AS FILED WITH THE SECURITIES EXCHANGE COMMISSION OF SEPTEMBER 7, 1999

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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


                                   FORM 10-K/A
                                (Amendment No. 2)

   (Mark One)
      [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended SEPTEMBER 30, 1998
                                       OR

      [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                        Commission File Number: 000-21956

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

                  TEXAS                                     74-1613155
      (State or other jurisdiction                       (I.R.S. Employer
    of incorporation or organization)                 (Identification number)


            720 AVENUE F NORTH, BAY CITY, TEXAS 77414 (409) 245-2424
                (Address including zip code and telephone number,
       including area code, of registrant's principal executive offices)

                        JERRIEL L. EVANS, SR., PRESIDENT
    Mailing Address: P.O. Box 2480, Bay City, Texas 77404-2480 (409) 245-2424
   Physical Address: 720 Avenue F North, Bay City, Texas 77414 (409) 245-2424
            (Name, address, including zip code, and telephone number,
                   including area code, of agent for service)

           Securities registered pursuant to Section 12(b) of the Act:
                                      None.

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


        Securities registered pursuant to Section 12(g) of the Act: None

<TABLE>
<S>                                               <C>
        TITLE OF EACH CLASS                       NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, par value $.01 per share                        NASDAQ-NMS Exchange

</TABLE>

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

On January 12, 1999, the aggregate market value of the Registrant's voting stock
held by non-affiliates was approximately $26,800,000.

On June 30, 1999, there were 4,094,831 shares of Common Stock outstanding,
exclusive of treasury shares or shares held by subsidiaries of the Registrant.

DOCUMENTS INCORPORATED BY REFERENCE: None.

<PAGE>
                                EXPLANATORY NOTE

      This Amendment No. 2 on Form 10-K/A (this "Amendment") is being filed in
order to amend the Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on January 13, 1999, as previously amended on
January 28, 1999, to amend Items 1,6,7,8 and 14 in Part IV thereof.

                                     PART I

This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Investors are
cautioned that all forward-looking statements involve risks and uncertainty,
including without limitation, the ability of the Company to successfully
implement its turnaround strategy, changes in costs of raw materials, labor, and
employee benefits, as well as general market conditions, competition and
pricing. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Annual Report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as representation by the Company or any other person that
the objectives and plans of the Company will be achieved. In assessing
forward-looking statements included herein, readers are urged to carefully read
those statements. When used in the Annual Report on Form 10-K, the words
"estimate," "anticipate," "expect," "believe," and similar expressions are
intended to be forward-looking statements.

ITEM 1.  BUSINESS

Evans Systems, Inc. ("ESI"), through its wholly-owned subsidiaries, collectively
referred to herein as the "Company", is a vertically integrated company which
has historically been engaged in the following business segments:

      o    petroleum marketing;
      o    convenience store operations;
      o    environmental remediation services; and
      o    packaging and marketing of automotive after-market chemical products.

The Company began in 1968 with a single gasoline station in Bay City, Texas,
emphasizing service and careful attention to customers' preferences and needs.
The Company has expanded over the years, and now distributes the products of
seven major oil companies, and operates a chain of convenience stores throughout
southeast Texas and southern Louisiana.

After sustaining losses during 1997, in early fiscal 1998 the management of ESI
developed and began to implement its turnaround strategy. Among other things,
the strategy included a decision to refocus the Company on its "core" business
segments: petroleum marketing and convenience store operations. Within these
"core" segments, the Company sold or closed lower-volume outlets. The Company
also took actions, including the elimination of nonessential corporate staff, to
reduce overhead expenses. See "Petroleum Marketing" and "Convenience Store"
segment discussions, below.

In February 1998, ESI discontinued operations in the packaging and marketing of
automotive after-market chemical products, previously operated through its
wholly-owned subsidiary, ChemWay Systems, Inc. ("ChemWay"). ChemWay's financial
results have been reclassified as a "discontinued operation" for financial
reporting purposes. In December 1998, the Company sold ChemWay in a
stock-for-stock transaction to Synaptix Systems Corporation, which has
subsequently received permission from its shareholders to change its name to
Affiliated Resources Corporation ("Affiliated"). See "ChemWay" below.

                                     Page 2

<PAGE>
Operating results for each of the Company's segments follow (in thousands):
<TABLE>
<CAPTION>

                              YEAR ENDED            YEAR ENDED           YEAR ENDED
                            SEPT. 30, 1998        SEPT. 30, 1997       SEPT. 30, 1996
                            --------------        --------------       --------------

<S>                                <C>                   <C>                  <C>
PETROLEUM MARKETING(1)
Revenue                            $70,467               $98,376              $91,374
Operating Income (Loss)            (3,205)               (2,070)                  644

CONVENIENCE STORES
Revenue                            $32,495               $38,300              $39,602
Operating Income (Loss)              (708)               (1,213)                  171

EDCO ENVIRONMENTAL
Revenue                             $1,152                $1,320               $2,031
Operating Loss                        (81)                 (399)                (456)

TOTAL CONTINUING OPERATIONS
Revenue                           $104,114              $137,996             $133,007
Operating Income (Loss)            (3,994)               (3,682)                  359

CHEMWAY
Revenue                             $2,268               $10,967              $25,773
Operating Income (Loss)            (1,694)               (1,831)                2,179

TOTAL
Revenue                           $106,382              $148,963              158,780
Operating income (Loss)            (5,688)               (5,513)                2,538
</TABLE>

(1) Includes administrative expenses of the parent company.

PETROLEUM MARKETING

The following table sets forth the revenues of the Petroleum Marketing segment
  (in thousands):

                                                   FISCAL YEAR ENDED
                                                      SEPTEMBER 30
                                           -----------------------------------
                                             1998         1997          1996
                                           -------       -------       -------
Refined petroleum product sales            $68,998       $96,714       $89,717
Non-petroleum product sales                  1,469         1,662         1,657
                                           -------       -------       -------
Total Sales                                $70,467       $98,376       $91,374


The Petroleum Marketing segment's revenues are primarily derived from the sale
of motor fuels to the public through retail outlets:

      o     Gasoline retail facilities with Company-supplied equipment
            consisting of pumps, lights, canopies and in many cases underground
            storage tanks, at independently owned convenience stores. Under the
            terms of the Company's agreements with such independent store
            operators ("Special Purpose Leases"), the Company receives 40
            percent or 50 percent of the gasoline gross profit, depending upon
            who owns the underground gasoline equipment.

      o     Independently owned gasoline stations and convenience stores ("Open
            Dealers") to which the Company provides major oil company brand
            names, credit card processing and signs and, without further
            investment, receives its customary markup on fuel deliveries.

                                     Page 3

<PAGE>
The Petroleum Marketing segment also supplies lubricants, tires and accessories
to commercial and industrial customers.

The Petroleum Marketing segment distributes to its motor fuel customers both
directly from refinery racks, and through the Company's bulk plant facilities.
The Company also has a 110,000 barrel terminal facility, located in Bay City,
Texas, from which it has historically distributed motor fuels to the southeast
Texas market. During the first fiscal quarter of 1998, the Company's supply
agreement with the primary fuel supplier to the Bay City terminal facility was
terminated. The loss of the fuel supply agreement had an adverse effect upon the
Petroleum Marketing segment's performance during 1998: the Company was unable to
sell fuels through its exchange agreements with other major oil companies. The
Company is presently negotiating with another supplier, however there can be no
assurance whether or when the terminal facility will be supplied with fuel.

Under regulations issued by the U.S. Environmental Protection Agency ("EPA"),
all underground storage tanks in the State of Texas were required to meet
certain standards of protection as of December 22, 1998. During 1998, the
Company evaluated the revenues generated by its Special Purpose Lease accounts,
and determined that it could not justify further investment at approximately 46
of such locations. Accordingly, management decided to either sell or close those
identified lower-volume Special Purpose Lease facilities. As of September 30,
1998, the Company sold its investment at 23 of the lower-volume Special Purpose
Lease accounts, and has subsequently sold the equipment at seven additional
sites. Additionally, the Company has discontinued the delivery of motor fuels,
and has removed the underground storage tanks at 16 Special Purpose Lease sites.
The Special Purpose Lease locations where the Company sold its investment in
equipment are now served by the Company as Open Dealers. See "Environmental
Issues," below. The Company estimates that it will spend approximately $237,000
in the year ended September 30, 1999 to comply with the December 22, 1998
environmental standards.

The effect of the conversion of Special Purpose Lease customers into Open
Dealers is to increase the Company's sales revenues with reduced gross margin,
and working capital requirements, and capital investment, resulting in an
improved return on investment. Since the Company's margins on Open Dealer
accounts are contractually fixed, however, the Petroleum Marketing Segment's
gross margins may be less volatile in the future, as a larger percentage of the
segment's business will be at fixed margins.

CONVENIENCE STORES

The following table sets forth the revenues of the Convenience Store segment
(in thousands):

                                                 FISCAL YEAR ENDED
                                                   SEPTEMBER 30
                                                 -----------------
                                      1998              1997              1996
                                    -------           -------           -------
Refined petroleum product sales     $18,162           $22,525           $22,993
Merchandise sales                    13,509            15,089            15,996
Other income                            824               686               613
                                    -------           -------           -------
Total Sales                         $32,495           $38,300           $39,602

Number of operating stores
  at year-end                            27                33                40


At September 30, 1998, the Company operated one full-service station without a
convenience store and 26 convenience stores, featuring self-service motor fuels
and a variety of food and non-food merchandise. Eight of the Company's
convenience stores are co-branded with a nationally recognized fast food
franchised or licensed food service operation.

The Company's stores are located in smaller communities throughout the gulf
coast region of Texas and Louisiana.

During fiscal 1998, the Company discontinued operations at six underperforming
convenience stores, and sold the equipment and business to independent
convenience store operators. In each of these transactions, the Company retained
the wholesale gasoline business, through an Open Dealer contract.

                                     Page 4

<PAGE>
EDCO ENVIRONMENTAL

EDCO Environmental provides environmental assessment and remediation services
for the petroleum distribution industry in the southeast Texas market area. EDCO
Environmental currently focuses its efforts on the following activities:

  Underground storage tank ("UST") removal          UST regulator upgrades
  Site assessments for regulatory agencies          UST repairs and maintenance
  Site clean up reimbursement

EDCO Environmental has provided environmental remediation services to
approximately 100 customers ranging from gasoline stations, convenience stores,
public utilities, banks, major oil companies, large industrial corporations,
various small local enterprises and a variety of governmental institutions and
enterprises. The environmental protection business is primarily the result of
government mandate. In the mid-1980's, the EPA initiated a program for the
management of USTs throughout the U.S.

The EPA now requires stage II vapor recovery improvements at fuel facilities
rather than through on-board canisters in new motor vehicles. The deadline for
compliance with the new UST improvement guidelines was December 1998.

A number of states, including Texas, have established remediation funds to
assist owners/operators in the clean-up of leaking USTs. In Texas, this was
accomplished through the Groundwater Protection Act ("GPA"), which became
effective on September 1, 1989. The GPA, as amended, provides clean-up funds for
eligible expenses, less applicable deductibles. The fund is continually financed
by a tax assessed on motor fuels sold in the state. Financing programs secured
by assignments of rights to reimbursement by the Texas Natural Resource
Conservation Commission ("TNRCC") can be obtained for leaking petroleum storage
tank sites impacted by releases from USTs. For locations where contamination
already exists, the UST owner/operator must comply with TNRCC clean-up
regulations or risk fines of up to $10,000 per day and disqualification from the
benefits and funding of the GPA.

The TNRCC is continuing to provide reimbursements for clean-up of contaminated
locations.

CHEMWAY

ChemWay previously packaged aerosol and liquid chemical products for the
aftermarket automotive industry. In February 1998, the Company suspended
production and, in March 1998, announced plans to sell its investment in
ChemWay. On December 30, 1998, the Company completed the sale of ChemWay to an
unrelated third party, Affiliated. The Company received 1,500,000 shares of
common stock of Affiliated in exchange for all of the common stock of ChemWay.
The number of shares of Affiliated common stock could be subject to a "make
whole" provision whereby the Company could receive up to an additional 1,000,000
shares of Affiliated common stock should the market value of such stock be below
$6,000,000 at the one-year anniversary of the closing of the transaction. The
Affiliated common stock is unregistered, however the Company has demand
registration rights with respect to such stock.

Affiliated common stock is currently quoted on the Nasdaq Over-the-Counter
Bulletin Board. In accordance with generally accepted accounting principles, the
Affiliated common stock received in exchange for the common stock of ChemWay was
valued at its "fair value" indicated by the bid price of $6.00 per share, as
quoted on the Nasdaq Over-the-Counter Bulletin Board, which resulted in a gain
of $3,973,000, net of a provision for income taxes of $1,203,000.

The Company's investment in Affiliated common stock is highly illiquid; in
addition, the average trading volume of Affiliated is small in comparison to the
number of shares held by the Company. The trading price of Affiliated stock has
been very volatile, ranging from a reported low closing price in the quarter
ended June 30, 1998 of $0.88 to a closing price of $6.00 at December 31, 1998
and a closing price of $0.63 at June 30, 1999. While the Company does not intend
to sell its Affiliated common stock in the foreseeable future, there can be no
assurance that the Company would be able to realize the recorded value of the
Affiliated common stock.

                                     Page 5

<PAGE>
At December 31, 1998, Affiliated reported, in its Annual Report on Form 10-K, an
accumulated deficit of $7,630,070 based on historic losses, and a negative
working capital balance of $912,605. Affiliated reported no revenues from
operations during the last six months of 1998, and reported a loss from
operations of $526,843. In its Annual Report on Form 10-K for the year ended
December 31, 1998, Affiliated's management stated:
      MANAGEMENT BELIEVES THAT CURRENT DISCUSSIONS WITH INVESTORS WILL YIELD
      SUFFICIENT ADDITIONAL CAPITAL TO CONTINUE ITS ACQUISITION STRATEGY AND TO
      FUND FUTURE OPERATIONS, AND THAT THESE ACQUISITIONS WILL GENERATE
      SUFFICIENT REVENUES TO OPERATE INDEPENDENTLY AND PROVIDE AN ASSET BASE FOR
      CONTINUED GROWTH. THERE IS NO ASSURANCE, HOWEVER THAT THE COMPANY WILL BE
      SUCCESSFUL IN RAISING EQUITY AND CONTINUING AS A GOING CONCERN.
See Note 2 to the Consolidated Financial Statements included herein.

EMPLOYEE RELATIONS

The Company employs 304 people, none of whom are represented by any collective
bargaining organizations. The Company has had no work stoppages, slow downs or
strikes. On July 1, 1997, the Company implemented an employee directed 401K
plan.

Management considers its employee relations to be satisfactory.

COMPETITION

All of the Company's business segments operate in a highly competitive
environment. The Company competes on the basis of price, service, and quality.
In addition, each of the respective business systems faces special competitive
factors. In all phases of operations, the Company encounters strong competition
from a number of companies, including some companies with significantly greater
resources than the Company. Many of these larger competitors possess and employ
financial and personnel resources substantially in excess of those which are
available to the Company. The Company's Petroleum Marketing division also
competes with integrated oil companies which, in some cases, own or control a
majority of their Petroleum Marketing facilities. These major oil companies may
offer their products to the Company's competitors on more favorable terms than
those available to the Company from its suppliers. A significant number of
companies, including integrated oil companies and petroleum products
distribution companies, distribute petroleum products through a larger number of
facilities than the Company.

The Company, however, is one of the leading independent suppliers of refined
petroleum products within a 250 mile radius surrounding Houston, Texas and
Southwest Louisiana. Being a multi-brand distributor gives the Company a
competitive advantage of flexibility in placing the proper brand for the
location. The Company sells to the smaller retail consumer and to the high
volume industrial customer. The Company markets approximately 20% of its volume
to the greater Houston metropolitan area where major oil companies are the
primary existing competitors. On occasion, the major oil companies cut prices to
increase their market position.

The convenience store industry is a retail service-oriented industry. It is
distinguished from other retail businesses by its emphasis on location and
convenience rather than price, and a commitment to customers who need to
purchase items quickly at extended hours. Convenience stores feature a wide
variety of items including groceries, dairy products, tobacco products,
beverages, and health and beauty aids. Many sell petroleum on a self-service
basis. Stores are generally designed with ample customer parking and quick
checkout procedures to maximize convenience as well as encourage impulse buying
of high margin items.

The convenience store industry is highly competitive, fragmented, and
regionalized. It is characterized by a few large companies and many small
independent companies. Several competitors are substantially larger and have
greater resources than the Company. The Company's primary competitors include
Diamond Shamrock, RaceTrac, Thomas Petroleum, and E-Z Mart. The Company also
competes with other convenience stores, small supermarkets, grocery stores, and
major and independent gasoline distributors who have converted units to
convenience stores.

The Company also encounters competition in attempting to acquire sites for new
stores and existing groups of convenience stores. The Company's continued growth
in this business depends upon its ability to identify acquisition candidates
that can be obtained and operated profitably and to find suitable locations for
new stores.

EDCO Environmental is a full service environmental company. In the past, the
remediation industry was not highly competitive, but increasingly companies are
entering the environmental business. Management of EDCO Environmental
anticipates that the business will become increasingly competitive in the years
ahead.

                                     Page 6

<PAGE>
The remediation industry is characterized by a few large companies, some medium
sized companies such as EDCO Environmental, and many small independent
companies. Some competitors are larger and have greater resources than EDCO
Environmental. EDCO Environmental competes primarily with engineering firms and
private contractors in addition to other environmental remediation companies.

The continued growth in the remediation service is dependent upon market
penetration, customer base, government regulations, funding, and legislative
changes. EDCO Environmental's growth in underground storage tank upgrading
depends upon its ability to work efficiently, meet price competition, and will
be adversely affected by restrictions upon reimbursements by the Texas Natural
Resource Conservation Commission (See "Business", "EDCO Environmental Systems,
Inc.").

                                         PART II

ITEM 6.  SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data which should be
read in conjunction with the Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included herein. Amounts are in thousands, except per-share data.
<TABLE>
<CAPTION>
                                                                                  Year Ended September 30
INCOME STATEMENT DATA:                                     1998            1997            1996            1995           1994
----------------------                                  ---------       ---------       ---------       ---------         -------
<S>                                                     <C>             <C>             <C>             <C>               <C>
Revenues                                                $ 104,114       $ 137,996       $ 133,007       $ 135,342         100,108
Gross Profit                                               13,868          14,765          17,266          17,345          13,341
Operating Income (Loss)                                    (3,994)         (3,682)            359             226             935
Income (Loss) from Continuing Operations                   (4,605)         (3,458)           (185)           (110)          1,064
Net Income (Loss)                                          (5,453)         (4,804)          1,119             335             740
Basic Income (loss) from continuing
  operations per common share(1)                            (1.48)          (1.12)           (.06)           (.04)            .35
Basic earnings (loss) per common share(1)                   (1.75)          (1.56)            .37             .11             .24
Basic weighted average number of common
  shares outstanding(1)                                     3,116           3,075           3,010           3,026           3,069
Diluted earnings (loss) from continuing
  operations per common share(1)                            (1.48)          (1.12)           (.06)           (.04)            .34
Diluted earnings (loss) per common share(1)                 (1.75)          (1.56)            .37             .11             .23
Weighted average number of common and
  common equivalent shares outstanding(1)                   3,116           3,075           3,010           3,026           3,152
</TABLE>


(1) Adjusted for 5% stock dividend as discussed in Item 5, Market for the
    Registrant's Common Equity and Related Stockholder Matters.
<TABLE>
<CAPTION>
                                                              1998            1997           1996            1995           1994
                                                             ------         -------        -------         -------        -------
BALANCE SHEET DATA:
-------------------
<S>                                                          <C>            <C>            <C>             <C>            <C>
Current Assets                                               $9,914         $14,962        $18,726         $21,566        $18,250
Current Liabilities                                           9,751          17,333          9,724          16,698         11,938
Current Ratio                                                1.02:1           .86:1         1.93:1          1.29:1         1.53:1
Total Assets                                                 32,448          38,218         41,073          40,609         33,164
Long-Term Debt                                               11,151           5,401         10,400           4,663          2,168
Total Stockholders' Equity                                   11,546          15,484         19,748          18,534         18,327
</TABLE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the historical financial
statements and notes thereto appearing elsewhere in this document.

                                     Page 7

<PAGE>
                              RESULTS OF OPERATIONS

1998 COMPARED WITH 1997

After sustaining losses during 1997, in early fiscal 1998 the management of ESI
developed and began to implement its turnaround strategy. Among other things,
the strategy included a decision to refocus the Company on its "core" business
segments: petroleum marketing and convenience store operations. Within these
"core" segments, the Company sold or closed lower-volume outlets. The Company
also took actions, including the elimination of nonessential corporate staff, to
reduce overhead expenses.

In February 1998, ESI discontinued operations in the packaging and marketing of
automotive after-market chemical products, previously operated through its
wholly-owned subsidiary, ChemWay Systems, Inc. ("ChemWay"). In December 1998,
the Company sold ChemWay to Affiliated in a stock-for-stock transaction. See
"ChemWay" below. In exchange for the common stock of ChemWay, the Company
received 1,500,000 shares of Affiliated common stock. The number of shares of
Affiliated common stock could be subject to a "make whole" provision whereby the
Company could receive up to an additional 1,000,000 shares of Affiliated common
stock should the market value of such stock be below $6 million at the one year
anniversary of the closing of the transaction. The Affiliated common stock is
unregistered, however the Company has demand registration rights with respect to
the stock.

Affiliated common stock is currently quoted on the Nasdaq Over-the-Counter
Bulletin Board. In accordance with generally accepted accounting principles, the
Affiliated common stock received in exchange for the common stock of ChemWay was
valued at its "fair value" indicated by the bid price of $6.00 per share, as
quoted on the Nasdaq Over-the-Counter Bulletin Board, which resulted in a gain
of $3,973,000, net of a provision for income taxes of $1,203,000.

The Company's investment in Affiliated common stock is highly illiquid; in
addition, the average trading volume of Affiliated is small in comparison to the
number of shares held by the Company. The trading price of Affiliated stock has
been very volatile, ranging from a closing price in the quarter ended June 30,
1998 of $0.88 to a closing price of $6.00 at December 31, 1998 and a closing
price of $0.63 at June 30, 1999. While the Company does not intend to sell its
Affiliated common stock in the foreseeable future, there can be no assurance
that the Company would be able to realize the recorded value of the Affiliated
common stock.

At December 31, 1998, Affiliated reported, in its Annual Report on Form 10-K, an
accumulated deficit of $7,630,070 based on historic losses, and a negative
working capital balance of $912,605. Affiliated reported no revenues from
operations during the last six months of 1998, and reported a loss from
operations of $526,843. In its annual report on Form 10-K for the year ended
December 31, 1998, Affiliated's management stated:
      MANAGEMENT BELIEVES THAT CURRENT DISCUSSIONS WITH INVESTORS WILL YIELD
      SUFFICIENT ADDITIONAL CAPITAL TO CONTINUE ITS ACQUISITION STRATEGY AND TO
      FUND FUTURE OPERATIONS, AND THAT THESE ACQUISITIONS WILL GENERATE
      SUFFICIENT REVENUES TO OPERATE INDEPENDENTLY AND PROVIDE AN ASSET BASE FOR
      CONTINUED GROWTH. THERE IS NO ASSURANCE, HOWEVER THAT THE COMPANY WILL BE
      SUCCESSFUL IN RAISING EQUITY AND CONTINUING AS A GOING CONCERN.
See Note 2 of the Notes to the Consolidated Financial Statements included
herein.

Consolidated sales revenues from continuing operations declined to $104,114,000
in 1998, from $137,996,000 in 1997, a decline of $33,882,000 or approximately
24.5%. During 1998, the Company implemented its turnaround strategy to
rationalize its base of stores and customers, which resulted in sales declines
in each of the Company's business segments. Sales revenues also declined as a
result of the lower overall pricing levels for petroleum products which
prevailed during 1998, as compared with 1997. Additionally, sales of fuels
through the Company's terminal facility declined $8,568,000 during 1998 as a
result of the termination of the Company's supply agreement for such facility.
See segment discussions, below.

Gross profit in 1998 was $13,868,000 as compared with $14,765,000 in 1997, a
decline of $897,000 or approximately 6.1%. Gross profit expressed as a
percentage of sales ("Gross Margin"), however, increased to approximately 13.3%
of sales in 1998 as compared with approximately 10.7% of sales in 1997. The
improved Gross Margin is principally attributable to the closing of unprofitable
stores and improved management of the Company's daily pricing of fuels.

Operating expenses in 1998 were $17,862,000, as compared with $18,447,000 in
1997, a decrease of $585,000 or approximately 3.2%. Operating expenses in 1998
include a noncash charge of $1,133,000 in compensation expense, as a result of
the application of APB25 with respect to certain incentive stock options which
had previously been awarded to employees, see Note 7 of Notes to Consolidated
Financial Statements included herein. Fiscal 1997 included a provision for loss
on marketable securities of $497,000 and a write-down of other assets of
approximately $818,000. The decline in operating expenses in 1998, as compared
with 1997, is primarily due

                                     Page 8

<PAGE>
to the closing of underperforming convenience stores, and to an overall staff
reduction.

Consolidated operating losses from continuing operations increased $312,000;
operating losses on continuing operations were $3,994,000 in 1998 as compared
with $3,682,000 in 1997. As noted above, fiscal 1998 results included a non-cash
charge of $1,133,000. Adjusted for the effect of the noncash compensation
expense charge, operating losses from continuing operations declined $821,000.
The Convenience Store segment and EDCO Environmental segment improved during
1998, however the improvement was offset by higher losses in the Petroleum
Marketing segment, due to reduced sales revenues, the $1,133,000 non-cash
compensation expense charges, the effect of which was partially offset by an
improved Gross Margin.

The Company incurred net losses of $5,453,000 and $4,804,000 for fiscal years
ended September 30, 1998 and September 30, 1997, respectively. Losses from
continuing operations were $4,605,000 and $3,458,000 in fiscal years 1998 and
1997, respectively. The net loss for 1998 included an increase in the deferred
tax asset valuation allowance of $782,000 and, as described above, a non-cash
charge of $1,133,000.

PETROLEUM MARKETING SEGMENT

Petroleum Marketing segment's sales revenues declined $27,909,000 to $70,467,000
in 1998, as compared with $98,376,000 in 1997, a decline of approximately 28%.
Fuel sales in gallons was 67,609,000 in 1998, as compared with 88,448,000
gallons in 1997, a decrease of approximately 24%. The Petroleum Marketing
segment distributes to its motor fuel customers both directly from refinery
racks, and through the Company's bulk plant facilities. The Company, through its
wholly-owned subsidiary Way Energy Systems, Inc. ("Way Energy") also has a
110,000 barrel terminal facility, located in Bay City, Texas, from which it has
historically distributed motor fuels to the southeast Texas market. During the
first quarter of 1998, the Company's supply agreement with the primary fuel
supplier to the Bay City terminal facility was terminated. The loss of the fuel
supply agreement had an adverse effect upon the Petroleum Marketing segment's
performance during 1998: the Company was unable to sell fuels through its
exchange agreements with other major oil companies. Way Energy's sales during
1998 were $3,826,000 as compared with $12,394,000 in 1997, a decline of
$8,568,000 or approximately 69%. The Company is presently negotiating with
another supplier, however there can be no assurance whether or when the terminal
facility will be supplied with fuel.

Under regulations issued by the U.S. Environmental Protection Agency ("EPA"),
all underground storage tanks in the State of Texas were required to meet
certain standards of protection as of December 22, 1998. During 1998, the
Company evaluated the revenues generated by its Special Purpose Lease accounts,
and determined that it could not justify further investment at approximately 46
of such locations. Accordingly, management decided to either sell or close those
identified lower-volume Special Purpose Lease facilities. As of September 30,
1998, the Company sold its investment at 23 of the lower-volume Special Purpose
Lease accounts, and has subsequently sold the equipment at seven additional
sites. Additionally, the Company has discontinued the delivery of motor fuels,
and has removed the underground storage tanks at 16 Special Purpose Lease sites.
The Special Purpose Lease locations where the Company sold its investment in
equipment are now served by the Company as Open Dealers. See "Environmental
Issues," in Section 1, Business, included herein.

The effect of the conversion of Special Purpose Lease customers into Open
Dealers is to increase the Company's sales revenues with reduced Gross Margins,
working capital requirements, and reduced capital investment, resulting in
improved return on investment. Since the Company's margins on Open Dealer
accounts are contractually fixed, however, the Petroleum Marketing Segment's
gross margins may be less volatile in the future, as a larger percentage of the
segment's business will be at fixed margins.

Gross profit in the Petroleum Marketing Segment was $6,407,000 in 1998, as
compared with $6,997,000 in 1997, a decline of $590,000 or approximately 8.4%.
Gross Margin, however, improved in 1998, to approximately 9.1% of sales as
compared with approximately 7.1% in 1997. The improvement in Gross Margin is
principally attributable to a higher gross profit earned per gallon, divided by
the lower selling prices which prevailed during 1998, as compared with 1997.
Gross profit per gallon sold increased in 1998, to approximately $0.095, as
compared to $0.079 in 1997, due to improved management of the Company's daily
pricing of fuels.

Operating expenses in the Petroleum Marketing Segment were $9,612,000 in 1998,
as compared with $9,067,000 in 1997, an increase of $545,000 or approximately
6.0%. Included in 1998, however, is a noncash charge of $1,133,000 for
compensation expense, discussed above. Operating expenses, adjusted for the
non-cash charge discussed above, declined $588,000 in 1998, as compared with
1997, reflecting management's cost reduction programs implemented during 1998.
Note that the operating expenses of the parent company are included within the
Petroleum Marketing segment results.

                                     Page 9

<PAGE>
Operating loss of the Petroleum Marketing Segment increased to $3,205,000 in
1998 as compared with $2,070,000 in 1997. The increased loss is primarily due to
the lower sales revenues and resultant gross profit, and to the $1,133,000
non-cash charge for compensation expense, discussed above.

CONVENIENCE STORE SEGMENT

Sales in the Convenience Store segment were $32,495,000 in 1998, as compared
with $38,300,000 in 1997, a decline of approximately 15%. During 1998, however,
the company closed and sold 6 underperforming stores, and has subsequently sold
an additional store during December 1998. Fuel sales in 1998 were $18,057,000 as
compared with $22,525,000 in 1997; fuel sales in gallons also declined in 1998,
to 17,000,000 gallons as compared with 18,459,000 gallons in 1997. The decrease
in fuel sales revenues is due to the lower retail selling prices for fuels which
prevailed during 1998, and to fewer operating stores during the current year.
Merchandise sales decreased $2,487,000 to $13,509,000 as compared with
$15,089,000 in 1997. The decline in merchandise sales is primarily due to fewer
operating stores during 1998.

Gross profit declined to $6,834,000 in 1998 as compared with $7,402,000 in 1997.
Gross Margin in the Convenience Store segment improved during 1998, however, to
approximately 21.0% as compared with approximately 19.3% in 1997. Merchandise
Gross Margin was comparable in the two years, at approximately 30.5% and 30.4%
during 1998 and 1997, respectively. Fuel Gross Margin, however, improved to
approximately 10.0% during 1998, as compared with approximately 9.4% during
1997.

The improvement in overall Gross Margin is partially due to the fact that
merchandise sales represented a higher percentage of the stores' total sales
during 1998 than in 1997; merchandise sales were approximately 41.6% of total
sales during 1998 as compared with approximately 39% during 1997. In addition to
closing 6 underperforming stores during 1998, the Company began pricing its fuel
more aggressively in order to maintain customer traffic, and generate additional
higher-margin merchandise sales.

Operating expenses during 1998 in the Convenience Store segment was $7,542,000
as compared with $8,615,000 in 1997, a decrease of $1,073,000 or approximately
12.5%. The decline in operating expenses is principally attributable to the
closing of 6 underperforming stores during 1998, and to an overall reduction in
staff during 1998.

The Convenience Store segment incurred an operating loss of $708,000 in 1998, as
compared with a loss of $1,213,000 in 1997. The reduced loss is due to reduced
operating expenses during the current year, partially offset by reduced sales
and resulting gross profits.

EDCO ENVIRONMENTAL

The management of EDCO Environmental has focused its attention on increasing
sales of environmental services, and reducing operating expenses. Sales were
$1,152,000 in 1998, as compared with $1,320,000 in 1997, a decrease of $168,000
or approximately 12.7%. Gross profit was $627,000 in 1998, an increase of
$261,000 from 1997. Gross Margin improved to approximately 54.4% of sales in
1998, as compared with approximately 27.7% of sales during 1997. The improved
Gross Margin is primarily attributable to management's decision to discontinue
low-margin construction operations at year-end 1997.

Operating expenses at EDCO Environmental decreased $57,000 in 1998, to $708,000
as compared with $765,000 in 1997, a decrease of approximately 7.5%. The
decrease is due to increased management emphasis on expense control, and staff
reductions.

EDCO Environmental incurred an operating loss of $81,000 in 1998, as compared
with an operating loss of $399,000 in 1997. The improvement is due to the higher
Gross Margin and reduced operating expenses during 1998.

CHEMWAY

Production activities at the ChemWay facility ceased in February 1998, and the
ChemWay segment was classified as a discontinued operation as of March 31, 1998.
Sales in the ChemWay segment were $2,268,000 in 1998, as compared with
$10,967,000 in 1997, a decline of $8,699,000 or approximately 79.3%. Gross
Margin in the ChemWay facility was approximately 3.1% of sales during 1998, as
compared with approximately 9.8% in 1997. During 1998, the Company liquidated
much of ChemWay's inventories, sometimes at prices at or below cost. Operating
expenses at ChemWay were $1,744,000 in 1998, as compared with $2,909,000 in
1997, reflecting the cessation of production activities in February 1998.
Operating losses at ChemWay were $1,694,000 in 1998 as compared with $1,831,000
in 1997, reflecting the reductions in operating expenses during the current
fiscal year, partially offset by lower sales and

                                     Page 10

<PAGE>
reduced Gross Margins.

1997 COMPARED WITH 1996

The Company's after-tax profits (losses) for the years ended 1997 and 1996,
respectively were ($4,804,000) and $1,119,000. Losses from continuing operations
were $3,458,000 and $185,000 in the years ended 1997 and 1996, respectively.
Management attributes the after-tax profit decrease of $5,923,000 in 1997 as
compared with 1996 mainly to the ChemWay sector, which lost $1,346,000 in 1997,
as compared with an after tax profit of $1,304,000 in 1996. The increased loss
from continuing operations during 1997 is mainly attributable to decreased Gross
Margins and an increase in expenses, partially offset by increased revenues.
Included in the 1997 loss was a security trading loss of $497,000 and other
asset write-downs of approximately $818,000. The Company's revenues from
continuing operations for 1997 increased $4,989,000 or approximately 3.8% to
$137,996,000 as compared with $133,007,000 in 1996. Fuel sales gallonage
increased to 106,907,000 gallons compared to 105,357,000 in 1996; a 1,550,000
(1.5%) increase. The Company's gross profit for 1997 was $14,765,000, or
approximately 10.7% of sales as compared to $17,266,000 or approximately 13.0%
of sales in 1996. Management attributes the decline in profit margins to
competitive pricing in the Petroleum Marketing and EDCO Environmental segments.

Operating expenses increased $1,540,000 in 1997 to $18,447,000 as compared with
$16,907,000 in 1996. Expressed as a percentage of sales, operating expenses were
approximately 13.4% of sales in 1997 as compared with approximately 12.7% in
1996. The increase is primarily attributable to higher depreciation and
amortization expenses in 1997, resulting from the purchase and installation of
the Company's new computer hardware and software, and to increased employment
expenses in the Petroleum Marketing and Convenience Store segments.

PETROLEUM MARKETING

The Petroleum Marketing segment had sales of $98,376,000 in 1997 compared to
$91,374,000 in 1996, a $7,002,000 (7.7%) increase. Fuel sales gallonage
increased to 88,448,000 gallons compared to 85,845,000 in 1996, a 2,603,000
(3.0%) increase. Gross profits for 1997 and 1996 were $6,997,000 and $8,810,000,
respectively. Gross profit margins decreased to 7.1% compared to 9.6% in 1996.
Operating expenses increased $901,000 in 1997. Operating expenses were 9.2% of
revenues in 1997, and 8.9% in 1996 primarily due to the transfer of EDCO
Environmental's service department into Petroleum Marketing and the related
increase in employment expenses, a $111,000 increase in allowance for doubtful
accounts in general and administrative expenses and a $100,000 write-down in
software costs. ESI, the parent company, is included in the Petroleum Marketing
results. Operating income (loss) decreased to ($2,070,000) compared to $644,000
in 1996.


CONVENIENCE STORES

The Convenience Store segment had sales of $38,300,000 in 1997 compared to
$39,602,000 in 1996; a $1,302,000 (3.3%) decrease. Fuel sales decreased to
$22,525,000 in 1997 compared to $22,993,000 in 1996; a $468,000 (2.0%) decrease.
Fuel sales gallonage decreased to 18,459,000 gallons compared to 19,512,000 in
1996; a 1,053,000 (5.4%) decrease. Merchandise sales decreased to $15,089,000 in
1997 compared to $15,996,000 and other income increased to $686,000 compared to
$613,000. Management attributes the declines to operating 6 fewer stores for
part of 1997. Gross profit margins decreased to 19.3% in 1997 compared to 20.0%
in 1996. Gross profit margins on fuel sales decreased to 9.4% compared to 10.6%;
merchandise margins decreased to 30.4% compared to 30.6% in 1996.

Operating expenses increased $842,000 in 1997. Operating expenses were 22.5% of
revenues in 1997 and 19.6% in 1996. Increases in operating expenses were
centered in employment $202,000, other operating $412,000, and general
administration $113,000. The Convenience Store segment incurred an operating
loss of $1,213,000, as compared to an operating profit of $171,000 in 1996.


EDCO ENVIRONMENTAL

EDCO Environmental sales were $1,320,000 in 1997 compared to $2,031,000 in 1996;
a $711,000 (35.0%) decrease. Gross profit for 1997 and 1996 was $366,000 and
$510,000, respectively. Gross profit margins increased to 27.7% compared to
25.1% in 1996. Operating expenses decreased $201,000 in 1997 compared to 1996.
The $201,000 decrease was mainly attributable to the transfer of EDCO's service
department to Petroleum Marketing offset by asset write-downs of approximately
$209,000. Operating loss was $399,000 compared to $456,000 in 1996.

                                     Page 11

<PAGE>
CHEMWAY

ChemWay had sales of $10,967,000 in 1997 compared to $25,773,000 in 1996; a
$14,806,000 (57.4%) decrease. The decrease was mainly attributable to a decrease
in R-12 sales of $12,269,000. Gross profit for 1997 and 1996 was $1,078,000 and
$4,422,000, respectively. Gross profit margins declined to 9.8% in 1997 compared
to 17.2% in 1996. Management attributes the decline in gross profit margins to
the loss of sales of R-12. Operating expenses increased $667,000 in 1997
compared to 1996. Included in these increases were asset, inventory, and
accounts receivable write-downs of approximately $398,000. Operating income
(loss) decreased to ($1,831,000) compared to $2,179,000 in 1996.

                         CAPITAL RESOURCES AND LIQUIDITY

Certain of the Company's notes payable to banks require maintenance of financial
covenants, including current ratio, debt to equity ratio, a minimum level of
tangible net worth, and fixed charge coverage ratios, all as defined within the
respective loan agreements. The Company has been in default of certain of these
covenants since September 30, 1997. Additionally, the determination of the
amount of funding available under the Company's revolving credit facility with
one bank is determined by a borrowing base calculation, based upon levels of
accounts receivable and inventory. Amounts outstanding under such revolving
credit facility have exceeded the amounts available pursuant to the borrowing
base calculation.

The Company had negotiated standstill agreements with the two bank lenders with
whom the Company had outstanding covenant defaults, pursuant to which the banks
agreed not to accelerate the maturities of such loans in return for additional
collateral and consideration by the Company. The present standstill agreements
expired at October 31, 1998.

On January 13, 1999, the company received a commitment letter from one of its
present bank lenders (the "Refinancing"), pursuant to which the bank would (i)
waive all previous covenant defaults; (ii) extend the maturity of its loan
balance to January 31, 2001; and (iii) assume the amounts outstanding under the
other bank lender's loans under their current terms and conditions. Under the
proposed terms of the Refinancing, such bank lender would receive a first lien
position on certain of the assets of the Company. The Refinancing would contain
certain financial covenant obligations, including minimum net worth, minimum
earnings before interest, taxes and depreciation, working capital ratio and
fixed charge coverage ratio. Management believes the Company will be able to
comply with the proposed financial covenants during the foreseeable future,
however there can be no assurance that the Company will be able to do so.

Cash and cash equivalents were $831,000 and $1,297,000 at September 30, 1998 and
1997, respectively. The Company had net working capital of $163,000, as compared
with a deficit of $2,371,000 at September 30, 1997. The working capital deficit
in 1997 is due to the reclassification of substantially all of the Company's
outstanding debt as a current liability, as a result of the financial covenant
defaults discussed above.

Cash used by operating activities was $611,000 in the year ended September 30,
1998, as compared with cash used by operating activities of $1,425,000 in the
previous fiscal year. The improvement in cash from operating activities is
primarily due to the improved working capital utilization during the current
fiscal year.

The Company identified certain nonessential assets which it sold during the year
ended September 30, 1998; assets disposed of during the current fiscal year
included nonperforming convenience stores, the Company's investment in certain
of its Special Purpose Lease locations, and assets utilized in the Company's
propane business. The Company received proceeds of $1,610,000 from the sale of
such assets during 1998. Cash provided by investing activities was $179,000 in
1998, as compared with $720,000 cash used by investing activities during 1997.

In December 1998, the Company completed the sale of its ChemWay subsidiary, in a
stock-for-stock exchange with Affiliated. Although the Company did not receive
any cash consideration in the transaction, Affiliated agreed to repay
outstanding trade credit liabilities of ChemWay of approximately $2,100,000.

In July 1999, two alleged purchasers of ESI common stock, who allegedly bought
their stock between December 29, 1997 and June 8, 1999, brought two purported
class action lawsuits against ESI and several of its current and former officers
and directors in the United

                                     Page 12

<PAGE>
States District Court for the Southern District of Texas. Each of these lawsuits
asserted that the defendants violated federal securities laws by issuing
allegedly false and misleading statements in 1997, 1998 and 1999 about ESI's
financial condition and results of operations. The lawsuits demanded, among
other relief, unspecified compensatory damages, attorneys' fees and the costs of
conducting the litigation.

It is not possible at this time to predict the impact that the above lawsuits
may have upon the Company, nor is it possible to predict whether any other suits
or claims may arise out of these matters in the future. It is reasonably likely,
however, that the outcome of any present or future litigation may have a
material adverse impact on the Company's financial condition or results of
operations in one or more future periods. ESI intends to defend itself
vigorously in all the above matters.

                                    YEAR 2000

As many computer systems and other equipment with embedded chips or processors
(collectively, "Business Systems") use only two digits to represent the year,
they may be unable to process accurately certain data before, during or after
the year 2000. As a result, business and governmental entities are at risk for
possible miscalculations or systems failures causing disruptions in their
business operations. This is commonly known as the Year 2000 ("Y2K") issue. The
Y2K issue can arise at any point in the Company's supply, processing,
distribution and financial systems.

The Company is in the process of implementing a Y2K readiness program with the
objective of having all of the Company's significant Business Systems
functioning properly with respect to the Y2K before January 1, 2000.

The first component of the Y2K readiness program is to identify the internal
Business Systems of the Company that are susceptible to system failures or
processing errors as a result of the Y2K issue. This effort is substantially
complete; management believes it has identified the Business Systems that may
require remediation or replacement. Management is presently assessing the
priority of each Business System remediation or replacement project.

The second component of the Y2K readiness program involves the actual
remediation and replacement of Business Systems. The Company is primarily
utilizing internal resources to complete this project. The Company's objective
is to complete substantially all remediation and replacement of internal
Business Systems by September 1999.

As part of the Y2K readiness program, significant service providers, vendors,
suppliers, customers and governmental entities ("Key Business Partners") that
are believed to be critical to business operations after January 1, 2000 are
being identified and the Company has begun to survey its Key Business Partners
in an attempt to reasonably ascertain their stage of Y2K readiness.

The Company utilizes a limited number of Business Systems in the conduct of its
operations, however due to the significant number of Key Business Partners, the
Company presently believes that it may experience some disruption in its
business due to the Y2K problem. More specifically, the Company could be
materially adversely affected if utilities, private businesses and governmental
entities with which it does business or that provide essential services are not
Y2K ready. The possible consequences of the Company or Key Business Partners not
being fully Y2K compliant by January 1, 2000 include, among other things, delays
in the delivery of products, delays in the receipt of supplies, invoice and
collection errors, and inventory and supply obsolescence. Consequently, the
business and results of operations of the Company could be materially adversely
affected by a temporary inability of the Company to conduct its business in the
ordinary course for a period of time after January 1, 2000. However, the Company
believes that its Y2K readiness program, including the contingency planning
discussed below, should significantly reduce the adverse effect any such
disruptions may have.

Concurrently with the Y2K readiness measures described above, the Company is
developing contingency plans intended to mitigate the possible disruption in
business operations that may result from the Y2K issue. Contingency plans may
include stockpiling supplies, increasing inventory levels, and securing
alternate sources of supply. Once developed, contingency plans and related cost
estimates will be continually refined as additional information becomes
available.

Since much of the Company's cost of its Y2K readiness program has been internal
resources, who are also involved in other duties related to the Company's
ongoing operations, the cost of the Y2K readiness program is not known, however
the Company does not believe that such costs are material. The costs are being
expressed as they are incurred, and are being funded through operating cash
flow. The costs associated with the replacement of computer systems, hardware or
equipment, if necessary, substantially all of which would be capitalized, is not
presently available.

                                     Page 13

<PAGE>
The Company's Y2K readiness program is an ongoing process; the estimated
completion dates and costs of the Y2K readiness program is subject to change.


THE ESTIMATES AND CONCLUSIONS HEREIN CONTAIN FORWARD-LOOKING STATEMENTS AND ARE
BASED ON MANAGEMENT'S BEST ESTIMATES OF FUTURE EVENTS. RISKS TO COMPLETING THE
PLAN INCLUDE THE AVAILABILITY OF RESOURCES, OUR ABILITY TO DISCOVER AND CORRECT
THE POTENTIAL YEAR 2000 SENSITIVE PROBLEMS WHICH COULD HAVE A MATERIAL ADVERSE
EFFECT ON SPECIFIC FACILITIES, AND THE ABILITY OF KEY BUSINESS PARTNERS TO BRING
THEIR SYSTEMS INTO YEAR 2000 COMPLIANCE.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements of the Company included in this annual
report on Form 10-K are listed under Item 14, Exhibits, Financial Statement
Schedules and Reports on Form 8-K.


                                     Page 14

<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) The following financial statements, schedules and exhibits are filed as part
      of this report:

    (1) and (2) Financial Statements and Financial Statement Schedules.
    See Index to Consolidated Financial Statements on Page F-1.
    (3) Exhibits.

          The list of exhibits is hereby amended by deleting exhibits 23.1 and
          27.1 and inserting in lieu thereof, the following:

          *23.1  -  Consent to incorporation by reference in the Company's
                    registration statements on Form S-3 and S-8 of the report of
                    PricewaterhouseCoopers LLP.
          *27.1  -  Financial Data Schedule.

(b) Reports on Form 8-K:

    No Reports on Form 8-K were filed during the quarter ended
    September 30, 1998.

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                                            EVANS SYSTEMS, INC.


                                            /s/ J.L. EVANS, SR.
                                                Jerriel L. Evans, Sr.
                                                Chairman of the Board and Chief
                                                Executive Officer

September 07, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date(s) indicated:

<TABLE>
<CAPTION>
<S>                                                        <C>
/s/ J. L. EVANS, SR.                                       /s/ RICHARD A. GOEGGEL
    Jerriel L. Evans, Sr., September 07, 1999                  Richard A. Goeggel, September 07, 1999
    Chairman of the Board and Chief Executive Officer          Chief Financial Officer and Director


                                                           /s/ CHARLES N. WAY
                                                               Charles N. Way, September 07, 1999
                                                               Corporate Controller and Director


/s/ DARLENE E. JONES                                       /s/ PETER J. LOSAVIO
    Darlene E. Jones, September 07, 1999                       Peter J. Losavio, Jr., September 07, 1999
    Treasurer and Director                                     Director

                                                           /s/ JULIE H. EDWARDS
                                                               Julie H. Edwards, September 07, 1999
                                                               Director

</TABLE>
                                         Page 15

<PAGE>
EVANS SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996

<PAGE>
EVANS SYSTEMS, INC.
FORM 10-K
INDEX TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

Report of Independent Accountants.......................................  F-2

Consolidated Balance Sheet at September 30, 1998 and 1997...............  F-3

Consolidated Statement of Operations for the Years Ended
  September 30, 1998, 1997 and 1996.....................................  F-4

Consolidated Statement of Cash Flows for the Years Ended
  September 30, 1998, 1997 and 1996.....................................  F-5

Consolidated Statement of Stockholders' Equity for the
  Years Ended September 30, 1998, 1997 and 1996.........................  F-6

Notes to Consolidated Financial Statements..............................  F-7


                                       F-1
<PAGE>
                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of
Evans Systems, Inc.


In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, cash flows and stockholders' equity
present fairly, in all material respects, the financial position of Evans
Systems, Inc. and its subsidiaries at September 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

As described in Note 13-A, the Company has restated its financial statements for
fiscal years 1998 and 1997.

See Note 13-C for information regarding the Company's results of operations and
liquidity.



PricewaterhouseCoopers LLP

Houston, Texas
January 13, 1999, except for the last paragraph of Notes 2 and 7 and Note 13 as
  to which the date is August 20, 1999.


                                      F-2
<PAGE>
EVANS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998 AND 1997
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
(IN THOUSANDS)                                                         1998           1997
                                                                     --------       --------
                                                                          (AS RESTATED)

                                     ASSETS
<S>                                                                  <C>            <C>
Current assets:
   Cash and cash equivalents ..................................      $    831       $  1,297
   Trade receivables, net of allowance for doubtful receivables
     of $264,000 and $340,000, respectively ...................         2,751          4,584
   Inventory ..................................................         3,714          7,962
   Income taxes receivable ....................................           128            310
   Prepaid expenses and other current assets ..................           775            618
   Deferred income taxes ......................................            78            191
   Current assets of ChemWay ..................................         1,637
                                                                     --------       --------
      Total current assets ....................................         9,914         14,962
Property and equipment, net ...................................        17,037         21,551
Other assets ..................................................           837          1,035
Deferred income taxes .........................................         1,125            670
Noncurrent assets of ChemWay ..................................         3,535
                                                                     --------       --------
      Total assets ............................................      $ 32,448       $ 38,218
                                                                     ========       ========
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued expenses ......................      $  6,019       $  9,496
   Current portion of long-term debt ..........................         1,698          7,837
   Current liabilities of ChemWay .............................         2,034
                                                                     --------       --------
      Total current liabilities ...............................         9,751         17,333
Long-term debt ................................................        11,151          5,401
                                                                     --------       --------
      Total liabilities .......................................        20,902         22,734
                                                                     --------       --------
Commitments and contingencies
Stockholders' equity:
   Common stock, $0.01 par value, 15,000,000 shares
     authorized, 3,268,298 and 3,163,573 shares issued,
     respectively .............................................            33             32
   Additional paid-in capital .................................        13,811         12,297
   Retained earnings (deficit) ................................        (1,864)         3,589
   Treasury stock, 72,589 shares, at cost .....................          (434)          (434)
                                                                     --------       --------
      Total stockholders' equity ..............................        11,546         15,484
                                                                     --------       --------
      Total liabilities and stockholders' equity ..............      $ 32,448       $ 38,218
                                                                     ========       ========
</TABLE>

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

                                       F-3

<PAGE>
EVANS SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                     1998            1997            1996
                                                          ---------       ---------       ---------
<S>                                                       <C>             <C>             <C>
Revenue:
   Refined product sales (including consumer
     excise and state fuel taxes of $20,000, $20,391
     and $17,514, respectively) ....................      $  87,822       $ 119,364       $ 112,790
   Other sales and services ........................         16,292          18,632          20,217
                                                          ---------       ---------       ---------
      Total revenue ................................        104,114         137,996         133,007
Cost of sales ......................................         90,246         123,231         115,741
                                                          ---------       ---------       ---------
Gross profit .......................................         13,868          14,765          17,266
                                                          ---------       ---------       ---------
Operating expenses:
   Employment expenses .............................          8,881           8,961           8,844
   Other operating expenses ........................          3,998           3,913           3,505
   Other general and administrative expenses .......          3,088           3,636           3,074
   Depreciation and amortization ...................          1,895           1,937           1,484
                                                          ---------       ---------       ---------
      Total operating expenses .....................         17,862          18,447          16,907
                                                          ---------       ---------       ---------
Operating income (loss) ............................         (3,994)         (3,682)            359
                                                          ---------       ---------       ---------
Other income (expense):
   Gain on sale of assets ..........................             46             (15)            125
   Interest income .................................             22              82             165
   Interest expense ................................         (1,387)           (922)           (830)
   Other ...........................................                           (489)           (104)
                                                          ---------       ---------       ---------
      Total other income (expense) .................         (1,319)         (1,344)           (644)
                                                          ---------       ---------       ---------
Loss from continuing operations before benefit
  from income taxes ................................         (5,313)         (5,026)           (285)
Benefit from income taxes ..........................           (708)         (1,568)           (100)
                                                          ---------       ---------       ---------
Loss from continuing operations ....................         (4,605)         (3,458)           (185)
Income (loss) from discontinued operations of
  ChemWay to March 31, 1998, less
  applicable income taxes (Note 2) .................           (848)         (1,346)          1,304
                                                          ---------       ---------       ---------

Net income (loss) ..................................      $  (5,453)      $  (4,804)      $   1,119
                                                          =========       =========       =========

Basic and diluted earnings (loss) per common share:
   Continuing operations ...........................      $   (1.48)      $   (1.12)      $   (0.06)
   Discontinued operations .........................          (0.27)          (0.44)           0.43
                                                          ---------       ---------       ---------

   Earnings (loss) per common share ................      $   (1.75)      $   (1.56)      $    0.37
                                                          =========       =========       =========

   Basic and diluted weighted average common
     shares outstanding ............................          3,116           3,075           3,010
                                                          =========       =========       =========
</TABLE>

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

                                       F-4
<PAGE>
EVANS SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
(IN THOUSANDS)                                                  1998          1997          1996
                                                              -------       -------       -------
                                                           (AS RESTATED) (AS RESTATED)
<S>                                                           <C>           <C>           <C>
Cash flows from operating activities:-
   Net income (loss) ...................................      $(5,453)      $(4,804)      $ 1,119
   Adjustments:
     Depreciation and amortization .....................        2,105         2,129         1,627
     Stock option compensation expense .................        1,401
     Deferred operating loss of ChemWay ................         (644)
     Gain on sale of assets ............................          (46)           15          (125)
     Deferred income taxes .............................       (1,452)       (2,079)          479
     Loss on marketable securities .....................                        498           106
     Changes in assets and liabilities:
      Receivables ......................................        1,817           576         1,207
      Inventory ........................................        3,092           220           (32)
      Prepaid expenses and other .......................           71           359           432
      Accounts payable and accrued expenses ............       (1,684)        1,934        (3,688)
      Income taxes receivable/payable ..................          182          (273)           55
                                                              -------       -------       -------
        Net cash provided (used) by operating activities         (611)       (1,425)        1,180
                                                              -------       -------       -------
Cash flows from investing activities:
   Capital expenditures ................................       (1,386)       (3,025)       (3,712)
   Proceeds from sale of marketable equity securities ..                      1,454           346
   Proceeds from sale of property and equipment ........        1,610           667           460
   Other ...............................................          (45)          184          (246)
                                                              -------       -------       -------
        Net cash provided (used) by investing activities          179          (720)       (3,152)
                                                              -------       -------       -------
Cash flows from financing activities:
   New borrowings ......................................        1,715         3,962         8,515
   Reduction of long-term debt .........................       (1,863)       (3,478)       (7,364)
   Net proceeds from stock issuance ....................          114           165            70
                                                              -------       -------       -------
        Net cash provided (used) by financing activities          (34)          649         1,221
                                                              -------       -------       -------
Net decrease in cash and cash equivalents ..............         (466)       (1,496)         (751)
Cash and cash equivalents, beginning of year ...........        1,297         2,793         3,544
                                                              -------       -------       -------

Cash and cash equivalents, end of year .................      $   831       $ 1,297       $ 2,793
                                                              =======       =======       =======

Supplemental disclosure of cash flow information:
   Cash paid for interest ..............................      $ 1,169       $ 1,178       $   997
   Cash paid for taxes .................................      $    58

Supplemental disclosure of noncash transactions:
   Acquisition of property by capital lease and
     issuance of debt ..................................                    $   209       $ 1,308

</TABLE>

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

                                       F-5
<PAGE>
EVANS SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
(IN THOUSANDS)                           COMMON STOCK          ADDITIONAL     RETAINED    UNREALIZED
                                   ------------------------      PAID-IN      EARNINGS      LOSS ON       TREASURY
                                     SHARES        AMOUNT        CAPITAL     (DEFICIT)    SECURITIES       STOCK         TOTAL
                                   ----------    ----------    ----------   ----------    ----------    ----------    ----------

<S>                                 <C>          <C>           <C>          <C>           <C>           <C>           <C>
Balance - September 30, 1995 ...    2,934,205    $       29    $   11,381   $    7,958    $     (400)   $     (434)   $   18,534

Decrease in marketable equity
  security valuation allowance .                                                                  25                          25
Warrants exercised by
  employees and stock award ....       23,500             1            69                                                     70
Net income for 1996 ............                                                 1,119                                     1,119
5% common stock dividend .......      147,885             1           683         (684)
                                   ----------    ----------    ----------   ----------    ----------    ----------    ----------

Balance - September 30, 1996 ...    3,105,590            31        12,133        8,393          (375)         (434)       19,748

Warrants exercised by employees        57,983             1           164                                                    165
Decrease in marketable equity
  securities valuation allowance                                                                 375                         375
Net loss for 1997 ..............                                                (4,804)                                   (4,804)
                                   ----------    ----------    ----------   ----------    ----------    ----------    ----------

Balance - September 30, 1997
  (as restated) ................    3,163,573            32        12,297        3,589                        (434)       15,484

Warrants exercised .............      104,725             1           152                                                    153
Compensation expense recog-
  nized in connection with
  options granted ..............                                    1,362                                                  1,362
Net loss for 1998 ..............                                                (5,453)                                   (5,453)
                                   ----------    ----------    ----------   ----------    ----------    ----------    ----------

Balance - September 30, 1998
  (as restated) ................    3,268,298    $       33    $   13,811   $   (1,864)   $        -    $     (434)   $   11,546
                                   ==========    ==========    ==========   ==========    ==========    ==========    ==========
</TABLE>


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

                                       F-6
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

1.    DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      BUSINESS OPERATIONS
      Evans Systems, Inc. and its subsidiaries (the Company) are engaged in
      petroleum marketing, convenience store operations and environmental
      remediation services.

      PRINCIPLES OF CONSOLIDATION
      The consolidated financial statements include the accounts of Evans
      Systems, Inc. and its subsidiaries. All significant intercompany
      transactions have been eliminated.

      CASH AND CASH EQUIVALENTS
      For purposes of the statement of cash flows, the Company considers all
      highly liquid investments with original maturities of three months or less
      to be cash equivalents. Cash and cash equivalents are stated at cost which
      approximates fair market value.

      INVENTORIES
      Substantially all inventories are products held for sale. Inventories of
      oil and grease, automotive/chemical products, tire and automotive
      accessories and convenience store products utilize the first-in, first-out
      (FIFO) method of accounting and are stated at the lower of cost or market.
      Gas and diesel fuels inventory is valued using the last-in, first-out
      (LIFO) method which resulted in inventory being $100,000 and $189,000 less
      at September 30, 1998 and 1997, respectively, than it would have been if
      the FIFO method had been used.

      PROPERTY AND EQUIPMENT
      Property and equipment is stated at cost and is depreciated utilizing the
      straight-line method of computing depreciation over their estimated useful
      lives. The cost of assets retired and the related accumulated depreciation
      are removed from the accounts and any gain or loss is included in the
      results of operations when incurred. Repairs and maintenance are charged
      to expense as incurred. Expenditures for major additions and replacements
      which extend the lives of assets are capitalized and depreciated over
      their estimated useful lives. The Company depreciates assets over the
      following estimated useful lives:

      Buildings and plant                   15-39 years
      Leasehold improvements                Life of lease, up to 39
      Equipment                             15 years
      Transportation equipment              5 years
      Office equipment                      5-7 years

      IMPAIRMENT OF LONG-LIVED ASSETS
      The Company periodically assesses the realizability of its long-lived
      assets and evaluates such assets for impairment whenever events or changes
      in circumstances indicate that the carrying amount of an asset may not be
      recoverable. Asset impairment is determined to exist if estimated future
      cash flows, undiscounted and without interest charges, are less than the
      carrying amount.

                                       F-7
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

      STOCK-BASED COMPENSATION PLANS
      The Company applies Accounting Principles Board Opinion No. 25,
      "Accounting for Stock Issued to Employees" (APB 25) and related
      interpretations in accounting for its plans.

      INCOME TAXES
      The Company and its subsidiaries file a consolidated federal income tax
      return.

      The Company recognizes income tax expense based on the liability method of
      accounting for income taxes. Deferred tax assets and liabilities are
      recognized for the income tax effect of temporary differences between the
      tax basis of assets and liabilities and their carrying values for
      financial reporting purposes. Deferred tax expense or benefit is the
      result of changes in the deferred tax assets and liabilities during the
      period. The Company has recorded a valuation allowance to reflect the
      estimated amount of deferred tax assets which more likely than not will be
      unrealized.

      EARNINGS (LOSS) PER SHARE
      The Company adopted Statement of Financial Accounting Standards No. 128,
      "Earnings per Share" (SFAS 128) during the first quarter of 1998. SFAS 128
      requires the Company to report both basic earnings per share, which is
      based on the weighted average number of common shares outstanding, and
      diluted earnings per share, which is based on the weighted average number
      of common shares as well as all potentially dilutive common shares
      outstanding. Stock options and warrants are the only potentially dilutive
      shares the Company has outstanding for the periods presented. All prior
      years' earnings per share data in the accompanying consolidated financial
      statements have been restated to reflect the provisions of SFAS 128. Stock
      options and warrants were not included in the computation of diluted loss
      per common share for 1998, 1997 and 1996 since they would have resulted in
      an antidilutive effect on loss from continuing operations.

      FAIR VALUE OF FINANCIAL INSTRUMENTS
      The Company has various financial instruments, including cash, trade
      receivables, accounts payable, accrued expenses, revolving credit
      facilities and notes payable. The carrying values of cash, trade
      receivables, accounts payable, accrued expenses and notes payable
      approximates current fair value. Revolving credit facilities are at
      variable market rates.

      USE OF ESTIMATES
      The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities at
      the date of the financial statements and reported amounts of revenues and
      expenses during the reporting period. Actual results could differ from
      those estimates. Management believes that the estimates are reasonable.

      CONCENTRATIONS OF CREDIT RISK
      The Company performs periodic evaluations of the relative credit standing
      of the financial institutions and investment funds which are considered in
      the Company's investment strategy. As of the date of the financial
      statements, the Company has no concentration of customers engaged in
      similar activities for which a failure to perform up to the terms of

                                      F-8
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

      their obligations due to shared activities, regions or economic
      characteristics would result in a material credit risk to the Company.
      Management believes that its credit and collection policies mitigate the
      potential effect of a concentration of credit risk in its accounts
      receivable.

      RECLASSIFICATIONS
      The accompanying consolidated financial statements include
      reclassifications from financial statements issued in previous years
      primarily as a result of presenting the historical results of operations
      of ChemWay Systems, Inc. (ChemWay), a wholly-owned subsidiary of the
      Company, as discontinued operations.

2.    DISCONTINUED OPERATION

      In February 1998, the Company suspended the production activities of its
      ChemWay operation which was engaged in the packaging and marketing of
      automotive after-market chemical products. In March 1998, the Company made
      the decision to sell ChemWay and recorded an estimated loss on disposal of
      $705,000 (net of applicable income tax benefit of $395,000) which included
      a provision for losses of $200,000 during the phase-out period. The
      results of operations of ChemWay have been classified as discontinued
      operations and prior periods have been restated. Summary operating results
      are as follows (in thousands):

                                                 YEAR ENDED SEPTEMBER 30,
                                            -----------------------------------
                                             1998(1)        1997          1996

Revenues                                    $  2,268      $10,967       $25,773
Earnings (loss) from operations               (1,694)      (1,831)        2,179
Income tax expense (benefit)                    (593)        (771)          700
Income (loss) from discontinued operation     (1,262)      (1,346)        1,304

      (1) Includes loss from operations of $414,000, net of tax benefits of
          $230,000, incurred during the phase-out period which has been deferred
          by the Company pending the sale described below.

      On December 30, 1998, the Company completed the sale of ChemWay to
      Affiliated Resources Corporation (Affiliated). The Company received 1.5
      million shares of common stock of Affiliated in exchange for all the
      outstanding common stock of ChemWay. The Company may receive up to an
      additional one million shares of common stock of Affiliated one year after
      the closing date if the average closing price of Affiliated common stock
      falls below certain amounts as defined in the purchase agreement. The
      Company will record a gain on the sale, net of income taxes, of
      approximately $4 million (as restated) in the first quarter of 1999. As a
      result of the sale, the estimated loss on disposal and the related
      provision for losses during the phase-out period recorded in the second
      and third quarters of 1998 were reversed during the fourth quarter of
      1998.

      Affiliated common stock is currently quoted on the Nasdaq Over-the-Counter
      Bulletin Board. In accordance with generally accepted accounting
      principles, the Affiliated common stock received in exchange for the
      common stock of ChemWay was valued at its

                                      F-9
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

      "fair value" indicated by the bid price of $6.00 per share at the
      transaction date resulting in the $4 million gain noted above. The
      Company's investment in Affiliated common stock is unregistered and highly
      illiquid; in addition, the average trading volume of Affiliated is small
      in comparison to the number of shares held by the Company. The trading
      price of Affiliated stock has been very volatile, ranging from a reported
      low closing price in the quarter ended June 30, 1998 of $0.88 to a closing
      price of $6.00 at December 31, 1998 and a closing price of $0.63 at June
      30, 1999. While the Company does not intend to sell its Affiliated common
      stock in the foreseeable future, there can be no assurance that the
      Company would be able to realize the recorded value of the Affiliated
      common stock. At December 31, 1998, Affiliated reported, in its Annual
      Report on Form 10-K, an accumulated deficit of $7,630,070 and a negative
      working capital balance of $912,605. Affiliated reported no revenues from
      operations during the last six months of 1998 and reported a loss from
      operations of $526,843. See Note 13-C for subsequent events.

3.    PROPERTY AND EQUIPMENT

      Property and equipment consisted of the following at September 30 (in
      thousands):

                                                               1998        1997
                                                             -------     -------

Land ...................................................     $ 2,698     $ 2,950
Buildings ..............................................       6,275       6,809
Leasehold improvements .................................         766         935
Equipment ..............................................      14,972      18,411
Transportation equipment ...............................       2,533       2,895
Office equipment .......................................       2,292       2,955
                                                             -------     -------
                                                              29,536      34,955
Less - accumulated depreciation and amortization .......      12,499      13,404
                                                             -------     -------

Property and equipment, net ............................     $17,037     $21,551
                                                             =======     =======

                                      F-10
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

4.    LONG-TERM DEBT

      Long-term debt is summarized as follows at September 30 (in thousands):

                                                                 1998      1997
                                                               -------   -------

Notes payable to banks, at prime to prime plus 3%,
  payable to 2003, secured by property and equipment,
  accounts receivable, inventory,  cash surrender value
  of life insurance and common stock of subsidiaries .......   $11,089   $11,135
Capital lease liability ....................................       956     1,209
Notes payable, 7.2% to 11.5%, payable to 2005, secured
  by property, equipment, improvements, inventory,
  accounts receivable and cash surrender value of life
  insurance ................................................       464       625
Other ......................................................       340       269
                                                               -------   -------
                                                                12,849    13,238
Less - current maturities ..................................     1,698     7,837
                                                               -------   -------

      Total ................................................   $11,151   $ 5,401
                                                               =======   =======

      Certain of the Company's notes payable to banks require maintenance of
      financial covenants, including current, debt to equity, tangible net worth
      and debt service coverage ratios. At September 30, 1998, the Company was
      in violation of substantially all of these covenants. In addition, the
      Company was out of compliance with the borrowing base limits with one
      bank.

      On January 13, 1999, the Company received a commitment letter from one of
      its present bank lenders, pursuant to which the bank would (i) waive all
      previous covenant defaults; (ii) extend the maturity of its loan balance
      to January 31, 2001; and (iii) assume the amounts outstanding under the
      other bank lender's loans under their current terms and conditions. Under
      the proposed term of the refinancing, such bank lender would receive a
      first-lien position on all of the assets of the Company. The refinancing
      would contain certain financial covenant obligations, including minimum
      net worth, minimum earnings before interest, taxes and depreciation,
      working capital ratio and fixed charge coverage ratio. Management intends
      to replace the Company's existing loan agreement with this lender with the
      new commitment and believes the Company will be able to comply with the
      proposed financial covenants during the next year.

      The Company is prohibited by its bank agreement from payment of any cash
      dividends and from obtaining additional debt without the bank's consent.

      The Company's capital lease liability relates to the lease of the
      Company's information system and trucks which were capitalized using
      effective interest rates of 9.3% and 9%, respectively. At September 30,
      1998 and 1997, the gross amount of assets recorded under capital leases
      was $1,436,000 and the related accumulated amortization was

                                      F-11
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

      $658,000 and $299,000, respectively. Total future capital lease payments
      are $1,105,000 and include unearned interest of $145,000.

      As of September 30, 1998 (after consideration of the debt refinancing
      described above), principal maturities of long-term debt are as follows
      (in thousands):


                  1999                              $    1,698
                  2000                                   2,973
                  2001                                   7,008
                  2002                                     328
                  2003                                     201
                  Thereafter                               641
                                                    ----------
                      Total                         $   12,849
                                                    ==========

5.    INCOME TAXES

      The provision for (benefit from) income taxes consists of the following
      (in thousands):


                                               YEAR ENDED SEPTEMBER 30,
                                      -----------------------------------------
                                        1998             1997             1996
                                      -------          -------          -------
Current:
   Federal ..................         $    43          $  (201)         $   (25)
   State ....................             108              (31)             146
                                      -------          -------          -------
                                          151             (232)             121
                                      -------          -------          -------
Deferred:
   Federal ..................          (1,085)          (1,901)             421
   State ....................            (137)            (178)              58
                                      -------          -------          -------
                                       (1,222)          (2,079)             479
                                      -------          -------          -------
      Total .................         $(1,071)         $(2,311)         $   600
                                      =======          =======          =======


                                      F-12
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

      The difference between income taxes at the statutory federal and effective
      income tax rates is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                        YEAR ENDED SEPTEMBER 30,
                                                                -------------------------------------
                                                                  1998          1997          1996
                                                                ---------     ---------     ---------
<S>                                                             <C>           <C>           <C>
Taxes computed by applying federal statutory rate........       $  (2,279)    $  (2,420)    $     584
State taxes, net of federal benefit ....................             (120)         (137)          135
Stock option compensation expense ...............                     518
Change in deferred tax asset valuation allowance                      782           231
Other, net ......................................                      28            37          (119)
                                                                ---------     ---------     ---------
      Total .....................................               $  (1,071)    $  (2,289)    $     600
                                                                =========     =========     =========
</TABLE>

      Income taxes are attributable to the following (in thousands):


                                                 YEAR ENDED SEPTEMBER 30,
                                          -------------------------------------
                                            1998          1997          1996
                                          ---------     ---------     ---------
Continuing operations ................    $    (708)    $  (1,568)    $    (100)
Discontinued operations ..............         (363)         (771)          700
                                          ---------     ---------     ---------
      Total ..........................    $  (1,071)    $  (2,339)    $     600
                                          =========     =========     =========

                                      F-13
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

Deferred tax assets (liabilities) are comprised of the following (in thousands):


                                                              SEPTEMBER 30,
                                                        -----------------------
                                                          1998            1997
                                                        -------         -------
Deferred tax liabilities:
   Book/tax depreciation differences ...........        $(2,319)        $(2,424)
   Other .......................................            (16)            (37)
                                                        -------         -------
      Total ....................................         (2,335)         (2,461)
                                                        -------         -------
Deferred tax assets:
   Net operating loss carryforward .............          3,508           2,547
   Alternative minimum tax credit ..............            444             454
   Net capital loss carryforwards ..............            211             205
   Allowance for doubtful receivables ..........            284             167
   Expense accruals ............................                            103
   Investment tax credit .......................             26              26
   Section 263A inventory adjustment ...........             16              38
   Other .......................................             62              13
                                                        -------         -------
      Total ....................................          4,551           3,553
                                                        -------         -------
Valuation allowance ............................         (1,013)           (231)
                                                        -------         -------

Net deferred tax assets ........................        $ 1,203         $   861
                                                        =======         =======


      At September 30, 1998, the Company had regular tax net operating loss
      carryforwards from continuing operations of $10.1 million available for
      federal income tax purposes which expire through 2018.

      At September 30, 1998, ChemWay had regular net operating loss
      carryforwards of $3.7 million available for federal income tax purposes
      and net deferred tax assets of $1.1 million.

      Changes in the Company's ownership, as defined under Section 382 of the
      Internal Revenue Code, could result in certain limitations on the annual
      amount of net operating losses that may be utilized.

                                      F-14
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

6.    OPERATING LEASES

      The Company leases 27 convenience store locations and 5 other facilities
      under operating lease agreements with varying lives and terms. Three of
      these leases are with related parties (see Note 8). At September 30, 1998,
      the scheduled future minimum lease payments required under the terms of
      the operating leases in effect are (in thousands):

            YEAR ENDED SEPTEMBER 30,

            1999                                         $    491
            2000                                              407
            2001                                              330
            2002                                              228
            2003                                              166
            Thereafter                                        284
                                                         --------

                  Total                                  $  1,906
                                                         --------

      In addition, the Company rents ten convenience store locations and other
      facilities on a month-to-month basis from various parties, including five
      from a related party (see Note 8). Rent paid for these facilities totaled
      $75,600, $180,000 and $174,000 for the years ended September 30, 1998,
      1997 and 1996.

      The Company has 12 subleases. Minimum rentals to be received in the future
      under noncancelable subleases totaled $572,400 as of September 30, 1998.

7.    COMMON STOCK

      On December 16, 1996, the Company declared a five percent stock dividend
      to stockholders of record on December 31, 1996 which was paid on January
      20, 1997. All earnings per share information included in the accompanying
      financial statements has been adjusted to give retroactive effect to the
      stock dividend for all periods presented. Additionally, all share
      information shown below has been adjusted to give retroactive effect to
      the stock dividend.

      In August 1992, the Company issued warrants to purchase 141,750 shares of
      the Company's common stock at an exercise price of $2.86 per share. In
      1997 and 1996, 57,938 and 24,150 of such warrants were exercised. In June
      1997, the Company extended the expiration date of the remaining warrants
      to August 1, 2002 and recorded compensation expense of $38,000.

      In December 1994 and May 1995, the Company issued warrants to purchase
      262,500 shares of the Company's common stock at an exercise price of $4.76
      per share. Of these warrants, 52,500 expired in May 1997. The remaining
      warrants expire in 1999.

      In May 1998, the Company issued warrants to purchase 100,000 shares of the
      Company's common stock at an exercise price of $1.00 per share in exchange
      for certain consulting services and recorded compensation expense of
      $38,500. The warrants were exercised in July 1998.

                                      F-15
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

      The following common stock purchase warrants are outstanding as of
September 30, 1998:

             WARRANT          NUMBER OF              EXPIRATION
              PRICE           WARRANTS                  DATE
             -------          ---------              ----------

             $ 16.50            126,000            July 15, 1999
                2.86             54,937            August 1, 2002
                7.62              7,875            December 29, 2002
                               --------

                                188,812
                               ========

      In November 1992, the Company adopted the Evans Systems, Inc. Incentive
      Stock Option Plan. Up to 420,000 shares of the Company's common stock may
      be purchased under the plan. The Company's Board of Directors may issue
      options to one or more persons who are full-time employees of the Company
      and/or its subsidiaries. Options granted under the plan must be granted
      within ten years from the date of the plan. Under the plan, no eligible
      employee shall be granted options during any one calendar year to the
      extent that the fair market value of such shares (determined at the time
      the option is granted) exceeds $100,000. If an employee, who is granted
      options under the plan, owns more than 10% of the outstanding voting stock
      of the Company, the options expire five years from the date of grant;
      otherwise, the expiration date is ten years from the date of grant. The
      options are nontransferable except upon death of the optionee. The option
      price of the stock shall not be less than the fair market value of the
      stock on the date of the grant, except in the case of an employee owning
      more than 10% of the outstanding voting stock when the exercise price
      shall be 110% of the fair market value of the stock at the date of grant.

      In December 1994, the Company adopted the ESI Stock Benefit Plan. Up to
      420,000 shares of the Company's common stock may be purchased or granted
      under the plan, and provision has been made for automatic increases in
      such amount of shares in the event the number of common shares issued by
      the Company increases to specified levels. An option granted under the
      plan by the Board of Directors to a key employee may be an incentive stock
      option or a nonqualified option and may be accompanied by stock
      appreciation rights or limited rights. Incentive stock options must be
      granted at an exercise price of not less than 100% of the then fair market
      value of the stock. Nonqualified stock options must be granted at an
      exercise price of not less than 90% of the then fair market value of the
      stock. All options shall expire upon termination of employment or within
      five or ten years of the date of grant. Nonemployee directors shall be
      automatically granted nonqualified options to purchase 2,500 shares of
      common stock annually. Vesting is to be determined by the Board of
      Directors.

      In August 1995, the Company granted contingent stock awards to two
      individuals. The individuals were granted an aggregate of 105,000 shares
      of restricted common stock which vest in fiscal 1998, 1997 and 1996,
      subject to achievements of certain profitability

                                      F-16
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

      levels. The grants will be canceled if such provisions are not met. In
      1998, 1997 and 1996, such provisions were not met and all grants were
      canceled.

      In June 1996, an officer of the Company was awarded 525 shares of
      restricted common stock.

      In May and December 1997, the Company granted certain employees options to
      purchase an aggregate of 330,600 shares of common stock at exercise prices
      ranging from $1.31 to $4.00. The options vest upon the Company's common
      stock reaching a market value of $6.50 per share for five consecutive days
      as specified in the agreements. The grants would be canceled if such
      provisions were not met. The provisions were met in November 1998. The
      Company recorded compensation expense of $1.1 million and $229,000 for
      continuing and discontinued operations, respectively, in the fourth
      quarter of 1998 for the difference in the exercise prices of the options
      and the market price of the Company's stock at September 30, 1998.

      A summary of the option activity under the various plans follows:

                                                       WEIGHTED-
                                         NUMBER OF      AVERAGE
                                           SHARES     OPTION PRICE
                                         ---------    ------------

Outstanding at September 30, 1995         268,275         $6.04

Granted in 1996 .................          98,700          5.53
Expired in 1996 .................        (194,933)         5.81
                                          -------

Outstanding at September 30, 1996         172,042          6.01

Granted in 1997 .................          55,714          3.35
Expired in 1997 .................        (138,550)         5.32
                                          -------

Outstanding at September 30, 1997          89,206          5.42

Granted in 1998 .................         403,800          1.67
Expired in 1998 .................         (54,149)         5.00
                                          -------

Outstanding at September 30, 1998         438,857
                                          =======

      The weighted average fair value at date of grant for options granted
      during 1998, 1997 and 1996 was $1.78, $1.89 and $3.31 per option,
      respectively.

      As of September 30, 1998, 438,857 options were outstanding with exercise
      prices ranging from $1.25 to $5.70, a weighted average remaining
      contractual life of 7.5 years and a weighted average option price of
      $1.43. Of these options outstanding, 25,757 were

                                      F-17
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

      exercisable with a weighted average option price of $3.93 and 18,857
      shares were not registered under a plan.

      The Company applies APB 25 and related interpretations in accounting for
      its plans. The following unaudited pro forma data is calculated as if
      compensation cost for the Company's stock option plans were determined
      based upon the fair value at the grant date for awards under these plans
      consistent with the methodology prescribed under Statement of Financial
      Accounting Standards No. 123, "Accounting for Stock-Based
      Compensation" (in thousands):

                                                     YEAR ENDED
                                                    SEPTEMBER 30,
                                               -----------------------
                                                  1998          1997
                                               ---------     ---------
         Net loss:
           As reported ...................    $  (5,453)    $  (4,804)
           Pro forma .....................       (4,422)       (4,861)
         Basic and diluted loss per share:
           As reported ...................    $   (1.75)    $   (1.56)
           Pro forma .....................        (1.42)        (1.58)

      The fair value of the options granted is estimated using the Black-Scholes
      option-pricing model with the following assumptions for 1998: no dividend
      yield, volatility of 40%, risk-free interest rate of 5.5 - 5.7% and an
      expected life of five years. For 1997, the following assumptions were
      used: no dividend yield, volatility of 50 - 52%, risk-free interest rate
      of 6.4% and an expected life of five years.

      On June 1, 1998, the Company agreed to issue 350,000 common shares for
      total consideration of $262,500 in a private placement to accredited
      investors. Such shares were issued on October 27, 1998. On January 4,
      1999, the Company issued 40,000 common shares valued at $15.25 per share
      to an investment advisor for investment advisory services rendered. The
      investment advisor has the right to put the shares back to the Company at
      $4 per share until at least December 31, 1999.

8.    RELATED PARTY TRANSACTIONS

      During 1998, the Company leased three convenience store locations from the
      majority shareholder of the Company. One ten-year lease commenced in June
      1987 with monthly lease payments of $2,500 and allows for one five-year
      automatic renewal at the Company's option. One ten-year lease commenced in
      December 1995 with monthly lease payments of $1,800 and allows for two
      five-year automatic renewals at the Company's option. The other location
      was sold by the majority shareholder in December 1998. The amounts paid
      under these leases were $76,800 for the year ended September 30, 1998 and
      $73,000 for the years ended September 30, 1997 and 1996. Future minimum
      lease commitments as of September 30, 1998 are $51,200.

                                      F-18
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

      As of September 30, 1998, the Company rents, on a month-to-month basis,
      five convenience store locations from the majority shareholder.
      Previously, the Company rented additional locations which were sold by the
      shareholder to unrelated parties. The total month-to-month rent paid for
      the year ended September 30, 1998 was $34,800 and $104,000 for the years
      ended September 30, 1997 and 1996. All five locations were sold by the
      shareholder to unrelated parties subsequent to September 30, 1998.

      Other current assets include a note receivable from a former director
      which was refinanced from an earlier note and is due in quarterly
      instalments. The note receivable is secured by 13,567 shares of the
      Company's common stock. The balance of the note receivable was
      approximately $111,000 at September 30, 1998 and 1997. Interest accrues at
      8.5%. The note was repaid in December 1998.

      From time to time, the Company makes advances to individuals who are
      shareholders, directors, officers and/or employees. Such advances are
      usually unsecured and accrue interest at 9%. There were no advances
      outstanding at September 30, 1998 and 1997.

9.    CONTINGENT LIABILITIES

      From time to time the Company exchanges refined products with suppliers by
      agreeing to purchase or sell refined products at a future date. Such
      activity could adversely affect the results of operations and financial
      condition of the Company if the market prices of such products were to
      fluctuate significantly. As of September 30, 1998, management believes the
      Company had no material risk related to such activities.

      The Company is subject to litigation, primarily as a result of customer
      claims, in the ordinary conduct of its operations. As of September 30,
      198, the Company had no knowledge of any legal proceedings which, by
      themselves or in the aggregate, could be expected to have a material
      adverse effect on the Company.

10.   EMPLOYEE BENEFIT PLANS

      The Company established a defined contribution benefit plan, the ESI
      Employee Retirement Plan, effective July 1, 1997. Employees become
      eligible for participation in the plan upon attaining the age of 21 and
      completion of 12 consecutive months of employment and 1,000 hours or more
      of service. The Company contributes an amount equal to 50% of employee
      voluntary contributions up to a maximum of 5% of the employee's
      compensation. Such contributions may be made in the common stock of the
      Company. The Company recorded contributions to the plan of $45,000 and
      $40,000 during fiscal 1998 and 1997, respectively.

      In 1992, the Company adopted an employee stock ownership plan to provide
      retirement benefits to eligible employees. The Company recorded
      contributions to the plan of $21,000, $40,000 and $117,000 during fiscal
      1998, 1997 and 1996, respectively. Effective December 31, 1998, the
      employee stock ownership plan was merged into the ESI Employee Retirement
      Plan.

                                      F-19
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

11.   SEGMENT REPORTING

      The Company is primarily engaged in the following industry segments:
      marketing and distribution of wholesale petroleum products; retail
      convenience store and gasoline station operations; and providing
      environmental remediation services and installing and maintaining
      underground storage tanks (EDCO Environ). Information concerning the
      Company's business activities is summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                               PROPERTY
                                              EARNINGS       DEPRECIATION        AND            IDENTI-
                                            (LOSS) FROM           AND         EQUIPMENT         FIABLE
     YEAR ENDED              REVENUES        OPERATIONS      AMORTIZATION     ADDITIONS         ASSETS
                            ---------        ---------        ---------       ---------       ---------
<S>                         <C>              <C>              <C>             <C>             <C>
SEPTEMBER 30, 1998
  Petroleum marketing       $  70,467        $  (3,205)       $   1,318       $     666       $  23,489
  Convenience stores           32,495             (708)             465           1,229           7,666
  EDCO Environ ......           1,152              (81)             112               5           1,170
                            ---------        ---------        ---------       ---------       ---------
                            $ 104,114        $  (3,994)       $   1,895       $   1,900       $  32,325
                            =========        =========        =========       =========       =========

SEPTEMBER 30, 1997
  Petroleum marketing       $  98,376        $  (2,070)       $   1,379       $   1,532       $  19,584
  Convenience stores           38,300           (1,213)             393             903           8,324
  EDCO Environ ......           1,320             (399)             165               3           1,277
                            ---------        ---------        ---------       ---------       ---------
                            $ 137,996        $  (3,682)       $   1,937       $   2,438       $  29,185
                            =========        =========        =========       =========       =========

SEPTEMBER 30, 1996
  Petroleum marketing       $  91,374        $     644        $     956       $   3,067       $  22,872
  Convenience stores           39,602              171              408           1,059           8,912
  EDCO Environ ......           2,031             (456)             120             214             957
                            ---------        ---------        ---------       ---------       ---------
                            $ 133,007        $     359        $   1,484       $   4,340       $  32,741
                            =========        =========        =========       =========       =========
</TABLE>

      Earnings (loss) from operations by segment represent revenues less
      operating costs, expenses and depreciation. Identifiable assets are
      primarily cash, accounts receivable, inventory, property, equipment and
      cash value of life insurance. All sales by the Company occur in the United
      States.

      During each of the years ended September 30, 1998, 1997 and 1996, no
      single customer represented 10% or more of the Company's revenues.

                                      F-20
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

12.   QUARTERLY FINANCIAL DATA (UNAUDITED)

      Unaudited quarterly data (as restated, see Note 13) is summarized as
      follows (in thousands, except for per share amounts):

<TABLE>
<CAPTION>
                                                                   YEAR ENDED SEPTEMBER 30, 1998
                              ----------------------------------------------------------------------------------------------------
                                         Q1                        Q2                        Q3                        Q4
                              ----------------------    ----------------------    ----------------------    ----------------------
                              PREVIOUSLY       AS       PREVIOUSLY       AS       PREVIOUSLY       AS       PREVIOUSLY       AS
                               REPORTED     RESTATED     REPORTED     RESTATED     REPORTED     RESTATED     REPORTED     RESTATED
                              ----------    --------    ----------    --------    ----------    --------    ----------    --------

<S>                            <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Revenue .....................  $ 28,769     $ 28,769     $ 24,600     $ 24,600     $ 26,453     $ 26,453     $ 24,292     $ 24,292
Gross profit ................     3,826        3,811        4,146        4,117        3,464        3,248        2,721        2,692
Operating income (loss) (2) .      (495)        (510)          82           53         (309)        (548)      (2,917)      (2,989)
Loss from continuing
  operations ................      (560)        (574)         (47)        (180)        (214)        (365)      (2,515)      (3,486)
Loss from discontinued
  operations ................      (385)        (385)      (1,148)      (1,168)        (242)        (242)         947          947
Net loss (1) ................      (945)        (959)      (1,195)      (1,348)        (456)        (607)      (1,568)      (2,539)
Basic and diluted loss per
  common share:-
    Income (loss) per
      common share:
      Continuing operations .     (0.19)       (0.19)       (0.02)       (0.06)       (0.07)       (0.12)       (0.80)       (1.11)
      Discontinued operations     (0.12)       (0.12)       (0.37)       (0.38)       (0.08)       (0.08)        0.31         0.30
      Net loss per common
        share ...............     (0.31)       (0.31)       (0.39)       (0.44)       (0.15)       (0.20)       (0.49)       (0.81)
</TABLE>


<TABLE>
<CAPTION>
                                                                   YEAR ENDED SEPTEMBER 30, 1997
                              ----------------------------------------------------------------------------------------------------
                                         Q1                        Q2                        Q3                        Q4
                              ----------------------    ----------------------    ----------------------    ----------------------
                              PREVIOUSLY       AS       PREVIOUSLY       AS       PREVIOUSLY       AS       PREVIOUSLY       AS
                               REPORTED     RESTATED     REPORTED     RESTATED     REPORTED     RESTATED     REPORTED     RESTATED
                              ----------    --------    ----------    --------    ----------    --------    ----------    --------

<S>                            <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Revenue .....................  $ 36,064     $ 36,064     $ 31,794     $ 31,794     $ 34,873     $ 34,873     $ 35,265     $ 35,265
Gross profit ................     4,351        3,944        3,973        3,435        4,216        4,851        2,904        2,535
Operating income (loss) .....        25         (432)        (375)        (913)        (274)         361       (2,352)      (2,698)
Income (loss) from continuing
  operations ................      (402)        (679)        (402)        (741)        (250)         150       (1,939)      (2,188)
Loss from discontinued
  operations ................      (373)        (373)         (31)         (31)        (283)        (283)        (659)        (659)
Net loss ....................      (775)      (1,052)        (433)        (772)        (533)        (133)      (2,598)      (2,847)
Basic and diluted loss per
  common share:-
    Income (loss) per
      common share:
      Continuing operations .     (0.14)       (0.23)       (0.13)       (0.24)       (0.08)        0.05        (0.63)       (0.72)
      Discontinued operations     (0.12)       (0.12)       (0.01)       (0.01)       (0.09)       (0.09)       (0.21)       (0.21)
      Net loss per common
        share ...............     (0.26)       (0.35)       (0.14)       (0.25)       (0.17)       (0.04)       (0.84)       (0.93)

</TABLE>
(1) The second quarter of 1998 included an estimated loss, net of applicable
    taxes of $705,000, for the disposal of the ChemWay operation. The third
    quarter of 1998 includes an operating loss from ChemWay of $242,000. These
    estimated losses were reversed in the fourth quarter of 1998 as ChemWay was
    sold in December 1998 at a gain (Note 2).

(2) The fourth quarter of 1998 included $1.1 million in compensation expense for
    performance-based stock options charged to continuing operations (Note 7).

                                      F-21
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

13.   SUBSEQUENT EVENTS

      A - RESTATEMENT OF FINANCIAL STATEMENTS
      The Company has restated previously reported financial results for fiscal
      years 1998 and 1997 to give effect to the write-down of certain assets
      (including credit card receivables, property and equipment costs and
      certain deferred income tax assets) and the accrual of certain
      liabilities. All disclosures related to 1998 and 1997 included herein have
      been amended, as appropriate, to reflect the restatement. The effect of
      the restatement discussed above on the statement of operations is as
      follows:

<TABLE>
<CAPTION>
                                                    YEAR ENDED SEPTEMBER 30,
                                  ------------------------------------------------------------
                                             1998                               1997
                                  --------------------------        --------------------------
                                  PREVIOUSLY           AS           PREVIOUSLY           AS
                                   REPORTED         RESTATED         REPORTED         RESTATED
                                  ---------        ---------        ---------        ---------

<S>                               <C>              <C>              <C>              <C>
Revenue ...................       $ 104,114        $ 104,114        $ 137,996        $ 137,996
Cost of sales .............          89,957           90,246          122,552          123,231
                                  ---------        ---------        ---------        ---------
Gross profit ..............          14,157           13,868           15,444           14,765
Operating expenses ........          17,796           17,862           18,420           18,447
                                  ---------        ---------        ---------        ---------
Operating loss ............          (3,639)          (3,994)          (2,976)          (3,682)
Interest expense ..........          (1,312)          (1,387)            (922)            (922)
Other .....................             182               68             (390)            (422)
                                  ---------        ---------        ---------        ---------
Loss from continuing
  operations before taxes .          (4,769)          (5,313)          (4,288)          (5,026)
Income tax benefit ........          (1,433)            (708)          (1,295)          (1,568)
                                  ---------        ---------        ---------        ---------
Loss from continuing
  operations ..............          (3,336)          (4,605)          (2,993)          (3,458)
Loss from discontinued
  operations ..............            (828)            (848)          (1,346)          (1,346)
                                  ---------        ---------        ---------        ---------
Net loss ..................       $  (4,164)       $  (5,453)       $  (4,339)       $  (4,804)
                                  =========        =========        =========        =========
Basic and diluted loss
  per common share:
    Continuing operations .       $   (1.07)       $   (1.48)       $   (0.97)       $   (1.12)
    Discontinued operations           (0.27)           (0.27)           (0.44)           (0.44)
                                  ---------        ---------        ---------        ---------
                                  $   (1.34)       $   (1.75)       $   (1.41)       $   (1.56)
                                  =========        =========        =========        =========
</TABLE>

      B - SHAREHOLDER LAWSUITS
      In July 1999, two alleged purchasers of the Company's common stock brought
      two purported class action lawsuits against the Company and several of its
      current and former officers and directors. Each of the lawsuits asserted
      that the defendants violated federal securities laws by issuing allegedly
      false and misleading statements in 1997, 1998 and 1999 about the Company's
      financial condition and results of operations. The lawsuits demanded,
      among other relief, unspecified compensatory damages, attorney's fees and

                                      F-22
<PAGE>
EVANS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------

      the costs of conducting the litigation. It is not possible, at this time,
      to predict the impact that the lawsuits may have upon the Company, nor is
      it possible to predict whether any other suits or claims may arise out of
      these matters in the future. It is reasonably likely, however, that the
      outcome of any present or future litigation may have a material adverse
      impact on the Company's financial condition or results of operations in
      one or more future periods. The Company intends to defend itself
      vigorously in these matters.

      C - RESULTS OF OPERATIONS AND LIQUIDITY
      In its June 30, 1999 Form 10-Q/A, the Company reported in its unaudited
      financial statements a loss from operations for the nine months ended June
      30, 1999 of $2,045,000 and a net loss, after a $4 million gain on the sale
      of ChemWay and a subsequent $8 million write-down of Affiliated common
      stock (see Note 2) of $7,214,000. In addition, the Company reported a
      working capital deficit of $58,000 and stockholders' equity of $6,356,000.

      Management believes that the Company will continue in the normal course of
      business until September 30, 1999; however, the Company faces several
      circumstances which threaten its longer-term survival. Among those
      circumstances are the need to return the Company to profitable operations
      through enhancement of revenues and/or reduction of costs and the
      restructuring of its debt arrangements. Management has already implemented
      several programs to return its operations to profitability and intends to
      replace its existing bank debt with new financing which would have the
      effect of increasing the availability of working capital; however, there
      can be no assurance that Management's plans will be successful.

                                      F-23