Environmental Management ("RIDEM") pursuant to which,
without admitting liability, the Company agreed to pay $400,000 over a
seven-year period and to perform community services and conduct informational
seminars over a five-year period. The settlement arose from certain notices of
violation that RIDEM issued in September 1994 and April 1995 pursuant to which
RIDEM sought penalties of $3,356,000, claiming that the Company had violated
state medical waste and solid waste regulations by, among other things,
mishandling and improperly treating medical waste and endangering its employees'
health by failing to provide proper training and protective clothing. The
Company believes that it is currently in compliance with RIDEM's requirements.

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MANAGEMENT

THE EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY ARE AS FOLLOWS:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark C. Miller............................... 43 President, Chief Executive Officer and a
Director
Richard T. Kogler............................ 39 Chief Operating Officer
Anthony J. Tomasello......................... 52 Vice President, Operations
Linda D. Lee................................. 42 Vice President, Regulatory Affairs and Quality
Assurance
Frank J.M. ten Brink......................... 42 Vice President, Finance and Chief Financial
Officer
Michael J. Bernert........................... 45 Vice President, Eastern Region
Joel P. Wilson............................... 39 Vice President, Central Region
Jack W. Schuler.............................. 58 Chairman of the Board of Directors
Rod F. Dammeyer.............................. 58 Director
Patrick F. Graham............................ 58 Director
John Patience................................ 51 Director
Peter Vardy.................................. 68 Director
L. John Wilkerson, Ph.D. .................... 55 Director
</TABLE>

Mark C. Miller has served as President and Chief Executive Officer and a
director since joining the Company in May 1992. From May 1989 until he joined
the Company, Mr. Miller served as Vice President for the Pacific, Asia and
Africa in the International Division of Abbott Laboratories, which he joined in
1976 and where he held a number of management and marketing positions. He is a
director of Affiliated Research Centers, Inc., which provides clinical research
for pharmaceutical companies and is a director of Lake Forest Hospital. Mr.
Miller received a B.S. degree in computer science from Purdue University, where
he graduated Phi Beta Kappa.

Richard T. Kogler joined the Company as Chief Operating Officer in December
1998. From May 1995 through October 1998, Mr. Kogler was Vice President and
Chief Operating Officer of American Disposal Services, Inc., a solid waste
management company. From October 1984 through May 1995, Mr. Kogler served in a
variety of management positions with Waste Management, Inc. Mr. Kogler received
a B.A. degree in chemistry from St. Louis University.

Anthony J. Tomasello has served as the Company's Vice President, Operations
since August 1990. For eight years prior to joining the Company, Mr. Tomasello
was President and Chief Operating Officer of Pi Enterprises and Orbital Systems,
companies providing process and automation services. From 1980 to 1982, he
served as Vice President of Operations for Spang and Company, an operating
service firm specializing in resource recovery and recycling for manufacturing
and process industries. Mr. Tomasello received a B.S. degree in mechanical
engineering from the University of Pittsburgh.

Linda D. Lee has served as the Company's Vice President, Regulatory Affairs
and Quality Assurance since June 1990. She previously served as the Company's
Executive Director for Regulatory Compliance. Prior to joining the Company in
November 1989, she served for six years as Director of Environmental Health and
Safety for Medical Services at the University of Arkansas. Ms. Lee has served as
the chairperson of the American Hospital Association's Environmental Advocacy
Committee and on the American Society for Hospital Engineers' Safety Committee.
She has also served on a number of government committees, including the Arkansas
Governor's Task Force on Medical Waste, and has written several books and
articles on safety and waste disposal. Ms. Lee received a B.S. degree in
environmental health sciences from Indiana State University and a M.S. degree in
operations management from the University of Arkansas.

Frank J.M. ten Brink has served as the Company's Vice President, Finance
and Chief Financial Officer since June 1997. From 1991 until 1996 he served as
Chief Financial Officer of Hexacomb Corporation, and from 1996 until joining the
Company, he served as Chief Financial Officer of Telular Corporation. Prior to
1991, he held various financial management positions with Interlake Corporation
and Continental Bank of Illinois. Mr. ten Brink received a B.B.A. degree in
international business and a M.B.A. degree in finance from the University of
Oregon.

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<PAGE> 47

Michael J. Bernert has served as the Company's Vice President, Eastern
Region, with responsibility for sales and service in New England and portions of
the Midwest, since February 1992. Prior to joining the Company in 1992, he held
a series of management positions with Abbott Laboratories. Mr. Bernert received
a B.A. degree in economics from Brown University and a M.B.A. degree from the
University of Dallas.

Joel P. Wilson has served as the Company's Vice President, Central Region,
with responsibility for sales and service in portions of the Midwest and Texas,
since October 1997. Since joining the company in 1991, Mr. Wilson has held the
positions of Director of Engineering, General Manager of the Midwest Region,
General Manager of Operations and District Manager of Wisconsin. Prior to
joining Stericycle, he held several management positions with Orbital Systems
and Orbital Engineering. Mr. Wilson received a B.S. degree in civil engineering
from Brigham Young University.

Jack W. Schuler has served as Chairman of the Board of Directors of the
Company since January 1990. From January 1987 to August 1989, Mr. Schuler served
as President and Chief Operating Officer of Abbott Laboratories, a diversified
health care company, where he served as a director from April 1985 to August
1989. Mr. Schuler serves as a director of Chiron Corporation, Medtronic, Inc.
and Ventana Medical Systems, Inc. He is a co-founder of Crabtree Partners LLC, a
private investment firm in Deerfield, Illinois, which was formed in June 1995.
Mr. Schuler received a B.S. degree in mechanical engineering from Tufts
University and a M.B.A. degree from the Stanford University Graduate School of
Business Administration.

Rod F. Dammeyer has served as a director of the Company since January 1998.
He is the Managing Partner of Equity Group Corporate Investments and Vice
Chairman and a director of Anixter International, Inc., where he has been
employed since 1985. Mr. Dammeyer is a director of Antec Corporation, CNA Surety
Corporation, Grupo Azucarero Mexico, IMC Global, Inc., Jacor Communications,
Inc., Metal Management, Inc., TeleTech Holdings, Inc. and Transmedia Network,
Inc., and a trustee of Van Kampen American Capital, Inc. closed-end funds. He
received a B.S. degree from Kent State University and serves as a trustee of the
Kent State University Foundation.

Patrick F. Graham has served as a director of the Company since May 1991.
Mr. Graham is President and Chief Executive Officer and a director of World
Corporation and a director of Intelidata Technologies, Inc. He was a co-founder
of Bain & Company, Inc., a management consulting firm in Boston, Massachusetts,
where he served in a number of positions from 1973 to 1997. He received a B.A.
degree in economics from Knox College and a M.B.A. degree from the Stanford
University Graduate School of Business Administration.

John Patience has served as a director of the Company since its
incorporation in March 1989. He is a co-founder and partner of Crabtree Partners
LLC, a private investment firm in Deerfield, Illinois, which was formed in June
1995. From January 1988 to March 1995, Mr. Patience was an indirect general
partner of Marquette Venture Partners, L.P., a venture capital fund which he
co-founded and which participated in the Company's initial capitalization. Mr.
Patience is a director of TRO Learning, Inc. and Ventana Medical Systems, Inc.
He received B.A. and B.L degrees from the University of Sydney in Sydney,
Australia, and a M.B.A. degree from the Wharton School of Business of the
University of Pennsylvania.

Peter Vardy has served as a director of the Company since July 1990. He is
the Managing Director of Peter Vardy & Associates, an international
environmental consulting firm in Chicago, Illinois, which he founded in June
1990. From April 1973 to May 1990, Mr. Vardy served at Waste Management, Inc., a
waste management services company, where he was Vice President, Environmental
Management. He is a director of EMCON, which he co-founded in 1971. Mr. Vardy
received a B.S. degree in geological engineering from the University of Nevada.

L. John Wilkerson, Ph.D., has served as a director of the Company since
July 1992. He is Chief Executive Officer and a consultant to The Wilkerson
Group, a health care products consulting firm in New York, New York. Dr.
Wilkerson has served with The Wilkerson Group since 1980 and prior to its
acquisition by IBM Corporation was its Chairman. Dr. Wilkerson also serves as a
general partner of Galen Partners, L.P. and Galen Partners International, L.P.,
affiliated health care venture capital funds. He is a director of British
Biotech Plc. and several privately held health care companies. Dr. Wilkerson
received a B.S. degree in biological sciences from Utah State University and a
Ph.D. degree in managerial economics and marketing research from Cornell
University.
47
<PAGE> 48

CERTAIN TRANSACTIONS

In December 1998, the Company entered into a subordinated loan agreement
with a group of lenders consisting of six of the Company's seven directors
(Patrick F. Graham being the only director not participating) pursuant to which
the lenders agreed to provide the Company with up to $5,500,000 of short-term
financing upon the Company's request. Each loan bears interest at 6.0% per annum
and is due within 10 days after completion of this Offering. Under the terms of
the subordinated loan agreement, the lenders have been granted five-year
warrants to purchase shares of the Company's Common Stock exercisable at any
time after the first anniversary of the grant date. Upon entering into the loan
agreement, each lender was granted a warrant for a number of shares of Common
Stock equal to the amount of the lender's loan commitment multiplied by 0.05 and
then divided by the closing price of a share of Common Stock on the trading day
immediately prior to the date of the lender's execution of the loan agreement.
This closing price is also the exercise price of the warrant. In addition, at
the time of each loan, each lender was granted a warrant for a number of shares
of Common Stock equal to the amount of the loan multiplied by 0.30 and then
divided by the closing price of a share of Common Stock on the trading day
immediately prior to date of disbursement of the lender's loan. This closing
price is also the exercise price of the warrant. As of February 3, 1999, the
Company had borrowed the full $5,500,000 under the subordinated loan agreement
and had granted the lenders warrants to purchase, in the aggregate, 18,970
shares of Common Stock at $14.50 per share, 43,551 shares of Common Stock at
$15.50 per share and 63,637 shares of Common Stock at $16.50 per share. The
loans to the Company pursuant to the subordinated loan agreement are unsecured
and are subordinated to the Company's obligations under its credit facility with
LaSalle National Bank.

48
<PAGE> 49

DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, par value $.01 per share.

COMMON STOCK

As of September 30, 1998, there were 10,741,603 shares of Common Stock
outstanding, which were held of record by approximately 190 stockholders.

Holders of Common Stock are entitled to one vote per share on all matters
to be voted upon by the stockholders but do not have cumulative voting rights in
respect of the election of directors. Holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Company's Board of Directors out of legally available funds. In the event of
the liquidation, dissolution or winding up of the Company, holders of Common
Stock are entitled to share ratably in all of the assets of the Company
remaining after payment or provision for payment of the Company's liabilities.
Holders of Common Stock have no preemptive or other subscription rights to
purchase any securities of the Company, and there are no conversion rights or
redemption or sinking fund provisions in respect the Common Stock. All shares of
Common Stock to be outstanding upon completion of this Offering will be fully
paid and nonassessable.

WARRANTS

As of September 30, 1998, there were outstanding warrants to purchase
286,619 shares of Common Stock, all of which were then exercisable at a weighted
average exercise price of $8.21 per share. Of these outstanding warrants,
warrants for 6,773 shares of Common Stock, at an exercise price of $69.02 per
share, expire in March 1999; warrants for 53,810 shares of Common Stock, at an
exercise price of $1.59 per share, expire in July 2000, and warrants for 226,036
shares of Common Stock, at an exercise price of $7.96 per share, expire in May
2001. Holders of warrants to purchase 178,794 shares of Common Stock are subject
to 90-day lock-up agreements with the Managing Underwriters. See "Underwriting."

OPTIONS

As of September 30, 1998, options to purchase a total of 986,746 shares of
Common Stock were outstanding under the Company's stock option plans, of which
options for a total of 377,175 shares were then exercisable at a weighted
average exercise price of $4.81. Of the total options exercisable, options for
286,809 shares were held by executive officers and directors subject to 90-day
lock-up agreements with the Managing Underwriters. See "Underwriting."

REGISTRATION RIGHTS OF CERTAIN HOLDERS

Holders of certain shares of Common Stock (the "Registrable Shares") are
entitled to certain rights in respect of the registration of the Registrable
Shares under the Securities Act of 1933, as amended (the "Securities Act"). All
of the Registrable Shares are already freely tradeable without restriction
except for 1,055,302 Registrable Shares held by the Company's executive officers
and directors, which may be sold subject to the volume limitation and other
conditions of Rule 144. The Company is unable to determine the number of
Registrable Shares that are currently issued and outstanding because it is
unable to identify the beneficial owners of shares of Common Stock held in the
names of brokers and other nominees. The Company estimates that in addition to
the Registrable Shares held by the Company's executive officers and directors,
there may be as many as a further 1,600,000 Registrable Shares issued and
outstanding. Under the agreement by which registration rights were granted in
respect of the Registrable Shares, no registration rights may be exercised for a
period of 180 days after the date of this Offering without the prior written
consent of Warburg Dillon Read LLC on behalf of the Managing Underwriters. See
"Underwriting."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank.

49
<PAGE> 50

SHARES ELIGIBLE FOR FUTURE SALE

In addition, certain holders of Common Stock have registration rights in
respect of their shares. Under the registration agreement by which these
registration rights were granted, no registration rights may be exercised for a
period of 180 days after the date of this Offering without the prior written
consent of Warburg Dillon Read LLC on behalf of the Managing Underwriters. See
"Description of Capital Stock -- Registration Rights of Certain Holders."

50
<PAGE> 51

UNDERWRITING

The names of the Underwriters of the shares of Common Stock offered hereby
and the aggregate number of shares of Common Stock which each has severally
agreed to purchase from the Company, subject to the terms and conditions
specified in the Underwriting Agreement, are as follows:

<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Warburg Dillon Read LLC..................................... 875,000
BT Alex. Brown Incorporated................................. 875,000
Credit Suisse First Boston Corporation...................... 875,000
William Blair & Company, L.L.C. ............................ 875,000
---------
Total.................................................. 3,500,000
=========
</TABLE>

If any shares of Common Stock offered hereby are purchased by the
Underwriters, all such shares will be so purchased. The Underwriting Agreement
contains certain provisions whereby, if any Underwriter defaults in its
obligation to purchase such shares, and the aggregate obligations of the
Underwriters so defaulting do not exceed 10% of the shares offered hereby, the
remaining Underwriters, or some of them, must assume such obligations.

The Underwriters propose to offer the shares of Common Stock to the public
initially at the offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a concession not to exceed $0.47 per
share. The Underwriters may allow, and such dealers may reallow, a concession
not to exceed $0.10 per share on sales to certain other dealers. The offering of
the shares of Common Stock is made for delivery when, as and if accepted by the
Underwriters and subject to prior sale and withdrawal, cancellation or
modification of the offer without notice. The Underwriters reserve the right to
reject any order for the purchase of the shares. After the shares are released
for sale to the public, the public offering price, the concession and the
reallowance may be changed by the Underwriters.

The Company has granted to the Underwriters an option to purchase up to an
additional 525,000 shares of Common Stock at the offering price less the
underwriting discount set forth on the cover page of this Prospectus. Such
option is exercisable during the 30 days beginning on the date of the
Underwriting Agreement. The Underwriters may exercise such option only to cover
over-allotments made of the shares in connection with the Offering. To the
extent the Underwriters exercise this option, each of the Underwriters will be
obligated, subject to certain conditions, to purchase the number of additional
shares proportionate to such Underwriter's initial commitment.

The Company has agreed in the Underwriting Agreement to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.

The Company and each of its officers and directors have agreed prior to
this Offering not to offer, sell, contract to sell, grant any option to sell, or
otherwise dispose of, directly or indirectly, any shares of Common Stock, or
securities convertible into or exercisable or exchangeable for, any shares of
Common Stock or warrants or other rights to purchase shares of Common Stock, or
permit the registration of any shares of Common Stock for a period of 90 days
after the date of this Prospectus, without the prior consent of Warburg Dillon
Read LLC acting on behalf of the Underwriters (with the exception that, without
such consent, the Company may sell the shares of Common Stock offered hereby).

The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate cover transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Over-allotment involves syndicate sales in excess of the Offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the Underwriters
to reclaim a selling concession from a syndicate member when

51
<PAGE> 52

the Common Stock originally sold by the syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.

The Underwriters may engage in passive market making on the Nasdaq National
Market in accordance with Rule 103 of Regulation M under the Exchange Act during
the one-day period before the commencement of offers or sales of Common Stock.
The passive market making transactions must comply with applicable volume and
price limits and be identified as such. In general, a passive market maker must
display its bid at a price not in excess of the highest independent bid for such
security; if all independent bids are lowered before the passive market maker's
bid, however, such bid must then be lowered when certain purchase limits are
exceeded. Passive market making may stabilize the market price of the Common
Stock above independent market levels and, if commenced, may be discontinued at
any time.

The Underwriters do not expect to confirm sales to accounts over which they
exercise discretionary authority.

LEGAL MATTERS

Certain legal matters in connection with the Common Stock offered hereby
are being passed upon for the Company by Johnson and Colmar, Chicago, Illinois
and for the Underwriters by Cahill Gordon & Reindel (a partnership including a
professional corporation), New York, New York.

EXPERTS

The consolidated financial statements of Stericycle, Inc. and Subsidiaries
at December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997, appearing in this Prospectus and in the Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

The financial statements of Waste System, Inc. and Subsidiary at December
31, 1996 and 1997, and for each of the years then ended, appearing in this
Prospectus and in the Registration Statement have been audited by Heard McElroy
& Vestal, L.L.P., independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.

The financial statements of Med-Tech Environmental Limited at December 31,
1996 and 1997, and for each of the years then ended, appearing in this
Prospectus and in the Registration Statement have been audited by Collins
Barrow, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act, and in accordance with such requirements files reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"). The Company's filings can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the Commission's regional offices at 7
World Trade Center, Suite 1300, New York, New York 10048, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of this material can be obtained by mail from the Public Reference
Section of the Commission at 450 Fifth Street, N.W, Washington, D.C. 20549 at
prescribed rates. In addition, the Commission maintains a site on the World

52
<PAGE> 53

Wide Web at http://www.sec.gov, and copies of the reports, proxy statements and
other information that the Company has filed electronically may be accessed at
this Web site.

This Prospectus forms part of a Registration Statement on Form S-3 (the
"Registration Statement") which the Company has filed with the Commission under
the Securities Act. In accordance with the Commission's rules and regulations,
this Prospectus omits certain of the information in the Registration Statement
and all of its exhibits, and reference is made to the Registration Statement and
its exhibits for further information relating to the Company and the Common
Stock offered hereby. Copies of the Registration Statement and its exhibits may
be obtained from the Commission upon payment of the prescribed fee or may be
inspected without charge at the Commission's public reference facilities
described above. Statements in this Prospectus concerning the provisions of any
document are not necessarily complete, and each such statement is qualified in
its entirety by reference to the copy of the relevant document filed as an
exhibit to the Registration Statement.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents that the Company has filed with the Commission are
incorporated in this Prospectus by reference: (i) the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-21229); (ii)
the Company's Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, June 30 and September 30, 1998; and (iii) the description of the
Company's Common Stock contained in the Registration Statement on Form 8-A which
the Company filed on August 21, 1996; and (iv) the Company's Current Reports and
Current Reports (Amended) on Forms 8-K and 8-K/A filed on September 15, October
15, November 4 and December 14, 1998 and January 4 and 7, 1999.

All documents that the Company files with the Commission pursuant to
sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus but prior to the termination of the Offering to which this Prospectus
relates shall be deemed to be incorporated in this Prospectus by reference from
their respective dates of filing.

Any statement in a document incorporated or deemed to be incorporated in
this Prospectus by reference shall be deemed to be modified or superseded for
purposes of this Prospectus and the Registration Statement to the extent that a
statement in this Prospectus or the Registration Statement, or in any document
filed after the date of this Prospectus which is deemed to be incorporated in
this Prospectus by reference, modifies or supersedes such statement. Any
statement so modified or superseded shall be incorporated or deemed to be
incorporated in this Prospectus only as so modified or superseded.

The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, at his or her written or oral request, copies of
all or any of the documents that have been or may be incorporated in this
Prospectus by reference (excluding the exhibits to any such documents, however,
unless the exhibits are specifically incorporated in this Prospectus). Requests
for copies should be directed to Investor Relations, Stericycle, Inc., at the
Company's offices at 28161 North Keith Drive, Lake Forest, Illinois 60045
(telephone number: (847) 367-5910).

53
<PAGE> 54

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STERICYCLE, INC. AND SUBSIDIARIES
Report of Independent Auditors, Ernst & Young LLP........... F-2
Consolidated Balance Sheets at December 31, 1996 and 1997... F-3
Consolidated Statements of Operations for Each of the Years
in the Three-Year Period Ended December 31, 1997.......... F-4
Consolidated Statements of Cash Flows for Each of the Years
in the Three-Year Period Ended December 31, 1997.......... F-5
Consolidated Statements of Changes in Shareholders' Equity
for Each of the Years in the Three-Year Period Ended
December 31, 1997......................................... F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Balance Sheets at December 31, 1997
and September 30, 1998 (Unaudited)........................ F-20
Condensed Consolidated Statements of Operations for the Nine
Months Ended September 30, 1997 and 1998 (Unaudited)...... F-21
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1998 (Unaudited)...... F-22
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-23
WASTE SYSTEMS, INC. AND SUBSIDIARY
Independent Auditor's Report, Heard McElroy & Vestal LLP.... F-27
Consolidated Balance Sheets at December 31, 1997 and 1996... F-28
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996................................ F-29
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years Ended December 31, 1996 and 1997............ F-30
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996................................ F-31
Notes to Consolidated Financial Statements.................. F-32
Consolidated Balance Sheets at September 30, 1998 and 1997
(Unaudited)............................................... F-47
Consolidated Statements of Operations for the Nine Months
Ended September 30, 1998 and 1997 (Unaudited)............. F-48
Consolidated Statements of Shareholders' Equity (Deficit)
for the Nine Months Ended September 30, 1998 and 1997
(Unaudited)............................................... F-49
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 (Unaudited)............. F-50
Selected Information........................................ F-51
MED-TECH ENVIRONMENTAL LIMITED
Auditor's Report, Collins Barrow, Chartered Accountants..... F-53
Consolidated Balance Sheets at March 31, 1998 and 1997...... F-54
Consolidated Statements of Deficit for the Years Ended March
31, 1998 and 1997......................................... F-55
Consolidated Statements of Income for the Years Ended March
31, 1998 and 1997......................................... F-56
Consolidated Statements of Changes in Financial Position for
the Years Ended March 31, 1998 and 1997................... F-57
Notes to Consolidated Financial Statements.................. F-58
Consolidated Balance Sheets at June 30, 1998 and 1997
(Unaudited)............................................... F-65
Consolidated Statements of Income for the Three Months Ended
June 30, 1998 and 1997 (Unaudited)........................ F-66
Consolidated Statements of Changes in Financial Position for
the Three Months Ended June 30, 1998 and 1997
(Unaudited)............................................... F-67
Notes to Consolidated Financial Statements (Unaudited)...... F-68
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Consolidated Financial
Statements................................................ F-69
Unaudited Pro Forma Consolidated Statement of Operations for
the Year Ended December 31, 1997.......................... F-70
Unaudited Pro Forma Consolidated Statement of Operations for
the Nine Months Ended September 30, 1998.................. F-72
Unaudited Pro Forma Consolidated Balance Sheet at September
30, 1998.................................................. F-74
</TABLE>

F-1
<PAGE> 55

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Stericycle, Inc.

We have audited the accompanying consolidated balance sheets of Stericycle,
Inc. and Subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Stericycle, Inc. and Subsidiaries at December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.

ERNST & YOUNG LLP

Chicago, Illinois
March 6, 1998

F-2
<PAGE> 56

STERICYCLE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11,950 $ 5,374
Short-term investments.................................... 5,799 2,335
Accounts receivable, less allowance for doubtful accounts
of $178 in 1996 and $361 in 1997....................... 4,756 10,286
Parts and supplies........................................ 360 660
Prepaid expense........................................... 426 440
Other..................................................... 490 392
-------- --------
Total current assets................................. 23,781 19,487
-------- --------
Property, plant and equipment:
Land...................................................... 90 90
Buildings and improvements................................ 5,598 5,561
Machinery and equipment................................... 10,702 11,469
Office equipment and furniture............................ 463 746
Construction in progress.................................. 362 614
-------- --------
17,215 18,480
Less accumulated depreciation............................... (5,208) (7,239)
-------- --------
Property, plant and equipment, net................... 12,007 11,241
-------- --------
Other assets:
Goodwill, less accumulated amortization of $807 in 1996
and $2,040 in 1997..................................... 18,834 29,458
Other..................................................... 533 1,040
-------- --------
Total other assets................................... 19,367 30,498
-------- --------
Total assets......................................... $ 55,155 $ 61,226
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 3,215 $ 3,052
Accounts payable.......................................... 1,510 1,927
Accrued liabilities....................................... 3,769 7,039
Deferred revenue.......................................... 670 255
-------- --------
Total current liabilities............................ 9,164 12,273
-------- --------
Long-term debt:
Industrial development revenue bonds and other............ 1,986 1,405
Notes payable............................................. 2,605 2,070
-------- --------
Total long-term debt................................. 4,591 3,475
-------- --------
Other liabilities........................................... 1,386 452
Shareholders' equity:
Common stock (par value $.01 per share, 30,000,000 shares
authorized, 10,000,264 issued and outstanding in 1996,
10,472,799 issued and outstanding in 1997)............. 100 105
Additional paid-in capital................................ 79,409 82,986
Notes receivable for common stock purchases............... (4) (4)
Accumulated deficit....................................... (39,491) (38,061)
-------- --------
Total shareholders' equity........................... 40,014 45,026
-------- --------
Total liabilities and shareholders' equity........... $ 55,155 $ 61,226
======== ========
</TABLE>

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

F-3
<PAGE> 57

STERICYCLE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues.................................................... $21,339 $24,542 $46,166
Costs and expenses:
Cost of revenues.......................................... 17,478 19,423 34,109
Selling, general and administrative expenses.............. 8,137 7,556 10,671
------- ------- -------
Total costs and expenses............................... 25,615 26,979 44,780
------- ------- -------
Income (loss) from operations............................... (4,276) (2,437) 1,386
Other income (expense):
Interest income........................................... 9 421 618
Interest expense.......................................... (277) (373) (428)
------- ------- -------
Total other income (expense)........................... (268) 48 190
------- ------- -------
Income (loss) before income taxes........................... $(4,544) $(2,389) $ 1,576
Income tax expense.......................................... -- -- 146
------- ------- -------
Net income (loss)........................................... $(4,544) $(2,389) $ 1,430
======= ======= =======
Basic earnings per share:
Basic net income (loss) per share......................... $ (0.81) $ (0.32) $ 0.14
======= ======= =======
Diluted earnings per share (restated EPS for FAS 128 and SAB
98)
Diluted net income (loss) per share....................... $ (0.81) $ (0.32) $ 0.13
======= ======= =======
</TABLE>

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

F-4
<PAGE> 58

STERICYCLE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................... $(4,544) $(2,389) $ 1,430
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Depreciation and amortization.......................... 1,916 2,064 3,078
Settlement with regulatory agency...................... 273 -- --
Other, net............................................. 129 -- --
Changes in operating assets, net of effect of acquisitions
and divestitures:
Accounts receivable.................................... 866 (554) (4,123)
Parts and supplies..................................... 135 144 (300)
Prepaid expenses....................................... 196 (18) (14)
Other assets........................................... 128 (37) 98
Accounts payable....................................... 570 (428) (413)
Accrued liabilities.................................... (838) 1,178 559
Deferred revenue and other liabilities................. 298 97 (415)
------- ------- -------
Net cash (used in) provided by operating activities......... (871) 57 (100)
------- ------- -------
INVESTING ACTIVITIES:
Capital expenditures................................... (726) (995) (1,235)
Payments for acquisitions, net of cash acquired........ (459) (6,516) (5,552)
Proceeds from maturity of short-term investments....... -- -- 5,799
Purchases of short-term investments.................... -- (5,799) (2,335)
Proceeds from divestitures............................. 792 -- --
------- ------- -------
Net cash used in investing activities....................... (393) (13,310) (3,323)
------- ------- -------
FINANCING ACTIVITIES:
Net proceeds from (payments of) note payable to bank... 858 (858) --
Repayment of long-term debt............................ (171) (3,275) (2,905)
Principal payments on capital lease obligations........ (482) (397) (305)
Principal payments on notes receivable for common stock
purchases............................................ -- 60 --
Proceeds from long-term debt........................... -- 1,000 --
Proceeds from issuance of common stock................. 18 28,535 57
Other.................................................. (27) -- --
------- ------- -------
Net cash provided by (used in) financing activities......... 196 25,065 (3,153)
------- ------- -------
Net increase (decrease) in cash and cash and cash
equivalents............................................... (1,068) 11,812 (6,576)
Cash and cash equivalents at beginning of year.............. 1,026 138 11,950
------- ------- -------
Cash and cash equivalents at end of year.................... $ 138 $11,950 $ 5,374
======= ======= =======
Non-cash activities:
Issuance of common stock for certain acquisitions...... $ -- $ -- $ 3,525
Issuance of notes payable for certain acquisitions..... $ -- $ 6,497 $ 1,120
</TABLE>

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

F-5
<PAGE> 59

STERICYCLE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
COMMON STOCK

<TABLE>
<CAPTION>
ACCUMULATED
DIVIDENDS ON TOTAL
CONVERTIBLE NOTES SHAREHOLDERS
ISSUED AND ADDITIONAL REDEEMABLE RECEIVABLE FOR EQUITY
OUTSTANDING PAID-IN PREFERRED COMMON STOCK ACCUMULATED (NET CAPITAL
SHARES AMOUNT CAPITAL STOCK PURCHASES DEFICIT DEFICIENCY
----------- ------ ---------- ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER
31, 1994........... 370 $ 4 $ 811 $(13,001) $ (619) $(32,558) $(45,363)
Common stock issued
in exchange for
preferred stock.... 5,043 50 49,439 49,489
Issuance of common
stock.............. 350 3 3
Accumulated dividends
cancelled.......... 13,001 13,001
Notes receivable
cancelled.......... (181) (2) (629) 619 (12)
Net loss............. (4,544) (4,544)
------ ---- ------- -------- ------ -------- --------
BALANCES AT DECEMBER
31, 1995........... 5,582 $ 55 $49,621 $ -- $ -- $(37,102) $ 12,574
Initial public
offering of common
stock (net of
offering costs).... 3,450 36 27,586 27,621
Issuance of common
stock for exercise
of options and
warrants and
employee stock
purchases.......... 870 9 717 (64) 662
Note payable
exchanged for
common stock....... 98 1 1,485 1,486
Principal payments
under note
receivable......... 60 60
Net loss............. (2,389) (2,389)
------ ---- ------- -------- ------ -------- --------
BALANCES AT DECEMBER
31, 1996........... 10,000 $100 $79,409 $ -- $ (4) $(39,491) $ 40,014
Issuance of common
stock for exercise
of options and
warrants and
employee stock
purchases.......... 70 1 56 57
Common stock issued
for acquisitions... 403 4 3,521 3,525
Net income........... 1,430 1,430
------ ---- ------- -------- ------ -------- --------
BALANCES AT DECEMBER
31, 1997........... 10,473 $105 $82,986 $ -- $ (4) $(38,061) $ 45,026
====== ==== ======= ======== ====== ======== ========
</TABLE>

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

F-6
<PAGE> 60

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997

NOTE 1 -- DESCRIPTION OF BUSINESS

Stericycle, Inc. (the "Company") was incorporated in Delaware in March 1989
for the purpose of providing collection, transportation, treatment, disposal,
reduction, re-use and recycling services for regulated medical waste to
hospitals and other health care providers in the United States and Canada.

NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES

Principles of Consolidation:

The consolidated financial statements include the accounts of Stericycle,
Inc. and its wholly-owned subsidiaries, Stericycle of Arkansas, Inc., Stericycle
of Washington, Inc., SWD Acquisition Corporation and Environmental Control Co.,
Inc. All significant intercompany accounts and transactions have been
eliminated.

Revenue Recognition:

The Company recognizes revenue when the treatment of the regulated medical
waste is completed on-site or the waste is shipped off-site for processing and
disposal. For waste shipped off-site, all associated costs are recognized at
time of shipment.

Cash Equivalents and Short-Term Investments:

The Company considers all highly liquid instruments with a maturity of less
than three months when purchased to be cash equivalents. Short-term investments
consist of highly liquid investments in corporate debt obligations which mature
in less than one year and are classified as held-to-maturity since management
has the positive intent and ability to hold the securities to maturity. These
obligations are stated at amortized cost, which approximates fair market value.
Interest income is recognized as earned.

Property, Plant and Equipment:

Property, plant and equipment are stated at cost. Depreciation and
amortization, which include the depreciation of assets recorded under capital
leases, are computed using the straight-line method over the estimated useful
lives of the assets as follows:

Buildings and improvements -- 10 to 30 years

Machinery and equipment -- 3 to 10 years

Office equipment and furniture -- 5 to 10 years

Goodwill:

Goodwill is amortized using the straight-line method over 25 years.
Amortization expense for 1995, 1996 and 1997 related to goodwill was
approximately $320,000, $390,000 and $1,042,000, respectively. The Company
continually evaluates the value and future benefits of its goodwill. The Company
assesses recoverability from future operations using income from operations of
the related acquired business as a measure. Under this approach, the carrying
value of good-will would be reduced if it becomes probable that the Company's
best estimate for expected undiscounted future cash flows of the related
business would be less than the carrying amount of goodwill over its remaining
amortization period. For the three-year period ended December 31, 1997, there
were no adjustments to the carrying amounts of goodwill resulting from these
evaluations.

F-7
<PAGE> 61
STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
New Plant Development and Permitting Costs:

The Company expenses costs associated with the operations of new plants
prior to the commencement of services to customers and all initial and on-going
costs related to permitting.

Research and Development Costs:

The Company expenses costs associated with research and development as
incurred. Research and development expense for 1995, 1996 and 1997 was $975,000,
$194,000 and $281,000, respectively.

Income Taxes:

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax liabilities
and assets are determined based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.

Financial Instruments:

The Company's financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable and payable and long-term debt. The
fair values of these financial instruments were not materially different from
their carrying values. Financial instruments which potentially subject the
Company to concentrations of credit risk consist principally of accounts
receivable. Credit risk on trade receivables is minimized as a result of the
large size of the Company's customer base. No single customer represents greater
than 10% of total accounts receivable. The Company performs ongoing credit
evaluation of its customers and maintains allowances for potential credit
losses. These losses, when incurred, have been within the range of management's
expectations.

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.

Net Income (Loss) Per Common Share:

In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes the dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All net income (loss) per
common share amounts for all periods have been presented, and where appropriate,
restated to conform to FAS 128 requirements. In restating net income (loss) per
common share to comply with the requirements of FAS 128, the Company applied the
recently issued Staff Accounting Bulletin No. 98 ("SAB 98"). As a result of
applying the provisions of SAB 98, the Company has restated the 1995 and 1996
loss per share to exclude the antidilutive effect of options and warrants ranted
within one year of the Company's 1996 initial public offering.

F-8
<PAGE> 62
STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Impact of Recently Issued Accounting Standards:

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes
standards for reporting and display of comprehensive income and its components
in financial statements and is effective for fiscal years beginning after
December 15, 1997. The adoption of FAS 130 will have no impact on the Company's
financial position, results of operations, or cash flows.

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
("FAS 131"). FAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosure about products and services,
geographic areas and major customers. FAS 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. The Company is
evaluating the disclosure requirements of FAS 131 and has not determined whether
its adoption will have a material impact on its future disclosure requirements.

NOTE 3 -- INITIAL PUBLIC OFFERING

On August 28 and August 30, 1996 the Company successfully completed an
initial public offering of 3,450,000 shares of common stock at $9 per share. The
Company received total proceeds from the offering, net of offering costs, of
approximately $27,621,000.

NOTE 4 -- INCOME TAXES

The Company's deferred tax liabilities and assets as of December 31, 1996
and 1997 are as follows:

<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Capital lease obligations....................... $ (324,000) $ (461,000)
Property, plant and equipment................... (694,000) (509,000)
Goodwill........................................ (160,000) (228,000)
------------ ------------
Total deferred tax liabilities.................... (1,178,000) (1,198,000)
Deferred tax assets:
Accrued liabilities............................. 835,000 857,000
Research and development costs.................. 324,000 324,000
Other........................................... 198,000 195,000
Net operating tax loss carryforward............. 15,102,000 14,344,000
Alternative minimum tax credit carryforward..... -- 60,000
------------ ------------
Total deferred tax assets......................... 16,459,000 15,780,000
------------ ------------
Net deferred tax assets........................... 15,281,000 14,582,000
Valuation allowance............................... (15,281,000) (14,582,000)
------------ ------------
Net deferred tax assets........................... $ -- $ --
============ ============
</TABLE>

At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $36,000,000, which expire beginning
in 2004. Based on the Internal Revenue Code of 1986, as amended, and changes in
the ownership of the Company, utilization of the net operating loss
carryforwards are subject to annual limitations, which could significantly
restrict or partially eliminate the

F-9
<PAGE> 63
STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4 -- INCOME TAXES (CONTINUED)
utilization of the net operating losses. Additionally, the Company has an
alternative minimum tax credit carryforward of $60,000 available indefinitely.

Significant components of the Company's income tax expense for the year
ended December 31, 1997 are as follows:

<TABLE>
<S> <C>
Current
Federal................................................... $ 60,000
State..................................................... 86,000
--------
Total provisions............................................ $146,000
========
</TABLE>

A reconciliation of the income tax provision computed at the federal
statutory tax rate to the effective tax rate for the year ended December 31,
1997 is as follows:

<TABLE>
<S> <C>
Federal statutory income tax rate........................... 34.0%
Effect of:
State taxes, net of federal tax effect.................... 4.4
Alternative minimum taxes................................. 3.8
Non-deductible goodwill amortization...................... 4.5
Other..................................................... 1.7
Utilization of net operating loss carryforward............ (39.1)
-----
Effective tax rate.......................................... 9.3%
=====
</TABLE>

In 1997, the Company paid income tax of $58,300. No income taxes were paid
in 1996 and 1995. Additionally, the Company did not recognize any income tax
benefit for 1996 and 1995 due to the Company's recurring operating losses and
valuation allowances established for net deferred tax assets.

NOTE 5 -- ACQUISITIONS AND DIVESTITURES

In November 1997, the Company purchased the customer list and certain other
assets of Cal-Va, Inc. ("Cal-Va"), which operated a regulated medical waste
business in northern Virginia and Washington D.C. The purchase price was paid by
the issuance of shares of the Company's common stock and the assumption of
certain of Cal-Va's liabilities. The purchase price is to be adjusted in the
event that revenues fall below certain levels.

In November 1997, the Company purchased selected customer contracts of
Phoenix Services Inc. ("Phoenix"), which operated a regulated medical waste
business in the Baltimore, Maryland metropolitan area. The purchase price was
paid in cash (in January 1998) and by delivery of a $20,000 note due in
September 1998.

In August 1997, the Company purchased the customer list and certain other
assets of Envirotech Enterprises, Inc. which operated a regulated medical waste
business in Arizona. The purchase price was paid in cash and by delivery of a
$300,000 note due in August 1998. The purchase price is to be adjusted in the
event that acquired revenues fall below certain levels.

In June 1997, the Company purchased the customer list and certain other
assets of the regulated medical waste business of Waste Management, Inc. ("WMI")
in Wisconsin ("WMI-WI"). In July 1997, the Company announced the purchase of the
customer lists and certain other assets of the regulated medical waste
businesses of Regional Carting, Inc. and Rumpke Container Service, Inc. in New
Jersey and Ohio, respectively. The purchase price for these three acquisitions
was paid by a combination of cash, assumption of

F-10
<PAGE> 64
STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5 -- ACQUISITIONS AND DIVESTITURES (CONTINUED)
liabilities and issuance of shares of common stock of the Company and, in one
case, delivery of a note which was paid in December 1997. In the event that
acquired revenues for each of these three companies fall below certain levels,
the purchase price will be adjusted accordingly.

In May 1997, the Company announced the acquisition of all of the
outstanding stock of Environmental Control Co., Inc. ("ECCO"), one of the
leading medical waste companies in the New York City market. The Company paid
$4,200,000 in cash; issued 125,000 shares of stock, assumed debt on vehicles and
issued a $2,300,000 10-year promissory note for the balance of the purchase
price. The note bears interest at a rate of 6.86% per annum payable in 10 equal
annual installments of $230,000 starting in May, 1998. The ECCO purchase price
is subject to downward adjustments to reflect uncollectible acquired accounts
receivable, additional outstanding obligations not reflected in the purchase
price at closing, and the extent to which ECCO's revenues during the one-year
period following closing are less than a specified amount.

In December 1996, the Company purchased the customer lists, vehicles and
certain other assets of the major portion of WMI's medical waste business (the
"WMI Acquisition") for $5,450,000 cash and a note for $5,210,000. During the
quarter ended June 30, 1997, adjustments were made to the value of the vehicles
purchased and to the purchase price. The purchase price was decreased by
$756,000 as specified in the agreement, and the related goodwill and note
payable were adjusted accordingly. The Company finalized its estimate of the
value of the vehicles purchased and reduced the related note accordingly. In the
quarter ended December 31, 1997, the purchase price was decreased by $163,000 as
specified in the agreement, and the related goodwill was adjusted accordingly.
The Company paid $1,796,650 of the adjusted $3,593,301 balance of the note to
WMI in December 1997. The balance plus accrued interest is due in December 1998.

In May 1996, the Company purchased the customer list and certain other
assets of Doctors Environmental Control, Inc. for $400,000 in cash and notes
payable issued for $600,000, which are payable on May 1, 1998 with an interest
rate of 6% per annum. In addition, the Company assumed vehicle leases totaling
$77,000, which were paid off in May 1996, and delivered option agreements to
shareholders of the seller giving them an option to purchase up to a total of
53,816 shares of the Company's common stock. The price for the purchase of the
common stock upon exercise of each option was the surrender and cancellation of
the note payable. The options were exercised in August 1996.

In April 1996, the Company purchased the customer list and certain other
assets of Sharps Incinerator of Fort, Inc. for $757,000 in cash of which
$562,000 was payable at closing and the balance plus interest was paid in
November 1996.

In January 1996, the Company purchased the customer lists and certain other
assets of WMI Medical Services of New England, Inc. for $100,000 in cash and
$492,000 in notes payable issued to the seller. The notes bear interest at a
rate of 7.5% per annum with $150,000 plus interest paid in 1996, $157,000 plus
interest paid in 1997 and $185,000 plus interest paid in January 1998.

In July 1995, the Company sold selected customer lists and related assets
for $248,000. The Company recognized a gain of $50,000 on this transaction,
which is included in selling, general and administrative expense in the 1995
Consolidated Statement of Operations.

In June 1995 the Company purchased the customer list and transportation
equipment and assumed certain contract obligations of Safetech Health Care for
$160,000.

In April 1995, the Company sold the St. Louis portion of its business to a
competitor. The Company received $544,000 as payment for the customer list and
concurrently agreed to resolve an antitrust lawsuit brought against this
competitor by the Company. The Company recognized a gain on this transaction of
$408,000, which is included in selling, general and administrative expense in
the 1995 Consolidated Statement of Operations.

F-11
<PAGE> 65
STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5 -- ACQUISITIONS AND DIVESTITURES (CONTINUED)
For financial reporting purposes these acquisition transactions were
accounted for using the purchase method of accounting. The total purchase price
for 1995, 1996 and 1997 of $459,000, $13,013,000 and $10,197,000, respectively,
net of cash acquired, was allocated to assets acquired and liabilities assumed
based on their estimated fair market value at the date of acquisition. The total
purchase price for 1997 acquisitions includes the value of 403,000 shares of
common stock issued to the sellers. The excess of the purchase price over the
fair market value of the net assets acquired is reflected in the accompanying
Consolidated Balance Sheets as goodwill. The results of operations of these
acquired businesses are included in the Consolidated Statement of Operations
from the date of the acquisition. The effect of these acquisitions would not
have a significant effect on the Company's operations, except for the WMI
Acquisition and the ECCO acquisition.

The following unaudited pro forma results of operations assumes that the
WMI Acquisition occurred as of January 1, 1995 and that the ECCO acquisition
occurred as of January 1, 1996, after giving effect to certain adjustments
including amortization of goodwill, increased interest expense on debt incurred
in connection with the acquisitions and adjustments to record incremental
recurring costs associated with the consolidation of the operations as the
historical results of operations of WMI and ECCO did not reflect these costs:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Pro forma revenues.............................. $36,839 $46,619 $48,181
Pro forma net income (loss)..................... (4,270) (1,575) 1,576
Pro forma diluted net income (loss) per share... $ (0.76) $ (0.21) $ 0.15
</TABLE>

The pro forma financial information does not purport to be indicative of
the results of operations that would have occurred had the transactions taken
place at the beginning of the periods indicated or of future results of
operations.

NOTE 6 -- LONG-TERM DEBT

Long-term debt consists of the following at December 31:

<TABLE>
<CAPTION>
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Industrial development revenue bonds........................ $1,492 $1,358
Obligations under capital leases............................ 517 212
Note payable to bank........................................ -- --
Notes payable............................................... 5,797 4,957
------ ------
7,806 6,527
Less: Current portion....................................... 3,215 3,052
------ ------
Total.................................................. $4,591 $3,475
====== ======
</TABLE>

In March 1998, the Company entered into a new revolving line of credit with
Silicon Valley Bank. To secure this line of credit, the Company granted the bank
a lien on all of the Company's assets. Borrowings under the line of credit are
limited to the lesser of $7,500,000 or a specific percentage of the Company's
eligible receivables, as defined in the loan and security agreement. Outstanding
borrowings bear interest at the bank's prime rate plus 0.50% or LIBOR plus 3.0%,
at the Company's option. This agreement has a maturity date of March 5, 1999.
Under the terms of the loan and security agreement, the Company is among other
things, restricted from paying dividends and is required to maintain minimum
levels of total liabilities to net

F-12
<PAGE> 66
STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6 -- LONG-TERM DEBT (CONTINUED)
worth, quick ratio and profitability. The Company had no borrowings under its
prior $2,500,000 line of credit with the bank as of December 31, 1997.

In connection with the Company's May 1997 purchase of ECCO's stock, a
10-year note for $2,300,000 was issued to the owners of ECCO. The note is
payable in 10 equal annual installments due on May 1 of each year starting in
1998. The note bears interest at the rate of 6.86% per annum.

In connection with the Company's December 1996 purchase of WMI's medical
waste business, a note payable totaling $5,210,000 was issued to WMI. The note
was adjusted to $3,593,301, of which $1,796,650 was repaid in 1997 and
$1,796,651 is due on December 20, 1998. The note bears interest at a rate of 7%
per annum.

In 1995, an agreement was reached with the Rhode Island Department of
Environmental Management regarding two notices of violation issued in 1994 and
1995. Although the Company believed that the allegations were meritless, the
agreement was entered into in order to resolve the matter in the best interest
of the Company and its customers in a timely manner. The Company agreed to pay
$35,000 each year from 1995 to 1998, $50,000 in 1999, $60,000 in 2000 and
$150,000 in 2001 to the Rhode Island Air and Water Protection Fund. In addition,
the Company agreed to perform community services and conduct seminars over a
five-year period. The Company recorded this obligation based on the discounted
cash flows expected to be paid over the term of agreement, using a discount rate
of 11.75%. The recorded obligation of $222,000 at December 31, 1997 has been
included in notes payable. An expense of $458,000 is included in the 1995
Consolidated Statement of Operations as a selling, general and administrative
expense. This amount reflects the recorded obligation and legal fees incurred in
the settlement.

In 1994, a non-interest bearing note in the amount of $2,480,000 was issued
as part of the purchase of the net assets of Safe Way Disposal Systems, Inc. As
a result of the Company's initial public offering in August 1996, a portion of
the note was converted into 98,001 shares of common stock and the remainder was
paid in cash.

During 1992, the Company entered into an obligation to finance the
development of its Woonsocket, Rhode Island facility. The development and
purchase of substantially all of the property and equipment for the Woonsocket,
Rhode Island facility was financed from the issuance of industrial development
revenue bonds. The bonds are due in various amounts through 2017 at fixed
interest rates ranging from 6.0% to 7.375% and are collateralized by the
property and equipment at the Woonsocket, Rhode Island facility. The terms of an
agreement entered into in connection with the issuance of the bonds contain,
among other provisions, requirements for maintaining defined levels of working
capital and various financial ratios including debt to net worth.

Payments due on long-term debt, excluding capital lease obligations, during
each of the five years subsequent to December 31, 1997 are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................................ $2,840
1999........................................................ 430
2000........................................................ 445
2001........................................................ 545
2002........................................................ 410
</TABLE>

The Company paid interest of $262,000, $352,000 and $444,000 for the fiscal
years ended December 31, 1995, 1996 and 1997, respectively.

F-13
<PAGE> 67
STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6 -- LONG-TERM DEBT (CONTINUED)
Capital Leases:

In February 1994, the Company entered into a sale leaseback transaction for
equipment acquisitions at its Yorkville, Wisconsin facility in the amount of
$882,000. The lease arrangement has a term of 60 months and at the end of the
lease, the Company will have the option to renew the lease, return the equipment
or purchase the equipment at a fair market value not to exceed 11% of the
original purchase price. In January 1996, the Company entered into a capital
lease obligation of $364,000 for equipment. The lease expires in 1998.

At December 31, property under capital leases included with property, plant
and equipment in the accompanying Consolidated Balance Sheet is as follows:

<TABLE>
<CAPTION>
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment..................................... $1,246 $1,246
Less -- accumulated depreciation and amortization........... 293 418
------ ------
$ 953 $ 828
====== ======
</TABLE>

Minimum future lease payments under capital leases are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................................ $ 218
1999........................................................ --
-----
Total minimum lease payments................................ 218
Less -- Amounts representing interest....................... (6)
-----
Present value of net minimum lease payments................. 212
Less--Current portion....................................... (212)
-----
Long-term obligations under capital leases.................. $ --
=====
</TABLE>

NOTE 7 -- LEASE COMMITMENTS

The Company leases various plant equipment, office furniture and equipment,
motor vehicles and office and warehouse space under operating lease agreements
which expire at various dates over the next six years. The leases for most of
the properties contain renewal provisions.

Rent expense for 1995, 1996 and 1997 was $1,739,000, $2,462,000 and
$3,284,000 respectively.

Minimum future rental payments under non-cancelable operating leases that
have initial or remaining terms in excess of one year as of December 31, 1997
for each of the next five years and in the aggregate are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................................ $ 4,222
1999........................................................ 3,642
2000........................................................ 2,168
2001........................................................ 954
2002........................................................ 393
Thereafter.................................................. 105
-------
Total minimum rental payments............................... $11,484
=======
</TABLE>

F-14
<PAGE> 68
STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8 -- COMMON AND PREFERRED STOCK

In August 1995, the Board of Directors adopted a plan of recapitalization
which was approved by the Company's stockholders in September 1995, pursuant to
which the Company reclassified its outstanding convertible redeemable preferred
stock as common stock. As part of the plan of recapitalization, all conversion,
redemption and liquidation rights associated with the convertible redeemable
preferred stock were terminated in exchange for the issuance of shares of common
stock.

Shares of the Company's common stock have been reserved for issuance upon
the exercise of options and warrants. Also see Note 10. These shares have been
reserved as follows at December 31, 1997:

<TABLE>
<S> <C>
1993 Plan options........................................... 4,938
1995 Plan options........................................... 383,060
1996 Directors Plan options................................. 106,170
1997 Plan options........................................... 351,693
Warrants.................................................... 301,683
---------
Total shares reserved....................................... 1,147,544
=========
</TABLE>

NOTE 9 -- NET INCOME (LOSS) PER COMMON SHARE

The following table sets forth the computation of net income (loss) per
common share (in thousands, except for share and per share data):

<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net income (loss)........................................ $ (4,544) $ (2,389) $ 1,430
Denominator:
Denominator for basic earnings per
share -- weighted-average shares...................... 5,582,385 7,471,151 10,239,996
Effect of dilutive securities:
Employee stock options................................... -- -- 441,586
Warrants................................................. -- -- 84,534
--------- --------- ----------
Dilutive potential common shares......................... -- -- 526,120
--------- --------- ----------
Denominator for diluted earnings per share -- adjusted
weighted-average shares and assumed conversions.......... 5,582,385 7,471,151 10,766,116
========= ========= ==========
Basic earnings per common share............................ $ (0.81) $ (0.32) $ 0.14
========= ========= ==========
Diluted earnings per common share.......................... $ (0.81) $ (0.32) $ 0.13
========= ========= ==========
</TABLE>

For additional information regarding outstanding employee stock options and
outstanding warrants, see Note 10.

Options and warrants to purchase 1,170,626 and 838,849 shares of common
stock were outstanding during 1995 and 1996, respectively, at exercise prices
ranging from $.53-$69.02 and $.53-$69.02, respectively, but were not included in
the computation of diluted earnings per common share in these years because the
Company had net losses in 1995 and 1996 and the effect would be antidilutive.

F-15
<PAGE> 69
STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- STOCK OPTIONS AND WARRANTS

Stock Options:

In September 1993, the Company's shareholders approved an amended and
restated stock option plan (the "1993 Plan"), which provided for the granting of
options to purchase up to 113,018 shares of common stock. In November 1995, the
outstanding options of all current employees were canceled in conjunction with
the Company's recapitalization.

In 1995, the Company's Board of Directors and shareholders approved an
incentive compensation plan (the "1995 Plan"), which as amended and restated in
1996, provides for the granting of 1,500,000 shares of common stock in the form
of stock options and restricted stock to employees, officers, directors and
consultants of the Company. The exercise price of options granted under the 1995
Plan must be at least equal to the fair market value of the common stock on the
date of grant. In 1995, the Board of Directors authorized the grant to officers
and employees of options to purchase 923,292 shares of the Company's common
stock at an exercise price of $.53 per share. In 1996, the Board of Directors
authorized the grant to officers and employees of options to purchase 229,883
shares of the Company's common stock at exercise prices ranging from $.53 to
$2.12 per share. All options granted to date have 10-year terms and vest over
periods of up to four years after the date of grant.

In 1997, the Company's Board of Directors and shareholders approved the
1997 Stock Option Plan (the "1997 Plan"), which provides for the granting of
1,500,000 shares of common stock in the form of stock options to selected
officers, directors and employees of the Company and its subsidiaries. The
exercise price of options granted under the 1997 Plan must be at least equal to
the fair market value of the common stock on the date of grant. In 1997, the
Board of Directors authorized the grant to officers and employees of options to
purchase 376,367 shares of the Company's common stock at exercise prices ranging
from $7.25 to $9.50 per share. All options granted to date have 10-year terms
and vest over periods of up to 5 years after the date of grant.

In June 1996, the Company's Board of Directors adopted and in July, 1996,
the Company's stockholders approved, the Directors Stock Option Plan. The plan
authorizes stock options for a total of 285,000 shares of common stock to be
granted to eligible directors of the Company, consisting of directors who are
neither officers nor employees of the Company. Each of the six incumbent
eligible directors automatically received an option as of the date of closing of
the Company's initial public offering for 8,195 shares of common stock with an
exercise price of $10.25. As of each annual meeting of the Company's
stockholders, each incumbent eligible director who is re-elected as a director
at the annual meeting automatically receives an option grant based on a
predetermined formula. The exercise price of each option will be the closing
price on the date of grant. In 1997, each of the six incumbent eligible
directors automatically received an option as of the date of the 1997 annual
meeting for 9,500 shares of common stock with an exercise price of $7.50. The
term of each option is six years from the date of grant, and each option vests
in 16 equal quarterly installments and may be exercised only when it is vested
and only while the holder of the option remains a director of the Company or
during the 90-day period following the date that he or she ceases to serve as a
director.

F-16
<PAGE> 70
STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of stock option information follows:

<TABLE>
<CAPTION>
1995 1996 1997
-------------------- --------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year............................ 109,729 $8.56 933,235 $0.62 537,166 $1.93
Granted......................... 923,292 0.53 279,053 3.20 433,367 7.97
Exercised....................... -- 0.00 (660,767) 0.59 (83,006) 0.70
Canceled/Forfeited.............. (99,786) 8.56 (14,355) 3.42 (41,666) 5.38
------- ----- -------- ----- --------- -----
Outstanding at end of year........ 933,235 $0.62 537,166 $1.93 845,861 $4.98
======= ===== ======== ===== ========= =====
Exercisable at end of year........ 542,620 $0.60 315,273 $0.81 326,119 $1.53
Available for future grant........ 576,708 592,004 1,700,303
</TABLE>

Options outstanding and exercisable as of December 31, 1997 by price range:

<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICE SHARES LIFE IN YEARS PRICE SHARES PRICE
----------------------- ------ ------------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
$.53-$1.99................................. 383,060 8.09 $1.04 298,693 $0.79
$7.25-$10.25............................... 462,801 9.27 $8.23 27,426 $9.54
------- -------
845,861 326,119
======= =======
</TABLE>

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 options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 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 approximates the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.

Pro forma information regarding net income (loss) and net income (loss) per
share is required by FAS 123 as if the Company has accounted for its employee
stock options granted subsequent to December 31, 1994 under the fair value
method of that statement. Options granted in 1997 were valued using the Black-
Scholes option pricing model. Options granted in 1996 and 1995, as a non-public
company, were valued using the minimum value method. The following assumptions
were used in 1995, 1996, and 1997: risk-free interest rates ranging from 5.5% to
5.7% in 1995, 5.1% to 6.7% in 1996 and 5.9% to 6.8% in 1997; a dividend yield of
0%; and a weighted-average expected life of the option of 31 months in 1995 and
1996 and 72 months in 1997. The weighted-average fair values of options granted
during 1995, 1996 and 1997 were $.09 per share, $.79 per share and $4.48 per
share, respectively.

Option value models require the input of highly subjective assumptions.
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 method does not necessarily provide a reliable single
measure of the fair value of its employee stock options.

F-17
<PAGE> 71
STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- STOCK OPTIONS AND WARRANTS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting period. The Company's
pro forma information follows (in thousands, except for per share information):

<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss)................................. $(4,559) $(2,474) $1,112
Pro forma diluted net income (loss) per share............... $ (0.82) $ (0.33) $ 0.10
</TABLE>

The pro forma effect for 1995, 1996, and 1997 is not representative of the
pro forma effect in future years as the pro forma disclosures reflect only the
fair value of stock options granted subsequent to December 31, 1994.

Warrants:

The Company, in conjunction with a lease financing agreement, issued the
lessor warrants to purchase up to 15,064 shares of common stock at $18.58 per
share. At December 31, 1997, all of these warrants were outstanding. They expire
in March 1998.

The Company, in connection with the issuance of preferred stock, which was
subsequently reclassified as common stock, issued warrants to purchase up to
6,773 shares of common stock at an exercise price of $69.02 per share. At
December 31, 1997, all of these warrants were outstanding. They expire in March
1999.

During 1995, several of the Company's shareholders and directors provided a
bridge loan to the Company. The loan totaled $830,000 with interest at the prime
rate plus 3% and was repaid. In addition to the interest, the lenders received
warrants to purchase 220,559 shares of common stock at $1.59 per share. These
warrants expire on July 31, 2000. In 1996, the lenders exercised warrants to
purchase 166,749 shares. At December 31, 1997, warrants to purchase 53,810
shares of common stock remained outstanding.

In May 1996, the Company obtained a $1,000,000 bridge loan from certain
shareholders, directors and officers to provide working capital and to finance
acquisitions. The bridge loan was repaid in August 1996. In connection with this
loan, the Company issued warrants to members of the lending group to purchase an
aggregate of 226,036 shares of common stock at $7.96 per share. The warrants
expire in May 2001. At December 31, 1997, all of these warrants were
outstanding.

NOTE 11 -- EMPLOYEE STOCK PURCHASE PLAN

Under a plan for 1997 approved by the Board of Directors, employees of
Stericycle can purchase shares of common stock at a market price. Under the
terms of the plan, employees were allowed to purchase shares throughout the year
and pay for the stock through salary deduction. Employees elected to purchase a
total of 5,235 shares under this plan during 1997.

NOTE 12 -- REGISTRATION AGREEMENT

The Company is a party to a registration agreement which gives certain
shareholders of the Company registration rights for their shares. The parties to
the registration agreement are the original holders of the Company's prior Class
A, B, C, D, E, F, H and I preferred stock and a holder of a warrant to purchase
up to 15,064 shares of common stock which the Company issued in conjunction with
a lease financing agreement. After the Company's 1995 recapitalization, the
registration agreement was amended to provide that the registration rights
applied to the shares of common stock that the parties to the registration
agreement received pursuant to the recapitalization, shares issuable under
certain warrants issued to purchasers of the Company's prior Class F preferred
stock, shares issuable under the warrant issued in conjunction with the

F-18
<PAGE> 72
STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12 -- REGISTRATION AGREEMENT (CONTINUED)
lease financing agreement and the common stock to be delivered by the Company in
payment of a note delivered in connection with the Safe Way acquisition, for a
total of 5,227,608 shares. According to the registration agreement (i) at any
time, the holders of a majority of the shares which are subject to the
registration rights can request registration of their shares on Form S-1 (a
"Long-Form Registration") and the holders of at least 25% of these shares can
request registration of their shares on Form S-2 or S-3, (ii) at any time, one
shareholder who is a party to the registration agreement may request a Long Form
registration, (iii) at any time, another shareholder who is a party to the
registration agreement can request a Long Form registration, and (iv) the
parties to the registration agreement have the right to include their shares in
any registration which is requested or in any other registration that the
Company may otherwise undertake. If any registration is requested, the Company
will use its best efforts to effect the requested registration at its own
expense.

NOTE 13 -- EMPLOYEE BENEFIT PLAN

The Company has a 401(k) defined contribution retirement savings plan
covering substantially all employees of the Company. Each participant may elect
to defer a portion of his or her compensation subject to certain limitations.
The Company may match up to 30% of the first $1,000 contributed to the plan by
each employee. The Company's contributions for the years ended December 31,
1995, 1996 and 1997 were approximately $14,000, $14,000 and $25,000,
respectively.

NOTE 14 -- RELATED PARTIES

In February 1998, the Company announced the formation of an international
joint venture company called Medam S.A. de C.V. ("Medam"), which will utilize
Stericycle's proprietary Electro-Thermal Deactivation (ETD) technology to treat
medical and infectious waste in the Mexico City market. Stericycle's partners in
the joint venture are Controladora Ambiental S.A. de C.V., headquartered in
Mexico City, and Pennoni Associates, Inc., headquartered in Philadelphia,
Pennsylvania. The Company owns 24.5% of the common stock of Medam. During 1997,
the Company received partial payments for machinery to be delivered to Medam in
1998. At December 31, 1997 the Company has made $461,000 in capital
contributions. Capital contributions will be approximately $702,000 in 1998.

In October 1993, the Company entered into an alliance agreement (the
"Alliance") with an investor in the Company. The purpose of the Alliance was to
develop new technologies and procedures for recycling regulated medical waste.
The Company devoted resources to the Alliance research and development program
during the first 18 months of the Alliance. The investor has rights with respect
to the development of any Alliance technology as part of the research and
development program. During the initial 18 months of the Alliance, the Company
provided for $1 million of research and development costs under this agreement.
A license agreement is effective upon the non-renewal of the Alliance and grants
the investor a license to use the Alliance technology subject to certain
conditions. The initial term of the Alliance Agreement ends on October 12, 1998,
and will be automatically renewed for successive one-year terms thereafter,
unless either party notifies the other at least six months prior to the end of
any term of its intent to terminate the Agreement.

Under the Alliance, the investor and the Company have an ongoing
relationship to provide services and products to the health care market place.

F-19
<PAGE> 73

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,374 $ 775
Short-term investments.................................... 2,335 2,335
Accounts receivable, less allowance for doubtful accounts
of $325 in 1998 and $361 in 1997........................ 10,286 10,902
Parts and supplies........................................ 660 1,037
Prepaid expenses.......................................... 440 528
Other..................................................... 392 2,087
------- -------
Total current assets.................................. 19,487 17,664
------- -------
Property, plant and equipment:
Land...................................................... 90 90
Buildings and improvements................................ 5,561 5,753
Machinery and equipment................................... 11,469 13,051
Office equipment and furniture............................ 746 1,030
Construction in progress.................................. 614 988
------- -------
18,480 20,912
Less accumulated depreciation............................... (7,239) (8,869)
------- -------
Property, plant and equipment, net.................... 11,241 12,043
------- -------
Other assets:
Goodwill, less accumulated amortization of $3,052 in 1998
and $2,040 in 1997...................................... 29,458 36,796
Other..................................................... 1,040 1,680
------- -------
Total other assets.................................... 30,498 38,476
------- -------
Total assets....................................... $61,226 $68,183
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 3,052 $ 6,281
Accounts payable.......................................... 1,927 1,986
Accrued liabilities....................................... 7,039 5,436
Deferred revenue.......................................... 255 663
------- -------
Total current liabilities............................. 12,273 14,366
------- -------
Long-term debt:
Industrial development revenue bonds and other............ 1,405 1,341
Notes payable............................................. 2,070 1,905
------- -------
Total long-term debt.................................. 3,475 3,246
------- -------
Other liabilities........................................... 452 21
Shareholders' equity:
Common stock (par value $.01 per share, 30,000,000 shares
authorized, 10,741,603 issued and outstanding in 1998,
10,472,799 issued and outstanding in 1997).............. 105 107
Additional paid-in capital................................ 82,986 85,087
Notes receivable for common stock purchases............... (4) (4)
Accumulated deficit....................................... (38,061) (34,640)
------- -------
Total shareholders' equity............................ 45,026 50,550
------- -------
Total liabilities and shareholders' equity......... $61,226 $68,183
======= =======
</TABLE>

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

F-20
<PAGE> 74

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1998
---- ----
<S> <C> <C>
Revenues.................................................... $ 33,475 $ 44,759
Costs and expenses:
Cost of revenues.......................................... 25,113 30,492
Selling, general and administrative expenses.............. 7,725 10,151
---------- ----------
Total costs and expenses............................... 32,838 40,643
---------- ----------
Income from operations...................................... 637 4,116
Other income (expense):
Interest income........................................... 528 308
Other income.............................................. -- 20
Interest expense.......................................... (336) (242)
---------- ----------
Total other income (expense)........................... 192 86
---------- ----------
Income before income taxes.................................. 829 4,202
Income tax expense.......................................... 18 781
---------- ----------
Net income.................................................. $ 811 $ 3,421
========== ==========
Earnings per share:
Basic..................................................... $ 0.08 $ 0.32
========== ==========
Diluted................................................... $ 0.08 $ 0.30
========== ==========
Weighted average number of common shares outstanding:
Basic..................................................... 9,999,026 10,579,886
========== ==========
Diluted................................................... 10,480,182 11,233,812
========== ==========
</TABLE>

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

F-21
<PAGE> 75

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------
1997 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 811 $ 3,421
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 2,489 2,694
Changes in operating assets, net of effect of acquisitions:
Accounts receivable....................................... (4,315) (541)
Parts and supplies........................................ (109) (365)
Prepaid expenses.......................................... 246 (88)
Other assets.............................................. 35 (1,632)
Accounts payable.......................................... (546) 59
Accrued liabilities....................................... 2,106 (2,179)
Deferred revenue.......................................... (181) (23)
------- -------
Net cash provided by operating activities................... 536 1,346
------- -------
INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired........... (5,704) (7,130)
Proceeds from maturity of short-term investments.......... 5,799 --
Purchases of short-term investments....................... (2,335) --
Capital expenditures...................................... (1,124) (1,825)
------- -------
Net cash used in investing activities....................... (3,364) (8,955)
------- -------
FINANCING ACTIVITIES:
Proceeds from line of credit.............................. -- 4,075
Repayment of long term debt............................... (936) (1,244)
Principal payments on capital lease obligations........... (246) (116)
Principal payments on notes receivable for common stock
purchases.............................................. 4 --
Proceeds from issuance of common stock.................... 37 295
------- -------
Net cash (used in) provided by financing activities......... (1,141) 3,010
------- -------
Net decrease in cash and cash equivalents................... (3,969) (4,599)
Cash and cash equivalents at beginning of period............ 11,950 5,374
------- -------
Cash and cash equivalents at end of period.................. $ 7,981 $ 775
======= =======
Non-cash activities:
Issuance of common stock for certain acquisitions......... $ 2,796 $ 1,807
Issuance of notes payable for certain acquisitions........ $ 2,737 $ 195
</TABLE>

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

F-22
<PAGE> 76

STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998

NOTE 1 -- BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in annual consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations; but the Company believes that
the disclosures in the accompanying condensed consolidated financial statements
are adequate to make the information presented not misleading. In the opinion of
management, all adjustments necessary for a fair presentation for the periods
presented have been reflected and are of a normal recurring nature. These
condensed consolidated financial statements should be read in conjunction with
the Consolidated Financial Statements and notes thereto for the three years
ended December 31, 1997. The results of operations for the nine months ended
September 30, 1998 are not necessarily indicative of the results that may be
achieved for the entire year ending December 31, 1998.

NOTE 2 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes
standards for reporting and display of comprehensive income and its components
in financial statements and was effective for the Company beginning January 1,
1998. The adoption of FAS 130 has had no impact on the Company's financial
position, results of operations, or cash flows.

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information'
("FAS 131"). FAS 131 establishes standards for reporting information about
operating segments in annual financial statements and requires reporting
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosure
about products and services, geographic areas and major customers. FAS 131 is
effective for the Company's annual financial statements for the year ended
December 31, 1998. The Company is evaluating the disclosure requirements of FAS
131 and has not determined whether its adoption will have a material impact on
its future disclosure requirements.

NOTE 3 -- ACQUISITIONS

In February 1998, the Company acquired selected small quantity generator
contracts of Bridgeview, Inc., located in Pennsylvania, and in April 1998, the
Company acquired the customer contracts and selected other assets of Medisin
Inc., located in eastern Kentucky. In June 1998, the Company acquired the
customer contracts and selected other assets of Mediwaste Disposal Services
LLC., Controlled Medical Disposal, Inc., and Arizona Hazardous Waste Disposal,
located in Texas, New Jersey and Arizona, respectively, and selected customer
contracts and other assets of Superior of Wisconsin, Inc., located in Wisconsin.

In July 1998, the Company acquired the customer contracts and selected
other assets of Regional Recycling, Inc. ("Regional"), and Allegro Carting and
Recycling, Inc. ("Allegro"), operating in New Jersey and the New York City
metropolitan market, respectively. In August 1998, the Company acquired the
F-23
<PAGE> 77
STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1998

NOTE 3 -- ACQUISITIONS (CONTINUED)
customer contracts and selected other assets of the affiliated Medical
Compliance Services, Inc., a Texas corporation, and Medical Compliance Services,
Inc., a New Mexico corporation (together, "MCS"), operating in western Texas and
New Mexico, respectively, and also agreed to purchase MCS's treatment facility
and equipment in Albuquerque, New Mexico.

The combined purchase price for these nine acquisitions of approximately
$9,347,000 (exclusive of the $1,250,000 purchase price of MCS's Albuquerque
treatment facility and equipment, the closing of the Company's purchase of which
is not expected to occur until 1999) was paid by a combination of cash,
promissory notes, the issuance of common stock (and, in one case, the
forgiveness of indebtedness).

NOTE 4 -- SALES OF EQUIPMENT TO JOINT VENTURE

During the nine months ended September 30, 1998, the Company sold equipment
utilizing the Company's Electro-Thermal-Deactivation ("ETD") technology to a
Mexican joint venture company, Medam S.A. de C.V. The Company holds a 24.5%
interest in the joint venture. Revenues of $1,202,000 have been recognized in
the condensed consolidated statement of operations for the nine months ended
September 30, 1998.

In July 1998, the Company entered into an agreement to supply and license
its ETD technology to Companhia Auxiliar de Viacao e Obras -- CAVO of Sao Paulo,
Brazil. The Company agreed to supply the ETD equipment and license technology
and to provide engineering, installation, training, and start up services.
Revenues of $2,600,000 have been recognized in the condensed consolidated
statement of operations for the nine months ended September 30, 1998.

NOTE 5 -- STOCK OPTIONS

During the nine months ended September 30, 1998, options to purchase a
total of 281,868 shares of common stock were granted to employees. These options
will vest ratably over a five-year period and have an average exercise price of
approximately $13.75 per share. The grant of options was made under the
Company's 1997 Stock Option Plan, which authorized the grant of options for a
total of 1,500,000 shares of the Company's common stock. The 1997 Stock Option
Plan was approved by the Company's stockholders in April 1997.

During the nine months ended September 30, 1998, options to purchase common
stock totaling 63,870 shares were granted to the Company's directors. These
options will vest ratably over a one-year period and have an exercise price of
$14.14 per share. The grant of options was made under the Company's Directors
Stock Option Plan, which authorized the grant of options for a total of 285,000
shares of the Company's common stock. The Directors Stock Option Plan was
approved by the Company's stockholders in April 1996.

NOTE 6 -- STOCK ISSUANCES

During the nine months ended September 30, 1998, options to purchase a
total of 138,131 shares of common stock were exercised at prices ranging from
$0.53-$14.00 per share. The Company also issued 130,673 shares of common stock
in connection with certain acquisitions.

NOTE 7 -- INCOME TAXES

Prior to 1997, the Company had generated net operating losses for income
tax purposes. Any benefit resulting from these net operating losses has been
offset by a valuation allowance. Annual utilization of the Company's net
operating loss carryforward is limited by Internal Revenue Code Section 382. The
Company's

F-24
<PAGE> 78
STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1998

NOTE 7 -- INCOME TAXES (CONTINUED)
1998 income tax expense reflects federal taxable income expected in excess of
the Section 382 limitation and income taxes in states where the Company has no
offsetting net operating losses. The Company's 1997 income tax expense reflects
the federal alternative minimum tax and income taxes in states where the Company
has no offsetting net operating losses. For the nine month periods ended
September 30, 1998 and 1997, utilization of the Company's net operating loss
carryforward reduced the Company's income tax expense by $900,000 and $314,000,
respectively.

NOTE 8 -- SUBSEQUENT EVENTS

Waste Systems, Inc. Acquisition

In October 1998, the Company acquired all of the outstanding capital stock
of Waste Systems, Inc. ("WSI"), from WSI's two stockholders, both German limited
liability partnerships. The purchase price was (i) $10,000,000 in cash and (ii)
the grant of certain exclusive negotiation and first refusal rights to the WSI
stockholders in respect of the purchase, for installation and operation in the
Federal Republic of Germany, of medical waste treatment units incorporating the
Company's proprietary ETD technology.

WSI owns a majority of the common stock and all of the preferred stock of
3CI Complete Compliance Corporation ("3CI"). 3CI is engaged in the regulated
medical waste management business in the southwestern and southeastern United
States, including Alabama, Arkansas, Georgia, Florida, Louisiana, Missouri,
Kansas, Mississippi, Oklahoma, Tennessee and Texas. 3CI's common stock is traded
on the Nasdaq SmallCap Market under the symbol "TCCC."

WSI owns 5,104,448 shares of 3CI's common stock, par value $.01 per share,
representing 52.2% of the 9,778,825 shares of 3CI common stock that were
outstanding as of August 14, 1998 (according to 3CI's quarterly report on Form
10-Q for the quarter ended June 30, 1998). In addition, WSI owns all of 3CI's
outstanding preferred stock, consisting of 7,000,000 shares of 3CI's preferred
stock designated as Series B Preferred Stock and 750,000 shares of 3CI's
preferred Stock designated as Series C Preferred Stock. WSI also owns a secured
promissory note from 3CI which, as amended in December 1998, is payable to WSI
in the principal amount of approximately $6,237,000 on or before September 30,
1999.

Med-Tech Environmental Acquisition

In October 1998, the Company purchased the junior secured indebtedness of
Med-Tech Environmental Limited ("Med-Tech") of approximately $3,576,000 from a
Canadian private investment company. The Company paid the face value of the
acquired debt, in the form of $2,920,000 in cash and 36,940 shares of
unregistered common stock, and replaced a letter of credit of approximately
$1,641,000 that the junior lender had provided to Med-Tech's primary lender.

Med-Tech is a privately held company in Toronto, Canada providing medical
waste management services in Canada and the northeastern United States. It
operates in the provinces of Alberta, British Columbia, Ontario and Quebec and
the states of Connecticut, Massachusetts, Maine, New Hampshire, New York, Rhode
Island and Vermont.

In December 1998 and January 1999, the Company purchased a total of
14,004,860 shares of Med-Tech's common stock, representing all of Med-Tech's
outstanding stock, and a total of 5,319,559 warrants, representing approximately
93% of Med-Tech's outstanding warrants. The Company's purchases were pursuant to
its amended offers to all holders of Med-Tech shares and to holders of certain
series of Med-Tech warrants to purchase Med-Tech shares at the price of Canadian
$0.3225 per share, payable in cash or shares of the Company's common stock at
the option of the holder, and to purchase eligible Med-Tech warrants at the

F-25
<PAGE> 79
STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1998

NOTE 8 -- SUBSEQUENT EVENTS (CONTINUED)
price of Canadian $.025 per warrant, payable in cash. The Company paid a total
of approximately U.S. $3,059,000 in cash for the Med-Tech shares and warrants
that it acquired.

The Med-Tech shares that the Company purchased include the shares that the
Company previously announced that it had acquired in October 1998. In accordance
with a decision of the Ontario Securities Commission in November 1998,
requiring, among other things, that the Company and Browning-Ferris Industries,
Inc. amend their then-current offers to Med-Tech shareholders in order to comply
with the formal take-over bid requirements of Ontario law, the Company granted
to the sellers of these shares the right to withdraw their shares or to obtain
the same terms of payment as other Med-Tech shareholders.

New $25,000,000 Credit Facility

In October 1998, the Company established a new $25,000,000 credit facility
at LaSalle National Bank in Chicago, Illinois under a credit agreement entered
into by the Company, its subsidiaries, and LaSalle National Bank, for itself and
as agent for other lenders who may participate in the credit agreement. This new
credit facility replaced the Company's previous credit facility with Silicon
Valley Bank. As amended, the new credit facility provides for a five-year
$5,000,000 revolving line of credit for working capital purposes and a one-year
$20,000,000 revolving line of credit for acquisition purposes. Upon the maturity
of this latter line of credit, the outstanding balance, if any, will convert
into a four-year term loan repayable in 16 equal quarterly payments of
principal. If the principal amount of the term loan upon conversion is less than
$15,000,000, however, a further one-year line of credit in the amount of the
difference will be available for acquisition purposes, and upon the maturity of
this further line of credit, the outstanding balance, if any, will convert into
a three-year term loan repayable in 12 equal quarterly payments of principal.

The Company's borrowings bear interest at either the Bank's prime rate plus
0.25% or an adjusted LIBOR rate as the Company elects at the time of each
borrowing. Interest is payable quarterly (or at the end of the interest period,
if the Company selects an interest period of less than three months in the case
of a borrowing bearing interest at the adjusted LIBOR rate). As security for the
Company's borrowings, the Company granted the Bank a security interest in all of
the Company's tangible and intangible assets and pledged all of the capital
stock of its subsidiaries, and the Company's subsidiaries granted the bank a
security interest in all of their respective assets.

As of December 31, 1998, the Company's outstanding indebtedness under its
new credit facility was approximately $16,389,000. The Company's indebtedness
was incurred in connection with (i) the repayment of Silicon Valley Bank under
the Company's previous credit facility , (ii) the Company's purchase of the
outstanding common stock of WSI and (iii) the Company's purchase of the junior
secured indebtedness and approximately 94% of the outstanding common stock of
Med-Tech and (iv) a loan to WSI to fund a loan by it to 3CI.

Sale of Recycling Facility

In October 1998, the Company sold its facility in West Memphis, Arkansas
for $425,000, relocating its recycling and research and development operations
to another facility.

F-26
<PAGE> 80

INDEPENDENT AUDITOR'S REPORT

To the Stockholders
Waste Systems, Inc.

We have audited the accompanying consolidated balance sheets of Waste
Systems, Inc. and Subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity (deficit) 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 consolidated 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 audits to obtain
reasonable assurance about whether the consolidated 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 consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Waste Systems, Inc. and Subsidiary as of December 31, 1997 and 1996 and the
results of its consolidated operations and cash flows for the years then ended,
in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Notes 1 and 13 to the consolidated financial statements, the Company (i) has
suffered recurring losses from operations, (ii) has a negative working capital,
(iii) has suffered recurring negative cash flow from operating activities and
(iv) is involved in legal proceedings, all of which collectively raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Notes 1 and 13. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

HEARD MCELROY & VESTAL LLP

Shreveport, Louisiana
November 4, 1998

F-27
<PAGE> 81

WASTE SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 44 $ 32
Restricted cash........................................... -- 130
Accounts receivable, net of allowance for doubtful
accounts of $875,144 and $990,994...................... 3,559 3,753
Inventory................................................. 72 59
Other current assets...................................... 441 233
------- --------
Total current assets................................. 4,116 4,207
Property, plant and equipment, at cost...................... 10,927 11,396
Less -- accumulated depreciation............................ (2,477) (2,933)
------- --------
Net property, plant and equipment.................... 8,450 8,463
Excess of cost over net assets acquired, net of accumulated
amortization of $74,988 and $49,888....................... 362 387
Other intangible assets, net of accumulated amortization of
$149,104 and $74,552...................................... 274 350
Other assets................................................ 25 48
------- --------
Total assets......................................... $13,227 $ 13,455
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdrafts........................................... $ 157 $ 34
Notes payable............................................. 217 212
Notes payable-revolving line of credit.................... -- 12,785
Current portion of long-term debt, unaffiliated lenders... 1,374 1,314
Accounts payable.......................................... 1,069 2,288
Accrued liabilities....................................... 2,189 2,501
Notes payable-stockholders................................ -- 3,851
------- --------
Total current liabilities............................ 5,006 22,985
Long-term debt unaffiliated lenders, net of current
portion................................................... 986 742
------- --------
Total liabilities.................................... 5,992 23,727
Accrued stock put option (565,500 shares of 3CI common stock
at $3.00 per share)....................................... -- 1,697
Shareholders' equity (deficit):
Common stock, no par value, 100 shares authorized, issued
and outstanding........................................... 500 500
Additional paid-in capital.................................. 31,596 11,152
Accumulated deficit......................................... (24,861) (23,621)
------- --------
Total shareholders' equity (deficit)................. 7,235 (11,969)
------- --------
Total liabilities and shareholders' equity
(deficit)........................................... $13,227 $ 13,455
======= ========
</TABLE>

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

F-28
<PAGE> 82

WASTE SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Revenues.................................................... $ 18,790 $ 17,748
Expenses:
Cost of services.......................................... 14,286 13,815
Depreciation.............................................. 1,171 1,304
Write-off of intangibles -- Note 12....................... -- 11,385
Write-off of fixed assets -- Note 3....................... -- 1,184
Selling, general and administrative....................... 3,784 5,496
-------- ---------
Total expenses....................................... 19,241 33,184
-------- ---------
Net loss from operations.................................... (451) (15,436)
Other income (expense):
Interest expense.......................................... (855) (1,444)
-------- ---------
Loss before income taxes and accretion of stock put......... $ (1,306) $ (16,880)
Income taxes................................................ -- --
Accretion of stock put...................................... -- (26)
-------- ---------
Loss before minority interest in loss of subsidiary......... (1,306) (16,906)
Minority interest in loss of subsidiary..................... 66 6,040
-------- ---------
Net loss.................................................... $ (1,240) $ (10,866)
======== =========
Weighted average shares outstanding......................... 100 100
======== =========
Loss per common share....................................... $(12,400) $(108,660)
======== =========
</TABLE>

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

F-29
<PAGE> 83

WASTE SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Common stock:
Balance at beginning of period............................ $ 500 $ 500
Additional shares issued (retired)........................ -- --
-------- --------
Balance at end of period.................................. $ 500 $ 500
Additional paid-in capital:
Balance at beginning of period............................ $ 11,152 $ 11,152
Conversion of stockholder debt and other liabilities to
additional paid-in capital............................. 5,507 --
Stockholder contributions to additional paid-in capital... 14,937 --
-------- --------
Balance at end of period.................................. $ 31,596 $ 11,152
Accumulated deficit:
Balance at beginning of period............................ $(23,621) $(12,755)
Net loss.................................................. (1,240) (10,866)
-------- --------
Balance at end of period.................................. $(24,861) $(23,621)
-------- --------
Total stockholders' equity (deficit)................... $ 7,235 $(11,969)
======== ========
</TABLE>

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

F-30
<PAGE> 84

WASTE SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (1,240) $(10,866)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
(Gain) on disposal of fixed and intangible assets...... (24) --
Depreciation and amortization.......................... 1,375 2,249
Accretion of stock put................................. -- 26
Write-off of impaired intangible assets................ -- 11,385
Write-off of fixed assets.............................. -- 1,183
(Increase) decrease in restricted cash................. 130 (30)
(Increase) decrease in net accounts receivable......... 194 (783)
(Increase) decrease in inventory....................... (13) 31
(Increase) in prepaid expenses......................... (207) (5)
(Increase) decrease in other current assets............ 92 126
Increase (decrease) in accounts payable................ (869) 777
Increase in accounts payable, affiliated companies..... 72 12
(Decrease) in accrued liabilities...................... (193) (110)
Gain on foreign currency transaction................... (31) (138)
Minority interest in loss of subsidiary................ (66) (6,040)
-------- --------
Total adjustments.................................... 460 8,683
-------- --------
Net cash (used in) operating activities.............. (780) (2,183)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment....... 249 62
Purchase of property, plant and equipment................. (1,417) (1,680)
-------- --------
Net cash (used in) investing activities.............. (1,168) (1,618)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in bank overdrafts............................... 122 34
Proceeds from issuance of notes payable................... 1,019 522
Principal reduction of notes payable...................... (1,013) (536)
Reduction of put option................................... (861) --
Proceeds from issuance of long-term debt, unaffiliated
lenders................................................ 931 1,222
Reduction of long-term debt, unaffiliated lenders......... (1,444) (2,638)
Proceeds from issuance of note payable to majority
shareholders........................................... 1,054 5,126
Repayment of revolving line of credit..................... (12,785) --
Contributed capital....................................... 14,937 --
-------- --------
Net cash provided by financing activities............ 1,960 3,730
-------- --------
Net increase (decrease) in cash and cash equivalents........ 12 (71)
Cash and cash equivalents, beginning of period.............. 32 103
-------- --------
Cash and cash equivalents, end of period.................... $ 44 $ 32
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for :
Interest............................................... $ 671 $ 960
======== ========
Taxes................................................ $ -- $ --
======== ========
NONCASH TRANSACTIONS:
Conversion of stockholder debt and other liabilities to
additional paid-in capital............................. $ 5,507 $ --
======== ========
</TABLE>

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

F-31
<PAGE> 85
WASTE SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying financial statements present the consolidated accounts of
Waste Systems, Inc. ("WSI" or "Company") and its majority-owned subsidiary, 3CI
Complete Compliance Corporation ("3CI" or "Subsidiary"). WSI was owned by a
group of German corporate investors and has a year ending on December 31. 3CI's
year ends on September 30. The consolidated financial statements include the
accounts for the respective year-ends. All significant intercompany accounts and
transactions have been eliminated in consolidation. 3CI has suffered recurring
net losses. Such losses have exceeded the minority interest's equity capital.
Under generally accepted accounting principles, such excess losses are charged
against the majority interest. If the losses reverse in later years, the
majority interest will be credited with the amount of minority interest losses
previously absorbed before credit is made to the minority interests.

Organization and Basis of Presentation

3CI, a Delaware corporation, is publicly held and is engaged in the
collection, transportation and incineration of biomedical waste in the
southeastern and southwestern United States. In February 1994, subsidiaries of
3CI acquired all the assets and business operations of American Medical
Transports Corporation ("AMTC"), an Oklahoma corporation, and A/MED, Inc.
("A/MED"), a Delaware corporation. Both AMTC and A/MED were engaged in
businesses similar to that of 3CI. Waste Systems, Inc. (WSI), a Delaware
corporation, was the majority shareholder of both AMTC and A/MED (the
"Companies"). Additionally, in February 1994, WSI purchased 1,255,182 shares of
3CI common stock ("Common Stock") from American Medical Technologies ("AMOT").

As a result of the transactions described above, WSI became the majority
shareholder of 3CI immediately following the acquisition of AMTC and A/MED. For
accounting purposes, AMTC and A/MED were considered the acquirer in a reverse
acquisition. The combined financial statements of AMTC and A/MED are the
historical financial statements of 3CI for periods prior to the date of the
business acquisition. Historical combined shareholders' equity of AMTC and A/MED
has been retroactively restated for the equivalent number of 3CI shares received
for the assets and business operations of AMTC and A/MED, and the combined
accumulated deficit of AMTC and A/MED has been carried forward.

In October 1992, Medical Environmental Disposal, Inc., a wholly-owned
subsidiary of WSI was merged with and into AMTC, with AMTC being the surviving
corporation.

Predecessor to 3CI

Prior to the merger with AMTC and A/MED, 3CI was a majority owned
subsidiary of AMOT. In September 1991, AMOT purchased the business and assets
and assumed certain liabilities of 3CI and 3CI Transportation Systems
Corporation (the "Predecessor Companies"), both existing Texas corporations that
had been in the medical waste disposal business since 1989 and 1990,
respectively. 3CI began operations when AMOT contributed substantially all the
net assets and business operations of the Predecessor Companies to 3CI. In April
1992, 3CI completed an initial public offering of Common Stock whereby 800,000
shares were sold by 3CI and 580,000 shares were sold by AMOT.

Substantial Doubt Regarding Ability to Continue as a Going Concern

The Subsidiary has consistently suffered losses for the past several fiscal
years, and losses have continued in fiscal 1998. As of September 30, 1997, the
Subsidiary had a working capital deficit of $6,135,666. The Subsidiary has
historically relied on WSI, the Subsidiary's majority stockholder, for funding,
and such support was again necessary in fiscal 1997. In the absence of the
Subsidiary being able to secure third party financing,
F-32
<PAGE> 86
WASTE SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
WSI agreed to provide the Subsidiary with a revolving credit facility of $8
million under a Promissory Note dated September 30, 1995, which provides for
deferred interest with cash advances not to exceed $7.4 million, of which $4.8
million including deferred interest, and $4.9 million including deferred
interest, has been drawn as of September 30, 1997, and December 31, 1997. During
the fiscal year ended September 30, 1996, WSI made additional cash advances that
were in excess of the principal in the original Promissory Note, and 3CI entered
into a second Revolving Credit Facility of $2.7 million including deferred
interest, dated December 20, 1996 with a maturity date of February 28, 1997. It
was the intent of WSI and 3CI that this Revolving Promissory Note evidence all
sums owing by 3CI to WSI to the extent that such sums represent advances of
funds to 3CI in excess of the maximum limits fixed under that certain $8,000,000
Revolving Promissory Note dated September 30, 1995. The Promissory Note dated
September 30, 1995 had a due date of December 31, 1996 of which 3CI requested
from and received an extension to discuss with WSI the possibility of
restructuring the terms of such Promissory Note. In February 1997, 3CI received
a letter from the Nasdaq Stock Market, Inc. regarding 3CI's failure to meet
listing requirements. These requirements include maintaining a minimum capital
and surplus of at least $1,000,000 and a minimum bid price of $1.00. While 3CI
remained out of compliance with these requirements, the Nasdaq Stock Market,
Inc. allowed 3CI to remain listed with an exception added to its trading symbol.
The Nasdaq Stock Market, Inc. gave 3CI until June 25, 1997, to meet the listing
requirements. In June 1997, WSI converted $7,000,000 of debt into 1,000,000
shares of 3CI preferred stock. This conversion allowed 3CI to meet the listing
requirements of the Nasdaq Stock Market, Inc. On June 26, 1997, the Nasdaq Stock
Market, Inc. informed 3CI that it had been found to be in compliance with all
requirements necessary for continued listing on the exchange, and the exception
to its trading symbol had been removed. In connection with the conversion of
debt to preferred stock, WSI canceled the Revolving Credit Facility of $2.7
million dated December 20, 1996, with a maturity date of February 28, 1997,
which had been previously extended to June 30, 1997. The conversion also
resulted in the reduction of the outstanding indebtedness of the Promissory Note
dated September 30, 1995. During the fiscal years ended December 31, 1997 and
1996 WSI made cash advances to 3CI of $2,303,000 and $4,000,000. Since the year
ended December 31, 1997, 3CI has not requested nor received any additional cash
advances from WSI. WSI is under no obligation to provide additional advances and
could demand payment on the debt at any time. During the fiscal year 1997, 3CI
had began to have discussions with a third party lender to obtain an alternative
source of financing apart from WSI. In the event 3CI and WSI do not come to a
resolution on the restructuring of the September 30, 1995 Promissory Note and
3CI is unable to obtain alternative financing, there can be no assurance that
3CI will be able to meet its obligations as they become due or realize the
recorded value of its assets and would likely be forced to seek bankruptcy
protection.

The nature and level of competition in this industry have remained at a
high level for several years. This condition has produced aggressive price
competition and results in pressure on profit margins. 3CI competes against
companies which may have access to greater capital resources. In order to
compete in this industry on a long-term basis and fully realize its business
strategy, 3CI will require additional and continued financing and other
assistance from its current shareholders and if available, from outside sources.
There is no assurance that adequate funds for these purposes will be available
when needed or, if available, on terms acceptable to 3CI.

Inventory

Inventory, consisting of containers and supplies, are stated at the lower
of cost (first-in, first-out method) or market.

F-33
<PAGE> 87
WASTE SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation of property,
plant and equipment is calculated on the straight-line method over the estimated
useful lives of the assets. Expenditures for major renewals and betterments are
capitalized, and expenditures for repairs and maintenance are charged to expense
as incurred.

Impact of Recently Issued Accounting Pronouncements

In March 1995, the FASB issued Statement No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed. The Company adopted Statement No. 121
in 1996 and, has completed an analysis to determine the impact. Prior to the
adoption of Statement No. 121, in the course of preparing its financial
statements, the Company routinely reviewed assets for impairment by reviewing
expected future undiscounted net cash flows.

In February 1997, the FASB issued Statement No. 128, "Earnings Per Share."
This pronouncement is effective for periods ending after December 15, 1997. This
statement requires that basic earnings per share be presented on the face of the
income statement. Further, entities with complex capital structures must also
present diluted earnings per shares on the face of the income statement. Basic
earnings per share excludes dilution and is to be computed by dividing income
available to common stockholders by the weighted average number of common shares
of stock outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities, options, or other contracts
to issue common stock were converted into common stock that then shared in the
earnings of the company. No potential common shares may be included in the
computation of any diluted per-share amount when a loss from continuing
operations exists, even if the company reports net income. At the present time
the ultimate impact of the adoption of this standard is not known or reasonably
estimable.

In February 1997, the FASB issued Statement No. 129, "Disclosure of
Information about Capital Structure." This pronouncement is effective for
periods ending after December 15, 1997. This statement establishes standards for
disclosing information for an entity's capital structure. Adoption of this
standard does not have a significant impact on the Company's financial
statements.

In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." This pronouncement will be effective for years beginning after December
15, 1997. This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Because the Company does not presently have any "items of
other comprehensive income," adoption of this standard should not have a
significant impact on the Company's financial statements.

Incineration Rights and Permits

The incineration rights represent amounts capitalized pursuant to the
reverse merger of 3CI for incineration contracts with the cities of Carthage and
Center, Texas (the "Cities"), which own the incineration facilities. The
amortization of the incineration rights commences at the start of the contract
and is amortized on the straight-line method over nine years, which corresponds
to the contract periods. Costs

F-34
<PAGE> 88
WASTE SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
associated with the permits are being amortized over the life of the contracts.
See Note 12 for write-off of incineration rights and permits.

Intangible Assets

Intangible assets are amortized on a straight-line method as follows:

<TABLE>
<S> <C>
Excess of cost over net assets acquired..................... 17.5-40 years
Permits..................................................... 5-7 years
Customer lists.............................................. 5-10 years
</TABLE>

Amortization expense charged to operations for the years ended December 31,
1997 and 1996 was $122,479 and $864,084, respectively.

Management evaluates the realization of the intangible assets recorded for
each acquisition based on the prospects for the ongoing operations of each
acquired company.

See Note 12 for write-off of intangibles during the fiscal year 1996.

Revenue Recognition

The Company recognizes revenue from the treatment of medical waste in the
period in which the wastes are treated.

Net Loss Per Share

Net loss per common share was computed by dividing the net loss by the
weighted average number of common shares outstanding. For the years ended
December 31, 1997 and 1996, the weighted average common shares outstanding was
100 for both years.

Statements of Cash Flows

For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to be
cash equivalents.

Restricted Cash

At December 31, 1997 and 1996, the Company had cash of $-0- and $130,000,
respectively, which was restricted pursuant to an irrevocable standby letter of
credit related to workers compensation insurance.

Income Taxes

The Company utilizes the liability method of accounting for income taxes in
accordance with the provisions of Statement of Financial Accounting Standards
No. 109 ("SAS No. 109"). SAS No. 109 requires that deferred income taxes reflect
the tax consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts.

Management Estimates

Management has used estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts

F-35
<PAGE> 89
WASTE SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
of assets and liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses. Actual results could vary from the
estimates that were used.

Reclassifications

Certain reclassifications have been made to the prior financial statements
to conform to the classifications used in the current financial statements.

2. BUSINESS ACQUISITIONS

River Bay Corporation

In October 1994, 3CI acquired substantially all of the assets and assumed
certain liabilities of River Bay corporation, a Mississippi Corporation ("River
Bay"), in consideration for 865,500 shares of Common Stock and additional shares
of Common Stock contingent upon the profits of the operations attributable to
the assets purchased from River Bay through December 31, 1996. In addition, 3CI
issued to River Bay a promissory note in the original principal amount of
$1,000,000 bearing an interest rate of 8.75%, which as amended, provided for
monthly principal payments ranging from $50,000 to $100,000 through February
1996.

Pursuant to a Put Option Agreement with River Bay, as amended ("Put Option
Agreement"), 3CI, in October 1995, repurchased 300,000 of the shares of Common
Stock issued in connection with acquisition in consideration for its promissory
note in the original principal amount of $900,000 ($3.00 per share) and
providing for monthly principal payments ranging from $25,000 to $75,000, plus
interest, through January 1997. Pursuant to the Put Option Agreement, 3CI were
obligated to repurchase the remaining 565,500 shares of 3CI Common Stock issued
in connection with the acquisition at the option of River Bay, from February 1,
1997 until April 1, 1997 for $3.00 per share. The liability associated with the
Put Option Agreement covering the remaining shares is included in Accrued Stock
Put Option on the accompanying balance sheet as of December 31, 1996. River Bay
exercised its Put Option on or about February 14, 1997, for 3CI to repurchase
the 565,500 shares of Common Stock. On or about March 10, 1997, 3CI commenced
arbitration proceedings before the American Arbitration Association in Houston,
Texas against River Bay and Marlan Baucum seeking to set aside the Purchase
Agreement (the "Purchase Agreement") entered into between 3CI and those parties
on or about October 10, 1994, together with ancillary agreements pertaining
thereto. 3CI was seeking damages and/or to set aside the Purchase Agreement and
collateral agreements, including the Put Option Agreement which, if otherwise
enforceable, would have required the payment by 3CI of approximately $1,700,000
for 565,500 shares of 3CI Common Stock. In response, on April 9, 1997, Bank of
Raleigh and Smith County Bank, assignees of certain rights under the Purchase
Agreement, commenced a complaint for declaratory and monetary relief in the U.S.
District Court for the Southern District of Mississippi, Jackson Division in
Civil Action No. 3:97cv249BN. The Smith County Bank and Bank of Raleigh prayed
declaratory judgment declaring the arbitration provision in the Purchase
Agreement to be not binding upon said banks, the claims of 3CI against River Bay
to be subordinate to the claims of the banks, unspecified compensatory damages,
and punitive damages of at least $1,000,000. In April 1997, the Bank of Raleigh
and Smith County Bank gave notice to certain customers in the River Bay division
that 3CI was in default of the Put Option Agreement and that its payments should
be directly made to the Bank of Raleigh and Smith County Bank. From these
efforts, the Bank of Raleigh and Smith County Bank collected $463,000 of 3CI's
accounts receivables that were pledged in the Purchase Agreement. On or about
May 10, 1997, 3CI filed a Petition of Arbitration in Suit No. 422,107 of the
First Judicial District Court, Caddo Parish, Louisiana, naming River Bay and
Marlan Baucum as defendants therein. This lawsuit sought an injunction and stay
of all judicial and extra-judicial proceedings pursuant to the Put Option
Agreement until such time as the

F-36
<PAGE> 90
WASTE SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996

2. BUSINESS ACQUISITIONS (CONTINUED)
arbitration is completed. This action was removed by the defendants to the U.S.
District Court for the Western District of Louisiana, Shreveport Division in
Civil Action No. 97-0578. On or about October 14, 1997, the parties settled the
lawsuits. In the settlement, 3CI agreed to repurchase the remaining 565,500
shares of Common Stock related to the Put Option Agreement, at a price of
$816,364, with payments ranging from $100,000 to $63,500. This liability is
recorded in the financial statements at December 31, 1997.

River Bay has been engaged in the business of medical waste management
services in Mississippi, Tennessee, Florida, Georgia and Alabama.

3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following at December 31,
1997 and 1996:

<TABLE>
<CAPTION>
USEFUL
1997 1996 LIFE
---- ---- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Land.......................................... 591 591
Buildings and improvements.................... 1,622 1,538 3-40 years
Transportation equipment...................... 3,287 3,917 5-10 years
Machinery and equipment....................... 5,098 4,859 5-20 years
Furniture and fixtures........................ 329 491 3-10 years
------ ------
10,927 11,396
====== ======
</TABLE>

Depreciation expense charged to operations was $1,252,462 and $1,385,072
for the years ending December 31, 1997 and 1996, respectively. During the year
ended December 31, 1996, an analysis was done of all the fixed assets of 3CI. In
conjunction with the analysis, 3CI reconsidered the appropriate asset lives as
well as revising various accounting estimates as a result of recent operating
experiences and current market conditions. This write down of $1,183,446 appears
as "write-off of fixed assets" on the Consolidated Statement of Operations.

Substantially all of the Company's property, plant and equipment has been
pledged as collateral against certain of the Company's liabilities.

Set forth below is a summary of the write-offs relating to fixed assets
during fiscal 1996:

Buildings..................................................$12,700

During 1996, it was necessary to replace the refractory in one of 3CI's
incinerators due to the normal wear and tear. There was a net book value of
$12,700 of the previously capitalized refractory that is being written-off.

Leasehold improvements.....................................$80,000

During 1996, 3CI updated and refurbished several of its transportation and
incinerator locations. Management believed the updating and refurbishment was
necessary to make the locations more functional and efficiently operational.
Also 3CI made an operational decision to close its Austin, Texas transportation
location. This closure was made in order to reduce operating costs and personnel
costs. Previous leasehold

F-37
<PAGE> 91
WASTE SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996

3. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
improvement costs, which were being amortized over the life of the lease, (the
lease was terminated due to the decision to close the location) were written-off
as they remained a part of the leased building.

Transportation equipment..................................$500,982

In February 1994, at the time of the reverse merger of 3CI, 3CI had a lease
agreement which was accounted for as a Capitalized Lease and was being
depreciated over the term of the lease agreement. During 1996, management made a
decision to terminate the lease agreement early due to the high cost of
maintenance of the leased transportation equipment. The Company had also
capitalized other costs associated with these leased assets. As the
transportation equipment was returned, it was necessary to write the remaining
capitalized net book value off of $500,982.

Reusable containers........................................$12,000

In 1996, 3CI made an operational decision to move a portion of their
customer base from disposable cardboard boxes to reusable plastic containers. A
significant investment was then made in reusable plastic containers and based
upon its prior operating experience with the reusable containers, the Company
estimated that a three (3) year life was more reflective of the reusable
containers than a five (5) year life. In previous periods 3CI had estimated that
the life of reusable containers was five (5) years. Due to this change in
estimate 3CI wrote-off previously capitalized reusable containers with a net
book value of $12,000.

Machinery and equipment....................................$88,000

During fiscal 1996, it was necessary to change the bags inside the scrubber
at an incinerator as these bags became excessively worn and the integrity of the
bags was beginning to deteriorate. These bags had a remaining net book value of
$22,200 that was written-off as they were no longer able to remain in service.
Also, there is a write-off of a previously capitalized major improvement that
was done to the upper chamber of the incinerator. During 1996, there was a major
improvement completed in the upper chamber and the previously capitalized
improvement was written-off at its net book value of $28,405. In the River Bay
division, machinery and equipment with a net book value of $37,395 was
written-off.

Computer and software.....................................$490,000

During 1994 and 1995, 3CI began capitalizing cost associated with one of
3CI's bar coding systems and an accounting system that would streamline the
paperwork from the transportation locations, to the incinerators, to ultimately
the accounting department (production/billing/accounting system). This was put
into service in fiscal 1995 and was being amortized. During fiscal 1996, due to
continued problems in the ongoing training of employees on the use of the
software and the prohibitive expense of replacing hardware due to harsh
conditions, management determined the bar coding system was no longer cost
effective and abandoned the project and appropriately wrote-off the unamortized
costs. The write-off of these capitalized costs totaled $472,000. The company
also wrote-off previously capitalized accounting software with a remaining net
book value of $18,000 that was acquired in a previous acquisition (River Bay
asset acquisition), as this software was abandoned when the River Bay division
was integrated in the fourth quarter of 1996 into the 3CI accounting system.

F-38
<PAGE> 92
WASTE SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996

4. NOTES PAYABLE

<TABLE>
<CAPTION>
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Notes payable to an insurance company, due in monthly
installments including interest of 7% to 9% through March
1998, unsecured........................................... 217 212
=== ======
The Company had a $12,800,000 unsecured revolving line of
credit maturing on December 31, 1997, of which $15,000 was
unused at December 31, 1996. Interest was payable monthly
and accrued at the interbank offered rate (IBOR) (7.15625
at December 31, 1996). The line of credit was repaid in
full on September 17, 1997................................ -- 12,785
=== ======
Notes payable to stockholders bear interest at 4.25%- 4.50%
with all unpaid principal and interest due at maturity.
All stockholder notes were converted to equity at January
1, 1997................................................... -- 3,851
=== ======
</TABLE>

5. LONG-TERM DEBT

Long-term debt-unaffiliated lenders consists of the following:

<TABLE>
<CAPTION>
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Note payable to prior owner of Incendere, at an annual
adjustable interest rate generally ranging between 7.5% to
9.75%, with 34% of interest being paid quarterly and 66%
of interest deferred and added to principal until May 21,
1995. Thereafter, principal and interest are due in equal
monthly installments until maturity on May 21, 1998,
convertible into common stock at $3.00 per share, secured
by substantially all of the assets of A/MED............... 241 615
Notes payable for purchased vehicles and equipment held as
collateral, due in monthly installments, including
interest, at rates ranging from 7% to 16.75%, maturing
through 2002.............................................. 1,303 991
Note payable to Stone Container Corp. due in monthly
payments with interest at 10% through 1997................ -- 74
Notes payable to River Bay Corporation due in monthly
payments with interest of 8.75% through December 1998,
secured by accounts receivable, equipment, and common
stock..................................................... 816 376
------ ------
2,360 2,056
Less--current portion....................................... (1,374) (1,314)
------ ------
986 742
====== ======
</TABLE>

F-39
<PAGE> 93
WASTE SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996

5. LONG-TERM DEBT (CONTINUED)
Payments due on long-term debt, during each of the five years subsequent to
December 31, 1997, are as follows:

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
1998........................................................ 1,374
1999........................................................ 662
2000........................................................ 314
2001........................................................ 7
2002........................................................ 3
</TABLE>

The total interest expense was $855,115 and $1,443,542 for the years ended
December 31, 1997 and 1996, respectively.

6. INCINERATION CONTRACTS

3CI is a party to exclusive incineration contracts with the Cities whereby
3CI is guaranteed minimum weekly burn capacity and is required to pay fees to
the Cities based on the total pounds incinerated. These contract rights were
obtained in exchange for the Predecessor Companies purchasing certain equipment
for the Cities' incinerators which enabled the Cities to meet all current
federal and state emissions control standards. Due to problems arising from
contractual agreements with the City of Center, 3CI is presently not utilizing
the incinerator at the City of Center for the treatment of medical waste. The
Company is no longer using the incinerator in the City of Center and does not
believe that discontinuing that use will have a material effect on 3CI's
business.

The City of Carthage requires minimum annual payments under the combined
contracts as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED MINIMUM REQUIRED
DECEMBER 31, PAYMENTS
- ------------------ ----------------
(DOLLARS IN THOUSANDS)
<C> <S> <C>
1998 ................................................. 1,000
1999 ................................................. 1,000
2000 ................................................. 1,000
-----
3,000
=====
</TABLE>

In the event 3CI fails to meet the minimum amounts of annual guarantees to
the City of Carthage, after giving effect to amounts paid above prior year
minimums, annual required minimums (on a cumulative basis), the City of Carthage
has the option to terminate 3CI's exclusive incineration rights.

3CI had a minimum guaranteed payment to the City of Carthage, for
incineration fees for the years ended May 31, 1997, 1996, and 1995, of
$1,000,000, $716,000, and $596,250, respectively. In the years ended May 31,
1997, 1996, and 1995, 3CI paid incineration fees of $1,401,692, $843,000, and
$750,000, respectively to the City of Carthage. 3CI also had minimum guaranteed
payments to the City of Center, for incineration fees for the years ended May
31, 1997, 1996, and 1995, of $762,000, $695,000, and $495,250, respectively. In
the years ended May 31, 1996 and 1995, 3CI paid incineration fees of $779,000
and $551,000, respectively, to the City of Center, in accordance with terms of
the contract, thereby meeting the annual minimum fees required.

In August 1996, 3CI discontinued use of the City of Center facility, due to
the City of Center's breach of the exclusivity portion of the contract. The
original agreement between 3CI and the City of Center, which was executed on
August 22, 1990, gave 3CI the exclusive and sole right to dispose of medical
waste at the City of

F-40
<PAGE> 94
WASTE SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996

6. INCINERATION CONTRACTS (CONTINUED)
Center's resource recovery facility. 3CI discovered that the City of Center
breached its exclusivity portions of the 1990 agreement, as amended on or about
October 27, 1994. Due to this breach of contract, 3CI does not believe that
minimum guaranteed payment is due to the City of Center. Despite not having the
ability to treat waste at the City of Center's resource recovery facility, 3CI
has ample treatment capacity to dispose of its medical waste. 3CI believes that
the effect of not utilizing this treatment facility has not and will not have a
material adverse effect on its financial position, results of operations or cash
flows.

Included in cost of sales for the years ended December 31, 1997 and 1996,
is $1,429,097 and $1,542,842, respectively, related to incineration costs at the
Cities since the reverse merger.

7. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax rate used was 37
percent for the years ended December 31, 1997 and 1996 representing the federal
rate and an average of state income tax rates. The components of deferred income
tax liabilities and assets are as follows:

<TABLE>
<CAPTION>
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred income tax liabilities:
Property and equipment................................ 1,461 1,116
Other................................................. 69 67
-------- -------
Total deferred income tax liabilities.............. 1,530 1,183
Deferred income tax assets
Net operating loss carryforward....................... 9,870 8,801
Bad debt reserves..................................... 323 344
Other................................................. 1,403 940
-------- -------
Total deferred income tax assets........................ 11,596 10,085
Valuation allowance..................................... (10,066) (8,902)
-------- -------
Net deferred income tax asset........................... (1,530) (1,183)
Total deferred income tax assets and liabilities... -- --
======== =======
</TABLE>

At December 31, 1997, the Company had approximately $25,559,268 of net
operating loss carryforwards for federal tax purposes which will expire
beginning in 2004 and continue through the year 2012. The Company also had state
net operating losses at December 31, 1997. The Company has established a
valuation allowance for the federal and state net operating losses of
$10,066,016 and $8,902,294 as of December 31, 1997 and 1996, respectively.
Because of separate return limitations, change in ownership limitations, and the
weight of available evidence, it is more likely than not that some portion or
possibly all of the net operating losses will not be available for use by the
consolidated entities.

8. STOCK OPTION PLAN

In conjunction with the business acquisition described in Note 1, a stock
option plan (the "Plan") approved by 3CI's previous shareholders in 1992
totaling 500,000 shares remains in effect. The purpose of the Plan is to provide
additional incentives to officers and employees of 3CI who are primarily
responsible for the management and growth of 3CI. Each option granted pursuant
to the Plan is designated at the time of grant as either an "incentive stock
option" or as a "nonqualified stock option." The exercise price equals or
exceeds the

F-41
<PAGE> 95
WASTE SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996

8. STOCK OPTION PLAN (CONTINUED)
market price as of the grant date. At September 30, 1995, 3CI had 230,000 shares
outstanding under options for two officers and one former officer of 3CI, of
which all were exercisable, at option prices of $3.00 to $4.00 per share. During
1995, 3CI reduced the total shares available under the Plan to 375,000 shares,
resulting in 145,000 shares available for future issuance as of December 31,
1997 and 1996.

During the years ended December 31, 1997 and 1996, 140,000 of the 230,000
option shares described above were canceled and a net of 47,500 option shares
were issued. As of December 31, 1997, a total of 137,500 option shares are
outstanding and a total of 237,500 option shares are available for issuance
under the Plan. The outstanding option shares vest monthly over a three-year
period. As of the year ended December 31, 1997, the exercise prices of all
options granted under the Plan have always exceeded the market price of 3CI's
Common Stock.

9. CONCENTRATION OF CREDIT RISK

3CI's customers are concentrated in the medical industry and, therefore,
changes in economic, regulatory and other factors which affect the medical
industry may impact 3CI's overall credit risk. 3CI monitors the status of its
receivables including follow-up directly with customers on past due balances.

10. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, Disclosure of Financial Instruments, requires companies to
disclose the fair value of each class of financial instruments for which it is
practical to estimate that value and for which the recorded value significantly
differs from the fair market value. The Company's primary financial instruments
are accounts receivable, notes payable, accounts payable, and accrued
liabilities. The fair value of accounts receivable approximates its carrying
amount. Because of the absence of availability of alternative financing and the
substantial doubt about the Company's ability to continue as a going concern, it
is not practical to estimate the fair values of notes payable, accounts payable
and accrued liabilities.

11. RELATED PARTY TRANSACTIONS

During 1996, the Company made purchases of business forms with a company
owned by the father of Curtis W. Crane, the Chief Financial Officer of the
Company. Payments to the business forms company during fiscal years ended
December 31, 1997 and 1996 totaled $22,000 and $62,000, respectively.

12. INTANGIBLE ASSET WRITE-OFF

In 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amounts. An evaluation of the fair value of the assets associated with
3CI's operations resulted in the determination that certain intangible assets
were impaired. The impaired assets were written down by $11,385,328. Fair value
was based on the estimated future cash flows to be generated by these intangible
assets. This write down is included in the "Write off of Intangibles" amount for
fiscal 1996 on the Consolidated Statements of Operations. During the fiscal year
of 1995, WSI sent an advisor to 3CI to review ongoing operations of 3CI and to
make recommendations as to how to achieve profitability. From this review 3CI
developed specific detail plans for its fiscal year ending September 1996. In
September 1995, management put together a business plan for the fiscal year
ending September 30, 1996. The Board of Directors reviewed the plan in detail
and after thorough consideration in

F-42
<PAGE> 96
WASTE SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996

12. INTANGIBLE ASSET WRITE-OFF (CONTINUED)
every aspect, the plan was approved by the Board of Directors. The Chairman of
the Board met with key operating personnel and officers of the Company to
discuss the actions to be taken. Additionally, the Board installed a new officer
to oversee the operations and implementation of its plan. The business plan for
the fiscal year ended December 31, 1996, included cost reductions and a small
amount of price increases. As the fiscal year began to develop key operating
objectives of the business plan were not being achieved. In one of 3CI's key
operating territories (Houston, Texas), a competitor opened a treatment facility
that significantly increased the capacity to treat waste and by the competitor's
desire to fill the capacity, the competitor began deep discount pricing to fill
the capacity of the new treatment facility. Also, 3CI did not bring its newly
constructed incinerator into full operational use until March 1996; the business
plan had projected the incinerator to be fully operational in January 1996. As
the losses continued, 3CI prepared a forecast based on the best available
business information. This forecast was prepared in the fourth quarter of 1996.
Because of the forecasted continued losses, it became apparent that an
impairment of long-lived assets had occurred.

13. COMMITMENTS AND CONTINGENCIES

In May 1995, a group of minority stockholders of the Company, including
Patrick Grafton, former Chief Executive Officer of the Company, acting
individually and purportedly on behalf of all minority stockholders, and on
behalf of the Company, filed suit in James T. Rash, et al v. Waste Systems,
Inc., et al., No. 95-024912 in the District Court of Harris County, Texas, 129th
Judicial District, against 3CI, WSI and various directors of the Company. The
plaintiffs alleged minority stockholder oppression, breach of fiduciary duty,
breach of contract, and "thwarting of reasonable expectations," and demanded an
accounting, appointment of a receiver for the sale of the Company, unspecified
actual damages and punitive damages of $10 million, plus attorney's fees. In
addition, Mr. Grafton alleged unspecified damages as a result of his removal as
an officer and director of the Company and the Company's failure to renew his
employment agreement in March 1995, and alleged that such removal was wrongful
and ineffective. The Company's insurer denied coverage in the lawsuit. The
Company has denied all material allegations of the lawsuit. However, the outcome
of this cannot be predicted, and an adverse decision in the lawsuit would likely
have a material adverse effect on the Company's financial condition and results
of operations and cash flows. The Company has reached an agreement in principle
with some, but not all, of the plaintiffs for the settlement of this action. The
execution of the appropriate documentation to evidence this settlement has been
completed and both parties are awaiting court approval which is set for late
February 1998. The Company and Mr. Grafton reached a settlement of Mr. Grafton's
individual claims relating to his removal as an officer and director of the
Company. The terms of the settlement reached between the Company and Mr. Grafton
are confidential to both parties. The Company accrued an amount in its fiscal
year ended 1996 and 1995 financial statements which closely approximates the
actual settlement.

In June 1995, the former stockholders of Med-Waste Disposal Service, Inc.
("Med-Waste") filed suit in James H. Shepherd, et al v. 3CI Complete Compliance
Corporation, et al., No. C.V.-95-1441-1 in the Circuit Court of Hot Springs
County, Arkansas, against 3CI and various current and former officers and
directors of 3CI. Plaintiffs have alleged violations of federal and state
securities laws, breach of contract, common law fraud and negligence in
connection with the acquisition of Med-Waste by 3CI, and have demanded
rescission, restitution, unspecified actual damages and punitive damages of $10
million, plus attorneys' fees. The case was transferred to the United States
District Court of the Western District of Arkansas Hot Springs Division and in
November 1996 was subsequently transferred to the United States District Court
for the Western District of Louisiana.

The parties, other than Patrick Grafton, former Chief Executive Officer of
3CI, have agreed to settle the suit in consideration of the issuance by 3CI to
the plaintiffs of 250,000 shares of Common Stock and the

F-43
<PAGE> 97
WASTE SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996

13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
payment by 3CI to the plaintiffs of 20% to 55% of the pre-tax profits, as
defined, attributable to the assets previously acquired from Med-Waste until
such time as the shares of Common Stock held by the plaintiffs become freely
tradable and the market price of the Common Stock averages at least $2.50 per
share over a period of 42 consecutive days. In addition, 3CI and WSI have agreed
to repurchase the shares of Common Stock held by the plaintiffs for $2.50 per
share in certain events, including the bankruptcy of 3CI or in the event WSI
ceases to be the largest beneficial holder of the Common Stock. The obligations
of 3CI to the plaintiffs are secured by a security interest in most of the
assets of 3CI, and WSI has agreed to subordinate its loans to 3CI, and all
related security interests, to the obligations, and the related security
interests, of 3CI to the plaintiffs. This matter has been settled by the parties
and was dismissed in its entirety on July 31, 1997, by order of the court.

3CI accrued $250,000 in expenses, which was reflected in its September 30,
1995 financial statements relating to the settlement of the Med-Waste lawsuit.

In connection with an auto accident in July 1996, two suits have been filed
against 3CI. Ryan O'Neil Youmans & Anita Youmans v. American 3CI, et al, No.
CV9604899, was filed in the Circuit Court of Jefferson County, Alabama, in
August 1996. Jimmy R. Whitfield & Rhonda Whitfield v. Paul Bronger, American
3CI, et al., No. CV-96-847, was filed in the Circuit Court of Shelby County,
Alabama in November of 1996. These proceedings have been settled by 3CI's
insurance carrier and the related expenditure to 3CI are reflected in the
current year consolidated financial statements. The resolution to these lawsuits
did not have a material effect on the Company's financial condition, results of
operations and cash flows.

On or about March 10, 1997, 3CI commenced arbitration proceedings before
the American Arbitration Association in Houston, Texas against River Bay
Corporation ("River Bay") and Marlan Baucum seeking to set aside a Purchase
Agreement (the "Purchase Agreement") entered into between those parties on or
about October 10, 1994, together with ancillary agreements pertaining thereto.
3CI was seeking damages and/or to set aside the Purchase Agreement and
collateral agreements, including a Put Option Agreement (the "Put Option
Agreement") which, if otherwise enforceable, would require the payment by 3CI of
approximately $1,700,000 for 565,500 shares of 3CI Common Stock. In response, on
April 9, 1997, Bank of Raleigh and Smith County Bank, assignees of certain
rights under the Purchase Agreement, commenced a complaint for a declaratory and
monetary relief in the U.S. District Court for the Southern District of
Mississippi, Jackson, Division in Civil Action No. 3:97cv249BN. The Bank of
Raleigh and Smith County Bank prayed declaratory judgment declaring the
arbitration provision in the Purchase Agreement to be not binding upon the said
banks, the claims of 3CI against River Bay to be subordinate to the claims of
the banks, unspecified compensatory damages, and punitive damages for least
$1,000,000. In this action the Bank of Raleigh and Smith County Bank proceeded
to collect the Company's accounts receivable in the River Bay division as it was
used as collateral in the Purchase Agreement; they collected approximately
$463,000, through October 14, 1997. On or about May 10, 1997, the Company filed
a Petition of Arbitration in Suit No. 422,107 of the First Judicial District
Court, Caddo Parish, Louisiana, naming River Bay and Marlan Baucum as defendants
therein. This lawsuit sought an injunction and stay of all judicial and
extra-judicial proceedings pursuant to the Put Option Agreement until such time
as the arbitration is completed. This action was removed by the defendants to
the U.S. District Court for the Western District of Louisiana, Shreveport
Division in Civil Action No. 97-0578. The parties agreed to settle the suit in
consideration of the Company repurchasing the remaining 565,500 shares of Common
Stock related to the Put Option Agreement for $816,364. The outcome of this
lawsuit does not have a material adverse effect on the Company's financial
position, result of operations and net cash flows.

The Company is subject to certain other litigation and claims arising in
the ordinary course of business. In the opinion of management of the Company,
the amounts ultimately payable, if any, as a result of such
F-44
<PAGE> 98
WASTE SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996

13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
litigation and claims will not have a materially adverse effect on the Company's
financial position, results of operations, and net cash flows.

The Company operates within the regulated medical waste disposal industry
which is subject to intense governmental regulation at the federal, state and
local levels. The Company believes it is currently in compliance in all material
respects with all applicable laws and regulations governing the medical waste
disposal business. However, continuing expenditures may be required in order for
the Company to remain in compliance with existing and changing regulations.
Furthermore, because the medical waste disposal industry is predicated upon the
existence of strict governmental regulation, any material relaxation of
regulatory requirements governing medical waste disposal or of their enforcement
could result in a reduced demand for the Company's services and have a material
adverse effect on the Company's revenues and financial condition. The scope and
duration of existing and future regulations affecting the medical waste disposal
industry cannot be anticipated and are subject to changing political and
economic pressures.

At September 30, 1995, 3CI had employment agreements with certain key
employees providing for compensation of $145,000 and $130,000 for the years
ended December 31, 1997 and 1996. These agreements further provide for a bonus
based on the achievement of certain performance objectives. For the years ended
December 31, 1997 and 1996, these performance objectives were not achieved.

At December 31, 1997 and 1996, 3CI had certain noncancelable leases,
principally for office space and equipment, with various expiration dates. The
aggregate rental expenses under such leases were $735,696 and $866,203, for the
fiscal years ended December 31, 1997 and 1996, respectively. Future minimum
rentals under such leases for the following fiscal years aggregate $605,000 for
1998, $353,000 for 1999, $106,000 for 2000, $60,000 for 2001 and $135,000
thereafter.

3CI granted River Bay security interests in certain of the assets purchased
from River Bay and certain accounts receivable attributable to these purchased
assets to secure future debt and the Put option.

The Company has agreed to pay the President of River Bay approximately
$65,000 over a period of 15 months related to the settlement of certain issues.
This liability is included in accrued liabilities in the December 31, 1997 and
1996 balance sheets.

3CI has committed to reimburse WSI approximately $6,000 per month for
services provided and costs incurred by the Company's vice president.

Mr. Charles D. Crochet serves as President of 3CI pursuant to an employment
agreement commencing February 1994. Mr. Crochet was entitled to a salary of
$6,250 per month in February and March 1994, and then $7,500 per month from
April through September 1994, increasing to $9,583 per month commencing October
1994 through September 1995. This employment agreement was renegotiated and
modified in August 1995, increasing Mr. Crochet's salary to $10,833 per month
commencing October 1, 1995 and thereafter increases to $13,333 on October 1,
1997, and continues through May 1998. As an additional incentive to Mr. Crochet
under the new employment agreement, Mr. Crochet is eligible for an annual bonus
based on Fiscal Year Pre-Tax Profits as a percentage of revenues. The amount of
such annual bonus is based on a percentage between 6% and 10% of an amount
determined by the Board of Directors from an approved bonus plan, and such
actual percentage depending upon the Company's Pre-Tax Profits as a percentage
of revenue.

14. SUBSEQUENT EVENTS

The James T. Rash, et al v. Waste Systems, Inc., et al suit (see Note 13)
has been settled. Court approval of such settlement was received in February
1998. Pursuant to the settlement, 3CI has agreed to
F-45
<PAGE> 99
WASTE SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996

14. SUBSEQUENT EVENTS (CONTINUED)
(i) transfer 78,014 shares of its Common Stock into escrow for later conveyance
to the plaintiffs, (ii) transfer warrants for 1,002,964 shares of 3CI Common
Stock into escrow for later conveyance to the plaintiffs on the basis of one
warrant for every three shares of 3CI Common Stock owned, that are exercisable
for two years from the effective date of the Settlement Agreement at a price of
$1.50 per share, (iii) pay $425,000 into an escrow account to pay the
plaintiffs, attorneys' fees, and (iv) obtain SEC approval, if necessary, to
convert the 1,000,000 shares of 3CI Series A Preferred Stock into 7,000,000
shares of 3CI Series B Convertible Preferred Stock ("Series B Preferred Stock").
Pursuant to the terms of the Settlement Agreement, $425,469 has been paid to the
plaintiff's attorneys' for fees and 78,014 shares of 3CI Common Stock and
warrants for 1,002,964 shares of 3CI Common Stock have been placed in escrow for
subsequent conveyance to the plaintiffs.

3CI, as authorized by the necessary approvals of the Board of Directors and
the 3CI's majority stockholder (WSI), has approved the adoption of an amendment
(the "Amendment") to 3CI's Certificate of Incorporation, as amended, to (i)
increase the authorized preferred stock, of 3CI from 1,000,000 shares to
16,050,000 shares, and (ii) increase the authorized common stock, par value $.01
per share ("Common Stock"), of 3CI from 15,000,000 shares to 40,450,000 shares.
The Amendment was adopted to facilitate (i) the conversion of $7,000,000 of debt
(the "Debt Conversion") owed by 3CI to WSI, 3CI's largest stockholder, in
exchange for 1,000,000 shares of 3CI's Series A Preferred stock, (ii) the
exchange of the Series A Preferred Stock for 7,000,000 shares of 3CI's Series B
Preferred Stock, and (iii) the conversion of an additional $750,000 of debt owed
by 3CI to WSI to 750,000 shares of the Company's Series C Convertible Preferred
Stock (the "Series C Preferred Stock").

3CI has filed the Registration Statement (Form S-1) with the Securities and
Exchange Commission to register 1,518,434 additional shares of its Common Stock.
On about February 27, 1998, an Information Statement was mailed to 3CI's
stockholders informing them of the previous approval by the Board of Directors
of 3CI of the corporate actions referred to above and their subsequent adoption
by the majority stockholder of the 3CI.

On or about October 1, 1998, Stericycle, Inc., a Delaware Corporation with
its principal offices in Deerfield, Illinois, purchased all of the issued and
outstanding shares of stock of WSI. The purchase price for the WSI shares was
$10,000,000 in cash. Upon completion of the transaction, WSI became a
wholly-owned subsidiary of Stericycle, Inc. Stericycle is engaged in the
business of collecting, transporting, treating and disposing of regulated
medical waste. It has developed a proprietary treatment technology known as
electro-thermal deactivation ("ETD"). As a part of the purchase transaction,
Stericycle granted to the sellers certain exclusive negotiation and first
refusal rights in respect of medical waste treatment units utilizing
Stericycle's ETD technology.

On October 1, 1998, the Revolving Promissory Note dated September 30, 1995
(between 3CI and WSI) in the maximum principal amount of $8,000,000 ("Original
Note") was amended and restated in its entirety. 3CI made a new secured
promissory note in the amount of $5,487,308 due on or before September 30, 1999.
The note may be extended to a date not later than September 30, 2000. The note
bears interest at prime plus 2% and the interest is payable quarterly. The
security documents relating to the original note remain in full force and
effect. The note places certain restrictions and financial covenants on 3CI.

F-46
<PAGE> 100

WASTE SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2 $ 68
Restricted cash........................................... -- 130
Accounts receivable, net of allowance for doubtful
accounts of $597,861 and $960,921...................... 2,813 4,091
Inventory................................................. 87 97
Other current assets...................................... 758 732
-------- --------
Total current assets................................... 3,660 5,118
Property, plant and equipment, at cost...................... 12,586 11,468
Less--accumulated depreciation.............................. (3,600) (2,905)
-------- --------
Net property, plant and equipment...................... 8,986 8,563
Excess of cost over net assets acquired, net of accumulated
amortization of $87,488 and $62,488....................... 343 369
Other intangible assets, net of accumulated amortization of
$186,380 and $111,828..................................... 226 293
Other assets................................................ -- 4
-------- --------
Total assets........................................... $ 13,215 $ 14,347
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdrafts........................................... $ 356 $ 534
Notes payable............................................. 642 514
Current portion of long-term debt, unaffiliated lenders... 1,018 863
Accounts payable.......................................... 1,393 1,519
Accounts payable-affiliated companies..................... 93 386
Accrued liabilities....................................... 843 1,249
-------- --------
Total current liabilities.............................. 4,345 5,065
Long-term debt unaffiliated lenders, net of current
portion................................................... 883 860
-------- --------
Total liabilities...................................... 5,228 5,925
Accrued stock put option.................................... -- 1,592
Shareholders' equity:
Common stock, no par value, 100 shares authorized, issued
and outstanding........................................ 500 500
Additional paid-in capital................................ 32,196 31,206
Accumulated deficit....................................... (24,709) (24,876)
-------- --------
Total shareholders' equity............................. 7,987 6,830
-------- --------
Total liabilities and shareholders' equity............. $ 13,215 $ 14,347
======== ========
</TABLE>

F-47
<PAGE> 101

WASTE SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues.................................................... $ 14,127 $ 13,978
Expenses:
Cost of services.......................................... 10,475 10,800
Depreciation and amortization............................. 814 881
Selling, general and administrative....................... 2,555 2,746
--------- -----------
Total expenses......................................... 13,844 14,427
--------- -----------
Net income (loss) from operations........................... 283 (449)
Other income (expense):
Interest expense.......................................... (175) (806)
--------- -----------
Income (loss) before income taxes........................... $ 108 $ (1,255)
Income taxes................................................ -- --
--------- -----------
Income (loss) before minority interest in loss of
subsidiary................................................ 108 (1,255)
Minority interest in loss of subsidiary..................... 43 --
--------- -----------
Net income (loss)........................................... $ 151 $ (1,255)
========= ===========
Weighted average shares outstanding......................... 100 100
========= ===========
Income (loss) per common share.............................. $1,513.73 $(12,548.16)
========= ===========
</TABLE>

F-48
<PAGE> 102

WASTE SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Common stock:
Balance at beginning of period............................ $ 500 $ 500
Additional shares issued (retired)........................ -- --
-------- --------
Balance at end of period.................................. $ 500 $ 500
Additional paid-in capital:
Balance at beginning of period............................ $ 31,595 $ 11,152
Conversion of stockholder debt and other liabilities to
additional paid-in capital................................ 601 18,775
Stockholder contributions to additional paid-in capital..... -- 1,279
-------- --------
Balance at end of period.................................. $ 32,196 $ 31,206
Accumulated deficit:
Balance at beginning of period............................ $(24,860) $(23,621)
Net income (loss)......................................... 151 (1,255)
-------- --------
Balance at end of period.................................. $(24,709) $(24,876)
-------- --------
Total stockholders' equity (deficit)................... $ 7,987 $ 6,830
======== ========
</TABLE>

F-49
<PAGE> 103

WASTE SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 151 $(1,255)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
(Gain) loss on disposal of fixed and intangible
assets.............................................. -- 18
Depreciation and amortization........................ 930 1,041
(Increase) decrease in net accounts receivable....... 746 (338)
(Increase) in inventory.............................. (15) (38)
(Increase) in prepaid expenses....................... (292) (474)
(Increase) decrease in other current assets.......... 11 (13)
Increase in accounts payable......................... 363 127
Increase in accounts payable, affiliated companies... 67 54
(Decrease) in accrued liabilities.................... (1,335) (558)
Gain on foreign currency transaction................. -- (39)
Minority interest in loss of subsidiary.............. (43) --
------- -------
Total adjustments................................. 432 (220)
------- -------
Net cash provided by (used in) operating
activities....................................... 583 (1,475)
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment....... 99 233
Purchase of property, plant and equipment................. (1,411) (372)
------- -------
Net cash (used in) investing activities........... (1,312) (139)
Cash flows from financing activities:
Increase in bank overdrafts............................... 199 --
Proceeds from issuance of notes payable................... 1,088 942
Principal reduction of notes payable...................... (663) (13,496)
Reduction of put option................................... -- (105)
Proceeds from issuance of long-term debt, unaffiliated
lenders................................................ 633 --
Reduction of long-term debt, unaffiliated lenders......... (1,092) (1,186)
Proceeds from issuance of note payable to majority
shareholders........................................... 557 14,216
Contributed capital....................................... -- 1,279
Other..................................................... (35) --
------- -------
Net cash provided by financing activities......... 687 1,650
------- -------
Net increase (decrease) in cash and cash equivalents........ (42) 36
Cash and cash equivalents, beginning of period.............. 44 32
------- -------
Cash and cash equivalents, end of period.................... $ 2 $ 68
======= =======
</TABLE>

F-50
<PAGE> 104

WASTE SYSTEMS, INC. AND SUBSIDIARY
SELECTED INFORMATION --
SUBSTANTIALLY ALL DISCLOSURES REQUIRED BY
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ARE NOT INCLUDED
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)

1. PRINCIPLES OF CONSOLIDATION

The accompanying financial statements present the consolidated accounts of
Waste Systems, Inc. ("WSI" or the "Company") and its majority-owned subsidiary,
3CI Complete Compliance Corporation ("3CI" or "Subsidiary"). WSI was owned by a
group of German corporate investors and has a year ending on December 31. 3CI's
year ends on September 30. All significant intercompany accounts and
transactions have been eliminated in consolidation. 3CI has suffered recurring
net losses. Such losses have exceeded the minority interest's equity capital.
Under generally accepted accounting principles, such excess losses are charged
against the majority interest. If the losses reverse in later years, the
majority interest will be credited with the amount of minority interest losses
previously absorbed before credit is made to the minority interests.

2. BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. As applicable under such regulations, certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The Company believes that the presentation and disclosures herein are
adequate to make the information not misleading and that the financial
statements reflect all adjustments that are of a normal recurring nature which
are necessary for a fair presentation of these financial statements. These
financial statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto for the year ended December
31, 1997.

3. BUSINESS CONDITIONS

3CI has historically funded its operations, acquisitions and debt service
through cash advances from its majority shareholder, WSI. As a result of 3CI's
prior expansion and program of acquisitions, it has experienced liquidity
deficiencies.

3CI has continued to have discussions with third party lenders to obtain an
alternative source of financing apart from WSI. In the event 3CI and WSI do not
come to a resolution on the restructuring of the 1995 Note and 3CI is unable to
obtain alternative financing, there can be no assurance that 3CI will be able to
meet its obligations as they become due or realize the recorded value of its
assets.

The nature and level of competition in the medical waste industry has
remained high for several years. This condition has produced aggressive price
competition and results in pressures on profit margins. The Company competes
against companies which have access to greater capital resources. In order to
effectively compete in the industry on a long-term basis and fully realize its
business strategy, 3CI will require additional and continued financing and other
assistance from its current majority shareholder and, if available, from outside
sources. There is no assurance that adequate funds for these purposes will be
available when needed or, if available, on terms acceptable to 3CI.

4. OTHER EVENTS

The James T. Rash, et al. v. Waste Systems, Inc., et al. suit (see Note 13
to the Company's consolidated financial statements for the year ended December
31, 1997) has been settled. Court approval of such settlement was received in
February 1998. Pursuant to the settlement, 3CI has agreed to (i) transfer 78,014
shares of its Common Stock into escrow for later conveyance to the plaintiffs,
(ii) transfer warrants for 1,002,964 shares of 3CI Common Stock into escrow for
later conveyance to the plaintiffs, on the basis of one

F-51
<PAGE> 105
WASTE SYSTEMS, INC. AND SUBSIDIARY
SELECTED INFORMATION --
SUBSTANTIALLY ALL DISCLOSURES REQUIRED BY
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ARE NOT INCLUDED -- (CONTINUED)
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)

4. OTHER EVENTS (CONTINUED)
warrant for every three shares of 3CI Common Stock owned, that are exercisable
for two years from the effective date of the Settlement Agreement at a price of
$1.50 per share, (iii) pay $425,000 into an escrow account to pay the
plaintiffs' attorneys' fees, and (iv) obtain SEC approval, if necessary, to
convert the 1,000,000 shares of 3CI Series A Preferred Stock into 7,000,000
shares of 3CI Series B Convertible Preferred Stock ("Series B Preferred Stock").
Pursuant to the terms of the Settlement Agreement, $425,469 has been paid to the
plaintiffs' attorneys' for fees and 78,014 shares of 3CI Common Stock and
warrants for 1,002,964 shares of 3CI Common Stock have been placed in escrow for
subsequent conveyance to the plaintiffs.

3CI, as authorized by the necessary approvals of the Board of Directors and
the 3CI's majority stockholder (WSI), has approved the adoption of an amendment
(the "Amendment") to 3CI's Certificate of Incorporation, as amended, to (i)
increase the authorized preferred stock of 3CI from 1,000,000 shares to
16,050,000 shares, and (ii) increase the authorized common stock, par value $.01
per share ("Common Stock"), of 3CI from 15,000,000 shares to 40,450,000 shares.
The Amendment was adopted to facilitate (i) the conversion of $7,000,000 of debt
(the "Debt Conversion") owed by 3CI to WSI, 3CI's largest stockholder, in
exchange for 1,000,000 shares of 3CI's Series A Preferred stock, (ii) the
exchange of the Series A Preferred Stock for 7,000,000 shares of 3CI's Series B
Preferred Stock, and (iii) the conversion of an additional $750,000 of debt owed
by 3CI to WSI to 750,000 shares of the Company's Series C Convertible Preferred
Stock (the "Series C Preferred Stock").

3CI has filed a Registration Statement (Form S-1) with the Securities and
Exchange Commission to register 1,518,434 additional shares of its Common Stock.
On about February 27, 1998, an Information Statement was mailed to 3CI's
stockholders informing them of the previous approval by the Board of Directors
of 3CI of the corporate actions referred to above and their subsequent adoption
by the majority stockholder of 3CI.

On or about October 1, 1998, Stericycle, Inc., a Delaware corporation with
its principal offices in Deerfield, Illinois, purchased all of the issued and
outstanding shares of stock of WSI. The purchase price for the WSI shares was
$10,000,000 in cash. Upon completion of the transaction, WSI became a
wholly-owned subsidiary of Stericycle, Inc. Stericycle is engaged in the
business of collecting, transporting, treating and disposing of regulated
medical waste. It has developed a proprietary treatment technology known as
electro-thermal deactivation ("ETD"). As a part of the purchase transaction,
Stericycle granted to the sellers certain exclusive negotiation and first
refusal rights in respect of medical waste treatment units utilizing
Stericycle's ETD technology.

F-52
<PAGE> 106

AUDITORS' REPORT

To the shareholders of
Med-Tech Environmental Ltd:

We have audited the consolidated balance sheet of Med-Tech Environmental
Ltd as at March 31, 1998 and 1997, and the consolidated statements of income,
deficit and changes in financial position 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 consolidated 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 an audit to obtain
reasonable assurance 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.

In our opinion, these consolidated financial statements represent fairly,
in all material respects, the financial position of the Company as at March 31,
1998 and 1997 and the results of its operations and the changes in its financial
position for the years then ended in accordance with generally accepted
accounting principles.

Without qualifying our opinion, we draw attention to Note 1(a) in the
financial statements which indicates the existence of a material uncertainty
which may cast significant doubt about the Company's ability to continue as a
going concern.

COLLINS BARROW, CHARTERED ACCOUNTANTS

Toronto, Canada
May 20, 1998
Except as to Notes 11(c) and 11(d)
which is as of November 16, 1998

F-53
<PAGE> 107

MED-TECH ENVIRONMENTAL LTD

CONSOLIDATED BALANCE SHEETS
(IN CANADIAN DOLLARS)

<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ -- $ 31,375
Accounts receivable....................................... 1,965,398 194,595
Other receivables......................................... 46,599 --
Subscriptions receivable.................................. -- 50,000
Inventory................................................. 169,649 5,500
Prepaid expenses.......................................... 45,693 289,771
----------- -----------
2,227,339 571,241
Capital assets (note 2)..................................... 1,400,184 510,070
Other assets (note 3)....................................... 8,751,671 955,875
----------- -----------
$12,379,194 $ 2,037,186
=========== ===========
LIABILITIES
Current liabilities:
Bank indebtedness (note 4)................................ $ 1,799,618 $ --
Accounts payable and accrued liabilities.................. 2,183,460 424,694
Convertible debenture (note 5)............................ 210,000 200,000
Current portion of obligations under capital lease........ 81,315 --
Current portion of long-term debt......................... 5,752,364 --
----------- -----------
10,026,757 624,694
Obligations under capital leases (note 6)................... 290,802 --
Long-term debt (note 7)..................................... 2,000,000 --
----------- -----------
12,317,559 624,694
----------- -----------
SHAREHOLDERS' EQUITY
Capital stock (note 8)...................................... 6,170,429 2,803,389
Deficit..................................................... (6,108,794) (1,390,897)
----------- -----------
61,635 1,412,492
----------- -----------
$12,379,194 $ 2,037,186
=========== ===========
</TABLE>

See accompanying notes.
F-54
<PAGE> 108

MED-TECH ENVIRONMENTAL LTD

CONSOLIDATED STATEMENTS OF DEFICIT
(IN CANADIAN DOLLARS)

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Deficit, beginning.......................................... $(1,390,897) $ (891,9l8)
Net loss.................................................... (4,717,897) (498,979)
----------- -----------
Deficit, ending............................................. $(6,108,794) $(1,390,897)
=========== ===========
</TABLE>

See accompanying notes.
F-55
<PAGE> 109

MED-TECH ENVIRONMENTAL LTD

CONSOLIDATED STATEMENTS OF INCOME
(IN CANADIAN DOLLARS)

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Sales....................................................... $10,983,298 $ 392,432
Direct costs................................................ 6,920,620 298,397
----------- ---------
Gross margin................................................ 4,062,678 94,035
----------- ---------
Operating expenses:
Amortization.............................................. 1,068,964 55,925
Bad debts................................................. 20,000 --
Interest.................................................. 1,467,476 722
Financing costs........................................... -- 106,822
Office and general........................................ 206,269 7,623
Premises costs............................................ 449,527 47,281
Professional fees......................................... 122,666 182,523
Telephone................................................. 126,806 6,479
Wages and benefits........................................ 1,525,864 99,727
----------- ---------
4,987,572 507,102
----------- ---------
Loss before the following................................... (924,894) (413,067)
Laidlaw financing and related costs....................... (1,148,634) --
SMS financing and related costs........................... (1,448,294) --
Loss from discontinued operations (note 9)................ (1,218,373) --
Gain (loss) on disposal of capital assets................. 22,298 (85,912)
----------- ---------
(3,793,003) (85,912)
----------- ---------
Net loss.................................................... $(4,717,897) $(498,979)
=========== =========
</TABLE>

See accompanying notes.
F-56
<PAGE> 110

MED-TECH ENVIRONMENTAL LTD

CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(IN CANADIAN DOLLARS)

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Cash Provided By (Used For)
Operating activities:
Net loss.................................................. $(4,717,897) $ (498,979)
Items not affecting cash
Amortization......................................... 1,068,964 55,925
(Gain) loss on disposal of capital assets............ (22,298) 85,912
----------- ----------
(3,671,231) (357,142)
Changes in non-cash working capital items................... 71,293 (94,385)
----------- ----------
(3,599,938) (451,527)
----------- ----------
Financing activities:
Issue of common shares.................................... 3,367,040 864,499
Obligations under capital leases.......................... 372,117 --
Increase in long-term debt................................ 8,097,166 --
Repayment of long-term debt............................... (500,000) --
Convertible debenture..................................... 10,000 200,000
----------- ----------
11,346,323 1,064,499
----------- ----------
Investing activity:
Purchase of capital assets................................ (1,553,690) (179,658)
Proceeds on disposal of capital assets.................... 16,352 --
Increase in goodwill...................................... (8,040,040) (479,332)
----------- ----------
(9,577,378) (658,990)
----------- ----------
Decrease in cash............................................ (1,830,993) (46,018)
Cash, beginning............................................. 31,375 77,393
----------- ----------
(Bank indebtedness) cash, ending............................ $(1,799,618) $ 31,375
=========== ==========
</TABLE>

See accompanying notes.
F-57
<PAGE> 111

MED-TECH ENVIRONMENTAL LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These financial statements are prepared in accordance with generally
accepted accounting principles in Canada.

(a) Going concern assumption

These financial statements have been prepared on the basis of accounting
principles applicable to a "going concern", which assumes that the Company will
continue in operation for the foreseeable future and will be able to realize its
assets and discharge its liabilities in the normal course of operations.

Several adverse conditions and events cast substantial assumption upon the
validity of this assumption. The Company has incurred significant operating
losses in the current year and has a significant working capital deficiency. In
addition the Company is in breach of certain financial covenants relating to its
bank credit facilities and subordinated debt.

The Company is dependent on the continued support of its banker and
subordinated debt holders and is currently renegotiating its financing
arrangements as well as seeking alternate equity funding and pursuing the
possibility of an outright sale.

These financial statements do not reflect adjustments that would be
necessary if the "going concern" assumption were not appropriate because
management believes that the actions already taken or planned, as described
above, will mitigate the adverse conditions and events which raise doubts about
the validity of the "going concern" assumption used in preparing these financial
statements.

If the "going concern" assumption were not appropriate for these financial
statements, then adjustments would be necessary in the carrying values of assets
and liabilities, the reported revenues and expenses, and the balance sheet
classifications used.

(b) Business combination

On April 4, 1997, Med-Tech Environmental Limited ("Med-Tech") acquired all
the issued and outstanding capital stock of Laidlaw Medical Services Ltd.
("LMSL") and Med-Tech Environmental Inc., a wholly owned subsidiary of Med-Tech,
and acquired all the issued and outstanding capital stock of Laidlaw Medical
Services, Inc. (Delaware) ("LMSI"), for $9,200,000. The purchase price was
funded by the issue of the Company's capital stock, term and subordinated
convertible term debt. The purchase price was allocated equally between LMSL and
LMSI. The acquisition was accounted for by the purchase method.

During the year, the following companies, by way of articles of amendment,
changed their names as follows:

<TABLE>
<CAPTION>
FROM TO
---- --
<S> <C>
Laidlaw Medical Services Ltd. Med-Tech Environmental (CDA) Ltd.
Laidlaw Medical Services, Inc. Med-Tech Environmental (MA) Inc.
</TABLE>

(d) Principles of consolidation

These consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Bio-Med Waste Disposal Systems Ltd., Med-Tech
Environmental (CDA) Ltd., Med-Tech Environmental Inc., and Med-Tech
Environmental (MA) Inc. All significant intercompany accounts and transactions
have been eliminated.

F-58
<PAGE> 112
MED-TECH ENVIRONMENTAL LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) Capital assets are recorded at cost. Amortization is calculated on the
following annual rates and methods:

<TABLE>
<S> <C>
Furniture and fixtures............................. 20% declining balance basis
Computers.......................................... 30% declining balance basis
Trucks............................................. 30% declining balance basis
Equipment.......................................... Straight-line over 5 years
Assets under capital leases........................ 30% declining balance basis
</TABLE>

Leasehold improvements are amortized on a straight line basis over the term
of the lease.

(f) Licenses and goodwill are recorded at cost and amortized on a
straight-line basis over a period no greater than 25 years.

(g) Foreign currency translation

Assets and liabilities of integrated foreign subsidiary operations and
foreign currency denominated assets and liabilities of Canadian operations are
translated into Canadian dollars at exchange rates prevailing at the transaction
date for non-monetary items. Revenue and expenses, except amortization, are
converted at average exchange rates for the year. Amortization is converted at
the same rate as the related assets. Gains or losses on translation are expensed
in the year realized or incurred except for the exchange gains or losses on
long-term monetary items which are deferred and amortized over the remaining
terms of the related items.

2. CAPITAL ASSETS

<TABLE>
<CAPTION>
1998 1997
---------- --------
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
---- ------------ -------- --------
<S> <C> <C> <C> <C>
Furniture and fixtures........... $ 538,199 529,805 $ 8,394 $ 11,046
Computers........................ 117,549 34,057 83,492 28,328
Trucks........................... 1,958,503 1,605,938 352,565 29,687
Equipment........................ 1,195,903 814,531 381,372 397,499
Leasehold improvements........... 189,338 50,407 138,931 13,395
Assets under capital leases...... 508,899 73,469 435,430 30,115
---------- --------- ---------- --------
$4,508,391 3,108,207 $1,400,184 $510,070
========== ========= ========== ========
</TABLE>

3. OTHER ASSETS

<TABLE>
<CAPTION>
1998 1997
---------- --------
ACCUMULATED NET BOOK NET BOOK
COST AMORTIZATION VALUE VALUE
---- ------------ -------- --------
<S> <C> <C> <C> <C>
Licenses................ $ 214,610 23,350 $ 191,260 $201,906
Goodwill................ 9,011,290 450,879 8,560,411 753,969
---------- ------- ---------- --------
$9,225,900 474,229 $8,751,671 $955,875
========== ======= ========== ========
</TABLE>

4. BANK INDEBTEDNESS

The bank indebtedness is secured by a registered general security agreement
covering all assets and bears interest at the bank's prime rate plus 100 basis
points

F-59
<PAGE> 113
MED-TECH ENVIRONMENTAL LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998

5. CONVERTIBLE DEBENTURE

<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
5% convertible debenture to Oriole Point Investment Inc.,
a shareholder; interest payable on the 31st day of March
in each year commencing March 31, 1998, repayable upon
the earlier of: (i) a distribution to the public of
securities of the Company and (ii) March 31,1999. The
Company will make mandatory principal prepayments
commencing April 30, 1998 to the lesser of 50% of annual
free cash flow or $100,000. ............................. $210,000 $200,000
======== ========
</TABLE>

6. OBLIGATIONS UNDER CAPITAL LEASES

<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Obligations related to leased trucks repayable in monthly
installments of $5,444 at interest rates ranging from
8%to 12%................................................. $372,117 $ --
Less current portion..................................... 81,315 --
-------- --------
$290,802 $ --
</TABLE>

Total payments due in the next 5 years are as follows:

<TABLE>
<S> <C>
1999........................................................ $ 81,315
2000........................................................ 88,999
2001........................................................ 90,355
2002........................................................ 56,680
2003 and thereafter......................................... 54,768
--------
$372,117
========
</TABLE>

7. LONG-TERM DEBT

<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
4.8% monthly (57.6% per annum) promissory note to
Oriole Point Investment Inc., a shareholder, due
October 6, 1997, interest accrued monthly commencing
October 6, 1997....................................... $ 105,000 $ --
25% non-revolving convertible term facility, interest
shall be paid monthly at the rate of 12.5% per annum,
the balance of 12.5% increases the amount of the debt,
due March 31, 1999, secured by a registered general
security agreement.................................... 4,647,364 --
Term loan, bearing interest at prime plus 200 basis
points, interest payable monthly, repayable in
quarterly principal payments of $250,000 plus 75% of
the free cash flow to a maximum of $1,000,000 prior to
March 31, 1998 and $500,000 every year thereafter,
secured by a registered general security agreement.... 3,000,000 --
---------- ----------
7,752,364 --
Less current portion.................................. 5,752,364 --
---------- ----------
$2,000,000 $ --
========== ==========
</TABLE>

F-60
<PAGE> 114
MED-TECH ENVIRONMENTAL LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998

7. LONG-TERM DEBT (CONTINUED)
At year end the company was in default of certain bank covenants and
certain covenants pertaining to the non-revolving convertible term facility and
is currently renegotiating its financing arrangements.

Principal payments required in each of the next three years are as follows:

8. CAPITAL STOCK

<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Authorized
Unlimited number of Class "A" common shares.........
Issued
14,605,000 (1997 9,725,000) Class "A" common
shares........................................... $6,170,429 $2,803,389
========== ==========
</TABLE>

During the year the Company entered into the following transactions
involving the issuance of capital stock:

a) The company issued 2,250,000 Class "A" common shares at $1.00 per
share for proceeds of $2,250,000.

b) 500,000 First Series Warrants were exercised at $1.00 per share for
500,000 Class "A" common shares for $500,000.

c) 2,000,000 Fourth Series Warrants were exercised at $0.40 per share
for 2,000,000 Class "A" common shares for $800,000.

d) 80,000 corporate share purchase options were exercised at $0.40
each for 80,000 Class "A" common shares for $32,000.

e) The Company issued 50,000 Class "A" Common shares at $0.40 per
share for proceeds of $20,000.

f) The equity portion of the pro rata share of fees paid to TEGS
Capital Corporation on the issue of Class "A" common shares in the amount
of $234,960 was charged as a reduction to capital stock.

The Company has the following warrants and options outstanding:

a) 3,268,062 First Series Warrants each entitling the holder to
subscribe for one Class "A" common share at $1.00 per share, expiring
December 31, 1998.

b) 500,000 Fourth Series Warrants each entitling the holder to
subscribe for one Class "A" common share at $0.40 per share expiring March
21, 1999.

c) 600,000 Fifth Series Warrants each entitling the holder to
subscribe for one Class "A" common share at $0.73 per share, expiring March
31, 2000.

F-61
<PAGE> 115
MED-TECH ENVIRONMENTAL LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998

8. CAPITAL STOCK (CONTINUED)
d) 600,000 Sixth Series Warrants each entitling the holder to
subscribe for one Class "A" common share at $1.00 per share, expiring March
31, 2000.

e) 1,333,333 Retractable Warrants each entitling the holder to
subscribe for one Class "A" common share at $0.40 per share, exercisable
from the earlier of March 31, 1999 and the prepayment date until the expiry
date, which will be two years from the date the Company becomes a reporting
issuer in Ontario and the retractable Warrants and Class "A" common shares
issuable on their exercise become freely tradeable for the holder or its
nominees.

f) 280,000 Corporate Share Purchase Options to purchase 280,000 Class
"A" common shares at the exercise price of $0.40 per share, expiring
January 23, 2001.

g) 480,000 Corporate Share Purchase Options to purchase 480,000 Class
"A" common shares at the exercise price of $1.00 per share, expiring
November 6, 2002.

h) 24,000 Corporate Share Purchase Options to purchase 24,000 Class
"A" common shares at the exercise price of $0.40 per share, expiring
January 23, 2001.

i) 260,000 Corporate Share Purchase Options to purchase 260,000 Class
"A" common shares at the exercise price of $1.00 per share, expiring
December 31, 2000.

j) 300,000 Corporate Share Purchase Options to purchase 300,000 Class
"A" common shares at the exercise price of $0.40 per share, expiring March
31, 1999.

k) 300,000 Corporate Share Purchase Options to purchase 300,000 Class
"A" common shares at the exercise price of $1.00 per share, expiring May
31, 1999.

l) During the year the 138,277 second series warrants and 553,110
third series warrants expired March 31, 1998 without being exercised.

9. LOSS FROM DISCONTINUED OPERATIONS

The Company discontinued its divisions in Etobicoke, Ontario and Gatineau,
Quebec. Management has estimated losses related to the discontinued operations
and accrued them in these financial statements. Any significant changes to these
estimates will be recorded in the period in which they are realized.

10. ACQUISITION

Effective April 4 1997, Med-Tech acquired all the issued and outstanding
capital stock of Laidlaw Medical Services Ltd. (Canada) and Med-Tech
Environmental Inc., a wholly owned subsidiary of "Med-Tech", acquired all the
issued and outstanding capital stock of Laidlaw Medical Services, Inc.,
(Delaware). Both companies operated a medical waste transportation and disposal
business. The acquisition has been

F-62
<PAGE> 116
MED-TECH ENVIRONMENTAL LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998

10. ACQUISITION (CONTINUED)
accounted for by the purchase method and the results of operations have been
consolidated from April 4, 1997.

<TABLE>
<S> <C>
Current assets.............................................. $ 1,744,901
Capital assets.............................................. 2,121,706
Goodwill.................................................... 8,057,321
-----------
$11,923,928
===========
Current liabilities......................................... $ 1,390,415
Long term debt.............................................. 7,500,000
Class "A" common shares..................................... 3,033,513
-----------
$11,923,928
===========
</TABLE>

11. COMMITMENTS AND CONTINGENCY

(a) The Company leases operating premises in Brampton, Ontario, St.
Catharines, Quebec, Calgary, Alberta and Haverhill, Massachusetts. The
minimum annual rentals for the balance of these leases amounts to $244,057.

(b) The Company has provided the Ministry of the Environment of
Ontario with bonds for approximately $136,000 as required by provincial
statute.

(c) The Ministry of the Environment of Ontario and the Massachusetts
Department of Environmental Protection have several non-compliance and
related charges outstanding. It is not possible at this time to determine
the amount, if any, of any fines or damages that may be levied as a result
of these non-compliance issues. Any fines or damages incurred as a result
of these concerns will be charged to operations in the year they are
incurred. Management does not believe that fines levied will be in excess
of $15,000 in total.

(d) As at May 20, 1998 several of the Company's legal counsels had not
yet responded to our audit legal enquiry. As at November 16, 1998 the last
of the outstanding legal enquiries was received and note 11(c) was amended
accordingly.

(e) Under the terms of the purchase and sale agreement as described in
note 1(b) between Allied Waste Industries Inc. ("Allied"), Med-Tech, LMSL
and LMSI, Med-Tech has an obligation to obtain a release of Allied's
guarantee on the lease at 139-141 Ferry Road, Haverhill, Massachusetts. To
date, this obligation to obtain a release has not yet been fulfilled.

(f) The Company agreed to issue to 1176698 Ontario Limited or its
nominees Warrants (the "Unrestricted Warrants") entitling the holder to
purchase 2,000,000 Class "A" common shares at an exercise price of $1.00
per share, subject to adjustments. The expiry date of the Unrestricted
Warrants will be two years from the date the Company became a reporting
issuer and the Unrestricted Warrants and Class "A" common shares issuable
on their exercise become freely tradeable for 1176698 Ontario Limited or
its nominees.

F-63
<PAGE> 117
MED-TECH ENVIRONMENTAL LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1998

12. TAX BENEFITS AVAILABLE

These financial statements do not reflect potential tax benefits available
through the application of losses carried forward against future years' earnings
otherwise subject to income taxes. These losses expire approximately as follows:

13. RELATED PARTY TRANSACTIONS

During the year the Company incurred the following related party
transactions with certain corporate directors, officers and professional firms
of these certain directors and officers.

<TABLE>
<S> <C>
Professional services expenses.............................. $454,035
Commissions................................................. 266,000
Management and consulting services expenses................. 36,598
Interest.................................................... 39,264
</TABLE>

At March 31, 1998, $319,150 remains outstanding and is included in accounts
payable.

Management is of the opinion that these transactions are in the normal
course of operations and are measured at the exchange amount which is the amount
of consideration established and agreed to by the related parties.

14. RISK MANAGEMENT AND FAIR VALUES

Financial risk is the risk to Med-Tech's earnings that arise from
fluctuations in interest rates and foreign exchange rates and the degree of
volatility of these rates. Med-Tech does not use derivative instruments to
reduce its exposure to interest and foreign exchange risk. The book value of
Med-Tech's financial assets and liabilities approximate amounts for which
instruments could be exchanged in a transaction between knowledgeable and
willing parties based on public market information.

F-64
<PAGE> 118

MED-TECH ENVIRONMENTAL LTD

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN CANADIAN DOLLARS)

<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable....................................... $ 1,899,021 $ 1,742,788
Other receivables......................................... 49,470 185,828
Inventory................................................. 135,007 129,704
Prepaids expenses and deposits............................ 183,650 220,582
----------- -----------
Total current assets................................... 2,267,148 2,278,902
Capital assets............................................ 1,482,794 2,927,700
Licenses.................................................. 189,114 198,385
Goodwill.................................................. 8,249,861 6,947,274
----------- -----------
Total assets........................................... $12,188,917 $12,352,261
=========== ===========
LIABILITIES
Current liabilities:
Bank indebtedness......................................... $ 1,732,353 $ 307,483
Accounts payable and accrued liabilities.................. 2,148,577 2,011,332
Convertible debenture..................................... 4,954,769 4,200,000
Current portion of obligations under capital lease........ 124,209 --
Current portion of long-term debt......................... 3,000,000 600,000
----------- -----------
Total Current liabilities.............................. 11,958,907 7,118,815
Obligations under capital lease........................... 372,626 --
Long-term debt............................................ -- 2,900,000
----------- -----------
Total liabilities...................................... 12,332,533 10,018,815
----------- -----------
SHAREHOLDERS' EQUITY
Capital stock............................................... 8,220,429 5,850,430
Deficit..................................................... (6,364,045) (3,316,984)
----------- -----------
Total shareholders equity.............................. (143,618) 2,333,446
----------- -----------
Total liabilities and shareholders' equity............. $12,188,917 $12,352,261
=========== ===========
</TABLE>

F-65
<PAGE> 119

MED-TECH ENVIRONMENTAL LTD

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN CANADIAN DOLLARS)

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Revenue..................................................... $2,894,208 $ 2,512,614
---------- -----------
Direct costs
Disposal and Processing................................... 903,232 1,242,538
Transportation............................................ 601,605 615,041
Packaging................................................. 314,983 282,137
---------- -----------
Total direct costs..................................... 1,819,820 2,139,715
---------- -----------
Gross margin................................................ 1,074,388 372,898
---------- -----------
Selling, general and administrative expenses................ 672,648 1,843,058
---------- -----------
Amortization................................................ 220,669 245,232
Interest expense............................................ 409,557 215,534
---------- -----------
Net loss.................................................... $ (228,486) $(1,930,926)
========== ===========
</TABLE>

F-66
<PAGE> 120

MED-TECH ENVIRONMENTAL LTD

CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(UNAUDITED)
(IN CANADIAN DOLLARS)

<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
JUNE 30,
------------------------
1998 1997
---- ----
<S> <C> <C>
Cash provided by (used for)
Operating activities:
Net loss.................................................. $(228,488) $(1,930,926)
Items not affecting cash
Amortization......................................... 220,689 245,232
</TABLE>

F-67
<PAGE> 121

MED-TECH ENVIRONMENTAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)

1. BASIS OF PRESENTATION

These interim financial statements have been prepared by management in
accordance with generally accepted accounting principles in Canada. These
interim financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the years ended March
31, 1997 and March 31, 1998. The results of operations for the three month
period ended June 30, 1998 are not necessary indicative of the results that may
be achieved for the entire year ending March 31, 1999.

These statements are denoted in Canadian Dollars.

2. STOCK ISSUANCES

In April 1998, options to purchase 150,000 shares of common stock were
exercised at an average price of $0.33 per share.

3. INCOME TAXES

These financial statements do not reflect potential tax benefits available
through the application of losses carried forward against future years earnings.

F-68
<PAGE> 122

INTRODUCTION TO
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma consolidated financial statements of the
Company present the unaudited pro forma consolidated statements of operations
for the year ended December 31, 1997 and the nine months ended September 30,
1998 and the unaudited pro forma consolidated balance sheet at September 30,
1998. The unaudited pro forma consolidated statement of operations for the year
ended December 31, 1997 gives pro forma effect to the Company's acquisition of
(a) all of the outstanding common stock of Waste Systems, Inc. ("WSI"), the
majority owner of 3CI Complete Compliance Corporation, on October 1, 1998, (b)
all of the junior secured indebtedness of Med-Tech Environmental Limited
("Med-Tech") on October 20, 1998, and (c) all of the outstanding common stock
and 93% of the outstanding warrants of Med-Tech in December 1998 and January
1999, as if such transactions had occurred on January 1, 1997. The unaudited pro
forma consolidated statement of operations for the nine months ended September
30, 1998 gives pro forma effect to the acquisition of the common stock of WSI
and the common stock, warrants and junior secured indebtedness of Med-Tech as if
such transactions had occurred on January 1, 1998. The unaudited pro forma
consolidated balance sheet gives pro forma effect to the acquisition of the
common stock of WSI and the common stock, warrants and junior secured
indebtedness of Med-Tech as if such transactions had occurred on September 30,
1998. The pro forma as adjusted consolidated financial statements give
additional effect to the offering of 3,500,000 shares of Common Stock made
hereby and the use of a portion of the net proceeds therefrom to repay
interest-bearing indebtedness in the amount of $10,000,000 issued to fund the
acquisition of the common stock of WSI and interest-bearing indebtedness in the
amount of $5,819,000 issued to fund the acquisition of the common stock,
warrants and junior secured indebtedness of Med-Tech, in each case as if such
events had occurred on the first day of the period presented, for purposes of
statement of operations data, and as if such events had occurred on September
30, 1998, for purposes of balance sheet data. The unaudited pro forma
consolidated financial statements presented herein are based on the assumptions
and adjustments described in the accompanying notes. The unaudited pro forma
consolidated statements of operations do not purport to represent what the
Company's results of operations would have been if the events described above
had occurred as of the dates indicated or what such results will be for any
future periods. The unaudited pro forma consolidated financial statements are
based on assumptions and adjustments that the Company believes are reasonable.
The unaudited pro forma consolidated financial statements and the accompanying
notes should be read in conjunction with the historical financial statements of
the Company, including the notes thereto, and the historical financial
statements of WSI and Med-Tech, and the notes thereto, which are included
elsewhere in this Prospectus.

F-69
<PAGE> 123

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
OFFERING
PRO FORMA PRO FORMA PRO FORMA
STERICYCLE WSI (1) MED-TECH (2) ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- ------- ------------ ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $46,166 $18,790 $ 7,835 -- $72,791 -- $72,791
Costs and expenses:
Cost of revenues......... 34,109 15,456 4,937 -- 54,502 -- 54,502
Selling, general, and
administrative
expenses............... 10,671 3,785 2,511 $ 221(3) 17,188 -- 17,188
Write-off of financing
and related costs...... -- -- 1,853 (820)(4) 1,033 -- 1,033
Loss from shut-down of
operations............. -- -- 869 -- 869 -- 869
------- ------- ------- ----- ------- ------ -------
44,780 19,241 10,170 (599) 73,592 -- 73,592
------- ------- ------- ----- ------- ------ -------
Income (loss) from
operations............... 1,386 (451) (2,335) 599 (801) -- (801)
Other income (expense):
Interest income.......... 618 -- -- -- 618 --(7) 618
Interest expense......... (428) (855) (1,047) (506)(5) (2,836) $1,291(8) (1,545)
Other income (expense)... -- -- 16 -- 16 -- 16
------- ------- ------- ----- ------- ------ -------
190 (855) (1,031) (506) (2,202) 1,291 (911)
------- ------- ------- ----- ------- ------ -------
Income (loss) before income
taxes and minority
interest................. 1,576 (1,306) (3,366) 93 (3,003) 1,291 (1,712)
Income tax expense......... 146 -- -- -- 146 -- 146
------- ------- ------- ----- ------- ------ -------
Income (loss) before
minority interest........ 1,430 (1,306) (3,366) 93 (3,149) 1,291 (1,858)
Minority interest in net
loss of subsidiary....... -- 66 -- -- 66 -- 66
------- ------- ------- ----- ------- ------ -------
Net income (loss).......... $ 1,430 $(1,240) $(3,366) $ 93 $(3,083) $1,291 $(1,792)
======= ======= ======= ===== ======= ====== =======
Weighted average shares
outstanding--basic....... 10,240 37(6) 10,277 3,500(9) 13,777
======= ===== ======= ====== =======
Basic net income (loss) per
share.................... $ 0.14 $ (0.30) $ (0.13)
======= ======= =======
Weighted average number of
common shares and common
stock equivalent shares
outstanding.............. 10,766 37(6) 10,803 3,500(9) 14,303
======= ===== ======= ====== =======
Diluted net income (loss)
per share................ $ 0.13 $ (0.29) $ (0.13)
======= ======= =======
</TABLE>

- -------------------------
(1) The statement of operations data for WSI for the year ended December 31,
1997 represent the historical results of operations of WSI for its fiscal
year ended December 31, 1997. The acquisition of WSI has been accounted for
as a purchase. Accordingly, the results of operations of WSI will be
included in the Company's results of operations from the date of
acquisition.

(2) The statement of operations data for Med-Tech for the year ended December
31, 1997 represent the historical results of operations of Med-Tech for its
fiscal year ended March 31, 1998 and have been converted to U.S. dollars
using the average exchange rate of Canadian $1.4018 for U.S. $1.00 for the
fiscal year ended March 31, 1998. The acquisition of Med-Tech has been
accounted for as a purchase.

F-70
<PAGE> 124

Accordingly, the results of operations of Med-Tech will be included in the
Company's results of operations from the date of acquisition.

(3) The adjustment to selling, general and administrative expenses consists of
an increase in amortization of goodwill from the acquisitions of WSI and
Med-Tech over a 25-year period, as if WSI and Med-Tech were acquired on
January 1, 1997. The adjustment also includes the effects of increased
amortization of goodwill of $8,000 for Med-Tech resulting from differences
in accounting principles generally accepted in Canada and the United States
as discussed in Note 4 below.

(4) The historical statement of operations of Med-Tech for the fiscal year ended
March 31, 1998 include certain legal and financing costs incurred to
complete and obtain financing for its acquisition on April 4, 1997 of
Laidlaw Medical Services, Ltd. and Laidlaw Medical Services, Inc. (together
"Laidlaw"). Under accounting principles generally accepted in Canada, these
costs have been expensed as incurred in the statement of operations for the
year ended March 31, 1998. Under accounting principles generally accepted in
the United States and for purposes of this unaudited pro forma consolidated
statement of operations, these costs have been deferred and are being
amortized on a straight-line basis over 25 years for the legal fees and over
the life of the related loan agreement for the financing costs.

(5) The adjustment to interest expense reflects the following: (a) additional
interest, including commitment fees on the unborrowed portion and net of
reduced commitment fees on the borrowed portion, of $1,361,000 that would
have been incurred had the Company borrowed the $10,000,000 required to fund
the acquisition of the common stock of WSI and the $5,819,000 required to
fund the acquisition of the common stock, warrants and junior secured
indebtedness of Med-Tech under its credit agreement with LaSalle National
Bank on January 1, 1997 at interest rates of 8.50% for WSI and 8.25% for
Med-Tech which were in effect on acquisition, (b) reduced interest expense
of $894,000 that would not have been incurred had the Company purchased on
January 1, 1997 the junior secured indebtedness of Med-Tech with a face
value of $3,576,000 and an interest rate of 25%, and (c) increased
amortization of deferred financing costs of $39,000 for Med-Tech from
January 1, 1997 resulting from differences in accounting principles
generally accepted in Canada and the United States as discussed in Note 4
above.

(6) Shares used in the computation of pro forma basic net income (loss) per
share and pro forma diluted net income (loss) per share give effect to the
issuance of 36,940 shares of Common Stock by the Company as consideration
for the purchase of the junior secured indebtedness of Med-Tech assuming
such shares were issued on January 1, 1997.

(7) The Company intends to invest in short-term, interest-bearing investment
grade securities the $31,290,000 of excess proceeds expected from the
Offering, after re-payment of certain indebtedness of the Company as more
fully described in "Use of Proceeds". Based on the 13-week Treasury bill
interest rate of 4.47% effective February 4, 1999, interest income of
$1,399,000 would have been earned assuming the investment of such excess
proceeds during the full period from January 1, 1997 to December 31, 1997.
Such interest income has not been included in the unaudited consolidated pro
forma statement of operations for the year ended December 31, 1997.

(8) The adjustment to interest expense reflects the repayment of certain
indebtedness of the Company by applying a portion of the estimated net
proceeds of the Offering as more fully described in "Use of Proceeds," as if
such transactions had occurred on January 1, 1997.

(9) Shares used in the computation of pro forma basic net income (loss) per
share and pro forma diluted net income (loss) per share, as adjusted, give
effect to the issuance and sale of 3,500,000 shares of Common Stock offered
by the Company hereby.

F-71
<PAGE> 125

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
OFFERING
PRO FORMA PRO FORMA PRO FORMA
STERICYCLE WSI(1) MED-TECH(2) ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- ------ ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.................... $44,759 $14,127 $5,985 -- $64,871 -- $64,871
Costs and expenses:
Cost of revenues.......... 30,492 11,289 4,283 -- 46,064 -- 46,064
Selling, general, and
administrative
expenses................ 10,151 2,555 1,779 $ 166(3) 14,651 -- 14,651
------- ------- ------ ----- ------- ------ -------
40,643 13,844 6,062 166 60,715 -- 60,715
------- ------- ------ ----- ------- ------ -------
Income (loss) from
operations................ 4,116 283 (77) (166) 4,156 -- 4,156
Other income (expense):
Interest income........... 308 -- -- -- 308 (6) 308
Interest expense.......... (242) (175) (834) (379)(4) (1,630) $1,044(7) (586)
Other income (expense).... 20 -- (53) -- (33) -- (33)
------- ------- ------ ----- ------- ------ -------
86 (175) (887) (379) (1,355) 1,044 (311)
------- ------- ------ ----- ------- ------ -------
Income (loss) before income
taxes and minority
interest.................. 4,202 108 (964) (545) 2,801 1,044 3,845
Income tax expense.......... 781 -- -- -- 781 -- 781
------- ------- ------ ----- ------- ------ -------
Income (loss) before
minority interest......... 3,421 108 (964) (545) 2,020 1,044 3,064
Minority interest in net
loss of subsidiary........ -- 43 -- -- 43 -- 43
------- ------- ------ ----- ------- ------ -------
Net income (loss)........... $ 3,421 $ 151 $ (964) $(545) $ 2,063 $1,044 $ 3,107
======= ======= ====== ===== ======= ====== =======
Weighted average shares
outstanding--basic........ 10,580 37(5) 10,617 3,500(8) 14,117
======= ===== ======= ====== =======
Basic net income per
share..................... $ 0.32 $ 0.19 $ 0.22
======= ======= =======
Weighted average number of
common shares and common
stock equivalent shares
outstanding............... 11,234 37(5) 11,271 3,500(8) 14,771
======= ===== ======= ====== =======
Diluted net income per
share..................... $ 0.30 $ 0.18 $ 0.21
======= ======= =======
</TABLE>

- -------------------------
(1) The statement of operations data for WSI for the nine months ended September
30, 1998 represent the results of operations of WSI from January 1, 1998 to
September 30, 1998. The acquisition of WSI has been accounted for as a
purchase. Accordingly, the results of operations of WSI will be included in
the Company's results of operations from the date of acquisition.

(2) The statement of operations data for Med-Tech for the nine months ended
September 30, 1998 represent the historical results of operations of
Med-Tech from January 1, 1998 to September 30, 1998 and have been converted
to U.S. dollars using the average exchange rate of Canadian $1.4692 for U.S.
$1.00 for the period from January 1, 1998 to September 30, 1998. The
acquisition of Med-Tech has been accounted for as a purchase. Accordingly,
the results of operations of Med-Tech will be included in the Company's
results of operations from the date of acquisition.

(3) The adjustment to selling, general and administrative expenses consists of
an increase in amortization of goodwill from the acquisitions of WSI and
Med-Tech over a 25 year period, as if WSI and Med-Tech were acquired on
January 1, 1998. The adjustment also includes the effects of increased
amortization of goodwill of $6,000 for Med-Tech resulting from differences
in accounting principles generally accepted in Canada and the United States
as discussed in Note 4 to the unaudited pro forma consolidated statement of
operations for the year ended December 31, 1997.

F-72
<PAGE> 126

(4) The adjustment to interest expense reflects the following: (a) additional
interest, including commitment fees on the unborrowed portion and net of
reduced commitment fees on the borrowed portion, of $1,021,000 that would
have been incurred had the Company borrowed the $10,000,000 required to fund
the acquisition of the common stock of WSI and the $5,819,000 required to
fund the acquisition of the common stock, warrants, and junior secured
indebtedness of Med-Tech under its credit agreement with LaSalle National
Bank on January 1, 1998 at interest rates of 8.50% for WSI and 8.25% for
Med-Tech which were in effect on the dates of acquisition; (b) reduced
interest expense of $671,000 that would not have been incurred had the
Company purchased on January 1, 1998 the junior secured indebtedness of
Med-Tech with a face value of $3,576,000 and an interest rate of 25%; and
(c) increased amortization of deferred financing costs of $29,000 for
Med-Tech from January 1, 1998 resulting from differences in accounting
principles generally accepted in Canada and the United States as discussed
in Note 4 to the unaudited pro forma consolidated statement of operations
for the year ended December 31, 1997.

(5) Shares used in the computation of pro forma basic net income per share and
pro forma diluted net income per share give effect to the issuance of 36,940
shares of Common Stock by the Company as consideration for the purchase of
the junior secured indebtedness of Med-Tech assuming such shares were issued
on January 1, 1998.

(6) The Company intends to invest in short-term interest-bearing investment
grade securities the $31,290,000 of excess proceeds expected from the
Offering, after repayment of certain indebtedness of the Company as more
fully described in "Use of Proceeds". Based on the 13-week treasury bill
interest rate of 4.47% effective February 4, 1999, interest income of
$1,049,000 would have been earned assuming the investment of such excess
proceeds during the full period from January 1, 1998 to September 30, 1998.
Such interest income has not been included in the unaudited consolidated pro
forma statement of operations for the nine months ended September 30, 1998.

(7) The adjustment to interest expense reflects the repayment of certain
indebtedness of the Company by applying a portion of the estimated net
proceeds of the Offering as more fully described in "Use of Proceeds," as if
such transaction had occurred on January 1, 1998.

(8) Shares used in the computation of pro forma basic net income per share and
pro forma diluted net income per share, as adjusted, give effect to the
issuance and sale of 3,500,000 shares of Common Stock offered by the Company
hereby.

F-73
<PAGE> 127

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
OFFERING
PRO FORMA PRO FORMA PRO FORMA
STERICYCLE WSI MED-TECH(1) ADJUSTMENTS(2) PRO FORMA ADJUSTMENTS(3) AS ADJUSTED
---------- --- ----------- -------------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 775 $ 2 $ -- $ (260) $ 517 $ 31,290 $ 31,807
Short-term investments......... 2,335 -- -- -- 2,335 -- 2,335
Accounts receivable, net....... 10,902 2,813 1,542 -- 15,257 -- 15,257
Parts and supplies............. 1,037 87 109 -- 1,233 -- 1,233
Prepaid expenses and other..... 2,615 758 180 -- 3,553 -- 3,553
------- ------- ------ -------- -------- -------- --------
Total current assets....... 17,664 3,660 1,831 (260) 22,895 31,290 54,185
Property, plant and equipment,
net............................ 12,043 8,986 971 -- 22,000 -- 22,000
Goodwill, net.................... 36,796 343 5,516 4,998 47,653 -- 47,653
Other............................ 1,680 226 341 100 2,347 -- 2,347
------- ------- ------ -------- -------- -------- --------
Total assets............... $68,183 $13,215 $8,659 $ 4,838 $ 94,895 $ 31,290 $126,185
======= ======= ====== ======== ======== ======== ========

LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt......................... $ 6,281 $ 1,660 $7,168 $ 7,243 $ 22,352 $(10,819) $ 11,533
Accounts payable and accrued
liabilities.................. 7,422 2,685 1,491 -- 11,598 -- 11,598
Deferred revenue............... 663 -- -- -- 663 -- 663
------- ------- ------ -------- -------- -------- --------
Total current
liabilities.............. 14,366 4,345 8,659 7,243 34,613 (10,819) 23,794
Long-term debt................... 3,246 883 -- 5,000 9,129 (5,000) 4,129
Other liabilities................ 21 -- -- -- 21 -- 21
Shareholders' equity:
Common stock................... 107 500 4,043 (4,543) 107 35 142
Additional paid-in capital..... 85,087 32,196 -- (31,614) 85,669 47,074 132,743
Notes receivable............... (4) -- -- -- (4) -- (4)
Accumulated deficit............ (34,640) (24,709) (4,043) 28,752 (34,640) -- (34,640)
------- ------- ------ -------- -------- -------- --------
Total shareholders'
equity................... 50,550 7,987 0 (7,405) 51,132 47,109 98,241
------- ------- ------ -------- -------- -------- --------
Total liabilities and
shareholders' equity..... $68,183 $13,215 $8,659 $ 4,838 $ 94,895 $ 31,290 $126,185
======= ======= ====== ======== ======== ======== ========
</TABLE>

- -------------------------
(1) The historical balance sheet data for Med-Tech have been converted to U.S.
dollars using an exchange rate of Canadian $1.5262 for U.S. $1.00 effective
as of September 30, 1998.

(2) Reflects the allocation of the purchase prices for the acquisitions of the
common stock of WSI and of the common stock, warrants and junior secured
indebtedness of Med-Tech to the underlying fair value of the net assets
acquired and the issuance of 36,940 shares of Common Stock of the Company
and incremental borrowings of $15,819,000 under the Company's credit
agreement with LaSalle National Bank to fund the purchase prices. The
allocation of the purchase prices is preliminary. The Company is in the
process of determining the fair values of the acquired property, plant and
equipment and does not expect final adjustments to the purchase price
allocations to be material.

(3) Reflects the issuance of 3,500,000 shares of Common Stock offered by the
Company hereby and the application of the net proceeds therefrom.

F-74
<PAGE> 128

[STERICYCLE LOGO]

[HOME]

Through on-site training and education programs, Stericycle helps customers
establish regulated medical waste management systems.

[HOME]

Stericycle helps health care providers protect patients and employees from the
potential hazards of regulated medical waste with puncture-resistant, leak-proof
Steri-Tub(R) collection containers.
[HOME]

Regulated medical waste is readied for treatment at the beginning of the
process.
[HOME]

The empty Steri-Tub(R) continues on to the wash station where it is sanitized
and prepared for re-use.
[HOME]

A processing vessel containing the regulated medical waste automatically enters
the dielectric oven, where it is treated using Stericycle's patented
Electro-Thermal-Deactivation (ETD) treatment process.

[HOME]

The regulated medical waste has now been rendered noninfectious. The treated
waste can now be recycled, used as a fuel to provide energy, or safely
landfilled.
<PAGE> 129

No dealer, salesperson or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus in connection with the offer contained herein, and if given or made,
such information or representation must not be relied upon as having been
authorized by the Company, or any Underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, shares of
Common Stock in any jurisdiction to any person to whom it is not lawful to make
any such offer or solicitation in such jurisdiction or in which the person
making such offer or solicitation is not qualified to do so. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that there has been no change in the
affairs of the Company since the date hereof.

TABLE OF CONTENTS

<TABLE>
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 15
Price Range of Common Stock........... 16
Capitalization........................ 17
Dividend Policy....................... 17
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 25
Management............................ 46
Certain Transactions.................. 48
Description of Capital Stock.......... 49
Shares Eligible for Future Sale....... 50
Underwriting.......................... 51
Legal Matters......................... 52
Experts............................... 52
Available Information................. 52
Documents Incorporated by Reference... 53
Index to Financial Statements......... F-1
</TABLE>

PROSPECTUS February 5, 1999

3,500,000 Shares

[STERICYCLE LOGO]

Common Stock

WARBURG DILLON READ LLC
BT ALEX. BROWN
CREDIT SUISSE FIRST BOSTON
WILLIAM BLAIR & COMPANY