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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ---------------------
                                   FORM 10-K
       [X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       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>
<CAPTION>
             TITLE OF EACH CLASS                  NAME OF EACH EXCHANGE ON WHICH REGISTERED
             -------------------                  -----------------------------------------
<S>                                             <C>
        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-K or any amendment to this
Form 10-K.  [X]

     The aggregate market value of Common Stock held by non-affiliates of the
registrant at March 27, 2001, based upon the last closing price of $0.26 on the
American Stock Exchange, was $2,570,000. As of March 27, 2001, there were
10,112,144 shares of Common Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Not applicable

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                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
                                   PART I

Item 1    Business....................................................    1
Item 2.   Properties..................................................    5
Item 3.   Legal Proceedings...........................................    5
Item 4.   Submission of Matters to a Vote of Security Holders.........    6

                                  PART II

Item 5.   Market for Registrant's Common Equity and Related
            Stockholder Matters.......................................    6
Item 6.   Selected Financial Data.....................................    6
Item 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations.................................    8
Item 7A.  Quantitative and Qualitative Disclosures About Market
            Risk......................................................   12
Item 8.   Financial Statements and Supplementary Data.................   13
Item 9.   Changes in and Disagreements With Accountants on Accounting
            and Financial Disclosure..................................   13

                                  PART III

Item 10.  Directors and Executive Officers of the Registrant..........   13
Item 11.  Executive Compensation......................................   14
Item 12.  Security Ownership of Certain Beneficial Owners and
            Management................................................   19
Item 13.  Certain Relationships and Related Transactions..............   21

                                  PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form
            8-K.......................................................   22
</TABLE>

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                                     PART I

ITEM 1. BUSINESS

INTRODUCTION

     Environmental Safeguards, Inc. is engaged in the development, production
and sale of environmental remediation and recycling technologies and services to
oil and gas industry participants, waste management companies and other
industrial customers, through its wholly-owned subsidiaries National Fuel &
Energy, Inc. ("NFE") and OnSite Technology, L.L.C. ("OnSite"). OnSite has four
wholly-owned subsidiaries, OnSite Environmental UK Ltd., OnSite Venezuela, Inc.,
OST Equipment Leasing L.L.C. and OnSite Mexico, L.L.C., and two 50%-owned
subsidiaries, OnSite Colombia, Inc. and OnSite Arabia, Inc., through which it
operates in foreign locations. The environmental remediation and recycling
services that we provide involve the removal of hydrocarbon contaminants and
valuable drilling fluids from soil using indirect thermal desorption remediation
and recycling technology. We provide these services on-site or at the central
location to which the customer hauls the contaminated materials.

HISTORY

     We were incorporated under the laws of the State of Nevada in December
1985, under the name of Cape Cod Investment Company. In December 1986, our name
was changed to Cape Cod Ventures, Inc. In August 1987, an initial public
offering was completed for 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, an Agreement and
Plan of Reorganization was executed with National Fuel & Energy, Inc., a Wyoming
corporation, providing for the acquisition of NFE in exchange for shares of our
Common Stock. In connection with the reorganization, our name was changed to
Environmental Safeguards, Inc., and NFE became our wholly-owned subsidiary.

     In January 1995, we entered into an agreement with Parker Drilling Company
("Parker"), a Delaware corporation, granting Parker exclusive marketing rights
to our 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, we expanded our
agreement with Parker by forming OnSite, a joint company between NFE and Parker,
in which NFE and Parker each owned 50%. In December 1997, we entered into a
Purchase Agreement (the "Purchase Agreement") with Parker which provided for our
acquisition, 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, we paid $8,000,000 for the 50% equity interest
and repaid a $3,000,000 loan that had been made to us by an affiliate of Parker.
As part of the transaction, Parker returned to us unexercised warrants to
purchase 300,000 shares of our Common Stock.

     Our 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 one of our Directors.

BUSINESS ACTIVITIES

     General:  Substantially all of our 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 its Internal Thermal Desorption ("ITD")
units, and the proprietary processes for on-site remediation and recycling of
hydrocarbon contaminated soil. To date, the environmental remediation and
recycling services which we have provided have involved the removal of petroleum
contaminants from soil using our ITD units. Our ITD units are easily

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transported processing systems which produce clean soil from contaminated soil
while reclaiming the hydrocarbons. Our customers consist primarily of 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 and waste management companies in the business of offering waste
disposal services.

     The primary services which we offer involve remediation and recycling of
soil contaminated by oil-based drilling fluids, fuel spills, leakage at storage
tanks, refinery wastes, ship sludges and other sources of hydrocarbon
contamination, as well as the remediation of industrial waste. To remediate and
recycle the contaminated soil, we utilize our 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 resulting in a safe and clean process. Our ITD units are
mobile, and thus, contaminated soil can be remediated and recycled at the site
where the contaminated soil is located. We do not haul or dispose of soil or
contaminants away from the customer's location.

     As of March 28, 2001, we owned six ITD units outright, and had a 50%
interest in four additional units which are owned by our 50%-owned subsidiaries
OnSite Arabia, Inc. (two units) and OnSite Colombia, Inc. (two units).

     Customers:  Our customers consist primarily of large oil and gas industry
participants, waste management companies and other industrial companies. Through
OnSite, we typically submit 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, equipment is
moved to the client's desired location.

     Indirect Thermal Remediation and Recycling:  The primary services we offer
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, ships and dock
facilities and other similar 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 we have employed our ITD units to provide
remediation and recycling services to oil and gas industry drilling operations,
tank farms and compressor sites, industrial waste disposal facilities and
oilfield waste disposal facilities. 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.

     Our ITD units, which are portable equipment, utilize a rotating,
heat-jacketed trundle to vaporize hydrocarbons from contaminated soil or other
contaminated materials. Our ITD units consist 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 hydrocarbon vapor to
condense to a liquid for 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, or other
contaminated materials, are 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 200 to 1,000 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

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confirm that the contaminants have been removed and the soil condition is within
an acceptable 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, our ITD units have demonstrated
their ability to process 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 our ITD units will continue to perform at this level, or
that this performance will continue to be competitive with other technologies
available in the market.

     Recycling of Hydrocarbon Contaminants:  We have developed proprietary
processes which are embodied in the condensation process system unit, one of the
two principal components of our ITD units. 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. We believe that this ability to
recycle the hydrocarbon contaminant(s) is an important competitive advantage, as
compared to the bioremediation, direct burn or "dig and haul" remediation
technologies.

     Manufacturing of ITD Units:  We have historically contracted with outside
fabricators to manufacture our ITD units. The primary contractors we have used
are National Oilwell and Houston ProFab. Currently, we have no ITD units under
construction by fabricators.

EXISTING CONTRACTS FOR OPERATIONS

     We operate with our own trained personnel through wholly or partially-owned
subsidiaries as discussed above, and as of March, 2001, our ITD units are
located in Colombia, Venezuela, Mexico, Scotland, the United Arab Emirates and
the United States.

COMPETITION

     There are many companies that currently dispose of hazardous and industrial
wastes and remediate or clean contaminated sites. 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 our competitors are
established companies with substantially greater capital resources, larger
research and development staffs and facilities and greater marketing
capabilities than us. There can be no assurance that we will be competitive in
the remediation and recycling industry in the future.

     We obtain our contracts through competitive bidding and are in direct
competition with companies providing alternative means of, and utilizing
alternative technologies for, remediating environmental problems. The most
significant competition comes from companies 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. We believe that the
technology we utilize is competitive because our 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, our remediation and recycling process addresses the
latent liability associated with the contamination at the site. We are currently
investigating techniques and technologies capable of evaporation of non-needed
liquids and micro-filtration applications. There can be no assurance that we
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.

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     Companies utilizing direct burn technology use direct heat sources to
incinerate contaminants found in the soil. Due to the closed nature of the heat
transfer systems of our ITD units, we 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 our ITD units have processed materials with
contamination levels as high as 40%. In addition, the portable nature of our ITD
units permit them to be located at the contamination site. Our ITD units also
permit the customer to recapture certain valuable liquids which are otherwise
destroyed.

     We differentiate ourselves from our competitors by providing significantly
higher operational service and a significantly higher value-added result for our
clients for the remediation of hydrocarbons from soils and other mediums, and
the subsequent reclaiming of the hydrocarbons into liquids for customer
recycling or resale. For example, some of the design features of our ITD unit,
which we believe provide service-level advantages, include:

     Remediation:  Our ITD units remove 99.9% of hydrocarbon contaminants from
the waste-stream soil, effectively eliminating the client's latent liability.

     Recycling:  Our ITD units transform waste streams into value for our
clients by reclaiming valuable hydrocarbons for client recycling or resale. For
example, our equipment has reclaimed millions of gallons of diesel oil while
processing drill cuttings for major oil and gas participants.

     Tonnage:  Our ITD units have proven processing capability of 1 to 10 tons
per hour with up to 30% hydrocarbon-saturation in the soil. Some competitors are
capable of similar processing speeds, but at lower hydrocarbon-saturation
levels, resulting in throughput advantages for us.

     Portability:  Our ITD units are built on two 44 foot trailer beds for
easier transport to our client's location, avoiding costly hauling expenses of
contaminated materials to a central location. In addition, the design of our ITD
units permit rig-down and/or rig-up in less than a day. Some competitive units
are much less transportable, or not transportable at all.

     Wide Range of Hydrocarbons Treated:  Our ITD units operate at low
temperatures (200 degrees Fahrenheit), high temperatures (1,000 degrees
Fahrenheit), and anywhere in between, thereby enabling the remediation of wide
ranges of hydrocarbon contaminants encountered at a client's site including both
oil and gas and industrial waste. We believe that competition in the industry is
concentrated in remediation services, whereas our ITD technology not only
provides remediation services, but also is capable of reclaiming and recycling
valuable drilling fluids and hydrocarbons. Further, we believe that our pricing
policies are competitive. No assurance, however, can be given that we will be
able to successfully compete with other companies or alternative technologies.

GOVERNMENTAL REGULATIONS -- COST OF COMPLIANCE

     We render 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.
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 we be deemed to be
responsible for contamination or pollution caused or increased by any
evaluation, remediation or cleanup effort conducted by us, or for an accident
which occurs in the course of such remediation or cleanup effort. There can be
no assurance that our policy of establishing and implementing proper procedures
for complying with environmental regulations will be effective at preventing us
from incurring a substantial environmental liability. If we were to incur a
substantial uninsured liability for environmental damage, our financial
condition could be materially adversely affected.

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     We presently have 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, we may not
be able to comply in either the delivery of our 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 our 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. Site-related permits, however, are generally the responsibility
of the client.

EMPLOYEES

     We currently have 27 employees, 8 of whom are in domestic and international
management or supervisory positions, including corporate and administrative
functions. None of our employees are represented by a union. We consider our
employee relations to be good.

TRANSFER AGENT AND REGISTRAR

     The co-transfer agents and registrars for our Common Stock 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

     Our principal executive offices are located in leased facilities at 2600
South Loop West, Suite 645, Houston, Texas 77054, which consist of 3,852 square
feet. The lease for the executive offices will expire in May, 2001. We believe
that our offices are adequate for our present needs and that suitable space will
be available to accommodate our future needs.

     We incorporate by reference in response to this item the information set
forth in item 1 of this annual report and the information set forth in Note 5 of
the Notes to Consolidated Financial Statements included in item 8 of this annual
report.

ITEM 3. LEGAL PROCEEDINGS

     In August 2000, litigation was instituted against us styled as Duratherm,
Inc. vs OnSite Technology LLC, Waste Control Specialists LLC and Kevin Nowlin;
In the United States District Court for the Southern District of Texas; Civil
Action No. H-00-2727. This is a lawsuit against OnSite, a former customer of
OnSite ("WCS") and a former employee of OnSite ("Nowlin") by Duratherm, Inc.
alleging (i) infringement of U.S. patent no. 5,523,060; (ii) misappropriation
and misuse of trade secrets and breach of confidentiality relationship; (iii)
tortuous interference with a business relationship; (iv) civil conspiracy to
commit the acts (ii)-(iii) listed above; and (v) business disparagement.
Plaintiff sought damages, exemplary damages, treble damages for infringement and
a permanent injunction (as well as attorneys fees and interest). The amount of
damages was not specified. OnSite filed a motion to dismiss on the grounds that
Duratherm was not the proper party to sue on the patents (or alternatively that
Duratherm needed to add additional parties as plaintiff's to the suit). This
motion to dismiss was granted by the court. Due to the pendant nature of the
other claims the entire case was dismissed. The decision was not appealed.
Duratherm could, however, re-file the lawsuit with the addition of other
parties. It could also refile the claims unrelated to the patent in state court.
OnSite still believes that it has a meritorious defense on the claims alleged in
the original lawsuit and will continue to vigorously defend against such claims
if they are reasserted. It is not possible at this time to determine the
probability of refiling the suit. OnSite's insurance carrier denied coverage
with regard to claims (i)-(iv), but accepted the (v) business disparagement
claim subject to a reservation of rights.

     While there is no pending litigation against our company, we are from time
to time involved in various other litigation incidental to our business, which
at times involve claims for significant monetary amounts, some of which would
not be covered by insurance.

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

     There were no matters submitted to a vote of security holders during the
fourth quarter of 2000.

                                    PART II

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

PRICE RANGE OF COMMON STOCK

     Our Common Stock is currently traded on the American Stock Exchange under
the symbol "EVV." The following table sets forth the range of high and low
closing sales prices of our Common Stock for the periods shown:

                            COMMON STOCK PRICE RANGE

<TABLE>
<CAPTION>
                                                              HIGH       LOW
                                                              -----     -----
<S>                                                           <C>       <C>
1999
  First Quarter.............................................  $2.00     $1 1/8
  Second Quarter............................................  $1 1/2    $  15/16
  Third Quarter.............................................  $1 11/16  $  7/8
  Fourth Quarter............................................  $1 3/8    $  3/4
2000
  First Quarter.............................................  $1 11/16  $  13/16
  Second Quarter............................................  $1 1/16   $  9/16
  Third Quarter.............................................  $  11/16  $  5/16
  Fourth Quarter............................................  $  3/8    $  3/16
</TABLE>

     On March 27, 2001, the closing price of our Common Stock was $0.26 per
share. On the same date, we had approximately 1,000 stockholders of record,
including broker-dealers holding shares beneficially owned by their customers.

DIVIDEND POLICY

     We have not paid, and do not currently intend to pay cash dividends on our
Common Stock in the foreseeable future. The current policy of our Board of
Directors is to retain all earnings, if any, to provide funds for the operation
and expansion of our business. The declaration of dividends, if any, will be
subject to the discretion of our Board of Directors, which may consider such
factors as our results of operations, financial condition, capital needs and
acquisition strategy, among other factors. We may not, except for dividends
payable in connection with our Series D Preferred Stock, authorize or pay any
dividends at any time if any amount is unpaid with respect to our current Loan
Agreement.

ITEM 6. SELECTED FINANCIAL DATA

     We have derived the following selected consolidated financial information
as of December 31, 2000 and 1999, and for each of the years in the three-year
period ended December 31, 2000, from our audited consolidated financial
statements included in item 8 of this annual report. You should read this
information in conjunction with those consolidated financial statements and the
notes thereto. We have derived the selected consolidated financial information
as of December 31, 1998, 1997 and 1996, and for each of the years in the
two-year period ended December 31, 1997, from our audited consolidated financial
statements of the

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Company, that are not included herein. Please read "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in item 7 of this
annual report.

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                ----------------------------------------------
                                                 2000      1999      1998      1997      1996
                                                -------   -------   -------   -------   ------
                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                             <C>       <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA(1):
Revenue.......................................  $11,250   $13,514   $10,672   $ 6,678   $   --
Income (loss) from operations.................    1,029     3,098     1,404       590     (511)
Net loss(2)...................................   (1,462)     (483)     (799)   (1,849)    (647)
Basic and dilutive net loss per share:
  Before extraordinary item...................    (0.19)    (0.12)    (0.17)    (0.61)   (0.11)
Extraordinary item............................       --        --        --     (0.04)    0.01
                                                -------   -------   -------   -------   ------
          Net loss per share..................  $ (0.19)  $ (0.12)  $ (0.17)  $ (0.65)  $(0.10)
                                                =======   =======   =======   =======   ======
</TABLE>

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                ----------------------------------------------
                                                 2000      1999      1998      1997      1996
                                                -------   -------   -------   -------   ------
                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                             <C>       <C>       <C>       <C>       <C>
BALANCE SHEET DATA(1):
Working capital surplus (deficit).............  $  (258)  $ 1,564   $ 5,431   $ 5,277   $3,304
Property and equipment, net...................    8,929    10,835     8,256     6,286        5
Total assets..................................   15,153    18,990    20,164    18,298    5,468
Long-term debt (including capital lease
  obligations), net of current portion........    2,163     4,325     6,636     5,210    3,694
Shareholders' equity..........................    5,664     6,956     7,813     9,206    1,515
</TABLE>

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

(1) For the year ended December 31, 1996, our investment in OnSite was accounted
    for using the equity method, because our 50% ownership interest did not
    provide effective control of OnSite. However, on December 17, 1997, we
    acquired the remaining 50% of OnSite from our former Joint Venture partner.
    Accordingly, we consolidated OnSite for the years ended December 31, 2000,
    1999, 1998 and 1997. This transaction affects the comparability of the
    selected financial information for periods prior to the year ended December
    31, 1997.

(2) Included in net loss for the year ended December 31, 1997 is a $786,000
    charge for acquired research and development in connection with the
    acquisition of OnSite.

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

     The following discussion should be read in conjunction with our
consolidated financial statements and related notes included in item 8 of this
annual report, and our "Forward-Looking Statements" which discusses certain
limitations inherent in such statements.

INFORMATION REGARDING AND FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

     We are including the following cautionary statement in this Form 10-K 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 us, or on behalf of us. 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 in this Form 10-K are forward-looking
statements. Words such as "expects," "anticipates," "estimates" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties are set forth
below. Our expectations, beliefs and projections are expressed in good faith and
are believed to have a reasonable basis, including without limitation, our
examination of historical operating trends, data contained in our records and
other data available from third parties. There can be no assurance, however,
that our expectations, beliefs or projections will result, be achieved, or be
accomplished.

     In addition to other factors and matters discussed elsewhere herein, the
following are important factors that, in our view, could cause material adverse
effects on our financial condition and results of operations: our ability to
secure contracts for our ITD units; our ability to attain widespread market
acceptance of our technology; our ability to obtain acceptable forms and amounts
of financing to fund continuing operations; the demand for, and price level of,
our services; competitive factors; the actual useful life of our ITD Units;
ability to mitigate concentration of business in a small number of customers;
the evolving industry and technology standards; the ability to protect
proprietary technology; the dependence on key personnel; the effect of business
interruption due to political unrest; the foreign exchange fluctuation risk; and
our ability to maintain acceptable utilization rates on our equipment. We are
not obligated to update or revise these forward-looking statements to reflect
the occurrence of future events or circumstances.

OVERVIEW

     We are engaged in the development, production and sale of environmental
reclamation and recycling technologies and services. Substantially all of our
technologies and services are provided through OnSite and we are devoting
substantially all of our efforts to the development of markets for OnSite's
services. We are currently providing reclamation and recycling services to
companies engaged in land-based oil and gas exploration, waste management, and
other industrial applications.

     Oil and gas exploration, refinery and other types of industrial activities,
often produce significant quantities of petroleum-contaminated drill cuttings
and waste, from which our 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. We have expanded
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, petrochemical and waste management sites, as well
as at Superfund, DOD and DOE sites.

     On December 17, 1997, we acquired the remaining 50% interest in OnSite from
Parker Drilling Co. ("Parker"), giving us complete control of the ITD technology
owned by OnSite, and providing us with a wholly-owned operating subsidiary that
forms the cornerstone of our future operations. Total purchase consideration in
the OnSite acquisition was financed by us through a private placement of
Convertible Preferred and Preferred Stock, combined with senior secured notes
and warrants to purchase shares of our Common Stock. We included OnSite's
operating results in our statement of operations for the year ended December
31,1997, as though the acquisition took place at the beginning of that year, and
deducted as a separate line item the pre-acquisition earnings attributable to
the former 50% owner of OnSite.
                                        8
<PAGE>   11

     We have focused essentially all of our attention on our now wholly-owned
business operations in OnSite. OnSite was formed, as a 50%-owned joint company
with Parker, as a means for assembling the capital necessary to build and
improve the ITD process and to generate market awareness and acceptance of ITD
technology. We expect that a substantial portion of our revenues will continue
to be generated from major international oil and gas industry participants, as
well as from other industrial applications.

     In November 1996, we formed a 50%-owned joint company, OnSite Colombia,
Inc., to provide hydrocarbon contaminated soil reclamation and recycling
services to oil and gas industry participants operating in Colombia.

     In January, 1998, OnSite Venezuela, Inc., our 100% owned subsidiary,
commenced operations to provide hydrocarbon contaminated soil reclamation and
recycling services to oil and gas industry participants operating in Venezuela.

     In December, 1998, we formed a 50%-owned joint company, OnSite Arabia,
Inc., to provide hydrocarbon contaminated soil reclamation and recycling
services to oil and gas industry participants operating in the Arabian Gulf
region.

     In April, 1999, we formed OnSite Environmental UK, Ltd., a wholly-owned
subsidiary, for operations in Scotland.

     In July, 1999, we registered OnSite Mexico LLC, a wholly-owned subsidiary,
for operations in Mexico.

RESULTS OF OPERATIONS

  Comparison of Operating Results -- Years Ended December 31, 2000 and 1999

     Summary.  For the year ended December 31, 2000, we incurred a net loss of
$1,462,000 as compared to a 1999 net loss of $483,000. The $979,000 increase in
net loss was primarily due to the sale of an ITD unit during the first quarter
of 1999 (not repeated during 2000), 10% lower equipment utilization during 2000
and the cost of equipment relocations during the first quarter of 2000.
Additional information follows.

     Revenue and Gross Margin.  Revenue of $11.3 million for 2000 generated $5.2
million (46% of revenue) gross margin as compared to revenue of $13.5 million
and gross margin of $7.3 million (54% of revenue) in 1999. The majority of the
2000 decrease in revenue was due to operating an average of 4.2 ITD units during
2000 as compared to an average of 4.6 in 1999, a reduction of 10%, combined with
the sale of an ITD unit to a 50%-owned subsidiary during the first quarter of
1999 (not repeated during 2000). The 8% decrease in gross margin ratio was
mainly due to the combination of increased ITD depreciation expense in 2000 (two
additional ITDs compared with 1999) and transportation and customs duty expenses
associated with movements of ITD units in and out of Latin America in the first
quarter of 2000.

     Selling, General and Administrative ("SGA") Expense.  SGA expenses were at
about the same level as 1999, both in amount and by type of expense. The average
number of management employees classified as SGA remained essentially the same
in 2000 as with 1999.

     Research & Development Costs ("R&D") Expense.  The expense for 2000,
essentially unchanged from 1999, reflects ongoing R&D improvements to our Series
6000 ITD system design.

     Amortization of Engineering Design and Developed Technology.  Reflects the
amortization of Engineering Design and Developed Technology costs, an intangible
asset related to the December 1997 acquisition of the remaining 50% interest in
OnSite from Parker Drilling. The intangible asset is being amortized over an 8
year estimated economic life.

     Interest Income.  The reduction in interest income resulted from a lower
average cash balance available for short term investment income during 2000.

     Interest Expense.  During 2000, $1,018,000 of interest expense was incurred
(including amortization of debt issuance costs of $294,000), compared to
interest expense of $1,455,000 for 1999 (including amortization of debt issuance
costs of $489,000, partly offset by $45,000 of interest capitalized in
connection with the first

                                        9
<PAGE>   12

quarter 1999 construction of ITD units). The $437,000 overall decrease in
interest expense for 2000 was due to lower interest expense on two international
leases in Colombia, lower amortization of debt issuance costs as noted above,
partially offset by no interest capitalization in 2000, as compared to $45,000
in 1999.

     Other Income (Expense).  Other income is mainly composed of foreign
currency translation gains. The financial statements of our foreign subsidiaries
are measured as if the functional currency were the U.S. Dollar ("USD"). The
re-measurement of local currencies into USD created favorable translation
adjustments which were included in net income in each year 2000 and 1999.

     Income Taxes.  The tax provision primarily relates to foreign income tax
effects in our Colombia, Venezuela, Mexico and Scotland subsidiaries in 2000,
and in our Colombia, Scotland and Mexico subsidiaries in 1999. We have 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 primarily 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. We are implementing tax planning strategies, which if
successful, may result in our recognizing these deferred tax assets in future
periods, which would result in significantly reduced effective tax rates.
However, presently there can be no assurances that the NOLs and foreign tax
credits will be utilized.

     Minority (Interest) Income.  Minority interest expense for 2000 reflects
our 50% minority partner's interest in the net income of OnSite Colombia, partly
offset by net loss of OnSite Arabia. During 1999, the minority interest expense
reflects our 50% minority partner's interest in the net income of OnSite
Colombia.

  Comparison of Operating Results -- Years Ended December 31, 1999 and 1998

     Summary.  For the year ended December 31, 1999, a net loss of $483,000 was
incurred as compared to a 1998 net loss of $799,000. The $316,000 reduction in
net loss was primarily due to higher revenue and improved gross margins from a
greater average number of ITD units in service, partially offset by higher
interest expense. Additional information follows.

     Revenue and Gross Margin.  Revenue of $13.5 million for 1999 generated $7.3
million (54% of revenue) gross margin in 1999 as compared to revenue of $10.7
million and gross margin of $5.3 million (50% of revenue) in 1998. The majority
of the 1999 increase in revenue was due to operating an average of 4.6 ITD units
during 1999 as compared to an average of 3.6 in 1998, an increase of 28%. The 4%
increase in gross margin ratio was largely due to lower startup expenses as
compared to 1998, improved processing efficiency in foreign operations and an
overall more favorable project mix during 1999.

     Selling, General and Administrative ("SGA") Expense.  SGA expense increased
9% during 1999 due to increased business activity in general (revenue increased
27%). Overall, the average number of management employees remained the same in
1999 as in the prior year.

     Research & Development Costs ("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.

     Amortization of Engineering Design and Developed Technology.  Reflects the
amortization of Engineering Design and Developed Technology costs, an intangible
asset related to the December 1997 acquisition of the remaining 50% interest in
OnSite from Parker Drilling. The intangible asset is being amortized over an 8
year estimated economic life.

     Interest Income.  In 1999, we earned interest income from cash surpluses.
The reduction in interest income resulted from a lower average cash balance
during 1999.

     Interest Expense.  During 1999, $1,455,000 of interest expense was incurred
(including amortization of debt issuance costs of $489,000, partly offset by
$45,000 of interest capitalized in connection with the first quarter 1999
construction of ITD units), compared to interest expense of $1,159,000 for 1998
(including amortization of debt issuance costs of $489,000, partly offset by
$228,000 interest capitalized in connection with the 1998 construction of ITD
units). The $296,000 overall increase in interest expense for 1999 was due
                                        10
<PAGE>   13

to less interest capitalization in 1999 due to reduced ITD unit construction
activity during 1999 as compared to 1998, increased interest expense on two
international leases in Colombia, and higher amortization of debt issuance costs
as noted above.

     Income Taxes.  The tax provision in 1999 and 1998 primarily relates to
foreign income taxes incurred by our wholly-owned subsidiaries in Venezuela,
Mexico and Scotland and in our 50%-owned subsidiary in Colombia. We have
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. We are implementing tax planning strategies, which if
successful, may result in our recognizing these deferred tax assets in future
periods, which would result in significantly reduced effective tax rates.
However, presently there can be no assurances that the NOLs and foreign tax
credits will be utilized.

     Minority (Interest) Income.  Minority interest for 1999 and 1998 reflects
our 50% minority partner's interest in the net income of OnSite Colombia for
each respective year.

LIQUIDITY AND CAPITAL RESOURCES

     We currently have no significant commitments for capital expenditures.

     During the past three years, we have expended a significant portion of our
resources to develop markets and industry awareness of our ITD remediation and
recycling/reclamation process technology. Our efforts have been focused
primarily on hydrocarbon soil contamination inherent in oil and gas exploration
activities. Our efforts to develop markets and produce equipment have required
significant amounts of capital, including long-term debt secured by our ITD
units and related ITD technology.

     We have incurred recurring net losses and have been dependent on revenue
from a limited customer base to provide cash flows. We completed our most
significant service contract in December 2000 and are currently exploring ways
to replace the revenue. During 2000 we experienced a tightening of cash reserves
and took actions to delay payments on our senior secured debt. Details of
amounts deferred are covered in Note 2 of the Notes to Consolidated Financial
Statements included in item 8 of this annual report, and as discussed below.

     We are currently seeking to obtain service contracts in our served markets
and are considering strategic alternatives including the possible sale of all or
substantially all of our assets. As part of our strategic plan, in August 2000,
we reached an agreement with our primary lenders and holders of our outstanding
preferred stock that resulted in a six-month deferment of certain principal,
interest and preferred stock dividends, and in March 2001, we negotiated an
additional agreement with the same parties that resulted in our continued
compliance with covenants provided in our senior secured debt and preferred
stock agreements. These agreements provide us with increased financial
flexibility to continue our pursuit of new market opportunities. See also Note
14 of the Notes to Consolidated Financial Statements included in item 8 of this
annual report, and Subsequent Events below.

     Our independent accountants PricewaterhouseCoopers LLP have provided us
their report which sets forth factors that raise substantial doubt about our
ability to continue as a going concern. Our viability as a going concern is
dependent on the continued restructuring of our obligations and/or capital
infusions, increased utilization of our ITD units, and the achievement of a
sustaining level of profitability. There can be no assurances, however, that we
will remain in compliance with our obligations, that we will increase ITD
utilization or become sufficiently profitable in a time frame necessary to meet
our obligations.

     The functional currency of our foreign operations (Colombia, Venezuela,
Mexico, Scotland and the Arabian Gulf region) 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. We plan to continue to
implement the same approach as other foreign operations come on line so as to
minimize our risks associated with foreign exchange fluctuation and its affect
on our profitability.

                                        11
<PAGE>   14

ACCOUNTING MATTERS

     In June 1998 and June 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," respectively.
These statements establish accounting and reporting standards requiring that
every derivative instrument be recorded on the balance sheet as either an asset
or liability measured at its fair value. SFAS Nos. 133 and 138 also require that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS No.s 133 and 138 are
effective for fiscal years beginning after June 15, 2000. We do not currently
hold derivative instruments or engage in hedging activities and, accordingly,
the adoption of these new standards is not expected to have a material impact on
our results of operations or financial position.

SUBSEQUENT EVENTS

     Effective March 1, 2001, we entered into an agreement with our primary
lenders and holders of our outstanding preferred stock that resulted in our
continued compliance with covenants provided in the senior secured debt and
preferred stock agreements and with increased financial flexibility to pursue
new market opportunities for our ITD technology. The agreement provides for a
three-month deferral of all principal and interest payments (both currently due
and previously deferred) due in March on our senior secured debt. At the end of
the deferral period, if we are engaged in good faith negotiations for our sale,
the sale of a subsidiary, the sale of substantially all of our assets, or the
sale of substantially all assets of our subsidiaries, then all deferrals will be
extended to July 8, 2001, and from month to month thereafter until the
consummation of the financing transaction or the termination of good faith
negotiations. Also, we received a three-month deferral on preferred dividends
due in March, with a possible continuing deferral on the same basis as the
senior secured debt. The agreement was designed to allow us to conserve working
capital while strategic plans are being considered and pursued. In exchange for
the deferral of senior secured debt and preferred stock dividend payments, the
conversion price of the Series D Preferred Stock was reset at the default rate
of $0.37 per share (see Notes 4 and 14 of the Notes to Consolidated Financial
Statements included in item 8 of this annual report). This change in the
conversion price would result in further dilution to our stockholders in the
event that the Series D Preferred Stock is converted into our Common Stock. We
believe the value attributable to the change in conversion feature should not
have a material effect on our financial position, results of operations and cash
flows.

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are subject to market risk exposure related to changes in interest rates
on our long-term debt facility. These instruments carry interest at a
pre-agreed-upon percentage point spread from the prime interest rate. As of
December 31, 2000, we had $5.4 million (contractual balance) outstanding under
this facility. Based on this balance, an immediate change of one percent in the
interest rate would cause a change in interest expense of approximately $54,000
on an annual basis.

     We are subject to market risk related to fluctuations in the value of the
U.S. dollar compared to certain foreign currencies. We have subsidiaries which
operate in Colombia, Venezuela, Mexico, Scotland and the Arabian Gulf region.
However, the functional currency used by each of these operating units is the
U.S. dollar. Substantial portions of these operating units' invoices, customer
receivables, imported equipment and operating cost factors are denominated in
dollars. We attempt to maintain a balance between assets and liabilities
denominated in foreign currencies, however, such foreign currency denominated
balances are generally not significant. These factors serve to mitigate the
impact on our financial statements associated with foreign exchange
fluctuations.

     A hypothetical 10% fluctuation of the U.S. dollar relative to the
currencies of Colombia, Venezuela, Mexico and Scotland would not have materially
adversely affected our fiscal year ended December 31, 2000 financial position,
results of operations, or cash flows, regardless of the direction of the change
in relation to

                                        12
<PAGE>   15

the U.S. dollar. Our sensitivity analysis of the effects of changes in foreign
currency exchange rates does not factor in a potential change in revenue levels.

     While we are not a purchaser or producer of crude oil or related products,
our customers to date have generally been large multinational oil and gas
producing companies which are directly impacted by the fluctuations in the price
of crude oil. Decreases in the price of crude oil directly affect our current
customers' cash flows and may therefore affect our ability to collect
receivables and our ability to generate repeat and new business.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required hereunder is included in this report as set forth
in the "Table of Contents" on page F-1.

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
       DISCLOSURE

     There have been no changes in or disagreements with our independent
accountants regarding accounting and financial disclosure matters.

                                    PART III

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

     The following table sets forth our directors and executive officers.

<TABLE>
<CAPTION>
NAME                             AGE                          POSITION
----                             ---                          --------
<S>                              <C>   <C>
James S. Percell...............  58    Director, Chairman, CEO and President
Bryan Sharp....................  57    Director
Albert M. Wolford..............  79    Director and Secretary
David L. Warnock...............  43    Director
Ronald L. Bianco...............  54    Chief Financial Officer, Treasurer and Vice-Secretary
</TABLE>

     Directors are elected annually and hold office until the next annual
stockholders meeting or until their successors are elected and qualified.
Officers serve at the discretion of our board. There are no family relationships
between or among any of our directors and executive officers.

BIOGRAPHIES

     James S. Percell serves as Director, Chairman, CEO and President also
serves as President of the our subsidiaries, NFE and OnSite. Mr. Percell became
a director and President, CEO and a director of NFE in November, 1995. Mr.
Percell became President and CEO of our consolidated 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.

     Bryan Sharp has served as Director since November, 1995. Mr. Sharp is also
a member of our audit committee. 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

                                        13
<PAGE>   16

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 since August 5, 1997. Mr. Wolford
is a member of our compensation and audit committees. Mr. Wolford is also our
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 the executive development and compensation committees. 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 has served as Director since December, 1997 in connection
with our December, 1997 financing. Mr. Warnock also heads our audit committee,
and is a member of our compensation committee. 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 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.

     Ronald L. Bianco joined us in April 1997 as Chief Financial Officer. Mr.
Bianco is presently our CFO, Treasurer and Vice-Secretary. From 1975 through
1991, Mr. Bianco was with Dresser Industries where he served as Controller of
Dresser Rand Power in Norway, as Controller for the North America Operations of
Dresser Masonelian Valve and in other division and headquarter 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 BBA in accounting in 1970 from St. Bonaventure
University in Olean, New York, and his MBA 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.

INFORMATION CONCERNING THE BOARD OF DIRECTORS AND ITS COMMITTEES

     James S. Percell and Albert M. Wolford are the only directors who also
serve as officers. In 1997, our the board established an independent
compensation committee whose members are David L. Warnock and Albert Wolford.
Also in 1997, our board established an independent audit committee whose present
members are David L. Warnock, Bryan Sharp and Albert M. Wolford. We held six
meetings of the board during the period covered by the fiscal year ended
December 31, 2000. All four Directors were present for at least 75% of the
meetings.

ITEM 11. EXECUTIVE COMPENSATION

DIRECTOR COMPENSATION

     We do not currently pay any cash director's fees. However, we pay the
expenses, if any, of our directors in attending board meetings. In 1998, our
board adopted a stock option plan (as detailed below) which included
participation in the plan by directors.

                                        14
<PAGE>   17

EXECUTIVE COMPENSATION

     Mr. James Percell became Chief Executive Officer in January, 1996. Our
employment contract with Mr. Percell (the "Employment Agreement"), which
commenced in April 1997, has a term of three years. The Employment Agreement
automatically extends, unless terminated by us 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 in the amount
of $125,000. In November, 1997, the Board of Directors increased Mr. Percell's
annual compensation to $250,000, however, during 1998 Mr. Percell agreed to
reduce his annual compensation to $180,000.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                   LONG TERM COMPENSATION
                                                                  -------------------------
                                                                    AWARDS       PAYOUTS
                                                                  ----------   ------------
                                      ANNUAL COMPENSATION                       SECURITIES
                                -------------------------------   RESTRICTED    UNDERLYING
NAME AND                                           OTHER ANNUAL     STOCK        OPTIONS/      LTIP      ALL OTHER
PRINCIPAL POSITION       YEAR    SALARY    BONUS   COMPENSATION     AWARDS         SARS       PAYOUTS   COMPENSATION
------------------       ----   --------   -----   ------------   ----------   ------------   -------   ------------
<S>                      <C>    <C>        <C>     <C>            <C>          <C>            <C>       <C>
James S. Percell.......  2000   $180,000    -0-        -0-           -0-             -0-        -0-         -0-
  Chief Executive
    Officer              1999   $180,000    -0-        -0-           -0-             -0-        -0-         -0-
                         1998   $209,167    -0-        -0-           -0-         201,775        -0-         -0-
</TABLE>

                     OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                                      POTENTIAL REALIZABLE
                                      PERCENT OF TOTAL OPTIONS/                      VALUE AT ASSUMED ANNUAL
                                      SARS GRANTED TO EMPLOYEES                       RATES OF STOCK PRICE
                        NUMBER OF     --------------------------                        APPRECIATION FOR
                        SECURITIES                                                        OPTION TERM:
NAME AND                UNDERLYING    GRANTED IN    EXERCISE OF                      -----------------------
PRINCIPAL POSITION     OPTIONS/SARS   FISCAL YEAR    BASE PRICE    EXPIRATION DATE       5%          10%
------------------     ------------   -----------   ------------   ---------------   ----------   ----------
<S>                    <C>            <C>           <C>            <C>               <C>          <C>
                                  "No Options/SAR Grants made during 2000"
</TABLE>

              AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                          AND FY-END OPTION SAR VALUES

<TABLE>
<CAPTION>
                                                           NUMBER OF SECURITIES        VALUE OF UNEXERCISED
                                                          UNDERLYING UNEXERCISED           IN-THE-MONEY
                                  SHARES                      OPTIONS/SARS AT             OPTIONS/SARS AT
NAME AND                        ACQUIRED ON    VALUE          FISCAL YEAR-END             FISCAL YEAR-END
PRINCIPAL POSITION               EXERCISE     REALIZED   EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
------------------              -----------   --------   -------------------------   -------------------------
<S>                             <C>           <C>        <C>                         <C>
James S. Percell..............      (*)         (*)             1,303,042/0                     0/0
  Chief Executive Officer
</TABLE>

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

(*) Did not exercise any options.

1998 STOCK OPTION PLAN

     While we have been successful in attracting and retaining qualified
personnel, we believe that our future success will depend in part on its
continued ability to attract and retain highly qualified personnel. We pay wages
and salaries which we believe are competitive. We also believe that equity
ownership is an important factor in our ability to attract and retain skilled
personnel, and on December 9, 1998, the Board of Directors approved the 1998
Stock Option Plan (the "Plan") which was approved by the Stockholders at our
1999 annual meeting of stockholders. The Plan will allow Incentive Stock Options
as determined by the Compensation Committee, or the Board of Directors if there
is no compensation committee (the "Committee"). The Board of Directors has
reserved 800,000 shares of Common Stock for issuance pursuant to the Plan. The
purpose of the Plan is to foster and promote our financial success and increase
stockholder value by enabling eligible key employees, directors and consultants
to participate in our long-term growth and financial success of the Company.

     Eligibility.  The Plan is open to key employees (including officers and
directors) and our consultants and affiliates ("Eligible Persons").

                                        15
<PAGE>   18

     Transferability.  The grants are not transferrable.

     Changes in Capital Structure.  The Plan will not effect our right to
authorize adjustments, recapitalizations, reorganizations or other changes in
our capital structure. In the event of an adjustment, recapitalization or
reorganization the award shall be adjusted accordingly. In the event of a
merger, consolidation, or liquidation, the Eligible Person will be eligible to
receive a like number of shares of stock in the new entity. The board may waive
any limitations imposed under the Plan so that all options are immediately
exercisable.

     Options.  The Plan provides for both Incentive and Nonqualified Stock
Options.

     Option price.  Incentive options shall be not less than the greater of (i)
100% of fair market value on the date of grant, or (ii) the aggregate par value
of the shares of stock on the date of grant. The Compensation Committee, at its
option, may provide for a price greater than 100% of fair market value. The
price for Incentive Stock Options for Stockholders owning 10% or more of our
shares ("10% Stockholders") shall be not less than 110% of fair market value.

     Amount exercisable-incentive options.  In the event an Eligible Person
exercises incentive options during the calendar year whose aggregate fair market
value exceeds $100,000, the exercise of options over $100,000 will be considered
non qualified stock options.

     Duration.  No option may be exercisable after the expiration date as set
forth in the option agreement.

     Exercise of Options.  Options may be exercised by written notice to our
President with:

          (i) cash, certified check, bank draft, or postal or express money
     order payable to Environmental Safeguards, Inc. for an amount equal to the
     option price of the shares;

          (ii) stock at its fair market value on the date of exercise;

          (iii) an election to make a cashless exercise through a registered
     broker-dealer (if approved in advance by the Compensation Committee);

          (iv) an election to have shares of stock, which otherwise would be
     issued on exercise, withheld in payment of the exercise price (if approved
     in advance by the Compensation Committee); and/or

          (v) any other form of payment which is acceptable to the Compensation
     Committee, including without limitation, payment in the form of a
     promissory note, and specifying the address to which the certificates for
     the shares are to be mailed.

  Termination of Options.

     Termination of Employment.  Any Option which has not vested at the time the
Optionee ceases continuous employment for any reason other than death,
disability or retirement shall terminate upon the last day that the Optionee is
employed by us. Incentive Stock Options must be exercised within three months of
cessation of Continuous Service for reasons other than death, disability or
retirement in order to qualify for Incentive Stock Option tax treatment.
Nonqualified Options may be exercised any time during the Option Period
regardless of employment status.

     Death.  Unless the Option expires sooner, the Option will expire one year
after the death of the Eligible Person.

     Disability.  Unless the Option expires sooner, the Option will expire one
year after the disability of the Eligible Person.

     Retirement.  Any Option which has not vested at the time the Optionee
ceases continuous employment due to retirement shall terminate upon the last day
that the Optionee is employed by us. Upon retirement Incentive Stock Options
must be exercised within three months of cessation of Continuous Service in
order to qualify for Incentive Stock Option tax treatment. Nonqualified Options
may be exercised any time during the Option Period regardless of employment
status.

                                        16
<PAGE>   19

     Amendment or Termination of the Plan.  The Committee may amend, terminate
or suspend the Plan at any time, in its sole and absolute discretion; provided,
however, that to the extent required to qualify the Plan under Rule 16b-3
promulgated under Section 16 of the Exchange Act, no amendment that would (a)
materially increase the number of shares of stock that may be issued under the
Plan, (b) materially modify the requirements as to eligibility for participation
in the Plan, or (c) otherwise materially increase the benefits accruing to
participants under the Plan, shall be made without the approval of our
Stockholders; provided further, however, that to the extent required to maintain
the status of any incentive option under the Code, no amendment that would (a)
change the aggregate number of shares of stock which may be issued under
incentive options, (b) change the class of employees eligible to receive
incentive options, or (c) decrease the option price for incentive options below
the fair market value of the stock at the time it is granted, shall be made
without the approval of the Stockholders. Subject to the preceding sentence, the
Board shall have the power to make any changes in the Plan and in the
regulations and administrative provisions under it or in any outstanding
incentive option as in the opinion of our counsel may be necessary or
appropriate from time to time to enable any incentive option granted under this
Plan to continue to qualify as an incentive stock option or such other stock
option as may be defined under the Code so as to receive preferential federal
income tax treatment. No amendment, suspension or termination of the Plan shall
act to impair or extinguish rights in Options already granted at the date of
such amendment, suspension or termination.

                  OPTIONS GRANTED UNDER 1998 STOCK OPTION PLAN

     The following sets forth the options granted under our 1998 Stock Option
Plan:

<TABLE>
<CAPTION>
NAME AND POSITION                                       DOLLAR VALUE(1)   NUMBER OF OPTIONS
-----------------                                       ---------------   -----------------
<S>                                                     <C>               <C>
James S. Percell, CEO.................................     $210,937            125,000
Executive Group.......................................     $210,937            125,000
Non-executive Director Group..........................     $101,250             60,000
Non-executive Officer Employee Group..................     $611,720            362,500
</TABLE>

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

(1) Dollar value was calculated based on the exercise price of $1.6875, which
    was also the market value per share on the date of the grants.

                                        17
<PAGE>   20

                         STOCK PRICE PERFORMANCE GRAPH

     The performance graph as set forth below compares the cumulative total
stockholder return of our Common Stock from December 31, 1995 through December
31, 2000, with Standard & Poors 500 Index (our Broad Market Index) and with
Standard & Poors Oil Composite Index (our Peer Group Index). The graph assumes
that the value of the investment in our Common Stock and each index was $100 on
December 31, 1995, and that all dividends, if any, were reinvested. The
comparisons in this table are not intended to forecast or be indicative of
possible future price performance.

  COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN OF ENVIRONMENTAL SAFEGUARDS,
                                     INC.,
 THE S&P 500 INDEX (BROAD MARKET INDEX), AND THE S&P OIL COMPOSITE INDEX (PEER
                                  GROUP INDEX)

                              [PERFORMANCE GRAPH]

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                        1995      1996      1997      1998      1999      2000
--------------------------------------------------------------------------------
<S>                    <C>       <C>       <C>       <C>       <C>       <C>
 Environmental
  Safeguards, Inc        100       364       379       152        98        23
 Broad Market Index      100       120       157       200       238       214
 Peer Group Index        100       120       143       152       174       184
</TABLE>

                                        18
<PAGE>   21

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information as of March 28, 2001,
with respect to the beneficial ownership of shares of Common Stock by (i) each
person who is known by us to beneficially own more than 5% of the outstanding
shares of Common Stock, (ii) each of our directors, (iii) each of our executive
officers, and (iv) all executive officers and directors as a group. Unless
otherwise indicated, each stockholder has sole voting and investment power with
respect to the shares shown.

<TABLE>
<CAPTION>
                                                        NUMBER OF
                                                         SHARES            PERCENT OF
NAME                                                    OWNED(1)             CLASS      CLASS SECURITIES
----                                                    ---------          ----------   ----------------
<S>                                                     <C>                <C>          <C>
James S. Percell......................................  1,486,960(2)          13.0%       Common Stock
  2600 South Loop West, Ste #645
  Houston, Texas 77054
Bryan Sharp...........................................  1,132,264(3)(11)      10.1%       Common Stock
  3200 Wilcrest, #200
  Houston, Texas 77042
Albert M. Wolford.....................................   109,346(4)(11)        1.1%       Common Stock
  2600 South Loop West, Ste #645
  Houston, Texas 77054
David L. Warnock......................................  7,592,745(5)(6)(7)(11)    42.9%   Common Stock
  One South Street, Ste #2150
  Baltimore, Maryland 21202
Edward L. Cahill......................................  7,572,745(5)(6)(7)    42.8%       Common Stock
  One South Street, Ste #2150
  Baltimore, Maryland 21202
Cahill, Warnock Strategic Partners Fund, L.P..........  7,572,745(5)(6)(7)    42.8%       Common Stock
  One South Street, Ste #2150
  Baltimore, Maryland 21202
Strategic Associates, L.P.............................  7,572,745(5)(6)(7)    42.8%       Common Stock
  One South Street, Ste #2150
  Baltimore, Maryland 21202
Cahill, Warnock & Company, L.L.C. ....................  7,572,745(5)(6)(7)    42.8%       Common Stock
  One South Street, Ste #2150
  Baltimore, Maryland 21202
Cahill, Warnock Strategic Partners, L.P...............  7,572,745(5)(6)(7)    42.8%       Common Stock
  One South Street, Ste #2150
  Baltimore, Maryland 21202
Ronald L. Bianco......................................   119,516(9)            1.2%       Common Stock
  2600 South Loop West, Ste #645
  Houston, Texas 77054
Newpark Resources, Inc. ..............................  6,815,484(6)(8)(10)    40.3%      Common Stock
  3850 N. Causeway, Ste #1770
  Metairie, LA 70002-1756
Nadia, L.L.C. ........................................   593,500               5.9%       Common Stock
Grosvenot Trust Co.
  33 Church Street
  Hamilton, Bermuda
All officers and directors as a Group (5 persons).....  10,440,831            51.4%       Common Stock
</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.

                                        19
<PAGE>   22

 (2) Includes an option to purchase 800,000 shares of our Common Stock at $0.60
     per share, and options to purchase 378,022 shares of our Common Stock at
     $1.44 per share. Also includes an option to purchase 125,000 shares of our
     Common Stock at $1.69 per share. These options are fully vested and
     immediately exercisable.

 (3) Includes an option to purchase 800,000 shares of our Common Stock at $0.60
     per share, an option to purchase 301,267 shares of our Common Stock at
     $3.00 per share, and an option to purchase 10,997 shares of our Common
     Stock at $5.00 per share. These options are fully vested and immediately
     exercisable.

 (4) Includes options to purchase 43,346 shares of our Common Stock at $1.44 per
     share. These options are fully vested and immediately exercisable.

 (5) Includes 1,722,900 shares of Series B Convertible Preferred Stock and
     warrants to purchase 513,572 shares of our Common Stock 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 warrants to purchase 28,457 shares
     of our Common Stock 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 our Common
     Stock, 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.

 (6) Not included herein are warrants for up to a total of 188,571 shares of our
     Common Stock which are issuable if loans made pursuant to the Loan
     Agreement are not repaid in full by December 17, 2001.

 (7) Includes 4,938,703 shares of our Common Stock which would arise upon the
     conversion of 182,732 shares of our Series D Convertible Preferred Stock,
     issued to the Cahill Warnock Fund, whose sole general partner is Cahill
     Warnock Partners. Also includes 273,649 shares of our Common Stock which
     would arise upon the conversion of 10,125 shares of our Series D
     Convertible Preferred Stock, issued to Strategic Associates, whose sole
     general partners is Cahill Warnock. These Preferred shares are immediately
     convertible into our Common Stock.

 (8) Includes 5,405,405 shares of our Common Stock which would arise upon the
     conversion of 200,000 shares of our Series D Convertible Preferred Stock,
     issued to Newpark Resources, Inc.. These Preferred shares are immediately
     convertible into our Common Stock.

 (9) Includes an option to purchase 69,516 shares of our Common Stock at $1.44
     per share. Also includes an option to purchase 50,000 shares of our Common
     Stock at $1.69 per share. These options are fully vested and immediately
     exercisable.

(10) Includes 847,975 shares of Series B Convertible Preferred Stock which are
     immediately convertible into shares of 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 warrants to purchase 562,104 shares of our Common
     Stock at $0.01 per share. The warrant is fully vested and immediately
     exercisable.

(11) Also includes an option to purchase 20,000 shares of our Common Stock at
     $1.69 per share. These options are fully vested and immediately
     exercisable.

     We know of no arrangement or understanding which may at a subsequent date
result in a change of control.

                                        20
<PAGE>   23

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

RELATED TRANSACTIONS

     Our Board of Directors has adopted a policy that our affairs will be
conducted in all respects by standards applicable to publicly-held corporations
and that we will not enter into any transactions and/or loans between us and our
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 our independent, disinterested directors.

     In December, 1997, we sold $8,000,000 of new Series B Convertible Preferred
Stock and Series C Preferred Stock to an investor group ("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 we obtained a loan of $6,000,000 from
the same investor group. Pursuant to this financing, David L. Warnock, a member
of Cahill, Warnock & Co., which is the general partner of Cahill, Warnock
Strategic Partners Fund, L.P., was appointed a Director. Subsequently, in June,
1998, we obtained an additional loan of $5,000,000 from the same investor group.

     In December, 1998, we and an investor formed OnSite Arabia, Inc. ("OnSite
Arabia"), a Cayman Island company for the purpose of providing environmental
remediation, reclamation and recycling services in Saudi Arabia, Qatar, Yemen,
the United Arab Emirates, Bahrain, Kuwait and Oman. We own 50% of OnSite Arabia.
Concurrent with the formation of OnSite Arabia, we sold 500,000 shares of our
Common Stock in a private placement to an investor who is an affiliate of an
investor in OnSite-Arabia, Inc. at a purchase price of $1.50 per share for total
cash consideration of $750,000.

     In December 1998, we redeemed 1,037,736 shares of our Series B Convertible
Preferred stock from a related party, Newpark Resources, Inc. ("Newpark"), a New
York Stock Exchange listed company, in consideration for certain receivables due
to us from Newpark. This transaction had the combined effect of reducing our
working capital and stockholders' equity by approximately $1,100,000, and a
reduction in common stock equivalents of 1,037,736 shares on a fully diluted
basis. After the 1,037,736 share redemption, Newpark continues to hold 847,975
shares of our Series B Convertible Preferred stock.

     In August 2000, as part of a plan to deal with liquidity issues, we
obtained a six-month deferral for payment of the quarterly installment on our
long-term debt of $692,623 including interest, that was due September 4, 2000, a
six-month deferral for payment of the principal-only portion of the quarterly
installment on our long-term debt that was due December 4, 2000 in the amount of
$540,642 and a six-month deferral for payment of the dividend on Series D
preferred stock that was due October 1, 2000 in the amount of $112,444. In order
to obtain the deferrals, we exchanged 400,000 newly issued shares of Series D
convertible Preferred Stock for all issued shares of Series C non-convertible
Preferred Stock held by our primary lender. The conversion feature associated
with the 400,000 shares of Series D Preferred Stock was valued at $168,000 based
on an independent appraisal. The value of the conversion feature, representing
unaccreted discount, is being amortized to expense over the remaining
fifteen-month term of the debt using the effective interest method.

     Effective March 5, 2001, we entered into an agreement (the "Agreement")
with our primary lenders and holders of our outstanding preferred stock that
provided us with increased financial flexibility to continue our pursuit of new
market opportunities. The Agreement provides for a three-month deferral of all
principal and interest payments (both currently due and previously deferred) due
in March on our senior secured debt. At the end of the deferral period, if we
are engaged in good faith negotiations for our sale, the sale of one of our
subsidiaries, the sale of substantially all of one of our subsidiary's assets,
or the sale of substantially all assets of our subsidiaries ("Financing
Transaction"), then all deferrals will be extended to July 8, 2001 and from
month to month thereafter until the consummation of the Financing Transaction or
the termination of good faith negotiations. Also, we received a three-month
deferral of preferred dividends due in March, with a possible continuing
deferral on the same basis as the senior secured debt. The Agreement was
designed to allow us to conserve working capital while strategic plans are being
considered.

     In exchange for the deferral of senior secured debt and preferred stock
dividend payments, the conversion price of the Series D Preferred Stock was
reset at the default rate or $0.37 per share. This change in the

                                        21
<PAGE>   24

conversion price results in further dilution to our stockholders. We believe the
value attributable to the change in conversion feature should not have a
material effect on our financial position, results of operations or cash flows.

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

     (A) Financial Statements

        Reports of Independent Accountants/Auditors

        Consolidated Balance Sheet as of December 31, 2000 and 1999.

        Consolidated Statement of Operations for the years ended December 31,
        2000, 1999 and 1998.

        Consolidated Statement of Stockholders' Equity for the years ended
        December 31, 2000, 1999 and 1998.

        Consolidated Statement of Cash Flows for the years ended December 31,
        2000, 1999 and 1998.

        Notes to Consolidated Financial Statements.

     (B) Exhibits

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
     3.1*                -- Certificate of Incorporation of the Registrant, as
                            amended.
     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.
     4.3.1**             -- Certificate of Designation, Preferences, Rights and
                            Limitations of Series B Convertible Preferred Stock.
     4.3.2**             -- Certificate of Designation, Preferences, Rights and
                            Limitations of Series C Preferred Stock.
     4.3.3*****          -- Certificate of Designation, Preferences, Rights and
                            Limitations of Series D Convertible Preferred Stock.
     4.4*                -- Form of Warrant Certificate dated December 17, 1997
                            (Included in Exhibit 4.8).
     4.5*                -- Form of Registration Rights Agreement pursuant to Private
                            Placement Memorandum dated September 18, 1996.
     4.6*                -- 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.
     4.7*                -- 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.
     4.8***              -- Form of Registration Rights Agreement dated December 7,
                            1998.
    10.1.1*****          -- Agreement in Principal dated August 17, 2000.
    10.1.2******         -- Agreement dated March 1, 2001.
    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.
</TABLE>

                                        22
<PAGE>   25

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
    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.
    10.7****             -- 1998 Stock Option Plan
    21.1*                -- Subsidiaries
</TABLE>

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

     * Previously filed as an exhibit to the Company's Annual Report on Form
       10-KSB as amended for the fiscal year ended December 31, 1997, and
       incorporated by reference thereto.

     ** 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 with Form S-3 as amended effective Feb. 8, 1999.

  **** Previously filed as an exhibit to the Company's Annual Report on Form
       10-KSB as amended for the fiscal year ended December 31, 1998, and
       incorporated by reference thereto.

 ***** Previously filed as an exhibit to the Company's Current Report on Form
       8-K dated August 17, 2000, and filed August 28, 2000, and incorporated
       herein by reference thereto.

****** Previously filed as an exhibit to the Company's Current Report on Form
       8-K dated March 1, 2001, and filed March 6, 2001, and incorporated herein
       by reference thereto.

     (C) Reports on Form 8-K

          None

                                        23
<PAGE>   26

                                   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 March 28, 2001.

                                            ENVIRONMENTAL SAFEGUARDS, INC.

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

     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                     Director, Chairman of the      March 28, 2001
-----------------------------------------------------      Board, Chief Executive
                  James S. Percell                         Officer and President

                   /s/ BRYAN SHARP                       Director                       March 28, 2001
-----------------------------------------------------
                     Bryan Sharp

                 /s/ ALBERT WOLFORD                      Director and Secretary         March 28, 2001
-----------------------------------------------------
                   Albert Wolford

                /s/ DAVID L. WARNOCK                     Director                       March 28, 2001
-----------------------------------------------------
                  David L. Warnock

                /s/ RONALD L. BIANCO                     Chief Financial Officer,       March 28,2001
-----------------------------------------------------      Treasurer and Vice-
                  Ronald L. Bianco                         Secretary
</TABLE>

                                        24
<PAGE>   27

                         ENVIRONMENTAL SAFEGUARDS, INC.

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

                       CONSOLIDATED FINANCIAL STATEMENTS

                    WITH REPORTS OF INDEPENDENT ACCOUNTANTS
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
<PAGE>   28

                         ENVIRONMENTAL SAFEGUARDS, INC.

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Reports of Independent Accountants..........................  F-2
Audited Financial Statements
  Consolidated Balance Sheet as of December 31, 2000 and
     1999...................................................  F-4
  Consolidated Statement of Operations for the years ended
     December 31, 2000, 1999 and 1998.......................  F-5
  Consolidated Statement of Stockholders' Equity for the
     years ended December 31, 2000, 1999 and 1998...........  F-6
  Consolidated Statement of Cash Flows for the years ended
     December 31, 2000, 1999 and 1998.......................  F-7
Notes to Consolidated Financial Statements..................  F-8
</TABLE>

                                       F-1
<PAGE>   29

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Environmental Safeguards, Inc.

     In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of
Environmental Safeguards, Inc. as of December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has incurred recurring
losses from operations, has a net working capital deficiency and has modified
the terms of its long-term debt obligations and obligations to its preferred
shareholders. In addition, the Company has not generated significant business
backlog to supplement expiring contracts in 2000. These factors, and the
Company's ability to honor its long-term obligations and Preferred Stock
agreements, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

                                            PRICEWATERHOUSECOOPERS LLP

Houston, Texas
March 19, 2001

                                       F-2
<PAGE>   30

                         REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Environmental Safeguards, Inc.

     We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Environmental Safeguards, Inc. for the
year ended December 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Environmental Safeguards, Inc. for the year ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States.

                                            ERNST & YOUNG, LLP

Houston, Texas
March 24, 1999

                                       F-3
<PAGE>   31

                         ENVIRONMENTAL SAFEGUARDS, INC.

                           CONSOLIDATED BALANCE SHEET
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2000      1999
                                                              -------   -------
<S>                                                           <C>       <C>
                                    ASSETS

Current assets:
  Cash and cash equivalents.................................  $ 3,068   $ 1,944
  Accounts receivable.......................................    1,023     3,579
  Prepaid expenses..........................................       66        87
  Deferred taxes............................................       30        33
  Other assets..............................................        9        76
                                                              -------   -------
          Total current assets..............................    4,196     5,719
Property and equipment, net.................................    8,929    10,835
Acquired engineering design and technology, net of
  accumulated amortization of $1,240 and $832 as of December
  31, 2000 and 1999, respectively...........................    2,019     2,427
Other assets................................................        9         9
                                                              -------   -------
          Total assets......................................  $15,153   $18,990
                                                              =======   =======

                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current portion of long-term debt.........................  $ 2,945   $ 2,098
  Accounts payable..........................................      156       667
  Dividends payable.........................................      225       101
  Accrued interest..........................................      220        50
  Other accrued liabilities.................................      688       621
  Income taxes payable......................................      220       618
                                                              -------   -------
          Total current liabilities.........................    4,454     4,155
Long-term debt..............................................    2,163     4,325
Minority interest...........................................    2,872     3,554
Commitments and contingencies
Stockholders' equity:
  Preferred stock; Series B convertible; voting, $.001 par
     value (aggregate liquidation value -- $2,898) 5,000,000
     shares authorized; 2,733,686 shares issued and
     outstanding............................................        3         3
  Preferred stock; Series C non-convertible, non-voting,
     cumulative; $.001 par value (aggregate liquidation
     value -- $4,000); 400,000 shares authorized, issued and
     outstanding as of December 31, 1999....................       --         1
  Preferred stock; Series D convertible, non-voting,
     cumulative $.001 par value (aggregate liquidation value
     $4,000); 400,000 shares authorized, issued and
     outstanding as of December 31, 2000....................        1        --
  Common stock; $.001 par value; 50,000,000 shares
     authorized; 10,112,144 shares issued and outstanding...       10        10
  Additional paid-in capital................................   14,935    14,329
  Accumulated deficit.......................................   (9,285)   (7,387)
                                                              -------   -------
          Total stockholders' equity........................    5,664     6,956
                                                              -------   -------
          Total liabilities and stockholders' equity........  $15,153   $18,990
                                                              =======   =======
</TABLE>

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

                                       F-4
<PAGE>   32

                         ENVIRONMENTAL SAFEGUARDS, INC.

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

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               2000      1999      1998
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Revenue.....................................................  $11,250   $13,514   $10,672
Cost of revenue.............................................    6,031     6,197     5,378
                                                              -------   -------   -------
  Gross margin..............................................    5,219     7,317     5,294
Selling, general and administrative expenses................    3,711     3,741     3,435
Amortization of acquired engineering design and
  technology................................................      408       408       407
Research and development....................................       71        70        48
                                                              -------   -------   -------
          Income from operations............................    1,029     3,098     1,404
Other income (expenses):
  Interest income...........................................       28       130       290
  Interest expense..........................................   (1,018)   (1,455)   (1,159)
  Other.....................................................      105        61        17
                                                              -------   -------   -------
Income before provision for income taxes and minority
  interest..................................................      144     1,834       552
Provision for income taxes..................................    1,117     1,396       756
                                                              -------   -------   -------
Income (loss) before minority interest......................     (973)      438      (204)
Minority interest...........................................     (489)     (921)     (595)
                                                              -------   -------   -------
Net loss....................................................  $(1,462)  $  (483)  $  (799)
                                                              =======   =======   =======
Net loss applicable to common stockholders..................  $(1,945)  $(1,244)  $(1,572)
                                                              =======   =======   =======
Basic and dilutive net loss per share.......................  $ (0.19)  $ (0.12)  $ (0.17)
                                                              =======   =======   =======
Weighted average shares outstanding (basic and dilutive)....   10,112    10,102     9,495
                                                              =======   =======   =======
</TABLE>

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

                                       F-5
<PAGE>   33

                         ENVIRONMENTAL SAFEGUARDS, INC.

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

<TABLE>
<CAPTION>
                                                                                                                       TOTAL
                                   SERIES B    SERIES C    SERIES D             UNISSUED   ADDITIONAL                  STOCK-
                                   PREFERRED   PREFERRED   PREFERRED   COMMON    COMMON     PAID-IN     ACCUMULATED   HOLDERS'
                                     STOCK       STOCK       STOCK     STOCK     STOCK      CAPITAL       DEFICIT      EQUITY
                                   ---------   ---------   ---------   ------   --------   ----------   -----------   --------
<S>                                <C>         <C>         <C>         <C>      <C>        <C>          <C>           <C>
BALANCE AS OF JANUARY 1, 1998....     $ 4         $ 1         $--       $ 9       $ 56      $14,459       $(5,323)    $ 9,206
Issuance of common stock for
  agreements reached in 1995
  (40,179 shares)................      --          --          --        --        (56)          56            --          --
Exercise of stock options
  (270,000 shares)...............      --          --          --        --         --          162            --         162
Cancellation of Series B
  Preferred stock in exchange for
  accounts receivable from an
  affiliate (1,037,736 shares)
  (Note 11)......................      (1)         --          --        --         --       (1,099)           --      (1,100)
Issuance of common stock for cash
  (500,000 shares)...............      --          --          --         1         --          740            --         741
Dividends on Series C preferred
  stock..........................      --          --          --        --         --           --          (397)       (397)
Net loss.........................      --          --          --        --         --           --          (799)       (799)
                                      ---         ---         ---       ---       ----      -------       -------     -------
BALANCE AS OF DECEMBER 31,
  1998...........................       3           1          --        10         --       14,318        (6,519)      7,813
Exercise of stock options (19,700
  shares)........................      --          --          --        --         --           11            --          11
Dividends on Series C preferred
  stock..........................      --          --          --        --         --           --          (385)       (385)
Net loss.........................      --          --          --        --         --           --          (483)       (483)
                                      ---         ---         ---       ---       ----      -------       -------     -------
BALANCE AS OF DECEMBER 31,
  1999...........................     $ 3         $ 1         $--       $10       $ --      $14,329       $(7,387)    $ 6,956
Issuance of 417,066 warrants to
  purchase common stock in
  connection with senior secured
  notes payable (Note 4).........      --          --          --        --         --          438            --         438
Issuance of Series D Preferred
  Stock in exchange for Series C
  Preferred Stock (Note 7).......      --          (1)          1        --         --          168            --         168
Dividends of $287 and $149 on
  Series C and Series D Preferred
  Stock, respectively............      --          --          --        --         --           --          (436)       (436)
Net loss.........................      --          --          --        --         --           --        (1,462)     (1,462)
                                      ---         ---         ---       ---       ----      -------       -------     -------
BALANCE AS OF DECEMBER 31,
  2000...........................     $ 3         $--         $ 1       $10       $ --      $14,935       $(9,285)    $ 5,664
                                      ===         ===         ===       ===       ====      =======       =======     =======
</TABLE>

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

                                       F-6
<PAGE>   34

                         ENVIRONMENTAL SAFEGUARDS, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               2000      1999      1998
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Cash flows from operating activities:
  Net loss..................................................  $(1,462)  $  (483)  $  (799)
  Adjustment to reconcile net loss to net cash provided by
     (used in) operating activities:
     Minority interest......................................      489       921       595
     Deferred tax expense...................................        3        18        34
     Depreciation expense...................................    2,245     1,814     1,208
     Amortization of acquired engineering design and
       technology...........................................      408       408       407
     Amortization of discount...............................      372       522         0
     Changes in operating assets and liabilities:
       Accounts receivable..................................    2,491    (1,845)   (1,280)
       Equipment held for sale..............................       --       545    (1,546)
       Prepaid expenses and other assets....................       88       371       (98)
       Accounts payable.....................................     (511)       39       148
       Accrued liabilities..................................      237       203       203
       Income taxes payable.................................     (398)      556      (463)
                                                              -------   -------   -------
          Net cash provided by (used in) operating
            activities......................................    3,962     3,069    (1,591)
                                                              -------   -------   -------
Cash flows from investing activities:
  Purchases of property and equipment.......................     (274)   (1,835)   (2,435)
                                                              -------   -------   -------
          Net cash used in investing activities.............     (274)   (1,835)   (2,435)
                                                              -------   -------   -------
Cash flows from financing activities:
  Net proceeds from long-term debt and convertible
     debentures.............................................       --        --     5,000
  Payments on long-term debt................................   (1,081)   (2,470)   (1,590)
  Payments on capital lease obligations.....................       --      (648)   (1,484)
  Net proceeds from sale of common stock, preferred stock,
     stock warrants and stock options.......................       --        11       903
  Dividends paid on Series C and Series D preferred stock...     (312)     (385)     (397)
  Distribution to minority interest.........................   (1,171)     (590)     (300)
                                                              -------   -------   -------
          Net cash provided by (used in) financing
            activities......................................   (2,564)   (4,082)    2,132
                                                              -------   -------   -------
Net increase (decrease) in cash and cash equivalents........    1,124    (2,848)   (1,894)
Cash and cash equivalents, beginning of year................    1,944     4,792     6,686
                                                              -------   -------   -------
Cash and cash equivalents, end of year......................  $ 3,068   $ 1,944   $ 4,792
                                                              =======   =======   =======
Supplemental disclosure of cash flow information:
  Cash paid for interest....................................  $   476   $ 1,469   $ 1,120
                                                              =======   =======   =======
  Cash paid for income taxes................................  $ 1,515   $   840   $ 1,185
                                                              =======   =======   =======
</TABLE>

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

                                       F-7
<PAGE>   35

                         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.

  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.

  Management Estimates

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue 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 in the event
of the sale of an ITD unit, when the equipment is shipped.

  Concentrations of Credit Risk

     Financial instruments which subject the Company to concentrations of credit
risk include cash and cash equivalents and accounts receivable. The Company
maintains its cash and cash equivalents with major financial institutions
selected based upon management's assessment of the banks' financial stability.
Balances periodically exceed the $100,000 federal depository insurance limit.
The Company has not experienced any losses on deposits. Accounts receivable
generally arise from sales of services to customers operating in the United
States, the United Kingdom and Latin America. Security and/or a parent company
guarantee is often required for credit granted. As of December 31, 2000, all of
the Company's trade receivables were due from two customers for services
performed in Latin America (Mexico and Colombia). As of December 31, 1999,
essentially all of the Company's trade receivables were due from three customers
for services performed in Latin America (Mexico, Colombia and Venezuela) and
from a private company operating and headquartered in the United Kingdom. The
Company has in place insurance to cover certain exposure in its foreign
operations and provides allowances for potential credit losses if necessary.

  Cash Equivalents

     The Company considers all short-term investments with an original maturity
of three months or less when purchased to be cash equivalents.

                                       F-8
<PAGE>   36
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On Site Colombia, Inc., a 50% owned joint Company has dividend restriction
that would preclude the Company from receiving 50% of cash and cash equivalents.
As of December 31, 2000 and 1999, the Company's financial statements include
$1,631,000 and $1,328,000 of cash and cash equivalents attributable to OnSite
Colombia, Inc.

  Property and Equipment

     Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over estimated useful lives of 5 years for ITD units
and 3 to 5 years for office furniture and equipment and transportation and other
equipment. Additions or improvements that increase the value or extend the life
of an asset are capitalized. Expenditures for normal maintenance and repairs are
expensed as incurred. Disposals are removed from the accounts at cost less
accumulated depreciation and any gain or loss from disposition is reflected in
operations currently.

  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. A valuation
allowance, if necessary, is provided against deferred tax assets, based upon
management's assessment as to their realization.

  Stock-Based Compensation

     Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") established financial accounting and reporting
standards for stock-based employee compensation plans. It defined a fair value
based method of accounting for an employee stock option or similar equity
instrument and encouraged all entities to adopt that method of accounting for
all of their employee stock compensation plans and include the cost in the
income statement as compensation expense. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company accounts
for compensation cost for stock option plans in accordance with APB Opinion No.
25.

  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 Technology, L.L.C. ("OnSite") in 1997.
In the acquisition of OnSite, the purchase price was allocated to the assets
acquired and liabilities assumed based on independent appraisal. This intangible
asset is being amortized over an estimated useful life of 8 years using the
straight-line method.

  Impairment of Long-Lived Assets

     In the event facts and circumstances indicate the carrying value of a
long-lived asset, including associated intangibles, may be impaired, an
evaluation of recoverability is performed by comparing the estimated future
undiscounted cash flows associated with the asset to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow is
required. Given the homogeneous nature and geographic deployment flexibility of
such assets, and based upon a recent evaluation by management, an impairment of
the Company's long-lived assets was not deemed necessary.

                                       F-9
<PAGE>   37
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Translation of Foreign Currencies

     All foreign subsidiaries of the Company operate with the U.S. dollar as
their functional currency and, accordingly, no cumulative translation adjustment
is presented in the accompanying balance sheet. The remeasurement of local
currencies into U.S. dollars creates translation adjustments which are included
in net income.

  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.

  Accounting Pronouncements

     In June 1998 and June 2000, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
respectively. These statements establish accounting and reporting standards
requiring that every derivative instrument be recorded on the balance sheet as
either an asset or liability measured at its fair value. SFAS Nos. 133 and 138
also require that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. SFAS Nos. 133 and
138 are effective for fiscal years beginning after June 15, 2000. The Company
does not currently hold derivative instruments or engage in hedging activities
and, accordingly, the adoption of these new standards is not expected to have a
material impact on the Company's results of operations or financial position.

     In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which clarifies certain existing accounting principles for the
timing of revenue recognition and its classification in the financial
statements. In June 2000, the SEC delayed the required implementation date of
SAB 101. As a result, SAB 101 will not be effective for the Company until the
quarter ended September 30, 2001. In October 2000, the SEC issued further
guidance on the interpretations included in SAB 101. The implementation of SAB
101 is not expected to have a material impact on the Company's results of
operations or financial position.

  Reclassification

     Certain amounts in the 1998 and 1999 financial statements have been
reclassified to conform with the current year presentation.

2. LIQUIDITY ISSUES

     Since its inception, the Company has expended a significant portion of its
resources to develop markets and industry awareness of the capabilities of its
indirect thermal desorption remediation and recycling/ reclamation process. The
Company's efforts have been focused primarily on hydrocarbon soil contamination
inherent in oil and gas exploration activities. The Company's efforts to develop
markets and produce equipment have required significant amounts of capital
including long-term debt secured by the Company's ITD units and related ITD
technology. The Company has incurred recurring net losses and has been dependent
on revenue from a limited customer base to provide cash flows. The Company
completed its most significant service contract in December 2000 and is
currently exploring ways to replace the revenue. During the year ended December
31, 2000 the Company experienced a tightening of cash reserves and took actions
to delay payments on its senior secured debt. The delay of principal and
interest payments of approximately $1,233,000 in 2000 will result in the
Company's payment of approximately $3,825,000 of principal and interest

                                       F-10
<PAGE>   38
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

payments on senior secured debt in 2001. These 2001 debt payments and expected
continuing losses will further strain the Company's liquidity. In addition, as
of December 31, 2000, the Company's current liabilities exceeded its current
assets by $258,000. These factors raise substantial doubt about the Company's
ability to continue as a going concern.

     The Company is currently seeking to obtain service contracts in the markets
that it serves and is also considering strategic alternatives including a
possible sale of all or substantially all of its assets. As part of its
strategic plan, effective March 1, 2001 the Company reached an agreement with
its primary lenders and holders of its outstanding preferred stock that resulted
in the Company remaining in compliance with covenants provided in its senior
secured debt agreement and stock agreements and provided the Company with
increased financial flexibility to continue its pursuit of new market
opportunities (See Note 14).

     The Company's long-term viability as a going concern is dependent on the
continued restructuring of its obligations and/or capital infusions, the
repositioning of its asset base and the achievement of a sustaining level of
profitability. The accompanying financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.

3. PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                               2000      1999
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
ITD Remediation/Recycling Units and auxiliary equipment.....  $14,973   $14,636
Office furniture and equipment..............................       36        34
Transportation and other equipment..........................       49        49
                                                              -------   -------
                                                               15,058    14,719
Less accumulated depreciation...............................    6,129     3,884
                                                              -------   -------
          Property and equipment, net.......................  $ 8,929   $10,835
                                                              =======   =======
</TABLE>

4. LONG-TERM DEBT

     Senior secured notes payable to certain corporate and individual investors
(the "Investor Notes") funded in connection with the Company's acquisition of
OnSite and subsequent exercise of an option for $5 million of additional debt
under similar terms. The Investor Notes have an original face value of $11
million and are carried net of unamortized discounts of approximately $298,000
and $64,000 as of December 31, 2000 and 1999, respectively. Payments are due in
quarterly principal installments of $541,000 plus accrued interest at a stated
rate of prime plus 1.5% (11% as of December 31, 2000) per year through December
2002. After considering the amortization of the discount, the notes bear an
effective interest rate that approximates prime plus 11.1% (20.6% and 18.4% as
of December 31, 2000 and 1999 respectively) per year. These notes are
collateralized by all assets of the Company.

     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                               2000     1999
                                                              ------   ------
                                                              (IN THOUSANDS)
<S>                                                           <C>      <C>
Contractual balance.........................................  $5,406   $6,487
Less unaccreted discount....................................    (298)     (64)
                                                              ------   ------
          Long-term debt....................................   5,108    6,423
Less current maturities.....................................   2,945    2,098
                                                              ------   ------
          Long-term debt, net of current portion............  $2,163   $4,325
                                                              ======   ======
</TABLE>

                                       F-11
<PAGE>   39
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Investor Notes contain certain covenants, the most restrictive of which
require the Company to maintain positive working capital of at least $2 million
and precludes the Company from paying common dividends until the Investor Notes
are repaid. During 1999, the Company requested and received a waiver of the
working capital requirement for the duration of the Investor Notes.

     The Investor Notes included 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 compliance with the terms of the
initial loan. The Company exercised its option to obtain the $5 million
supplemental loan in June 1998.

     As part of a plan to deal with liquidity issues, in August 2000 the Company
obtained a six-month deferral for payment of the quarterly installment on its
long-term debt of $692,623 including interest, that was due September 4, 2000, a
six-month deferral for payment of the principal-only portion of the quarterly
installment on its long-term debt that was due December 4, 2000 in the amount of
$540,642 and a six-month deferral for payment of the dividend on Series D
preferred stock that was due October 1, 2000 in the amount of $112,444. In order
to obtain the deferrals, the Company exchanged 400,000 newly issued shares of
Series D convertible Preferred Stock for all issued shares of Series C
non-convertible Preferred Stock held by the Company's primary lender. The
conversion feature associated with the 400,000 shares of Series D Preferred
Stock was valued at $168,000 based on an independent appraisal. The value of the
conversion feature, representing unaccreted discount, is being amortized to
expense over the remaining fifteen-month term of the debt using the effective
interest method.

     The Investor Notes also included a provision for the Company to issue to
the lenders warrants to acquire up to 707,142 shares of the Company's Common
Stock 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 were
repaid in full prior to February 17, 2000, then no additional warrants would be
issued. The Investor Notes further provided that if a portion of the notes were
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. Based on this
provision, on February 17, 2000, the Company issued the lenders warrants to
acquire 417,066 shares of the Company's common stock at $0.01 per share. These
warrants had an approximate value of $438,000 at the date of issue and such
value has been treated as additional interest and is being amortized to expense
over the remaining twenty-two month term of the debt using the effective
interest method.

     The Investor Notes include a further 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.

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

<TABLE>
<CAPTION>
                                                                      UNACCRETED
YEAR ENDED DECEMBER 31,                                 CONTRACTUAL    DISCOUNT    TOTAL
-----------------------                                 -----------   ----------   ------
                                                                 (IN THOUSANDS)
<S>                                                     <C>           <C>          <C>
2001..................................................    $3,243         $298      $2,945
2002..................................................    $2,163           --       2,163
                                                          ------         ----      ------
  Long-term debt......................................    $5,406         $298      $5,108
                                                          ======         ====      ======
</TABLE>

                                       F-12
<PAGE>   40
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     During the years ended December 31, 2000, 1999 and 1998, the Company
incurred interest charges as follows:

<TABLE>
<CAPTION>
                                                              2000     1999     1998
                                                             ------   ------   ------
                                                                  (IN THOUSANDS)
<S>                                                          <C>      <C>      <C>
Interest charged to expense................................  $1,018   $1,455   $1,159
Interest capitalized as construction period interest.......      --       45      228
                                                             ------   ------   ------
          Total interest...................................  $1,018   $1,500   $1,387
                                                             ======   ======   ======
</TABLE>

5. LEASE COMMITMENTS

     The Company leases certain equipment and facilities (mainly offices and
vehicles) 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 $100,000, $115,000 and $69,000
during the years ended December 31, 2000, 1999 and 1998, respectively.

     Minimum lease payments due under operating leases with original lease terms
of greater than one year and expiration dates subsequent to December 31, 2000
are summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------                                  (IN THOUSANDS)
<S>                                                      <C>
2001..................................................        $37
2002..................................................          1
                                                              ---
          Total minimum lease payments................        $38
                                                              ===
</TABLE>

6. 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:

<TABLE>
<CAPTION>
                                                               2000      1999
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Deferred tax liabilities:
  Tax on undistributed foreign income.......................  $   232   $   533
  Basis of property and equipment...........................      656       341
                                                              -------   -------
          Total deferred tax liabilities....................      888       874
                                                              -------   -------
Deferred tax assets:
  Net operating loss carryforwards..........................    2,389     2,007
  Foreign tax credit carryforwards..........................      834       517
  Purchased in-process research and development.............      208       225
  Basis of acquired engineering design and technology.......      197       132
  Deferred gain on sale of licensing agreement..............       17        31
  Deferred foreign taxes....................................       30        23
  Other.....................................................       --       680
                                                              -------   -------
          Total deferred tax assets.........................    3,675     3,615
Valuation allowance.........................................   (2,757)   (2,708)
                                                              -------   -------
                                                                  918       907
                                                              -------   -------
          Net deferred tax assets...........................  $    30   $    33
                                                              =======   =======
</TABLE>

                                       F-13
<PAGE>   41
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                                           2000      1999      1998
                                                          -------   -------   -------
                                                                (IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
United States...........................................  $(1,066)  $(1,521)  $(1,027)
Foreign.................................................    1,210     3,355     1,579
                                                          -------   -------   -------
          Income before provision for income taxes and
            minority interest...........................  $   144   $ 1,834   $   552
                                                          =======   =======   =======
</TABLE>

     Significant components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>
                                                               2000     1999    1998
                                                              ------   ------   ----
                                                                  (IN THOUSANDS)
<S>                                                           <C>      <C>      <C>
Current:
  Federal...................................................  $   --   $   --   $ --
  Foreign...................................................   1,110    1,378    722
                                                              ------   ------   ----
          Total current.....................................   1,110    1,378    722
                                                              ------   ------   ----
Deferred:
  Federal...................................................      --       --     --
  Foreign...................................................       7       18     34
                                                              ------   ------   ----
          Total deferred....................................       7       18     34
                                                              ------   ------   ----
          Provision for income taxes........................  $1,117   $1,396   $756
                                                              ======   ======   ====
</TABLE>

     The differences between the statutory income tax rate and the Company's
effective income tax rate are as follows:

<TABLE>
<CAPTION>
                                                              2000   1999   1998
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Federal statutory rate......................................   34%    34%    34%
Foreign income taxes........................................  776%    76%   137%
Increase in valuation allowance.............................  (34)%  (34)%  (34)%
                                                              ---    ---    ---
                                                              776%    76%   137%
                                                              ===    ===    ===
</TABLE>

     As of December 31, 2000, for U.S. federal income tax reporting purposes,
the Company has approximately $7,028,000 of unused net operating losses ("NOLs")
available for carryforward to future years. The benefit from carryforward of
such NOLs will expire during the years ended December 31, 2001 to 2019. Because
the Company's 1997 private placement of preferred stock, combined with other
private placements in 1996 and 1995, resulted in more than a 50 percent change
in shareholder ownership percentages, the provisions of Section 382 of the
Internal Revenue Code limit the Company's ability to utilize approximately
$3,600,000 of its NOL carryforwards to reduce future taxable income and tax
liabilities. Additionally, because United States tax laws limit the time during
which NOL carryforwards may be applied against future taxable income, the
Company may be unable to take full advantage of its NOL for federal income tax
purposes should the Company generate taxable income. Based on the above
limitations, the Company has significant NOL carryforwards for which realization
of tax benefits is uncertain. The benefit from utilization of NOL carryforwards
could be subject to limitations if additional material ownership changes occur
in the Company. As of December 31, 2000 the Company had approximately $834,000
of foreign tax credit carryforwards which can be offset against taxable income
in Colombia. The benefit from carryforward of such foreign tax credits will
expire during the years ended December 31, 2002 to 2005.

                                       F-14
<PAGE>   42
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. 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, 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 non-voting
non-convertible preferred stock. During the year ended December 31, 2000, the
board of directors authorized the issuance of up to 400,000 shares of Series D
convertible preferred stock.

  Series B Convertible Preferred Stock

     In 1997, the Company issued 3,771,422 shares of $0.001 par value Series B
convertible preferred stock for $4,000,000, or $1.06 per share. Dividends are
paid at the same rate as common stock based upon the conversion rate. The Series
B convertible preferred stock can be converted to common stock at any time at
the option of the holder. The initial rate is one common share for each
preferred share; however, the conversion rate is subject to adjustments to
prevent dilution. The holders of the Series B convertible preferred stock have
essentially the same voting rights as the holders of common stock except for the
election of Directors, upon which the Series B Convertible Preferred
shareholders are not entitled to vote. Series B Convertible Preferred
shareholders, however have the right to vote separately, as a class, for the
election of one Director. The Series B convertible preferred stock has a
liquidation preference of $1.06 per share plus any unpaid dividends. As
discussed in Note 11, the Company canceled 1,037,736 shares of Series B
convertible preferred stock in exchange for accounts receivable.

  Series C Preferred Stock

     In 1997, 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 (8.50% as of December 31, 1999) 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. Proceeds of $4,000,000
from the Series C preferred stock were recorded net of a discount of $809,000,
which included related offering costs incurred and the allocation of a portion
of the proceeds to the warrants issued to the same investors. The allocation of
proceeds between the Series C preferred stock, Investor Notes (See Note 4) and
the warrants (See stock warrants below) was based upon relative fair values of
the underlying securities. The Series C preferred stock was accreted to its
liquidation value over a period of 26 months to February 17, 2000. The accretion
of the Series C preferred stock is deducted from the net loss to derive the net
loss applicable to common stockholders in the calculation of earnings per share
(See Note 8).

 Series D Preferred Stock

     During 2000, the Company exchanged 400,000 newly issued shares of Series D
convertible Preferred Stock for Series C non-convertible Preferred Stock held by
the Company's primary lender. The newly issued shares of Series D Preferred
stock are convertible into common stock at a conversion price of $2.25 per share
until December 31, 2002, and a conversion price of $1.00 after December 31,
2002. In the event of a default under the loan agreement, the conversion price
shall be the lesser of $1.00 per share or the averaging thirty-day trailing
price. The conversion feature associated with the 400,000 shares of Series D
Preferred Stock was valued at $168,000 based on an independent appraisal. The
value of the conversion feature, representing unaccreted discount, is being
amortized to expense over the remaining term of the debt using the effective
interest method (See Note 4). Other than the conversion feature of the Series D
Preferred Stock, its features and preferences are the same as the Series C
Preferred Stock.

                                       F-15
<PAGE>   43
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

 Unissued Common Stock

     Unissued common stock at January 1, 1998 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 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.

 Stock Option Plan

     The Company has adopted the 1998 Stock Option Plan (the "Option Plan")
under which incentive stock options for up to 800,000 shares of the Company's
common stock may be awarded to officers, directors and key employees. The Option
Plan is designed to attract and reward key executive personnel. At December 31,
1999, the Company had granted options for 610,000 of a total of 800,000 shares
of common stock reserved for issuance under the Option Plan. During 2000, 62,500
options were forfeited resulting in a 547,500 of a total of 800,000 shares of
common stock reserved for issuance under the Option Plan.

     Stock options granted pursuant to the Option Plan expire not more than ten
years from the date of grant and typically vest over two years, with 50% vesting
after one year and 50% vesting in the succeeding year. All of the options
granted by the Company were granted at an option price equal to the fair market
value of the common stock at the date of grant.

 Proforma Disclosures

     For purposes of proforma disclosures, the estimated fair value of the
options is included in expense over the option's vesting period or expected
life.

     During the year ended December 31, 1999, 626,730 of the Company's stock
options were repriced from original exercise prices ranging from $2.50 to $5.00
per share to a new exercise price of $1.44 per share. The new exercise price was
based on the quoted market value of the Company's common stock at the date of
repricing. The repricing of options significantly impacted proforma financial
information in 1999. The Company's proforma information follows:

<TABLE>
<CAPTION>
                                                           2000      1999      1998
                                                          -------   -------   -------
                                                             (IN THOUSANDS, EXCEPT
                                                              PER SHARE AMOUNTS)
<S>                                                       <C>       <C>       <C>
Proforma net loss.......................................  $(1,637)  $(1,197)  $(1,457)
Proforma net loss available to common stockholders......  $(2,120)  $(1,958)  $(2,230)
Proforma basic and dilutive loss per share..............  $ (0.21)  $ (0.19)  $ (0.23)
</TABLE>

                                       F-16
<PAGE>   44
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the Company's stock option activity and related information
for the years ended December 31, 2000, 1999 and 1998 follows:

<TABLE>
<CAPTION>
                                                            NUMBER OF
                                                             SHARES
                                                              UNDER     WEIGHTED-AVERAGE
                                                             OPTIONS     EXERCISE PRICE
                                                            ---------   ----------------
<S>                                                         <C>         <C>
Outstanding -- January 1, 1998............................  4,821,686        $1.76
  Granted.................................................    782,718         2.41
  Exercised...............................................   (270,000)        0.60
  Forfeited...............................................   (463,542)        5.00
                                                            ---------        -----
Outstanding -- December 31, 1998..........................  4,870,862         1.62
  Granted.................................................         --           --
  Exercised...............................................    (19,700)        0.60
  Forfeited...............................................         --           --
  Repricing...............................................         --        (0.24)
                                                            ---------        -----
Outstanding -- December 31, 1999..........................  4,851,162         1.38
  Granted.................................................         --           --
  Exercised...............................................         --           --
  Forfeited...............................................    (62,500)        1.69
                                                            ---------        -----
Outstanding -- December 31, 2000..........................  4,788,662        $1.38
                                                            =========        =====
Exercisable -- December 31,
  1998....................................................  4,260,862        $1.61
  1999....................................................  4,546,162        $1.36
  2000....................................................  4,788,662        $1.38
</TABLE>

     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 1998: risk-free interest rate of 7%; no dividend yield; weighted
average volatility factor of the expected market price of the Company's common
stock of 0.873; and a weighted-average expected life of the options of 5 years.
No options were granted in 2000 or 1999 and, accordingly, no option pricing
assumptions are presented.

     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.

     The weighted-average fair value of options granted during the year ended
December 31, 1998 was $1.74. No options were granted during the years ended
December 31, 2000 and 1999; however the repricing of certain options reduced the
weighted average exercise price by $0.24 in 1999.

                                       F-17
<PAGE>   45
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     As shown above, all outstanding stock options are exercisable at December
31, 2000. A summary of outstanding stock options at December 31, 2000, follows:

<TABLE>
<CAPTION>
                                                                   REMAINING
NUMBER OF COMMON                                                  CONTRACTUAL
STOCK EQUIVALENTS                               EXPIRATION DATE   LIFE (YEARS)   EXERCISE PRICE
-----------------                               ---------------   ------------   --------------
<C>       <S>                                   <C>               <C>            <C>
          Exercisable as of December 31, 2000:
2,470,300 ....................................   November 2005        4.9            $0.60
  112,500 ....................................      March 2007        6.2             1.44
  480,000 ....................................      March 2007        6.2             2.50
   35,000 ....................................   November 2007        6.9             1.44
  356,813 ....................................   December 2007        7.0             1.44
  613,831 ....................................   December 2007        7.0             3.00
    1,053 ....................................    January 2008        7.1             2.38
      800 ....................................    January 2008        7.1             3.12
      770 ....................................    January 2008        7.1             3.25
      625 ....................................    January 2008        7.1             4.00
   47,053 ....................................      April 2008        7.3             5.00
  122,417 ....................................      April 2008        7.3             1.44
  547,500 ....................................   December 2008        8.0             1.69
---------
4,788,662
=========
</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 as of January 1, 1998...........    707,143    $0.01         $0.01
  Issued.............................................         --       --            --
  Canceled...........................................         --       --            --
  Exercised..........................................         --       --            --
                                                       ---------
Warrants outstanding as of December 31, 1998.........    707,143    $0.01         $0.01
  Issued.............................................         --       --            --
  Canceled...........................................         --       --            --
  Exercised..........................................         --       --            --
                                                       ---------
Warrants outstanding as of December 31, 1999.........    707,143    $0.01         $0.01
  Issued.............................................    417,066    $0.01         $0.01
  Canceled...........................................         --       --            --
  Exercised..........................................         --       --            --
                                                       ---------
Warrants outstanding as of December 31, 2000.........  1,124,209    $0.01         $0.01
                                                       =========
</TABLE>

     All warrants outstanding were issued in connection with the funding of the
Investor Notes (See Note 4). All warrants bear an exercise price of $0.01 per
share, are currently exercisable, and expire in December 2007.

8. EARNINGS PER SHARE

     For the years ended December 31, 2000, 1999 and 1998, 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

                                       F-18
<PAGE>   46
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

common stock equivalents (totaling 10,424,335 as of December 31, 2000) disclosed
in Note 7 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 applicable to
common stockholders:

<TABLE>
<CAPTION>
                                                           2000      1999      1998
                                                          -------   -------   -------
                                                                (IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
Net loss................................................  $(1,462)  $  (483)  $  (799)
Less: Series C and D Preferred stock dividends ($1.0914,
      $0.9627 and $0.9925 per share) in 2000, 1999 and
      1998, respectively................................     (436)     (385)     (397)
      Accretion of discount on Series C preferred stock
      (Note 7)..........................................      (47)     (376)     (376)
                                                          -------   -------   -------
Net loss applicable to common stockholders..............  $(1,945)  $(1,244)  $(1,572)
                                                          =======   =======   =======
</TABLE>

9. 401(K) SALARY DEFERRAL PLAN

     The Company has a 401(k) salary deferral plan (the "Plan") which became
effective on January 1, 1998, for eligible employees who have met certain
service requirements. The Plan does not provide for Company matching or
discretionary contributions and, accordingly, the Company recognized no expense
under the Plan in 2000, 1999 or 1998.

10. LITIGATION

     In August 2000, litigation was instituted against the Company styled as
Duratherm, Inc. vs. OnSite Technology, LLC, Waste Control Specialists, LLC and
Kevin Nowlin; In the United States District Court for the Southern District of
Texas; Civil Action No. H-00-2727. This is a lawsuit against OnSite Technology,
LLC, the Company's wholly-owned subsidiary ("OnSite"), a customer of OnSite
("WCS") and a former employee of OnSite ("Nowlin") by Duratherm, Inc. alleging
(i) infringement of U.S. patent no. 5,523,060, by the Company's ITD Units, which
are its primary revenue producing asset; (ii) misappropriation and misuse of
trade secrets and breach of confidential relationship; (iii) tortuous
interference with a business relationship; (iv) civil conspiracy to commit the
acts (ii)-(iii) listed above; and business disparagement. The plaintiff sought
damages, exemplary damages, treble damages for infringement and a permanent
injunction (as well as attorneys fees and interest). The amount of damages was
not specified. The Company filed a motion to dismiss on the grounds that
Duratherm, Inc. was not the proper party to file suit on the patents (or
alternatively that Duratherm, Inc. needed to add additional parties as
plaintiff's to the suit). This motion to dismiss was granted by the court and
was not appealed. Duratherm Inc. could, however, refile the lawsuit with the
addition of other parties. It could also refile the claims, unrelated to the
patent, in state court. The Company still believes that it has a meritorious
defense on the claims alleged in the original lawsuit and will continue to
vigorously defend against such claims if they are reasserted. It is not possible
at this time to determine the probability of refiling the suit by Duratherm,
Inc. The Company's insurance carrier denied coverage with regard to certain
claims included in the original suit, but accepted the business disparagement
claim subject to a reservation of rights.

     The Company is from time to time involved in various other litigation
incidental to its business, which at times involves claims for significant
monetary amounts, some of which would not be covered by insurance. Presently the
Company has no existing litigation.

                                       F-19
<PAGE>   47
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. RELATED PARTY TRANSACTIONS

     Effective March, 2001 and August, 2000, the Company entered into agreements
with its primary lenders and holders of its outstanding preferred stock to defer
various principal and interest payments on its senior debt. See Notes 4 and 14.

     Effective January 1, 1998, the Company entered into a one year, $240,000
per month, remediation and recycling contract (the "Contract") with a
corporation that is a significant preferred stockholder (the "Stockholder") and
a member of the investment group that funded the Investor Notes (See Note 4).
After the Contract was signed, the Stockholder was unable to fully utilize the
Company's services and subsequently requested a release. The Company granted the
release under the condition that the Stockholder compensate the Company for the
six and one-half months of service. To fulfill its obligation, the Stockholder
agreed that in addition to $460,000 of payments that had been made, the
Stockholder would surrender 1,037,736 shares of Series B preferred stock in
satisfaction of the remaining $1,100,000 receivable on the Company's books. The
total revenue recognized under this contract during 1998 was $1,560,000.

     During 1998, the Company entered into a marketing assistance agreement (the
"Marketing Agreement") with the minority owners of OnSite Colombia, Inc. Under
the terms of the Marketing Agreement, in exchange for assisting the Company in
its business expansion efforts, the minority owners and the Company each
received marketing assistance fees totaling $320,000 during each of the years
ended December 31, 2000, 1999 and 1998.

     During December 1998, the Company formed a joint company, OnSite Arabia,
Inc., with an investor group for the purpose of providing environmental
remediation in the Arabian Gulf region. The Company sold two ITD Units to the
newly formed joint company (one in 1999 and one in 1998) and recognized gains to
the extent proceeds received exceeded the Company's proportional basis in the
assets.

     During 1999 the Company incurred approximately $726,000 of marketing and
administrative costs associated with the operations of OnSite Arabia and 50% of
those costs were invoiced to the minority owners. At December 31, 1999 $67,000
of such costs remain uncollected from the minority owners and are in other
current assets.

12. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION

     The Company currently operates in the environmental remediation and
hydrocarbon reclamation/recycling services. Substantially all revenues result
from the sale of services using the Company's ITD units. The Company's
reportable segments are based upon geographic area and all intercompany revenue
and expenses are eliminated in computing revenues and operating income (loss).

     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 corporate component of operating income (loss) represents corporate
general and administrative expenses. Corporate assets include cash and cash
equivalents, and restricted cash investments.

                                       F-20
<PAGE>   48
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Following is a summary of segment information:

<TABLE>
<CAPTION>
                                                           2000      1999      1998
                                                          -------   -------   -------
                                                                (IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
Revenue:
  United States.........................................  $ 1,464   $ 1,150   $ 2,708
  United Kingdom........................................       52       993        --
  Latin America.........................................    9,734    11,371     7,964
                                                          -------   -------   -------
          Total revenue.................................  $11,250   $13,514   $10,672
                                                          =======   =======   =======
Depreciation and Amortization:
  United States.........................................  $ 1,566   $ 1,034   $   856
  United Kingdom........................................      253       154        --
  Latin America.........................................      834     1,034       759
                                                          -------   -------   -------
          Total depreciation and amortization...........  $ 2,653   $ 2,222   $ 1,615
                                                          =======   =======   =======
Income (Loss) From Operations:
  United States.........................................  $(1,245)  $  (230)  $   140
  United Kingdom........................................     (513)      342        --
  Latin America.........................................    3,561     3,399     1,814
  Middle East...........................................     (452)       --        --
  Corporate.............................................     (322)     (413)     (550)
                                                          -------   -------   -------
          Total income from operations..................  $ 1,029   $ 3,098   $ 1,404
                                                          =======   =======   =======
Interest Expense:
  Latin America.........................................  $    15   $   270   $   139
  Corporate.............................................    1,003     1,185     1,020
                                                          -------   -------   -------
          Total interest expense........................  $ 1,018   $ 1,455   $ 1,159
                                                          =======   =======   =======
Provision (Benefit) For Income Taxes:
  United Kingdom........................................  $   (70)  $    76   $    --
  Latin America.........................................    1,187     1,320       756
                                                          -------   -------   -------
          Total provision for income taxes..............  $ 1,117   $ 1,396   $   756
                                                          =======   =======   =======
Number of Customers:
  United States.........................................        1         1         1
  United Kingdom........................................        1         1        --
  Latin America.........................................        4         4         2
                                                          -------   -------   -------
                                                                6         6         3
                                                          =======   =======   =======
</TABLE>

<TABLE>
<CAPTION>
                                                               2000      1999
                                                              -------   -------
<S>                                                           <C>       <C>
Assets:
  United States.............................................  $ 5,891   $ 6,423
  United Kingdom............................................    1,173     1,991
  Latin America.............................................    4,624     6,993
  Middle East...............................................    3,440     3,390
  Corporate.................................................       25       193
                                                              -------   -------
          Total assets......................................  $15,153   $18,990
                                                              =======   =======
</TABLE>

                                       F-21
<PAGE>   49
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                               2000      1999
                                                              -------   -------
<S>                                                           <C>       <C>
Long Lived Assets:
  United States.............................................  $ 5,021   $ 6,049
  United Kingdom............................................    1,009     1,263
  Latin America.............................................    1,537     2,569
  Middle East...............................................    3,390     3,390
                                                              -------   -------
          Total long lived assets...........................  $10,957   $13,271
                                                              =======   =======
Capital Expenditures:
  United States.............................................  $   267   $    28
  United Kingdom............................................       --       112
  Latin America.............................................       72        --
  Middle East...............................................       --     1,695
                                                              -------   -------
          Total capital expenditures........................  $   339   $ 1,835
                                                              =======   =======
</TABLE>

     During the years ended December 31, 2000, 1999 and 1998, the Company's
largest customer accounted for 50%, 58% and 71% of revenue, respectively. On
January 2, 2001, the contract with this customer expired without renewal.

13. NON-CASH INVESTING AND FINANCING ACTIVITIES

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

<TABLE>
<CAPTION>
                                                              2000    1999     1998
                                                              ----   ------   ------
                                                                  (IN THOUSANDS)
<S>                                                           <C>    <C>      <C>
Stock warrants issued to extend the due date of senior
  secured notes payable.....................................  $438   $   --   $   --
Series D convertible preferred stock exchanged for Series C
  non-convertible preferred stock...........................   168       --       --
Property and equipment for settlement of accounts
  receivable................................................    65       --       --
Indirect Thermal Desorption Unit value contributed to 50/50
  joint company in Arabia...................................    --    1,150    1,150
Net ITD Unit cost transferred between property and equipment
  from equipment held for sale, net of accumulated
  depreciation of $350 in 1999 and 1998.....................    --    1,408      407
Series B preferred stock re-purchased in exchange for
  accounts receivable.......................................    --       --    1,100
</TABLE>

14. SUBSEQUENT EVENTS

     Effective March 5, 2001 the Company entered into an agreement (the
"Agreement") with its primary lenders and holders of its outstanding preferred
stock that provided the Company with increased financial flexibility to continue
its pursuit of new market opportunities. The Agreement provides for a
three-month deferral of all principal and interest payments (both currently due
and previously deferred) due in March on the Company's senior secured debt. At
the end of the deferral period, if the Company is engaged in good faith
negotiations for its sale, the sale of a subsidiary, the sale of substantially
all of its assets, or the sale of substantially all assets of its subsidiaries
("Financing Transaction"), then all deferrals will be extended to July 8, 2001
and from month to month thereafter until the consummation of the Financing
Transaction or the termination of the good faith negotiations. Additionally, the
Company received a three-month deferral of

                                       F-22
<PAGE>   50
                         ENVIRONMENTAL SAFEGUARDS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

preferred dividends due in March, with a possible continuing deferral on the
same basis as the senior secured debt. The Agreement was designed to allow the
Company to conserve working capital while strategic plans are being considered.

     In exchange for the deferral of senior secured debt and preferred stock
dividend payments, the conversion price of the Series D Preferred Stock was
reset at the default rate or $0.37 per share (See Note 4). This change in the
conversion price results in further dilution to the Company's stockholders.
Management believes the value attributable to the change in conversion feature
should not have a material effect on the Company's financial position, results
of operations or cash flows.

                                       F-23