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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                     ---------------------------------------

                                   FORM 10-KSB

{X}      ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
         OF 1934.
         FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2002.

{ }      TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
         ACT OF 1934. FOR THE TRANSITION PERIOD FROM ____ TO _____.

                         Commission file number: 0-32995

                               MEDSOLUTIONS, INC.
                 (Name of small business issuer in its charter)

            Texas                                                75-2531556
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                              Identification No.)


                 12750 Merit Drive, Park Central VII, Suite 770
                              Dallas, Texas 75251
           (Address of principal executive office including zip code)

                                 (972) 931-2374
                         (Registrant's telephone number)

Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:

                     Common Stock, Par Value $.001 Per Share
                                (Title of Class)

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

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form { }

State Issuer's revenues for most recent fiscal year: $5,410,710

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates  computed by reference to the price at which the common equity
was sold,  or the average bid and asked  price of such  common  equity,  as of a
specified date within the past 60 days. $0.

The number of shares  outstanding of registrant's  common stock, $.001 par value
per share as of March 15, 2003, was 16,347,154 shares.

Transitional Small Business Disclosure Format (check one): Yes { }  No {X}

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<PAGE>

                               MEDSOLUTIONS, INC.
                        2002 ANNUAL REPORT ON FORM 10-KSB
                                      INDEX

Part I.                                                                     Page
                                                                            ----
    Item 1.  Description of Business                                          1
    Item 2.  Description of Property                                         11
    Item 3.  Legal Proceedings                                               12
    Item 4.  Submission of Matters to a Vote of Security Holders             13
Part II.
    Item 5.  Market for Common Equity and Related Stockholder Matters        13
    Item 6.  Management's Discussion and Analysis or Plan of Operation       14
    Item 7.  Consolidated Financial Statements                               20
    Item 8.  Changes In and Disagreements with Accountants on Accounting
             and Financial Disclosures                                       20

Part III.
    Item 9.  Directors,  Executive  Officers, Promoters and Control Persons,
             Compliance With Section 16(a) of the Exchange Act               20
    Item 10. Executive Compensation                                          22
    Item 11. Security  Ownership of Certain Beneficial Owners and
             Management and Related Stockholder Matters                      24
    Item 12. Certain Relationships and Related Transactions                  26
    Item 13. Exhibits and Reports on Form 8-K                                27
    Item 14. Controls and Procedures                                         29
Signatures                                                                   30
Certifications under Section 302 of the Sarbanes-Oxley Act of 2002           31
Audited Consolidated Financial Statements                                    F-i
Exhibit Index


<PAGE>

                SAFE HARBOR REGARDING FORWARD LOOKING STATEMENTS

         This Form 10-KSB contains forward-looking statements.  These statements
relate to future events or our future financial performance. You should exercise
extreme caution with respect to all forward-looking statements contained in this
Form 10-KSB. Specifically, the following statements are forward-looking:

o        statements   regarding   our  overall   strategy   including,   without
         limitation,  our intended  markets,  service offerings and acquisitions
         and our expected liquidity and capital resources;

o        statements  regarding the plans and  objectives of our  management  for
         future  operations,  expectations  for sales and marketing and the size
         and nature of the costs we expect to incur and the people and  services
         we may employ;

o        statements regarding anticipated trends in our business;

o        statements regarding regulations that may affect us;

o        statements  regarding our  competition  and our ability to compete with
         third parties;

o        any statements  using the words  "anticipate,"  "believe,"  "estimate,"
         "expect," "intend," "may," "will," "should," "would," "expect," "plan,"
         "predict," "potential," "continue" and similar words; and

o        any statements other than historical fact.

         Forward-looking  statements reflect the current view of management with
respect to future events and are subject to numerous  risks,  uncertainties  and
assumptions.  We can give no assurance that such  expectations  will prove to be
correct.  Should any one or more of such risks or  uncertainties  materialize or
should any underlying assumptions prove incorrect,  actual results are likely to
vary  materially  from  those  described  in this Form  10-KSB.  There can be no
assurance  that the  projected  results  will  occur,  that these  judgments  or
assumptions will prove correct or that unforeseen  developments  will not occur.
We are under no duty to update any of the  forward-looking  statements after the
date of this Form 10-KSB.


<PAGE>

                                     PART I

Item 1.  Description of Business

Company Overview

         MedSolutions,  Inc. ("we," "us," or the "Company"), a Texas corporation
that was organized on November 11, 1993, is a diversified  holding  company that
provides complete and effective waste management  outsource  solutions  marketed
and  serviced  through  two  wholly  owned  subsidiaries.   Through  EnviroClean
Management Services, Inc. ("EMSI"), from which we currently derive virtually all
of our revenue,  we are primarily  engaged in regulated medical waste management
services,  which  include  collecting,  transporting,  treating and disposing of
regulated  medical  waste  from  a  variety  of  healthcare  customers.  Through
ShredSolutions,  Inc.  ("SSI"),  we  market  a fully  integrated,  comprehensive
service  for  the  collection,   transportation  and  destruction  of  Protected
Healthcare Information (PHI) and other confidential  documents,  primarily those
generated by  healthcare  providers  and  regulated  under the Health  Insurance
Portability  and  Accountability  Act  ("HIPAA").  We  are  a  fully  integrated
regulated  medical  waste  management  company  providing  medical waste and PHI
collection,  transportation,  treatment  and  disposal  and related  consulting,
training  and  education  services and  products.  Our two  principal  groups of
customers  include small medical waste  generators  such as outpatient  clinics,
medical and dental offices and long-term and sub-acute care facilities and large
medical  waste  generators  such as  hospitals,  blood banks and  pharmaceutical
manufacturers.  We believe  that the  services  we offer are  compelling  to our
customers because they allow our customers to avoid the significant  capital and
operating  costs  that they  would  have to incur if they  were to manage  their
regulated medical waste or PHI destruction internally.  Moreover, by outsourcing
these waste  management,  PHI destruction,  consulting and other services to us,
our customers  reduce or eliminate their risk of the large fines associated with
regulatory non-compliance.

Business Background

         We were originally  incorporated as Advanced EnviroTech Systems,  Inc.,
and subsequently  changed our name to EnviroClean  International,  Inc., for the
purpose of  developing,  designing  and  manufacturing  a patented  solid  waste
treatment technology,  the EnviroClean(R)Thermal  Oxidation System, which we may
sometimes  refer  to as  the  "EnviroClean(R)System",  for  the  destruction  of
regulated  medical and other specialized waste streams generated by the medical,
commercial  and industrial  business  communities  in an  environmentally  sound
manner.  We have two issued  patents (No.  5,680,820  and No.  5,730,072)  and a
trademark regarding the  EnviroClean(R)System.  Although we were established for
the purpose of  developing,  manufacturing  and marketing of the  EnviroClean(R)
System,  our success in that regard has been marginal,  and we have not produced
significant  revenue or any  profit  from such  activity.  Lack of funds for the
development,  modification  and marketing of the  EnviroClean(R)System,  coupled
with the general lack of acceptance  and demand,  and the cost of production and
operation  of the product,  contributed  to our  disappointing  results in prior
periods.  There are no plans to reactivate the  development  of the  EnviroClean
System.  In 1999, we altered our focus from the  development of the  EnviroClean
System to the  development  of our regulated  medical waste  management  service
business and modified our business model to emulate that of the industry leader,
but with an emphasis on customer service.  In addition,  we have also focused on
the creation and development of subsidiaries  that can provide our large base of
health care provider  customers  with other health care related waste  services.
From the time we changed our business strategy, our business has seen a dramatic
turnaround and a more receptive market.

Industry Overview

         The  regulated  medical  waste  industry  arose with the Medical  Waste
Tracking  Act of 1988,  or MWTA,  which  Congress  enacted in  response to media
attention  after medical waste washed ashore on ocean beaches,  particularly  in
New York and New Jersey. Since the 1980s, government regulation has increasingly
required the proper  handling and disposal of the medical waste generated by the
health care  industry.  Regulated  medical  waste is generally  described as any
medical  waste  that  can  cause an  infectious  disease,  including  single-use
disposable items, such as needles,  syringes, gloves and other medical supplies;
cultures and stocks of infectious agents; and blood and blood products.

         According to the industry  leader,  the size of the  regulated  medical
waste market in the United States is approximately $3.0 billion and is in excess
of $10.0 billion when  ancillary  services such as PHI  destruction,  re-useable
sharps container  programs,  training,  education,  product sales and consulting
services  are  taken  into  account.  Industry  growth  is driven by a number of
factors. These factors include:

         Pressure To Reduce  Hospital  Costs.  The health care industry is under
pressure to reduce costs and improve  efficiency.  To accomplish this reduction,
outside contractors are being hired to perform some services,  including medical
waste management,  PHI destruction and re-useable sharps container programs.  We
believe that our medical waste  management  services help health care  providers
reduce costs by reducing their medical waste  tracking,  handling and compliance
costs,  reducing  their  potential  liability  related to  employee  exposure to
bloodborne pathogens and other infectious  material,  and reducing the amount of
money invested in on-site treatment of medical waste and/or PHI destruction.


                                       1
<PAGE>

         Shift to Off-Site  Treatment.  We believe  that  managed care and other
health care  cost-containment  pressures are causing  patient care to shift from
institutional  higher-cost  acute-care  settings  to  less  expensive,  smaller,
off-site  treatment  alternatives.  Many common  diseases and conditions are now
being  treated  in smaller  non-institutional  settings.  We believe  that these
non-institutional  alternate-site health care expenditures will continue to grow
as cost-cutting  pressures  increase.  Typically these type of settings generate
only small amounts of medical waste; thus, the potential risks of non-compliance
with applicable state and federal medical waste regulations is  disproportionate
to the cost of services we can provide.

         Aging of U.S. Population.  According to industry statistics,  the "baby
boom" generation (births between 1946 and 1964) constitutes approximately 30% of
the United States population. The relative size of this generation will continue
to result in an increase in the average  age of the  population,  while  falling
mortality rates ensure that the average person will live longer.  As people age,
they typically  require more medical  attention and a wider variety of tests and
procedures.  In addition,  as  technology  improves,  more tests and  procedures
become available.  All of these factors lead to increased  generation of medical
waste.

         Environmental  and  Safety  Regulation.  Our  industry  is  subject  to
extensive  regulation beyond the MWTA. For example, the Clean Air Act Amendments
of 1990 (the "Clean Air Act")  regulations  adopted in 1997 limit the  discharge
into the atmosphere of pollutants released by medical waste incineration.  These
regulations have increased the costs of operating medical waste incinerators and
have resulted in the closures of several on-site treatment  facilities,  thereby
increasing the demand for off-site treatment services. In addition, Occupational
Safety and Health  Administration,  or OSHA, has issued  regulations  concerning
employee  exposure to  bloodborne  pathogens  and other  potentially  infectious
materials that require,  among other things, special procedures for the handling
and disposal of medical  waste and annual  training of all  personnel who may be
exposed to blood and other body fluids. These regulations underlie the expansion
of our service  offerings  to include OSHA  compliance  services for health care
providers.

Services and Operations

         Our  services  and   operations   are  comprised  of  the   collection,
transportation,  treatment,  and  disposal of regulated  medical  waste and PHI,
together with related training and education  programs,  consulting services and
product  sales.  We have two  treatment/collection  facilities  and one transfer
station  located  in the state of Texas  that  serve our  customers.  We develop
programs  to help our  customers  learn how to  properly  handle,  separate  and
package for disposal  medical waste. We also advise our health care customers on
the proper methods of recording and documenting  their medical waste  management
to comply with  federal,  state and local  regulations.  In  addition,  we offer
consulting  services to our health care  customers  for OSHA  compliance  and to
assist them in reducing the amount of medical waste they generate.  We have over
1000 medical waste  disposal  agreements  with  customers for the  collection of
their medical  waste and/or PHI.  During 2002,  the  University of Texas Medical
Branch ("UTMB") accounted for approximately 22.0% of our revenue,  Baylor Health
Care System  approximately  10.8%,  Methodist Medical Center approximately 6.6%,
Christus Spohn Hospital System approximately 6.5%, Texas Health Resources System
approximately  6.2%, and East Texas Medical System  approximately 5.7%. The loss
of any of these  sources of revenue  could  reduce our  revenues,  increase  our
losses from operations and materially impact our ability to be profitable.

         Collection and Transportation. We consider efficiency of collection and
transportation to be a critical element of our operations  because it represents
approximately  one-half  of our  operating  costs.  We  utilize a  sophisticated
routing software to optimize our routes.  We try to maximize the number of stops
on each route. We use a global  positioning  system ("GPS")  tracking system for
our collection vehicles to improve  efficiency.  We try to match the size of our
collection  vehicles  to the  amount  of  medical  waste  to be  collected  at a
particular  stop or on a particular  route.  We collect  reusable  containers or
corrugated boxes of medical waste from our customers at intervals depending upon
customer  requirements,  terms of service and volume of medical waste  produced.
The containers or boxes are inspected at each  customer's  site prior to pickup.
The waste is then transported  directly to one of our treatment facilities or to
our  transfer  station  where  it is  combined  with  other  medical  waste  and
transported to a treatment facility.  In some select  circumstances we transport
medical waste to other specially licensed medical waste treatment facilities.

         As part of our  collection  operations,  we supply  specially  designed
containers for use by most of our customers. We have reusable plastic containers
that  are  leak  and  puncture-resistant.  The  plastic  containers  enable  our
customers to reduce costs by reducing the number of times that medical  waste is
handled,  eliminating the cost (and weight) of corrugated  boxes and potentially
reducing liability  resulting from human contact with medical waste. The plastic
containers  are  designed to  maximize  the loads that will fit within the cargo
compartments  of our standard  trucks and  trailers.  If a customer  generates a
large  volume of waste,  we will place a large  temporary  storage  container or
trailer on the customer's premises.  In order to maximize regulatory  compliance
and minimize potential liability,  we will not accept medical waste unless it is
properly  packaged by customers in  containers  that we have either  supplied or
approved.


                                       2
<PAGE>

         Treatment  and  Disposal.   Upon  arrival  at  a  treatment   facility,
containers or boxes of medical  waste are typically  scanned to verify that they
do not  contain any  unacceptable  substances  like  radioactive  material.  Any
container or box that is discovered to contain unacceptable waste is returned to
the customer. After inspection,  the waste is treated using one of our treatment
technologies.  Upon completion of the particular process, the resulting waste or
incinerator  ash is transported  for disposal in a landfill  operated by parties
unaffiliated with us. After the plastic  containers have been emptied,  they are
washed, sanitized and returned to customers for re-use.

         Treatment   Technologies.   We  currently  use  both   autoclaving  and
incineration technologies for treating regulated medical waste.

         Autoclaving.  Autoclaving  treats  medical  waste  with  steam  at high
temperature  and pressure to kill pathogens.  Autoclaving  alone does not change
the appearance of waste, and  recognizable  medical waste may not be accepted by
some landfill  operators,  but  autoclaving  may be combined with a shredding or
grinding process to render the medical waste unrecognizable.

         Incineration. Incineration burns medical waste at elevated temperatures
and reduces it to ash.  Incineration  reduces the volume of waste, and it is the
recommended  treatment and disposal  option for some types of medical waste such
as  anatomical  waste or residues from  chemotherapy  procedures.  However,  air
emissions from incinerators can contain certain byproducts, which are subject to
federal,  state and, in some  cases,  local  regulation.  In  addition,  the ash
byproduct of incineration may be regulated in some instances.

Our current capacity to treat regulated  medical waste is approximately  divided
between these treatment methods in the following percentages:

                   autoclaving                    60%
                   incineration                   40%

We vary our treatment of medical waste among  available  treatment  technologies
based on the type of waste  and  capacity  and  pricing  considerations  in each
service area, in order to minimize operating costs and capital investments.

         Disposal Operations. We operate two permitted treatment facilities. Our
treatment/transfer  facility located in Garland,  Texas can service North Texas,
Oklahoma,  Arkansas  and  Louisiana  with an  emphasis on the  Dallas/Ft.  Worth
service  area  (the  "Garland  Facility").  Our other  facility  is  located  in
Galveston,  Texas,  which  can  service  customers  located  in South  Texas and
Southern  Louisiana  with an emphasis on the Greater  Houston  service area. The
Galveston  facility is owned by UTMB (the "UTMB  Facility"),  a component of the
University of Texas System, which is an agency of the State of Texas. We use the
UTMB  Facility for the disposal of waste  streams that we collect and  transport
for our customers  located in this region,  and also for waste streams generated
by UTMB and its  affiliates.  As part of our  acquisition of BMI Services,  Inc.
("BMI") in 1996,  BMI's  contract  to operate  the  medical  waste  incineration
facility at UTMB and to provide medical waste incineration  services to UTMB was
assigned to us. Our current agreement with UTMB expires in December 2005. We are
currently in negotiations with UTMB to extend the term of the agreement.

         Under the current  agreement  with UTMB,  certain fees that we must pay
UTMB will increase on a gradual  annual basis,  including a fixed facility usage
and  maintenance  fee that was $18,500 per month in 2002,  and will  increase to
$21,500  per  month  by the year  2005,  a  graduated  capital  renewal  fee (to
reimburse UTMB for a capital  investment of approximately  $1.3 million) ranging
from $20,208 per month in 2002 to approximately  $27,200 per month from December
2002 until December 2005, and a constant usage fee of $.005 per lb. based on the
volume of medical waste  processed at the UTMB Facility for non-UTMB  waste.  We
pay all utilities and are entitled to a variable credit for steam generated from
the unit.

         In the past, the UTMB Facility has experienced  operational disruptions
that have caused us to occasionally  discontinue  incinerator  operations at the
facility  while  appropriate  repairs were made.  In the spring of 2002,  it was
determined that the UTMB incinerator would require  extensive  modifications and
improvements  in  order to  comply  with the New  Source  Performance  Standards
promulgated by the  Environmental  Protection Agency ("EPA") that were to became
effective  in  September  2002.  As a result from April 15, 2002 until March 25,
2003, we were unable to incinerate waste at the UTMB Facility.  This required us
to arrange for waste disposal with alternative  vendors in order to continue our
operations. Our transportation and treatment costs for using alternative vendors
for waste disposal are usually higher than the costs of using the UTMB Facility.


                                       3
<PAGE>

During this time,  we continued to make  payments to UTMB;  however,  due to the
closure of the incinerator,  UTMB was required to credit back to us a portion of
such payments and pay us an additional amount as a penalty for the closure. As a
result  of  the  downtime  issues  related  to  the  UTMB  facility,  we  sought
authorization to install and operate  alternative  waste treatment  equipment at
the  Garland  Facility.  In  February  2002,  we  submitted  a permit  amendment
application to the Texas Commission on Environmental  Quality (TCEQ) to allow us
to install autoclave technology at our Garland Facility.  On October 7, 2002 our
permit  amendment  was  approved.  Prior  to  receipt  of  our  approved  permit
amendment,  we  received  temporary  authorization  from the TCEQ to process our
regulated  medical waste at the Garland  Facility using the autoclave  method of
treatment for a period of six months in order to allow for uninterrupted medical
waste treatment while the UTMB Facility was not in operation.

         Consulting  Services.  Before medical waste is picked up by our trucks,
our integrated  waste  management  approach  attempts to "build in" efficiencies
that will yield  advantages  for our  customers.  For  example,  our  consulting
services can assist our  customers in reducing the volume of medical  waste that
they  generate.  In  addition,  we  provide  customers  with  the  documentation
necessary for compliance with laws,  which,  if they complete the  documentation
properly, will reduce interruptions to their businesses to verify compliance.

         Documentation.  We provide complete  documentation to our customers for
all medical waste and PHI that we collect,  including the name of the generator,
date of pick-up and date of delivery to a treatment  facility.  We believe  that
our  documentation  system  meets  all  applicable  federal,   state  and  local
regulations  regarding the packaging  and labeling of medical  waste,  including
regulations issued by the U.S.  Department of Transportation,  or U.S. DOT, OSHA
and state and local  authorities.  This  documentation  is sometimes used by our
customers to prove that they are in  compliance  with these  regulations.

Business Strategy

         Our goals are to  strengthen  our  position  as a regional  provider of
integrated  services in the regulated medical waste industry and to continuously
improve our financial  performance.  Components of our strategy to achieve these
goals include:

         Improve Margins.  We intend to continue actively to work to improve our
margins by  increasing  our base of small  account  customers  and  focusing  on
service  strategies  that more  efficiently  meet the needs of our large account
customers.  Small account customers typically do not produce a sufficient volume
of  regulated   medical  waste  on  an  individual   basis  to  justify  capital
expenditures  for their own waste  treatment  facility  or the expense of hiring
regulatory  compliance  personnel.  We believe that the number of small  account
customers and the opportunities for sales of ancillary  services and products to
both large and small account customers will continue to grow.

         Expand  Range of Services  and  Products.  We believe  that we have the
opportunity  to expand our  business by  increasing  the range of  products  and
services that we offer to our existing customers.  For example, we now offer PHI
destruction and a broad range of OSHA compliance and consulting  services to our
customers.  Because our drivers call on numerous medical facilities on a routine
basis,  we also offer  single-use  disposable  medical  supplies  to our medical
customers,  and we may  increase  these  offerings  in the future.  In 2002,  we
incorporated a new subsidiary, SharpSolutions, Inc., that will market a reusable
sharps container program to our customers.

         Seek   Complementary   Acquisitions.   We   actively   seek   strategic
opportunities to acquire businesses that expand our network of treatment centers
and increase our customer  base.  We believe  that  strategic  acquisitions  can
enable us to gain operating  efficiencies through increased capacity utilization
and increased route density as well as to expand the geographic service areas in
which we operate.

         Capitalize on Outsourcing Due to Clean Air  Regulations.  The Clean Air
Act  regulations  have  increased  both the capital costs required to bring many
existing  incinerators  into  compliance  and the  operating  costs of continued
compliance.  We  plan  to  continue  to try and  capitalize  on the  anticipated
movement by hospitals to outsource medical waste treatment rather than incur the
cost of installing the air pollution  control  systems  necessary to comply with
these EPA regulations.

         Our business strategy and expansion plans will place significant strain
on our management, working capital, financial and management control systems and
staff.  Our failure to properly respond to these needs by failing to maintain or
upgrade financial and management control systems,  failing to recruit additional
staff or failing to  respond  effectively  to  difficulties  encountered  during
expansion could adversely affect our business,  financial  condition and results
of operations.  Although,  based on our  experience in the industry,  we believe
that our management  and financial  systems and controls are adequate to address
current needs and we are attempting to recruit and train additional staff, there
can be no  assurance  that our  systems,  controls  or staff will be adequate to
sustain future growth.


                                       4
<PAGE>

Acquisitions and Corporate Background

         BMI Services,  Inc. BMI, a regulated  medical waste and  transportation
management  company,  was  acquired  by EMSI in  April  1996.  BMI was  based in
Houston,  Texas and was one of the largest  independent  transporters of medical
waste in Texas.  We acquired  our primary  waste  transportation  business,  our
transfer  station  in Tyler,  Texas  and the UTMB  arrangement  through  the BMI
acquisition.

         EnviroClean   Management   Services,   Inc   ("EMSI").   We  and  other
shareholders  formed EMSI in February 1996, as a  consolidation  vehicle for the
merger or acquisition of BMI and other  proposed  entities.  In January 1998, we
exchanged shares of our common stock, $.001 par value per share ("Common Stock")
to acquire 667,375 shares of EMSI from other shareholders. This transaction gave
us a controlling  interest of approximately  51.3% of EMSI. In December 1998, we
offered to exchange one of our shares for each share of EMSI still  outstanding.
As a result, we acquired shares  representing  96.1% of EMSI's stock. Since then
we have continued the exchange offer and have acquired additional shares and now
own 99.3% of EMSI.

         Evaluation and  Integration.  We believe that our  management  team can
evaluate  potential  acquisition  candidates and determine  whether a particular
medical  waste  management  business  can be  successfully  integrated  into our
business. In determining whether to proceed with a business acquisition, we will
evaluate a number of factors including:

         o        the financial  impact of the proposed  acquisition,  including
                  the effect on our cash flow and earnings per share;

         o        the historical and projected  financial  results of the target
                  company;

         o        the purchase price negotiated with the seller and our expected
                  internal rate of return;

         o        the  composition  and size of the  target  company's  customer
                  base;

         o        the efficiencies that we can achieve by integrating the target
                  company with our existing operations;

         o        the  potential  for  enhancing  or  expanding  our  geographic
                  service area and allowing us to make other acquisitions in the
                  same service area;

         o        the  experience,  reputation  and  personality  of the  target
                  company's management;

         o        the target  company's  reputation  for  customer  service  and
                  relationships with the communities that it serves; and

         o        whether the acquisition gives us any strategic advantages over
                  our competition.

Once a business is  acquired,  we will  implement  programs  designed to improve
customer service, sales,  marketing,  routing,  equipment utilization,  employee
productivity, operating efficiencies and cash flow.

Marketing and Sales

         Marketing Strategy.  We use both telemarketing and direct sales efforts
to obtain new customers.  In addition, we have a large database of potential new
small account  customers,  which we believe gives us a competitive  advantage in
identifying  and reaching  these  higher-margin  accounts.  Our drivers also may
participate  in our  marketing and sales  efforts by actively  soliciting  small
account customers while they service their routes.

         Small Account Customers.  We have targeted small account customers as a
growth  area.  We believe  that these  customers  offer  high  profit  potential
compared to other  potential  customers.  Typical  small  account  customers are
individual or small groups of doctors,  dentists and other health care providers
who are widely dispersed and generate only small amounts of medical waste. These
customers  are very  concerned  about  having the  medical  waste  picked up and
disposed of in compliance  with  applicable  state and federal  regulations.  We
believe that these  customers view the potential  risks of  non-compliance  with
applicable state and federal medical waste  regulations as  disproportionate  to
the cost of the services  that we provide.  We believe that this factor has been
the basis for the significantly  higher gross margins that we have achieved with
our small account customers relative to our large account customers.


                                       5
<PAGE>

         Large  Account  Customers.  We believe that we have been  successful in
serving large account customers and plan to continue to serve those customers as
long as they establish route anchors and/or satisfactory levels of profitability
can be  maintained.  In  addition,  we believe that the  implementation  of more
stringent  Clean Air Act and other federal  regulations  directly and indirectly
affecting medical waste will enable us to improve our marketing efforts to large
account  customers  because the additional  costs that they will incur to comply
with these  regulations  will make the costs of our  services  more  attractive,
particularly relative to their use of their own incinerators.  Our marketing and
sales  efforts to large account  customers  are  conducted by full-time  account
executives  whose  responsibilities   include  identifying  and  attracting  new
customers and serving our existing account base of large account  customers.  In
addition to securing new contracts,  our marketing and sales  personnel  provide
consulting services to our health care customers, assisting them in reducing the
amount of medical waste that they generate,  training their  employees on safety
issues and implementing  programs to audit, classify and segregate medical waste
in a proper manner.

         Contract  and Service  Agreements.  We have  long-term  contracts  with
substantially all of our customers.  We negotiate  individual service agreements
with each large account and small account customer.  Although we have a standard
form of  agreement,  particularly  for small account  customers,  terms may vary
depending upon the  customer's  service  requirements  and the volume of medical
waste generated and, in some jurisdictions,  requirements  imposed by statute or
regulation.  Service  agreements  typically include  provisions  relating to the
types  of   containers,   frequency  of  collection,   pricing,   treatment  and
documentation  for  tracking   purposes.   Each  agreement  also  specifies  the
customer's  obligation  to  pack  its  medical  waste  in  approved  containers.
Substantially all of our agreements with customers contain automatic renewal and
price increase provisions.

         Service  agreements  are  generally  for a period of one to five years,
although  customers  may  terminate on written  notice and, in most cases,  upon
payment  of a  penalty.  We may set our  prices  on the  basis of the  number of
containers that we collect,  the weight of the medical waste that we collect and
treat, the number of collection stops that we make on the customer's  route, the
number of collection  stops that we make for a particular  multi-site  customer,
and other factors.

         Competition.  There are  several  regulated  medical  waste  management
companies  operating in the state of Texas and the surrounding  region,  and the
market is highly competitive.  Our two primary  competitors are large,  publicly
traded corporations with regional and national businesses.  These companies also
provide a variety of services other than collection,  transportation,  treatment
and  disposal.  As such,  these  competitors  have a broad scope of business and
substantially greater financial and other resources than we possess.

         According to public securities filings,  Stericycle Inc. ("Stericycle")
is the largest medical waste management company in the United States. Stericycle
utilizes  a  proprietary  electro-thermal  deactivation  ("ETD")  process  in  a
multi-regional  strategy. By utilizing their ETD process,  Stericycle is able to
recycle or reuse a portion of the plastics  within the  regulated  medical waste
stream. However,  Stericycle, like us, primarily utilizes autoclave technologies
to process a majority of their waste stream and to a lesser degree  incineration
technologies  .  3CI  Complete  Compliance   Corporation   ("American  3CI"),  a
subsidiary of Stericycle, is one of the larger regional medical waste management
companies in the Southwest.

         Based  on our  experience  in the  industry,  we  believe  that  we can
successfully  compete with these  companies by  concentrating  our operations in
Texas and the Southern U.S. We believe that we gain a  competitive  advantage by
offering  better service than our competitors and by reducing the price of waste
disposal  services to customers to an amount below that of our  competitors.  We
can accomplish  this as a result of having our  facilities in closer  geographic
proximity to the generators of medical waste, cost reduction  efforts,  offering
of ancillary services and expansion through acquisitions.

         In addition,  we face potential  competition  from  businesses that are
attempting  to  commercialize   alternate  treatment  technologies  or  products
designed  to reduce or  eliminate  the  generation  of  medical  waste,  such as
reusable or degradable medical products.

         We  compete  for  service   agreements   primarily   on  the  basis  of
cost-effectiveness,  quality of service and geographic location. We also attempt
to compete by demonstrating to customers that we can do a better job in reducing
their potential  liability.  Our 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 offer prices to
the potential customer that are lower than ours.

Competitive Strengths

We believe that we benefit from the following competitive strengths:


                                       6
<PAGE>

         Broad  Range of  Services.  We offer  our  customers  a broad  range of
services to help them develop internal  systems and processes,  which allow them
to manage their medical waste and PHI  destruction  efficiently  and safely from
the point of generation  through  treatment and disposal.  For example,  we have
developed programs to help train our customers'  employees on the proper methods
of handling medical waste in order to reduce potential employee exposure.  Other
services  include those designed to help clients ensure and maintain  compliance
with  OSHA and  other  relevant  regulations.  In 2002,  we  incorporated  a new
subsidiary,  SharpSolutions,  Inc., that will market a reusable sharps container
program to our customers.

         Low-Cost  Operations.  We are often the  low-cost  provider  within the
markets  we  serve.  Our low  costs  result  from  our  facilities  being  close
geographically  to generators  of medical  waste.  As a result,  we are able to:
increase our route  densities,  which permits our drivers to make more stops per
shift;  minimize the distance  traveled by our collection  vehicles to treatment
facilities;  and increase the  utilization  of our equipment  and  facilities to
treat more of the waste that we collect internally.

         Strong   Sales   Network  and   Proprietary   Database.   We  use  both
telemarketing and direct sales efforts to obtain new customers.  In addition, we
have a large database of potential new small and large account customers,  which
we believe gives us a competitive  advantage in  identifying  and reaching these
higher-margin and route anchor accounts.

         Experienced  Senior  Management Team. Our three most senior  executives
collectively have over 30 years of management  experience in the health care and
waste management industries. Our Founder and Chief Executive Officer, Matthew H.
Fleeger,  has been with us during our growth from an early stage venture capital
concept to the present. Sam Hicks joined us in 1998 as Senior Vice President and
Chief Financial Officer and previously served as Director of Financial Reporting
of HealthCor,  Inc., a publicly-held healthcare services company. Prior to that,
Mr.  Hicks was with Ernst & Young LLP for 31 years,  with 16 of those years as a
Partner.  John E. Hill III recently  joined us as Chief Operating  Officer.  Mr.
Hill  previously   served  in  operations   management  roles  with  Stericycle,
Bridgeview,  Inc.  (acquired by  Stericycle in 2002),  MedWaste,  Inc. and Waste
Management, Inc.

Governmental Regulation

         We are subject to extensive and frequently changing federal,  state and
local laws and  regulations.  This  statutory and regulatory  framework  imposes
compliance  burdens  and  risks on us,  including  requirements  to  obtain  and
maintain government permits.  These permits grant us the authority,  among other
things:

         o        to construct and operate treatment and transfer facilities;

         o        to  transport   medical  waste  within  and  between  relevant
                  jurisdictions; and

         o        to handle particular regulated substances.

Our permits  must be  periodically  renewed and are subject to  modification  or
revocation by the regulatory authority.  We are also subject to regulations that
govern   the   definition,   generation,   segregation,   handling,   packaging,
transportation,  treatment,  storage and disposal of medical waste.  We are also
subject to  extensive  regulations  designed  to minimize  employee  exposure to
medical waste.

         Federal Regulation.  There are at least four federal agencies that have
authority over medical waste. These agencies are the EPA, OSHA, the U.S. DOT and
the U.S. Postal Service.  These agencies  regulate medical waste under a variety
of statutes and regulations.

         Medical Waste Tracking Act of 1988. In the late 1980s, the EPA outlined
a  two-year  demonstration  program  pursuant  to MWTA,  which  was added to the
Resource Conservation and Recovery Act of 1976. 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  grew  following  media reports of
careless management of medical waste. The MWTA was intended to be the first step
in addressing  these problems.  The primary  objective of the MWTA was to ensure
that  medical  wastes which were  generated  in a covered  state and which posed
environmental  problems,  including an unsightly  appearance,  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.


                                       7
<PAGE>

         In regulations implementing the MWTA, the EPA defined medical waste and
established guidelines for its segregation,  handling, containment, labeling and
transport.  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 August 1997, the EPA adopted regulations
under  the  Clean  Air Act that  limit  the  discharge  into the  atmosphere  of
pollutants  released by medical waste incineration.  These regulations  required
every state to submit to the EPA for  approval a plan to meet  minimum  emission
standards for these pollutants. Due to these regulations,  the UTMB Facility was
closed from April 15, 2002 until March 25, 2003 in order to  implement  upgrades
and improvements to the UTMB incinerator to comply with the new regulations.  We
believe that we will be successful  in  maintaining  all  necessary  federal and
state permits to continue the operation of our incinerators.

         Occupational Safety and Health Act of 1970. The Occupational Safety and
Health  Act of 1970  authorizes  OSHA to issue  occupational  safety  and health
standards.  OSHA  regulations are designed to minimize the exposure of employees
to hazardous work  environments.  Various  standards apply to certain aspects of
our operations. These regulations govern, among other things:

         o        exposure  to  bloodborne   pathogens  and  other   potentially
                  infectious materials;

         o        lock out/tag out procedures;

         o        medical surveillance requirements;

         o        use of respirators and personal protective equipment;

         o        emergency planning;

         o        hazard communication;

         o        noise;

         o        ergonomics; and

         o        forklift safety.

Our  employees  are  required  by our policy to receive new  employee  training,
annual  refresher  training and training in their specific tasks. As part of our
medical  surveillance  program,   employees  receive  pre-employment  physicals,
including  drug  testing,   annually  required  medical  surveillance  and  exit
physicals.  We also subscribe to a drug-free  workplace policy. In addition,  we
are subject to unannounced OSHA Safety inspections at any time.

         Resource  Conservation  and  Recovery  Act of 1976.  In 1976,  Congress
passed  the  Resource  Conservation  and  Recovery  Act of 1976,  or 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.  These  standards  included a  documentation  program for the
transportation  of hazardous  wastes and a permit system for solid and hazardous
waste disposal facilities. Medical wastes are currently considered non-hazardous
solid wastes under RCRA. However,  some substances  collected by us from some of
our customers,  including photographic fixer developer solutions, lead foils and
dental amalgam, are considered hazardous wastes.

         We use landfills  operated by parties  unrelated to us for the disposal
of  incinerator  ash and autoclaved  waste.  Waste is not regulated as hazardous
under RCRA unless it contains hazardous  substances exceeding certain quantities
or concentration  levels,  meets specified  descriptions,  or exhibits  specific
hazardous  characteristics.  Following autoclave treatment, waste is disposed of
as  non-hazardous  waste.  After  incineration  treatment,  we test ash from the
incineration  process to  determine  whether it must be disposed of as hazardous
waste.

         We employ quality control  measures to check incoming medical waste for
specific types of hazardous substances. Our customer agreements also require our
customers to exclude  different  kinds of hazardous  substances  or  radioactive
materials from the medical waste they provide us.

         DOT Regulations. The U.S. DOT has put regulations into effect under the
Hazardous Materials Transportation Authorization Act of 1994 which require us to
package and label medical waste in compliance  with  designated  standards,  and


                                       8
<PAGE>

which  incorporate  bloodborne  pathogens  standards issued by OSHA. Under these
standards,   we  must,  among  other  things,  identify  our  packaging  with  a
"biohazard" marking on the outer packaging, and our medical waste container must
be  sufficiently  rigid and strong to prevent  tearing or  bursting  and must be
puncture-resistant, leak-resistant, properly sealed and impervious to moisture.

         DOT  regulations   also  require  that  a  transporter  be  capable  of
responding  on a  24-hour-a-day  basis in the event of an  accident,  spill,  or
release to the  environment  of a hazardous  material.  We have  entered into an
agreement with an organization that provides 24-hour emergency spill response to
provide this service.

         Our drivers are trained on topics such as safety,  hazardous materials,
medical  waste,  hazardous  chemicals and infectious  substances.  Employees are
trained to deal with emergency spills and releases of hazardous  materials,  and
we have a written  contingency plan for these events. Our vehicles are outfitted
with spill control equipment and the drivers are trained in its use.

         Comprehensive Environmental Response, Compensation and Liability Act of
1980. The Comprehensive  Environmental Response,  Compensation and Liability Act
of 1980, or CERCLA, established a regulatory and remedial program to provide for
the  investigation  and cleanup of facilities  that have released or threaten to
release hazardous substances into the environment. CERCLA and state laws similar
to it may 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 these facilities.  Responsible  parties may be liable
for  substantial  site  investigation  and cleanup  costs and  natural  resource
damages,  regardless  of  whether  they  exercised  due care and  complied  with
applicable laws and regulations.  If we were found to be a responsible party for
a  particular  site,  we could be  required  to pay the entire  cost of the site
investigation  and cleanup,  even though other parties also may be liable.  This
result  would  be the  case if we were  unable  to  identify  other  responsible
parties,  or if those parties were financially unable to contribute money to the
cleanup.

State and Local  Regulation.  We currently conduct all of our business in Texas.
At some point in the future,  we may conduct  business  in other  states.  Other
states  have  different  regulations  regarding  medical  waste,  medical  waste
transport and medical waste incineration. If at any time, we expand our business
into other states, we believe,  because of the stringent standards applicable in
Texas,  that  the  costs of  bringing  our  business  into  compliance  with the
regulations of other states will be minimal.

Medical Waste. The Texas  Department of Health retains  authority to define what
waste will be  regulated  and how it may be  treated.  These  rules,  which were
updated in December  1994,  can be found in Title 25 Texas  Administrative  Code
("TAC")  Sections  1.131-1.137.  Under Texas law, the term  "special  waste from
health-care facilities" ("SWFHCRF") is used to define medical waste regulated by
state agencies. Only five categories of waste are regulated:

o        animal waste from animals intentionally exposed to pathogens;

o        bulk human blood and blood products;

o        pathological waste;

o        microbiological waste; and

o        sharps.

The  criteria  for  selection  of  these  categories  were  based  primarily  on
environmental  concerns rather than occupational  concerns. A chain of events is
necessary to produce disease from contact with medical waste. The items selected
for regulation were deemed to have the highest potential for disease  production
provided all of the required  events took place.  Sharps,  due to their inherent
ability to provide a portal of entry,  must be managed  properly  regardless  of
their contamination status.

Transportation of Medical Waste.  Subchapter Y, 30 TAC ss. 330.1001-1010 defines
rules for medical waste  management,  disposal,  transportation,  collection and
storage. These rules were updated in December 1994. The responsibility for these
regulations  rests  with the  Office  of Waste  Management  of the  TCEQ.  Under
Subchapter Y, the TCEQ regulates and registers transporters of medical waste by,
among other things,  requiring  specific  documentation of transportation of all
medical waste. Currently, the Company is a registered medical waste transporter.
The registration is subject to annual renewal,  and though we believe,  based on
our  experience  in the  industry,  that we are in  compliance  with  all of the
statutory guidelines, there is no guarantee that the TCEQ will continually grant
renewal registration to us.


                                       9
<PAGE>

Treatment  of Medical  Waste.  Approved  methods of  treatment of SWFHCRF can be
found in Title 25 TAC Section 1.133.  There are currently six approved treatment
methods:

o        steam disinfection;

o        chlorine disinfection/maceration;

o        chemical disinfection;

o        moist disinfection;

o        thermal inactivation; and

o        incineration.

We employ the steam disinfection (i.e.  autoclave) and incineration  methods for
the treating of medical waste. We have been successful in obtaining  permits for
our current medical waste transfer,  treatment and processing facilities and for
our transportation  operations.  Currently, we lease and operate one incinerator
from UTMB at the UTMB  Facility  that is properly  licensed by the Office of Air
Quality of the Texas Natural  Resource  Conservation  Commission  ("TNRCC").  On
October 7, 2002,  we  received a permit  amendment  from the TCEQ to allow us to
operate an autoclave at the Garland Facility. Prior to that, we had received and
operated  under a temporary  authorization  to process  medical  waste using the
autoclave method.

         We are  responsible  for  complying  with the  maintenance  obligations
pursuant to numerous  governmental  permits  and  licenses  owned by us or under
which we conduct  our  business.  We are also  responsible  for  complying  with
permits maintained by others. These permits include:

         o        transport permits for solid waste, medical waste and hazardous
                  substances;

         o        permits to construct and operate treatment facilities;

         o        permits to construct and operate transfer stations;

         o        permits governing discharge of sanitary water and registration
                  of equipment under air regulations;

         o        approvals for the use of ETD and other  technologies  to treat
                  medical waste; and

         o        various business operator's licenses.

         We believe that we are currently in compliance in all material respects
with our permits and applicable laws and regulations.  If we expand our services
to other states,  we will have to comply with such state's  specific  permitting
process to obtain the necessary permits to operate in such state, including, but
not  limited  to  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 enough  public  interest is shown,  a public  hearing may be
held. If we are successful in meeting all regulatory requirements, the state may
issue a permit to construct the new 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 may provide an  opportunity  for public
opposition  or other  action that may impede our ability to construct or operate
the  planned  facility.  Permitting  for  transportation  operations  frequently
involves  registration  of vehicles,  inspection  of equipment,  and  background
investigations on our officers and directors.

Patents and Proprietary Rights

         We rely on  unpatented  and  unregistered  trade  secrets,  proprietary
know-how  and  continuing  technological  innovation.  We  try to  protect  this
information, in part, by confidentiality agreements with our employees,  vendors
and  consultants.  There can be no assurance that these  agreements  will not be
breached,  that we would have adequate remedies for any breach or that our trade
secrets or know-how will not otherwise become known or independently  discovered
by other parties.


                                       10
<PAGE>

         Our commercial  success may also depend on our not  infringing  patents
issued to other  parties.  There can be no assurance  that patents  belonging to
other parties will not require us to alter our processes,  pay licensing fees or
cease  using any  current  or future  processes.  In  addition,  there can be no
assurance  that we would be able to license  the  technology  rights that we may
require at a reasonable  cost or at all. If we could not obtain a license to any
infringing  technology  that we currently use, it could have a material  adverse
effect on our business.

Potential Liability and Insurance

         The medical waste industry  involves  potentially  significant risks of
statutory,   contractual,  tort  and  common  law  liability  claims.  Potential
liability claims could involve, for example:

         o        cleanup costs;

         o        personal injury;

         o        damage to the environment;

         o        employee matters;

         o        property damage; or

         o        alleged negligence or professional  errors or omissions in the
                  planning or performance of work.

We could also be subject to fines or penalties in connection  with violations of
regulatory requirements.

         We  carry  $5  million  of  liability  insurance   (including  umbrella
coverage),  and $1 million of aggregate  pollution and legal liability insurance
($2 million per incident),  which we consider  sufficient to meet regulatory and
customer requirements and to protect our employees,  assets and operations.  Our
pollution liability insurance excludes liabilities under CERCLA. There can be no
assurance  that we will not face  claims  under  CERCLA or  similar  state  laws
resulting in  substantial  liability  for which we are uninsured and which could
have a material adverse effect on our business.

Employees

         As of March 15, 2003, the Company had  approximately  fifty-seven  (57)
full-time and two (2) part-time  employees.  Seven of the employees are employed
in executive capacities; the remaining are in transportation  operations,  sales
positions  and  administrative  and clerical  capacities.  None of the Company's
employees are subject to collective bargaining agreements.

Item 2.  Description of Property

         We lease approximately 6,800 square feet of administrative office space
at 12750 Merit Drive-Park Central VII, Suite 770, Dallas, Texas 75251. The lease
expires on October 31, 2005.  The rent is $9,626.25  per month from  November 1,
2001,  through  October 31, 2002,  $10,192.50  per month from  November 1, 2002,
through  October 31, 2003,  $10,758.75 per month from November 1, 2003,  through
October 31, 2004, and  $11,375.00 a month from November 1, 2004 through  October
31, 2005.

         We own the Garland Facility, which consists of real property,  building
and  improvements,  furniture and equipment.  The  EnviroClean(R)  System in the
Garland  Facility  has been idle  since  approximately  June 1998.  The  Garland
Facility includes 17,450 square feet of space (2,450 square feet of office space
and 15,000  square feet of  warehouse  space),  and is located on  approximately
three  acres of land.  The  building  is  approximately  30 years  old,  and was
extensively  remodeled  in 1996 at a cost of more than  $500,000  to upgrade the
facility to accommodate the EnviroClean(R)  System and to showcase its operation
for sales and marketing  purposes.  The EnviroClean(R)  System has been idle for
approximately five years.  During most of that time we used the Garland Facility
solely as a transfer station. In 1999, we provided an allowance to write down to
-zero- the  undepreciated  cost of the  EnviroClean(R)  System  and the  Garland
building  improvements.  We have  received  a  permit  amendment  from  the TCEQ
allowing us to process regulated medical waste at the Garland Facility using the
autoclave  method (steam  disinfection)  of treatment  and have been  processing
waste at the  Garland  Facility  since  August 29,  2002  using  such  method of
treatment.


                                       11
<PAGE>

         As mentioned  above,  we operate the UTMB Facility in Galveston,  Texas
pursuant  to a  contract  with  UTMB,  but UTMB  owns the  property,  plant  and
equipment comprising the UTMB Facility.

Item 3.  Legal Proceedings

         We operate in a highly regulated industry and are exposed to regulatory
inquiries  or  investigations  from  time to time.  Government  authorities  can
initiate  investigations  for a variety of  reasons.  We have been  involved  in
certain legal and administrative proceedings that have been settled or otherwise
resolved on terms  acceptable to us, without having a material adverse effect on
our business.

         We are  also a  party  to  various  legal  proceedings  arising  in the
ordinary course of business. However, there are no legal proceedings pending or,
to our knowledge, threatened against us that will adversely affect our financial
condition or our ability to carry on the business except the following:

         On November 25, 1998, we were a named defendant,  along with several of
our  officers,  in a lawsuit  filed in  Buncombe  County,  Superior  Court North
Carolina.  A default  judgment was rendered  against all  defendants in November
1999,  as a result of not  filing  answers  in a timely  manner.  The ruling was
appealed to the North  Carolina  Supreme  Court and the Company  posted a surety
bond in the amount of the judgment of $354,708.  Our President posted a $100,000
letter of credit  secured by a  certificate  of deposit in  connection  with the
surety  bond.  The  estimated  liability  due under  the  judgment  amounted  to
$403,369; including interest accrued since November 1999. The Company provided a
$360,000  loss related to this  judgment in the 1999  consolidated  statement of
operations.  On June 8, 2001, the Supreme Court in North  Carolina  affirmed the
judgment.  In July 2001, the  plaintiffs  received the amount of the surety bond
and the Company paid accrued interest in the amount of $48,255 in December 2001.
On August 1, 2001,  the  bonding  company  seized the  $100,000  certificate  of
deposit  posted in  connection  with the bond by our  President  and in December
2001, seized 63,450 shares of the Company's common stock which had been tendered
by the plaintiffs as part of the lawsuit. In addition,  on November 9, 2001, the
bonding  company  filed a  lawsuit  against  the  Company  claiming  damages  of
$254,708,  (the  amount it paid to the  plaintiffs  on the surety  bond less the
certificate of deposit), plus interest and attorneys' fees. However, the Company
believes that by seizing the shares of common stock  tendered by the  plaintiffs
in the litigation,  the bonding company has been fully reimbursed for the amount
paid on the  bond  and does not have a valid  claim  against  the  Company.  The
Company is examining options regarding claims for indemnification, contribution,
and  claims  against  third  parties.  However,  the  Company  has not  made any
decisions  and such issues  remain  unresolved.  The  accompanying  consolidated
balance sheet, as of December 31, 2002 and 2001,  reflects an accrual for losses
in connection  with this  litigation of $260,000.  In February 2003, the bonding
company's  Motion for Summary  Judgment was granted and a judgment in the amount
of  approximately  $295,000 was entered  against us. We filed a Motion for a New
Trial  based on what we  believe  are  judicial  errors  in the  ruling.  We are
currently  in  settlement  discussions  with the bonding  company to resolve the
matter.

         Michael  Moorhead,  one of the defendants in the North Carolina  action
filed suit in Texas against the Company's  former  counsel in the North Carolina
action claiming,  among other things, that the counsel is liable for the loss in
such case for  failure  to timely  respond  to  discovery.  The case was  styled
Michael  Moorhead v. Hunton & Williams,  et al, 160th Judicial  District  Court,
Dallas County,  Texas,  Cause No. 01-07565.  Hunton & Williams then on September
14, 2001 filed a  third-party  action  against Mr.  Fleeger,  alleging  that Mr.
Fleeger was the contact  person for all of the  defendants in the North Carolina
case, and was therefore  responsible to the plaintiff.  Hunton & Williams, et al
sought  contribution  from Mr.  Fleeger  in the  event  they are  liable  to Mr.
Moorhead.   Mr.  Fleeger  denied  the  allegations   against  him  and  filed  a
counterclaim against Hunton & Williams, seeking damages for negligence. The case
was settled on October 17,  2002 and the  settlement  amount of $50,000 is being
held in trust and will be applied to the outstanding bond obligation, if any.

         We are a named  defendant  in a lawsuit  in the  District  Court of the
126th Judicial District in Travis County, Texas, commenced by the State of Texas
on November 20, 2000. The lawsuit claims that we breached a contract award under
the Texas Smart Jobs  Program and  violated  its  promises  and  obligations  by
failing to meet the requirements of the contract and seeks compensatory  damages
in the amount of $439,631,  plus costs and attorneys' fees. We have answered the
suit and denied all  material  allegations.  It is the opinion of the  Company's
attorneys that a range between $230,182 and $290,549,  plus prejudgment interest
at  the  rate  of 10%  per  annum  simple  interest,  plus  attorney's  fees  is
reasonable.  The  attorneys  base  their  opinion  primarily  upon  a  Close-Out
Worksheet  that was  prepared  by the State of  Texas,  Department  of  Economic
Development,  and  forwarded to the Company on July 12, 1999.  While the Company
cannot  predict  the  outcome of any  settlement,  an accrual  of  $290,000  was
reflected in the accompanying  December 31, 2002 and 2001  consolidated  balance
sheets.  The  Company  also  accrued  prejudgment  interest  expense of $30,000;
$30,000  and  $44,000  in the years  ended  December  31,  2002,  2001 and 2000,
respectively.  On March 3, 2003 we reached a settlement  with the State of Texas


                                       12
<PAGE>

the terms of which will require that we pay the State  $240,620 with no interest
in 36 equal  installments  of $6,684  commencing on or about April 30, 2003. The
settlement also requires that we retroactively  pay $6,110 to those employees or
past  employees  whom we were  obligated  to pay,  but  failed  to pay in  full,
pursuant to the Smart Jobs Program.

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

         Our annual meeting of shareholders was held on December 18, 2002.

Election of Directors.

         Our  shareholders  elected each of the six  nominees  for  directors as
listed in our  Proxy  Statement  dated  November  15,  2002.  The votes  were as
follows:

Director                     For                Against         Abstain
--------                     ---                --------        -------
Matthew H. Fleeger           10,063,000         205,258         0
Sam Hicks                    10,063,000         205,258         0
Mark M. Altenau, M.D.        10,063,000         205,258         0
Don McAfee, M.D.             10,063,000         205,258         0
Winship B. Moody, Sr.        10,063,000         205,258         0
Vivian Eriksen               10,063,000         205,258         0

Adoption of our 2002 Stock Plan.

         Our shareholders approved the adoption of our 2002 Stock Plan. The
votes were as follows:

For                          Against            Abstain         Broker Non-Votes
----                         -------            -------         ----------------
9,605,696                    662,562            0               0

Appointment of Auditors.

         Our shareholders ratified the appointment of Marcum & Kliegman, LLP as
our independent auditors for the fiscal year ending December 31, 2002. The votes
were as follows:

For                          Against            Abstain         Broker Non-Votes
---                          -------            -------         ----------------
10,231,717                   36,541             0               0

                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters


         There is currently no public market for our Common Stock.

         At  December  31,  2002,  we had  16,347,154  shares  of  Common  Stock
outstanding and had approximately 700 shareholders of record.

         We have no fixed dividend policy.  The Board of Directors is authorized
to consider dividend distributions from time to time, upon its assessment of our
operating  results,  capital  requirements and general  financial  condition and
requirements.  We  have  not  paid a  dividend  since  our  inception.  For  the
foreseeable  future, it is anticipated that we will use all available cash flows
to finance our growth and that dividends will not be paid to shareholders.

Recent Sales of Unregistered Securities

         During  2000,  we (i) issued  707,333  shares of Common Stock at prices
ranging  from $1.25 to $1.50 per share for a total of  $857,273  less  expenses,
(ii) issued  19,595  shares of Common Stock in conversion of 4,899 shares of our
Series  I  Preferred  Stock,  (iii)  issued  7,500  shares  of  Common  Stock in
conversion of 7,500 shares of our EMSI Series I Preferred  Stock and (iv) issued
1,885,966  shares of Common  Stock in exchange for  cancellation  of debt in the
amount of $1,052,448.

         During 2001, we (i) issued  585,413 shares of Common Stock at $1.25 per
share for a total of  $731,767  (after  expenses of the  offering),  (ii) issued
3,808  shares of Common  Stock in  conversion  of 1,334  shares of our Series II


                                       13
<PAGE>

Preferred  Stock,  (iii) issued 9,404  shares of Common Stock in  conversion  of
2,177  shares of our Series I  Preferred  Stock (iv)  issued  240,500  shares of
common stock as employee  stock bonuses and (v) issued  860,532 shares of Common
Stock in exchange for the cancellation of debt in the amount of $902,548.

         During 2002, we (i) issued  988,591  shares of Common Stock for a total
of $1,155,763 at prices ranging from $1.05 to $1.26 per shares,  and (ii) issued
368,790 shares of Common Stock in exchange for the  cancellation  of debt in the
amount of $276,548.

         All  transactions  described  above  were  deemed  to  be  exempt  from
registration under the Securities Act of 1933, as amended (the "Securities Act")
in reliance on Section 4(2) of the  Securities Act and/or Rule 506 of Regulation
D promulgated  under the  Securities  Act. The  recipients of securities in each
such  transaction  represented  their  intentions to acquire the  securities for
investment  only  and not  with a view to or for  sale in  connection  with  any
distribution   thereof  and  appropriate  legends  were  affixed  to  the  share
certificates  issued in such  transactions.  All recipients had adequate access,
through their relationships with the Company, to information about us.

         In 2001, we filed a Registration Statement on Form 10-SB on a voluntary
basis with the Securities and Exchange  Commission  ("SEC"),  which registration
statement became effective on September 14, 2001.  Although we were not required
to register  under the  applicable  federal  securities  laws,  we believe  that
commencing  voluntary  reporting  under the Securities  Exchange Act of 1934, as
amended  (the  "Exchange  Act"),  will enhance our ability to access the capital
markets.  We also are hopeful  that one or more market  makers will  provide the
basis for our  Common  Stock to  attain  trading  status  and allow for a public
market in our Common Stock. We believe that the establishment of a public market
for our  shares  will  allow  us to be in a better  position  to  obtain  future
financing and also provide  increased  liquidity to our  shareholders.  While we
have had preliminary discussions with four broker-dealers  concerning a range of
financial  advisory  services,  we do  not  have  an  understanding  with,  or a
commitment from,  anyone to act as a market maker for our securities,  and there
can be no  assurance  that we will find a market  maker for our  securities,  or
otherwise establish a public market for our Common Stock.

         We intend  to seek  additional  financing  through  additional  private
placement(s) or a public offering within the next twenty-four  months. If we do
so, all of the then current existing  shareholders and their stock holdings will
be proportionately diluted.

Item 6.  Management's Discussion and Analysis or Plan of Operation.

         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 and related footnotes.

Background

         We were  incorporated  in November 1993. We provide  regulated  medical
waste and PHI collection, transportation and treatment services to our customers
and related  training and education  programs and consulting  services.  We also
sell ancillary supplies.

         Our revenues  increased to $5,410,710  in 2002 from  $4,046,061 in 2001
and from  $2,900,914  in 2000.  We derive  our  revenues  from  services  to two
principal  types of  customers:  (i)  outpatient  clinics,  medical  and  dental
offices, biomedical companies,  municipal entities, long-term and sub-acute care
facilities  and other  smaller-quantity  generators  of regulated  medical waste
("small  account"   customers)  and  (ii)  hospitals,   blood  banks  and  other
larger-quantity   generators  of  regulated   medical  waste  ("large   account"
customers).  Substantially all of our services are provided pursuant to customer
contracts  specifying  either  scheduled  or  on-call  regulated  medical  waste
management  services,  or both. Contracts with small account customers generally
provide for annual  price  increases  and have an  automatic  renewal  provision
unless the customer  notifies us prior to completion of the contract.  Contracts
with  hospitals and other large account  customers,  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.  At
December 31, 2002, we served approximately 1,000 customers.


                                       14
<PAGE>

Statements of Operations Data

Years Ended December 31, 2002 and 2001

                                                     Years Ended December 31,
                                                   ----------------------------
                                                       2002            2001
                                                   ------------    ------------
Revenues                                           $  5,410,710    $  4,046,061
Cost of revenues                                      3,589,904       3,788,566
                                                   ------------    ------------

Gross profit                                          1,820,806         257,495

Selling, general and administrative expenses          1,846,787       1,254,480
Compensatory element of stock bonuses                      --           250,000
Depreciation and amortization                           149,530         142,051
                                                   ------------    ------------

Loss from operations                                   (175,511)     (1,389,036)
Interest expense                                        133,856         183,725
Deferred offering cost                                     --           326,688
Debt conversion expense                                  78,300          22,533
Other income                                           (101,941)         (1,694)
                                                   ------------    ------------
Loss before extraordinary item                         (285,726)     (1,920,288)


Extraordinary item-loss from
extinguishments of debt                                    --            87,573
                                                   ------------    ------------


Net loss                                           $   (285,726)   $ (2,007,861)
                                                   ============    ============
Basic and diluted loss per common share:
    Before extraordinary item                      $      (0.02)   $      (0.13)
    Extraordinary item                                    (0.00)          (0.01)
                                                   ------------    ------------
    Net loss                                       $      (0.02)   $      (0.14)
                                                   ============    ============
Weighted  average  common  shares used in basic
and diluted loss per share                           15,758,003      13,911,278
                                                   ------------    ------------

EBITDA(1)                                          $     75,960    $ (1,571,979)
                                                   ============    ============

(1)  Calculated  for any  period  as the sum of net  income  or  loss,  plus net
interest  expense,  income tax expense,  depreciation  expense,  debt conversion
expense and loss from extinguishments of debt. We consider EBITDA to be a widely
accepted  financial  indicator  of a  company's  ability to service  debt,  fund
capital  expenditures  and expand its business.  EBITDA is not calculated in the
same way by all  companies  and  therefore  may not be  comparable  to similarly
titled  measures  reported  by  other  companies.  EBITDA  is not a  measure  in
accordance with accounting  principles  generally accepted in the United States.
EBITDA should not be considered as an alternative to net income, as an indicator
of  operating  performance  or as an  alternative  to cash flow as a measure  of
liquidity.  The  funds  depicted  by  this  measure  may  not be  available  for
management's  discretionary  use due to legal or functional  requirements,  debt
service, other commitments and uncertainties.


Critical Accounting Policies and Procedures

         Our discussion  and analysis of our financial  condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States.  The preparation of these financial  statements  requires that we
make  estimates  and  judgments  that  affect  the  reported  amounts of assets,
liabilities,  revenues and  expenses,  and the related  disclosure of contingent
assets and liabilities (see Note 1 to the consolidated financial statements). We
believe  that  of  our  significant  accounting  policies  (see  Note  2 to  the
consolidated financial statements), the following may involve a higher degree of
judgment on our part and complexity of reporting.

         Accounts  Receivable.  Accounts receivable consist primarily of amounts
due to us from our normal  business  activities.  We maintain an  allowance  for
doubtful  accounts  to  reflect  the  expected   uncollectibility   of  accounts
receivable based on past collection  history and specific risks identified among
uncollected accounts.


                                       15
<PAGE>

         Revenue Recognition.  We recognize revenue at the time of medical waste
collection.  We provide an  accrual  for  estimated  expense  relating  to waste
collected but not processed at the end of each accounting period.

Results of Operations - Year 2002 Compared to 2001.

         Revenues.  Our revenues  increased  $1,364,649 or 33.7%,  to $5,410,710
during the year ended December 31, 2002, from  $4,046,061  during the year ended
December  31,  2001.  The  increase in revenue  from 2001 was due  primarily  to
increased  volume of medical waste  processed from current and new customers and
to a lesser extent from price increases and from higher disposal fees charged to
UTMB because of  substantial  incinerator  downtime in 2002. In November 2001 we
hired two new vice presidents for our investor relations and sales and marketing
departments  and  additional  sales  personnel  in the second,  third and fourth
quarters of 2002.

         Cost of revenues.  Our cost of revenues  decreased $198,662 or 5.2%, to
$3,589,904  during 2002, from $3,788,566 in 2001. The decrease was primarily due
to lower  operating  costs  at the  UTMB  incineration  facility  following  its
shutdown in mid April 2002 and reduced  transportation,  internal processing and
third-party  disposal costs offset by slightly higher  container costs resulting
from increased volume of waste processed. Costs of revenue for 2002 were reduced
by a debt extinguishment credit of $44,054.

         Selling,  general and administrative expenses. Our selling, general and
administrative expenses increased $592,307, or 47.2%, to $1,846,787 during 2002,
from  $1,254,480 in 2001.  The increase was  attributable  principally to higher
payroll and payroll-related expenses, increased legal, accounting and consulting
fees, and increased  costs related to the management of the  installation of the
new autoclave at our Garland  Facility.  Our office rental expenses were reduced
in 2001 by  subleasing a portion of our  corporate  offices.  That  sublease was
terminated  on  September  30, 2001. A  substantial  part of the parent  company
salaries in 2002 and 2001 were  accrued but not paid.  The  increase in selling,
general  and  administrative  expenses  was  attributable  to a slightly  higher
increase in the expenses of the parent company  compared to EMSI,  both of which
were offset by a debt extinguishment credit of $25,623.

         Compensatory  element of stock  bonuses.  Stock  compensation  included
bonus shares for officers and  employees  totaling  $250,000 in 2001 compared to
none in 2002.

         Depreciation and amortization.  Depreciation and amortization increased
by $7,479,  or 5.3%,  to $149,530 for the year ended  December  31,  2002,  from
$142,051 for the year ended December 31, 2001. The increase was due primarily to
reduced  depreciation of certain EMSI fixed assets that became fully depreciated
during the year ended December 31, 2001 offset by higher depreciation during the
fourth  quarter of 2002  related to the new  autoclave  installed in our Garland
Facility.

         Interest expense.  Our interest expense decreased $49,869,  or 27.1% to
$133,856  during the year ended December 31, 2002 from $183,725  during the year
ended  December 31, 2001.  Interest  expense  declined in EMSI and in the parent
company  during the  period as a result of modest  debt  reductions.  In 2002 we
charged interest expense for $30,000 in connection with pending  litigation with
the State of Texas,  whereas in 2001 we charged  interest expense for $45,368 in
connection with pending  litigation.  Interest  expense in EMSI will continue to
decline as a result of debt payoff to Southtrust Bank in September 2002 and will
increase  in the  parent  company  because  of the new loan of  $615,000  from a
stockholder discussed in the liquidity section below.

         Other income.  During the year ended December 31, 2002, the Company and
EMSI  were the  beneficiaries  of  certain  debt  extinguishments  from  certain
creditors with whom the companies  either  reached  legally  binding  agreements
whereby  certain  debt was  forgiven  or the statute of  limitations  had passed
whereby the debt  holders lost their right to present  legal claims  against us.
Accordingly,  we recorded such  extinguishments  as other income.  There were no
comparable significant credits during the year ended December 31, 2001.

         Deferred  offering  cost. In December 2001, we wrote off to expense the
financing  costs we had previously  deferred in connection  with our arrangement
with Lilly Beter Capital  Group,  Ltd.  ("LBCG").  The original Firm  Commitment
Agreement from LBCG expired on October 31, 2001, and LBCG informed us they would
be unable to renew the  agreement on the same terms and  conditions as set forth
in the original Firm  Commitment  Agreement.  We have retained  legal counsel in
connection with potential  litigation for conflict of interest between the legal
firms  and an  individual  law  partner  representing  LBCG and our  Company  in
connection with the services that were to have been provided by LBCG.

         Debt conversion  expense.  In 2002, we allowed our President to convert
his advances  receivable into our Common Stock at a conversion rate of $0.75 per
share. In connection with such conversion, we charged $28,300 to debt conversion

                                       16
<PAGE>

expense in the first quarter of 2002 and $50,000 to debt  conversion  expense in
the fourth  quarter of 2002.  We amended a note  agreement  in May 2001 with our
largest shareholder,  permitting him to convert, at his option, his note payable
from the  Company  into our  Common  Stock at $1.25  per  share  instead  of the
original  $1.50 per share.  In  connection  with such  amendment,  we charged an
additional  $19,500 to debt conversion expense in the second quarter of 2001 and
an additional $3,033 in the fourth quarter of 2001.

         Extraordinary  item-loss  from  extinguishment  of debt. In 2001, as an
inducement  to our president who had made cash advances to the Company from time
to time, we gave him the right to convert such  advances  receivable by him into
our Common Stock at a conversion rate of $0.75 per share and recorded $87,573 as
loss from extinguishment of debt.

         Net loss.  Net loss was $285,726  during 2002,  compared to  $2,007,861
during 2001. The reduced loss was primarily due to the factors described above.

         EBITDA.  EBITDA was $75,960  during 2002  compared to  $(1,571,979)  in
2001.  The  increased  EBITDA was also  primarily  due to the factors  described
above.

Liquidity and Capital Resources

         Source of Funds for Operations and Capital Expenditures.
         --------------------------------------------------------

         Our principal source of liquidity is collections on accounts receivable
from waste management  service  revenue,  from sales of our Common Stock through
private offerings to certain individuals,  primarily existing shareholders,  and
from loans and advances received from certain shareholders. Revenues during 2002
were  approximately  $114,000 per month higher than the monthly  average revenue
for 2001. The principal  uses of liquidity are payments for labor,  material and
expenses,  and debt and lease  obligations  to carry out our  regulated  medical
waste management  services.  The UTMB Facility did not operate for much of 2002,
causing increased  transportation costs and alternative  regulated medical waste
processing  costs and resulting in the  continuation  of  significant  operating
losses and cash flow deficiencies.

         We are of the opinion  that our  existing  cash  position and cash flow
from operations will not enable us to satisfy our current cash requirements.  We
will be required to obtain additional  financing to implement our business plan.
Historically,  we have met our cash  requirements from a combination of revenues
from  operations  (which  by  themselves  have  been  insufficient  to meet such
requirements), shareholder loans and advances, and proceeds from the sale of our
debt and equity securities.

         Going concern.
         --------------

         The  following  factors  raise  substantial  doubt about the  Company's
ability to continue as a going  concern.  As indicated by the  Company's  annual
consolidated  financial  statements,  the Company incurred restated consolidated
net losses of $285,726;  $2,007,861  and $2,747,923 for the years ended December
31, 2002; 2001 and 2000, respectively. Additionally, the Company has significant
deficits in both working capital and  stockholders'  equity at December 31, 2002
and 2001.  The Company has remained  current with its payroll taxes for the year
2002,  and has paid the  substantial  EMSI payroll tax  obligation  amounting to
approximately  $362,000  for the years  ended  December  31,  2001 and 2000.  On
October 16, 2002 a  Certificate  of Release of Federal Tax Lien was  executed by
the Internal Revenue Service.

         History of negative cash flow.
         ------------------------------

         Historically,  shareholders  of  the  Company  have  funded  cash  flow
deficits. However, the shareholders are under no specific funding obligation. As
a means of obtaining  working  capital and funds for expansion,  the Company has
received,  from private placements of the Company's Common Stock,  approximately
$1,155,763,  $731,767,  and $857,273  during the years ended  December 31, 2002,
2001, 2000,  respectively.  One of our largest  shareholders  loaned the Company
$615,000 in 2000.  Also, our President has advanced funds for working capital to
us from  time  to time  totaling  $262,721  through  December  31,  2001  and an
additional  $131,654  during  2002.  There is no  assurance  that  such  private
placement  funding  and loans and  advances  will  continue  to satisfy our cash
needs.

         A few of our customers have accounted for a majority of our sales.
         ------------------------------------------------------------------

         During the year ended  December 31,  2002,  sales of our services to 21
customers represented approximately 85.2% of our total revenues, including sales
to UTMB, which amounted to approximately 22.0% of our total revenues.  A loss of
any of these  customers  could  reduce our  revenues,  increase  our losses from
operations and limit our ability to achieve profitability.


                                       17
<PAGE>

         Outstanding liabilities.
         ------------------------

         We have outstanding liabilities and debt of approximately $3,724,544 at
December 31, 2002 compared to $4,298,891 at December 31, 2001.  Our current rate
of revenue may be insufficient to enable us to repay our debt upon maturity.  In
the event  that we  cannot  generate  sufficient  revenue  and we are  unable to
finance the repayment of our debt, we could be sued or face judgments against us
which could result in a loss of assets and a discontinuation of operations.

         Litigation by a bonding company.
         --------------------------------

         As  discussed  above,  we,  along  with  certain  of our  officers  and
directors,  were named as defendants in a lawsuit in North Carolina in 1998. The
judgment has been  satisfied,  but a bonding company has filed a lawsuit against
us  claiming  damages  of  $254,708.17,  plus  interest  and  attorneys  fees as
indemnification  for the payments made to  plaintiffs in connection  with a bond
posted on our behalf. We have responded alleging, among other things, accord and
satisfaction  and believe that by seizing the shares of Common Stock tendered by
the plaintiffs in the litigation,  the bonding company has been fully reimbursed
for the  amount  paid on the bond and does not have a valid  claim  against  us.
However,  there can be no  assurance  that we will  prevail,  and if we lose the
lawsuit, it will significantly reduce cash available for continuing operations.

Discussion of Liquidity - Year 2002 Compared to 2001

         At December 31, 2002,  our working  capital  deficit was  $(1,754,171),
compared to a working  capital deficit of $(3,261,775) at December 31, 2001. The
decrease in working capital deficit was primarily due to an increase in accounts
receivable and prepaid  insurance and a decrease in accounts payable and accrued
liabilities,  note payable to  stockholder  and  classifying a note payable to a
bank as a non-current liability offset by a reduction in supplies inventory.

         Net cash used in  operating  activities  was  $(658,124)  during  2002,
compared  to  $(810,347)   for  2001.   This  decrease   primarily   reflects  a
substantially  decreased  loss  in  2002  offset  by  an  increase  in  accounts
receivable and reductions in accounts payable and accrued liabilities.

         Net cash used in investing  activities  for the year ended December 31,
2002, was ($748,046) compared to ($54,433) for the year ended December 31, 2001.
The change is  primarily  attributable  to an  increase  in  property  additions
(principally  reusable  containers  for collecting  and  transporting  regulated
medical waste) and the installation of an autoclave and related equipment at our
Garland Facility and the cost of amending our permit for the Garland Facility.

         Net cash provided by financing  activities  was  $1,406,170  during the
year ended  December 31, 2002,  compared to $608,715 for the year ended December
31, 2001. Proceeds from the sale of Common Stock increased by $423,996. Payments
on long-term  obligations  increased to $364,593 in 2002 from  $101,364 in 2001.
Contributing to the increase in 2002 were repayments of the Southtrust Bank loan
and of a stockholder loan in the third quarter of 2002.

         There was no net cash  decrease  for the year ended  December 31, 2002,
compared to a decrease in cash of $256,065 for the year ended December 31, 2001,
for the reasons discussed above.

Other Liquidity Matters

         At December  31,  2002,  our  long-term  obligations  were  $1,164,077,
including  bank debt of $265,209,  a note payable to a stockholder  of $584,302,
installment  notes of $67,836 and a liability  for the  settlement  of the Smart
Jobs litigation matter in February 2003 in the aggregate amount of $246,730.

         Our bank debt at December 31,  2002,  of $265,209 is secured by a first
lien on the Garland Facility, and bears interest at a variable rate based on the
national prime rate as published in the Wall Street Journal, plus 0.5% (5.25% at
December  31,  2002).  The note is payable in minimum  monthly  installments  of
principal and interest totaling $3,186,  matures in July 2011, and is guaranteed
by Mr. Matthew Fleeger, our President and Chief Executive Officer.


                                       18
<PAGE>

         From time to time during  2001,  the Company had been in arrears on the
bank note and  therefore in default with respect to the  provisions  of the debt
agreement.  As of December  31,  2002,  the Company is current  with its payment
requirements and in compliance with such terms of the agreement.

         One of our largest  stockholders loaned the Company a total of $615,000
($584,302 was outstanding at December 31, 2002) in August and September 2002 for
the  purpose of  repaying a note to our  largest  stockholder  of  approximately
$202,000,  which was secured by all of the assets of the Company, a bank loan of
approximately  $90,000 and our unpaid payroll taxes of  approximately  $323,000.
The new note bears interest at the rate of 10 percent per annum and is repayable
in 60 equal  monthly  installments  of $13,067,  including  interest,  beginning
September  28,  2002,  and is secured by a second lien deed of trust on the real
property at our Garland,  Texas facility. The note payable to our single largest
stockholder  due  July  31,  2002,  bore  interest  at 10%  per  annum  and  was
collaterized  by  certain  future  royalties,  if  any,  from  the  sale  of the
EnviroClean(R)  Systems and the  related  patented  technology  and by all other
tangible and intangible assets of the Company.  The note was repaid in full with
accrued  interest on August 28,  2002,  and the lien was released on November 4,
2002.

         We are also obligated under various  installment  notes payable for the
purchase of  equipment.  The notes,  which bear  interest at rates  ranging from
8.15% to 12.15%,  are due at various dates through January 2006, and are payable
in monthly installments of approximately $2,798. The notes are collateralized by
the equipment acquired therewith.

         We have two  series  of  convertible  debentures  outstanding  totaling
$40,135 at December 31, 2002 and 2001.  The Company has permitted the holders of
the debentures to convert such amounts into our Common Stock,  but these amounts
reflect  debentures that have not yet been converted by the holders thereof.  We
have not made any cash payments for interest or principal on these debentures in
2002 or 2001 and are default thereof.

Material Commitments For Capital Expenditures

         We currently have no significant  commitments for capital expenditures.
However,  we are currently  planning to expand our business  through a series of
acquisitions.  We have no commitments  for financing such  acquisitions  but are
exploring  a number of  financing  alternatives,  the  success  of which will be
crucial to the accomplishment of our acquisition objectives.

Events Subsequent to December 31, 2002

         The UTMB  incinerator  has, as of March 25,  2003,  resumed  operations
following  extensive  modifications and improvements to maintain compliance with
certain federal and state regulatory  requirements.  Beginning April 15, 2002 we
were unable to incinerate waste at the UTMB Facility in order that the foregoing
modifications  and  improvements  could be made so the incinerator  would comply
with the New  Source  Performance  Standards  promulgated  by the EPA that  took
effect in September 2002. In order to avoid an extensive  period during which we
would be unable to  internally  process  the  medical  waste we  collected  from
customers,  we  submitted an  application  to the TCEQ to allow us to install an
alternative  state-approved technology at our Garland Facility in order to allow
for uninterrupted  processing of medical waste. We received  Authorization  from
the TCEQ  permitting  us to  process  our  regulated  medical  waste  using  the
autoclave  method  of  treatment.   Now  that  the  UTMB  Facility  has  resumed
operations,  we  expect  our cost of sales to  increase  as a result  of  higher
operating  costs  and our  revenues  to  decrease  as a result of  reduced  UTMB
disposal fees.

         On March 3, 2003 we  reached a  settlement  with the State of Texas the
terms of which will require that we pay the State  $240,620  with no interest in
36 equal  installments  of $6,684  commencing  on or about April 30,  2003.  The
settlement also requires that we retroactively  pay $6,110 to those employees or
past  employees  whom we were  obligated  to pay,  but  failed  to pay in  full,
pursuant to the Smart Jobs Program.  Accordingly, we have reduced the litigation
accrual  by the  amount  ($180,465)  of  the  settlement  to be  paid  in  years
subsequent to December 31, 2003. Further,  the excess litigation accrual and the
accrued  interest  expense related to the Smart Jobs litigation will be credited
to income in February 2003 in the amount of $147,270.

Recently Issued Accounting Standards

         The  following   pronouncements  have  been  issued  by  the  Financial
Accounting Standards Board ("FASB").


                                       19
<PAGE>


         SFAS  No.  145,  "Rescission  of  FASB  Statement  Nos.  4,  44 and 64,
Amendment of FASB Statement No. 13, and Technical  Corrections as of April 2002"
primarily  provides guidance for reporting gains and losses from  extinguishment
of debt and  sale-leaseback  transactions.  The provisions of this Statement are
effective for financial  statements  issued for fiscal years beginning after May
15, 2002 with early adoption encouraged.

         SFAS No. 146,  "Accounting  for Costs  Associated with Exit or Disposal
Activities." This standard required companies to recognize costs associated with
exit or disposal  activities when they are incurred rather than at the date of a
commitment  to an exit or disposal  plan.  SFAS No. 146  replaces  the  existing
guidance  provided by EITF Issue No. 94-3,  "Liability  Recognition  for Certain
Employee  Termination  Benefits  and Other Costs to Exit an Activity  (including
Certain  Costs  incurred  in a  Restructuring)."  SFAS No.  146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.

         In  November  2002,  the  FASB  issued  FASB   Interpretation   No.  45
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  including
Indirect  Guarantees of  Indebtedness  of Others"  ("FIN45").  FIN45  requires a
company,  at the time it issues a guarantee,  to recognize an initial  liability
for the fair value of obligations  assumed under the guarantee and elaborates on
existing  disclosure  requirements  related to guarantees  and  warranties.  The
initial  recognition  requirements of FIN 45 are effective for guarantees issued
or modified  after December 31, 2002.  Adoption of the  disclosure  requirements
were effective for interim and annual periods ending after December 15, 2002 and
did not have a significant  impact on the consolidated  financial  statements of
the Company. The Company does not expect the adoption of the initial recognition
requirements  of  FIN 45 to  have  a  significant  impact  on  its  consolidated
financial position or results of operations.

         In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest  Entities  - an  Interpretation  of ARB No.  51."  This  interpretation
provides guidance related to identifying  variable interest entities (previously
known  generally as special purpose  entities or SPEs) and  determining  whether
such entities should be consolidated.  Certain disclosures are required when FIN
No. 46  becomes  effective  if it is  reasonably  possible  that a company  will
consolidate or disclose  information  about a variable  interest  entity when it
initially applies FIN No. 46. This interpreation must be applied  immediately to
variable interest entities created or obtained after January 31, 2003. For those
variable  interest  entities  created or obtained on or before January 31, 2003,
the  Company  must apply the  provisions  of FIN No. 46 in the third  quarter of
2003.

         Management  does  not  believe  that  the  adoption  of  any  of  these
pronouncements   had,  or  will  have,  a  material   effect  on  the  Company's
consolidated financial statements.

Item 7.  Consolidated Financial Statements.

         The  Company's   Consolidated   Financial   Statements   and  Notes  to
Consolidated  Financial Statements are attached to this Form 10-KSB beginning at
page F-i and are incorporated herein by reference.

Item  8.  Changes  in and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosure.

          None.

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.

         Members of our Board of Directors  serve until the next annual  meeting
of our  shareholders  or until  their  successors  have  been duly  elected  and
qualified.  Our officers are elected at the Board of Directors meeting following
each annual  shareholders'  meeting,  and serve at the  pleasure of our Board of
Directors.  Our last annual  meeting was held on December 18, 2002, for the 2002
fiscal year.

         The following persons comprise the directors and executive  officers of
the Company:
<TABLE>
<CAPTION>

                              Director/Officer
Name and Age                  Since              Position(s) Held
------------                  ----------------   ----------------
<S>                           <C>                <C>
Matthew H. Fleeger (39)       1993               President, Chief Executive Officer and
                                                 Chairman of the Board of Directors of the
                                                 Company
John Hill (37)                2003               Executive Vice President; Chief Operating Officer
Sam Hicks, C.P.A. (62)        1998               Director; Senior Vice President; Chief Financial
                                                 Officer
Mark M. Altenau, M.D. (61)    1994               Director
Donald McAfee (51)            2001               Director
Winship B. Moody (69)         2002               Director
Vivian Eriksen (60)           2002               Director
Beverly L. Fleeger (68)       1993               Vice President and Corporate Secretary
Robert Centeno (42)           2001               Vice President, Sales and Marketing
</TABLE>


                                       20
<PAGE>

Matthew H.  Fleeger -  Chairman  of the Board,  President,  and Chief  Executive
--------------------------------------------------------------------------------
Officer
-------

         Mr.  Fleeger is a founder of the Company  and serves as its  President,
Chairman of the Board of Directors and Chief Executive Officer, positions he has
held since 1993. Mr. Fleeger  graduated  from Southern  Methodist  University in
1985,  receiving a Bachelors  degree in business with an emphasis in finance and
marketing.  He has also been selected as a member of International  Who's Who of
Business Professionals.

         Mr.  Fleeger  has a  background  in finance,  marketing  and sales with
several years of  experience  in the oil and gas industry.  From 1985 to 1990 he
served as the President of Gulf Coast Western,  Inc., a family-owned oil and gas
exploration business.  From 1990 to 1993, Mr. Fleeger served as a Vice President
of Kinlaw Oil Company, a large Dallas/Fort Worth, Texas-based petroleum company.
From 1999 to 2000, Mr. Fleeger served as a director of Palm Beach Tan, Inc., the
largest chain of indoor  tanning  salons in the United  States.  Mr. Fleeger has
experience in corporate  structuring,  mergers and acquisitions,  joint ventures
and a variety of equity and debt  private  placement  vehicles  used to fund the
working and expansion capital needs of small developmental and growth companies.
Mr.  Fleeger is the son of Beverly L. Fleeger,  the Company's Vice President and
Corporate Secretary.

John Hill  - Executive Vice President and Chief Operating Officer
-----------------------------------------------------------------

         John E. Hill joined us as Chief  Operating  Officer in  February  2003.
From November 2002 to February  2003, Mr. Hill was the Director of Operations in
the Mid Atlantic  Region for  Stericycle/Biosystems.  From  September 1998 until
November 2002, Mr. Hill was the Director of Operations of Bridgeview,  Inc. From
May 1996 until August 1998, Mr. Hill was the Vice President Mid Atlantic  Region
for MedWaste, Inc. Mr. Hill received his BA from Rutgers University.

Sam Hicks, C.P.A. - Director; Senior Vice President and Chief Financial Officer
-------------------------------------------------------------------------------

         Mr. Hicks, a member of the Board of Directors  since 1999,  manages the
accounting/finance  departments of the Company and its operating divisions,  and
is the Company's Chief Financial Officer.  Mr. Hicks received his BS in Business
Administration from Creighton University in 1962 and holds CPA certificates from
the states of Nebraska and Texas.  He is a member of the  American  Institute of
Certified  Public   Accountants  and  the  Texas  Society  of  Certified  Public
Accountants.

         His   previous   career   includes   over  20  years  of  domestic  and
international  experience in accounting and finance, with 16 of those years as a
partner  of Ernst & Young  LLP,  a  big-four  accounting  firm.  From 1996 until
joining the Company in 1998, Mr. Hicks served as Director of Financial Reporting
for HealthCor Holdings, Inc. a large, publicly-held home healthcare organization
in  Dallas.   Mr.  Hicks  oversees  all  financial   aspects  of  the  Company's
development,  including  the  responsibility  for  staffing the  divisions  with
financial personnel.

Mark M. Altenau, M.D. - Director
--------------------------------

         Dr.  Altenau,  a member of the Board of  Directors  since  1994,  is an
otolaryngologist  in Dallas,  Texas,  where he has been in private  practice for
over 20 years. He has been a significant  shareholder of the Company since March
of 1994. Dr. Altenau  received his  undergraduate  degree from the University of
Cincinnati and his graduate degree from University of Cincinnati Medical School.

Donald D. McAfee, M.D. - Director
---------------------------------

         Dr. McAfee,  a member of the Board of Directors since May 2, 2001, is a
cardiologist in Bellingham,  Washington,  where he has been in practice for over
20 years. He is on the Governing  Board of St.  Joseph's  Hospital and Mt. Baker
Kidney  Center.  He is the former  Chief of Staff of St.  Joseph's  Hospital  in
Bellingham.

Winship B. Moody - Director
---------------------------

         Mr.  Moody has a  background  in finance and  accounting.  His previous
career included 28 years of experience in the pulp and paper industry. From 1962
to 1990, he worked at Rice Barton  Corporation  where he rose to the position of
President,  Chief Executive Officer and Chief Financial  Officer.  Mr. Moody has
also  served  as  President  and a Board  Member  of the  American  Pulp & Paper
Manufacturers Association. Mr. Moody retired in 1990 and currently serves on the
Board of Profile Senior Golf  Association.  He received his Bachelors  degree in
chemical engineering from the University of Maine.


                                       21
<PAGE>

Vivian Eriksen - Director
-------------------------

         Mr. Eriksen has a background in investments and franchising.  From 1989
to 1997,  Mr.  Eriksen was the  Chairman  of the Board of The Rio Grande  County
Bank. In addition, during Mr. Eriksen's business career, he has owned and sold a
national  fast food  franchise,  a Canon  copier  franchise  and a  Ford/Mercury
dealership.  Currently retired,  Mr. Eriksen is President of the Kiwanis Club of
Monte Vista,  Colorado and a past President of St. Joseph's Hospital and Nursing
Home.

Beverly L. Fleeger - Vice President, Corporate Secretary
--------------------------------------------------------

         Ms.  Fleeger has worked for the Company  since its  inception  in 1993.
Prior to  joining  the  Company,  Ms.  Fleeger  had  over 30  years of  business
organization and  administrative  experience.  For 17 years, Ms. Fleeger managed
the offices of a  family-owned  oil and gas  production  company.  In 1978,  Ms.
Fleeger formed Bevco,  Int'l.,  an  international  search firm  specializing  in
mid-to-top management personnel for major mining and oil exploration  companies.
Ms.  Fleeger  graduated from a New Mexico  Business  College and received her BA
from the  University  of Texas at  Dallas.  Ms.  Fleeger  is the  mother  of our
President, Matthew Fleeger.


Robert Centeno - Vice President, Sales and Marketing
----------------------------------------------------

         Mr. Centeno  joined the Company in November 2001. Mr. Centeno  attended
Mount San Antonio  College in Los Angeles,  California  and went  directly  into
inside sales for a large corporation in Los Angeles. He has over twenty years of
experience in  operations,  sales,  sales  management,  consulting  and business
development. In 1987 Mr. Centeno moved to Dallas where he owned and operated the
Dallas  Hair Club for Men.  He sold that  business  in 1999 and bought the first
franchise  offering of the Great  Outdoors  Sub Shops.  Mr.  Centeno  negotiated
franchise  sales in  several  new Texas  markets  outside  of  Dallas  for Great
Outdoors Franchise, Inc. prior to selling his share to his partner.

Section 16(a) Beneficial Ownership Reporting Compliance

         Section 16(a) of the Exchange Act requires the Company's  directors and
executive  officers,  and persons who own more than 10% of a registered class of
our equity securities,  to file with the SEC reports of ownership and changes in
ownership of Common Stock and other equity securities of the Company.  Executive
officers,  directors  and  greater  than 10%  stockholders  are  required by SEC
regulation  to furnish the Company  with copies of all Section  16(a) forms they
file.

         Based on the  review  of  copies of such  reports  furnished  to us and
written  representations  that no other reports were required,  we believe that,
during the 2002 fiscal year, all Section 16(a) filing requirements applicable to
the Company's  executive  officers,  directors  and greater than 10%  beneficial
owners were  complied with.

Item 10.          Executive Compensation.

         The following table sets forth the aggregate cash  compensation paid by
the Company in the three most recent  fiscal years ended  December 31, 2002,  to
each of its most highly compensated officers of the Company.


                                       22
<PAGE>
<TABLE>
<CAPTION>

                           Summary Compensation Table
                               Annual Compensation


                                                                  Other Annual      All other
Name and Principal Position       Year    Salary(1)   Bonus(2)   Compensation(3)  Compensation
---------------------------       ----    ---------   --------   ---------------  ------------
<S>                               <C>     <C>         <C>        <C>              <C>
Matthew H. Fleeger...........     2002    $190,800        --       $ 78,300(3)     $  3,874(4)
  Chairman of the Board,          2001    $180,000        --       $ 87,573(3)     $  5,534(4)
  President and Chief             2000    $120,000    $125,000         --          $  1,645(4)
  Executive Officer

Sam Hicks....................     2002    $101,760        --           --              --
  Senior Vice President,          2001    $ 94,661        --           --              --
  Director, Chief Financial       2000    $ 85,000    $ 30,000         --              --
  Officer and Principal
  Accounting Officer

Robert Centeno...............     2002    $117,450        --           --              --
  Vice President, Sales

Beverly L. Fleeger                2002    $ 60,498        --           --          $  6,582(5)
  Vice President and              2001    $ 61,539        --           --          $  6,582(5)
  Corporate Secretary             2000    $ 55,000    $ 40,000         --          $  6,582(5)
</TABLE>
--------------------------------------------------------------------------------

(1)      Salary  includes  accrued but unpaid  salaries in each year as follows:
         Matthew H. Fleeger - 2002 - $85,008;  2001 - $180,000;  2000 - $111,500
         Sam Hicks - 2002 - $10,480;  2001 - $25,613;  2000 - $17,000
         Beverly L. Fleeger - 2002 - None; 2001 - $6,532; 2000 - $8,250

(2)      Bonuses of up to  250,000  shares of Common  Stock were  awarded by the
         Board of Directors for the year 2000 and charged to expense at the rate
         of $1  per  share.  Specific  awards  were  approved  by the  Board  of
         Directors on May 1, 2001.

(3)      During 2002, the following  named  officers were  authorized to convert
         their accrued  salaries and loans into Common Stock of the Company at a
         conversion rate of $0.75 per share:


                      Accrued               Total       Number of   Compensation
Name of Officer       Salary      Loans     Converted   Shares      Element
---------------       ------      -----     ---------   ---------   ------------
Matthew H. Fleeger    $405,508    $84,900   $234,900    313,200     $78,300
Sam Hicks             $ 67,259       --         --         --          --
Beverly L. Fleeger    $ 24,522       --         --         --          --

The  compensation  element ($0.25 per share) was charged to debt  extinguishment
expense in 2002.

         During 2001, the following  named  officers were  authorized to convert
their  accrued  salaries  and  loans  into  Common  Stock  of the  Company  at a
conversion rate of $0.75 per share:


                      Accrued               Total       Number of   Compensation
Name of Officer       Salary      Loans     Converted   Shares      Element
---------------       ------      -----     ---------   ---------   ------------
Matthew H. Fleeger    $321,250    $262,721  $262,721     350,295    $87,573
Sam Hicks             $ 56,779        --        --          --         --
Beverly L. Fleeger    $ 24,522        --        --          --         --

The  compensation  element ($0.25 per share) was charged to debt  extinguishment
expense in 2001.

(4)      Represents  payments on a club  membership for Matthew Fleeger used for
         Company  purposes in 2000 and 2001,  and  gasoline for  automobile  and
         disability insurance premiums in 2002.

(5)      Represents  payments  on  automobile  driven  by Ms.  Fleeger  used for
         Company purposes.

         The directors receive no compensation for attendance at meetings of the
Board of Directors.  The Company pays for each non-employee  directors  ordinary
and necessary travel expenses incurred in attending such meetings.


                                       23
<PAGE>

Employment Agreements

         On  May 1,  2001,  our  Board  of  Directors  approved,  in  principal,
effective  January 1, 2001, an employment  agreement between the Company and Mr.
Fleeger.  The  agreement  has not yet been  reduced to a written  contract.  The
material  terms of the agreement  include:  (i) a five-year  term;  (ii) minimum
annual compensation of $180,000, with a yearly cost of living increase of 6%, or
an amount  equal to the  highest-paid  employee as a result of any  acquisition;
(iii) that Mr. Fleeger will remain Chief Executive  Officer and President;  (iv)
that a severance  package will include the compensation of any remaining term of
the agreement; (v) an annual stock or cash bonus based upon EBITDA formula to be
developed and approved by LBCG and/or the Company's  Board of Directors;  (vi) a
bonus for the year 2000 of  125,000  shares of Common  Stock,  and the option to
convert any loans made by him and/or accrued compensation at a price of $.75 per
share; and (vii) a formal written agreement will be prepared by our counsel.

         On  May 1,  2001,  our  Board  of  Directors  approved,  in  principal,
effective  January 1, 2001, an employment  agreement between the Company and Mr.
Hicks.  The  agreement  has not yet been  reduced  to a  written  contract.  The
material  terms of the agreement  include:  (i) a five-year  term;  (ii) minimum
annual compensation of $96,000,  with a yearly cost of living increase of 6%, or
an  amount  equal to the  highest-paid  financial  employee  as a result  of any
acquisition;  (iii) that Mr. Hicks will remain the Chief Financial Officer, (iv)
that a severance  package will include the compensation of any remaining term of
the agreement; (v) an annual stock or cash bonus based upon EBITDA formula to be
developed and approved by LBCG and/or the Company's  Board of Directors;  (vi) a
bonus for the year 2000 of 30,000  shares  of Common  Stock,  and the  option to
convert  his  accrued  compensation  at a price of $.75 per  share;  and (vii) a
formal written agreement will be prepared by our counsel.

Item 11.  Security  Ownership of Certain  Beneficial  Owners and  Management and
Related Stockholder Matters.

         The  following  table sets forth  certain  information  concerning  the
number of shares of Common Stock owned beneficially as of March 15, 2003 by: (i)
each person known to us to own more than five percent of any class of our voting
securities;  (ii) each of our directors and the executive officers named in Item
10. above; and (iii) all our directors and executive officers as a group. Unless
otherwise indicated,  the shareholders listed possess sole voting and investment
power with respect to the shares shown.

                                            Number of Shares          Percent of
Name and Address of Beneficial Owner      Beneficially Owned(1)        Class(2)
------------------------------------      ---------------------       ----------

Matthew H. Fleeger                             1,023,771(3)              6.1%
    12750 Merit Drive -Park Central VII
    Suite 770
    Dallas, Texas 75251
Mark Altenau, M.D.                             2,583,459                15.8%
    12750 Merit Drive -Park Central VII
    Suite 770
    Dallas, Texas 75251
Vivian Erikson                                 1,000,000                 6.1%
    12750 Merit Drive
    Suite 770
    Dallas, Texas  75251
Beverly Fleeger                                  578,469(4)              3.5%
  12750 Merit Drive -Park Central VII
   Suite 770
   Dallas, Texas 75251
Don McAfee, M.D.                                 201,229                 1.2%
    12750 Merit Drive -Park Central VII
    Suite 770
    Dallas, Texas 75251
Sam Hicks                                        201,470(5)              1.2%
    12750 Merit Drive -Park Central VII
    Suite 770
    Dallas, Texas 75251
Winship B. Moody                                 163,062                 1.0%
    12750 Merit Drive -Park Central VII
    Suite 770
    Dallas, Texas 75251
Robert Centeno                                    20,000(6)              -- %
    12750 Merit Drive -Park Central VII
    Suite 770
    Dallas, Texas 75251


                                       24
<PAGE>

All Directors and Executive
Officers as a Group (11 persons)               5,848,860(7)             34.3%(8)

Ron Michael, M.D.                                779,364                 4.8%
    12750 Merit Drive -Park Central VII
    Suite 770
    Dallas, Texas 75251

(1)  Pursuant  to Rule 13d-3  under the  Exchange  Act a person  has  beneficial
ownership of any  securities  as to which such person,  directly or  indirectly,
through any contract, arrangement,  undertaking,  relationship or otherwise, has
or shares voting power and/or  investment  power as to which such person has the
right to acquire such voting and/or investment power within 60 days.  Percentage
of beneficial  ownership as to any person as of a particular  date is calculated
by dividing the number of shares beneficially owned by such person by the sum of
the  number of shares  outstanding  as of such date and the  number of  unissued
shares as to which such person has the right to acquire voting and/or investment
control within 60 days. The number of shares shown includes  outstanding  shares
owned as of March 15,  2003,  by the  person  indicated  and  shares  underlying
warrants,  options and/or convertible debt and accrued interest thereon owned by
such  person on March 15,  2003,  that were  exercisable  within 60 days of that
date.

(2)  Applicable  percentage  ownership is based on  16,347,154  voting shares of
Common Stock outstanding on March 15, 2003.

(3) Includes  220,442  shares owned by Preston Harris  Interests,  Inc., a Texas
corporation,  of which Mr.  Fleeger is the president  and majority  shareholder;
340,677 shares of Common Stock underlying  convertible accrued salaries at March
15, 2003;  75,000  shares for 2001 bonus not yet issued;  and 36,000  shares for
advances made in 2002. (See Certain Relationships and Related Transactions.)

(4)  Includes  32,696  shares of Common  Stock  underlying  convertible  accrued
salaries at March 15, 2003 and 40,000 shares for 2001 bonus not yet issued. (See
Certain Relationships and Related Transactions.)

(5)  Includes  89,679  shares of Common  Stock  underlying  convertible  accrued
salaries at March 15, 2003 and 35,000 shares for 2001 bonus not yet issued. (See
Certain Relationships and Related Transactions.)

(6) Includes 20,000 shares of Common Stock underlying 2001 bonus not yet issued.

(7) Includes  719,052  shares of Common Stock  underlying  convertible  debt and
accrued  interest  thereon, convertible  accrued  salaries  at March  15,  2003,
convertible  advances  from  stockholder  and bonus  shares not yet issued  (See
Certain Relationships and Related Transactions.)

(8)  Applicable  percentage  ownership is based on  16,347,154  voting shares of
Common Stock  outstanding  on March 15, 2003, and on shares  issuable  within 60
days of March 15, 2003.






















                                       25
<PAGE>
<TABLE>
<CAPTION>


                      Equity Compensation Plan Information

--------------------------------------------- ---------------- ---------------- -----------------
                                                 Number of                         Number of
                                               securities to     Weighted-         securities
                                              be issued upon      average          remaining
                                                exercise of    exercise price    available for
                                                outstanding    of outstanding   future issuance
                                                 options,         options,        under equity
                                               warrants and     warrants and      compensation
                                                  rights           rights            plans
--------------------------------------------- ---------------- ---------------- -----------------
<S>                                           <C>              <C>              <C>
Equity compensation plans approved by               --               --             850,000
  security holders...........................
--------------------------------------------- ---------------- ---------------- -----------------
Equity compensation plans not approved by           --               --                --
  security holders...........................
--------------------------------------------- ---------------- ---------------- -----------------
  Total......................................       --               --             850,000
--------------------------------------------- ---------------- ---------------- -----------------
</TABLE>

Item 12. Certain Relationships and Related Transactions.

         We incur certain general and administrative expenses jointly with other
related parties. Such costs are allocated amongst us and our affiliates based on
the specific entity incurring the expense,  square footage utilization on shared
facilities,  estimated  utilization of other relevant products and services,  or
the human resources dedicated to each respective entity.

         We have certain payable balances with our shareholders and officers. At
December 31, 2001 and 2002,  our payables to  shareholders  and officers were as
follows:

                                                   December 31,
                                             2001              2002
                                           --------           --------
         Vivian Eriksen                    $   --             $584,302
         Dr. Mark Alteneau                  190,945               --
         Matthew Fleeger                    322,596            295,508
         Sam Hicks                           56,779             67,259
         Beverly Fleeger                     24,522             32,622
                                           --------           --------
           Total                           $594,842           $979,691
                                           ========           ========


Loans from Directors and Shareholders

         One of our largest shareholders and a director,  Vivian Eriksen, loaned
us a total of $615,000 ($584,302 was outstanding at December 31, 2002) in August
and  September  2002  for  the  purpose  of  repaying  a  note  to  our  largest
shareholder, repaying a second lien working capital note to Southtrust Bank, and
paying a substantial  portion of our delinquent  payroll tax liability.  The new
note bears  interest at the rate of 10 percent per annum and is  repayable in 60
equal  monthly  installments  of  $13,067,  including  interest,   beginning  on
September  28,  2002,  and is secured by a second lien deed of trust on the real
property at our Garland Facility.

Shareholder Lock-Up Agreement

         Shareholders  owning  approximately  61.2%  of our  Common  Stock  have
entered into a lock-up agreement (the "Lock-Up  Agreement") with us by which the
shareholders  agreed  to place  certain  restrictions  on  their  right to sell,
pledge, or otherwise  transfer shares of Common Stock owned by them for one year
following the date that the Common Stock is initially quoted on the OTC Bulletin
Board(R) or other national  exchange (the "Effective  Date").  Essentially,  the
shareholders who signed the agreement (the "Restricted Shareholders") agreed not
to sell,  pledge,  or otherwise  transfer  shares of Common Stock owned by them,
subject  to the  following:  (i)  after  the  expiration  of one  year  from the
Effective  Date,  20% of the  shares of  Common  Stock  owned by the  Restricted
Shareholder will no longer be subject to the Lock-Up  Agreement;  (ii) after the
expiration of 90 days  following  the  completion of one year from the Effective
Date, 40% of the shares of Common Stock owned by the Restricted Shareholder will
no longer be subject to the Lock-Up Agreement; (iii) after the expiration of 180
days  following the  completion of one year from the Effective  Date, 60% of the
shares of Common  Stock owned by the  Restricted  Shareholder  will no longer be
subject  to the  Lock-Up  Agreement;  (iv)  after  the  expiration  of 270  days
following the completion of one year from the Effective  Date, 80% of the shares
of Common Stock owned by the Restricted Shareholder will no longer be subject to


                                       26
<PAGE>

the Lock-Up Agreement;  and (v) after expiration of two years from the Effective
Date,  100% of the shares of Common  Stock owned by the  Restricted  Shareholder
will no longer be subject to the  Lock-Up  Agreement.  The  restrictions  do not
apply to (i) a bona fide gift made by the Restricted Shareholder,  provided that
the donee of the  shares  of  Common  Stock or  securities  convertible  into or
exchangeable  or exercisable  for any shares of Common Stock agree in writing to
be bound by the  terms  of the  Lock-Up  Agreement  prior  to the  gift;  (ii) a
distribution to partners or shareholders of the Restricted  Shareholder  (and to
any  direct or  indirect  partner or  shareholder  thereof),  provided  that the
ultimate  distributees  of the shares of Common Stock or securities  convertible
into or  exchangeable  or  exercisable  for any shares of Common  Stock agree in
writing  to be  bound  by  the  terms  of the  Lock-Up  Agreement  prior  to the
distribution;  and (iii) transfers,  without consideration,  of shares of Common
Stock or securities  convertible  into or  exchangeable  or exercisable  for any
shares of Common  Stock to family  members or to one or more trusts  established
for the  benefit of one or more family  members,  provided  that the  transferee
agrees in writing to be bound by the terms of the Lock-Up Agreement prior to the
transfer.

Item 13. Exhibits and Reports on Form 8-K.

         (a)Exhibits.

         3.1 Articles of Incorporation of the Company,  filed with the Secretary
of Sate of the State of Texas on November  12, 1993 (filed as Exhibit 3.1 to the
Company's  Form  10-SB  filed on July  16,  2001,  and  incorporated  herein  by
reference).

         3.2  Articles of  Amendment  to the  Articles of  Incorporation  of the
Company,  filed with the Secretary of State of the State of Texas on January 10,
1994 (filed as Exhibit 3.2 to the  Company's  Form 10-SB filed on July 16, 2001,
and incorporated herein by reference).

         3.3  Articles of  Amendment  to the  Articles of  Incorporation  of the
Company,  filed with the Secretary of State of the State of Texas on January 31,
1996 (filed as Exhibit 3.3 to the  Company's  Form 10-SB filed on July 16, 2001,
and incorporated herein by reference).

         3.4  Articles of  Amendment  to the  Articles of  Incorporation  of the
Company, filed with the Secretary of State of the State of Texas on November 12,
1996 (filed as Exhibit 3.4 to the  Company's  Form 10-SB filed on July 16, 2001,
and incorporated herein by reference).

         3.5  Articles of  Amendment  to the  Articles of  Incorporation  of the
Company, filed with the Secretary of State of the State of Texas on December 23,
1999 (filed as Exhibit 3.5 to the  Company's  Form 10-SB filed on July 16, 2001,
and incorporated herein by reference).

         3.6  Articles of  Amendment  to the  Articles of  Incorporation  of the
Company,  filed  with the  Secretary  of State of the State of Texas on June 27,
2001 (filed as Exhibit 3.6 to the  Company's  Form 10-SB filed on July 16, 2001,
and incorporated herein by reference).

         3.7  Bylaws,  as amended,  of the Company  (filed as Exhibit 3.7 to the
Company's  Form  10-SB  filed on July  16,  2001,  and  incorporated  herein  by
reference).

         4.1 Form of Lock-Up  Agreement  (filed as Exhibit 4.1 to the  Company's
Form 10-SB filed on July 16, 2001, and incorporated herein by reference).

         4.2  Form  of  Subscription  Agreement  (filed  as  Exhibit  4.2 to the
Company's  Form  10-SB  filed on July  16,  2001,  and  incorporated  herein  by
reference).


                                       27
<PAGE>

         4.3 Stock Purchase Option,  dated January 15, 1997, between the Company
and Gary S. Krall (filed as Exhibit 4.3 to the Company's Amendment No. 1 to Form
10-SB filed on February 13, 2002, and incorporated herein by reference).(*)

         10.1 Firm Commitment  Agreement,  dated October 31, 2000, between Lilly
Beter  Capital  Group,  Ltd.  and the  Company  (filed  as  Exhibit  10.1 to the
Company's  Form  10-SB  filed on July  16,  2001,  and  incorporated  herein  by
reference).

         10.2  Loan  Conversion  and  Common  Stock  Agreement  between  Mark M.
Altenau, M.D. and the Company, dated July 31, 2000 (filed as Exhibit 10.2 to the
Company's  Form  10-SB  filed on July  16,  2001,  and  incorporated  herein  by
reference).

         10.3. Contractor Services Agreement effective May 28, 1995, as amended,
between the Company and The  University  of Texas  Medical  Branch at  Galveston
(filed as Exhibit 10.3 to the Company's  Form 10-SB filed on July 16, 2001,  and
incorporated herein by reference).

         10.4 Memorandum of Agreement,  dated June 15, 2001, between the Company
and  Intercontinental  Manufacturing  Company  (filed  as  Exhibit  10.4  to the
Company's  Form  10-SB  filed on July  16,  2001,  and  incorporated  herein  by
reference).

         10.5 Exclusive Medical Waste Service  Agreement,  dated March 21, 2002,
between EnviroClean  Management Services,  Inc. and Christus Spohn Health System
(filed as Exhibit  10.5 to the  Company's  Form 10-QSB filed on August 16, 2002,
and incorporated herein by reference).+

         10.6 Medical Waste  Transportation and Disposal Agreement,  dated March
1, 2001,  between  EnviroClean  Management  Services,  Inc.,  and Trinity Mother
Frances Regional Health Center (filed as Exhibit 10.6 to the Company's Amendment
No. 1 to Form 10-SB filed on  February  13,  2002,  and  incorporated  herein by
reference).+

         10.7  Amended and Restated  Promissory  Note dated July 31, 2001 by the
Company to Mark M. Altenau,  M.D. for $171,666.67  (filed as Exhibit 10.7 to the
Company's  Amendment  No.  1 to Form  10-SB  filed on  February  13,  2002,  and
incorporated herein by reference).

         10.8 Amended and Restated Loan  Conversion  and Common Stock  Agreement
between Mark M.  Altenau,  M.D.  and the Company,  dated July 31, 2001 (filed as
Exhibit 10.8 to the  Company's  Amendment  No. 1 to Form 10-SB filed on February
13, 2002, and incorporated herein by reference).

         10.9  Amendment  4 to the  Contractor  Services  Agreement  between the
Company and  University  of Texas  Medical  Branch at Galveston  (Exhibit  10.9)
(filed as Exhibit 10.9 to the  Company's  Amendment No. 1 to Form 10-SB filed on
February 13, 2002, and incorporated herein by reference).

         10.10 LBCG Financing  Proposal (filed as Exhibit 10.10 to the Company's
Amendment  No. 1 to Form 10-SB  filed on February  13,  2002,  and  incorporated
herein by reference).

         10.11  Purchase  Agreement  for the  purchase of an  autoclave  for the
Company's Garland facility between  EnviroClean  Management  Services,  Inc. and
BondTech,  Inc.  (filed as Exhibit 10.11 to the  Company's  Form 10-QSB filed on
August 19, 2002, and incorporated herein by reference).

         10.12  Promissory  Note dated  August 28, 2002 by the Company to Vivian
Eriksen for  $202,250.79.  (filed as Exhibit 10.12 to the Company's  Form 10-QSB
filed on November 14, 2002, and incorporated herein by reference).

         10.13.  Promissory  Note dated August 28, 2002 by the Company to Vivian
Eriksen for  $90,000.00.  (filed as Exhibit 10.13 to the  Company's  Form 10-QSB
filed on November 14, 2002, and incorporated herein by reference).

         10.14  Promissory  Note dated  August 28, 2002 by the Company to Vivian
Eriksen for  $322,749.21.  (filed as Exhibit 10.14 to the Company's  Form 10-QSB
filed on November 14, 2002, and incorporated herein by reference).

         99.1.  Certification of Chief Executive  Officer of MedSolutions,  Inc.
Pursuant to 18 U.S.C. Section 1350.**

         99.2  Certification of Chief Financial  Officer of  MedSolutions,  Inc.
Pursuant to 18 U.S.C. Section 1350.**

----------


                                       28
<PAGE>

         (*) Denotes a management contract or compensatory plan or arrangement.

         (+)  Confidential  treatment  was  requested  with  respect  to certain
portions of this exhibit. Omitted portions were filed separately with the SEC at
the time the exhibit was filed.

         (**) Filed herewith.

         (b)      Reports on Form 8-K.

                  None.

Item 14. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

         Based on an evaluation under the supervision and with the participation
of our  management as of a date within 90 days of the filing date of this Annual
Report on Form 10-KSB, our principal  executive officer and principal  financial
officer have concluded  that our disclosure  controls and procedures (as defined
in Rules 13a-14(c) and 15d-14(c) under the Exchange Act, are effective to ensure
that  information  required to be  disclosed  in reports  that we file or submit
under the Exchange Act is recorded,  processed,  summarized and reported  within
the time periods specified in the SEC rules and forms.

Changes in Internal Controls.

         There were no significant  changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation. There were no significant deficiencies or material weaknesses,
and therefore there were no corrective actions taken. However, the design of any
system  of  controls  is  based  in part  upon  certain  assumptions  about  the
likelihood  of future  events and there is no  certainty  that any  design  will
succeed in achieving its stated goal under all potential future  considerations,
regardless of how remote.




















                                       29
<PAGE>

                                   SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.


                                                  MEDSOLUTIONS, INC.


Dated:  April 15, 2003                  By: /S/ Matthew H. Fleeger
                                           -------------------------------------
                                           Matthew H. Fleeger
                                           President and Chief Executive Officer



         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.

      Signature                        Title                           Date
      ---------                        -----                           ----

/s/ Matthew H. Fleeger       President, Chief Executive           April 15, 2003
----------------------       Officer  and Chairman of
 Matthew H. Fleeger          the Board of Directors

/s/ Sam  Hicks               Director, Senior Vice President,     April 15, 2003
----------------------       Chief Financial Officer and
Sam Hicks                    Principal Accounting Officer

/s/ Mark M. Altenau          Director                             April 15, 2003
----------------------
Mark M. Altenau, M.D.

                             Director                             April 15, 2003
----------------------
Donald McAfee, M.D.

                             Director                             April 15, 2003
----------------------
Winship B. Moody

                            Director                             April 15, 2003
----------------------
Vivian Eriksen














                                       30
<PAGE>



                                  CERTIFICATION

I, Matthew H. Fleeger, certify that:

         1. I have reviewed  this annual report on Form 10-KSB of  MedSolutions,
Inc.;

         2. Based on my  knowledge,  this  annual  report  does not  contain any
untrue  statement of a material fact or omit to state a material fact  necessary
to make the  statements  made,  in light of the  circumstances  under which such
statements  were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

                  (a) designed such disclosure controls and procedures to ensure
         that material  information  relating to the  registrant,  including its
         consolidated  subsidiaries,  is made known to us by others within those
         entities, particularly during the period in which this annual report is
         being prepared;

                  (b) evaluated the effectiveness of the registrant's disclosure
         controls and procedures as of a date within 90 days prior to the filing
         date of this annual report (the "Evaluation Date"); and

                  (c) presented in this annual report our conclusions  about the
         effectiveness  of the disclosure  controls and procedures  based on our
         evaluation as of the Evaluation Date;

         5. The  registrant's  other  certifying  officers and I have disclosed,
based on our most recent evaluation,  to the registrant's auditors and the audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent functions):

                  (a) all significant deficiencies in the design or operation of
         internal controls which could adversely affect the registrant's ability
         to  record,  process,  summarize  and  report  financial  data and have
         identified  for the  registrant's  auditors any material  weaknesses in
         internal controls; and

                  (b)  any  fraud,  whether  or  not  material,   that  involves
         management  or  other  employees  who  have a  significant  role in the
         registrant's internal controls; and

         6. The registrant's  other certifying  officers and I have indicated in
this annual report whether there were significant  changes in internal  controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: April 15, 2003
                                                          /s/ Matthew H. Fleeger
                                                         -----------------------
                                                         Matthew H. Fleeger
                                                         Chief Executive Officer



                                       31
<PAGE>

                                  CERTIFICATION

I, Sam Hicks, certify that:

         1. I have reviewed  this annual report on Form 10-KSB of  MedSolutions,
Inc.;

         2. Based on my  knowledge,  this  annual  report  does not  contain any
untrue  statement of a material fact or omit to state a material fact  necessary
to make the  statements  made,  in light of the  circumstances  under which such
statements  were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

                  (a) designed such disclosure controls and procedures to ensure
         that material  information  relating to the  registrant,  including its
         consolidated  subsidiaries,  is made known to us by others within those
         entities, particularly during the period in which this annual report is
         being prepared;

                  (b) evaluated the effectiveness of the registrant's disclosure
         controls and procedures as of a date within 90 days prior to the filing
         date of this annual report (the "Evaluation Date"); and

                  (c) presented in this annual report our conclusions  about the
         effectiveness  of the disclosure  controls and procedures  based on our
         evaluation as of the Evaluation Date;

         5. The  registrant's  other  certifying  officers and I have disclosed,
based on our most recent evaluation,  to the registrant's auditors and the audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent functions):

                  (a) all significant deficiencies in the design or operation of
         internal controls which could adversely affect the registrant's ability
         to  record,  process,  summarize  and  report  financial  data and have
         identified  for the  registrant's  auditors any material  weaknesses in
         internal controls; and

                  (b)  any  fraud,  whether  or  not  material,   that  involves
         management  or  other  employees  who  have a  significant  role in the
         registrant's internal controls; and

         6. The registrant's  other certifying  officers and I have indicated in
this annual report whether there were significant  changes in internal  controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: April 15, 2003
                                                          /s/ Sam Hicks
                                                         -----------------------
                                                         Sam Hicks
                                                         Chief Financial Officer


                                       32
<PAGE>

                               MEDSOLUTIONS, INC.

                        CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2002 and 2001























                                      F-i
<PAGE>

                                MEDSOLUTIONS, INC.

                          INDEX TO FINANCIAL STATEMENTS


                                                                         Page
                                                                      ----------
PART I - FINANCIAL INFORMATION:


   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                           F-1


   CONSOLIDATED BALANCE SHEETS                                        F-2
     At December 31, 2002 and 2001


   CONSOLIDATED STATEMENTS OF OPERATIONS                              F-3
     For the Years Ended December 31, 2002 and 2001


   CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY                F-4 - F-6
     For the Years Ended December 31, 2002 and 2001


   CONSOLIDATED STATEMENTS OF CASH FLOWS                              F-7 - F-8
     For the Years Ended December 31, 2002 and 2001


   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         F-9 - F-30

















                                     F-ii

<PAGE>

To the Board of Directors
MedSolutions, Inc.



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                    ----------------------------------------

We have audited the  accompanying  consolidated  balance sheets of MedSolutions,
Inc.  (the  "Company")  as of  December  31,  2002  and  2001,  and the  related
consolidated statements of operations,  stockholders'  deficiency and cash flows
for the years  then  ended.  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 auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit 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  consolidated  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
MedSolutions,  Inc.  as of December  31,  2002 and 2001,  and the results of its
operations  and  cash  flows  for the  years  then  ended,  in  conformity  with
accounting principles generally accepted in the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated  financial statements,  the Company's significant operating losses,
working capital deficiency and stockholders'  deficiency raise substantial doubt
about its ability to continue as a going concern.  Management's  plans regarding
these matters are also described in Notes 2 and 14. The  consolidated  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.


                                                       MARCUM & KLIEGMAN, L.L.P.

New York, New York
February 21, 2003






                                      F-1
<PAGE>
<TABLE>
<CAPTION>

                                MEDSOLUTIONS, INC.

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
                                     ------
                                                                                December 31,
                                                                       ----------------------------
                                                                             2002              2001
                                                                       ------------    ------------
<S>                                                                    <C>             <C>
Current Assets:
  Cash                                                                 $       --      $       --
  Accounts receivable - trade, net                                          872,906         831,945
  Prepaid expenses and other current assets                                 124,088         101,661
  Supplies                                                                   19,148          34,147
                                                                       ------------    ------------
      Total Current Assets                                                1,016,142         967,753

Property and equipment - at cost, net of accumulated
  depreciation                                                            1,259,650         699,026
Intangible assets - permits                                                  60,447          23,153
Other                                                                         7,245           3,014
                                                                       ------------    ------------
      Total Assets                                                     $  2,343,484    $  1,692,946
                                                                       ============    ============

                    LIABILITIES AND STOCKHOLDERS' DEFICIENCY
                    ----------------------------------------

Current Liabilities:
  Bank overdraft                                                       $     87,588    $    145,500
  Convertible debentures                                                     40,135          40,135
  Current maturities of long-term obligations                                38,949         425,911
  Accounts payable                                                          847,432       1,157,537
  Accrued liabilities                                                     1,603,477       2,287,432
  Current maturities - notes payable stockholders                           104,632         171,667
  Advances from stockholder                                                  48,100           1,346
                                                                       ------------    ------------
      Total Current Liabilities                                           2,770,313       4,229,528

Long-term obligations, less current maturities                              294,096          69,363
Notes payable - stockholder, less current maturities                        479,670            --
Smart Jobs litigation settlement, less current
  maturities included in accrued liabilities                                180,465            --
                                                                       ------------    ------------
      Total Liabilities                                                   3,724,544       4,298,891
                                                                       ------------    ------------
Commitments, Contingencies and Other Matters
  (Notes 1, 2, 9, 13, 14 and 16)
Stockholders' Deficiency:
  Common stock (par value $.001) - 100,000,000 shares
    authorized at December 31, 2002 and 2001; 16,359,354 shares
    issued and 16,347,154 shares outstanding at December 31,
    2002 and 15,001,973 shares issued and 14,989,773 shares
    outstanding at December 31, 2001                                         16,359          15,002
  Preferred stock (par value $.001) - 100,000,000 and
    5,000,000 shares authorized at December 31, 2002 and 2001,
    respectively
      Preference on liquidation of $6.00 per share; -0-
        shares outstanding at December 31, 2002 and
        2001, respectively                                                     --              --
      Preference on liquidation of $3.00 per share; -0-
        shares outstanding at December 31, 2002 and
        2001, respectively                                                     --              --
   Additional paid-in capital                                            19,963,268      18,454,014
   Accumulated deficit                                                  (21,342,687)    (21,056,961)
   Treasury stock, at cost - 12,200 shares at December 31, 2002
       and 2001                                                             (18,000)        (18,000)
                                                                       ------------    ------------
        Total Stockholders' Deficiency                                   (1,381,060)     (2,605,945)
                                                                       ------------    ------------
        Total Liabilities and Stockholders' Deficiency                 $  2,343,484    $  1,692,946
                                                                       ============    ============
</TABLE>

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

                                      F-2
<PAGE>

                               MEDSOLUTIONS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS




                                                       For the Years Ended
                                                           December 31,
                                                   ----------------------------
                                                       2002            2001
                                                   ------------    ------------

Revenues:
  Sales - Net                                      $  5,410,710    $  4,046,061
                                                   ------------    ------------

Cost, Expenses and Other Income:
  Cost of sales                                       3,589,904       3,788,566
  Compensatory element of stock issuances for
   Bonus                                                   --           250,000
  General and administrative expenses                 1,846,787       1,254,480
  Depreciation and amortization                         149,530         142,051
                                                   ------------    ------------
                                                      5,586,221       5,435,097
                                                   ------------    ------------
Loss from operations                                   (175,511)     (1,389,036)

Other expenses:
  Debt conversion expense                                78,300          22,533
  Interest expense                                      133,856         183,725
  Other income                                         (101,941)         (1,694)
  Write-off of deferred offering costs                     --           326,688
                                                   ------------    ------------
                                                        110,215         531,252
                                                   ------------    ------------
Loss before extraordinary item                         (285,726)     (1,920,288)

Extraordinary item - loss from extinguishment of
  debt, net of income tax benefit of $-0-                 (--)          (87,573)
                                                   ------------    ------------
Net Loss                                           $   (285,726)   $ (2,007,861)
                                                   ============    ============

Basic and diluted loss per common share:
    Before extraordinary item                      $       (.02)   $       (.13)
    Extraordinary item                                     (.00)           (.01)
                                                   ------------    ------------
      Net Loss                                     $       (.02)   $       (.14)
                                                   ============    ============
Weighted average common shares used in basic and
  diluted loss per share                             15,758,003      13,911,278
                                                   ============    ============





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

                                      F-3

<PAGE>
<TABLE>
<CAPTION>

                               MEDSOLUTIONS, INC.

               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001


                                                                           MSI Preferred Stock
                                                   MSI Common Stock              Series I
                                               -----------------------   ------------------------
                                                 Shares       Amount       Shares        Amount
                                               ----------   ----------   ----------    ----------
<S>                                            <C>          <C>          <C>           <C>
Year Ended December 31, 2002:
----------------------------
Balance - December 31, 2001                    15,001,973   $   15,002         --      $     --
MSI common stock sold for cash                    988,591          988         --            --
MSI common stock exchanged to cancel
  stockholder advances and accrued salaries       313,200          313         --            --
Debt conversion expense                              --           --           --            --
MSI common stock exchanged for
  accounts payable and stock based
  compensation                                    55,590           56         --            --
Net loss                                            --           --           --            --
                                               ----------   ----------   ----------    ----------
Balance - December 31, 2002                    16,359,354   $   16,359         --      $     --
                                               ==========   ==========   ==========    ==========
Year Ended December 31, 2001:
-----------------------------

Balance - December 31, 2000                    13,294,026   $   13,294        2,177    $   13,065
MSI common stock sold for cash                    585,413          586         --            --
MSI common stock exchanged to cancel
  stockholder loan                                350,295          350         --            --
Debt conversion expense                              --           --           --            --
Extraordinary item - loss from
  extinguishment of debt                             --           --           --            --
MSI common stock exchanged for accounts
  payable                                         483,476          483         --            --
MSI common stock issued for bonus                 240,500          241         --            --
MSI common stock exchanged from PFD II              3,808            4         --            --
MSI common stock exchanged from PFD I               9,404            9       (2,177)      (13,065)
MSI common stock exchanged for EMSI
  common stock                                      8,290            8         --            --
MSI common stock exchanged for
  debentures                                       26,761           27         --            --
Accrual of 2001 interest to be exchanged
  in stock in 2002                                   --           --           --            --
Accrual of 2001 employee bonuses to be
  issued in stock in 2003                            --           --           --            --
Net loss                                             --           --           --            --
                                               ----------   ----------   ----------    ----------
Balance - December 31, 2001                    15,001,973   $   15,002         --      $     --
                                               ==========   ==========   ==========    ==========
</TABLE>






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

                                      F-4
<PAGE>
<TABLE>
<CAPTION>

                               MEDSOLUTIONS, INC.

               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

                                                   MSI Preferred Stock      EMSI Preferred Stock
                                                       Series II                  Series I
                                               ------------------------    -----------------------
                                                 Shares        Amount        Shares       Amount
                                               ----------    ----------    ----------   ----------
<S>                                            <C>           <C>           <C>          <C>
Year Ended December 31, 2002:
-----------------------------

Balance - December 31, 2001                          --      $     --            --     $     --
MSI common stock sold for cash                       --            --            --           --
MSI common stock exchanged to cancel
  stockholder advances and accrued salaries          --            --            --           --
Debt conversion expense                              --            --            --           --
MSI common stock exchanged for
  accounts payable and stock based
  compensation                                       --            --            --           --
Net loss                                             --            --            --           --
                                               ----------    ----------    ----------   ----------
Balance - December 31, 2002                          --      $     --            --     $     --
                                               ==========    ==========    ==========   ==========
Year Ended December 31, 2001:
-----------------------------

Balance - December 31, 2000                         1,334    $    4,002          --     $     --
MSI common stock sold for cash                       --            --            --           --
MSI common stock exchanged to cancel
  stockholder loan                                   --            --            --           --
Debt conversion expense                              --            --            --           --
Extraordinary item - loss from
  extinguishment of debt                             --            --            --           --
MSI common stock exchanged for accounts
  payable                                            --            --            --           --
MSI common stock issued for bonus                    --            --            --           --
MSI common stock exchanged from PFD II             (1,334)       (4,002)         --           --
MSI common stock exchanged from PFD I                --            --            --           --
MSI common stock exchanged for EMSI
  common stock                                       --            --            --           --
MSI common stock exchanged for
  debentures                                         --            --            --           --
Accrual of 2001 interest to be exchanged
  in stock in 2002                                   --            --            --           --
Accrual of 2001 employee bonuses to be
  issued in stock in 2003                            --            --            --           --
Net loss                                             --            --            --           --
                                               ----------    ----------    ----------   ----------
Balance - December 31, 2001                          --      $     --            --     $     --
                                               ==========    ==========    ==========   ==========
</TABLE>






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

                                      F-5
<PAGE>
<TABLE>
<CAPTION>

                               MEDSOLUTIONS, INC.

               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001


                                                Additional
                                                 Paid-in       Accumulated       Treasury
                                                 Capital         Deficit           Stock           Total
                                               ------------    ------------    ------------    ------------
<S>                                            <C>             <C>             <C>             <C>
Year Ended December 31, 2002:
-----------------------------

Balance - December 31, 2001                    $ 18,454,014    $(21,056,961)   $    (18,000)   $ (2,605,945)
MSI common stock sold for cash                    1,154,775            --              --         1,155,763
MSI common stock exchanged to cancel
  stockholder advances and accrued salaries         234,587            --              --           234,900
Debt conversion expense                              78,300            --              --            78,300
MSI common stock exchanged for
  accounts payable and stock based
  compensation                                       41,592            --              --            41,648
Net loss                                               --          (285,726)           --          (285,726)
                                               ------------    ------------    ------------    ------------
Balance - December 31, 2002                    $ 19,963,268    $(21,342,687)   $    (18,000)   $ (1,381,060)
                                               ============    ============    ============    ============
Year Ended December 31, 2001:
-----------------------------

Balance - December 31, 2000                    $ 16,423,679    $(19,049,100)   $    (18,000)   $ (2,613,060)
MSI common stock sold for cash                      731,181            --              --           731,767
MSI common stock exchanged to cancel
  stockholder loan                                  262,371            --              --           262,721
Debt conversion expense                              22,533            --              --            22,533
Extraordinary item - loss from
  extinguishment of debt                             87,573            --              --            87,573
MSI common stock exchanged for accounts
  payable                                           602,841            --              --           603,324
MSI common stock issued for bonus                      (241)           --              --              --
MSI common stock exchanged from PFD II                4,757            --              --               759
MSI common stock exchanged from PFD I                14,102            --              --             1,046
MSI common stock exchanged for EMSI
  common stock                                           (8)           --              --              --
MSI common stock exchanged for
  debentures                                         36,476            --              --            36,503
Accrual of 2001 interest to be exchanged
  in stock in 2002                                   18,750            --              --            18,750
Accrual of 2001 employee bonuses to be
  issued in stock in 2003                           250,000            --              --           250,000
Net loss                                               --        (2,007,861)           --        (2,007,861)
                                               ------------    ------------    ------------    ------------
Balance - December 31, 2001                    $ 18,454,014    $(21,056,961)   $    (18,000)   $ (2,605,945)
                                               ============    ============    ============    ============
</TABLE>






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

                                      F-6
<PAGE>
<TABLE>
<CAPTION>

                               MEDSOLUTIONS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001




                                                              For the Years Ended
                                                                  December 31,
                                                          --------------------------
                                                              2002           2001
                                                          -----------    -----------
<S>                                                       <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

  Net loss                                                $  (285,726)   $(2,007,861)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
      Depreciation and amortization                           149,530        142,051
      Bad debt expense                                         19,182         19,498
      Loss from extinguishment of debt                           --           87,573
      Debt conversion expense                                  78,300         22,533
      Stock/options issued for services and interest            8,148         37,058
      Employees' stock bonus                                     --          250,000
      Write-off of deferred offering costs                       --          326,688
    Changes in assets (increase) decrease:
      Accounts receivable                                     (60,143)      (396,249)
      Supplies                                                 14,999         37,530
      Prepaid expenses and other current assets               (26,658)       (48,140)
    Changes in liabilities increase (decrease):
      Accounts payable and accrued liabilities               (629,498)       417,409
      Bank overdraft                                          (57,912)       113,781
      Advances from stockholder                               131,654        187,782
                                                          -----------    -----------
        NET CASH USED IN OPERATING ACTIVITIES                (658,124)      (810,347)
                                                          -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Additions to property and equipment                        (710,752)       (54,433)
  Increase in permits                                         (37,294)          --
                                                          -----------    -----------
    NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES      (748,046)       (54,433)
                                                          -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from sale of common stock                        1,155,763        731,767
  Proceeds from notes payable - stockholder                   615,000         55,000
  Payments on other long-term obligations                    (364,593)      (101,364)
  Deferred offering costs                                        --          (76,688)
                                                          -----------    -----------
      NET CASH PROVIDED BY FINANCING ACTIVITIES             1,406,170        608,715
                                                          -----------    -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS             --         (256,065)

CASH AND CASH EQUIVALENTS - BEGINNING                            --          256,065
                                                          -----------    -----------
CASH AND CASH EQUIVALENTS - END                           $      --      $      --
                                                          ===========    ===========
</TABLE>



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

                                      F-7
<PAGE>
<TABLE>
<CAPTION>

                               MEDSOLUTIONS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



                                                                  For the Years Ended
                                                                      December 31,
                                                             ---------------------------
                                                                 2002           2001
                                                             ------------   ------------
<S>                                                          <C>            <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

  Interest paid                                              $    110,589   $    114,030
                                                             ============   ============
  Income taxes paid                                          $       --     $       --
                                                             ============   ============

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING INFORMATION:

  Write-off of fully depreciated assets                      $       --     $    375,023
                                                             ============   ============

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING INFORMATION:

  Stock issued in connection with loans and accounts
    payable                                                  $    346,700   $    886,045
                                                             ============   ============
  Stock and options issued for compensation                  $      8,148   $       --
                                                             ============   ============
  Accrued employees' stock bonus                             $       --     $    250,000
                                                             ============   ============
  Issuance of MSI common stock for EMSI common stock         $       --     $          8
                                                             ============   ============
  Conversion of MSI preferred stock for common stock         $       --     $     17,067
                                                             ============   ============
</TABLE>



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

                                      F-8
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE  1  DESCRIPTION OF BUSINESS

MedSolutions,  Inc.  ("MSI"  or the  "Company")  formerly  known as  EnviroClean
International,  Inc. was incorporated in the State of Texas in November 1993 and
commenced  operations in January 1994. The Company was organized for the purpose
of developing, manufacturing, and marketing the EnviroClean(R) Thermal Oxidation
System  ("EnviroClean(R)  System" or "ETOS"),  which was designed to  incinerate
medical and other  specialized  wastes in an  environmentally  sound manner.  In
1994,  through   collaboration  with   Intercontinental   Manufacturing  Company
("IMCO"),  the Company built the  EnviroClean(R)  System prototype.  The initial
sale of  EnviroClean(R)  Systems  occurred  in  1996.  There  were no  sales  of
EnviroClean(R)  Systems  during the years ended  December 31, 2001 and 2000. The
Company has suspended its efforts to manufacture  and market the  EnviroClean(R)
Systems  until  such time it has the  financial  resources  to  reinstate  these
activities.

In 1995,  the  Company  founded  EnviroClean  Management  Services,  LLC,  which
subsequently became EnviroClean Management Services, Inc. ("EMSI") in 1996. EMSI
is a waste management  services company that services  principally medical waste
generators such as hospitals,  clinics, and physicians' offices.  EMSI collects,
transports,  and  disposes of medical  waste at two  facilities,  one located in
Garland,  Texas,  which  services  the North  Texas  area,  and one  located  in
Galveston, Texas, which services Houston and the South Texas area.

In January  1998,  the Company  exchanged  shares of its common stock to acquire
667,375  shares of EMSI's  common  stock from other  shareholders,  giving MSI a
controlling  interest of  approximately  51.3% in EMSI.  In December  1998,  the
Company  offered to exchange one share of MSI common stock for one share of EMSI
common stock with the remaining shareholders of EMSI. This offer resulted in the
acquisition  of  1,771,151  additional  shares  of EMSI  common  stock,  thereby
increasing the Company's  ownership to approximately  96.1%.  During  subsequent
periods, the Company has continued to obtain outstanding shares of EMSI's common
stock such that its ownership of EMSI is presently approximately 99.3%.

During   2002  the  Company   formed   three  new   wholly-owned   subsidiaries:
ShredSolutions,  Inc., SharpSolutions,  Inc. and EnviroClean Transport Services,
Inc. These subsidiaries did not have any significant  operations at December 31,
2002.

NOTE 2  GOING CONCERN

As indicated by the accompanying consolidated financial statements,  the Company
incurred  consolidated net losses of $285,726 and $2,007,861 for the years ended
December  31,  2002  and  2001,  respectively.  Additionally,  the  Company  has
significant  deficits  in both  working  capital  and  stockholders'  equity  at
December 31, 2002 and 2001.  These  factors  raise  substantial  doubt about the
Company's ability to continue as a going concern.

Historically,  cash flow  deficits  have  been  funded  by  shareholders  of the
Company.  However, the shareholders are under no specific funding obligation. As
a means of providing working capital and funding for a proposed  financing,  the
Company has received, from private placements of the Company's common


                                      F-9
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE 2  GOING CONCERN (Continued)

stock, approximately $1,155,000 and $732,000 during the years ended December 31,
2002 and 2001,  respectively.  One of the Company's largest  shareholders loaned
the Company $615,000 in 2002.  Also, the Company's  President has advanced funds
for working  capital from time to time totaling  $262,721  through  December 31,
2001 and an additional  $131,654 during the year ended December 31, 2002.  There
is no assurance that such private  placement funding and loans and advances will
continue to satisfy the Company's cash needs,  or that any other  financing will
occur.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will be able to continue as a going concern.  Accordingly,  the
consolidated financial statements do not include any adjustments relative to the
recoverability  and  classification of assets, or the amounts and classification
of  liabilities  that might be  necessary  in the event the Company is unable to
continue operations.

NOTE  3  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
---------------------------

The accompanying  consolidated  financial statements include the accounts of the
Company, its 99% owned subsidiary, EMSI, and its newly formed subsidiaries.  All
significant  intercompany  balances and transactions between the Company and its
subsidiaries have been eliminated in consolidation.

Cash and Cash Equivalents
-------------------------

For purposes of the consolidated  statement of cash flows, the Company considers
all  investments  with an original  maturity of three  months or less to be cash
equivalents.

Allowance for Doubtful Accounts
-------------------------------

The  Company's  trade  accounts  receivable  is stated net of an  allowance  for
doubtful  accounts  of  $21,744  and  $50,000  at  December  31,  2002 and 2001,
respectively.  The allowance for doubtful  accounts  reflects  management's best
estimate  of  probable  losses  inherent  in  the  account  receivable  balance.
Management determines the allowance based on known troubled accounts, historical
experience, and other currently available evidence.


Supplies
--------

Supplies  are  stated at the lower of  average  cost or fair  value and  consist
primarily of medical  waste  containers  and supplies  provided to hospitals and
medical  clinics and  offices.


                                      F-10
<PAGE>

                                MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE  3  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Property and Equipment
----------------------

Property and equipment are stated at cost less appropriate  valuation allowances
and accumulated  depreciation and amortization.  Depreciation is provided on the
straight-line  method over the  estimated  useful  lives of the related  assets,
generally  three to twenty  years.  Amortization  of leasehold  improvements  is
provided on the  straight-line  method over the lesser of the  estimated  useful
lives of the  improvements  or the  initial  term of the lease.  Gain or loss is
recognized upon sale or other disposition of property and equipment.

Intangible Assets - Permits
---------------------------

Beginning  in 2002  with the  adoption  of SFAS No.  142,  "Goodwill  and  Other
Intangible  Assets," such assets are no longer  amortized but instead are tested
for impairment in value at least  annually.  Currently the Company does not have
any  goodwill.  Intangible  assets  consist  solely of permit costs  incurred in
amending  the Garland  facility  medical  waste  disposal  permit from the Texas
Commission on Environmental Quality ("TCEQ"). Permits are subjected to an annual
impairment test. At December 31, 2002, no impairment exists.

Impairment of Long-Lived Assets
-------------------------------

In accordance  with SFAS No. 144, the Company  continually  monitors  events and
changes in  circumstances  that could  indicate  carrying  amounts of long-lived
assets, including intangible assets, may not be recoverable.  An impairment loss
is recognized when expected cash flows are less than the assets' carrying value.
Accordingly,  when indicators or impairment are present,  the Company  evaluates
the carrying value of such assets in relation to the operating  performance  and
future undiscounted cash flows of the underlying business.  The Company's policy
is to record an impairment  loss when it is determined  that the carrying amount
of the asset may not be recoverable.

Revenue Recognition
-------------------

Revenues from waste management services are recognized at the time medical waste
is received and prepared for processing. The Company provides an accrual for the
estimated  expense  relating to waste  collected but not processed at the end of
each accounting period.

Fair Value of Financial Instruments
-----------------------------------

The recorded carrying values of accounts receivable, accounts payable, and other
long-term  obligations  are  considered to  approximate  the fair values of such
financial instruments.


                                      F-11
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE  3  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Provisions for Income Taxes
---------------------------

No provisions have been made for federal or state income taxes since the Company
has incurred net operating losses since its inception.

Stock-Based Compensation
------------------------

The Company follows  Statement of Financial  Accounting  Standards No. 123 (SFAS
No.  123),  "Accounting  for  Stock-Based  Compensation."  SFAS 123  establishes
accounting and reporting standards for stock-based employee  compensation plans.
This statement allows companies to choose between the "fair  value-based  method
of  accounting"  as defined in this  statement  and the  "intrinsic  value-based
method of accounting" as prescribed by Accounting  Principles  Board Opinion No.
25 (APB 25), "Accounting for Stock Issued to Employees."

The Company has elected to continue to follow the accounting  guidance  provided
by APB 25, as permitted for stock-based  compensation  relative to the Company's
employees.  Stock and options  granted to other parties in  connection  with the
provision of goods and  services to the Company is accounted  for under the fair
value method as prescribed by SFAS No. 123.

Loss Per Share of Common Stock
------------------------------

Basic net loss per share of common stock has been computed based on the weighted
average number of common shares outstanding during the periods presented.

Common stock equivalents,  consisting of options,  convertible accrued wages and
convertible  securities,  discussed  in  Note  10,  were  not  included  in  the
calculation of diluted loss per share because their inclusion would have had the
effect of decreasing the loss per share otherwise computed.

Advertising Expenses
--------------------

Advertising costs are charged to expense when incurred.  Advertising expense for
the years ended  December  31, 2002 and 2001  approximated  $30,000 and $14,000,
respectively.

Other income
--------------------

Other income consists principally of debt extinguishments from certain creditors
with whom the  companies  either  reached  legally  binding  agreements  whereby
certain debt was forgiven or the statute of  limitations  has passed whereby the
debt holders lost their right to present legal claims against us.


                                      F-12
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE  3  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Environmental Expenditures
--------------------------

Environmental  expenditures  are  capitalized  if the costs  mitigate or prevent
future  environmental  contamination  or if the costs improve  existing  assets'
environmental  safety or efficiency.  All other  environmental  expenditures are
expensed.  Liabilities  for  environmental  expenditures  are accrued when it is
probable  that  such  obligations  have been  incurred  and the  amounts  can be
reasonably estimated.

Use of Estimates
----------------

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses  during the related  periods.  Actual results could differ
from such estimates.

Impact of Recently Issued Accounting Standards
----------------------------------------------

The  following  pronouncements  have  been  issued by the  Financial  Accounting
Standards Board ("FASB").


SFAS No. 145, "Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections as of April 2002" primarily provides
guidance  for  reporting  gains  and  losses  from  extinguishment  of debt  and
sale-leaseback transactions.  The provisions of this Statement are effective for
financial  statements  issued for fiscal years beginning after May 15, 2002 with
early adoption encouraged.













                                      F-13
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE  3  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

SFAS  No.  146,   "Accounting  for  Costs   Associated  with  Exit  or  Disposal
Activities". This standard required companies to recognize costs associates with
exit or disposal  activities when they are incurred rather than at the date of a
commitment  to an exit or disposal  plan.  SFAS No. 146  replaces  the  existing
guidance  provided by EITF Issue No. 94-3,  "Liability  Recognition  for Certain
Employee  Termination  Benefits  and Other Costs to Exit an Activity  (including
Certain  Costs  incurred  in a  Restructuring)."  SFAS No.  146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.

In  November  2002,  the FASB  issued FASB  Interpretation  No. 45  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  including  Indirect
Guarantees of Indebtedness of Others"  ("FIN45").  FIN45 requires a company,  at
the time it issues a guarantee,  to recognize an initial  liability for the fair
value of  obligations  assumed under the  guarantee  and  elaborates on existing
disclosure  requirements  related to  guarantees  and  warranties.  The  initial
recognition  requirements  of FIN 45 are  effective  for  guarantees  issued  or
modified after December 31, 2002.  Adoption of the disclosure  requirements were
effective for interim and annual  periods ending after December 15, 2002 and did
not have a significant  impact on the consolidated  financial  statements of the
Company.  The Company  does not expect the  adoption of the initial  recognition
requirements  of  FIN 45 to  have  a  significant  impact  on  its  consolidated
financial position or results of operations.

In January 2003, the FASB issued FIN No. 46,  "Consolidation of Variable Inteest
Entities  - an  Interpretation  of ARB No.  51."  This  interpretation  provides
guidance related to identifying  variable  interest  entities  (previously known
generally  as special  purpose  entities or SPEs) and  determining  whether such
entities should be consolidated.  Certain  disclosures are required when FIN No.
46  becomes  effective  if  it  is  reasonably  possible  that  a  company  will
consolidate or disclose  information  about a variable  interest  entity when it
initially applies FIN No. 46. This interpreation must be applied  immediately to
variable interest entities created or obtained after January 31, 2003. For those
variabe interest entities created or obtained on or before January 31, 2003, the
Company must apply the provisions of FIN No. 46 in the third quarter of 2003.

Management  does not believe  that the  adoption of any of these  pronouncements
had, or will have, a material  effect on the  Company's  consolidated  financial
statements.

NOTE  4  PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

                                                   At December 31,
                                               ----------------------
                                                 2002         2001
                                              ----------   ----------

            Land                              $   20,000   $   20,000
            Building                             661,179      589,738
            Furniture and equipment            1,307,303      667,992
                                              ----------   ----------
                                               1,988,482    1,277,730
            Less:  Accumulated depreciation      728,832      578,704
                                              ----------   ----------
            Property and Equipment, Net       $1,259,650   $  699,026
                                              ==========   ==========

Depreciation of property and equipment for the years ended December 31, 2002 and
2001 amounted to $149,530 and $117,267, respectively.

NOTE  5 INCOME TAXES

The Company was not  required  to record a  provision  for income  taxes for the
years ended  December  31, 2002 and 2001,  as a result of net  operating  losses
incurred during those years.


                                      F-14
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE  5  INCOME TAXES (Continued)

As of December 31, 2002, the Company had available approximately  $16,100,000 of
net operating losses ("NOL") for income tax purposes that may be carried forward
to offset future taxable income, if any. The NOL carryforwards from December 31,
1995 through 1997 expire during the years 2010 through 2012 and the December 31,
1998  through  2002 NOL  carryforwards  expire in the years 2018  through  2022,
respectively.  The Company's ability to utilize its carryforwards may be subject
to an annual  limitation  in  future  periods  pursuant  to  Section  382 of the
Internal Revenue Code, as amended.

At December  31,  2002,  the Company has a deferred  tax asset of  approximately
$7,550,000,  principally representing the benefits of its net operating loss and
certain  other  expenses  not  currently  deductible  for  tax  purposes.  These
temporary  differences  consist  principally  of  compensation  related  to  the
granting of restricted  stock and stock  options,  valuation  allowances  for an
investment in a joint venture and property and equipment,  accrued  salaries and
depreciation and amortization.  The Company's  deferred tax asset has been fully
reserved by a valuation allowance since realization of its benefit is uncertain.
The valuation allowance increased by $150,000 during the year ended December 31,
2002.

NOTE  6 ACCRUED LIABILITIES

Accrued liabilities consist of the following:

                                                 At December 31,
                                             -----------------------
                                                2002         2001
                                             ----------   ----------

            Salaries                         $  374,149   $  428,844
            Payroll and other taxes              88,217      394,951
            Royalty obligation                   80,000         --
            Interest                            152,249      134,859
            Processing expenses                 187,484      334,527
            Insurance                            47,543       35,831
            Litigation provision (Note 12)      369,535      550,000
            Miscellaneous                       304,300      408,420
                                             ----------   ----------
                                             $1,603,477   $2,287,432
                                             ==========   ==========

The Company  reached an  agreement  with the State of Texas on February 28, 2003
concerning  litigation  under the Texas Smart Jobs  Program.  The State of Texas
agreed to accept payment of $240,620 to be paid over a 36-month  period in equal
installments of $6,684 commencing in April 2003 plus payments aggregating $6,110
to certain  former  employees who were  participants  in the Smart Jobs Training
Program.  Accordingly,  payments  amounting  to  $180,465  scheduled  to be made
subsequent to December 31, 2003 have been  classified as a long-term  obligation
on the accompanying balance sheet.


                                      F-15
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE  7 LONG-TERM OBLIGATIONS

Long-term obligations are comprised of the following:

                                                      At December 31,
                                                    ------------------
                                                     2002       2001
                                                   --------   --------

          Bank note - EMSI facility                $265,209   $285,413
          Bank note - EMSI EnviroClean(R) System
            and facility                               --      117,316
          Installment notes - equipment              67,836     92,545
                                                   --------   --------
          Total indebtedness to banks and
            financial institutions                  333,045    495,274

          Less:  Bank notes classified as
                   current                             --      402,728
          Less:  Current maturities                  38,949     23,183
                                                   --------   --------
               Total Long-Term Obligations         $294,096   $ 69,363
                                                   ========   ========

In July 1996, the Company borrowed  $367,500 from a bank. The note is secured by
a first lien on EMSI's  facility  in  Garland,  Texas,  and bears  interest at a
variable rate based on the national prime rate, plus 2.5%,  aggregating 5.25% at
December  31,  2002.  The  note  was  originally   payable  in  minimum  monthly
installments  of principal  and  interest  totalling  $3,910  (reduced to $3,186
beginning August 9, 2002), and matures in July 2011. The Company's president and
chief executive  officer has guaranteed this debt. The total amount  outstanding
at December 31, 2002 is $265,209.

In July 1999,  the Company  borrowed  $200,000 from a bank primarily for working
capital  purposes.  The note is secured by a second lien on the EMSI facility in
Garland, and a first lien on the EnviroClean(R) System located at that facility.
The note bears  interest  at 10.5% and is payable  in  monthly  installments  of
principal  and  interest  totaling  $4,315  through  July  2004.  The  Company's
president and chief  executive  officer has  guaranteed  this debt. The debt was
repaid in full on September  10, 2002 from the proceeds of a  stockholder  note.
(See Note 8 entitled Notes Payable - Stockholder).

From time to time during 2001,  the Company had been in arrears on the bank note
and therefore in default with respect to the  provisions of the debt  agreement.
As of December  31, 2002,  the Company is current with its payment  requirements
and in compliance with such terms of the agreement.



                                      F-16
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE  7 LONG-TERM OBLIGATIONS (Continued)

The  Company is  obligated  under  various  installment  notes  payable  for the
purchase of  equipment.  The notes,  which bear  interest at rates  ranging from
8.15% to 12.15%,  are due at various dates through  January 2006 and are payable
in monthly  installments  of  approximately  $2,798  consisting of principal and
interest. The notes are collateralized by the equipment acquired.


Aggregate  maturities of long-term  indebtedness  (including the notes payable -
stockholder  described in Note 8 below) and the Smart Jobs litigation settlement
subsequent to December 31, 2002 are as follows:

             Year Ended December 31,                    Amount
             -----------------------                  ----------

                      2003                            $  209,846
                      2004                               237,075
                      2005                               253,392
                      2006                               185,731
                      2007 and thereafter                278,033
                                                      ----------
                                                      $1,164,077
                                                      ==========

NOTE  8  NOTES PAYABLE - STOCKHOLDER

On August 28,  2002,  the Company  received the first of a series of three loans
totaling  $615,000  from a  stockholder  of the  Company.  The  initial  loan of
$202,250 was used to repay the principal and accrued  interest of a note,  which
was  secured  by all of the  assets  of the  Company,  due  another  stockholder
totaling the same amount.  The notes payable to the stockholder bear interest at
the rate of 10 percent per annum and are payable  monthly  commencing  September
28, 2002 for a period of 60 months. The total monthly payment amount is $13,067.
$90,000 of the  proceeds  of the notes was used to repay a second  lien  working
capital note to Southtrust  Bank, and the remainder of the proceeds were applied
to payment of the  delinquent  payroll tax  liability  mentioned in Note 12. The
loans are secured by a second lien deed of trust on the  Garland,  Texas  plant.
The liens securing the paid  obligations  were released in October and November.
At December 31, 2002 the total obligation was $584,302

At January 1, 2001,  the  Company  was  obligated  on a note  payable to another
stockholder of MSI in the amount of $116,667  bearing  interest at a stated rate
of 10% due  July  31,  2002.  The  note was  collateralized  by  certain  future
royalties,  if any,  from the sale of EC-500  Systems and the  related  patented
technology.


                                      F-17
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE  8  NOTES PAYABLE - STOCKHOLDER (Continued)

The note and accrued interest thereon were convertible into common stock, at the
option of the holder,  based on the rate of $1.50 per share. On May 7, 2001, the
Company  concluded an agreement  with such  stockholder to modify the conversion
rate from  $1.50  per share to $1.25 per  share.  The  Company  recorded  a debt
conversion  expense of $19,500 during the second quarter of 2001 related to such
modification.  On July 31, 2001,  the note was amended to  recognize  additional
loans,  totaling  $55,000,  the  reduced  conversion  price and the  granting of
additional collateral in the form of all other tangible and intangible assets of
the Company. The new note, totalling $171,667, bears interest at 10% and was due
on July 31, 2002.  The note and accrued  interest  were repaid in full on August
28, 2002 from the proceeds of a new stockholder note mentioned above.

NOTE 9  CONVERTIBLE DEBENTURES

Series I Debentures
-------------------

In 1994 and 1995,  the Company  issued a total of $1,100,000 of 15%  Convertible
Redeemable  Subordinated  Debentures  ("Series I  Debentures")  for the  primary
purpose of funding  the initial R&D  activities  relating to the  EnviroClean(R)
System. The terms of the Series I Debentures  specified a final maturity date of
March 31,  1999,  with  provisions  for  conversion  of the  debentures,  at the
holder's  option,  into the Company's  common stock at varying  conversion rates
through maturity. The Series I Debentures also allowed the Company to redeem the
debentures  any time prior to maturity at a price of 105% of the debenture  face
value. Interest on the Series I Debentures is scheduled to be paid semi-annually
on April 1 and October 1 of each year.

The outstanding  principal balance of the Series I Debentures at January l, 2001
was $50,000.  Due to cash  constraints,  the Company was not able to redeem this
balance at the stated maturity date of March 31, 1999. In addition,  the Company
is delinquent in its payment of interest on the outstanding debentures. However,
the Company is still  allowing the holders to convert  Series I Debentures  into
MSI  common  stock  at a  conversion  rate of  $1.50  per  share.  During  2001,
noteholders  converted  $20,000 of  principal  and  $16,503 of unpaid  interest,
respectively,  into the Company's common stock.  Accrued interest payable on the
debentures  as of December  31,  2002 and 2001  totalled  $29,312  and  $24,813,
respectively. The principal balance at December 31, 2002 and 2001 was $30,000.

Series II Debentures
--------------------

In October  1998,  the  Company  issued 10%  Convertible  Redeemable  Debentures
("Series II Debentures")  primarily for working capital  purposes.  The terms of



                                      F-18

<PAGE>

                                MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE 9  CONVERTIBLE DEBENTURES (Continued)

the  Series II  Debentures  specify a maturity  date of  November  l, 1999,  and
contain a provision for conversion of the  debentures,  at the holder's  option,
into the Company's  common stock at a rate of $3 per share. The Company may also
redeem the  debentures at a price of 110% of the  debenture  face value prior to
November l, 1999, and at a price of 100% of face value  thereafter.  Interest on
the Series II  Debentures  is  scheduled to be paid  semi-annually  on May 1 and
November 1 of each year.

The outstanding principal balance of the Series II Debentures at January l, 2001
was $10,135.  Due to cash  constraints,  the Company was not able to redeem this
balance at the stated  maturity  date of  November  1, 1999.  In  addition,  the
Company is delinquent in its payment of interest on the outstanding  debentures.
However,  the  Company  is  still  allowing  the  holders  to  convert  Series I
Debentures into MSI common stock at a conversion rate of $1.75 per share.  There
have been no conversions  during the two years ended December 31, 2002.  Accrued
interest  payable on the  debentures  as of December  31, 2002 and 2001  totaled
$3,956 and $2,942, respectively.  The principal balance at December 31, 2002 and
2001 was $10,135.


NOTE 10  STOCKHOLDERS' DEFICIENCY

On November  12,  1999,  the  Company's  stockholders  approved  the increase in
authorized   common  and  preferred   shares  to   100,000,000   and  5,000,000,
respectively. Also on that date, the stockholders approved a reverse stock split
(the  "Reverse  Split"),  in which  each share of common  stock then  issued and
outstanding  or held in  treasury  would  be  reclassified  and  exchanged  into
one-half  (1/2) of a share of new common stock,  thereby  reducing the number of
issued and outstanding  shares of the Company by 50%.  Although the stockholders
approved the Reverse Split,  the Board of Directors has not yet  implemented the
Reverse Split.

On May 2, 2001, the Company's  stockholders  approved the increase in authorized
preferred shares to 100,000,000.  In addition,  the stockholders  authorized the
Board of Directors to determine, in its sole discretion, the advisability of the
Reverse Split of common stock originally authorized in 1999 and to rescind it if
necessary.

Series I Preferred Stock
------------------------

In 1996,  the Company  issued  Series I Cumulative  Redeemable  Preferred  Stock
("Series I Preferred Stock"),  par value $.001, as an offer to holders of Series
I Debentures  (see Note 9) to receive shares of the Series I Preferred  Stock in



                                      F-19

<PAGE>



                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE 10  STOCKHOLDERS' DEFICIENCY  (Continued)

Series I Preferred Stock  (Continued)
------------------------

exchange for the debenture  principal and accrued unpaid interest.  The Company,
at its option,  may convert the Series I Preferred Stock into common stock based
on a rate of four  shares of common  stock for each share of Series I  Preferred
Stock.  The  Series I  Preferred  Stock  issued  to  debenture  holders  is also
convertible into the Company's common stock, at the option of the holder,  based
on the same  rate of four  shares of  common  stock  for each  share of Series I
Preferred Stock. The Series I Preferred Stock carries a cumulative dividend rate
of 8%, which is payable annually on June 1.

The Series I Preferred Stock can be redeemed by MSI at a redemption  price of $7
per share, plus accumulated unpaid dividends. The Series I Preferred Stock has a
liquidation  preference of $6 per share, plus accumulated  unpaid dividends.  In
addition, the Company has the option of making the 8% annual dividend payment in
additional shares of Series I Preferred Stock, in lieu of cash, based on a value
of $6 per share for the Series I Preferred Stock, or in common stock, based on a
value of $1.50  per  share.  The  Company  has also  issued  shares  of Series I
Preferred  Stock or common stock,  at the same values ($6 per share for Series I
Preferred  Stock and $1.50 per share for common  stock),  in lieu of making cash
payments for accrued  interest on  debentures.  Cumulative  unpaid  dividends on
Series  I  Preferred  Stock at  December  31,  2002 and 2001 was $-0- and  $-0-,
respectively.

During  November  2001, the Company  converted all remaining  Series I preferred
stock to common stock based on a value of $1.50 per share.

Series II Preferred Stock
-------------------------

In 1999,  the Company  issued Series II Cumulative  Redeemable  Preferred  Stock
("Series II Preferred Stock"),  par value $.001 and a stated value of $3.00, for
working  capital  purposes.  The Series II Preferred  Stock is convertible  into
common  stock,  based on a rate of one share of common  stock for each  share of
Series II  Preferred  Stock,  at the  shareholders'  option prior to January 31,
2000,  or at the  Company's  option at any time.  The Series II Preferred  Stock
carries a cumulative dividend rate of 10%, which is payable annually on December
31.

The Series II Preferred Stock can be redeemed by MSI at a redemption price of $3
per share, plus accumulated unpaid dividends. Series II Preferred Stock also has
a liquidation preference of $3 per share, plus accumulated unpaid dividends, and
is senior in priority as to both dividends and  liquidation  with respect to the
Series I Preferred Stock, the Company's common stock, and the preferred stock of
EMSI discussed below.  Until the first anniversary  after issuance,  the Company
has the option of paying all cumulative dividends through issuance of additional
shares of Series II Preferred Stock in lieu of cash. After the first anniversary
of issuance,  the 10% dividends  must be paid in cash only.  Accumulated  unpaid
dividends  on Series II  Preferred  Stock at December 31, 2002 and 2001 was $-0-
and $-0-, respectively.



                                      F-20
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE 10  STOCKHOLDERS' DEFICIENCY (Continued)

Series II Preferred Stock (Continued)
------------------------

As an inducement  for  shareholders  to convert  Series II Preferred  Stock into
common stock, the Company decreased the conversion rate on October 11, 1999 from
$3 per share to $1.75 per share.  During 1999,  $15,375 (5,125 shares) of Series
II Preferred Stock was exchanged for 5,125 shares of the Company's  common stock
at the original  conversion rate. Also, during 1999, $116,889 (38,964 shares) of
Series II  Preferred  Stock was  exchanged  for 66,794  shares of the  Company's
common stock at the new conversion rate.

During  October 2001,  the Company  converted all remaining  Series II preferred
stock to common stock, based on a value of $1.25 per share. EMSI, the subsidiary
company of MSI, has also issued Series I Convertible  Redeemable Preferred Stock
("EMSI  Series I Preferred  Stock"),  par value $.001 and stated  value $7. EMSI
Series I Preferred  Stock is convertible  into common stock of EMSI at a rate of
one share of common stock for each share of the EMSI Series I Preferred Stock if
converted  on or before  May 31,  1997,  or at a rate of eight  shares of common
stock for ten shares of EMSI Series I Preferred  Stock if  converted  during the
period from June 1, 1997 through May 31, 1998.  After that date, the EMSI Series
I Preferred  Stock may not be converted  without the  approval of the  Company's
Board of Directors.  EMSI Series I Preferred Stock has a liquidation preference,
with respect to EMSI, of $7 per share,  and may be redeemed at various prices at
the Company's option.

Dividends  on EMSI  Series I  Preferred  Stock are  payable as  declared  by the
Company's Board of Directors. No dividends have been declared to date.

During  the year  2000,  the  Company  converted  all  remaining  shares of EMSI
Preferred to MSI common stock.

Common Stock
------------

During 2002 the Company offered to its current  stockholders  the opportunity to
purchase  the  MedSolutions,  Inc.  Common  Stock Unit  Offering  to finance the
installation of certain autoclave treatment equipment at EMSI's Garland facility
and general working capital purposes.  The Unit Offering  consisted of ten units
of common  stock at $60,000 per unit for the  purchase  of 40,000  shares of MSI
common stock and a one-tenth  interest in the  Processed  Waste  Trust.  EMSI is
obligated to pay to the Trust a royalty of one-half cent per pound for all waste
processed  through  autoclave  number  one  for  a  period  of  two  years  from
commencement  of operation of the  autoclave.  The Company  guaranteed a minimum
processing volume of 800,000 pounds per month for royalty  calculation  purposes
to be shared amount the ten units. Accordingly, the Company recognized as common
stock proceeds at $1.26 per share  ($520,000)  and recorded a royalty  liability
for $0.24 per share ($80,000). Royalty payments covering the period of operation
of the autoclave from August 29, 2002 to December 31, 2002 have been made to the
unit  holders.  The  remaining  balance of minimum  royalties due under the unit
offering is  included in accrued  liabilities.

In February 2002, we received $525,000 from an existing  shareholder to purchase
500,000 shares of our Common Stock. Our Board of Directors  approved the sale of
the shares.


                                      F-21
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE 10  STOCKHOLDERS' DEFICIENCY (Continued)

Stock Grants and Options
-------------------------

At the annual meeting of  stockholders  of the Company on December 18, 2002, the
stockholders  approved the adoption of the  MedSolutions,  Inc. 2002 Stock Plan.
The  purpose of the plan is to attract and retain the best  available  personnel
for positions of substantial responsibility,  to provide additional incentive to
employees, directors and consultants and to promote the success of the Company's
business.  Options  granted  under the plan may be  Incentive  Stock  Options or
Nonstatutory Stock Options,  as determined by the Board of Directors at the time
of grant.  850,000  shares of common stock have been reserved for issuance under
the plan.  No  options  have been  granted  under the terms of the plan  through
February 21, 2003.

The Company's Board of Directors has previously  approved grants of common stock
and options to purchase  common stock to key executives  and  employees,  all of
which were granted prior to January 1, 1999.  The Company has also granted stock
and options to a  stockholder  of the Company in  connection  with various loans
made by the  stockholder  to the  Company,  all of which were  granted  prior to
January 1, 1999. The option grants are for periods of two to five years. Certain
options may not be exercised  for a period of two years after the grant date. An
option to purchase 25,000 shares of the Company's  common stock held by a former
officer of the Company expired on January 15, 2002. The option was not exercised
before expiration.

The Board of Directors  has approved an  employee's  stock bonus of $250,000 for
the year ended December 31, 2001.  These bonuses were reflected as  compensation
expense in the year  ended  December  31,  2001.  The  shares  will be issued to
employees in 2003.  No options were granted to employees  during the years ended
December  31, 2002 or 2001 and no  compensation  expense was  recognized  during
those years with respect to stock options.  No stock bonuses were granted during
the year ended December 31, 2002.













                                      F-22
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE 10  STOCKHOLDERS' DEFICIENCY (Continued)

A summary of activity involving options on the Company's common stock follows:

                                              Number of Options   Exercise Price
                                              -----------------   --------------

   Balance outstanding at December 31, 2001        25,000           $  0.75

   Granted                                           --                --
   Exercised                                         --                --
   Cancelled/Expired                              (25,000)            (0.75)
                                                  -------           -------
   Balance outstanding at December 31, 2002          --             $  --
                                                  =======           =======

On  May  31,  2001,  the  Board  of  Directors  authorized  three  officers  and
shareholders to convert accrued salaries and loans, at their option, into shares
of  common  stock,  at the rate of $0.75 per  share.  During  2002 and 2001,  an
officer/stockholder  converted loans and accrued salaries  totaling $234,900 and
$262,721,  respectively,  into 313,200 and 350,295 shares, respectively,  of the
Company's common stock. Since the conversion rate was less than the market value
of the common stock, the Company  recorded a debt conversion  expense of $78,300
and $22,533 during the years ended December 31, 2002 and 2001, respectively.  At
December 31, 2002, the officers and shareholders have remaining accrued salaries
not  converted  totaling  $347,289 that could be converted  into 463,052  common
shares.

Earnings Per Share
------------------

Securities that could potentially dilute basic earnings per share ("EPS") in the
future that were not included in the computation of diluted EPS because to do so
would  have  been  anti-dilutive  for  the  periods  presented  consist  of  the
following:

                                                              At December 31,
                                                           ---------------------
                                                             2002        2001
                                                           ---------   ---------

        Convertible accrued salaries                         463,052     536,734
        Options to purchase common stock                        --        25,000
        Convertible debentures and unpaid interest            47,593      45,259
        Note payable to stockholder and accrued interest        --       152,756
        Shares to be issued to employees under stock
          bonus                                              259,500     259,500
        Shares to be issued to directors for letter of
          credit guarantee                                      --        18,750
                                                           ---------   ---------
                Total                                        770,145   1,037,999
                                                           =========   =========




                                      F-23
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE 11  WASTE MANAGEMENT FACILITY AGREEMENT

In April 1996, EMSI acquired  certain assets and assumed certain  liabilities of
BMI Services,  Inc.  ("BMI"),  a medical  waste  transportation  and  management
company.  As part of this  acquisition,  BMI's  contract  to operate the medical
waste incineration facility at UTMB in Galveston,  Texas, and to provide medical
waste incineration services to UTMB, was assigned to EMSI. The original contract
was for an  initial  term of five  years that  ended in  December  2000,  but is
renewable for a second five-year term (see below). The contract required EMSI to
pay UTMB a monthly fixed facility usage fee on one medical waste incinerator;  a
monthly  variable  fee based on the volume of  medical  waste  processed  at the
facility;  and utility charges for the facility.  EMSI was also  responsible for
repairs and maintenance  costs of the facility up to an annual limit of $90,000.
In return,  EMSI received  medical waste  management fees from UTMB based on the
quantity of waste  processed.  Such fees are determined using a progressive rate
schedule, which is adjusted annually.

The Company has renegotiated with UTMB an amendment  extending the UTMB contract
until December 8, 2005. The amendment  requires the Company to pay the following
estimated monthly amounts during the contract years:

                           Fixed Facility
                            Maintenance         Capital          Variable
        Contract Years      and Use Fee       Renewal Fee        Usage Fee
        --------------     --------------     -----------     ---------------
                                                              (Based on waste
                                                                incinerated)

             2001             $ 17,500          $ 10,833       $.005 per lb.
             2002             $ 18,500          $ 20,208       $.005 per lb.
             2003             $ 19,500          $ 27,159       $.005 per lb.
             2004             $ 20,500          $ 27,159       $.005 per lb.
             2005             $ 21,500          $ 27,159       $.005 per lb.

The  Company is required  to pay all  utility  costs but will  receive a monthly
credit for the value of steam produced by the incinerator plant. The contract is
cancelable  by either  party with a one year  written  notice and payment of the
remaining capital renewal fee.

NOTE 12  COMMITMENTS AND CONTINGENCIES

Financing Agreement Terminated
------------------------------

On October 31,  2000,  MSI entered into a financing  agreement  with Lilly Beter
Capital Group, Ltd. ("LBCG"), whereby LBCG agreed to assist MSI in raising up to
$5,000,000 of equity  financing and provide  services to MSI with respect to the
raising of a minimum of  $15,000,000  and a maximum of  $20,000,000  of tradable
low-grade,  high-yield,  10-year  bonds.  Pursuant to the terms of the financing
agreement,  MSI is required to provide the costs and  expenses  associated  with
both the equity and debt offerings,  not to exceed  $850,000.  In November 2000,
$250,000 was paid to LBCG, which was reported as deferred  offering costs in the
December 31, 2000 consolidated balance sheet. During the year ended December 31,
2001, an additional  $50,000 was paid to LBCG, which was capitalized in deferred
offering costs totalling $326,688.



                                      F-24
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE 12  COMMITMENTS AND CONTINGENCIES (Continued)


         The  financing  agreement MSI entered into with LBCG expired on October
30, 2001. In January,  2002 LBCG presented the Company with a proposal for a new
financing  agreement,  which contains  additional  conditions.  Those conditions
included,  the  replenishment of the escrow account that the Company has paid to
LBCG  (to pay the  costs  and  expenses  associated  with  the  equity  and debt
offerings)  to $500,000,  and MSI  becoming a company  whose shares are publicly
traded. There was no assurance that the contingencies  specified in the proposed
agreement  would be met and that the  financing  contemplated  by the  agreement
would be  consummated.  As of February 22, 2002,  there is no firm commitment or
guarantee  by LBCG to  provide  the  financing.  Due to the  uncertainty  of the
negotiations  between  the Company  and LBCG,  the Company  decided to charge to
expense in 2001 all related  deferred  offering costs in the amount of $326,688.
The Company has retained legal counsel in connection  with potential  ligitation
for conflict of interest  between the legal firms and an individual  law partner
representing  LBCG and the Company in connection  with the services that were to
have been provided by LBCG.

Risks and Concentrations
------------------------

MSI and EMSI operate exclusively in one industry. EMSI provides waste management
services to medical waste generators in North and South Texas.  Until August 29,
2002,  EMSI's  operations were highly dependent upon utilization of UTMB's waste
incineration  facility.  EMSI uses this  facility to service UTMB in addition to
several  other  customers  in the South  Texas area.  Prior to August 29,  2002,
substantially  all  of the  waste  processed  by the  Company  was  done  at the
Galveston facility, except when the facility was not operational,  in which case
the  Company   outsourced  its  medical  waste  processing   through   alternate
facilities.  On August 29, 2002, EMSI commenced  using its own autoclave  system
that was installed in its Garland,  Texas  facility.  Accordingly,  in the event
that UTMB cancelled the waste  management  facility  agreement  with EMSI,  EMSI
would be able to use its Garland  facility as a suitable  alternate  facility to
avoid any  significant  detrimental  impact on the  operations of EMSI (see Note
11).

Financial  instruments,  which potentially subject the Company to concentrations
of credit risk,  are  primarily  cash and cash  equivalents  and trade  accounts
receivable.

With respect to trade  receivables,  ongoing  credit  evaluations  of customers'
financial condition are performed and generally,  no collateral is required. The
Company  maintains a reserve for potential credit losses and such losses, in the
aggregate, have not exceeded management's expectations.

At December 31, 2002 and 2001, UTMB accounted for  approximately  30% and 35% of
the accounts receivable balance. For the years ended December 31, 2002 and 2001,
UTMB accounted for approximately 22% and 25%,  respectively,  of net revenues in
each  year.  Five  other  customers  accounted  for an  additional  35.8% of net
revenues at December 31, 2002, of which one customer accounted for 10.8%.

The  Company  carries $5  million of  liability  insurance  (including  umbrella
coverage),  and $1 million of aggregate  pollution and legal liability insurance
($2  million  per  incident),  which the Company  considers  sufficient  to meet
regulatory and customer  requirements  and to protect its employees,  assets and
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 its
business.



                                      F-25
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE 12  COMMITMENTS AND CONTINGENCIES (Continued)

Lease Obligations
-----------------

The Company has a  non-cancelable  operating lease covering its corporate office
in Dallas, Texas that expired on October 31, 2001.

In October 2001,  the Company  extended its lease covering its office in Dallas,
Texas for a term of four years,  commencing on November 1, 2001.  Minimum annual
rentals under the new lease are as follows:

              Years Ended
              December 31,                      Amount
              ------------                    ----------

                 2003                         $  123,442
                 2004                            130,238
                 2005                            113,250
                                              ----------
                                              $  366,930
                                              ==========

Rent expense and sub-rental income for the years ended December 31, 2002 and
2001 were as follows:

                                            For the Years Ended
                                                December 31,
                                            -------------------
                                              2002       2001
                                            --------   --------

             Rent expense                   $120,379   $142,127
             Less: Sub-rental income            --       69,750
                                            --------   --------
                                            $120,379   $ 72,377
                                            ========   ========

On September 30, 2001, the sublease agreement with the tenant was terminated.

During the year ended  December 31, 2002, the Company,  through its  subsidiary,
EnviroClean Transport Services, Inc., entered into a lease agreement for the use
of  seven  new  vehicles  and  one  used  vehicle  to  replace  previously  used
transportation  equipment.  The monthly lease payments range from $993 to $1,101
and the lease periods range from 39 months for the used truck to 72 to 84 months
for the remaining vehicles.  In addition the Company pays a per-mile maintenance
fee of $0.06 to $0.065 for the use of the vehicles. The following






                                      F-26
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE 12  COMMITMENTS AND CONTINGENCIES (Continued)

table shows the future minimum  operating  lease payments that are due under the
contract.

                     Years Ended
                     December 31,                  Amount
                     ------------                ---------

                        2003                     $  99,775
                        2004                        99,775
                        2005                        99,775
                        2006                        86,671
                        2007                        86,671
                        Thereafter                 113,099
                                                 ---------
                                                 $ 585,766
                                                 =========


Payroll Tax Delinquency
-----------------------

The  Company is current  in paying its  payroll  taxes for 2002 and 2003 but was
delinquent in paying its payroll taxes for the third and fourth quarters of 2000
and the  second,  third and fourth  quarters  of 2001.  The total  amount of the
delinquency, including penalties and interest, was $362,109. Of such amount, the
Company  paid  $24,000  during the months of July and August  2002,  $228,914 on
September  27, 2002,  and $109,195 on October 15, 2002.  On October 16, 2002 the
IRS released the federal tax lien against the Garland plant real property  which
was filed in June 2002.

Environmental Matters
---------------------

The Company  operates  within the medical waste  management  industry,  which is
subject to various federal, state and local laws and regulations.  Management is
not  aware  of  any  significant   contingent   liabilities  relative  to  these
activities.

Litigation
----------

The Company was a named  defendant,  along with several officers of the Company,
named individually,  in a lawsuit filed in Buncombe County, Superior Court North
Carolina.  A default  judgment was rendered  against all  defendants in November
1999 as a result of not  filing  answers  in a timely  manner.  The  ruling  was
appealed to the North  Carolina  Supreme  Court and the Company  posted a surety
bond in the amount of the judgment of $354,708. The Company's President posted a
$100,000 letter of credit secured by a certificate of deposit in connection with
the surety bond.  The  estimated  liability  due under the  judgment  amounts to



                                      F-27
<PAGE>


                                MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE 12  COMMITMENTS AND CONTINGENCIES (Continued)

$403,369, including interest accrued since November 1999. The Company provided a
$360,000  loss related to this  judgment in the 1999  consolidated  statement of
operations.  On June 8, 2001, the Supreme Court in North  Carolina  affirmed the
judgment. In July 2001 the plaintiffs received the amount of the surety bond and
the Company paid accrued  interest in the amount of $48,255 in December 2001. On
August 1, 2001 the bonding  company  seized the $100,000  certificate of deposit
posted in connection  with the bond by the  Company's  President and in December
2001 seized 63,450 shares of the Company's  common stock which had been tendered
by the plaintiffs as part of the lawsuit. In addition,  on November 9, 2001, the
bonding  company  filed a  lawsuit  against  the  Company  claiming  damages  of
$254,708,  (the  amount it paid to the  plaintiffs  on the surety  bond less the
certificate of deposit), plus interest and attorneys' fees. However, the Company
believes that by seizing the shares of common stock  tendered by the  plaintiffs
in the litigation,  the bonding company has been fully reimbursed for the amount
paid on the bond and does not have valid claim against the Company.  The Company
is examining options  regarding claims for  indemnification,  contribution,  and
claims  against third parties.  However,  the Company has not made any decisions
and such issues remain unresolved. The accompanying consolidated balance sheets,
as of December  31, 2002 and 2001,  reflect an accrual for losses in  connection
with this litigation of $260,000. In February 2003, the bonding company's Motion
for Summary  Judgment was granted and a judgment in the amount of  approximately
$295,000 was entered against us. We filed a Motion for a New Trial based on what
we believe are judicial  errors in the ruling.  We are  currently in  settlement
discussions with the bonding company to resolve the matter.

Michael Moorhead,  one of the defendants in the North Carolina action filed suit
in Texas  against the  Company's  former  counsel in the North  Carolina  action
claiming,  among other  things,  that the counsel is liable for the loss in such
case for failure to timely  respond to  discovery.  The case was styled  Michael
Moorhead v. Hunton & Williams,  et al, 160th  Judicial  District  Court,  Dallas
County,  Texas,  Cause No. 01-07565.  Hunton & Williams then filed a third-party
action against Mr. Fleeger, alleging that Mr. Fleeger was the contact person for
all of the defendants in the North Carolina case, and was therefore  responsible
to the plaintiff.  Hunton & Williams, et al sought contribution from Mr. Fleeger
in the event they are liable to Mr. Moorhead. Mr. Fleeger denied the allegations
against him and filed a counterclaim against Hunton & Williams,  seeking damages
for  negligence.  The case was settled on October  17,  2002 and the  settlement
amount of $50,000 is being held in trust and will be applied to the  outstanding
bond obligation, if any.

The Company is named defendant in a lawsuit filed in Travis County, Texas by the
State of Texas.  The lawsuit claims that the Company breached a contract awarded
under the Texas Smart Jobs  Program by failing to meet the  requirements  of the
contract and seeks  compensatory  damages in the amount of $439,631,  plus costs
and  attorneys'  fees.  The  Company  has  answered  and has  denied  all of the
plaintiff's  allegations.  It is the opinion of the Company's  attorneys  that a
range between $230,182 and $290,549,  plus  prejudgment  interest at the rate of
10% per annum simple interest, plus attorney's fees is reasonable. The attorneys
base their opinion primarily upon a Close-Out Worksheet that was prepared by the
State of Texas, Department of Economic Development, and forwarded to the Company
on  July  12,  1999.  While  the  Company  cannot  predict  the  outcome  of any


                                      F-28
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE 12  COMMITMENTS AND CONTINGENCIES (Continued)

settlement,  an accrual of $290,000 was reflected in the  accompanying  December
31, 2001  consolidated  balance  sheet.  The Company  also  accrued  prejudgment
interest expense of $30,000, $30,000 and $44,000 in the years ended December 31,
2002, 2001 and 2000, respectively. On March 3, 2003 we reached a settlement with
the  State  of Texas  the  terms of which  will  require  that we pay the  State
$240,620 with no interest in 36 equal  installments  of $6,684  commencing on or
about April 30, 2003. The  settlement  also requires that we  retroactively  pay
$6,110 to those  employees or past  employees whom we were obligated to pay, but
failed to pay in full, pursuant to the Smart Jobs Program.  Accordingly, we have
reduced the litigation  accrual by the amount ($180,465) of the settlement to be
paid in years subsequent to December 31, 2003.  Further,  the excess  litigation
accrual and the accrued  interest  expense  related to the Smart Jobs litigation
will be credited to income in February 2003 in the amount of $147,270.


The Company is also subject to various  matters of litigation  during its normal
course of  operations.  Management  believes that the eventual  outcome of these
matters  will not have a  material  adverse  effect on the  Company's  financial
position, results of operations, or cash flows.

Employment Agreements
---------------------

On May 1,  2001,  the  Company's  Board of  Directors  approved,  in  principal,
effective  January 1, 2001, an  employment  agreement  with its Chief  Executive
Officer  and  President.  The  agreement  has not yet been  reduced to a written
contract.  The material terms of the agreement  include:  (i) a five-year  term;
(ii) a minimum  compensation of $180,000  yearly,  with an annual cost of living
increase of 6%, or an amount equal to the highest  paid  employee as a result of
any  acquisition;  (iii) that such employee will remain Chief Executive  Officer
and President;  (iv) that a severance  package will include the  compensation of
any  remaining  term of the  agreement;  (v) an annual stock or cash bonus based
upon a formula  considering  earnings before interest,  taxes,  depreciation and
amortization  ("EBITDA") to be developed and approved by LBCG;  and (vi) a bonus
for the year 2000 of  125,000  shares of common  stock and the option to convert
any loans made by him and/or accrued compensation at a price of $.75 per share.

On May 1,  2001,  the  Company's  Board of  Directors  approved,  in  principal,
effective  January 1, 2001, an  employment  agreement  with its Chief  Financial
Officer.  The  agreement  has not yet been  reduced to a written  contract.  The
material terms of the agreement  include:  (i) a five-year  term; (ii) a minimum
compensation  of $96,000 yearly with an annual cost of living  increase of 6% or
an  amount  equal to the  highest  paid  financial  employee  as a result of any
acquisition;  (iii) that such employee will remain the Chief Financial  Officer;
(iv) that a severance  package will include the  compensation  of any  remaining
term of the  agreement;  (v) an annual  stock or cash bonus based upon an EBITDA
formula to be developed and approved by LBCG; and (vi) a bonus for the year 2000
of  30,000  shares  of  common  stock and the  option  to  convert  his  accrued
compensation at a price of $.75 per share.


                                      F-29
<PAGE>

                               MEDSOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001



NOTE 13 RELATED PARTY TRANSACTIONS

Related  party  payables  at  December  31,  2002 and 2001 to  stockholders  and
officers  amounted to $979,691 and $594,842,  of which $347,289 and $421,829 are
included in accrued liabilities, respectively.

Related party expenses included in the accompanying  consolidated  statements of
operations are as follows:

                                          Years Ended December 31,
                                          ------------------------
                                             2002          2001
                                          ----------    ----------

                 Interest expense         $   37,573    $   14,416
                                          ==========    ==========

Other debt and equity  transactions  with related parties are disclosed in Notes
8, 10 and 12.


Note 14-Selected Quarterly Financial Data (Unaudited)

The following table summarizes our unaudited  consolidated  quarterly results of
operations  as reported  for 2002 and 2001 (in  thousands,  except for per share
amounts):
<TABLE>
<CAPTION>


                                           First     Second      Third     Fourth
                                          Quarter    Quarter    Quarter    Quarter
                                           2002       2002       2002       2002
                                          -------    -------    -------    -------
<S>                                       <C>        <C>        <C>        <C>
Revenues ..............................   $ 1,209    $ 1,313    $ 1,386    $ 1,503
Gross profit ..........................       298        360        469        694
Income (loss) from operations .........      (161)      (128)       (29)       143
Net income (loss) .....................      (213)      (132)       (20)        79
*Basic and diluted earnings (loss).....
     per common share .................     (0.01)     (0.01)     (0.00)      0.00


                                           First     Second      Third     Fourth
                                          Quarter    Quarter    Quarter    Quarter
                                           2001       2001       2001       2001
                                          -------    -------    -------    -------
Revenues ..............................   $   887    $   985    $ 1,007    $ 1,167
Gross profit (loss) ...................        21        (92)       144        185
Loss from operations ..................      (248)      (463)      (199)      (480)
Income (loss) before extraordinary item      (293)      (523)      (240)      (864)
Extraordinary item, net of tax ........      --          (19)       (18)       (51)
Net income (loss) .....................      (293)      (542)      (257)      (916)
*Basic and diluted earnings (loss)
     per common share .................     (0.02)     (0.04)     (0.02)     (0.06)
</TABLE>

------

* Earnings per share are  calculated  on a quarterly  basis,  and, as such,  the
amounts may not total the calculated full-year earnings per share.


                                      F-30

<PAGE>

                                  EXHIBIT INDEX
EXHIBIT
  NO.    DESCRIPTION
--------------------

3.1      Articles of Incorporation  of the Company,  filed with the Secretary of
         Sate of the State of Texas on  November  12, 1993 (filed as Exhibit 3.1
         to the Company's  Form 10-SB filed on July 16, 2001,  and  incorporated
         herein by reference).

3.2      Articles of Amendment to the Articles of  Incorporation of the Company,
         filed with the  Secretary of State of the State of Texas on January 10,
         1994  (filed as Exhibit 3.2 to the  Company's  Form 10-SB filed on July
         16, 2001, and incorporated herein by reference).

3.3      Articles of Amendment to the Articles of  Incorporation of the Company,
         filed with the  Secretary of State of the State of Texas on January 31,
         1996  (filed as Exhibit 3.3 to the  Company's  Form 10-SB filed on July
         16, 2001, and incorporated herein by reference).

3.4      Articles of Amendment to the Articles of  Incorporation of the Company,
         filed with the Secretary of State of the State of Texas on November 12,
         1996  (filed as Exhibit 3.4 to the  Company's  Form 10-SB filed on July
         16, 2001, and incorporated herein by reference).

3.5      Articles of Amendment to the Articles of  Incorporation of the Company,
         filed with the Secretary of State of the State of Texas on December 23,
         1999  (filed as Exhibit 3.5 to the  Company's  Form 10-SB filed on July
         16, 2001, and incorporated herein by reference).

3.6      Articles of Amendment to the Articles of  Incorporation of the Company,
         filed  with the  Secretary  of State of the  State of Texas on June 27,
         2001  (filed as Exhibit 3.6 to the  Company's  Form 10-SB filed on July
         16, 2001, and incorporated herein by reference).

3.7      Bylaws,  as  amended,  of the  Company  (filed  as  Exhibit  3.7 to the
         Company's Form 10-SB filed on July 16, 2001, and incorporated herein by
         reference).

4.1      Form of Lock-Up  Agreement  (filed as Exhibit 4.1 to the Company's Form
         10-SB filed on July 16, 2001, and incorporated herein by reference).

4.2      Form of Subscription  Agreement  (filed as Exhibit 4.2 to the Company's
         Form  10-SB  filed  on  July  16,  2001,  and  incorporated  herein  by
         reference).

4.3      Stock Purchase Option,  dated January 15, 1997, between the Company and
         Gary S. Krall (filed as Exhibit 4.3 to the Company's Amendment No. 1 to
         Form 10-SB filed on  February  13,  2002,  and  incorporated  herein by
         reference).(*)

10.1     Firm Commitment Agreement,  dated October 31, 2000, between Lilly Beter
         Capital  Group,  Ltd.  and the  Company  (filed as Exhibit  10.1 to the
         Company's Form 10-SB filed on July 16, 2001, and incorporated herein by
         reference).

10.2     Loan  Conversion  and Common Stock  Agreement  between Mark M. Altenau,
         M.D. and the Company, dated July 31, 2000 (filed as Exhibit 10.2 to the
         Company's Form 10-SB filed on July 16, 2001, and incorporated herein by
         reference).

10.3     Contractor  Services  Agreement  effective  May 28,  1995,  as amended,
         between the  Company  and The  University  of Texas  Medical  Branch at
         Galveston  (filed as Exhibit 10.3 to the Company's  Form 10-SB filed on
         July 16, 2001, and incorporated herein by reference).

10.4     Memorandum of Agreement,  dated June 15, 2001,  between the Company and
         Intercontinental  Manufacturing  Company  (filed as Exhibit 10.4 to the
         Company's Form 10-SB filed on July 16, 2001, and incorporated herein by
         reference).

<PAGE>

10.5     Exclusive  Medical  Waste  Service  Agreement,  dated  March 21,  2002,
         between EnviroClean Management Services, Inc. and Christus Spohn Health
         System  (filed as Exhibit  10.5 to the  Company's  Form 10-QSB filed on
         August 16, 2002, and incorporated herein by reference).+

10.6     Medical Waste  Transportation  and Disposal  Agreement,  dated March 1,
         2001, between EnviroClean Management Services, Inc., and Trinity Mother
         Frances  Regional Health Center (filed as Exhibit 10.6 to the Company's
         Amendment  No.  1 to  Form  10-SB  filed  on  February  13,  2002,  and
         incorporated herein by reference).+

10.7     Amended and Restated Promissory Note dated July 31, 2001 by the Company
         to Mark M. Altenau,  M.D. for $171,666.67 (filed as Exhibit 10.7 to the
         Company's Amendment No. 1 to Form 10-SB filed on February 13, 2002, and
         incorporated herein by reference).

10.8     Amended and Restated Loan Conversion and Common Stock Agreement between
         Mark M.  Altenau,  M.D. and the Company,  dated July 31, 2001 (filed as
         Exhibit 10.8 to the  Company's  Amendment  No. 1 to Form 10-SB filed on
         February 13, 2002, and incorporated herein by reference).

10.9     Amendment 4 to the Contractor  Services  Agreement  between the Company
         and  University of Texas  Medical  Branch at Galveston  (Exhibit  10.9)
         (filed as Exhibit 10.9 to the  Company's  Amendment No. 1 to Form 10-SB
         filed on February 13, 2002, and incorporated herein by reference).

10.10    LBCG  Financing  Proposal  (filed  as  Exhibit  10.10 to the  Company's
         Amendment  No.  1 to  Form  10-SB  filed  on  February  13,  2002,  and
         incorporated herein by reference).

10.11    Purchase  Agreement  for the purchase of an autoclave for the Company's
         Garland  facility between  EnviroClean  Management  Services,  Inc. and
         BondTech,  Inc.  (filed as Exhibit 10.11 to the  Company's  Form 10-QSB
         filed on August 19, 2002, and incorporated herein by reference).

10.12    Promissory  Note dated August 28, 2002 by the Company to Vivian Eriksen
         for  $202,250.79.  (filed as Exhibit 10.12 to the Company's Form 10-QSB
         filed on November 14, 2002, and incorporated herein by reference).

10.13    Promissory  Note dated August 28, 2002 by the Company to Vivian Eriksen
         for  $90,000.00.  (filed as Exhibit 10.13 to the Company's  Form 10-QSB
         filed on November 14, 2002, and incorporated herein by reference).

10.14    Promissory  Note dated August 28, 2002 by the Company to Vivian Eriksen
         for  $322,749.21.  (filed as Exhibit 10.14 to the Company's Form 10-QSB
         filed on November 14, 2002, and incorporated herein by reference).

99.1     Certification of Chief Executive Officer of MedSolutions, Inc. Pursuant
         to 18 U.S.C. Section 1350.**

99.2     Certification of Chief Financial Officer of MedSolutions, Inc. Pursuant
         to 18 U.S.C. Section 1350.**
----------

(*) Denotes a management contract or compensatory plan or arrangement.
(+) Confidential  treatment  was requested  with respect to certain  portions of
    this exhibit.  Omitted  portions were filed  separately  with the SEC at the
    time the exhibit was filed.
(**) Filed herewith.