<PAGE>   1

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

                                  FORM 10-KSB
                             ---------------------

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

                 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997.

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

                          COMMISSION FILE NUMBER: 000-21953

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

<TABLE>
<S>                                            <C>
                   NEVADA                                       87-0429198
        (State or other jurisdiction                           (IRS Employer
      of incorporation or organization)                     Identification No.)
</TABLE>

                        2600 SOUTH LOOP WEST, SUITE 645
                              HOUSTON, TEXAS 77054
          (Address of principal executive offices, including zip code)

                                 (713) 641-3838
              (Registrant's telephone number, including area code)
                             ---------------------

         Securities registered under Section 12(b) of the Exchange Act:

<TABLE>
<S>                                            <C>
                                                           NAME OF EACH EXCHANGE
             TITLE OF EACH CLASS                            ON WHICH REGISTERED
---------------------------------------------  ---------------------------------------------
        Common Stock, $.001 par value                     American Stock Exchange
</TABLE>

       Securities registered pursuant to 12(g) of the Exchange Act: NONE

     Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (ii) 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

     Issuer's revenues for the year ended December 31, 1997 were $6,678,000. The
aggregate market value of Common Stock held by non-affiliates of the registrant
at March 25, 1998, based upon the last closing price on the American Stock
Exchange, was $53,843,904. As of March 25, 1998, there were 9,282,265 shares of
Common Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

                                      N/A

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                               TABLE OF CONTENTS

<TABLE>
<S>         <C>                                                           <C>
PART I

  Item 1.   Business....................................................    3
  Item 2.   Properties..................................................    7
  Item 3.   Legal Proceedings...........................................    7
  Item 4.   Submission of Matters to a Vote of Security Holders.........    7

PART II

  Item 5.   Market for Registrant's Common Equity and Related
            Stockholder Matters.........................................    8
  Item 6.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................    8
  Item 7.   Financial Statements........................................   13
  Item 8.   Changes in and Disagreements With Accountants on Accounting
            and Financial Disclosure....................................   13

PART III

  Item 9.   Directors, Executive Officers, Promoters and Control
            Persons; Compliance with Section 16(a) of The Exchange
            Act.........................................................   14
  Item 10.  Executive Compensation......................................   16
  Item 11.  Security Ownership of Certain Beneficial Owners and
            Management..................................................   17
  Item 12.  Certain Relationships and Related Transactions..............   20
  Item 13.  Exhibits and Reports on Form 8-K............................   21
</TABLE>

                                        2
<PAGE>   3

                                     PART I

ITEM 1. BUSINESS

INTRODUCTION

     Environmental Safeguards, Inc. (the "Company"), is engaged in the
development, production and sale of environmental remediation and recycling
technologies and services, primarily to oil and gas industry participants,
through its wholly-owned subsidiaries National Fuel & Energy, Inc. ("NFE") and
OnSite Technology, L.L.C. ("OnSite"). The environmental remediation and
recycling services provided by the Company involve the removal of hydrocarbon
contaminants and valuable drilling fluids from soil using indirect thermal
desorption remediation and recycling technology. The Company provides these
services on site. The Company does not haul remediated soil or recycled material
away from a site.

     Unless otherwise indicated, references to the Company include OnSite and
NFE, the Company's wholly owned subsidiaries. The Company's Common Stock is
traded on the American Stock Exchange under the symbol "EVV".

HISTORY

     The Company was incorporated under the laws of the State of Nevada in
December 1985, under the name of Cape Cod Investment Company. In December 1986,
the name of the Company was changed to Cape Cod Ventures, Inc. In August 1987,
the Company completed an initial public offering of 4,148,000 shares of Common
Stock at a price of $0.001 per share pursuant to the exemption from the
registration requirements of the Securities Act of 1933 provided by Regulation
A. In May 1993, the Company executed an Agreement and Plan of Reorganization
(the "Reorganization Agreement") with National Fuel & Energy, Inc. , a Wyoming
corporation ("NFE"), providing for the acquisition of NFE by the Company in
exchange for shares of the Company's Common Stock. In connection with the
reorganization, the name of the Company was changed to Environmental Safeguards,
Inc., and NFE became a wholly-owned subsidiary of the Company.

     In January 1995, the Company entered into an agreement with Parker Drilling
Company ("Parker"), a Delaware corporation, granting Parker exclusive marketing
rights to the Company's proprietary processes for on-site remediation and
recycling services in connection with drill cuttings at oil and gas drilling
sites throughout the United States and in certain foreign countries. In August
1995, the Company expanded its agreement with Parker by forming OnSite, a joint
company between NFE and Parker, in which NFE and Parker each owned 50%. Pursuant
to its agreement with OnSite, NFE granted to OnSite certain exclusive licenses
to use the technologies relating to the Company's Indirect Thermal Desorption
Units (the "ITD Units"), and the proprietary processes for on-site remediation
and recycling of hydrocarbon contaminated soil.

     In December 1997, the Company entered into a Purchase Agreement (the
"Purchase Agreement") with Parker which provided for the acquisition by the
Company, through NFE, of Parker's 50% equity interest in OnSite resulting in NFE
becoming the owner of 100% of the equity interest in OnSite. Pursuant to the
terms of the Purchase Agreement, the Company paid $8,000,000 for the 50% equity
interest and repaid a $3,000,000 loan that had been made to the Company by an
affiliate of Parker. As part of the transaction, Parker returned to the Company
unexercised warrants to purchase 300,000 shares of the Company's common stock.

     The Company's sources of funds to effect the acquisition included the sale
of $8,000,000 of new Series B Convertible Preferred Stock and Series C Preferred
Stock to an investor group consisting of Cahill, Warnock Strategic Partners
Fund, L.P., Strategic Associates, L.P., Newpark Resources, Inc. and James H.
Stone, who is the Chairman of Stone Energy Corporation and a secured loan of
$6,000,000 from the same investor group ("Loan Agreement"). Pursuant to the
financing, David L. Warnock, a member of Cahill, Warnock & Co., L.L.C. and
general partner of Cahill, Warnock Strategic Partners Fund, L.P., was appointed
as a Director of the Company.

     As a result of the financing, the Company retained approximately $3,000,000
after the transaction to use for working capital, payment of expenses associated
with the financing and general corporate purposes.

                                        3
<PAGE>   4

BUSINESS ACTIVITIES

     General. Substantially all of the Company's activities are conducted
through OnSite, which is engaged in the development and production of
remediation and recycling technology and the sale of environmental remediation
and recycling services. OnSite owns the technologies included in the ITD Units,
and the proprietary processes for on-site remediation and recycling of
hydrocarbon contaminated soil. To date, the environmental remediation and
recycling services provided by the Company have involved the removal of
petroleum contaminants from soil using the ITD Units. Each ITD Unit is an easily
transportable processing system which produces clean soil from contaminated soil
while reclaiming the hydrocarbons. ITD Units may be transported from one
clean-up site to another. The Company's customers are large corporations in the
oil and gas drilling industry that have responded to the changing regulatory
climate with respect to soil and other environmental contamination.

     The primary services offered by the Company involve remediation and
recycling of soil contaminated by oil-based drilling mud, fuel spills, leakage
at storage tanks and other sources of hydrocarbon contamination. To remediate
and recycle the contaminated soil, the Company utilizes ITD Units consisting of
(i) an indirect thermal desorption unit wherein the hydrocarbon contaminated
soil is indirectly heated, thereby causing the hydrocarbon contamination to
vaporize; and (ii) a condensation process system, which causes the hydrocarbon
vapor to condense to a liquid, or an afterburner or thermal oxidizer which
incinerates the hydrocarbon vapor. The ITD Units are mobile, and thus,
contaminated soil can be remediated and recycled at the site where the
contaminated soil is located. The Company does not haul or dispose of soil or
contaminants away from the customer's location.

     As of March, 1998, the Company owns four ITD Units. It operates three of
these ITD Units, one in Louisiana for Newpark Resources, Inc. ("Newpark
Resources"), one in Venezuela pending finalization of a contract with a major
oil and gas producer and one in Houston undergoing final internal quality
control testing and review. The fourth ITD Unit owned by the Company is leased
to OnSite Colombia, Inc. ("OnSite Colombia"), an affiliate in which the Company
owns a 50% interest. OnSite Colombia leases two additional ITD Units pursuant to
sale-leaseback arrangements with unrelated third parties. All three of the ITD
Units leased by OnSite Colombia are under contract to a multinational oil and
gas company operating in Colombia. Four additional ITD Units are under
construction by third parties, with delivery of the completed ITD Units expected
to begin in May, 1998, bringing the Company's fleet of portable units to 10.
There can be no assurance that delivery of the four ITD Units will be made
starting in May, 1998.

     Customers. The Company's customers are large oil and gas industry
participants. The Company, through OnSite, typically submits a bid for a project
based on the costs of moving the equipment to the location, the estimated
charges for labor and fuel, the nature and extent of the contamination, the type
and moisture content of the soil and the estimated processing time. Once a
contract has been awarded, OnSite moves its equipment to the client's desired
location.

     Indirect Thermal Remediation and Recycling. The primary services offered by
the Company involve: (i) the remediation and recycling of soil contaminated by
oil-based drilling mud, fuel spills, leakage at storage tanks, leakage from
pipelines; (ii) the remediation and recycling of hydrocarbon contamination at
settling ponds, oil and gas exploration sites, refineries, petrochemical
facilities, abandoned production fields, Department of Defense installations and
other similar type sites; and (iii) the remediation and recycling of valuable
drilling fluids which have been captured in soil and drilling muds during the
drilling process. To date the Company has employed its ITD Units to provide
remediation and recycling services to oil and gas industry drilling operations,
tank farms and compressor sites. This process is known as "indirect thermal
desorption" because it reverses the contamination process and removes the
hydrocarbons from the soil and discharges the contaminants previously absorbed
without direct contact of the soil to a flame.

     The ITD Units are portable pieces of equipment which utilize a rotating,
heat-jacketed trundle to vaporize hydrocarbons from contaminated soil. An ITD
Unit consists of two principal components: (i) an indirect thermal desorption
unit wherein the hydrocarbon contaminated soil is indirectly heated, thereby
causing the hydrocarbon contamination to vaporize; and (ii) a condensation
process system, which causes the

                                        4
<PAGE>   5

hydrocarbon vapor to condense to a liquid for client recycling. As an
alternative to the condensing system, the vapor can be passed through an
afterburner or thermal oxidizer which incinerates the hydrocarbon vapors.

     The heat exchange system is comprised of a large fabricated steel shell
which houses a rotating trundle. Hot gases pass through the shell and around the
outside surface of the trundle. Hydrocarbon contaminated soil is loaded into the
elevated end of the trundle by a conveyor belt or a front end loader. As the
trundle revolves, the soil is agitated by internal lifts and oars as it passes
through the inside of the trundle by gravity flow and is heated to temperatures
from 300 degrees to 1200 degrees Fahrenheit. At these temperatures, the
hydrocarbon contaminants in the soil transform into vapors which are vacuumed
out of the heat exchange system into the condensing system, the afterburner or
the thermal oxidizer. The clean soil then drops out of the discharge door at the
low end of the trundle and is passed through an enclosed conveyor for
rehydration before final discharge. Random soil samples are tested at the end of
the process to confirm that the contaminants have been removed and the soil
condition is within the permitted range. The soil is then returned to its
original location or such other location specified by the customer.

     The hydrocarbon vapors removed from the heat exchange system by vacuum are
passed through a fan-cooled condensing system. The vapors are condensed into
liquids and collected in storage tanks and can then be recycled or disposed,
depending on the nature of the contaminant, the needs of the customer and the
specifications required for reuse. To date, an ITD Unit has processed up to 192
tons of contaminated soil in a 24-hour period with a 30% hydrocarbon saturation.
However, the processing capacity varies significantly depending on the moisture
content, degree of contamination, soil type, contamination type and the
remediation and recycling required. There can be no assurance that the ITD Units
will continue to perform at this level, or that this performance will continue
to be competitive with other technology available in the market.

     Recycling of Hydrocarbon Contaminants. The Company has developed
proprietary processes which are embodied in the condensation process system
unit, one of the two principal components of the ITD Unit. Within this component
the hydrocarbon contaminant(s) are condensed from the vapor state created in the
dryer unit back into a liquid state via the proprietary processes and placed
into storage for recycling back to the client. This allows the client to realize
actual savings from its ability to re-utilize the hydrocarbons. This ability to
recycle the hydrocarbon contaminant(s) is an important competitive advantage
which the Company believes it possesses as compared to the bioremediation,
direct burn and "dig and haul" remediation technologies.

     Manufacturing of ITD Units. The Company contracts with outside fabricators
to manufacture ITD Units. The primary contractors which the Company uses are
Roberds-Johnson Industries, Cobrans Corporation, Stelcon, Inc. and Houston Pro
FAB. Currently, four ITD Units are under construction by fabricators for the
Company and the Company expects delivery of these four ITD Units beginning in
May 1998, but there can be no assurance that this will occur.

EXISTING CONTRACTS FOR OPERATIONS

     As of March, 1998, the Company operates three ITD Units. One is under
contract to Newpark Resources in Louisiana, one is in Venezuela pending
finalization of a contract with a major oil and gas producer and one is in
Houston undergoing final testing and review. OnSite Colombia operates three
additional ITD Units, all of which are currently under contract and in operation
for a multinational oil and gas company in Colombia.

COMPETITION

     There are many companies which currently dispose of hazardous and
industrial wastes and remediate or clean up sites which have been contaminated,
and such companies are continually attempting to develop new and improved
products and services. Other companies utilize competing technologies and
techniques in an attempt to provide more economical or superior remediation
services. Many of the Company's competitors are well established and have
substantially greater capital resources, larger research and development staffs
and facilities and substantially greater marketing capabilities than the
Company. There can be no assurance that the Company will be competitive in the
soil remediation and recycling industry in the future.
                                        5
<PAGE>   6

     The Company obtains its contracts through competitive bidding and is in
direct competition with firms providing alternative means of, and utilizing
alternative technologies for, remediating environmental problems. The most
significant competition comes from firms utilizing "dig and haul," direct burn,
and bioremediation technology to remediate soil contamination.

     Companies utilizing the dig and haul method generally transport the
contaminated soil to other facilities for processing. The Company believes that
the technology utilized by the Company is competitive with dig and haul methods
because the Company's equipment is mobile, and thus, contaminated soil can be
remediated on location. The waste processing, remediation and recycling
businesses are, to a large extent, dependent upon and constrained by the costs
and regulations associated with transporting such wastes. More importantly, the
Company's remediation and recycling process addresses the latent liability
associated with the contamination at the site. The Company is currently
investigating techniques and technologies capable of evaporation of non-needed
liquids and ultra-filtration applications. There can be no assurance that the
Company will be able to develop or acquire such technology and skill or that, if
obtained, will be competitive with other alternatives available in the market.

     Companies utilizing direct burn technology use direct heat sources to
incinerate contaminants found in the soil. Because of the closed nature of the
heat transfer system, the ITD Unit can safely handle much higher concentrations
of contaminants than conventional direct burn methods. Conventional direct burn
methods process material with maximum contamination levels of 3% to 4% while the
ITD Unit has processed materials with contamination levels as high as 30%. In
addition, the portable nature of the ITD Unit permits it to be located at the
contamination site to process and replace the soil on location. ITD Units also
permit the customer to recapture certain valuable liquids which are otherwise
destroyed.

GOVERNMENTAL REGULATIONS -- COST OF COMPLIANCE

     The Company renders services in connection with the remediation, recycling
and disposal of various wastes. Federal, state and local laws and regulations
have been enacted regulating the handling and disposal of wastes and creating
liability for certain environmental contamination caused by such waste.
Accordingly, the Company is subject to potential liability for environmental
damage its ITD Units or its operations may cause, particularly as a result of
the contamination of water or soil. Environmental laws regulate, among other
things, the transportation, storage, handling and disposal of waste.
Governmental regulations govern matters such as the disposal of residual
chemical wastes, operating procedures, waste water discharges, air emissions
fire protection, worker and community right-to-know, and emergency response
plans. Moreover, so-called "toxic tort" litigation has increased markedly in
recent years as persons allegedly injured by chemical contamination seek
recovery for personal injuries or property damage. These legal developments
present a risk of liability should the Company be deemed to be responsible for
contamination or pollution caused or increased by any evaluation, remediation or
cleanup effort conducted by it, or for an accident which occurs in the course of
such remediation or cleanup effort. There can be no assurance that the Company's
policy of establishing and implementing proper procedures for complying with
environmental regulations will be effective at preventing the Company from
incurring a substantial environmental liability. If the Company were to incur a
substantial uninsured liability for environmental damage, its financial
condition could be materially adversely affected.

     The Company presently has the ability to deliver soil remediation and
recycling services that meet applicable federal and state standards for the
delivery of its services, and for the level of contaminant removal. The
government can, however, impose new standards. If new regulations were to be
imposed, the Company may not be able to comply in either the delivery of its
services, or in the level of contaminant removal from the soil.

     Operating permits are generally required by federal and state environmental
agencies for the operation of the Company's ITD Units. Most of these permits
must be renewed periodically and the governmental authorities involved have the
power, under various circumstances, to revoke, modify, or deny issuance or
renewal of these permits. Moreover, site-related permits are generally the
responsibility of the customer, not the Company.

                                        6
<PAGE>   7

EMPLOYEES

     The Company has 18 full-time employees, eight of whom are in management
positions, including corporate and administrative operations. The Company
utilizes the services of an employee leasing firm, Business Staffing, Inc., for
all of its U.S. domiciled employees. None of the Company's employees are
represented by a union and the Company considers its employee relations to be
good.

SUBSEQUENT DEVELOPMENTS

     On February 12, 1998 the Company's Common Stock began trading on the
American Stock Exchange under the symbol "EVV".

TRANSFER AGENT AND REGISTRAR

     The co-transfer agents and registrars for the Common Stock of the Company
are Colonial Stock Transfer Company, Inc. ("Colonial Transfer") and Registrar
and Transfer Company. Colonial Transfer's address is 455 East 400 South, Suite
100, Salt Lake City, Utah 84111; (801) 355-5740.

ITEM 2. PROPERTIES

     The Company's principal executive offices are located in leased facilities
at 2600 South Loop West, Suite 645, Houston, Texas 77054, which consist of a
total of approximately 2,000 square feet. The current monthly rental for these
executive offices is $1,500. The lease for the executive offices will expire in
May 1998. The Company anticipates renewing the lease. The Company believes that
its offices are adequate for its present needs and that suitable space will be
available to accommodate its future needs.

ITEM 3. LEGAL PROCEEDINGS

     The Company was named as a defendant in 1993 by Goldfield Engineering and
Machine Works ("Goldfield"), styled as Huron, Inc dba Goldfield Engineering &
Machine vs Don Cox, et.al. Cause No. 930400525 in the fourth District Court of
Utah County, Utah. The litigation originally involved claims by Goldfield that
the Company owed additional compensation of approximately $150,000 for ITD Units
constructed which the Company believes did not meet required performance
criteria. The Company filed a counterclaim for $200,000 to obtain damages from
Goldfield. The Company has been advised that Goldfield filed a petition seeking
Chapter 11 Bankruptcy protection in 1994. A Notice of Automatic Stay was filed
in August, 1994, based on the Chapter 11 Petition in In Re Huron , et al filed
in the US Bankruptcy Court for the Central Division of Utah, Case No. 94A-20001.
In January, 1995, a Plan of Reorganization was confirmed by the Bankruptcy Court
whereby the Company received nothing and no adversary pleadings were filed
against the Company by Goldfield. The Company believes, after consultation with
counsel, that the risk of material financial exposure to the Company is remote.

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

     The Company held its Annual Meeting of shareholders on November 17, 1997.
The following table sets forth the names and tabulations of all nominees for
Director at the Annual Meeting:

<TABLE>
<CAPTION>
                          DIRECTOR                               FOR       WITHHELD
                          --------                               ---       --------
<S>                                                           <C>          <C>
James S. Percell............................................  5,974,346     6,000
Robin M. Pate...............................................  5,974,346     6,000
Bryan Sharp.................................................  5,974,346     6,000
Albert M. Wolford...........................................  5,974,346     6,000
Billy G. Taylor.............................................  5,974,346     6,000
</TABLE>

                                        7
<PAGE>   8

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

     The Company's Common Stock is currently traded on the American Stock
Exchange under the symbol "EVV". Prior to February 12, 1998, the Company's
Common Stock was traded in the over-the-counter securities market on the OTC
Bulletin Board. The following table sets forth, for the periods indicated,
closing prices on the American Stock Exchange or the high and low closing bid
prices for the Common Stock of the Company as reported on the OTC Bulletin
Board. The bid prices reflect inter-dealer quotations, do not include retail
markups, markdowns or commissions and do not necessarily reflect actual
transactions.

<TABLE>
<CAPTION>
                                                                  COMMON STOCK PRICE RANGE
                                                                ----------------------------
                                                                HIGH BID            LOW BID
                                                                --------            -------
<S>                                                             <C>                 <C>
1996
  First Quarter.............................................       $5                  $ 11/16
  Second Quarter............................................       $3 1/4              $2 1/4
  Third Quarter.............................................       $4 3/4              $2 3/4
  Fourth Quarter............................................       $4                  $2 3/4
1997
  First Quarter.............................................       $3 7/8              $2 3/8
  Second Quarter............................................       $3 5/8              $2 1/4
  Third Quarter.............................................       $3 3/8              $2 3/8
  Fourth Quarter............................................       $4 9/16             $2 3/16
</TABLE>

     On March 25, 1998, the closing price for the Common Stock of the Company on
the American Stock Exchange was $6.00 per share. On March 25, 1998, there were
approximately 900 stockholders of record of the Common Stock, including
broker-dealers holding shares beneficially owned by their customers.

DIVIDEND POLICY

     The Company has not paid, and the Company does not currently intend to pay
cash dividends on its Common Stock in the foreseeable future. The current policy
of the Company's Board of Directors is for the Company to retain all earnings,
if any, to provide funds for operation and expansion of the Company's business.
The declaration of dividends, if any, will be subject to the discretion of the
Board of Directors, which may consider such factors as the Company's results of
operations, financial condition, capital needs and acquisition strategy, among
others.

     The Company may not, except for dividends payable in connection with its
Series C Preferred Stock, authorize or pay any dividends at any time if any
amount is unpaid with respect to the Company's $6,000,000 Loan Agreement.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere in this
Report. See, Financial Statements.

OVERVIEW

     The Company is engaged in the development, production and sale of
environmental reclamation and recycling technologies and services. Substantially
all of the Company's technologies and services are provided through On-Site and
the Company is devoting substantially all of its efforts to the development of
markets for OnSite's services. The Company is currently providing reclamation
and recycling services to companies engaged in land-based oil and gas
exploration, and to offshore applications where drill cuttings are barged to an
accessible land based facility for recycling. Oil and gas exploration often
produces significant quantities of

                                        8
<PAGE>   9

petroleum-contaminated drill cuttings, from which the Company's Indirect Thermal
Desorption ("ITD") process can extract and recover the hydrocarbons as
re-useable or re-saleable liquids, and produce recycled soil compliant with
environmental regulations. The Company intends to expand the activities of
OnSite to include use of ITD technology to address hydrocarbon contamination
problems and hydrocarbon recycling and reclamation opportunities at heavy
industrial, refining and petrochemical sites, as well as at Superfund, DOD and
DOE sites.

     On December 17, 1997, the Company acquired the remaining 50% interest in
OnSite from Parker Drilling Co., giving the Company complete control of the ITD
technology owned by OnSite, and providing the Company with a wholly-owned
operating subsidiary that forms the cornerstone of the Company's future
operations. Total purchase consideration in the OnSite acquisition was financed
by the Company through a private placement of Convertible Preferred and
Preferred Stock, combined with senior secured notes and warrants to purchase
shares of the Company's Common Stock. The Company has included OnSite's
operating results in its statement of operations for the year ended December 31,
1997, as though the acquisition took place at the beginning of the year, and has
deducted as a separate line item the preacquisition earnings attributable to the
former 50% owner.

     For the past two years the Company has focused essentially all of its
attention on its now wholly owned business operations in OnSite. OnSite was
formed, as a 50/50 joint company with Parker, as a means for assembling the
capital necessary to build and improve the ITD Units and to generate market
awareness and acceptance of ITD technology. The Company expects that a
substantial portion of its revenues will continue to be generated from major oil
and gas industry participants operating in Columbia and other Latin American
countries. In December 1997, the Company reached an agreement with Newpark
Resources, Inc. to provide reclamation and recycling services in support of
offshore drilling activity in the Gulf of Mexico.

     In November 1996, OnSite formed a 50/50 joint company, OnSite Columbia,
Inc. ("OnSite Columbia") with a group of South American investors. OnSite
Columbia was established to provide hydrocarbon contaminated soil reclamation
and recycling services to oil and gas industry participants operating in
Columbia. OnSite Columbia's operations are included in the Company's
consolidated results in 1997 because the Company has effective management
control.

RESULTS OF OPERATIONS

     The Company's historical consolidated operating results have been
significantly affected by the acquisition of the remaining 50% interest in
OnSite. In order to make a more meaningful period-to-period comparison of the
Company's operating results, the table below compares historical results (on the
left side) and pro forma financial data (on the right side). Historical
financial data is based on the consolidated method of reporting for 1997
(adopted in December 1997), and is based on the equity method for 1996
consistent with historical reporting prior to the change to the consolidated
method. Pro forma financial data assumes the acquisition and related financing
transaction were consummated as of the beginning of the periods presented. The
pro forma data presents both 1997 and 1996 using the consolidated method of
reporting to enhance comparability. The pro forma results of operations are not
necessarily indicative of the results that would have

                                        9
<PAGE>   10

occurred had the acquisitions been consummated as of the beginning of the
periods presented or that might be attained in the future.

<TABLE>
<CAPTION>
                                                          HISTORICAL                    PRO FORMA
                                                   YEAR ENDED DECEMBER 31,       YEAR ENDED DECEMBER 31,
                                                  --------------------------   ----------------------------
                                                   1997     1996    VARIANCE    1997      1996     VARIANCE
                                                  -------   -----   --------   -------   -------   --------
                                                      (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                               <C>       <C>     <C>        <C>       <C>       <C>
Service revenue.................................  $ 6,678   $  --   $ 6,678    $ 6,678   $   730   $ 5,948
Gross margin....................................    3,452      --     3,452      3,307        18     3,289
Selling, general and administrative expense.....   (2,076)   (511)   (1,565)    (2,467)   (1,332)   (1,135)
Acquired research & development costs...........     (786)     --      (786)       (24)       --       (24)
                                                  -------   -----   -------    -------   -------   -------
Operating income (loss).........................      590    (511)    1,101        816    (1,314)    2,130
Other income (expense):
  Investment in OnSite..........................       --     (93)       93         --        --        --
  Interest income...............................      192      18       174        192        18       174
  Interest (expense)............................     (466)   (138)     (328)    (1,253)   (1,218)      (35)
  Foreign currency..............................      (31)     --       (31)       (31)       --       (31)
  Other.........................................        4       3         1         --        --        --
                                                  -------   -----   -------    -------   -------   -------
Income (loss) before provision for income tax...      289    (721)    1,010       (276)   (2,514)    2,238
Provision for income tax........................   (1,205)     --    (1,205)    (1,205)      (22)   (1,183)
                                                  -------   -----   -------    -------   -------   -------
Loss before minority interest...................     (916)   (721)     (195)    (1,481)   (2,536)    1,055
Elimination of minority interest................     (581)     --      (581)      (547)       82      (629)
                                                  -------   -----   -------    -------   -------   -------
Loss before extraordinary item..................   (1,497)   (721)     (776)    (2,028)   (2,454)      426
Extraordinary item..............................     (352)     74      (426)        --        74       (74)
                                                  -------   -----   -------    -------   -------   -------
         Net loss...............................  $(1,849)  $(647)  $(1,202)   $(2,028)  $(2,380)  $   352
                                                  =======   =====   =======    =======   =======   =======
</TABLE>

     The pro forma consolidated net loss from 1997 and 1996 includes pro forma
interest expense of $1.1 million in each year, which is not necessarily
indicative of future years' expenses. For example, the Company is evaluating
additional equity financing which could be utilized to retire certain debt. In
such case, the incremental interest expense could be eliminated on a go-forward
basis, but there can be no assurances that the Company will be successful in
that effort.

     The pro forma consolidated net loss for 1997 and 1996 also includes in each
year pro forma expense of $151,000 additional depreciation expense resulting
from the adjustment of OnSite's ITD Units to fair value at the time of
acquisition (to be depreciated over a 4.5 year weighted average remaining
economic life of that equipment); and $407,000 amortization of engineering
design and developed technology costs, an intangible asset related to the
acquisition of the 50% interest in OnSite (to be amortized over an 8 year
estimated economic life).

     The pro forma data for 1997 excludes the $762,000 acquired research and
development writeoff and the $352,000 extraordinary charge from extinguishment
of debt, as these charges are one-time events.

COMPARISON OF HISTORICAL OPERATING RESULTS

     Summary. For the year ended December 31, 1997, the Company incurred a net
loss of $1,849,000 as compared to a 1996 net loss of $647,000. The $1,202,000
increase essentially resulted from a $352,000 extraordinary charge from
retirement of debt, a $762,000 write-off of acquired research and development in
connection with the Company's acquisition of OnSite, and the non-recurrence of a
$74,000 extraordinary gain on elimination of debt recorded in 1996.

     The following line-by-line comparison reflects 1997 using the consolidated
method of reporting (adopted as a consequence of the Company's acquiring the
remaining 50% of OnSite), whereas 1996 results use the equity method (the 1996
historical basis of reporting). (The pro forma comparison which follows the

                                       10
<PAGE>   11

historical comparison reflects both 1997 and 1996 under the consolidated method
in order to enhance comparability).

     Revenues and Gross Margin. Service revenue of $6.6 million for 1997 was
primarily generated by ITD Units under contract in Colombia. Gross margin for
1997 was $3.4 million, or 51% of revenue. In 1996, neither revenue nor gross
margin were reported, as the Company accounted for the operations of OnSite
under the equity method. (See comments under pro forma comparison for additional
details).

     Selling, General and Administrative ("SGA") Expense. SG&A expenses
increased by $1,565,000 compared with the amount reported in 1996 due in part to
OnSite being accounted for on the equity method in 1996. SGA expenses in 1997
were the result of increased operations in Colombia which increased from one ITD
Unit in operation in November 1996 to three ITD Units in full operation starting
in June 1997. The higher level of business activity also prompted personnel
additions and/or recruitment of more experienced personnel at the Corporate
level in such key areas as international operations, accounting/finance,
engineering design and procurement, and regulatory matters. The number of
management employees increased from four at the end of 1996 to six at the end of
1997.

     Research and Development ("R&D") Expense. The 1997 R&D expense is primarily
the writeoff of acquired research and development based on a valuation of
in-process technology that resulted from the acquisition of Parker Drilling
Company's 50% interest in OnSite.

     Interest Income. In 1997, the Company earned interest income from
investment of proceeds from long-term debt of $3 million received in the fourth
quarter of 1996, and investment of net proceeds of approximately $800,000 from
the company's Regulation D offering that closed in February 1997. During 1996
the Company had little excess cash to invest.

     Interest Expense. The 1997 increase to $466,000 resulted from increased
borrowing to finance the construction of additional ITD Units.

     Income Taxes. The Company's reported tax provision in 1997 primarily
relates to foreign income taxes incurred by OnSite Colombia, a 50% owned
consolidated subsidiary of OnSite. (The 1996 taxes were included in the loss
from investment in OnSite). The Company has incurred net operating losses
("NOLs") in the U.S. in recent years, which may be used to offset taxable income
reported in future periods. The NOLs and certain foreign tax credits associated
with the taxes paid in Colombia have generated deferred tax assets, but due to
uncertainties regarding the future realization of these assets, a valuation
allowance has been provided for the full amount of the deferred tax assets. The
Company is implementing tax planning strategies, which if successful, may result
in the Company recognizing these deferred tax assets in future periods, which
would significantly reduce the current effective tax rate. There can be no
assurances that the NOL and foreign tax credits will be utilizable.

     Elimination of Minority Interest. Minority interest for 1997 reflects the
50% minority ownership's interest in the 1997 net income of OnSite Colombia. In
1996, the Company accounted for its 50% ownership in OnSite Colombia using the
equity method (which excluded the minority ownership).

     Extraordinary Item. The extraordinary loss of $352,000 for 1997 resulted
from the writeoff of deferred financing costs that resulted from the early
repayment of the $3 million long-term debt due to Parker. This debt was repaid
in connection with the Company's acquisition of OnSite. The $74,000
extraordinary gain in 1996 also relates to elimination of debt.

COMPARISON OF CONSOLIDATED PRO FORMA OPERATING RESULTS

     Summary. The pro forma consolidated data presents 1997 and 1996 operating
results as if the acquisition and related financing transaction were consummated
as of the beginning of each year, and also presents OnSite for both years under
the consolidated method of reporting to enhance line-by-line comparability.

     The 1997 pro forma consolidated net loss of $2,028,000 indicates an
improvement of $352,000 as compared to the pro forma consolidated net loss of
$2,380,000 for 1996. The $352,000 improvement is due to $3,289,000 higher gross
margin from increased volume of ITD Units operating in Colombia, partially
offset by
                                       11
<PAGE>   12

increases of $1,135,000 in SGA expense, $1,183,000 in Colombian income tax and
$629,000 in minority interests (each resulting from higher revenues and business
activity).

     Following are line-by-line comparisons of 1997 to 1996 on a consolidated
pro forma basis, where variances are significant:

     Revenues and Gross Margin. The Company's consolidated pro forma revenues
for 1997 increased from $730,000 to $6,678,000 as a direct result of OnSite's
construction and subsequent deployment of additional ITD Units under contract
with a major oil and gas industry participant in Colombia.

     During 1997, based on the positive recycling and remediation results that
were initially achieved, the Company was able to expand the scope of its initial
contract in Colombia and increase, from one to three, the number of ITD Units
deployed there. In 1996, the Company had concentrated its efforts and resources
on a single contract in Lysite, Wyoming and on the construction and improvement
of its ITD and Ultra-filtration technology. The Lysite project provided valuable
feedback concerning ITD Unit performance. Such feedback formed the basis for
improvements which were made to the current Series 6000 ITD design.

     Consolidated pro forma gross margin reached $3,307,000 or 49% of revenue
during 1997, reflecting economies of scale from operating 2.3 average units per
month in Colombia throughout 1997 versus one unit for two months only in 1996.

     Selling, General and Administrative ("SGA") Expense. Pro forma consolidated
SGA expenses increased by $1,135,000, an increase of 85% over 1996, versus a
corresponding revenue increase of over 800%, which demonstrates the benefits
derived from economies of scale on profitability. The increased SGA included
additions to the Corporate staff of important skills (as discussed above in the
historical analysis).

LIQUIDITY AND CAPITAL RESOURCES

     During both 1997 and 1996, the Company raised additional debt and equity
capital to fund current operations, support the construction of ITD Units
necessary for its future growth, and acquire the remaining 50% of OnSite from
Parker. In December 1997, the Company raised $14 million in a private placement
of Series B Convertible Preferred Stock, non-convertible Series C Preferred
Stock, senior secured notes and warrants to purchase the Company's Common Stock.
The proceeds from this private placement were primarily used to fund the $8
million acquisition of OnSite, repay $3 million of long-term debt to a Parker
subsidiary, and provide the Company with capital resources to continue funding
current operations and planned capital expenditures. In the 1997 private
placement, the Company received $6 million in proceeds from senior secured notes
and a commitment by the investors for an additional $5 million of long-term
debt, provided that the Company remains in compliance with the loan covenants of
the secured notes.

     Prior to the $14 million in funding described above, in the first quarter
of 1997, the Company converted debt and related accrued interest totaling
$1,262,000 to equity and completed a Regulation D offering of its common stock.
The proceeds from these transactions, along with the $3 million long-term debt
proceeds raised by the Company in December 1996 were used to support operations
throughout most of 1997.

     During 1997 the Company arranged capital leasing with third party lenders
for two ITD Units operated in OnSite Colombia in order to improve cash flows.
The Company has and will continue to make capital expenditures for ITD Units,
and at December 31, 1997, had placed orders for four additional units at an
aggregate cost of approximately $4.6 million. The Company plans to finance
additional ITD Units through a combination of surplus operating cash flows,
additional third party sale leaseback transactions, bank term financing, and
potentially an additional sale of equity. There can be no assurances that the
Company will be able to obtain this additional financing.

     The functional currency of OnSite Colombia is the U.S. dollar because
customer invoicing, customer receivables, imported equipment and many of the
operating cost factors are denominated in U.S. dollars. The Company plans to
continue to implement the same approach as other foreign operations come on
stream in

                                       12
<PAGE>   13

the course of conducting business abroad in an effort to minimize risks
associated with foreign exchange fluctuation and its affect on Company
profitability.

IMPACT OF YEAR 2000

     The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruption of business activities.

     Based on ongoing assessments, the Company believes that no significant
modifications of existing computer software will be required. The Company
believes that its computer systems will function property with respect to dates
in the year 2000 and thereafter. The Company's ITD units are not dependent on
computer software or hardware, and therefore the Year 2000 issue is not expected
to pose material operational problems. The Company also believes that costs
related to the Year 2000 issue will not be significant.

     The Company is currently assessing its relationships with significant
suppliers and major customers to determine the extent to which the Company is
vulnerable to any third party's failure to remedy their own Year 2000 issues.
Based on preliminary assessments, management believes that significant exposure
does not exist with respect to third parties.

INFORMATION REGARDING AND FACTORS AFFECTING FORWARD LOOKING STATEMENTS

     The Company is including the following cautionary statement in this Annual
Report on Form 10-KSB to make applicable and take advantage of the safe harbor
provision of the Private Securities Litigation Reform act of 1995 for any
forward-looking statements made by, or on behalf of the Company. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements
which are other than statements of historical facts. Certain statements
contained herein are forward looking statements and, accordingly, involve risks
and uncertainties which could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitations, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectation, beliefs or
projections will result or be achieved or accomplished. In addition to other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward-looking statements: the ability
of the Company to attain widespread market acceptance of its technology; the
ability of the Company to obtain acceptable forms and amounts of financing to
fund planned expansion efforts; demand for the Company's services; competitive
factors; the actual useful life of ITD Units; and the ability of the Company to
maintain acceptable utilization rates on its equipment. The Company disclaims
any obligation to update any forward-looking statements to reflect events or
circumstances after the date hereof.

ITEM 7. FINANCIAL STATEMENTS

     The information required hereunder is included in this report as set forth
in the "Index to Financial Statements" on page F-1.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     Ham, Langston & Brezina, LLP ("Ham, Langston & Brezina") audited the
financial statements of the Company for the years ended December 31, 1995 and
1996, and were replaced by Ernst & Young LLP ("Ernst & Young), Certified Public
Accountants on September 17, 1997.

     There were no disagreements between the Company and Ham, Langston & Brezina
whether resolved or not resolved, on any matter of accounting principles or
practices, financial statement disclosure or auditing

                                       13
<PAGE>   14

scope or procedure, which, if not resolved, would have caused them to make
reference to the subject matter of the disagreement in connection with their
report.

     The report of Ham, Langston & Brezina for the past two fiscal years did not
contain any adverse opinion or disclaimer of opinion, excepting a "going
concern" qualification, and was not qualified or modified as to uncertainty,
audit scope or accounting principles.

     The decision to change principal accountants was not submitted for approval
to the Board of Directors. The change was made by the Company's President, James
S. Percell, in order to provide for the Company's growing need for global
expertise in accounting and other business matters.

     Also, during the Company's two most recent fiscal years, and since then,
Ham, Langston & Brezina has not advised the Company that any of the following
exist or are applicable:

          (1) That the internal controls necessary for the Company to develop
     reliable financial statements do not exist, that information has come to
     their attention that has lead them to no longer be able to rely on
     management's representations, or that has made them unwilling to be
     associated with the financial statements prepared by management;

          (2) That the Company needs to expand significantly the scope of its
     audit, or that information has come to their attention that if further
     investigated may materially impact the fairness or reliability of a
     previously issued audit report or the underlying financial statements or
     any other financial presentation, or cause him to be unwilling to rely on
     management's representations or be associated with the Company's financial
     statements for the foregoing reasons or any other reason; or

          (3) That they have advised the Company that information has come to
     their attention that they have concluded materially impacts the fairness or
     reliability of either a previously issued audit report or the underlying
     financial statements for the foregoing reasons or any other reason.

     Prior to the engagement of Ernst & Young as independent auditors, the
Company had not consulted Ernst & Young regarding the application of accounting
principles to a specified transaction, either completed or proposed; or the type
of audit opinion that might be rendered on the Company's financial statements or
any other financial presentation whatsoever.

     Ham, Langston & Brezina has provided the Securities and Exchange Commission
with a letter agreeing to the disclosure contained herein.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

     The following table sets forth the directors and executive officers of the
Company.

<TABLE>
<CAPTION>
                  NAME                    AGE                    POSITION
                  ----                    ---                    --------
<S>                                       <C>   <C>
James S. Percell........................  55    Chairman, President and CEO
Robin M. Pate...........................  71    Director
Bryan Sharp.............................  54    Director
Albert M. Wolford.......................  76    Director and Secretary
David L. Warnock........................  40    Director
Douglas A. Schonacher, Jr...............  42    Vice President and Chief Operating Officer
Ronald L. Bianco........................  51    Chief Financial Officer and Vice-Secretary
</TABLE>

     Directors are elected annually and hold office until the next annual
meeting of the stockholders of the Company or until their successors are elected
and qualified. Officers serve at the discretion of the Board of

                                       14
<PAGE>   15

Directors. There is no family relationship between or among any of the directors
and executive officers of the Company.

BIOGRAPHIES

     JAMES S. PERCELL serves as Chairman, President and CEO of the Company and
also serves as President of the Company's subsidiary, NFE. Mr. Percell became a
director of the Company and President, Chief Executive Officer and a director of
NFE in November, 1995. Mr. Percell became President and CEO of the Company in
January, 1996. Mr. Percell also serves as President of Percell & Associates, a
project developer of facilities in the hydrocarbon industry. From 1985-1993, Mr.
Percell served as Vice-President of Belmont Constructors, Inc., a heavy
industrial contractor. From 1982-1984, he served as President of Capital
Services Unlimited, an international supply company for refining, petrochemical
and oil field compressor stations, modular refineries and modular oilfield
components. From 1977-1980, Mr. Percell served as President of Percell & Lowder,
Inc., an oilfield fabricator of onshore and offshore facilities, and from 1960-
1977, he served as project manager for various onshore and offshore projects. He
attended Amarillo College in Amarillo, Texas.

     ROBIN M. PATE has been a director of the Company since November, 1995. Mr.
Pate recently retired from the position of Executive Vice-President of
Enterprise Products Company. Mr. Pate joined Enterprise as Senior Vice-President
of operations in 1980. Before joining Enterprise, Mr. Pate served as President
of American Borate Company for three years, Vice-President of Tenneco Oil for 12
years, and Executive Vice-President of Houston Reinforced Plastics. Mr. Pate is
a registered professional engineer and is a member of the Texas Professional
Engineering Association, Texas Bar Association and American Bar Association, Gas
Processors Association and the National Petroleum Refiners Association of
America. He formerly served on the Board of Directors of the Gas Processors
Association and National Petroleum Refiners Association of America. Mr. Pate has
a degree in Chemical Engineering from the University of Texas in addition to a
Doctor of Jurisprudence in Law from the University of Houston.

     BRYAN SHARP has served as a director of the Company since November, 1995.
Mr. Sharp currently serves as Principal-in-Charge and Director of Espey, Huston
& Associates, Inc. ("EH&A"), an environmental consulting company, and from
1990-1993, he served as President of EH&A. Mr. Sharp has also been employed by
North Texas State University, the Department of the Interior, and the University
of Texas. Mr. Sharp has a B.S. degree in Education from North Texas State
University, a M.S. degree in Biology from North Texas State University and
studied for his Ph.D. in Zoology from the University of Texas at Austin.

     ALBERT M. WOLFORD has served as director of the Company since August 5,
1997. Mr. Wolford is a member of the Company's independent audit committee. Mr.
Wolford is also the Company's Secretary. Mr. Wolford has been an independent
business consultant since 1988. From 1970 to 1988, Mr. Wolford served with Texas
United Corporation as a director, a member of the executive committee, senior
vice-president, and as the chairman of executive development and compensation
committee. As a senior vice-president of Texas United Corporation, Mr. Wolford
served its subsidiaries as president and CEO of Texas United Chemical
Corporation, as the chairman, president and CEO of United Salt Corporation, and
as the president of American Borate Corporation. He has also served the Texas
Chemical Council, an industry trade group, as a director, a member of its
executive committee, and as secretary-treasurer. Mr. Wolford served as a member
of the executive committee of the Salt Institute, an industry trade group. Mr.
Wolford is a graduate of the University of Texas.

     DAVID L. WARNOCK was appointed as Director of the Company in December, 1997
in connection with the December, 1997 financing. Mr. Warnock is a founding
partner of Cahill, Warnock & Company, L.L.C., an asset management firm
established in 1995 to invest in small public companies. From 1983 to 1995, Mr.
Warnock was with T. Rowe Price Associates in senior management positions
including President of the corporate general partner of T. Rowe Price Strategic
Partners I and T. Rowe Price Strategic Partners II, and as the Executive Vice
President of T. Rowe Price New Horizons Fund. Mr. Warnock also serves on the

                                       15
<PAGE>   16

Boards of Directors of other companies including Children's Comprehensive
Services, Inc., SRB Corporation, and ALLIANCE National Incorporated. Mr. Warnock
received a Bachelor of Arts Degree, History, from the University of Delaware and
a Masters Degree, Finance, from the University of Wisconsin.

     DOUGLAS A. SCHONACHER, JR. joined the Company in March 1997 and is the
Company's Vice President and Chief Operating Officer. Mr. Schonacher has 23
years of experience in the fields of drilling fluids control and drilling waste
management. From 1992 until 1997, Mr. Schonacher was with Tubescope/Vetco
International in the solids control division, serving as manager of Latin
American operations. Mr. Schonacher also served as the manager of technical
services for the solids control division of Tubescope/Vetco International. From
1987 until 1992, Mr. Schonacher was with Sun Drilling Products Corp. serving as
vice president of Sun Environmental Services, Inc. and Gulf Coast operations
manager. Mr. Schonacher was responsible for sales engineering and all product
applications. Mr. Schonacher also was with Sun Drilling Products Corp. 1979
until 1983 where he was responsible for hiring drilling fluid engineers and for
application of drilling fluids specialty products in offshore Gulf Coast
regions. From 1974 until 1979, and again from 1983 until 1987, Mr. Schonacher
was a drilling fluids consultant. Mr. Schonacher attended Nichols State
University and Louisiana State University.

     RONALD L. BIANCO joined the Company in April 1997 as Chief Financial
Officer. From 1975 through 1991, Mr. Bianco was with Dresser Industries where he
served as controller of Dresser Rand Power in Norway, as the controller for
North America -- Operations of Dresser Masonelian Valve and in other headquarter
and division assignments. From 1992 through 1993, Mr. Bianco was an independent
business consultant. From 1994 through 1996, Mr. Bianco served as Chief
Financial Officer of SWECO Oilfield Services. Mr. Bianco received his B.B.A. in
accounting in 1970 from St. Bonaventure University in Olean, New York, and his
M.B.A. in 1983 from Southern Methodist University in Dallas, Texas.

CERTAIN SECURITIES FILINGS

     The Company believes that the reports required by Section 16(a) of the
Exchange Act have been filed timely.

ITEM 10. EXECUTIVE COMPENSATION

     Mr. James Percell, became President and Chief Executive Officer of the
Company in January, 1996. The Company has an employment contract with Mr.
Percell (the "Employment Agreement"). The Employment Agreement which commenced
in April 1997, has a term of three years. The Employment Agreement automatically
extends, unless terminated by the Company or Mr. Percell, for additional
successive one year periods after the initial three year term. Mr. Percell's
employment contract provides that he receive annual compensation from the
Company in the amount of $125,000. However on November 17, 1997, the Company's
Board of Directors increased Mr. Percell's annual compensation to $250,000. No
other executive officer of the Company received compensation which exceeded
$100,000 during 1997.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                      LONG TERM
                                                                 COMPENSATION AWARDS
                                                               -----------------------
                                                                            SECURITIES   PAYOUTS
                                    ANNUAL COMPENSATION        RESTRICTED   UNDERLYING   -------       ALL
       NAME AND                -----------------------------     STOCK       OPTIONS/     LTIPS       OTHER
  PRINCIPAL POSITION    YEAR      SALARY       BONUS   OTHER     AWARDS        SARS      PAYOUTS   COMPENSATION
----------------------  ----   ------------    -----   -----   ----------   ----------   -------   ------------
<S>                     <C>    <C>             <C>     <C>     <C>          <C>          <C>       <C>
James S. Percell......  1997     $168,750(*)    -0-     -0-       -0-          -0-         -0-         -0-
  Chief Executive       1996          -0-       -0-     -0-       -0-          -0-         -0-         -0-
  Officer               1995          -0-       -0-     -0-       -0-          -0-         -0-         -0-
</TABLE>

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

(*) In addition to the compensation received pursuant to Mr. Percell's
    employment contract, Mr. Percell also received compensation directly from
    OnSite.

                                       16
<PAGE>   17

DIRECTOR COMPENSATION

     The Company does not currently pay any cash director's fees, but it pays
the expenses, if any, of its directors in attending board meetings. In November,
1995, the Company issued to each of Messrs. Percell, Pate and Sharp an option to
purchase 800,000 shares of Common Stock of the Company at $0.60 per share. Each
option is fully vested and may be exercised at any time until the option
terminates on November 2, 2005.

EMPLOYEE STOCK OPTION PLAN

     While the Company has been successful in attracting and retaining qualified
personnel, the Company believes that its future success will depend in part on
its continued ability to attract and retain highly qualified personnel. The
Company pays wages and salaries which it believes are competitive. The Company
also believes that equity ownership is an important factor in its ability to
attract and retain skilled personnel, and the Board of Directors of the Company
may adopt an employee stock option program.

     The purpose of the stock option program will be to further the interest of
the Company, its subsidiaries and its stockholders by providing incentives in
the form of stock options to key employees and directors who contribute
materially to the success and profitability of the Company. The grants will
recognize and reward outstanding individual performances and contributions and
will give such persons a proprietary interest in the Company, thus enhancing
their personal interest in the Company's continued success and progress. This
program will also assist the Company and its subsidiaries in attracting and
retaining key employees and directors.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information as of March 25, 1998
with respect to the beneficial ownership of shares of Common Stock by (i) each
person who is known to the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each executive officer of the Company and (iv) all executive officers and
directors of the Company as a group. Unless otherwise indicated, each
stockholder has sole voting and investment power with respect to the shares
shown.

<TABLE>
<CAPTION>
                                                   NUMBER OF             PERCENT       CLASS OF
                     NAME                       SHARES OWNED(1)          OF CLASS     SECURITIES
                     ----                       ---------------          --------     ----------
<S>                                             <C>                      <C>         <C>
James S. Percell..............................     1,269,785(2)            12.3%     Common Stock
  2600 South Loop West,
  Suite #645
  Houston, Texas 77054
Robin M. Pate.................................     1,119,030(3)            10.9%     Common Stock
  9723 Truscan
  Houston, Texas 77080
Bryan Sharp...................................     1,101,267(4)            10.7%     Common Stock
  3200 Wilcrest, #200
  Houston, Texas 77042
Albert M. Wolford.............................        56,415(5)             0.7%     Common Stock
  2600 South Loop West,
  Suite #645
  Houston, Texas 77054
David L. Warnock..............................     2,159,308(6)(7)         18.9%     Common Stock
  One South Street,
  Suite #2150
  Baltimore, Maryland 21202
</TABLE>

                                       17
<PAGE>   18

<TABLE>
<CAPTION>
                                                   NUMBER OF             PERCENT       CLASS OF
                     NAME                       SHARES OWNED(1)          OF CLASS     SECURITIES
                     ----                       ---------------          --------     ----------
<S>                                             <C>                      <C>         <C>
Edward L. Cahill..............................     2,159,308(6)(7)         18.9%     Common Stock
  One South Street,
  Suite #2150
  Baltimore, Maryland 21202
Cahill, Warnock Strategic
Partners Fund, L.P............................     2,159,308(6)(7)         18.9%     Common Stock
  One South Street,
  Suite #2150
  Baltimore, Maryland 21202
Strategic Associates, L.P.....................     2,159,308(6)(7)         18.9%     Common Stock
  One South Street,
  Suite #2150
  Baltimore, Maryland 21202
Cahill, Warnock & Company, L.L.C..............     2,159,308(6)(7)         18.9%     Common Stock
  One South Street,
  Suite #2150
  Baltimore, Maryland 21202
Cahill, Warnock Strategic Partners, L.P.......     2,159,308(6)(7)         18.9%     Common Stock
  One South Street,
  Suite #2150
  Baltimore, Maryland 21202
Douglas A. Schonacher, Jr.....................        68,829(8)             0.8%     Common Stock
  2600 South Loop West,
  Suite #645
  Houston, Texas 77054
Ronald L. Bianco..............................        68,829(9)             0.8%     Common Stock
  2600 South Loop West,
  Suite #645
  Houston, Texas 77054
Newpark Resources, Inc........................     2,239,282(7)(10)        19.5%     Common Stock
  3850 N. Causeway
  Suite 1770
  Metairie, LA 70002-1756
All officers and directors as a Group (7           5,843,463               39.4%     Common Stock
  persons)....................................
</TABLE>

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

 (1) Under the rules of the Securities and Exchange Commission (the
     "Commission"), a person who directly or indirectly has or shares voting
     power or investment power with respect to a security is considered a
     beneficial owner of the security. Voting power is the power to vote or
     direct the voting of shares, and investment power is the power to dispose
     of or direct the disposition of shares. Shares as to which voting power or
     investment power may be acquired within 60 days are also considered as
     beneficially owned under the Commission's rules and are, accordingly,
     included as shares beneficially owned.

 (2) Includes an option to purchase 800,000 shares of Common Stock of the
     Company at $0.60 per share, and an option to purchase 301,267 shares of
     Common Stock of the Company at $3.00 per share. These options are fully
     vested and immediately exercisable.

 (3) Includes an option to purchase 700,000 shares of Common Stock of the
     Company at $0.60 per share, and an option to purchase 301,267 shares of
     Common Stock of the Company at $3.00 per share. These options are fully
     vested and immediately exercisable.

                                       18
<PAGE>   19

 (4) Includes an option to purchase 800,000 shares of Common Stock of the
     Company at $0.60 per share, and an option to purchase 301,267 shares of
     Common Stock of the Company at $3.00 per share. These options are fully
     vested and immediately exercisable.

 (5) Includes an option to purchase 9,415 shares of Common Stock of the Company
     at $3.00 per share and includes an option to purchase 25,000 shares of
     Common Stock at $3.75 per share. These options are fully vested and
     immediately exercisable.

 (6) Includes 1,722,900 shares of Series B Convertible Preferred Stock and a
     warrant to purchase 323,044 shares of common stock of the Company at $0.01
     per share issued to Cahill, Warnock Strategic Partners Fund, L.P. ("Cahill
     Warnock Fund"), whose sole general partner is Cahill, Warnock Strategic
     Partners, L.P. ("Cahill Warnock Partners"). In addition, includes 95,464
     shares of Series B Convertible Preferred Stock and a warrant to purchase
     17,900 shares of common stock of the Company at $0.01 per share issued to
     Strategic Associates, L.P. ("Strategic Associates"), whose sole general
     partner is Cahill, Warnock & Company, L.L.C. ("Cahill Warnock"). Each share
     of Series B Convertible Preferred Stock is immediately convertible into one
     share of common stock of the Company, subject to adjustment under certain
     conditions. The warrant is fully vested and immediately exercisable. David
     L. Warnock and Edward L. Cahill are the sole general partners of Cahill
     Warnock Partners and the sole members of Cahill Warnock. David L. Warnock
     and Edward L. Cahill are control persons of Cahill Warnock Fund, Cahill
     Warnock Partners, Strategic Associates, and Cahill Warnock. David L.
     Warnock, Edward L. Cahill, Cahill Warnock Fund, Cahill Warnock Partners,
     Strategic Associates and Cahill Warnock have shared voting power and shared
     dispositive power of these shares and each disclaim beneficial ownership of
     the shares and warrants, except with respect to their pecuniary interest
     therein, if any.

 (7) Not included herein are other warrants which could be issuable under
     certain circumstances pursuant to the terms of the Loan Agreement as
     follows: (i) warrants for up to a total of 707,142 shares of Common Stock
     of the Company are issuable upon the earlier of an event of default under
     the terms of the Loan Agreement or February 17, 2000, provided, however,
     that if the loans are repaid in full prior to February 17, 2000, then no
     additional warrants would be issued, and further provided that if a portion
     of the loans are repaid prior to February 17, 2000, then warrants for a
     number of shares of Common Stock of the Company would be issued on a pro
     rata basis; and (ii) warrants for up to a total of 188,571 shares of Common
     Stock of the Company are issuable if loans made pursuant to the Loan
     Agreement are not repaid in full by December 17, 2001.

 (8) Includes an option to purchase 50,000 shares of Common Stock of the Company
     at $2.50 per share, and an option to purchase 18,829 shares of Common Stock
     of the Company at $3.00 per share. These options are fully vested and
     immediately exercisable.

 (9) Includes an option to purchase 50,000 shares of Common Stock of the Company
     at $2.50 per share, and an option to purchase 18,829 shares of Common Stock
     of the Company at $3.00 per share. These options are fully vested and
     immediately exercisable.

(10) Includes 1,885,711 shares of Series B Convertible Preferred Stock which are
     immediately convertible into shares of the Company's Common Stock. The
     number of shares of Common Stock into which each share of Preferred Stock
     may be converted is presently one share of Common Stock for each share of
     Series B Convertible Preferred Stock, subject to adjustment under certain
     conditions. Also includes a warrant to purchase 353,571 shares of Common
     Stock of the Company at $0.01 per share. The warrant is fully vested and
     immediately exercisable.

                                       19
<PAGE>   20

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The current Board of Directors of the Company has adopted a policy that
Company affairs will be conducted in all respects by standards applicable to
publicly-held corporations and that the Company will not enter into any
transactions and/or loans between the Company and its officers, directors and 5%
stockholders enter into any transactions and/or loans between the Company and
its officers, directors and 5% stockholders unless the terms are no less
favorable than could be obtained from independent, third parties and will be
approved by a majority of the independent, disinterested directors of the
Company.

     The Company sold $4,000,000 of Series B Convertible Preferred Stock and
$4,000,000 of Series C Preferred Stock, and borrowed $6,000,000 from an investor
group consisting of, among others, Cahill, Warnock Strategic Partners Fund,
L.P., Strategic Associates, L.P. and Newpark Resources, Inc. Pursuant to the
financing, David L. Warnock was appointed as a Director of the Company. Mr.
Warnock has an indirect interest in these transactions. Mr. Warnock is a general
partner of Cahill Warnock Strategic Partners, L.P. which is the sole general
partner of Cahill, Warnock Strategic Partners Fund, L.P. Mr. Warnock is a member
of Cahill, Warnock & Company, L.L.C. which is the sole general partner of
Strategic Associates, L.P.

                                       20
<PAGE>   21

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

<TABLE>
<CAPTION>
      EXHIBIT NO.                          IDENTIFICATION OF EXHIBIT
      -----------                          -------------------------
<C>                       <S>
           3.1 (*)        -- Certificate of Incorporation of the Registrant, and
                             amendments thereto.
           3.2 (*)        -- Bylaws of the Registrant
           4.1 (*)        -- See Exhibits 3.1 and 3.2. for provisions of the Articles
                             of Incorporation and Bylaws of the Registrant defining
                             rights of holders of common stock of the Registrant
           4.2 (*)        -- Common Stock specimen
           4.3 (**)       -- Certificate of Designation, Preferences, Rights and
                             Limitations of Series B Convertible Preferred Stock.
           4.4 (**)       -- Certificate of Designation, Preferences, Rights and
                             Limitations of Series C Preferred Stock.
           4.5 (*)        -- Form of Warrant Certificate dated December 17, 1997
                             (Included in Exhibit 10.5).
          10.1 (**)       -- Purchase Agreement dated December 17, 1997, among the
                             Company, Parker Drilling Investment Company and Parker
                             Drilling Company.
          10.2 (*)        -- Loan and Security Agreement dated December 17, 1997 by
                             and among the Company, National Fuel & Energy, and OnSite
                             Technology, L.L.C. as Borrowers and Cahill, Warnock
                             Strategic Partners Fund, L.P., Strategic Associates,
                             L.P., Newpark Resources, Inc. and James H. Stone, as
                             Lenders.
          10.3 (*)        -- Form of Registration Rights Agreement pursuant to Private
                             Placement Memorandum dated September 18, 1996.
          10.4 (*)        -- Form of Registration Rights Agreement dated December 17,
                             1997, between the Company and Cahill, Warnock Strategic
                             Partners Fund, L.P., Strategic Associates, L.P., Newpark
                             Resources, Inc. and James H. Stone.
          10.5 (*)        -- Form of Warrant Agreement dated December 17, 1997,
                             between the Company and Cahill, Warnock Strategic
                             Partners Fund, L.P., Strategic Associates, L.P., Newpark
                             Resources, Inc. and James H. Stone.
          10.6 (*)        -- Employment Agreement of James S. Percell.
          16.1 (***)      -- Letter on Change in Certifying Accountant
          21.1 (*)        -- Subsidiaries of Registrant
          27.1 (*)        -- Financial Data Schedule
</TABLE>

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

(*)   Filed herewith

(**)  Previously filed as an exhibit to the Company's Current Report on Form 8-K
      dated December 17, 1997 and filed December 30, 1997, and incorporated
      herein by reference thereto.

(***) Previously filed as an exhibit to the Company's Current Report on Form 8-K
      dated September 17, 1997 and filed September 19, 1997, and incorporated
      herein by reference thereto.

(B) REPORTS ON FORM 8-K.

     A Current Report on Form 8-K dated December 17, 1997 was filed on December
30, 1997, relating to (i) Item 2. Acquisition or Disposition of Assets and (ii)
Item 7. Financial Statements and Exhibits. An Amendment No. 1 to the Form 8-K
relating to Item 7. Financial Statements and Exhibits was subsequently filed on
March 2, 1998.

                                       21
<PAGE>   22

                                   SIGNATURES

     In accordance with the requirements of Section 13 of 15(d) of the Exchange
Act, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 30th day of March, 1998.

                                            ENVIRONMENTAL SAFEGUARDS, INC.

                                            By:    /s/ JAMES S. PERCELL
                                              ----------------------------------
                                                       James S. Percell
                                                  Chairman of the Board and
                                                   Chief Executive Officer

     Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons in the capacities and on the dates
indicated:

<TABLE>
<CAPTION>
                      SIGNATURE                                    TITLE                     DATE
                      ---------                                    -----                     ----
<C>                                                    <S>                              <C>

                /s/ JAMES S. PERCELL                   Chairman of the Board, Chief     March 30, 1998
-----------------------------------------------------    Executive Officer, and
                  James S. Percell                       Director

                   /s/ BRYAN SHARP                     Director                         March 30, 1998
-----------------------------------------------------
                     Bryan Sharp

                   /s/ ROBIN PATE                      Director                         March 30, 1998
-----------------------------------------------------
                     Robin Pate

                 /s/ ALBERT WOLFORD                    Director and Secretary           March 30, 1998
-----------------------------------------------------
                   Albert Wolford

                /s/ DAVID L. WARNOCK                   Director                         March 30, 1998
-----------------------------------------------------
                  David L. Warnock

                  /s/ RONALD BIANCO                    Chief Financial Officer and      March 30, 1998
-----------------------------------------------------    Vice-Secretary
                    Ronald Bianco
</TABLE>

                                       22
<PAGE>   23

                         ENVIRONMENTAL SAFEGUARDS, INC.

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

                       CONSOLIDATED FINANCIAL STATEMENTS
                      WITH REPORTS OF INDEPENDENT AUDITORS
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<PAGE>   24

                         ENVIRONMENTAL SAFEGUARDS, INC.

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                              PAGE(S)
                                                              -------
<S>                                                           <C>
Reports of Independent Auditors.............................    F-2
Audited Financial Statements
  Consolidated Balance Sheets as of December 31, 1997 and
     1996...................................................    F-4
  Consolidated Statements of Operations for the years ended
     December 31, 1997 and 1996.............................    F-5
  Consolidated Statements of Stockholders' Equity for the
     years ended December 31, 1997 and 1996.................    F-6
  Consolidated Statements of Cash Flows for the years ended
     December 31, 1997 and 1996.............................    F-7
Notes to Consolidated Financial Statements..................    F-8
</TABLE>

                                       F-1
<PAGE>   25

                         REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Environmental Safeguards, Inc.

     We have audited the accompanying consolidated balance sheet of
Environmental Safeguards, Inc. as of December 31, 1997, and the related
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

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

                                                 /s/ ERNST & YOUNG, LLP

Houston, Texas
March 24, 1998

                                       F-2
<PAGE>   26

                         REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Environmental Safeguards, Inc.

     We have audited the accompanying consolidated balance sheet of
Environmental Safeguards, Inc. as of December 31, 1996, and the related
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

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

                                            /s/ HAM, LANGSTON & BREZINA, LLP

Houston, Texas
March 18, 1997

                                       F-3
<PAGE>   27

                         ENVIRONMENTAL SAFEGUARDS, INC.

                          CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1997       1996
                                                              -------    -------
<S>                                                           <C>        <C>
Current assets:
  Cash and cash equivalents.................................  $ 6,686    $ 3,363
  Accounts receivable.......................................    1,554         --
  Prepaid expenses..........................................      206         --
  Deferred taxes............................................       85         --
                                                              -------    -------
          Total current assets..............................    8,531      3,363
Property and equipment, net.................................    6,286          5
Investments in joint venture................................       --      1,980
Acquired engineering design and technology, net.............    3,242         --
Other assets................................................      239        120
                                                              -------    -------
          Total assets......................................  $18,298    $ 5,468
                                                              =======    =======

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current portion of long-term debt.........................  $   844    $    --
  Current portion of capital lease obligation...............    1,039         --
  Accounts payable..........................................      480         10
  Accrued liabilities.......................................      366         49
  Income taxes payable......................................      525         --
                                                              -------    -------
          Total current liabilities.........................    3,254         59
Long-term debt..............................................    4,117      3,694
Capital lease obligation....................................    1,093         --
Deferred gain...............................................       --        200
Minority interest...........................................      628         --
Commitments and contingencies (Notes 6 and 13)
Stockholders' equity:
  Preferred stock; Series B convertible; voting, $.001 par
     value (aggregate liquidation value -- $3,998,000);
     5,000,000 shares authorized; 3,771,422 shares issued
     and outstanding at December 31, 1997...................        4         --
  Preferred stock; Series C non-convertible, non-voting,
     cumulative; $.001 par value (aggregate liquidation
     value -- $4,000,000); 400,000 shares authorized, issued
     and outstanding at December 31, 1997...................        1         --
  Common stock; $.001 par value; 50,000,000 shares
     authorized; 9,282,265 and 6,854,828 shares issued and
     outstanding at December 31, 1997 and 1996,
     respectively...........................................        9          7
  Unissued common stock.....................................       56        813
  Additional paid-in capital................................   14,459      4,152
  Accumulated deficit.......................................   (5,323)    (3,457)
                                                              -------    -------
          Total stockholders' equity........................    9,206      1,515
                                                              -------    -------
          Total liabilities and stockholders' equity........  $18,298    $ 5,468
                                                              =======    =======
</TABLE>

                See notes to consolidated financial statements.

                                       F-4
<PAGE>   28

                         ENVIRONMENTAL SAFEGUARDS, INC.

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

<TABLE>
<CAPTION>
                                                                 YEAR ENDED
                                                                DECEMBER 31,
                                                              -----------------
                                                               1997       1996
                                                              -------    ------
<S>                                                           <C>        <C>
Service revenue.............................................  $ 6,678    $   --
Cost of providing services..................................    3,226        --
                                                              -------    ------
  Gross margin..............................................    3,452        --
Selling, general and administrative expenses................   (2,076)     (511)
Acquired research and development...........................     (786)       --
                                                              -------    ------
  Income (loss) from operations.............................      590      (511)
Other income (expenses):
  Loss from investment in joint venture.....................       --       (93)
  Interest income...........................................      192        18
  Interest expense..........................................     (466)     (138)
  Foreign currency transaction losses.......................      (31)       --
  Other.....................................................        4         3
                                                              -------    ------
Income (loss) before provision for income taxes, minority
  interest, elimination of pre-acquisition earnings of
  subsidiary and extraordinary item.........................      289      (721)
Provision for income taxes..................................    1,205        --
                                                              -------    ------
Loss before minority interest, elimination of
  pre-acquisition earnings of subsidiary and extraordinary
  item......................................................     (916)     (721)
Minority interest...........................................     (547)       --
Elimination of pre-acquisition earnings of subsidiary.......      (34)       --
                                                              -------    ------
Loss before extraordinary item..............................   (1,497)     (721)
Extraordinary gain (loss) on extinguishment of debt.........     (352)       74
                                                              -------    ------
Net loss....................................................  $(1,849)   $ (647)
                                                              =======    ======
Net loss available to common stockholders...................  $(5,880)   $ (647)
                                                              =======    ======
Basic and dilutive earnings (loss) per common share:
  Before extraordinary item.................................  $ (0.61)   $(0.11)
  Extraordinary item........................................    (0.04)      .01
                                                              -------    ------
  Net loss per common share.................................  $ (0.65)   $(0.10)
                                                              =======    ======
Weighted average shares outstanding.........................    9,075     6,375
                                                              =======    ======
</TABLE>

                See notes to consolidated financial statements.

                                       F-5
<PAGE>   29

                         ENVIRONMENTAL SAFEGUARDS, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                        SERIES B    SERIES C             UNISSUED   ADDITIONAL
                                        PREFERRED   PREFERRED   COMMON    COMMON     PAID-IN     ACCUMULATED
                                          STOCK       STOCK     STOCK     STOCK      CAPITAL       DEFICIT     TOTAL
                                        ---------   ---------   ------   --------   ----------   -----------   ------
<S>                                     <C>         <C>         <C>      <C>        <C>          <C>           <C>
Balance at January 1, 1996............    $ --        $ --       $  6      $ 50      $ 2,449       $(2,810)    $ (305)
  Issuance of common stock............                              1        --          409            --        410
  Issuance for which the proceeds were
    received in 1995 (62,500
    shares)...........................      --          --         --       (50)          50            --         --
  Exercise of stock options and
    warrants (410,000 shares).........      --          --         --        --          190            --        190
  Issuances for services, compensation
    and settlement of debt (318,378
    shares)...........................      --          --         --        --          594            --        594
  Proceeds received on Regulation D
    offering that closed in February
    1997..............................      --          --         --       689           --            --        689
  Issuance declared in payment of
    accrued interest on convertible
    debentures (84,791 shares)........      --          --         --        68           --            --         68
  Shares to be issued in January 1998
    under terms of a note settlement
    agreement.........................      --          --         --        56           --            --         56
  Fair value of warrants issued in
    connection with the funding of
    long-term debt (See Note 1).......      --          --         --        --          460            --        460
  Net loss............................      --          --         --        --           --          (647)      (647)
                                          ----        ----       ----      ----      -------       -------     ------
Balance at December 31, 1996..........    $ --        $ --       $  7      $813      $ 4,152       $(3,457)    $1,515
  Issuance of common stock including
    shares for which the proceeds were
    received in 1996 (333,400
    shares)...........................      --          --         --      (689)         833            --        144
  Exercise of stock options (100,000
    shares)...........................      --          --         --        --           60            --         60
  Issuance in conversion of debentures
    and related accrued interest
    (1,994,037 shares)................      --          --          2       (68)       1,125            --      1,059
  Repurchase and cancellation of stock
    warrants originally issued in
    connection with the funding of
    long-term debt in 1996............      --          --         --        --         (170)           --       (170)
  Issuance of preferred stock and
    warrants for common stock
    (3,771,422 shares -- Series B,
    400,000 shares -- Series C and
    warrants for 707,142 shares of
    common stock).....................       4           1         --        --        8,459            --      8,464
  Dividends on Series C preferred
    stock.............................      --          --         --        --           --           (17)       (17)
  Net loss............................      --          --         --        --           --        (1,849)    (1,849)
                                          ----        ----       ----      ----      -------       -------     ------
  Balance at December 31, 1997........    $  4        $  1       $  9      $ 56      $14,459       $(5,323)    $9,206
                                          ====        ====       ====      ====      =======       =======     ======
</TABLE>

                See notes to consolidated financial statements.

                                       F-6
<PAGE>   30

                         ENVIRONMENTAL SAFEGUARDS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  YEAR ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1997       1996
                                                              -------    -------
<S>                                                           <C>        <C>
Cash flows from operating activities:
  Net loss..................................................  $(1,849)   $  (647)
  Adjustment to reconcile net loss to net cash used in
     operating activities:
     Extraordinary (gain) loss..............................      352        (74)
     Elimination of pre-acquisition earnings of
      subsidiary............................................       34         --
     Write-off of acquired research and development.........      762         --
     Common stock exchanged for services and interest
      expense...............................................       30        418
     Loss from investment in joint venture..................       --         93
     Depreciation expense...................................       45         55
     Amortization expense...................................      119         --
     Changes in operating assets and liabilities, net of
      effects of acquisition:
       Accounts receivable..................................     (116)       (57)
       Prepaid expenses and other assets....................     (344)        (1)
       Accounts payable.....................................      163       (131)
       Accrued liabilities..................................       19         47
       Income taxes payable.................................      118         --
                                                              -------    -------
          Net cash provided by (used in) operating
           activities.......................................     (667)      (297)
                                                              -------    -------
Cash flows from investing activities:
  Acquisition of remaining 50% interest in OnSite, net of
     cash acquired..........................................   (6,609)        --
  Purchase of property and equipment........................      (40)        --
  Investment in OnSite......................................   (1,050)    (1,692)
  Proceeds from sale of property and equipment..............       --          6
                                                              -------    -------
          Net cash used in investing activities.............   (7,699)    (1,686)
                                                              -------    -------
Cash flows from financing activities:
  Payments on notes payable.................................       --        (95)
  Net proceeds from long-term debt and convertible
     debentures.............................................    6,191      4,055
  Payments on long-term debt................................   (3,000)       (26)
  Repurchase of stock warrants..............................     (170)        --
  Net proceeds from sale of common stock, preferred stock
     and stock warrants.....................................    8,668      1,218
                                                              -------    -------
          Net cash provided by financing activities.........   11,689      5,152
                                                              -------    -------
Net increase in cash and cash equivalents...................    3,323      3,169
Cash and cash equivalents, beginning of year................    3,363        194
                                                              -------    -------
Cash and cash equivalents, end of year......................  $ 6,686    $ 3,363
                                                              =======    =======
Supplemental disclosure of cash flow information:
  Cash paid for interest....................................  $   421    $     5
                                                              =======    =======
  Cash paid for income taxes................................  $   859    $    --
                                                              =======    =======
</TABLE>

                See notes to consolidated financial statements.

                                       F-7
<PAGE>   31

                         ENVIRONMENTAL SAFEGUARDS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

     Environmental Safeguards, Inc. (the "Company") provides environmental
remediation and hydrocarbon reclamation/recycling services principally to oil
and gas companies, using proprietary Indirect Thermal Desorption ("ITD")
technology. To date the primary service offered by the Company has been the
remediation of soil contaminated by oil based drill cuttings and the subsequent
recovery of diesel and synthetic oils which were in the drill cuttings.
Substantially all of the Company's operations to date have been conducted in
Colombia.

  Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
and its majority owned or controlled subsidiaries after elimination of all
significant intercompany accounts and transactions. (See Note 4)

  Management 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 the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. These estimates mainly involve the useful lives of property and
equipment, the valuation of deferred tax assets and the realizability of
accounts receivable.

  Research and Development

     Research and development activities are expensed as incurred, including
costs relating to patents or rights which may result from such expenditures.

  Revenue Recognition

     Revenue is recognized at the time services are performed or when products
are shipped.

  Concentrations of Credit Risk

     Financial instruments which subject the Company to concentrations of credit
risk include cash and accounts receivable. The Company maintains its cash in
well known banks selected based upon management's assessment of the banks'
financial stability and international capability. Balances periodically exceed
the $100,000 federal depository insurance limit; however, the Company has not
experienced any losses on deposits. Accounts receivable generally arise from
sales of services to multinational energy companies operating in the United
States and South America. Collateral is generally not required for credit
granted. Essentially all of the Company's trade receivables were due from one
multinational energy company for services performed in Colombia. Management
believes that all receivables are fully collectible.

  Cash Equivalents

     For purposes of reporting cash flows, the Company considers all short-term
investments with an original maturity of three months or less to be cash
equivalents.

                                       F-8
<PAGE>   32
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Property and Equipment

     Property and equipment is stated at cost. Depreciation is computed
principally by the straight-line method over the estimated useful lives of 5
years for ITD Units, 7 years for office furniture and equipment, and 3 to 7
years for transportation and other equipment.

  Income Taxes

     The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and income tax carrying amounts of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.

  Stock-Based Compensation

     The Company accounts for its stock compensation arrangements under the
provisions of APB 25, Accounting for Stock Issued to Employees.

  Acquired Engineering Design and Technology

     Acquired engineering design and technology represents the intangible value
associated with certain proprietary equipment and process designs acquired by
the Company in the acquisition of OnSite (See Note 2). This intangible asset is
being amortized over an estimated useful life of 8 years using the straight-line
method. As of December 31, 1997, the accumulated amortization was $18,000.

  Fair Value of Financial Instruments

     The Company includes fair value information in the notes to financial
statements when the fair value of its financial instruments is different from
the book value. When the book value approximates fair value, no additional
disclosure is made.

  Reclassifications

     Certain prior year amounts in the 1996 consolidated balance sheet have been
reclassified to conform to the 1997 presentation. In December 1996, the Company
issued stock warrants in connection with the funding of certain long-term debt
with Parker Drilling Company ("Parker"). These warrants were assigned a value of
zero at the date of issuance but should have been valued at approximately
$460,000 with a related increase to additional paid-in capital. The accompanying
December 31, 1996 financial statements include a reclassification of the value
assigned to stock warrants. This reclassification had no impact on the statement
of operations. In addition, certain amounts in the 1996 statement of operations
have been reclassified to conform to the 1997 presentation.

  Recently Issued Pronouncements

     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. It requires (a)
classification of the components of other comprehensive income by their nature
in a financial statement and (b) the display of the accumulated balance of the
other comprehensive income separate from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
130 is effective for years beginning after December 15, 1997 and is not expected
to have a material impact on financial position or results of operations.

                                       F-9
<PAGE>   33
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. ACQUISITION OF ONSITE TECHNOLOGY, L.L.C.

     On December 17, 1997, the Company acquired Parker Drilling Company's 50%
interest in OnSite Technology, L.L.C. ("OnSite") and, accordingly, OnSite became
a wholly-owned consolidated subsidiary of the Company. Prior to this
transaction, the Company accounted for its 50% ownership interest in OnSite on
the equity method. The $8 million purchase price and the required repayment of
$3 million of long-term debt due to a Parker subsidiary was financed through a
private placement of Series B convertible preferred stock, Series C preferred
stock, senior secured notes, and warrants for shares of the Company's common
stock. This acquisition has been accounted for using the purchase method of
accounting and the results of operations of OnSite have been consolidated with
the Company's for the year ended December 31, 1997 with a deduction in the
consolidated statement of operations for preacquisition earnings attributable to
Parker's interest prior to December 17, 1997.

     The $8 million purchase price has been allocated to the assets acquired and
liabilities assumed based on independent valuation. Approximately $762,000 of
the purchase price was allocated to research and development activities which
had not yet reached technological feasibility. This amount has been included in
the Company's 1997 consolidated statement of operations as acquired research and
development. The following is a summary of assets acquired and liabilities
assumed in the purchase.

<TABLE>
<CAPTION>
                                                              (IN THOUSANDS)
<S>                                                           <C>
Assets acquired:
  Fair value of tangible assets acquired....................      $5,072
  Engineering design and technology.........................       3,259
  Acquired research and development.........................         762
                                                                  ------
                                                                   9,093
Cash paid to Parker, net of cash in OnSite..................       6,609
                                                                  ------
Liabilities assumed.........................................      $2,484
                                                                  ======
</TABLE>

     The following unaudited summary proforma information presents the
consolidated results of operations as if the effective date of the acquisition
occurred at the beginning of each of the periods presented after giving effect
to certain adjustments which include increased depreciation of ITD units, the
expensing of acquired research and development and the additional interest
expense associated with the financing of the transaction.

<TABLE>
<CAPTION>
                                                               1997       1996
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Service revenue.............................................  $ 6,678    $   730
Loss before extraordinary item..............................  $(2,028)   $(2,454)
Net loss....................................................  $(2,028)   $(2,380)
Net loss available to common stockholders...................  $(2,696)   $(7,153)
Basic and dilutive net loss per common share................  $ (0.30)   $ (1.12)
</TABLE>

                                      F-10
<PAGE>   34
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                 1997     1996
                                                                ------    ----
                                                                (IN THOUSANDS)
<S>                                                             <C>       <C>
ITD Remediation/Recycling Units, including the cost of units
  currently under construction of $1,338,000................    $7,019    $--
Office furniture and equipment..............................        18      9
Transportation and other equipment..........................       111     --
                                                                ------    ---
                                                                 7,148      9
Less accumulated depreciation and amortization..............       862      4
                                                                ------    ---
                                                                $6,286    $ 5
                                                                ======    ===
</TABLE>

     The Company presently contracts with one fabricator for the manufacture of
ITD Units and one fabricator for the manufacture of Condensing Units used in the
Company's operations. As of December 31, 1997, the Company had 1 ITD Unit and 2
Condensing Units in process at a cost of $1,338,000 with an expected cost to
complete of approximately $140,000. An unexpected disruption of the fabricator's
ability to timely deliver ITD Units could cause a delay in the Company's ability
to meet future service orders. Should a delay occur, the Company has taken steps
to facilitate the placement of orders with alternative fabricators.

4. INVESTMENT IN ONSITE TECHNOLOGY, L.L.C.

     During the year ended December 31, 1996, the Company accounted for its
investment in OnSite on the equity method. The following summarized financial
information presents the consolidated financial position and results of
operations of OnSite as of December 31, 1996 and for the year then ended:

BALANCE SHEET

<TABLE>
<CAPTION>
                                                              (IN THOUSANDS)
<S>                                                           <C>
                                   ASSETS
Cash and cash equivalents...................................      $  221
Accounts receivable.........................................         210
Prepaid expenses and other assets...........................          48
                                                                  ------
          Total current assets..............................         479
Property and equipment, net.................................       4,665
                                                                  ------
          Total assets......................................      $5,144
                                                                  ======
                      LIABILITIES AND MEMBERS' EQUITY
Accounts payable............................................      $1,111
Accrued liabilities.........................................          15
Income taxes payable........................................          22
Due to the Company..........................................          44
                                                                  ------
          Total current liabilities.........................       1,192
Minority interest in subsidiaries...........................          80
Members' equity.............................................       3,872
                                                                  ------
          Total liabilities and members' equity.............      $5,144
                                                                  ======
</TABLE>

                                      F-11
<PAGE>   35
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                   (IN
                                                               THOUSANDS)
<S>                                                           <C>
Service revenue.............................................      $ 730
Cost of providing services..................................        561
                                                                  -----
  Gross margin..............................................        169
General and administrative expenses.........................        414
                                                                  -----
  Loss before provision for income taxes and minority
     interest...............................................       (245)
Provision for income taxes..................................         22
                                                                  -----
Loss before minority interest...............................       (267)
Minority interest...........................................         82
                                                                  -----
Net loss....................................................      $(185)
                                                                  =====
</TABLE>

5. LONG-TERM DEBT

     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                               1997      1996
                                                              ------    ------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Senior secured notes payable to certain corporate and
  individual investors (the "Investor Notes") funded in
  connection with the Company's acquisition of OnSite. (See
  Note 2) The notes have a face value of $6 million and are
  carried net of an unamortized discount of approximately
  $1,039,000. Payments are due in quarterly principal
  installments of $300,000 plus accrued interest at a stated
  rate of prime plus 1.5% per year through December 2002.
  After considering the amortization of the discount, the
  notes bear an effective interest rate that approximates
  prime plus 7.5% per year. These notes are collateralized
  by all assets of the Company except ITD units financed
  under capital leases......................................  $4,961    $   --
Note payable to Parker, $3 million stated value, bearing
  interest at a stated rate of 6.3% per year and repayable
  based upon cash distributions from OnSite. At December 31,
  1996, the unamortized discount on this note was $460,000.
  This note was repaid December 17, 1997 upon acquisition of
  OnSite (See Note 2). Upon the early extinguishment of this
  debt, the Company incurred an extraordinary loss of
  $352,000 related to the write-off of the unamortized
  discount..................................................      --     2,540
Convertible debentures, bearing interest at a stated rate of
  10% per year. These debentures were converted to common
  stock of the Company in February 1997. (See Note 10)......      --     1,154
                                                              ------    ------
          Total long-term debt..............................   4,961     3,694
Less current maturities.....................................     844        --
                                                              ------    ------
Long-term debt..............................................  $4,117    $3,694
                                                              ======    ======
</TABLE>

     The Investor Notes contain certain covenants, the most restrictive of which
requires the Company to maintain positive working capital of at least $2 million
and precludes the Company from paying common dividends. Management believes the
Company is in compliance with all debt covenants at December 31, 1997.

                                      F-12
<PAGE>   36
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Investor Notes include a commitment by the lenders to provide an
additional $5 million supplemental loan under provisions similar to the initial
loan provided that the Company remains in

                                      F-13
<PAGE>   37
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

compliance with the terms of the initial loan. The Investor Notes also include a
provision for the Company to issue the lenders warrants to acquire an additional
188,571 shares of the Company's common stock at $0.01 per share if the Investor
Notes are not prepaid in full by December 2001.

     Further, the Investor Notes include a provision for the Company to issue to
the lenders warrants to acquire up to a total of 707,142 shares of Common Stock
of the Company upon the earlier of an event of default under the terms of the
Investor Notes or February 17, 2000, provided, however, that if the Investor
Notes are repaid in full prior to February 17, 2000, then no additional warrants
would be issued, and further provided that if a portion of the Investor Notes
are repaid prior to February 17, 2000, then warrants for a number of shares of
Common Stock of the Company would be issued on a pro rata basis.

     Following is an analysis of future annual maturities of long-term debt:

<TABLE>
<CAPTION>
 YEAR ENDED
DECEMBER 31,
------------                                                         (IN THOUSANDS)
<S>          <C>                                                     <C>
   1998............................................................      $  844
   1999............................................................         910
   2000............................................................         982
   2001............................................................       1,060
   2002............................................................       1,165
                                                                         ------
                                                                         $4,961
                                                                         ======
</TABLE>

6. LEASE COMMITMENTS

     During 1997, OnSite Colombia sold and leased back an indirect thermal
desorption unit. No gain or loss resulted from this transaction, and the related
lease is accounted for as a capital lease. Amortization of leased assets is
included in depreciation and amortization expense. Included in property and
equipment in the accompanying consolidated balance sheet at December 31, 1997
are the following assets held under capital leases:

<TABLE>
<CAPTION>
                                                              (IN THOUSANDS)
<S>                                                           <C>
Indirect thermal desorption units...........................      $2,155
Accumulated amortization....................................        (391)
                                                                  ------
Assets under capital leases, net............................      $1,764
                                                                  ======
</TABLE>

     OnSite Colombia also leases office and warehouse facilities and a truck
under operating leases. Certain of the leases provide for renewal options;
however, only one such lease has an original term of greater than one year.
Rental expense for operating leases was $52,000 and $7,000 during the years
ended December 31, 1997 and 1996, respectively.

                                      F-13
<PAGE>   38
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Minimum lease payments due under leases with original lease terms of
greater than one year and expiration dates subsequent to December 31, 1997 are
summarized as follows:

<TABLE>
<CAPTION>
                         YEAR ENDED                           CAPITAL    OPERATING
                        DECEMBER 31,                          LEASES      LEASES
                        ------------                          -------    ---------
                                                                 (IN THOUSANDS)
<S>                                                           <C>        <C>
  1998......................................................  $1,292        $27
  1999......................................................     839         27
  2000......................................................     290         14
Total minimum leases........................................   2,421        $68
                                                                            ===
Less amount representing interest...........................     289
Present value of minimum lease payments.....................   2,132
                                                              ------
Less current portion........................................   1,039
                                                              ------
Long-term portion...........................................  $1,093
                                                              ======
</TABLE>

     Included in other assets at December 31, 1997 is $238,000 of restricted
cash deposits that secure a letter of credit. Such letter of credit serves as a
payment bond on one existing capital lease.

7. INCOME TAXES

     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities were as follows (in
thousands):

<TABLE>
<CAPTION>
                                                               1997      1996
                                                              -------    -----
<S>                                                           <C>        <C>
Deferred tax liabilities:
  Tax on undistributed foreign income.......................  $   196    $  --
Deferred tax assets:
  Net operating loss carryforwards..........................    1,217      758
  Foreign tax credit carryforwards..........................      301       --
  Purchased in-process research and development.............      259       --
  Deferred gain on sale of licensing agreement..............       66       68
  Deferred foreign municipal tax............................       85       --
  Other.....................................................       26       30
                                                              -------    -----
          Total deferred tax assets.........................    1,954      856
  Valuation allowance for deferred tax assets...............   (1,673)    (856)
                                                              -------    -----
                                                                  281       --
                                                              -------    -----
Net deferred tax assets.....................................  $    85    $  --
                                                              =======    =====
</TABLE>

     For financial reporting purposes, income before income taxes, minority
interest and extraordinary items includes the following components:

<TABLE>
<CAPTION>
                                                               1997      1996
                                                              -------    -----
<S>                                                           <C>        <C>
Pretax income (loss):
  United States.............................................  $(2,011)   $(721)
  Foreign...................................................    2,300       --
                                                              -------    -----
                                                              $   289    $(721)
                                                              =======    =====
</TABLE>

                                      F-14
<PAGE>   39
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Significant components of the provision for income taxes attributable to
continuing operations are as follows:

<TABLE>
<CAPTION>
                                                               1997      1996
                                                              -------    ----
<S>                                                           <C>        <C>
Current:
  Federal...................................................  $    --    $ --
  Foreign...................................................    1,290      --
                                                              -------    ----
          Total current.....................................    1,290      --
                                                              -------    ----
Deferred:
  Federal...................................................       --      --
  Foreign...................................................      (85)     --
                                                              -------    ----
          Total deferred....................................      (85)     --
                                                              -------    ----
                                                              $ 1,205    $ --
                                                              =======    ====
</TABLE>

     The Company consolidates its 50% owned subsidiary, OnSite Colombia, Inc., a
Cayman Island company that conducts operations in Colombia. The Cayman Island
imposes no income tax on such operations. However, the operations in Colombia
are subject to Colombian federal and local taxes. Accordingly, the Company has
included in its financial statements the Colombian income tax expense related to
such operations.

     The differences between the Federal statutory income tax rates and the
Company's effective income tax rates were as follows:

<TABLE>
<CAPTION>
                                                              1997    1996
                                                              ----    ----
<S>                                                           <C>     <C>
Federal statutory rate......................................   34%     34%
Foreign (Colombian) income taxes............................  417%     --
Increase in valuation allowance.............................  (34%)   (34%)
                                                              ---     ---
                                                              417%      0%
                                                              ===     ===
</TABLE>

     At December 31, 1997, for federal income tax reporting purposes, the
Company has approximately $3,580,000 of unused net operating losses available
for carryforward to future years. The benefit from carryforward of such net
operating losses will expire during the years ended December 31, 2001 to 2013.
The benefit from utilization of net operating loss carryforwards could be
subject to limitations if significant ownership changes occur in the Company.

8. FOREIGN OPERATIONS

     Financial information relating to the Company's foreign operations is as
follows:

<TABLE>
<CAPTION>
                                                               1997      1996
                                                              ------    ------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Sales to unaffiliated customers.............................  $6,432    $  188
Operating income (loss).....................................   2,574      (118)
Identifiable assets.........................................   6,403     1,278
Net assets..................................................   1,256       135
</TABLE>

     Substantially all of the Company's foreign operations were conducted by the
Company's 50% owned joint company in Colombia. The Company's Colombian
subsidiary operated with the U.S. dollar as its functional

                                      F-15
<PAGE>   40
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

currency and, accordingly, no cumulative translation adjustment is presented in
the accompanying balance sheet.

9. STOCKHOLDERS' EQUITY

     The Company's articles of incorporation authorize the issuance of up to
10,000,000 shares of preferred stock with characteristics determined by the
Company's board of directors. Effective December 17, 1997, in connection with
the Company's acquisition of OnSite, the board of directors authorized the
issuance and sale of up to 5,000,000 shares of Series B convertible preferred
stock and up to 400,000 shares of Series C preferred stock.

  Series B Convertible Preferred Stock

     The Company issued 3,771,422 shares of $0.001 par value Series B
convertible preferred stock. Dividends are paid at the same rate as common stock
based upon the conversion rate. The initial rate is 1 common share for each
preferred share; however, the conversion rate is subject to adjustments to
prevent dilution. The Series B convertible preferred stock has a liquidation
preference of $1.06 per share plus any unpaid dividends.

  Series C Preferred Stock

     The Company issued 400,000 shares of Series C non-voting preferred stock
with a $0.001 per share par value and a $10 per share stated value. The Series C
preferred stock carries a quarterly dividend payable in arrears of prime (8.5%
at December 31, 1997) plus 1.5% based on the stated value of the stock. The
Series C preferred stock is redeemable at the option of the Company at a price
of $10 per share plus any unpaid dividends.

  Common Stock

     In February 1997, the Company completed a public registration of 2,304,792
shares of its common stock. The Company's 10% convertible debentures provided
for automatic conversion into shares of the Company's common stock upon the
effective registration by the Company of its common stock under the Securities
Exchange Act of 1934, as amended. Of the 2,304,792 shares registered, 1,934,792
were newly issued shares for conversion of the 10% debentures and payment of
related accrued interest.

     In February 1997, the Company closed an exempt offering under Regulation D
of the Securities Act of 1933. The Company collected cash proceeds of $833,500
for the issuance of 333,400 shares of common stock ($688,500 collected in 1996
and $145,000 in 1997).

     In February 1996, the Company closed an exempt offering under Regulation D
of the Securities Act of 1933. The Company collected cash proceeds of $700,000
for issuance of 875,000 shares of common stock ($290,000 collected in 1995 and
$410,000 in 1996).

  Unissued Common Stock

     Unissued common stock at December 31, 1997 and 1996 represents shares for
which cash proceeds or other consideration had been received but shares had not
been issued.

  Stock Options

     The Company periodically issues incentive stock options to key employees,
officers, and directors to provide additional incentives to promote the success
of the Company's business and to enhance the ability to attract and retain the
services of qualified persons. The issuance of such options are approved by the
Board of

                                      F-16
<PAGE>   41
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Directors. The exercise price of an option granted is determined by the fair
market value of the stock on the date of grant.

     The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation", requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options is greater than or equals the market price of the
underlying stock on the date of grant, no compensation expense has been
recognized.

     Proforma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996: risk-free interest rate of 6%; no dividend yield;
weighted average volatility factor of the expected market price of the Company's
common stock of 0.698; and a weighted-average expected life of the options of 5
years.

     The Black-Scholes option valuation model was developed for use in
estimating fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

     For purposes of proforma disclosures, the estimated fair value of the
options is included in expense at the date of issuance because the options may
be fully exercised at that date. The Company's proforma information follows:

<TABLE>
<CAPTION>
                                                               1997       1996
                                                              -------    ------
                                                               (IN THOUSANDS,
                                                              EXCEPT PER SHARE
                                                                  AMOUNTS)
<S>                                                           <C>        <C>
Proforma net loss...........................................  $(4,676)   $ (647)
Proforma net loss available to common stockholder's.........  $(8,707)   $ (647)
Proforma basic and dilutive loss per share..................  $ (0.96)   $(0.10)
</TABLE>

     A summary of the Company's stock option activity and related information
for the years ended December 31, 1997 and 1996 follows:

<TABLE>
<CAPTION>
                                              1997                           1996
                                  ----------------------------   ----------------------------
                                              WEIGHTED-AVERAGE               WEIGHTED-AVERAGE
                                   OPTIONS     EXERCISE PRICE     OPTIONS     EXERCISE PRICE
                                  ---------   ----------------   ---------   ----------------
<S>                               <C>         <C>                <C>         <C>
Outstanding -- beginning of
  year..........................  3,323,542        $1.32         3,363,542        $1.21
  Granted.......................  1,598,144         2.82                --           --
  Exercised.....................   (100,000)         .60           (40,000)         .60
  Forfeited.....................         --           --                --           --
                                  ---------                      ---------
Outstanding-end of year.........  4,821,686         1.76         3,323,542         1.21
                                  =========                      =========
Exercisable at end of year......  4,821,686         1.76         3,323,542         1.21
                                  =========                      =========
Weighted-Average fair value of
  options granted during the
  year..........................                    1.77                             --
</TABLE>

                                      F-17
<PAGE>   42
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of outstanding stock options, all of which are currently
exercisable at December 31, 1997, follows:

<TABLE>
<CAPTION>
                                                            REMAINING
                                                           CONTRACTUAL
NUMBER OF SHARES                EXPIRATION DATE            LIFE (YEARS)            EXERCISE PRICE
----------------                ---------------            ------------            --------------
<S>              <C>            <C>                        <C>                     <C>
    463,542...................  November 1998                   0.9                    $5.00
  2,760,000...................  November 2005                   7.9                    $0.60
    602,500...................  March 2007                      9.2                    $2.50
     25,000...................  November 2007                   9.9                    $3.75
    970,644...................  December 2007                  10.0                    $3.00
</TABLE>

  Stock Warrants

     Following is a summary of stock warrant activity:

<TABLE>
<CAPTION>
                                                NUMBER OF      EXERCISE         WEIGHTED
                                                 SHARES          PRICE        AVERAGE PRICE
                                                ---------    -------------    -------------
<S>                                             <C>          <C>              <C>
Warrants outstanding at January 1, 1996.......   370,000         $0.45            $0.45
  Issued......................................   250,000         $2.50            $2.50
  Exercised...................................  (370,000)        $0.45               --
                                                --------
Warrants outstanding at December 31, 1996.....   250,000         $2.50            $2.50
  Issued......................................   757,143      $0.01-$2.50         $0.17
  Canceled....................................  (300,000)        $2.50
                                                --------
Warrants outstanding at December 31, 1997.....   707,143         $0.01            $0.01
                                                ========
</TABLE>

     All warrants outstanding at December 31, 1997 were issued in connection
with the sale of the Company's Series B and Series C preferred stock and the
funding of the Investor Notes (See Note 5). The warrants bear an exercise price
of $0.01 per share, are currently exercisable, and expire in December 2007.

10. EARNINGS PER SHARE

     For the years ended December 31, 1997 and 1996, due to the fact that the
Company incurred net losses, all common stock equivalents have been excluded
from the calculation of earnings per share because their effect is
anti-dilutive. In future periods, the calculation of diluted earnings per share
may require that the common stock equivalents disclosed in Note 9 be included in
the calculation of the weighted average shares outstanding for periods in which
net income is reported, using the treasury stock method. Following is the
reconciliation of net loss to the net loss available to common stockholders.

<TABLE>
<CAPTION>
                                                               1997        1996
                                                              -------      -----
                                                                (IN THOUSANDS)
<S>                                                           <C>          <C>
Net loss....................................................  $(1,849)     $(647)
Less: Accretion of discount on Class B preferred stock......   (3,998)        --
      Series C Preferred stock dividends....................      (17)        --
      Accretion of discount on Class C preferred stock......      (16)        --
                                                              -------      -----
Net loss available to common stockholders...................  $(5,880)     $(647)
                                                              =======      =====
</TABLE>

11. RESEARCH AND DEVELOPMENT

     During the year ended December 31, 1997, expenditures for research and
development were $786,000, which includes approximately $762,000 of acquired
research and development (See Note 2). During the year

                                      F-18
<PAGE>   43
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ended December 31, 1996, all research and development was conducted by OnSite
and such expenses are not included separately in the 1996 consolidated financial
statements as OnSite was accounted for under the equity method.

12. MAJOR CUSTOMERS

     During the years ended December 31, 1997 and 1996, the Company provided
services to only two customers and each accounted for more than 10% of service
revenue.

13. LITIGATION

     The Company is involved as a defendant in certain litigation filed by an
engineering company (the "Engineering Company") that constructed certain soil
remediation units for the Company. The litigation originally involved claims by
the Engineering Company that the Company owed additional compensation of
approximately $150,000 for units which the Company believes did not meet
required performance criteria. The Company filed a counter claim for $200,000 to
obtain damages from the Engineering Company. The Company has been advised that
in 1994, the Engineering Company filed a petition seeking Chapter 11 Bankruptcy
Protection. A Notice of Automatic Stay was filed in August 1994. In January
1995, the Engineering Company filed a Plan of Reorganization with the Bankruptcy
Court whereby the Company received nothing and no adversary pleadings were filed
against the Company. The Company believes, after consultation with legal
counsel, that the risk of material financial exposure to the Company is remote.

14. RELATED PARTY TRANSACTIONS

     The Company and OnSite share office facilities and certain employees.
Shared costs are generally specifically identified by company; however, certain
costs must be allocated based upon management's estimates. The operations of the
Company and OnSite were combined during the year ended December 31, 1997 in a
manner described in Note 4. However, during the period from January 1, 1997
through December 17, 1997 and the year ended December 31, 1996, 50% of OnSite's
operations were attributable to Parker, the former owner of a 50% interest in
OnSite.

15. NON-CASH INVESTING AND FINANCING ACTIVITIES

     The Company engaged in certain non-cash investing and financing activities
as follows:

<TABLE>
<CAPTION>
                                                               1997     1996
                                                              ------    ----
                                                              (IN THOUSANDS)
<S>                                                           <C>       <C>
Conversion of debentures to common stock, net of deferred
  offering costs............................................  $  889    $ --
Assumption of liabilities upon acquisition of OnSite
  Technology, L.L.C. (Includes $607 minority interest in
  OnSite Colombia, Inc.)....................................   2,484      --
Deferred gain offset in acquisition of OnSite...............     193      --
Investment in the Joint company in exchange for an
  all-inclusive license for ITD technology..................      --     203
Converted short-term notes and accrued liabilities to common
  stock.....................................................      --     276
</TABLE>

                                      F-19
<PAGE>   44

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
      EXHIBIT NO.                          IDENTIFICATION OF EXHIBIT
      -----------                          -------------------------
<C>                       <S>
           3.1 (*)        -- Certificate of Incorporation of the Registrant, and
                             amendments thereto.
           3.2 (*)        -- Bylaws of the Registrant
           4.1 (*)        -- See Exhibits 3.1 and 3.2. for provisions of the Articles
                             of Incorporation and Bylaws of the Registrant defining
                             rights of holders of common stock of the Registrant
           4.2 (*)        -- Common Stock specimen
           4.3 (**)       -- Certificate of Designation, Preferences, Rights and
                             Limitations of Series B Convertible Preferred Stock.
           4.4 (**)       -- Certificate of Designation, Preferences, Rights and
                             Limitations of Series C Preferred Stock.
           4.5 (*)        -- Form of Warrant Certificate dated December 17, 1997
                             (Included in Exhibit 10.5).
          10.1 (**)       -- Purchase Agreement dated December 17, 1997, among the
                             Company, Parker Drilling Investment Company and Parker
                             Drilling Company.
          10.2 (*)        -- Loan and Security Agreement dated December 17, 1997 by
                             and among the Company, National Fuel & Energy, and OnSite
                             Technology, L.L.C. as Borrowers and Cahill, Warnock
                             Strategic Partners Fund, L.P., Strategic Associates,
                             L.P., Newpark Resources, Inc. and James H. Stone, as
                             Lenders.
          10.3 (*)        -- Form of Registration Rights Agreement pursuant to Private
                             Placement Memorandum dated September 18, 1996.
          10.4 (*)        -- Form of Registration Rights Agreement dated December 17,
                             1997, between the Company and Cahill, Warnock Strategic
                             Partners Fund, L.P., Strategic Associates, L.P., Newpark
                             Resources, Inc. and James H. Stone.
          10.5 (*)        -- Form of Warrant Agreement dated December 17, 1997,
                             between the Company and Cahill, Warnock Strategic
                             Partners Fund, L.P., Strategic Associates, L.P., Newpark
                             Resources, Inc. and James H. Stone.
          10.6 (*)        -- Employment Agreement of James S. Percell.
          16.1 (***)      -- Letter on Change in Certifying Accountant
          21.1 (*)        -- Subsidiaries of Registrant
          27.1 (*)        -- Financial Data Schedule
</TABLE>

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

(*)   Filed herewith

(**)  Previously filed as an exhibit to the Company's Current Report on Form 8-K
      dated December 17, 1997 and filed December 30, 1997, and incorporated
      herein by reference thereto.

(***) Previously filed as an exhibit to the Company's Current Report on Form 8-K
      dated September 17, 1997 and filed September 19, 1997, and incorporated
      herein by reference thereto.