##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31,
2002

Commission file number 0-30417



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Philip Services Corporation

(Exact Name of Registrant as Specified in its
Charter)


|                                                                                            |  |                                            
|------------------------------------------------------------------------------------------- |  | -------------------------------------------
|Delaware                                                                                    |  | 98-0131394                                 
|(State or Other Jurisdiction of
    Incorporation or Organization)                          |  | (I.R.S. Employer
    Identification Number)
|                                                                                           
|5151 San Felipe, Suite 1600,
    Houston, Texas(Address of Principal Executive
    Offices) |  | 77056(Zip Code)                            

(713) 623-8777

(Registrants Telephone Number, Including
Area Code)


Securities registered pursuant to
Section 12(g) of the Act:

Title of Class

Common Stock, $0.01 par value

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

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.     þ

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes o          No þ

The aggregate market value of the voting stock
held by non-affiliates of the Registrant, based on the closing
price of shares of common stock on the NASDAQ stock market on
June 28, 2002, was approximately $13,367,327 (assumes
officers, directors and all stockholders beneficially owning 5%
or more of the outstanding shares of Common Stock are
affiliates).

Indicate by check mark whether the registrant has
filed all documents and reports required to be filed by
Section 12, 13, or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan
confirmed by a
court.     Yes þ          No o

The number of shares of common stock of the
Registrant outstanding on April 11, 2003 was 27,909,342.



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TABLE OF CONTENTS



|                                                                                      |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                                               
|                                                                                      | Item 1. Business                                                                                       
|                                                                                      | Item 2. Properties                                                                                     
|                                                                                      | Item 3. Legal Proceedings                                                                              
|                                                                                      | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                                                              
|EQUITY COMPENSATION PLAN INFORMATION                                                 
|                                                                                      | Item 6. Selected Financial Data                                                                        
|                                                                                      | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                                                      | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|                                                                                      | Item 8. Financial Statements and Supplementary Data                                                    
|REPORT OF INDEPENDENT ACCOUNTANTS                                                    
|REPORT OF INDEPENDENT ACCOUNTANTS                                                    
|PHILIP SERVICES CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
|PHILIP SERVICES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS                    
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                           
|                                                                                      | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III                                                                             
|                                                                                      | Item 10. Directors and Executive Officers of the Registrant                                            
|                                                                                      | Item 11. Executive Compensation                                                                        
|                                                                                      | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                                                      | Item 13. Certain Relationships and Related Transactions                                                
|                                                                                      | Item 14. Control and Procedures                                                                        
|                                                                                      | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURE PAGE                                                                       
|SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS                                     
|CERTIFICATIONS                                                                       
|Amended and Restated Certificate of Incorporation                                    
|Amended Nonemployee Dir. Restricted Stock Plan                                       
|Employment Agreement - Robert J. Millstone                                           
|6th Amendment to Credit Agreement                                                    
|Subsidiaries of the Registrant                                                       
|Power of Attorney                                                                    
|Certification of CEO Pursuant to Section 1350/906                                    
|Certification of CFO Pursuant to Section 1350/906                                    



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INDEX

TO FORM 10-K

|          |  |                                                                                                     |  |          |    | 
|--------- |  | --------------------------------------------------------------------------------------------------- |  | -------- | -- | 
|10-K Part |  |                                                                                                     |  |         
|and       |  |                                                                                                     |  |         
|Item No.  |  |                                                                                                     |  | Page No.
|          |  |                                                                                                     |  |         
|PART I   
|Item 1.   |  | Business                                                                                            |  |          | 1  | 
|Item 2.   |  | Properties                                                                                          |  |          | 12 | 
|Item 3.   |  | Legal Proceedings                                                                                   |  |          | 14 | 
|Item 4.   |  | Submission of Matters to a Vote of Security
    Holders                                             |  |          | 15 | 
|PART II  
|Item 5.   |  | Market for Registrants Common Equity and
    Related Stockholder Matters                           |  |          | 16 | 
|Item 6.   |  | Selected Financial Data                                                                             |  |          | 18 | 
|Item 7.   |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations           |  |          | 19 | 
|Item 7A.  |  | Quantitative and Qualitative Disclosure About
    Market Risk                                       |  |          | 39 | 
|Item 8.   |  | Financial Statements and Supplementary Data                                                         |  |          | 41 | 
|Item 9.   |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure            |  |          | 76 | 
|PART III 
|Item 10.  |  | Directors and Executive Officers of the Registrant                                                  |  |          | 76 | 
|Item 11.  |  | Executive Compensation                                                                              |  |          | 76 | 
|Item 12.  |  | Security Ownership of Certain Beneficial Owners
    and Management, and Related Stockholder Matters |  |          | 76 | 
|Item 13.  |  | Certain Relationships and Related Transactions                                                      |  |          | 76 | 
|Item 14.  |  | Controls and Procedures                                                                             |  |          | 76 | 
|Item 15.  |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                 |  |          | 76 | 

SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

Certain statements contained in this Annual
Report on Form 10-K constitute forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. When used in this document, the
words anticipate, believe,
estimate, expect and similar
expressions, as they relate to the Company or its management,
are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect
to future events and are subject to certain risks, uncertainties
and assumptions. Many factors could cause the actual results,
performance or achievements of the Company to be materially
different from any future results, performance or achievements
that may be expressed or implied by such forward-looking
statements, including, among others, the risks discussed in
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations, and risks
discussed from time to time in the Companys other filings
with the Securities and Exchange Commission and other regulatory
authorities. Should one or more of these risks or uncertainties
materialize, or should assumptions underlying the
forward-looking statements prove incorrect, actual results may
vary materially from those described herein as anticipated,
believed, estimated or expected. These risks and uncertainties
should be considered in evaluating forward-looking statements,
and undue reliance should not be placed on such statements. The
Company does not assume any obligation to update these
forward-looking statements.



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PART I




Item 1.     Business

Introduction

Philip Services Corporation (together with its
subsidiaries, PSC or the Company) is an
industrial and metals services company that operated two Groups
at December 31, 2002: (i) Industrial Services Group
and (ii) Metals Services Group. The Company also operated
the Project Services Division (see Special Notes Regarding
Recent Events, below), a group of businesses that were
being offered for sale. At December 31, 2002, PSC had
approximately 8,600 full-time employees at over
147 locations across North America. The Companys
operations are based primarily in the United States. The
financial results presented in this Form 10-K reflect the
Companys operations in three segments unless otherwise
noted.

The Company previously operated in three
segments, Industrial Outsourcing, Environmental Services and
Metals Services. In November 2002, the Company combined the
industrial cleaning businesses of the Industrial Outsourcing
Group with the Environmental Services Group and renamed the
business the Industrial Services Group. The remainder of the
Industrial Outsourcing Group, an agglomeration of businesses
relating to turnaround, maintenance, welding, refractory,
catalyst and power services, began to operate as a separate
segment under the name, Project Services Division
(PSD).

As of March 2, 2003, the Company divested
the bulk of the PSD business to a subsidiary of Fluor
Enterprises Inc. (see Special Note Regarding Recent
Events, below), including piping and fabrication, part of
turnaround and outage services, electrical contracting and
instrumentation, and welding. The divested businesses employed
more than 5,000 people including casual hourly personnel at
approximately 17 locations. The remaining PSD operations,
that are a part of the Company as of the date of filing of this
Form 10-K, consist of refractory, catalyst, and union
mechanical and turnaround services. The Company is considering
strategic alternatives, including sales, for the remaining PSD
businesses.

The Industrial Services Group provides the
industrial cleaning services provided by the former Industrial
Outsourcing Group and also provides the services formerly
delivered by the Environmental Services Group, including
commercial and industrial waste collection, recycling,
processing and disposal, laboratory analytical services,
container and tank cleaning, and emergency response services.

The Metals Services Groups operations
include ferrous and non-ferrous scrap collection and processing
services, brokerage, transportation and on-site mill services as
well as processing and distribution of steel products. The
Metals Services Group primarily services the steel, foundry,
manufacturing and automotive industries. Its operations were not
altered by the combination of the Industrial Outsourcing Group
and Environmental Services Group in November 2002.

The Company was originally incorporated in
Delaware on July 10, 1991 under the name Philip
Environmental (Delaware), Inc. The Companys principal
executive offices are at 5151 San Felipe, Suite 1600,
Houston, Texas 77056, and its telephone number is
(713) 623-8777.

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Special Note Regarding Recent Events

Certain material events have occurred since
December 31, 2002, of which investors should be aware in
considering the information contained in this Form 10-K.

Credit Facilities

The Company operates under two credit facilities,
the term loan and the revolving operating facility (see
Note 9 of Notes to Consolidated Financial Statements). The
revolving operating facility, which is senior to the term loan
and provides day-to-day working capital for the Company, was
scheduled to mature on April 8, 2003. Through a negotiated
agreement, the revolving operating facility has been extended to
June 2, 2003, subject to certain terms and fees described
below.

The Company intends to use the period of the
extension to prepare to restructure its balance sheet and
refinance its debt. It is anticipated that the restructuring
will be effected through a proceeding under Chapter 11 of
the Bankruptcy Code. To this end, the Company has retained
bankruptcy counsel and is consulting with its significant
stockholders, its lenders and its other advisors. Among other
things, the Company is in discussions with its lenders
concerning debtor-in-possession financing though there can be no
assurances that such financing will be available or obtained.

Under the amendment of the revolving operating
facility executed with the lenders as of April 8, 2003, the
lending commitment under Tranche A of the facility was
reduced from $100 million to $78 million. The capacity
under other tranches is unchanged, and as a result, the total
capacity of the facility is unchanged. In connection with the
amendment, the Company has paid an aggregate fee of $100,000 to
the lenders under Tranche B-Prime, which are, respectively,
affiliates of the Companys two largest stockholders,
Carl C. Icahn and affiliates and Stephen Feinberg and
affiliates.

The Companys financial statements contained
in this Form 10-K have been prepared on the assumption that
it will continue as a going concern, which contemplates the
realization of assets and settlement of liabilities in the
normal course of business. The report of KPMG LLP, the
Companys independent accountants, on the Companys
financial statements as of and for the year ended
December 31, 2002, contained in this Form 10-K
includes an explanatory paragraph which states that the
expiration of the Companys revolving operating facility on
June 2, 2003, and the absence of a replacement revolving
operating facility, raises substantial doubt about the
Companys ability to continue as a going concern.

Sale of Project Services Division
Businesses

As of March 2, 2003, PSC sold the five
business units that were part of the Project Services Division
to a subsidiary of Fluor Corporation of Aliso Viejo, California
for a purchase price of $21.2 million. The working capital
of these business units sold, of approximately
$43.0 million, was retained by PSC. The businesses were the
Mechanical Turnaround business, the Electrical and
Instrumentation Services business, Power Services (excluding the
group, now part of the Industrial Services Group, that provides
industrial cleaning and boiler improvement for power plants),
and Fabrication and Specialty Welding. The Mechanical and
Turnaround Services business unit develops, estimates, plans
schedules and executes projects requiring specialist mechanical
expertise. The Electrical & Instrumentation Contracting
business unit provides project management, construction and
maintenance services. The Specialty Welding business unit
provides shop fabrication of ASME-code vessels, furnaces,
boilers and tanks, and field specialty welding of piping for
oil, gas, chemical and power customers throughout the United
States, as well as fabrication and power services. These
businesses have been classified as discontinued operations in
the Companys Consolidated Financial Statements in
accordance with Statement of Financial Accounting Standards
No. 144 (FAS 144; See Note 24 of Notes to
Consolidated Financial Statements). In conjunction with the
sale, which is sometimes referred to herein as the Fluor
divestiture, PSC transferred approximately 5,000 employees,
including casual hourly personnel, to Fluor. Refractory and
Catalyst Services, Union Mechanical and Turnaround Operations,
and All Safety, remain with PSC as the Project Services Division
and will continue to be operated by PSC. The Company is
considering strategic alternatives, including sales, for the
remaining PSD businesses.



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Information Regarding Oldco

This Form 10-K contains information relating
to Philip Services Corporation and its subsidiaries, which has
been prepared by management, and Philip Services Corp.
(Oldco), an Ontario company, and its subsidiaries
(Oldco and its subsidiaries being referred to collectively as
the Predecessor Company), which has been compiled by
management of PSC.

On April 7, 2000, Oldco (whose bankruptcy is
described below) and certain of its Canadian subsidiaries
transferred substantially all of their assets and liabilities
(except for liabilities subject to compromise) to the Company at
fair value. The liabilities subject to compromise of
$726.5 million were retained by Oldco and certain of its
Canadian subsidiaries. As a result, Oldco remains insolvent.
Management of PSC has determined that certain consolidated
financial and other information concerning the Predecessor
Company may be of limited interest to the stockholders of the
Company and has therefore included such information in this
document. The consolidated financial information concerning the
Predecessor Company does not reflect the effects of the
application of fresh start reporting. Readers should, therefore,
review this material with caution and not rely on the
information concerning the Predecessor Company as being
indicative of future results for the Company or providing an
accurate comparison of financial performance.

On June 25, 1999, Oldco and substantially
all of its wholly owned subsidiaries located in the United
States (the U.S. Debtors), filed voluntary
petitions for reorganization under Chapter 11 of the
U.S. Bankruptcy Code with the United States Bankruptcy
Court for the District of Delaware (the
U.S. Court). Oldco and substantially all of its
wholly owned subsidiaries located in Canada (the Canadian
Debtors) commenced proceedings under the Companies
Creditors Arrangements Act in Canada in the Ontario Superior
Court of Justice (the Canadian Court) on the same
date.

On November 26, 1999, the Canadian Court
sanctioned the Plan of Compromise and Arrangement (as amended
and supplemented, the Canadian Plan), and on
November 30, 1999, the U.S. Court confirmed the Joint
Plan of Reorganization (as amended, the
U.S. Plan). The Canadian Plan and the
U.S. Plan were further amended during March 2000
(collectively, the Plan) and became effective, as
amended, on April 7, 2000. Under the Plan, the Company
emerged from bankruptcy protection as a new publicly held entity.

Under the Plan, syndicated debt of Oldco of
$1 billion was converted into $250 million of senior
secured debt, $100 million of convertible secured
payment-in-kind debt and 91% of the shares of common stock of
the Company. The senior secured debt was reduced to
$235.8 million on plan implementation due to repayment of
$14.2 million from proceeds of asset sales. The secured
payment-in-kind debt was convertible into 25% of the shares of
common stock of the Company, calculated on a fully diluted
basis, as of the effective date of the Plan. The Plan also
provided for the conversion of certain specified impaired
unsecured claims into $60 million of unsecured
payment-in-kind notes and 5% of the shares of common stock of
the Company as of the effective date of the Plan. The Plan
allowed certain holders of unsecured claims to receive $1.50 in
face amount of unsecured convertible notes in exchange for every
$1.00 in unsecured payment-in-kind notes that such holder would
have received under the Plan. The aggregate amount of unsecured
convertible notes issued was $17.5 million. The Company
also issued 1.5% of its shares of common stock to Canadian and
U.S. class action plaintiffs to settle all class action
claims. Other potential equity claimants received 0.5% of the
shares of common stock of the Company and the stockholders of
Oldco received 2% of the shares of common stock of the Company.

The Company has adopted fresh start reporting in
accordance with the AICPAs Statement of Position 90-7
Financial Reporting by Entities in Reorganization under
the Bankruptcy Code. For financial reporting purposes, the
effective date of the Plan is considered to be March 31,
2000. Due to the changes in the financial structure of the
Company and the application of fresh start reporting as a result
of the consummation of the Plan, the consolidated financial
statements of the Company issued subsequent to Plan
implementation are not comparable with the consolidated
financial statements issued by the Predecessor Company prior to
Plan implementation. A black line has been drawn on the
accompanying consolidated financial information to separate and
distinguish between the Company and Predecessor Company.

[This black line does not appear in the
electronically filed version of this Form 10-K]

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Operating Groups

PSC currently reports in three segments. Prior to
November 2002, the Company reported in three different segments,
Industrial Outsourcing, Environmental Services and Metals
Services Groups. In November 2002, the Company combined the
industrial cleaning operations of the Industrial Outsourcing
Group with the Environmental Services Group into a new
Industrial Services Group. The remaining activities of the
Industrial Outsourcing Group began to operate as a separate
segment under the name, Project Services Division. On
March 2, 2003, the Company divested the bulk of the PSD
businesses to a subsidiary of Fluor Corporation (see
Special Note Regarding Recent Events, above).
Accordingly, the Company now operates the Industrial Services
Group and the Metals Services Group. The remaining businesses of
PSD, union mechanical and turnaround, catalyst and refractory
are operated separately. The description that follows is, except
as noted, of the Companys businesses subsequent to the
Fluor divestiture.



| |                          
| | -------------------------
| | Industrial Services Group

The Industrial Services Group is the successor to
the industrial cleaning businesses of the Industrial Outsourcing
Group and all of the businesses of the Environmental Services
Group. The integrated Group provides a broad range of industrial
and environmental services, with approximately 86 locations
and approximately 5,500 employees at December 31, 2002. The
Group has a significant presence in the heavily industrialized
regions of the Northeast, Northwest, Midwest and Southeast
United States and Southern Ontario. The Group is headquartered
in Houston, Texas. See Note 21 of Notes to Consolidated
Financial Statements for certain financial information of the
Industrial Services Group for the years ended December 31,
2002, 2001 and 2000 (reclassified to reflect current segments).

The Industrial Services Group primarily serves
heavy industry, with the deepest market penetration in the
refining, petrochemical and utilities industries. Services
provided by the Group include industrial cleaning and
maintenance, decommissioning and remediation services. The Group
also provides commercial and industrial by-product collection,
processing and disposal, engineered fuel blending, solvent
distillation, analytical services, container- and
tank-cleaning services, on-site services, lab packing, household
hazardous waste services and emergency response services to
generators of hazardous wastes. The Group also operates
wastewater treatment facilities to manage wastes generated by
these operations and three rail car cleaning facilities. PSC is
one of the largest independent operators of container- and
tank-cleaning facilities in North America. In addition, the
group operates an engineered landfill in Stoney Creek, Ontario
that is licensed to receive non-hazardous commercial and
industrial wastes.

Laboratory analytical testing across North
America is provided through a network of environmental
laboratories, primarily based in Canada. Analytical services are
offered to the Groups engineering and consulting clients
and also are utilized to meet the Groups internal
analytical testing requirements. The Group also provides
emergency response services, including containment, clean-up,
and disposal of material resulting from the inadvertent release
of dangerous or hazardous materials, and wastes or spills of
material that are unusual to the environment in quantity or
quality.



| |                      
| | ---------------------
| | Metals Services Group

The Metals Services Group provides ferrous and
non-ferrous scrap collection and processing services, brokerage
and transportation and on-site mill services. The Group is one
of the largest providers of ferrous scrap processing and
brokerage services in North America. The Metals Services
operations are concentrated in the Southeast United States, the
Ohio-Pittsburgh corridor, and the Southern Great Lakes Basin,
and employed approximately 1,000 people at approximately
30 locations at December 31, 2002. The Group provides
services to North American steel companies and is headquartered
in Cleveland, Ohio. See Note 21 of Notes to Consolidated
Financial Statements for certain financial information of the
Metals Services Group for the years ended December 31,
2002, 2001 and 2000.

The Metals Services Group is a major processor
and broker of ferrous scrap to steel mills and foundries. In
2002, the Group processed approximately 1.7 million tons of
scrap. Ferrous scrap is generated as a by-product of metals
stamping and fabrication and is also derived from post-consumer
sources such as cars and

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refrigerators. It is processed by baling,
shearing, separation or shredding during which time the material
is graded and sorted. The primary consumers of ferrous scrap are
the foundry industry and steel mills, which use ferrous scrap as
a primary feedstock. The Groups operations are regionally
concentrated close to industrial scrap producers and other
suppliers and to local steel mills.


The Metals Services Groups prices for
ferrous scrap are established and adjusted based upon prices
offered monthly by the major steel producers. The price of
ferrous scrap is a significant factor influencing the
profitability of the Group. The Group manages its commodity
price risk by acquiring ferrous metal scrap as it is needed for
its clients and maintaining relatively low inventories of scrap
and processed metals that are turned regularly.

The Group also operates a large brokerage
business, which involves the purchase of scrap from generators
and the sale and transportation of the scrap to the
Companys steel mill and foundry customers to meet their
raw material requirements. In 2002, the Company brokered
approximately 1.8 million tons of scrap.



| |                          
| | -------------------------
| | Project Services Division

The Project Services Division (post-Fluor
divesture) provides turnaround and outage services for
facilities requiring a union workforce, catalyst services to
chemical and petrochemical facilities and refineries,
decontamination, heat exchange maintenance, and refractory and
corrosion prevention services. The Division utilizes
technologies that reduce the downtime associated with the
turnaround and outage projects and reduces the safety risks
associated with confined space entry. See Note 21 of Notes
to Consolidated Financial Statements for certain financial
information of PSD for the years ended December 31, 2002,
2001, and 2000 (reclassified to reflect current segments).

Backlog

Revenue backlog was $136.4 million as at
December 31, 2002, with all of the work anticipated to be
completed in 2003. Contracts representing $120.6 million of
this backlog were transferred to Fluor in the Fluor divestiture.
While backlog can be an indication of expected future revenues,
backlog is subject to revisions from time to time due to
cancellations, modifications and changes in the scope of
projects or their design and construction schedules. There can
be no assurance whether or when backlog will be realized as
revenue. While the Metals Services Group and certain divisions
of the Industrial Services Group have alliances with customers,
they do not have contracts for committed volumes or fixed price
arrangements and, therefore, do not have any revenue backlog.

Impact of Inflation, Economic Conditions and
Seasonality

The Companys operating groups are impacted
by seasonal demands for their services. However, the sector that
was most seasonal and historically made the most severe demands
for seasonal working capital was the portion of the PSD business
sold in the Fluor divestiture. Large maintenance projects
including turnaround and outage services in the refining,
petrochemical and utilities industries, are primarily scheduled
in the spring and fall, which are lower demand periods in these
industries. The Industrial Services Group and Project Services
Division are still impacted by some seasonality in both demand
for personnel and demand for working capital. Moreover,
inclement weather during the winter months, primarily in the
Northeast, can affect the ability of these businesses to provide
services and can depress the demand for services from customers.
The Metals Services Group is impacted by traditional steel
industry shutdowns in the summer months and December.

A general economic slowdown results in the
Company experiencing lower levels of activity and demand for its
services in all business segments.

Proprietary Technology

The Company possesses a body of patented and
unpatented technology that it uses in its business. For example,
the Industrial Services Group utilizes Life Guard, a
technology for decontaminating hydrocarbons

5



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in refinery towers and vessels to reduce
potential health and safety impacts during cleaning and
maintenance activities. Additionally, the Metals Services Group
applies processing technologies to obtain better yields from
ferrous scrap, as well as produce a higher-quality and
higher-density product to meet the melt requirements of its
steel mill clients. However, proprietary technology is not a
driving force for the Company, and the Company performs minimal
research and development activity. Although the Company
possesses patents for certain of its technologies, it relies
primarily on trade secret protection and confidentiality to
protect its proprietary technologies. There can be no assurance
that the Company will be able to maintain the confidentiality of
its technology; however, the Company does not believe the loss
of any single patent or trade secret would materially affect its
business.


Several patented technologies were transferred to
Fluor in the divestiture. These include the Fast Draw®
technology, a remote control heat exchanger bundle extraction
technology, the Fast Clean technology, a semi-robotic heat
exchanger bundle cleaning process, and a welding and
heat-treatment process. Fluor licensed the Fast Clean and Fast
Draw technology back to PSC subject to certain conditions.
Principal among these conditions are that the technology be used
by PSC (or a successor in interest) solely in connection with
projects conducted by union services for four years from
closing. Thereafter, PSC may use the technology in any business.
Other conditions relate primarily to safety, training and
insurance. Neither party is obligated to provide the other with
any improvements of the technology.

Sales and Marketing

The Companys sales and marketing objective
is to establish long-term relationships with its clients and
develop a thorough understanding of their businesses to create
value for clients by providing differentiated products and
services. Through these relationships, the Company works with
its clients to maximize their process efficiencies, reduce down
time and health, safety and environmental risks, and minimize
waste destined for end-disposal.



| |                          
| | -------------------------
| | Industrial Services Group

The Industrial Services Group places less
emphasis on traditional sales approaches to capture new clients
for its industrial cleaning business and more on selling a range
of services to its existing industrial client base. The Company
has established a base of clients crossing key industrial
sectors. This process is carried out by sales and operating
personnel who have relationships with these clients. To support
many of its industrial services contracts, PSC dedicates on-site
personnel at some clients facilities to manage the
relationship. PSC seeks to enter into master service agreements
with large clients to establish the Company as an approved
national vendor. Master service agreements are a primary vehicle
for large companies to reduce the number of suppliers and
control costs while concurrently establishing high standards of
service delivery.

Environmental services are primarily marketed to
mid-size accounts by a sales force that relies on more
traditional marketing methods to broaden its customer base. The
Group participates in competitive bidding processes to obtain
contracts granted by municipalities, local governments or
private enterprise for services such as analytical services and
household hazardous waste management. Contracts are generally
awarded on the basis of sealed bids submitted by interested
bidders, and competition for these contracts is generally
intense.



| |                      
| | ---------------------
| | Metals Services Group

The Metals Services Group employs account
representatives within its brokerage business who are
responsible for purchasing scrap from commercial and industrial
generators and selling the scrap to end-users, principally steel
mills. The Group has established relationships with scrap
generators as well as end users. The market for the Groups
services is narrow and largely relationship oriented and
geographically based. The Groups account representatives
and location managers are principally responsible for managing
and growing client relationships.

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Competition

The industrial and metals services industries are
highly competitive and require substantial capital resources.
Competition is both national and regional in nature, and the
level of competition faced by the Company in its various lines
of business is significant. The Company provides outsourcing
services that, while non-core to its customers primary
business activities, are critical to the customers
operations. The Companys customers are seeking to improve
competitiveness by focusing on their core businesses, reducing
costs and accessing specialized technologies and expertise
through more effective vendor relationships. Three key trends
that the Company believes have developed as a result are:
(i) increased outsourcing of non-core services; (ii) a
reduction in the number of vendors from which outsourced
services are purchased; and (iii) a trend towards
longer-term and broader-based vendor alliances. The Company
believes that its operations benefit from these trends.

Potential customers of the Company typically
evaluate a number of criteria, including price, service,
reliability, safety, prior experience, financial capability and
liability management. The Company believes its primary
competitive strengths are: (i) a range of industrial
services; (ii) a good safety record; and (iii) skilled
and experienced employees. The Company competes with a variety
of companies that may be larger in particular business lines in
which the Company operates. The Company seeks to enhance its
competitive position by increasing the efficiency of its
operations through economies of scale and increased recovery
rates, thereby lowering its costs, which increases margin and
gives it pricing flexibility. The Company also seeks to provide
multiple services to its customers at their plant locations. The
Companys competitive position has been damaged by
continuing market concerns about its financial condition since
its emergence from bankruptcy in 2000.

Industrial outsourcing and metals services
companies operate in a largely unconsolidated market. PSC
competes with a number of local service providers who do not
offer a similar breadth of services or geographic reach.
PSCs revenue is primarily generated from the
Companys large corporate accounts, with heavy
concentration in the refining, petrochemical and steel
industries. The Company cannot yet fully assess whether the
reduced range of services as a result of the PSD divestiture
will negatively impact the Companys ability to attract and
retain large industrial customers. The Company expects, however,
that the reduced seasonal demand on its working capital will
permit it to improve and expand services in its remaining
businesses and become more competitive.



| |                          
| | -------------------------
| | Industrial Services Group

The Industrial Services Group competes with
numerous local, regional and national companies of varying
sizes, many of which have greater financial resources and
flexibility than the Company. Competition for industrial
outsourcing services is based primarily on unit prices,
productivity, safety, innovative approaches and quality of
service.

The waste management services offered by the
Industrial Services Group compete with other services provided
in the hazardous waste management industry. The Group competes
for waste streams by employing technologies that minimize
on-site waste generation for its clients, maximizing the value
of, and reuse opportunities for, industrial by-products and
servicing small quantity generators, where there is strong
demand for the Groups by-products collection and
management services.

The Group concentrates on servicing the small to
mid-size waste generator market. The Groups network of
waste processing and by-product recovery facilities enables it
to provide its clients with a competitive alternative to
conventional disposal. The Group does not own or control any
waste end-disposal facilities in the United States, and depends
on obtaining competitive rates from such facilities in order to
provide its clients with competitive waste-management services.
This lack of proprietary end-disposal capacity is a competitive
limitation for the Group.

7



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| |                      
| | ---------------------
| | Metals Services Group

The primary competitors of the Metals Services
Group on the purchase side are other scrap processors in regions
where the Group operates. Availability depends upon the level of
economic activity in the industries from which the Group
acquires its scrap. The Company believes that its longstanding
relationship with generators of metal-bearing scrap provides it
with a stable source of supply. In its scrap processing and
brokerage operations, the Group competes for access to scrap
with large regional operators as well as numerous smaller
operators. On the sale side, scrap prices tend to respond to
worldwide supply and demand from steel mill customers and,
therefore, can be highly volatile. The Metals Services Group
competes by offering a secure supply of high-quality scrap that
is processed according to customer specifications and by
providing a range of additional on-site mill services.

Government Regulation

The Company is subject to significant government
regulation, including stringent environmental laws and
regulations. Among other things, these laws and regulations
impose requirements to control discharges to the air, soil and
surface and subsurface waters. The Company is also subject to
regulations regarding health, safety, zoning, land use and the
handling and transportation of industrial by-products and waste
materials. This regulatory framework imposes considerable
compliance burdens and costs on the Company. See Capital
Expenditures in Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations,
for a discussion of the Companys estimated capital
expenditures in relation to environmental compliance matters.
Notwithstanding the burdens of this compliance, the Company
believes that its business prospects are enhanced by the
enforcement of environmental laws and regulations by government
agencies.

Applicable federal and state or provincial laws
and regulations regulate many aspects of the industrial and
metal services industries. Laws and regulations typically
provide operating standards for treatment, storage, management
and disposal of waste and set limits on the release of
contaminants into the environment. Such laws and regulations,
among other things, (i) regulate the nature of the
industrial by-products and wastes that the Company can accept
for processing at its treatment, storage and disposal
facilities, the nature of the treatment it can provide at such
facilities and the location and expansion of such facilities;
(ii) impose liability for remediation and clean-up of
environmental contamination, including spills or releases of
certain industrial by-products and waste materials resulting
from shipping waste off-site or past and present operations at
the Companys facilities; and (iii) may require
financial assurance that funds will be available for the
clean-up and remediation or the closure and, in some cases,
post-closure care of sites. Such laws and regulations also
require manifests to be completed and delivered in connection
with any shipment of prescribed materials so that the movement
and disposal of such material can be traced and the persons
responsible for any mishandling of such material identified.

This regulatory process also requires the Company
to obtain and retain numerous governmental approvals, licenses
and permits to conduct its operations. In addition, because a
portion of the Companys business consists of the
transportation of wastes, including hazardous wastes, the
Company is subject to United States Department of Transportation
and other regulations requiring certain licensing, permits and
other government approvals. Operating permits need to be renewed
periodically and may be subject to revocation, modification,
denial or non-renewal for various reasons, including the failure
of the Company to satisfy regulatory concerns. Adverse decisions
by governmental authorities on permit applications submitted by
the Company may result in abandonment or delay of projects,
premature closure of facilities or restriction of operations,
all of which could have a material adverse effect on the
Companys financial condition.

Federal, state, provincial, local and foreign
governments have also from time to time proposed or adopted
other types of laws, regulations or initiatives with respect to
the industrial and metal services industry. Included are laws,
regulations and initiatives to ban or restrict the shipment of
wastes, impose higher taxes on out-of-state waste shipments than
in-state shipments, and reclassify certain categories of
non-hazardous wastes as hazardous. Certain state and local
governments have promulgated flow control
regulations that attempt to require that all waste generated
within the state or local jurisdiction must go to certain
disposal sites. Due to the complexity of regulation of the
industry and to public pressure, implementation of existing or

8



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future laws, regulations or initiatives by
different levels of governments may be inconsistent and are
difficult to foresee.


The Companys facilities are subject to
periodic unannounced inspection by federal, provincial, state
and local authorities to ensure compliance with license terms
and applicable laws and regulations. The Company generally works
with such authorities to remedy any deficiencies found during
such inspections. If serious violations are found or
deficiencies, if any, are not remedied, the Company could incur
substantial fines, penalties and other expenses.

Environmental laws and regulations impose strict
operational requirements on the performance of certain aspects
of hazardous substances remedial work. These requirements
specify complex methods for identification, storage, treatment
and disposal of waste materials managed during a project.
Failure to meet these requirements could result in termination
of contracts, substantial fines and other expenses.

In the event that administrative actions fail to
cure the perceived problem, or where the relevant regulatory
agency so desires, an injunction or temporary restraining order
or damages may be sought in a court proceeding. In addition,
public interest groups, local citizens, local municipalities and
other persons or organizations may have a right to seek relief
from a court for purported violations of law. In some
jurisdictions recourse to the courts for individuals under
common law principles such as nuisance have been or may be
enhanced by legislation providing members of the public with
statutory rights of action to protect the environment. In such
cases, even if an industrial by-products or waste materials
treatment, storage or disposal facility is operated in full
compliance with applicable laws and regulations, local citizens
and other persons and organizations may seek compensation for
damages caused by the operation of the facility.

The industrial and metal services industries in
North America have become subject to extensive and evolving
regulation. The Company makes a continuing effort to anticipate
relevant material regulatory, political and legal developments,
but it cannot predict the extent to which any future legislation
or regulation may affect its operations. The Company believes
that with heightened legal, political and citizen awareness and
concerns, companies in the industrial and metal services
industries may from time to time incur fines and penalties and
will be faced, in the normal course of business, with the need
to expend funds for capital projects, remedial work and
operating activities, such as environmental contamination
monitoring, and related activities. Regulatory or technological
developments relating to the environment may require companies
engaged in the industrial and metal services industries to
modify, supplement or replace equipment and facilities at costs
that may be substantial. Because the businesses in which the
Company is engaged are intrinsically connected with the
protection of the environment and the potential discharge of
materials into the environment, a portion of the Companys
capital expenditures is expected to relate, directly or
indirectly, to such equipment and facilities. Moreover, it is
possible that future developments, such as increasingly strict
environmental laws and regulations, and enforcement policies
thereunder, could affect the manner in which the Company
operates its projects and conducts its business, including the
handling, processing or disposal of the industrial by-products
and waste materials generated thereby.



| |                                   
| | ----------------------------------
| | Hazardous Substances
    Liability

United States laws and state common law may
impose liability on the present or former owners or operators of
facilities that release hazardous substances into the
environment. Furthermore, companies may be required by law to
provide financial assurances for operating facilities in order
to ensure their performance complies with applicable laws and
regulations. Similar liability may be imposed upon the
generators and transporters of wastes that contain hazardous
substances. All such persons may be liable for waste-site
investigation costs, waste-site clean-up costs and natural
resource damages, regardless of fault, the exercise of due care
or compliance with relevant laws and regulations. Such costs and
damages can be substantial.

In the United States, statutory liability stems
primarily from the Comprehensive Environmental Response
Compensation and Liability Act of 1980 (CERCLA) and
its state equivalents (collectively, Superfund) and
the Resource Conservation and Recovery Act of 1976
(RCRA) and similar state statutes. CERCLA imposes
joint and several liability for the costs of remediation and
natural resource damages on the owner or operator of a facility
from which there is a release or a threat of a release of a

9



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hazardous substance into the environment and on
the generators and transporters of those hazardous substances.
Under RCRA and equivalent state laws, regulatory authorities may
require, pursuant to administrative order or as a condition of
an operating permit, that the owner or operator of a regulated
facility take corrective action with respect to contamination
resulting from past or present operations. Such laws also
require that the owner or operator of regulated facilities
provide assurance that funds will be available for the closure
and, in some cases, post-closure care of its facilities. The
Company is exposed to potential liability under RCRA, CERCLA and
their state-law equivalents resulting from the handling and
transportation of such wastes and for alleged environmental
damage associated with past, present and future waste-disposal
practices. There may also be common law liability for personal
injury caused by hazardous substances. The Company may face
similar potential liability in other countries in which it
operates.


The Company is aware that hazardous substances
are present in some of the landfills and transfer, storage,
processing and disposal facilities used by it. Certain of these
sites have experienced environmental problems, and clean-up and
remediation is required. The Predecessor Company grew in the
past by acquiring other businesses. As a result, the Predecessor
Company acquired, and the Company may in the future acquire,
landfills and other transfer and processing sites that contain
hazardous substances or that have other potential environmental
problems and related liabilities, and may acquire businesses
that in the future incur substantial liabilities arising out of
their respective past practices, including past disposal
practices, which acquisitions may expose the Company to
potential liability under RCRA and CERCLA and their state law
and Canadian provincial equivalents.

Certain of PSCs metals facilities and
certain of its transfer, storage, processing and disposal
facilities are environmentally impaired as a result of operating
practices at the sites, and remediation will be required at a
substantial cost. Investigations of these sites have
characterized to varying degrees the nature and extent of the
contamination. PSC, in conjunction with environmental regulatory
agencies, has in some instances commenced remediation of the
sites in accordance with approved corrective action plans
pursuant to permits or other agreements with regulatory
authorities. The Company has established procedures to
periodically evaluate these sites, giving consideration to the
nature and extent of the contamination. Estimated remediation
costs, for individual sites and in the aggregate, are
substantial. While the Company maintains reserves for these
matters based upon cost estimates, there can be no assurance
that the ultimate cost and expense of corrective action will not
exceed such reserves and have a material adverse impact on the
Companys operations or financial condition.

The Company is required under certain
U.S. and Canadian laws and regulations to demonstrate
financial responsibility for possible bodily injury and property
damage to third parties caused by both sudden and non-sudden
occurrences. The Company is also required to provide financial
assurance that funds will be available when needed for closure
and post-closure care at certain of its treatment, storage and
disposal facilities, the costs of which could be substantial.
Such laws and regulations allow the financial assurance
requirements to be satisfied by various means, including letters
of credit, surety bonds, trust funds, a financial (net worth)
test and a guarantee by a parent company. In the United States,
a company must pay the closure costs for a waste treatment,
storage or disposal facility owned by it upon the closure of the
facility and thereafter, in some cases, pay post-closure care
costs. There can be no certainty that these costs will not
materially exceed the amounts provided pursuant to financial
assurance requirements. In addition, if such a facility is
closed prior to its originally anticipated time, it is unlikely
that sufficient funds will have been accrued over the life of
the facility to fund such costs, and the owner of the facility
could suffer a material adverse impact as a result.
Consequently, it may be difficult to close such facilities to
reduce operating costs at times when, as is currently the case
in the hazardous waste services industry, excess treatment,
storage or disposal capacity exists.

Estimates of the Companys liability for
remediation of a particular site and the method and ultimate
cost of remediation require a number of assumptions and are
inherently difficult, and the ultimate outcome may differ from
current estimates. As additional information becomes available,
estimates are adjusted. It is possible that technological,
regulatory or enforcement developments, the results of
environmental studies or other factors could alter estimates and
necessitate the recording of additional liabilities, which could
be material. Moreover, because PSC has disposed of waste
materials at numerous third-party disposal facilities, it is
possible that PSC will be identified as a potentially
responsible party at additional sites. The impact of such

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future events cannot be estimated at the current
time. The Company may also be required to indemnify clients who
incur liability in connection with the foregoing pursuant to the
terms of contracts between such clients and the subsidiaries
involved.


Employees

At December 31, 2002, PSC employed
approximately 8,600 full-time employees, of whom approximately
1,000 are unionized. Of the total employees, approximately 5,500
worked in the Industrial Services Group, approximately 1,000
worked in the Metals Services Group, approximately 2,000 worked
in the Project Services Division, and approximately 100 worked
in shared services/ corporate.

11



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|        |           
|------- | ----------
|Item 2. | Properties

At December 31, 2002, the Company operated
147 locations primarily in North America. Of these locations, 17
were divested to Fluor in whole or in part as part of the Fluor
divestiture. The Company believes that most of its primary
existing facilities are effectively utilized, well maintained
and in good condition. The Company continues to divest itself of
unneeded or underutilized properties. The Company believes that
its facilities are adequate for its current needs and that
suitable additional space will be available as required. The
Companys corporate headquarters are located in Houston,
Texas and comprise leased premises of 50,000 square feet.
The following is a list of the principal sites from which the
Company conducts its operations. Unless otherwise indicated, all
of the listed sites are owned by PSC or a wholly owned
subsidiary, subject to the security interests of the
Companys lenders under the credit facility and the
revolving operating facility described elsewhere herein.

Industrial Services Group

|                                                   |  |                          |  |                                                
|-------------------------------------------------- |  | ------------------------ |  | -----------------------------------------------
|Owner                                              |  | Location                 |  | Nature of Services Provided(1)                 
|                                                   |  |                          |  |                                                
|PSC Industrial Outsourcing, Inc.                   |  | Benicia, California      |  | service depot                                  
|                                                   |  | Deerpark, Texas          |  | service depot(2)                               
|                                                   |  | Reserve, Louisiana       |  | service depot(2)                               
|                                                   |  | Houston, Texas           |  | service depot                                  
|                                                   |  | Los Angeles, California  |  | service depot                                  
|Burlington Environmental, Inc.                     |  | Kansas City, Missouri    |  | by-products collection, processing and transfer
|                                                   |  | Seattle, Washington      |  | by-products collection, processing and transfer
|                                                   |  | Kent, Washington         |  | by-products collection, processing and transfer
|                                                   |  | Tacoma, Washington       |  | by-products collection, processing and transfer
|Nortru, Inc.                                       |  | Detroit, Michigan        |  | by-products collection, processing and transfer
|Cousins Waste Control Corporation                  |  | Toledo, Ohio             |  | by-products industrial services contracting    
|Northland Environmental, Inc.                      |  | Providence, Rhode Island |  | by-products collection, processing and transfer
|Republic Environmental Systems (Pennsylvania) Inc. |  | Hatfield, Pennsylvania   |  | by-products collection, processing and transfer
|Philip Reclamation Services, Houston Inc.          |  | Houston, Texas           |  | by-products collection, processing and transfer

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Metals Services Group

|                 |  |                            |  |                                              
|---------------- |  | -------------------------- |  | ---------------------------------------------
|Owner            |  | Location                   |  | Nature of Services Provided(1)               
|                 |  |                            |  |                                              
|PSC Metals, Inc. |  | Burns Harbor, Indiana      |  | metals collection, processing and transfer(2)
|                 |  | St. Louis, Missouri        |  | metals collection, processing and transfer   
|                 |  | Beaver Falls, Pennsylvania |  | metals collection, processing and transfer   
|                 |  | Nashville, Tennessee       |  | metals collection, processing and transfer(2)
|                 |  | Chattanooga, Tennessee     |  | metals collection, processing and transfer   
|                 |  | Harriman, Tennessee        |  | metals collection, processing and transfer(2)
|                 |  | Knoxville, Tennessee       |  | metals collection, processing and transfer(2)
|                 |  | Cleveland, Ohio            |  | metals collection, processing and transfer(2)
|                 |  | Canton, Ohio               |  | metals collection, processing and transfer(2)
|                 |  | Hamilton, Ontario          |  | metals collection, processing and transfer   
|                 |  | Granite City, Illinois     |  | metals collection, processing and transfer(2)
|                 |  | Aurora, Illinois           |  | metals collection, processing and transfer(2)
|                 |  | Columbus, Ohio             |  | metals collection, processing and transfer(2)
|                 |  | Ashland, Virginia          |  | metals collection, processing and transfer(2)

Project Services Division

|                                 |  |                        |  |                               
|-------------------------------- |  | ---------------------- |  | ------------------------------
|Owner                            |  | Location               |  | Nature of Services Provided(1)
|                                 |  |                        |  |                               
|PSC Industrial Outsourcing, Inc. |  | Houston, Texas         |  | service depot(3)              
|                                 |  | Toledo, Ohio           |  | service depot                 
|                                 |  | Sand Springs, Oklahoma |  | service depot(3)              



---



|    |                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------
|(1) | A number of the Companys subsidiaries
    operate sites that provide services in more than one category.
|   
|(2) | Leased facility.                                                                                         
|   
|(3) | Facility divested subsequent to December 31,
    2002 through the Fluor divestiture.                     

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|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

On June 27, 2001 the Port Authority of the
City of Quebec filed a claim with the Superior Court for the
District of Quebec, Canada, against the Predecessor Company for
damages for failure to return leased property to its condition
when first leased in 1993. The leased property was abandoned in
the bankruptcy. The claim, including environmental investigation
costs and estimated clean-up costs, is CDN $1,900,000. The
Company filed an appearance in defense of the present and former
officers and directors. An answer was filed in October 2002.
Insurance coverage has been denied.

In addition to the matter discussed above, from
time to time PSC becomes aware of compliance matters relating
to, or receives notice from Federal, state, or local
governmental entities of, alleged violations of environmental,
health, and/or safety laws and regulations pertaining to, among
other things, the disposal or discharge of chemical substances
(including hazardous wastes). In some instances, these matters
may become the subject of administrative proceedings or lawsuits
and may involve monetary sanctions of $100,000 or more
(exclusive of interest and costs).

The Company is a defendant in numerous lawsuits
for which the Company has insurance coverage. Each of these
suits is, in the event of an adverse verdict, subject to a
deductible. The Company currently has a deductible of
$1 million on most coverages and $2 million on
property. Accordingly, for many of these suits, the Company is
effectively self-insured. Although the Company does not believe
that the uninsured liability from any single suit would be
material, it is not possible to predict the effect of cumulative
deductibles.

The Company is named as a defendant in a number
of other lawsuits which have arisen in the ordinary course of
its business. The Company believes that except as otherwise
reported herein, neither insured litigation nor other litigation
is likely to have a material adverse effect on its business or
financial condition. The Company has made provision in its
Consolidated Financial Statements for potential liability from
litigation in certain instances.

The Company is unable to predict the outcome of
certain of the foregoing matters, and cannot provide assurance
that these or future matters will not have a material adverse
effect on the result of operations or financial condition of the
Company.

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##### Table of Contents






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

The Companys annual meeting of stockholders
was held on December 19, 2002, at the Omni Houston Hotel in
Houston, Texas. At the annual meeting, the Companys
stockholders voted on five proposals: (1) the election of
six nominees to serve as directors until the 2003 Annual Meeting
of Stockholders; (2) the ratification of the selection of
KPMG LLP as the Companys independent auditors for the year
ending December 31, 2002; (3) the amendment and
restatement of the Companys Certificate of Incorporation;
(4) the amendment of the Nonemployee Directors Restricted
Stock Plan; and (5) the adoption of a
(2002) Stock-Based Bonus Plan. The voting of the
Companys stockholders as to these matters was as follows:

(a) Election of Directors 
Voting Results

Directors elected

|                   |  |                            
|------------------ |  | ---------------------------
|Harold First      
|18,501,070         |  | For                        
|474,928            |  | Voted to Withhold Authority
|Edmund B. Frost   
|18,504,186         |  | For                        
|474,812            |  | Voted to Withhold Authority
|Robert L. Knauss  
|18,503,898         |  | For                        
|475,100            |  | Voted to Withhold Authority
|Robert J. Mitchell
|18,504,027         |  | For                        
|474,971            |  | Voted to Withhold Authority
|Stanley N. Nortman
|18,504,238         |  | For                        
|474,960            |  | Voted to Withhold Authority
|Felix Pardo       
|18,504,329         |  | For                        
|474,669            |  | Voted to Withhold Authority

(b) Matters Voted Upon

Proposal to Ratify the appointment of KPMG LLP as
independent auditors for 2002

|           |  |        
|---------- |  | -------
|18,972,830 |  | For    
|3,723      |  | Against
|2,895      |  | Abstain

Proposal to Amend and Restate the Certificate of
Incorporation

|           |  |        
|---------- |  | -------
|15,868,878 |  | For    
|477,384    |  | Against
|6,030      |  | Abstain

Proposal to Amend the Non-Employee Directors
Restricted Stock Plan

|           |  |        
|---------- |  | -------
|15,793,797 |  | For    
|488,990    |  | Against
|17,967     |  | Abstain

Proposal to Adopt the (2002) Stock-Based
Bonus Plan

|           |  |        
|---------- |  | -------
|15,759,798 |  | For    
|94,202     |  | Against
|19,044     |  | Abstain

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PART II

Item 5.Market
for Registrants Common Equity and Related Stockholder
Matters

Market Information

The Companys common stock traded under the
symbol PSCD in the United States on the Nasdaq
National Market tier of the Nasdaq Stock Market
(Nasdaq) from May 22, 2000 through July 9,
2002, at which time the shares were delisted for failure to file
a quarterly report on Form 10-Q for the quarter ended
March 31, 2002 that had been reviewed by the Companys
auditors and the failure to satisfy the net tangible
assets/stockholders equity requirements under the Nasdaq
Marketplace Rules. Thereafter, the Companys common stock
has been listed in the pink sheets and has not been traded on an
established public trading market in the United States. The
Companys common stock has also been traded under the
symbol PSC in Canada on the Toronto Stock Exchange
since May 22, 2000.

The following table sets forth for the periods
indicated (based on the year ended December 31) the high
and low sale prices per share of the Companys common stock
as reported on Nasdaq.

|                               |  |                       |      |     |  |  |      | 
|------------------------------ |  | --------------------- | ---- | --- |  |  | ---- | 
|                               |  |                      
|                               |  | Price Range of       
|                               |  | Common Stock  Nasdaq
|                               |  |                      
|                               |  | High                  |      | Low
|                               |  |                       |      |    
|2002                           |  |                       |      |     |  |  |      | 
|First quarter                  |  |                       | 1.28 |     |  |  | 0.81 | 
|Second quarter                 |  |                       | 1.22 |     |  |  | 0.40 | 
|Third quarter (through July 9) |  |                       | 0.68 |     |  |  | 0.42 | 
|2001                           |  |                       |      |     |  |  |      | 
|First quarter                  |  |                       | 4.50 |     |  |  | 2.75 | 
|Second quarter                 |  |                       | 3.81 |     |  |  | 2.60 | 
|Third quarter                  |  |                       | 3.56 |     |  |  | 2.36 | 
|Fourth quarter                 |  |                       | 3.00 |     |  |  | .63  | 

At April 11, 2003, there were 27,909,342
shares of common stock outstanding and held of record by
approximately 1,200 stockholders of record.

Dividend Policy

The Company has never declared or paid any cash
dividends on its common stock. The Company currently intends to
retain any future earnings for use in its business and does not
anticipate paying any cash dividends on its common stock in the
foreseeable future. Any future declaration and payment of
dividends will be subject to the discretion of the
Companys Board of Directors and to applicable law and will
depend upon the Companys results of operations, earnings,
financial condition, contractual limitations, cash requirements,
future prospects and other factors deemed relevant by the
Companys Board of Directors. The Companys credit
facility and revolving operating facility prohibit the payment
of dividends by the Company other than to certain subsidiaries.

Securities Authorized for Issuance Under
Equity Compensation Plans

The Companys stock-based benefit plans and
arrangements outstanding as of December 31, 2002 consist of
the Philip Services Corporation Stock Option Plan (the
Stock Option Plan), options to purchase 500,000
shares of common stock issued to the Companys then CEO,
Mr. Fernandes, the Philip Services Corporation Officers
Stock-Based Bonus Plan (the Officers Plan),
the Non-Employee Directors Restricted Stock Plan (the
Directors Plan) and the Philip Services Corporation
(2002) Stock-Based Bonus Plan (the 2002 Plan).
Each of the Stock Option Plan and the grant to
Mr. Fernandes was adopted as part of or in connection with
the Plan. Accordingly, no separate stockholder approval was
obtained. Each of the other plans was approved by the
Companys stockholders. The following table provides
information regarding such plans and

16



---



##### Table of Contents



arrangement as of December 31, 2002.
Additional information on these plans is contained in
Note 17 of Notes to Consolidated Financial Statements.







EQUITY COMPENSATION PLAN INFORMATION


|                          |                                  |                      |           |                              |  |                         |      |      |  |  |           |           |    
|------------------------- | -------------------------------- | -------------------- | --------- | ---------------------------- |  | ----------------------- | ---- | ---- |  |  | --------- | --------- | ---
|                          |                                  | Number of Securities |           |                              |  |                        
|                          |                                  | to be Issued Upon    |           |                              |  | Number of Securities   
|                          |                                  | Exercise of          |           | Weighted-Average Exercise    |  | Remaining Available for
|Plan Category             |                                  | Outstanding Options  |           | Price of Outstanding Options |  | Future Issuance(1)     
|                          |                                  |                      |           |                              |  |                        
|Equity Compensation Plans |                                  |                      |           |                              |  |                         |      |      |  |  |           |          
|                          | Approved by Security Holders     |                      |           | 1,034,934                    |  |                         | $    | 0.51 |  |  |           | 1,565,066 | (2)
|Equity Compensation Plans |                                  |                      |           |                              |  |                         |      |      |  |  |           |          
|                          | Not Approved by Security Holders |                      |           | 1,011,452                    |  |                         |      | 6.40 |  |  |           | 528,548   |    
|Total                     |                                  |                      | 2,046,386 |                              |  | $                       | 3.63 |      |  |  | 2,093,614 |          



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes securities reflected in the first column
    of table.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(2) | Includes 292,456 shares available for
    issuance as shares of restricted stock under the Directors Plan,
    647,610 shares available for issuance under the
    Officers Plan, 425,000 shares available for issuance
    for grants to key executives and managerial employees under the
    2002 Plan and 200,000 shares available for issuance
    for grants to non-employee directors under the 2002 Plan. No
    further awards will be granted under the Officers Plan.
    The 2002 Plan, adopted by the stockholders of the Company,
    supplanted the Officers Plan. Existing grants under the
    Officers Plan will remain outstanding until they are
    exercised, are forfeited or expire.

Recent Sales of Unregistered
Securities

On May 5, 2000, the Company issued 41,946
shares of common stock to the then President and CEO of the
Company for $249,998 in cash. Such shares were placed in
reliance on Section 4(2) of the Securities Act of 1933, as
amended, and Regulation D promulgated thereunder.

On April 12, 2002, in connection with the
mezzanine financing, the Company issued 3,638,466 shares of
common stock to entities affiliated with Carl C. Icahn and
Stephen Feinberg, upon payment in cash of the par value of $0.01
per share. Such shares were placed in reliance on
Section 4(2) of the Securities Act of 1933, as amended, and
Regulation D promulgated thereunder.

17



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

Due to changes in the financial structure of the
Company and the application of fresh start reporting as a result
of the consummation of the Plan under the reorganization
proceedings, the Consolidated Financial Statements of the
Company issued subsequent to Plan implementation are not
comparable with the Consolidated Financial Statements issued by
the Predecessor Company. A black line has been drawn on the
accompanying financial statements to separate and distinguish
between the financial information that relates to the Company
and the financial information that relates to the Predecessor
Company. Financial information regarding the Predecessor Company
has been compiled by the Company.

[This black line does not appear in the
electronically filed version of this Form 10-K]

The selected financial data should be read in
conjunction with the accompanying Consolidated Financial
Statements of the Company and the related notes thereto. Cash
dividends were not paid during the periods set forth below. The
basic and diluted earnings (loss) per share for the Predecessor
Company have not been presented as they are not comparable to
subsequent periods due to the Plan implementation and fresh
start reporting. (In thousands of dollars, except per share
amounts).

|                                                                                                                                                   |  |              |           |              |  |              |           |                     |  |                          |         |             |  |   |           |   |  |   |           |   |  |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ------------ |  | ------------ | --------- | ------------------- |  | ------------------------ | ------- | ----------- |  | - | --------- | - |  | - | --------- | - |  | - | ---------- | -
|                                                                                                                                                   |  |              |           |              |  |              |           |                    
|                                                                                                                                                   |  |              |           |              |  |              |           | Predecessor Company
|                                                                                                                                                   |  |              |           |              |  |              |           |                    
|                                                                                                                                                   |  | Year         |           | Year         |  | Nine Months  |           | Three Months        |  |                         
|                                                                                                                                                   |  | Ended        |           | Ended        |  | Ended        |           | Ended               |  | Years ended December 31,
|                                                                                                                                                   |  | December 31, |           | December 31, |  | December 31, |           | March 31,           |  |                         
|                                                                                                                                                   |  | 2002         |           | 2001         |  | 2000         |           | 2000                |  | 1999                     |         | 1998       
|                                                                                                                                                   |  |              |           |              |  |              |           |                     |  |                          |         |            
|                                                                                                                                                   |  |              |           |              |  |              |           | (unaudited)         |  | (unaudited)              |         | (unaudited)
|Statement of Earnings Data:                                                                                                                        |  |              |           |              |  |              |           |                     |  |                          |         |             |  |   |           |   |  |   |           |   |  |   |            |  
|Revenue                                                                                                                                            |  | $            | 1,118,460 |              |  | $            | 1,144,753 |                     |  | $                        | 916,996 |             |  | $ | 382,589   |   |  | $ | 1,322,045 |   |  | $ | 1,969,774  |  
|Operating expenses                                                                                                                                 |  |              | 953,051   |              |  |              | 987,023   |                     |  |                          | 797,308 |             |  |   | 333,817   |   |  |   | 1,185,673 |   |  |   | 1,725,175  |  
|Selling, general and administrative costs                                                                                                          |  |              | 106,758   |              |  |              | 147,111   |                     |  |                          | 98,379  |             |  |   | 31,783    |   |  |   | 167,054   |   |  |   | 273,254    |  
|Depreciation and amortization                                                                                                                      |  |              | 40,341    |              |  |              | 40,001    |                     |  |                          | 31,484  |             |  |   | 11,388    |   |  |   | 48,898    |   |  |   | 91,108     |  
|Asset impairments and other unusual costs                                                                                                          |  |              | 10,889    |              |  |              | 11,935    |                     |  |                          | 17,117  |             |  |   |          |   |  |   |          |   |  |   | 1,109,877  |  
|                                                                                                                                                   |  |              |           |              |  |              |           |                     |  |                          |         |             |  |   |           |   |  |   |           |   |  |   |            |  
|Income (loss) from operations                                                                                                                      |  |              | 7,421     |              |  |              | (41,317   | )                   |  |                          | (27,292 | )           |  |   | 5,601     |   |  |   | (79,580   | ) |  |   | (1,229,640 | )
|Interest expense                                                                                                                                   |  |              | 50,849    |              |  |              | 39,301    |                     |  |                          | 28,983  |             |  |   | 854       |   |  |   | 52,462    |   |  |   | 74,477     |  
|Other (income) and expense  net                                                                                                                   |  |              | 87        |              |  |              | 1,252     |                     |  |                          | (4,827  | )           |  |   | (11,636   | ) |  |   | (7,714    | ) |  |   | (1,968     | )
|                                                                                                                                                   |  |              |           |              |  |              |           |                     |  |                          |         |             |  |   |           |   |  |   |           |   |  |   |            |  
|Income (loss) from continuing operations before
    income taxes, reorganization costs and cumulative effect of
    change in accounting principle |  |              | (43,515   | )            |  |              | (81,870   | )                   |  |                          | (51,448 | )           |  |   | 16,383    |   |  |   | (124,328  | ) |  |   | (1,302,149 | )
|Reorganization costs                                                                                                                               |  |              |          |              |  |              |          |                     |  |                          |        |             |  |   | 20,607    |   |  |   | 164,205   |   |  |   |           |  
|Provision for income taxes                                                                                                                         |  |              | 1,790     |              |  |              | 840       |                     |  |                          | 3,863   |             |  |   | 732       |   |  |   | (6,822    | ) |  |   | 34,134     |  
|                                                                                                                                                   |  |              |           |              |  |              |           |                     |  |                          |         |             |  |   |           |   |  |   |           |   |  |   |            |  
|Loss from continuing operations before cumulative
    effect of change in accounting principle                                                     |  | $            | (45,305   | )            |  | $            | (82,710   | )                   |  | $                        | (55,311 | )           |  | $ | (4,956    | ) |  | $ | (281,711  | ) |  | $ | (1,336,283 | )
|                                                                                                                                                   |  |              |           |              |  |              |           |                     |  |                          |         |             |  |   |           |   |  |   |           |   |  |   |            |  
|Basic and diluted loss per common share-
    continuing operations                                                                                 |  | $            | (1.68     | )            |  | $            | (3.44     | )                   |  | $                        | (2.30   | )           |  |   | n/a       |   |  |   | n/a       |   |  |   | n/a        |  
|Weighted average number of shares of common stock
    outstanding                                                                                  |  |              | 26,873    |              |  |              | 24,060    |                     |  |                          | 24,037  |             |  |   | n/a       |   |  |   | n/a       |   |  |   | n/a        |  
|Balance Sheet Data: (end of period)                                                                                                                |  |              |           |              |  |              |           |                     |  |                          |         |             |  |   |           |   |  |   |           |   |  |   |            |  
|Working capital (deficiency)                                                                                                                       |  | $            | 96,243    |              |  | $            | 92,905    |                     |  | $                        | 174,702 |             |  | $ | 233,995   |   |  | $ | 236,254   |   |  | $ | (772,168   | )
|Total assets                                                                                                                                       |  |              | 601,010   |              |  |              | 639,403   |                     |  |                          | 722,549 |             |  |   | 867,755   |   |  |   | 861,579   |   |  |   | 1,098,857  |  
|Total debt including current maturities                                                                                                            |  |              | 392,102   |              |  |              | 354,213   |                     |  |                          | 347,270 |             |  |   | 1,152,036 |   |  |   | 1,153,653 |   |  |   | 1,097,546  |  
|Stockholders equity (deficit)                                                                                                                     |  |              | (63,550   | )            |  |              | (11,031   | )                   |  |                          | 70,582  |             |  |   | (644,725  | ) |  |   | (641,133  | ) |  |   | (393,125   | )
|Other Data:                                                                                                                                        |  |              |           |              |  |              |           |                     |  |                          |         |             |  |   |           |   |  |   |           |   |  |   |            |  
|Additions to property, plant and equipment for
    continuing operations                                                                           |  |              | 28,449    |              |  |              | 47,613    |                     |  |                          | 39,549  |             |  |   | 11,185    |   |  |   | 29,313    |   |  |   | 59,053     |  

18



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Introduction

PSC is an industrial and metals services company
reporting in three segments: (i) the Industrial Services
Group; (ii) the Metals Services Group, and (iii) the
Project Services Division. At December 31, 2002, PSC had
approximately 8,600 full-time employees at over 147 locations
primarily in North America. The Companys operations are
based primarily in the United States. For geographical
information, see Note 21 of Notes to Consolidated Financial
Statements.

The Company earns revenue by providing its
industrial and project services described in Item 1.
Business and from the sale of recovered metals. Other sources of
revenue include fees charged for environmental consulting and
engineering and other services.

The Companys operating expenses include
direct labor, indirect labor, payroll-related taxes, benefits,
fuel, maintenance and repairs of equipment and facilities,
depreciation, insurance, property taxes and accrual for future
closure and remediation costs. Selling, general and
administrative expenses include management salaries, clerical
and administrative costs, provisions for bad debts, professional
services and facility rentals, as well as costs related to the
Companys marketing and sales force.

The Companys financial statements contained
in this Form 10-K have been prepared on the assumption that
it will continue as a going concern, which contemplates the
realization of assets and settlement of liabilities in the
normal course of business. The report of KPMG LLP, the
Companys independent accountants, on the Companys
financial statements as of and for the year ended
December 31, 2002, contained in this Form 10-K
includes an explanatory paragraph which states that the
expiration of the Companys revolving operating facility on
June 2, 2003, and the absence of a replacement revolving
operating facility, raises substantial doubt about the
Companys ability to continue as a going concern.

The Consolidated Financial Statements herein
contain information relating to Philip Services Corporation and
its subsidiaries, which has been prepared by management, and
information relating to the Predecessor Company, which has been
compiled by management of PSC. On April 7, 2000, Oldco and
certain of its Canadian subsidiaries transferred substantially
all of their assets and liabilities (except for liabilities
subject to compromise) to the Company at fair value. The
liabilities subject to compromise of $726.5 million were
retained by Oldco and certain of its Canadian subsidiaries. As a
result, Oldco remains insolvent. For financial reporting
purposes, the effective date of the reorganization is
March 31, 2000. Management of PSC has determined that
certain consolidated financial and other information of the
Predecessor Company may be of limited interest to the
stockholders of PSC and has therefore included such information
in this document. The consolidated financial information of the
Predecessor Company does not reflect the effects of the
application of fresh start reporting. Readers should, therefore,
review this material with caution and not rely on the
information concerning the Predecessor Company as being
indicative of future results for the Company or providing an
accurate comparison of financial performance.

Credit Facilities

The Company operates under two credit facilities,
the term loan and the revolving operating facility. The
Companys two credit facilities are more fully described in
the Liquidity and Capital Resources section of this
Form 10-K and in Note 9 of Notes to Consolidated
Financial Statements. The revolving operating facility, which is
senior to the term loan and provides day-to-day working capital
for the Company, was scheduled to mature on April 8, 2003.
Through a negotiated agreement, the revolving operating facility
has been extended to June 2, 2003, subject to certain terms
and fees described below.

The Company intends to use the period of the
extension to prepare to restructure its balance sheet and
refinance its debt. It is anticipated that the restructuring
will be effected through a proceeding under Chapter 11 of
the Bankruptcy Code. To this end, the Company has retained
bankruptcy counsel and is consulting with its significant
stockholders, its lenders and its other advisors. Among other
things, the Company is in discussions with its lenders
concerning debtor-in-possession financing though there can be no
assurances that such financing will be available or obtained.

19



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##### Table of Contents



Under the amendment of the revolving operating
facility executed with the lenders as of April 8, 2003, the
lending commitment under Tranche A of the facility was
reduced from $100 million to $78 million. The capacity
under other tranches is unchanged, and as a result, the total
capacity of the facility is unchanged. In connection with the
amendment, the Company has paid an aggregate fee of $100,000 to
the lenders under Tranche B-Prime, which are, respectively,
affiliates of the Companys two largest stockholders, Carl
C. Icahn and affiliates and Stephen Feinberg and affiliates.

Results of Operations

To facilitate a comparison of the Companys
operating performance, the following discussion of results of
operations compares the consolidated financial results for the
years ended December 31, 2002 and December 31, 2001,
with the combined consolidated financial results for the twelve
months ended December 31, 2000, which represents the
consolidated financial results for the Predecessor Company for
the three months ended March 31, 2000 and the consolidated
results for the Company for the nine months ended
December 31, 2000. Consequently, the prior years
information presented below does not comply with AICPAs
Statement of Position 90-7 Financial Reporting by Entities
in Reorganization under the Bankruptcy Code, which calls
for separate reporting for the Company and the Predecessor
Company. Additionally, the Companys results of operations
have been reclassified to reflect current segment reporting. The
businesses divested to Fluor have been classified as
discontinued operations in the Companys Consolidated
Financial Statement in accordance with FAS 144.

The following table presents, for the periods
indicated, the results of operations and the percentage
relationships that the various items in the Consolidated
Statements of Earnings bear to the consolidated revenue from
continuing operations.

|                                                                                                                |  |                                          |         |      |  |      |     |    |  |             |         |   |  |  |     |    |  |   |         |   |  |  |     |   
|--------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | ---- |  | ---- | --- | -- |  | ----------- | ------- | - |  |  | --- | -- |  | - | ------- | - |  |  | --- | --
|                                                                                                                |  |                                         
|                                                                                                                |  | Years ended December 31, ($ in millions)
|                                                                                                                |  |                                         
|                                                                                                                |  |                                          |         |      |  |     
|                                                                                                                |  | 2002                                     |         | 2001 |  | 2000
|                                                                                                                |  |                                          |         |      |  |     
|                                                                                                                |  |                                          |         |      |  |      |     |    |  |            
|                                                                                                                |  |                                          |         |      |  |      |     |    |  |            
|                                                                                                                |  |                                          |         |      |  |      |     |    |  | (unaudited)
|Revenue                                                                                                         |  | $                                        | 1,118.5 |      |  |      | 100 | %  |  | $           | 1,144.8 |   |  |  | 100 | %  |  | $ | 1,299.6 |   |  |  | 100 | % 
|Operating expenses                                                                                              |  |                                          | 953.1   |      |  |      | 85  | %  |  |             | 987.0   |   |  |  | 86  | %  |  |   | 1,131.1 |   |  |  | 87  | % 
|Selling, general and administrative costs                                                                       |  |                                          | 106.8   |      |  |      | 9   | %  |  |             | 147.1   |   |  |  | 13  | %  |  |   | 130.2   |   |  |  | 10  | % 
|Depreciation and amortization                                                                                   |  |                                          | 40.3    |      |  |      | 4   | %  |  |             | 40.0    |   |  |  | 4   | %  |  |   | 42.9    |   |  |  | 3   | % 
|Asset impairment and other unusual costs                                                                        |  |                                          | 10.9    |      |  |      | 1   | %  |  |             | 11.9    |   |  |  | 1   | %  |  |   | 17.1    |   |  |  | 1   | % 
|                                                                                                                |  |                                          |         |      |  |      |     |    |  |             |         |   |  |  |     |    |  |   |         |   |  |  |     |   
|Income (loss) from operations                                                                                   |  |                                          | 7.4     |      |  |      | 1   | %  |  |             | (41.3   | ) |  |  | (4  | )% |  |   | (21.7   | ) |  |  | (2  | )%
|Interest expense                                                                                                |  |                                          | 50.8    |      |  |      | 5   | %  |  |             | 39.3    |   |  |  | 3   | %  |  |   | 29.8    |   |  |  | 2   | % 
|Other (income) and expense-net                                                                                  |  |                                          | 0.1     |      |  |      |    |    |  |             | 1.3     |   |  |  |    |    |  |   | (16.5   | ) |  |  | (1  | )%
|                                                                                                                |  |                                          |         |      |  |      |     |    |  |             |         |   |  |  |     |    |  |   |         |   |  |  |     |   
|Loss from continuing operations before income
    taxes and cumulative effect of change in accounting principle |  |                                          | (43.5   | )    |  |      | (4  | )% |  |             | (81.9   | ) |  |  | (7  | )% |  |   | (35.0   | ) |  |  | (3  | )%
|Reorganization costs                                                                                            |  |                                          |        |      |  |      |    |    |  |             |        |   |  |  |    |    |  |   | 20.6    |   |  |  | 1   | % 
|Provision for income taxes                                                                                      |  |                                          | 1.8     |      |  |      |    |    |  |             | 0.8     |   |  |  |    |    |  |   | 4.6     |   |  |  |    |   
|                                                                                                                |  |                                          |         |      |  |      |     |    |  |             |         |   |  |  |     |    |  |   |         |   |  |  |     |   
|Loss from continuing operations before cumulative
    effect of change in accounting principle                  |  |                                          | (45.3   | )    |  |      | (4  | )% |  |             | (82.7   | ) |  |  | (7  | )% |  |   | (60.2   | ) |  |  | (4  | )%
|Cumulative effect of change in accounting
    principle, net of taxes                                           |  |                                          | (2.4    | )    |  |      |    |    |  |             |        |   |  |  |    |    |  |   |        |   |  |  |    |   
|Income (loss) from discontinued operations, net
    of taxes                                                    |  |                                          | (11.5   | )    |  |      | (1  | )% |  |             | 4.6     |   |  |  |    |    |  |   | 15.2    |   |  |  | 1   | % 
|Fresh start adjustment                                                                                          |  |                                          |        |      |  |      |    |    |  |             |        |   |  |  |    |    |  |   | 45.3    |   |  |  | 3   | % 
|                                                                                                                |  |                                          |         |      |  |      |     |    |  |             |         |   |  |  |     |    |  |   |         |   |  |  |     |   
|Net income (loss)                                                                                               |  | $                                        | (59.2   | )    |  |      | (5  | )% |  | $           | (78.1   | ) |  |  | (7  | )% |  | $ | 0.3     |   |  |  |    |   
|                                                                                                                |  |                                          |         |      |  |      |     |    |  |             |         |   |  |  |     |    |  |   |         |   |  |  |     |   

20



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##### Table of Contents



Earnings from Continuing Operations

For the year ended December 31, 2002, the
Company had a loss from continuing operations of
$45.3 million. This compares to a loss of
$82.7 million from continuing operations for the year ended
December 31, 2001 and a loss for the combined Company and
Predecessor Company from continuing operations of
$60.2 million for the year ended December 31, 2000.

The results of continuing operations for the
years ended December 31, 2002, 2001 and 2000 were impacted
by asset impairments and other unusual costs amounting to
$10.9 million, $11.9 million, and $17.1 million
respectively (see Asset Impairment and Other Unusual
Costs below). The results of continuing operations for the
year ended December 31, 2000, were impacted by
reorganization costs amounting to $20.6 million (see
Reorganization Costs below). Excluding these asset
impairment and other unusual costs and reorganization costs, the
results from continuing operations before income taxes and
cumulative effect of change in accounting principle, interest
expense and other (income) and expense-net were an income (loss)
of $18.3 million, $(29.4) million, and $(4.6) million
for the years ended December 31, 2002, 2001 and 2000,
respectively.

Operating Results

The operating results reflect the following:

|                              |  |                                              |       |          |  |          |       |           |  |       |       |   |  |   |       |   |  |   |         | 
|----------------------------- |  | -------------------------------------------- | ----- | -------- |  | -------- | ----- | --------- |  | ----- | ----- | - |  | - | ----- | - |  | - | ------- | 
|                              |  |                                             
|                              |  | Year Ended December 31, 2002 ($ in millions)
|                              |  |                                             
|                              |  | Industrial                                   |       | Metals   |  | Project  |       |          
|                              |  | Services                                     |       | Services |  | Services |       | Corporate |  | Total
|                              |  |                                              |       |          |  |          |       |           |  |      
|Revenue                       |  | $                                            | 530.2 |          |  | $        | 483.9 |           |  | $     | 104.4 |   |  | $ |      |   |  | $ | 1,118.5 | 
|Income (loss) from operations |  |                                              | 25.2  |          |  |          | 7.1   |           |  |       | (4.6  | ) |  |   | (20.3 | ) |  |   | 7.4     | 

|                              |  |                                              |       |          |  |          |       |           |  |       |       |   |  |   |       |   |  |   |         |  
|----------------------------- |  | -------------------------------------------- | ----- | -------- |  | -------- | ----- | --------- |  | ----- | ----- | - |  | - | ----- | - |  | - | ------- | -
|                              |  |                                             
|                              |  | Year Ended December 31, 2001 ($ in millions)
|                              |  |                                             
|                              |  |                                              |       |         
|                              |  | Industrial                                   |       | Metals   |  | Project  |       |          
|                              |  | Services                                     |       | Services |  | Services |       | Corporate |  | Total
|                              |  |                                              |       |          |  |          |       |           |  |      
|Revenue                       |  | $                                            | 572.2 |          |  | $        | 467.7 |           |  | $     | 104.9 |   |  | $ |      |   |  | $ | 1,144.8 |  
|Income (loss) from operations |  |                                              | 9.7   |          |  |          | (26.4 | )         |  |       | (6.4  | ) |  |   | (18.2 | ) |  |   | (41.3   | )

|                              |  |                                                          |       |          |  |          |       |           |  |       |       |   |  |   |       |   |  |   |         |  
|----------------------------- |  | -------------------------------------------------------- | ----- | -------- |  | -------- | ----- | --------- |  | ----- | ----- | - |  | - | ----- | - |  | - | ------- | -
|                              |  |                                                         
|                              |  | Year Ended December 31, 2000 ($ in millions) (unaudited)
|                              |  |                                                         
|                              |  | Industrial                                               |       | Metals   |  | Project  |       |          
|                              |  | Services                                                 |       | Services |  | Services |       | Corporate |  | Total
|                              |  |                                                          |       |          |  |          |       |           |  |      
|Revenue                       |  | $                                                        | 581.3 |          |  | $        | 605.3 |           |  | $     | 113.0 |   |  | $ |      |   |  | $ | 1,299.6 |  
|Income (loss) from operations |  |                                                          | (8.5  | )        |  |          | 8.4   |           |  |       | (1.6  | ) |  |   | (20.0 | ) |  |   | (21.7   | )

Industrial
Services Group

Revenue from the Industrial Services Group
decreased by $42.0 million or 7% for the year ended
December 31, 2002, when compared to the prior year. The
reduction in revenue is due primarily to the significant
postponement, rescheduling or reduction in scope of certain
large-scale maintenance and capital projects by the Groups
customers. The decline in market conditions surrounding the
refining, petrochemical, power and pulp/paper industries were
key contributors. Specifically, the decline in demand for
refined petroleum products during most of 2002, in conjunction
with the weak economy, has influenced a decline in market
pricing for refined petroleum products, in turn driving a
conscious and marked cutback in the amount of maintenance
spending by many clients. Additionally, waste volumes in the
technology and non-automotive manufacturing industries were down
compared to peak generation periods in 2001, thus impacting the
Groups waste services business line. Also negatively
impacting revenue was the first quarter 2002 divestiture of
certain operations which produced $26.0 million of revenue
in 2001. For the year ended December 31, 2001, revenue
decreased $9.1 million or 2% when compared to the same
period for 2000. Similar to 2002, the 2001 revenue decrease was
principally attributable to the economic slowdown in general
manufacturing industries that began to impact the revenue and
profitability of the Industrial Services Group in the latter
part of 2001, particularly customers continuing to defer
projects following the events of September 11, 2001.

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Income (loss) from operations as a percentage of
revenue was 5%, 2%, and (1)% for the years ended
December 31, 2002, 2001 and 2000, respectively. Income from
operations for 2002 was positively impacted by cost reduction
initiatives and the settlement of a $19.8 million insurance
litigation matter involving certain environmental sites offset
by a $5.0 million charge for incremental environmental
liabilities and a $2.4 million charge associated with the
closure of one of the Companys waste management
facilities. Income from operations for 2001 was positively
impacted by increases in revenue, improved asset utilization,
closure and consolidation of unprofitable locations and cost
reduction initiatives.

Metals
Services Group

Revenue from the Metals Services Group increased
by $16.2 million or 3% for the year ended December 31,
2002 compared to the prior year. This increase was principally
due to higher volumes and a 7% increase in average scrap prices
during the year. The increase in ferrous scrap metal prices is
directly related to the reduction in foreign steel imports, the
improvement in the U.S. steel industry operating rate and
the corresponding increase in demand for ferrous scrap. For
2001, revenue decreased $137.6 million or 23% when compared
to 2000 due to production cutbacks at domestic steel mills, a
weak export market, an oversupply of industrial scrap and a
strong availability of scrap alternatives. Several steel mills
entered or operated under Chapter 11 bankruptcy during
2001. Additionally, a Canadian operation was sold in May 2001
that generated approximately $3 million and $8 million
in revenue during 2001 and 2000, respectively.

Income (loss) from operations as a percentage of
revenue was 2%, (6)%, and 1% for the years ended
December 31, 2002, 2001 and 2000, respectively. The
increase in margin for 2002 compared to 2001 was primarily
related to higher demand for domestically produced steel due to
tariffs imposed on steel imports in the second quarter of 2002
coupled with an increase in the average scrap prices as
mentioned above and the recording of $18.0 million of bad
debt provision in 2001. The deterioration in 2001 from the prior
year was principally due to the bad debt provision mentioned
above, compared to $5.9 million in 2000, as well as
operating losses incurred due to the low volume and pricing.

Project
Services Division

Revenue from the Project Services Division
decreased by $0.5 million or less than 1% for the year
ended December 31, 2002 when compared to the prior year.
For the year ended December 31, 2001, revenue decreased
$8.1 million or 7% when compared to the same period for
2000. Income (loss) from operations as a percentage of revenue
was (4)%, (6)%, and (1)% for the years ended December 31,
2002, 2001 and 2000, respectively.

The business of PSD depends upon its engagement
to perform services for construction, maintenance and similar
projects and its performance as expected on those projects. The
Division is often engaged in projects where its revenues are
relatively fixed, making the profitability of the projects
depend upon the Divisions costs in performing the contract
for services and its ability to reliably estimate these costs.
The existence of or delay in one or a few large projects in any
period can materially impact the revenues of PSD for that
period. The Divisions failure to accurately predict its
costs on one or a few large projects can materially impact its
profits in any period. The Division recorded a loss of
$2.4 million on a project for the year ended
December 31, 2002. The Divisions operating losses in
2002 and 2001 are also attributable to the economic slowdown
that began to impact revenue and profitability of the Project
Services Division in the latter part of 2001, which was most
prominently noted in the postponement of some large maintenance
projects handled by PSD, including turnaround and outage
services. The decrease in revenues in 2001 compared with 2000 is
principally attributable to the economic slowdown in the
refining and chemical industries.

Corporate

The results of Corporate include expenses related
to corporate overhead operations, the retained liabilities of
the Companys captive insurance company and other
non-operating entities. The loss from operations was $(20.3),
$(18.2), and $(20.0) million for the years ended
December 31, 2002, 2001 and 2000, respectively.

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The increases in corporate expenses between years
are primarily attributable to corporate level bad debt charges
and increases in risk insurance costs.


Asset Impairment and Other Unusual
Costs

For the year ended December 31, 2002, the
Companys asset impairment and other unusual costs were
composed of the following:

|                                                             |                                                           |                         |      |      |  |      |      |     |  |   |      |     | 
|------------------------------------------------------------ | --------------------------------------------------------- | ----------------------- | ---- | ---- |  | ---- | ---- | --- |  | - | ---- | --- | 
|                                                             |                                                           |                        
|                                                             |                                                           | Year Ended December 31,
|                                                             |                                                           |                        
|                                                             |                                                           | 2002                    |      | 2001 |  | 2000
|                                                             |                                                           |                         |      |      |  |     
|Business units, locations or activities to be
    exited:    |                                                           |                         |      |      |  |      |      |     |  |   |      |    
|                                                             | Assets written down to estimated net realizable
    value |                         | $    | 0.6  |  |      | $    | 0.2 |  |   | $    | 5.7 | 
|                                                             | Severance costs                                           |                         |      | 1.9  |  |      |      | 0.3 |  |   |      | 4.8 | 
|                                                             | Other exiting costs                                       |                         |      | 4.7  |  |      |      | 2.9 |  |   |      | 1.2 | 
|Business units, locations or activities to be
    continued: |                                                           |                         |      |      |  |      |      |     |  |   |      |    
|                                                             | Assets written down to estimated net realizable
    value |                         |      | 0.5  |  |      |      | 1.8 |  |   |      |    | 
|                                                             | Process re-engineering costs                              |                         |      | 3.2  |  |      |      | 6.7 |  |   |      | 5.4 | 
|                                                             |                                                           |                         |      |      |  |      |      |     |  |   |      |    
|                                                             |                                                           | $                       | 10.9 |      |  | $    | 11.9 |     |  | $ | 17.1 |    
|                                                             |                                                           |                         |      |      |  |      |      |     |  |   |      |    

Business
units, locations or activities to be exited:

During 2002, the Company closed its corporate
headquarters in Rosemont, Illinois and the corporate governance
functions were moved to the shared service operations in
Houston, Texas. Included in the unusual costs for the
twelve-month period is $6.6 million in cash costs for
severance and other exit costs to be incurred at these locations
as a result of this closure. Twelve employees were terminated as
a result of these restructurings. Also during 2002, the
Companys Metals Services Group terminated an existing mill
service agreement with a customer and concurrently leased
certain equipment back to a third party. An assessment of the
recoverability of the net asset value for this equipment
resulted in a non-cash asset impairment charge of
$0.6 million.

During 2001, the Company continued to seek
operating efficiencies and identified locations or business
units to be closed, resulting in non-cash costs for asset
impairments of $0.2 million and $3.2 million in cash
costs for severance and other exit costs to be incurred at these
locations. There were 48 employees terminated as a result
of these restructurings.

During 2000, the Company made the decision to
exit its European industrial outsourcing operations due to its
limited geographical presence following the sale of the UK
Metals business in the second quarter, resulting in
$4.1 million in non-cash costs for asset impairments and
$0.8 million in cash costs related to severance and other
exit costs. Additionally, the Company made the decision in 2000
to close and/or consolidate several locations, resulting in cash
costs of $5.2 million for severance and other exit costs
and $1.6 million in non-cash costs relating to asset
impairments. There were 132 employees terminated as a result of
these restructurings.

Business
units, locations or activities to be continued:

During 2002, $0.5 million non-cash
impairment charge was recorded for certain impaired equipment in
the Companys waste management services business.

The Company began in 2000 an initiative, the PSC
Way, which continued through 2002, and was aimed at
standardizing business processes and allowing the Company to
operate more efficiently and share information and best
practices. This initiative includes defining common business
processes related to transactional functions as well as client
relationships and includes establishing a common management
systems platform. The total cash costs for the PSC Way
initiative were $5.7 million, $12.2 million and
$8.6 million during 2002, 2001 and 2000, respectively, of
which $2.5 million, $5.5 million and $3.2 million,

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respectively, was capitalized to fixed assets and
$3.2 million, $6.7 million and $5.4 million,
respectively, was included in other unusual costs as process
re-engineering costs.


During 2001, a patent infringement lawsuit was
settled during the year in which the Company agreed to
discontinue the use of certain equipment parts at an ongoing
operation. An assessment of the recoverability of the net asset
value for this equipment resulted in a non-cash asset impairment
charge of $1.8 million.

Selling, General and Administrative
Costs

Selling, general and administrative costs were
$106.8 million or 9% of revenue in fiscal 2002 compared to
$147.1 million or 13% of revenue in fiscal 2001. The
decrease in selling, general and administrative costs in 2002 is
attributable to increased operating efficiencies, decreases in
the amount of bad debt charges, the divestiture of certain
unprofitable operations and an insurance charge related to
Reliance Insurance, which is discussed in Note 8 of Notes
to Consolidated Financial Statements.

Selling, general and administrative costs were
$147.1 million or 13% of revenue in fiscal 2001 compared to
$130.2 million or 10 % of revenue in fiscal 2000. Costs
increased due to higher bad debt expense and an insurance charge
related to Reliance Insurance, which is discussed in Note 8
of Notes to Consolidated Financial Statements.

Depreciation and Amortization

Depreciation and amortization of property, plant
and equipment was $40.3 million, $40.0 million and
$42.9 million for the years ended 2002, 2001, and 2000,
respectively. The $0.3 increase in depreciation and amortization
in 2002 as compared to 2001 is a nominal change while the
$2.9 million decrease in deprecation and amortization in
2001 as compared to 2000 is principally the result of the
Companys divested operations in 2000.

Interest Expense

Interest expense in 2002 was $50.8 million,
representing an increase of $11.5 million or 29% over 2001.
This increase in interest expense was due to the Companys
amendment fees and other consideration related to the mezzanine
financing amendment of the operating facility on April 12,
2002 coupled with additional interest expense of approximately
$2.7 million due to increased average operating facility
balances during 2002.

Interest expense in 2001 was $39.3 million,
representing an increase of $9.5 million over 2000. This
increase was due to having a full twelve months of interest
expense in 2001 compared to nine months of interest expense in
2000. The Predecessor Companys reorganization resulted in
suspended interest during the first quarter of 2000 being
included in the balance of the debt at Fresh Start.

Other Income and Expense 
Net

Other (income) and expense  net, for
the year ended December 31, 2002 was a net expense of
$0.1 million resulting from the following:



| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Investment income of $2.3 million associated
    with certain investments of the Company;                                                       
|
| |  | A $2.0 million charge associated with the
    write-down of a certain escrow receivable owed to the Company;                                    
|
| |  | A $1.3 million charge in conjunction with
    the write-down of the Companys South American equity
    investments;                            
|
| |  | A $1.3 million gain associated with the
    settlement of a property insurance claim related to the
    Companys Industrial Services Group; and
|
| |  | Net losses on asset sales of $0.4 million
    associated with disposals of certain other fixed assets of the
    Company.                       

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Other (income) and expense  net, for
the year ended December 31, 2001 was a net expense of
$1.3 million resulting from the following:



| |   |                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A $4.3 million gain associated with the sale
    of the Companys metals recycling and mill services
    business in Montreal;                                                                                                                  
|
| |  | Investment income of $3.5 million associated
    with certain investments and equity interests of the Company;                                                                                                                                  
|
| |  | A $6.8 million charge associated with the
    Companys divestiture of its paint services operations;                                                                                                                                           
|
| |  | A $1.8 million charge associated with the
    valuation and subsequent write-down of the Companys
    investment in a joint venture for providing ferrous scrap
    material and handling services, Sparrows Point Scrap Services
    LLC.; and
|
| |  | Net losses on asset sales of $0.5 million
    associated with disposals of certain other fixed assets of the
    Company.                                                                                                                       

Other (income) and expense  net, for
the year ended December 31, 2000 was a net income of
$(16.5) million which consisted of net gains on asset sales
of $9.6 million coupled with interest earned and equity
income on investments of $6.9 million.

Provision for Income Taxes

In assessing the value of the deferred tax
assets, management considered whether it would be more likely
than not that all of the deferred tax assets will be realized.
Projected future income tax planning strategies and the expected
reversal of deferred tax liabilities are considered in making
this assessment. Based on the level of historical taxable
income, projections for future taxable income and subject to the
limitation on the utilization of net operating loss
carryforwards and excess interest deduction carryforwards, the
Company has determined at this time that it is more likely than
not that the Company will not realize the benefits of the
deferred tax assets at December 31, 2002. The Company has
recorded a valuation allowance of $265.8 million at
December 31, 2002 and $239.5 million at
December 31, 2001.

Certain future events may result in the net
operating loss and excess interest deduction carryforwards being
utilized in the Companys future income tax returns which
the Company will record as a reduction in the valuation
allowance. To the extent the utilized amount relates to a period
prior to the reorganization, the associated credit will be to
additional paid-in capital in accordance with the principles of
fresh start reporting. To the extent the utilized amount relates
to a period subsequent to the reorganization, the associated
credit will be to the tax provision.

The provisions for income tax in 2002 and 2001
result from taxes on profits in certain foreign jurisdictions
and state income taxes on profits in certain states.

Reorganization Costs

AICPAs Statement of Position 90-7
Financial Reporting by Entities in Reorganization under
the Bankruptcy Code requires that costs for transactions
and events directly associated with the reorganization of the
Predecessor Company be recorded separately in the Consolidated
Statement of Earnings. Reorganization costs of
$20.6 million were recorded in the three months ended
March 31, 2000, including $17.9 million in
professional fees and $2.7 million in other costs.

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Discontinued Operations and
Divestitures

Discontinued
Operations

For the twelve-months ended December 31,
2002, 2001 and 2000, the Company recognized before-tax income
(loss) on discontinued operations of $(12.6) million,
$5.7 million and $15.7 million, respectively. The
before-tax income (loss) from discontinued operations results
from the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the fourth quarter of 2002, the facts and
    circumstances surrounding the Companys business units
    divested to Fluor were such that they met FASB Statement
    No. 144 guidelines (See Note 24 of Notes to
    Consolidated Financial Statements) requiring the operations to
    be accounted for as discontinued operations whose assets are
    held for sale. As such, the Company recorded the results of
    operations for these businesses as discontinued on the
    Consolidated Statements of Earnings for the year ended
    December 31, 2002 and recorded the related assets as
    held for sale on the 2002 Consolidated Balance
    Sheet. The businesses divested to Fluor generated revenue of
    approximately $260.2 million, $302.9 million and
    $262.6 million, and before-tax income (loss) from
    discontinued operations of approximately $(8.3) million,
    $3.8 million and $16.1 million, in 2002, 2001 and
    2000, respectively. On March 2, 2003, the bulk of the
    Project Services Division was sold for net proceeds of
    $21.2 million. The working capital of these business units
    sold, of approximately $43.0 million, was retained by PSC.
    Company management has not yet completed the calculation of the
    gain/loss on the Fluor divestiture.
|
| |  | Additionally, during the fourth quarter of 2002,
    the facts and circumstances surrounding the Companys
    business plans for the Canadian Ferrous Division were such that
    they met FASB Statement No. 144 guidelines (See
    Note 24 of Notes to Consolidated Financial Statements)
    requiring the operations to be accounted for as discontinued
    operations whose assets are held for sale. As such, the Company
    recorded the results of operations for the Canadian Ferrous
    Division as discontinued on the Consolidated Statements of
    Earnings and recorded the related assets of the division as
    held for sale on the 2002 Consolidated Balance
    Sheet. The Companys Canadian Ferrous Division generated
    revenue of approximately $40.1 million, $44.8 million
    and $49.6 million, and before-tax income from discontinued
    operations of approximately $1.4 million, $4.0 million
    and $0.4 million, in 2002, 2001 and 2000, respectively.
    Subsequent to December 31, 2002, certain assets of the
    Canadian Ferrous Division were sold for net proceeds of
    $3.8 million and a gain on the divestiture transaction was
    recorded in the amount of $1.4 million.                                                                                         
|
| |  | The impairment of assets ultimately sold related
    to the Companys Demolition and Decommissioning business
    resulted in a loss for the twelve-months ended December 31,
    2002 of $(2.8) million, in addition to before-tax loss from
    discontinued operations of $(4.1) million,
    $(3.1) million and $(1.3) million, in 2002, 2001 and
    2000, respectively. Operations associated with these assets
    generated revenues of $3.1 million, $14.7 million and
    $21.3 million in 2002, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | The sale of certain other assets during 2002,
    with a net book value of $2.9 million generated a gain for
    the twelve-months ended December 31, 2002 of
    $2.3 million, in addition to before-tax income from
    discontinued operations of $0.2 million, $1.0 million
    and $1.3 million in 2002, 2001 and 2000, respectively.
    Operations associated with these assets generated revenues of
    $.5 million, $2.9 million and $3.3 million in
    2002, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | A charge of $1.3 million for the impairment
    of assets held for sale as of December 31, 2002. The net
    book value of the assets was $2.0 million after impairment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | On May 18, 1999, Oldco sold its investment
    in Philip Utilities Management Corp. (PUMC) for cash
    proceeds of $70.1 million resulting in a gain of
    $39.1 million. The operations of PUMC (previously reported
    as the utilities management segment) have been treated as
    discontinued operations. In December 1998, Oldco made the
    decision to discontinue its non-ferrous and copper operations
    segments. A sale of certain of the aluminum operations (included
    in non-ferrous operations) closed on January 11, 1999 for
    total consideration of approximately $69.5 million. Revenue
    from the discontinued non-ferrous, copper and utilities
    management operations, net of intercompany revenue was
    $6.1 million and before-tax income (loss) from discontinued
    operations was $(0.8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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| |  |                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | million in 2000. The remaining operations in
    these segments were closed or sold during 1999 and 2000 except
    for three operations with annual revenue of $7.0 million,
    which were transferred to continuing operations.

Divestitures

During 2001, the Company determined that its
Paint Services operations were not a strategic fit with the rest
of the business units and obtained a signed commitment from a
buyer to purchase the business. Consequently, $6.8 million
was charged to Other income and expense 
net in recognition of the loss on the sale of the Paint
Services business. The Paint Services sale was completed during
the first quarter of 2002. Also during 2001, the Company sold
its metals recycling and mill services business in Montreal for
net proceeds of $10.3 million. The business, which was part
of the Metals Services Group, generated revenue of
$3.0 million and $8.2 million, and income from
operations of $0.3 million and $1.3 million in 2001
and 2000, respectively. The gain on sale of $4.3 million is
included in Other income and expense 
net. Additionally, various European operations of the
Industrial Services Group were sold in 2001 for net proceeds of
$2.0 million. These European operations generated revenue
of $7.5 million and $11.4 million, and loss from
operations of $(1.4) million and $(1.9) million in 2001 and
2000, respectively. No significant gain or loss was realized on
the sale of the European operations.

On April 7, 2000, Oldco sold its metals
recycling and mill services business in the United Kingdom for
net proceeds of $47.7 million. The business, which was part
of the Metals Services Group, generated annual revenue of
$29.9 million and income from operations of
$2.4 million in 2000. The gain realized on the sale of the
United Kingdom metals recycling and mill services business is
included in Other income and expense  net.

Cumulative Effect of Change in Accounting
Principle

The Company elected early adoption of Statement
of Financial Accounting Standard No. 143 Accounting
for Asset Retirement Obligations
(FAS 143). The only Company location impacted
by the adoption of FAS 143 was the Companys sole operating
landfill located in Hamilton, Ontario. While FAS 143
adoption did have an impact on the Companys accounting for
its landfill asset, it did not change the basic landfill
accounting followed historically by the Company. In general, the
Company has historically recognized expenses associated with
both amortization of capitalized costs and future closure and
post-closure obligations on a units-of-consumption basis as
airspace is consumed over the life of the landfill. This
practice, referred to as life cycle accounting within the waste
industry, will continue to be followed after adoption of
FAS 143, except as discussed below.

Under the new FAS 143 rules, costs
associated with future final capping activities that occur
during the operating life of a landfill, which are currently
recognized on an undiscounted basis over the operating life of
the landfill as airspace is consumed, will be accounted for as
an asset retirement obligation, on a discounted basis. Under the
new FAS 143 rules, the Company will record a landfill
retirement obligation that relates to its closure and
post-closure activities over the operating life of the landfill
as the landfill airspace is consumed and the asset retirement
obligation is incurred. Upon adoption of FAS 143, the
Company recorded a landfill retirement obligation of
$3.0 million in addition to the $2.6 million
obligation that was previously reflected on the Companys
books prior to FAS 143 adoption. In accordance with
FAS 143, the Company also added accretion expense to the
obligation of $0.9 million for a total landfill retirement
obligation at December 31, 2002, of $6.5 million. The
Companys asset retirement obligation was determined based
on its estimated fair value, which was measured on a present
value basis, using a credit-adjusted, risk-free rate of 7.5%
coupled with an inflation rate of 2.0%. Accretion expense was
and will continue to be added to the landfill retirement
obligation using the effective interest method. All landfill
retirement costs arising from closure and post-closure
obligations were capitalized as part of the landfill asset and
are being amortized using the Companys existing landfill
accounting practices. At December 31, 2002, the gross value
of landfill asset retirement costs was $3.0 million, which
was offset by $2.9 million of accumulated depreciation. The
$2.9 million of accumulated depreciation coupled with the
$0.9 million of obligation accretion offset by a tax
benefit of

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$1.4 million total the $2.4 million
cumulative effect of change in accounting principle as shown in
the Consolidated Statements of Earnings for the year ended
December 31, 2002.


FINANCIAL CONDITION

Liquidity and Capital Resources

At December 31, 2002, the Companys
working capital was $96.2 million, representing a increase
of $3.3 million since December 31, 2001. Cash provided
by continuing operating activities was $10.9 million for
the year ended December 31, 2002 compared to
$13.1 million for the year ended December 31, 2001.
The reduction in cash provided in 2002 as compared to 2001 was
principally attributable to the increase in working capital of
the Company.

As of March 31, 2000, the Company entered
into its existing credit facility (the Credit
Facility). Concurrently, the Company entered into the
revolving operating facility, which initially provided up to
$175 million, subject to a borrowing base formula
calculated on accounts receivable (the Credit Facility and
revolving operating facility, together the Existing Senior
Debt). The Credit Facility provides term debt of
$235.8 million (term debt) and
$100.0 million in convertible payment-in-kind debt
(PIK debt). The term debt of $250 million
contemplated under the Plan was reduced to $235.8 million
on plan implementation due to the repayment of
$14.2 million from proceeds of asset sales. Obligations
under the Credit Facility were $302.4 at December 31, 2002.
The Credit Facility matures on March 31, 2005 and bears
interest at a fixed rate of 9% for the term debt and 10% for the
PIK debt. Interest payments on the term debt are due quarterly
in arrears, and, on the PIK debt, interest is payable in full on
March 31, 2005. The term debt or any part thereof and/or
all of the PIK debt may be prepaid and redeemed by the Company
at any time during the agreement once the revolving operating
facility has been terminated. The Company must pay a redemption
premium of between 1% and 5% on the amount of the term debt
being redeemed (excluding mandatory prepayments) and between
8 1/3% and 25% on the amount of the PIK debt being
redeemed. The PIK debt is convertible by the lenders at any time
into shares of common stock of PSC at an initial conversion
price of $11.72 per share, which was in excess of the fair
market value of PSC on a per-share basis at the time of issue.

The Company generally is required to repay the
term debt first and then the PIK debt in an amount equal to:



| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) 25% of the net asset-sale proceeds from
    the disposition of assets sold other than in the ordinary course
    of business after first paying off various tranches of senior
    debt and collateralizing letters of credit.
|
| | (ii) the net proceeds from any foreign
    subsidiary dispositions in excess of $1 million annually.                                                                                                                              

The Company is also required yearly for the first
two years and quarterly after that, to repay the term debt first
and then the PIK debt in an amount equal to 75% of the cash flow
available for debt service.

During 2000, the Company made mandatory
prepayments of the term debt relating to net asset sales of
$47.2 million, including the sale of the UK Metals
business. During 2001, the Company made mandatory prepayments
relating to net asset sales of $17.7 million, reducing the
term debt to $170.9 million as at December 31, 2001.
No mandatory prepayments were made in 2002.

The Existing Senior Debt is guaranteed jointly
and severally by PSC and substantially all of its direct and
indirect wholly owned subsidiaries and is collateralized by
security interests in the assets of PSC and substantially all of
its direct and indirect wholly owned subsidiaries and a pledge
of securities of substantially all of its direct and indirect
wholly owned subsidiaries.

The revolving operating facility provides for a
revolving line of credit, subject to a borrowing base formula
calculated on accounts receivable, of up to $195.0 million.
At December 31, 2002, the Companys borrowing base
formula limited the availability of the revolving operating
facility to approximately $153.7 million. The Company had
undrawn capacity under the revolving operating facility of
approximately $26.9 million, net of borrowings and
outstanding letters of credit of approximately
$126.8 million. The revolving operating facility, which is
senior to the term loan and provides day-to-day working capital
for the Company, was scheduled to

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mature on April 8, 2003. Through a
negotiated agreement, the revolving operating facility has been
extended to June 2, 2003, subject to certain terms and fees
described below.


The Company intends to use the period of the
extension to prepare to restructure its balance sheet and
refinance its debt. It is anticipated that the restructuring
will be effected through a proceeding under Chapter 11 of
the Bankruptcy Code. To this end, the Company has retained
bankruptcy counsel and is consulting with its significant
stockholders, its lenders and its other advisors. Among other
things, the Company is in discussions with its lenders
concerning debtor-in-possession financing though there can be no
assurances that such financing will be available or obtained.

Under the amendment of the revolving operating
facility executed with the lenders as of April 8, 2003, the
lending commitment under Tranche A of the facility was
reduced from $100 million to $78 million. The capacity
under other tranches is unchanged, and as a result, the total
capacity of the facility is unchanged. In connection with the
amendment, the Company has paid an aggregate fee of $100,000 to
the lenders under Tranche B-Prime, which are, respectively,
affiliates of the Companys two largest stockholders,
Carl C. Icahn and affiliates and Stephen Feinberg and
affiliates.

Borrowings under the revolving operating facility
bear interest at a rate equal to the base rate (which is based
on the Wells Fargo Bank prime rate) plus 1% on
Tranche A advances, 3% on Tranche B-Prime advances,
and the greater of 11.5% or the base rate plus 5% on
Tranche Sub-B advances or at the option of the Company on
Tranche A advances at a rate equal to the LIBOR rate plus
3%. A letter of credit issuance fee of .25% plus an annual fee
of 2.75% is charged on the amount of all outstanding letters of
credit issued under Tranche A. Letters of credit issued
under Tranche Sub-B bear an annual fee of 10.075%.

Under the revolving operating facility, the
Company is required to pay an annual service/ agency fee equal
to $900 and a monthly loan servicing fee equal to $20 for
Tranches A and B-Prime. The Tranche Sub-B Agency fee is
$10 paid monthly. In addition, the Company is required to
pay monthly an unused line of credit fee equal to 0.375%, 0.75%
and 2.0% per annum on the average unused portion of
Tranche A, Tranche B-Prime and Tranche Sub-B, respectively.

The Existing Senior Debt contains cross-default
provisions as well as certain restrictive covenant provisions,
including limitations on the incurrence of indebtedness, the
sale of assets, the incurrence of liens, the making of specified
investments and the payment of cash dividends. In addition, the
Company is required to satisfy, among other things, certain
financial covenants, including specified amounts of EBITDA and
maximum capital expenditures. At December 31, 2002, the
Company was in compliance with the covenants under the Existing
Senior Debt. However, the qualified opinion of the
Companys independent accountants for the Consolidated
Financial Statements at December 31, 2002, constitutes an
event of default (as defined in the credit agreements) under
both the revolving operating facility and the Credit Facility.
The Company received a waiver of this default from the lenders
under each facility in connection with the extension of the
revolving operating facility.

Financial Reporting Release No. 61 requires
all registrants to discuss liquidity and capital resources,
trading activities involving non-exchange traded contracts and
relationships and transactions with related parties that derive
benefit from their non-independent relationships with the
registrant. The following table summarizes the maturity dates of
the significant financial obligations and commitments of the
Company:

|                                   |  |      |        |           |  |           |         |            |  |       |        |  |  |   |        |  |  |   |         | 
|---------------------------------- |  | ---- | ------ | --------- |  | --------- | ------- | ---------- |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                                   |  | 2003 |        | 2004-2005 |  | 2006-2007 |         | After 2007 |  | Total
|                                   |  |      |        |           |  |           |         |            |  |      
|Operating facility                 |  | $    | 34,002 |           |  | $         |        |            |  | $     |       |  |  | $ |       |  |  | $ | 34,002  | 
|Long-term debt                     |  |      | 1,847  |           |  |           | 304,793 |            |  |       | 17,475 |  |  |   | 32,556 |  |  |   | 356,671 | 
|Capital lease obligations          |  |      | 1,100  |           |  |           | 207     |            |  |       | 92     |  |  |   | 30     |  |  |   | 1,429   | 
|Operating leases                   |  |      | 13,261 |           |  |           | 14,365  |            |  |       | 5,815  |  |  |   | 2,315  |  |  |   | 35,756  | 
|                                   |  |      |        |           |  |           |         |            |  |       |        |  |  |   |        |  |  |   |         | 
|Total contractual cash obligations |  | $    | 50,210 |           |  | $         | 319,365 |            |  | $     | 23,382 |  |  | $ | 34,901 |  |  | $ | 427,858 | 
|                                   |  |      |        |           |  |           |         |            |  |       |        |  |  |   |        |  |  |   |         | 

Letters of credit issued amounted to $92,775 at
December 31, 2002 (December 31, 2001 
$84,282). The Company did not utilize derivatives in 2002 or
2001.

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Related Parties

The Companys two largest stockholders, Carl
C. Icahn and Stephen Feinberg (see Item 12. Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters), were involved in providing interim
financing to the Company in April 2002 and the amendment of the
revolving operating facility in April 2003 (see the
Liquidity and Capital Resources section in this
Form 10-K and Note 19 of Notes to Consolidated
Financial Statements). These stockholders also participate
through entities they control in the revolving operating
facility described in Note 9(c) of Notes to Consolidated
Financial Statements and share interest and fees paid on that
facility. In connection with the April 2003 revolving operating
facility amendment, a fee of $100,000 was paid to the lenders
under Tranche B-Prime, which are, respectively, affiliates
of the Companys two largest stockholders, Carl C. Icahn
and affiliates and Stephen Feinberg and affiliates.
Additionally, they are participants in the Companys PIK
and term debt facilities described in Note 9(a) of Notes to
the Consolidated Financial Statements. Mr. Icahn controlled
approximately $187.1 million and $184.0 million of the
Companys debt as of December 31, 2002 and 2001,
respectively. Mr. Icahns share of the debt was
associated with approximately $18.6 million and $14.0
million in interest expense and fees during 2002 and 2001,
respectively. Mr. Feinburg controlled approximately
$102.5 million and $60.0 million of the Companys
debt as of December 31, 2002 and 2001, respectively.
Mr. Feinburgs share of the debt was associated with
approximately $10.3 million and $4.5 million in
interest expense and fees during 2002 and 2001, respectively. In
addition, entities controlled by these stockholders received
shares of common stock in connection with the companys
April 2002 mezzanine financing.

The Company has utilized the services of SBI and
Company, Inc. (SBI) for information technology
services associated with the PSC Way business reengineering
project. SBI is partially owned by entities controlled by one of
the Companys largest stockholders, Stephen Feinberg (see
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters). Fees paid to
SBI totaled $2.7 million and $8.5 million during 2002
and 2001, respectively.

Capital Expenditures

Capital expenditures for continuing operations
were $28.0 million for the year ended December 31,
2002, compared to $44.4 million for the same period in 2001.

The Companys capital expenditure program
for 2003 is expected to be approximately $32.8 million.
Approximately $8.1 million of the capital expenditure
program is expected to be spent on environmental compliance
matters relating to facilities operated by the Company.

Critical Accounting Estimates and
Assumptions

Financial Reporting Release No. 60 released
by the SEC recommends that all registrants include a discussion
of critical accounting policies or methods used in
the preparation of the financial statements. The Companys
significant accounting policies are contained in the Notes to
the Consolidated Financial Statements in Form 10-K. The
financial statements have been prepared in conformity with
generally accepted accounting principles and, accordingly,
include amounts based upon informed estimates and judgments of
management with due consideration given to materiality. As a
result, actual results could differ from those estimates. The
following represents those critical accounting policies where
materially different amounts would be reported under different
conditions or using different assumptions.

REVENUE
RECOGNITION Revenue from
industrial services is recorded as the services are performed,
using the percentage-of-completion basis for fixed rate
contracts and as-the-related-service-is-provided for time and
material contracts. Revenue from by-product recovery operations
is recognized along with the related costs of treatment,
disposal and transportation at the time of performance of
services. Revenue is recognized at the time of customer
acceptance for the direct sale of recovered commodities and
steel products or for contracts where the Company brokers
materials between two parties, takes title to the product and
assumes the risks and rewards of ownership. If the Company is
acting as an agent in those transactions, then only the
commission on the transaction is recorded.

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The Company uses the percentage-of-completion
basis to account for its fixed-price contracts. Under this
method, the amount of total costs and profits expected to be
realized is estimated, as is the recoverability of costs related
to change orders. Revenue is recognized as work progresses in
the ratio that costs bear to the estimated total costs for each
contract. Contract costs include all direct material and labor
costs and those indirect costs related to contract performance.
Selling, general and administrative costs are charged to expense
as incurred. Provisions for estimated losses on incomplete
contracts are recorded in the period in which such losses are
determined. Changes in estimates or differences in the actual
cost to complete the contract could result in recognition of
differences in earnings.

ENVIRONMENTAL
COSTS At December 31,
2002, the Company had accrued liabilities of $67.4 million
for environmental investigation, compliance and remediation
costs. The liabilities are based upon estimates with respect to
the number of sites for which the Company may be responsible,
the scope and cost of work to be performed at each site, the
portion of costs that will be shared with other parties and the
timing of remediation work. When timing and amounts of
expenditures can be reliably estimated, amounts are discounted.
Where timing and amounts cannot be reliably estimated, a range
is estimated and the best estimate within the high and low end
of the ranges is recognized. Estimates can be affected by
factors including future changes in technology, changes in
regulations or requirements of local governmental authorities,
the extent of the remediation necessary based upon environmental
testing and the actual costs of disposal.

RECEIVABLES, NET OF VALUATION
ALLOWANCES Accounts
receivable at December 31, 2002 were $206.1 million
net of a $19.6 million allowance for doubtful accounts. The
valuation allowance was determined based upon the Companys
evaluation of known requirements, aging of receivables,
historical experience and the economic environment. While the
Company believes it has appropriately considered known or
expected outcomes, its customers ability to pay their
obligations could be adversely affected by contraction in the
economy or unexpected changes in ferrous metals or energy
prices. Changes in these estimates of collectability could have
a material impact on earnings.

INVENTORY
Inventories primarily comprise unprepared and prepared ferrous
scrap and are valued at the lower of average purchase cost or
market valuation. Ferrous scrap is a commodity and its price is
determined by the market based on a number of factors including,
but not limited to, the demand for ferrous scrap by the
U.S. steel making industry, the level of imports and
exports of ferrous scrap and the regional supply of scrap
available. As a result of these factors the price for ferrous
scrap can fluctuate widely from period to period. The Company
manages its commodity price risk by frequently adjusting its
purchase price to reflect current market pricing; managing and
turning inventory frequently and utilizing its considerable
experience in the ferrous scrap industry to anticipate price
movements.

RESTRUCTURING
CHARGES The Company
continuously evaluates the productivity and profitability of
individual operating locations and the existing asset base to
identify opportunities to improve its cost structure. Future
opportunities may involve, among other things, adding or closing
locations, re-deploying or disposing of assets or otherwise
restructuring operations. Costs associated with closures,
severances and asset impairments are estimated and are recorded
in accordance with applicable accounting requirements. Actual
costs incurred and timing could vary based upon many factors
outside the Companys control, including environmental and
local governmental requirements.

INSURANCE
LIABILITIES Insurance
accruals were $49.6 million at December 31, 2002. The
Company retains liability for workers compensation claims,
auto and general liability, where permitted, for up to
$1 million for any single occurrence and for property
claims up to $2 million. Insurance claims liabilities have
been accrued using actuarial principles and industry standard
rates on an undiscounted basis. Third party administrators
estimate the ultimate potential cost for individual claims.
Actual development of individual claims could vary from the
estimated amounts due to severity of injuries, the potential for
damage awards and future changes in medical costs.

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Impact of Recently Issued Accounting
Standards

In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 141, Business
Combinations. This statement addresses financial
accounting and reporting for business combinations and
supersedes APB Opinion No. 16, Business
Combinations and FASB Statement No. 38,
Accounting for Preacquisition Contingencies of Purchased
Enterprises. The provisions of this statement apply to all
business combinations initiated after September 30, 2001.
The Companys adoption of Statement No. 141 on
January 1, 2002 did not have a material effect on the
Companys Consolidated Financial Statements.

In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets. This Statement addresses
financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. The Companys adoption of
Statement No. 142 on January 1, 2002 did not have a
material effect on the Companys Consolidated Financial
Statements.

In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligations. The statement applies to
legal obligations associated with the retirement of long-lived
assets, except for certain obligations of lessees. The
provisions of this statement are required to be applied for
fiscal years beginning after June 15, 2002, with early
adoption of the Statement encouraged by the FASB. The Company
elected early adoption of Statement No. 143 in December
2002, resulting in the recording of certain asset retirement
obligations and corresponding long-lived assets. Additionally,
the adoption of Statement No. 143 resulted in a charge of
$2,423, net of tax, recognized on the Companys
Consolidated Statement of Earnings as a cumulative effect of a
change in accounting principle.

In August 2001, the FASB issued Statement of
Financial Accounting Standards No. 144 Accounting for
the Impairment or Disposal of Long-Lived Assets. This
statement supersedes FASB Statement No. 121. This statement
addresses financial accounting and reporting for long-lived
assets impaired or disposed of by sale. The provisions of this
statement are effective for financial statements issued for
fiscal years beginning after December 15, 2001. The Company
adopted Statement No. 144 on January 1, 2002. The adoption
of Statement No. 144 has resulted in the recognition of
discontinued operations for disposals subsequent to
December 31, 2001, that would not have been recognized as
such prior to the adoption.

In April 2002, the FASB issued Statement of
Financial Accounting Standards No. 145, Rescission of
FASB Statements Nos. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, which
was effective for the Company beginning June 1, 2002.
Statement No. 145 rescinds FASB Statement Nos. 4, 44,
and 64 and amends SFAS No. 13, Accounting for
Leases, to provide guidance for income statement
classification and gains and losses on extinguishment of debt
and eliminate an inconsistency between the required accounting
for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. The Companys
adoption of Statement No. 145 in June 2002 did not have a
material effect on the Companys Consolidated Financial
Statements.

In July 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting
for Costs Associated with Exit or Disposal Activities.
Statement No. 146 addresses significant issues regarding
the recognition, measurement and reporting of costs that are
associated with exit and disposal activities, including
restructuring activities that are currently accounted for
pursuant to the guidance set forth in EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity. Statement
No. 146 is effective for the Company in January 2003. The
Companys adoption of Statement No. 146 on
January 1, 2003 is not expected to have a material effect
on the Companys Consolidated Financial Statements.

In October 2002, the FASB issued Statement of
Financial Accounting Standards No. 147, Acquisitions
of Certain Financial Institutions. This pronouncement
relates to accounting for acquisitions and the impairment or
disposal of certain long-term customer-relationship intangible
assets of financial institutions. The pronouncement is effective
for reporting periods beginning after October 1, 2002. The
Companys

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adoption of Statement No. 147 in October
2002 did not have a material effect on the Companys
Consolidated Financial Statements.


In December 2002, the FASB issued Statement of
Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation, Transition and Disclosure.
Statement No. 148 amends Statement No. 123 and
requires prominent disclosures in both annual and interim
financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. Statement No. 148 is effective
for fiscal years ending after December 15, 2002. The
Companys adoption of Statement No. 148 in December
2002 did not have a material effect on the Companys
Consolidated Financial Statements.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, An Interpretation of FASB Statements
Nos. 5, 57 and 107 and Rescission of FASB Interpretation
No. 34 (FIN 45). FIN 45 clarifies the
requirements of FASB Statement No. 5, Accounting For
Contingencies relating to the guarantors accounting
for, and disclosure of the issuance of certain types of
guarantees. The disclosure provisions of the Interpretation are
effective for financial statements of interim or annual reports
that end after December 15, 2002, irrespective of the
guarantors year-end. The Companys adoption of FIN 45
did not have a material impact in the Companys
Consolidated Financial Statements.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest
Entities (FIN 46). FIN 46 requires that
unconsolidated variable interest entities be consolidated by
their primary beneficiaries. A primary beneficiary is the party
that absorbs a majority of the entitys expected losses or
residual benefits. FIN 46 applies immediately to variable
interest entities created after January 31, 2003 and to
existing variable interest entities in the periods beginning
after June 15, 2003. The Company has yet to determine the
impact that the adoption of FIN 46 will have on the
Companys Consolidated Financial Statements.

Capital Structure

Under the bankruptcy plan (described under
Information Regarding Oldco, in Item 1.
Business), the Company allocated 24,000,000 shares of common
stock to claimants at the Plan effective date. Because of
disputed claims 654,291 shares have not yet been issued. When
these claims are resolved, the shares will be issued to the
appropriate claimants. It is anticipated that 250,680 of these
shares will be issued to claimants on or about April 15,
2003. The Company currently cannot determine the persons with
the rights to the shares other than those expected to be
distributed on or about April 15, 2003. In all events the
shares will be issued to claimants under the Plan.

During 2002, 63,732 shares of restricted stock
were issued to non-employee members of the Board of Directors
under the applicable plan discussed in Note 17 of Notes to
Financial Statements. In addition, 139,496 shares of restricted
stock previously issued to various officers and non-employee
members of the Board of Directors were cancelled. Also during
2002, 470 shares were issued in conversion of the Companys
3% Convertible Subordinated Notes during the twelve months ended
December 31, 2002. On April 12, 2002, in connection
with the mezzanine financing, the Company issued 3,638,466
shares of common stock to entities affiliated with Carl C. Icahn
and Stephen Feinberg, upon payment in cash of the par value of
$0.01 per share.

Fresh Start Reporting

The Company has adopted fresh start reporting in
accordance with the AICPAs Statement of Position 90-7
Financial Reporting by Entities in Reorganization under
the Bankruptcy Code. For financial reporting purposes, the
effective date of the Plan was considered to be March 31,
2000. The following audited balance sheet of the Company
reflects the effects of the fresh start reporting under the
Plan. The effect of the Plan and

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the implementation of fresh start reporting on
the Companys Consolidated Balance Sheet as at
March 31, 2000 were as follows: (in thousands)


|                                  |                                   |                 |           |             |  |             |          |               |   |                 |          |         |   |   |         |         |   |   |         |         | 
|--------------------------------- | --------------------------------- | --------------- | --------- | ----------- |  | ----------- | -------- | ------------- | - | --------------- | -------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | 
|                                  |                                   | Predecessor     |           |             |  |             |          |               |   |                
|                                  |                                   | Company         |           |             |  |             |          |               |   | Reorganized    
|                                  |                                   | Philip Services |           |             |  |             |          |               |   | Philip Services
|                                  |                                   | Corporation     |           | Net Assets  |  | Debt        |          |               |   | Corporation    
|                                  |                                   | March 31,       |           | Not         |  | Discharge   |          | UK Metals     |   | March 31,      
|                                  |                                   | 2000            |           | Acquired    |  | Under Plan  |          | Business Sold |   | 2000           
|                                  |                                   |                 |           |             |  |             |          |               |   |                
|                                  |                                   | (unaudited)     |           | Note A      |  | Note B      |          | Note C        |   | (audited)      
|                                  |                                   |                 |           | (unaudited) |  | (unaudited) |          | (unaudited)   |   |                
|Current assets                    |                                   |                 |           |             |  |             |          |               |   |                 |          |         |   |   |         |         |   |   |         |        
|                                  | Cash                              |                 | $         | 36,454      |  |             | $        |              |   |                 | $        |        |   |   | $       | (4,338  | ) |   | $       | 32,116  | 
|                                  | Accounts receivable               |                 |           | 329,571     |  |             |          |              |   |                 |          |        |   |   |         | (15,880 | ) |   |         | 313,691 | 
|                                  | Inventory for resale              |                 |           | 40,440      |  |             |          |              |   |                 |          |        |   |   |         | (3,659  | ) |   |         | 36,781  | 
|                                  | Other                             |                 |           | 102,843     |  |             |          | (4,509        | ) |                 |          | (14,175 | ) |   |         | 44,523  |   |   |         | 128,682 | 
|                                  |                                   |                 |           |             |  |             |          |               |   |                 |          |         |   |   |         |         |   |   |         |        
|                                  |                                   |                 | 509,308   |             |  |             | (4,509   | )             |   |                 | (14,175  | )       |   |   | 20,646  |         |   |   | 511,270 |        
|Fixed assets                      |                                   |                 | 297,976   |             |  |             | (59      | )             |   |                 |         |         |   |   | (16,505 | )       |   |   | 281,412 |        
|Other assets                      |                                   |                 | 60,471    |             |  |             | (5,821   | )             |   |                 |         |         |   |   |        |         |   |   | 54,650  |        
|                                  |                                   |                 |           |             |  |             |          |               |   |                 |          |         |   |   |         |         |   |   |         |        
|                                  |                                   | $               | 867,755   |             |  | $           | (10,389  | )             |   | $               | (14,175  | )       |   | $ | 4,141   |         |   | $ | 847,332 |        
|                                  |                                   |                 |           |             |  |             |          |               |   |                 |          |         |   |   |         |         |   |   |         |        
|Current liabilities               |                                   |                 |           |             |  |             |          |               |   |                 |          |         |   |   |         |         |   |   |         |        
|                                  | Accounts payable                  |                 | $         | 105,967     |  |             | $        |              |   |                 | $        |        |   |   | $       | (11,570 | ) |   | $       | 94,397  | 
|                                  | Accrued liabilities               |                 |           | 151,218     |  |             |          | (4,286        | ) |                 |          |        |   |   |         | (3,875  | ) |   |         | 143,057 | 
|                                  | Current portion of long-term debt |                 |           | 11,333      |  |             |          | (6,000        | ) |                 |          |        |   |   |         | (172    | ) |   |         | 5,161   | 
|                                  |                                   |                 |           |             |  |             |          |               |   |                 |          |         |   |   |         |         |   |   |         |        
|                                  |                                   |                 | 268,518   |             |  |             | (10,286  | )             |   |                 |         |         |   |   | (15,617 | )       |   |   | 242,615 |        
|Long-term debt                    |                                   |                 | 4,235     |             |  |             | 8,619    |               |   |                 | 371,820  |         |   |   | (134    | )       |   |   | 384,540 |        
|Deferred income taxes             |                                   |                 | 6,886     |             |  |             |         |               |   |                 |         |         |   |   | (306    | )       |   |   | 6,580   |        
|Other long-term liabilities       |                                   |                 | 96,373    |             |  |             |         |               |   |                 |         |         |   |   | (1,070  | )       |   |   | 95,303  |        
|Liabilities subject to compromise |                                   |                 | 1,136,468 |             |  |             | (726,451 | )             |   |                 | (410,017 | )       |   |   |        |         |   |   |        |        
|Stockholders equity              |                                   |                 | (644,725  | )           |  |             | 717,729  |               |   |                 | 24,022   |         |   |   | 21,268  |         |   |   | 118,294 |        
|                                  |                                   |                 |           |             |  |             |          |               |   |                 |          |         |   |   |         |         |   |   |         |        
|                                  |                                   | $               | 867,755   |             |  | $           | (10,389  | )             |   | $               | (14,175  | )       |   | $ | 4,141   |         |   | $ | 847,332 |        
|                                  |                                   |                 |           |             |  |             |          |               |   |                 |          |         |   |   |         |         |   |   |         |        



---

Notes:



|   |                                                                                                                                                                          
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A. | Certain assets and liabilities of the Predecessor
    Company were not acquired by the Company, which includes
    syndicate debt of the Predecessor Company of $657,286.



|   |                                                                                                                                                                                                                                                                                                                                                                  
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|B. | To record the discharge of debt, which was
    converted into $250,000 of senior secured debt, $100,000 of
    convertible secured payment in-kind debt and 91% of the common
    stock of the Company, and the repayment on Plan implementation
    of $14,175 of term debt from the proceeds of asset sales, which
    were previously held as restricted cash.



|   |                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|C. | The UK Metals business was sold effective
    April 7, 2000. The net proceeds of $47,684 represents the
    fair value of the net assets of the UK Metals business and was
    recorded in other current assets at March 31, 2000. On
    May 25, 2000 the Canadian Court ordered the distribution of
    approximately $44,587 of the net proceeds, which reduced the
    term debt of the Company.

RISK FACTORS

Control by Principal Stockholders

Carl C. Icahn, and entities over which he
exercises direct or indirect control, owned in the aggregate
approximately 45.4% of the Companys outstanding common
stock as of December 31, 2002, and PIK debt

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that is convertible into 4,880,037 additional
shares of common stock. Stephen Feinberg, and entities over
which he exercises direct or indirect control, owned
approximately 16.5% of the Companys outstanding common
stock as of December 31, 2002, and PIK debt convertible
into 1,823,499 additional shares of common stock. These
stockholders are each in a position to exercise significant
influence over the affairs of the Company, which influence might
or might not be consistent with the interests of other
stockholders, and on the outcome of any matters submitted to the
Companys stockholders for approval.


Future Restructuring and Refinancing

The Company currently utilizes debt financing as
discussed in Note 9 of Notes to Consolidated Financial
Statements. The revolving operating facility, which is senior to
the Credit Facility and provides day-to-day working capital for
the Company, was scheduled to mature on April 8, 2003.
Through a negotiated agreement, the revolving operating facility
has been extended to June 2, 2003, subject to certain terms
and fees described below.

The Company intends to use the period of the
extension to prepare to restructure its balance sheet and
refinance its debt. It is anticipated that the restructuring
will be effected through a proceeding under Chapter 11 of
the Bankruptcy Code. To this end, the Company has retained
bankruptcy counsel and is consulting with its significant
stockholders, its lenders and its other advisors. Among other
things, the Company is in discussions with its lenders
concerning debtor-in-possession financing though there can be no
assurances that such financing will be available or obtained.

Under the amendment of the revolving operating
facility executed with the lenders as of April 8, 2003, the
lending commitment under Tranche A of the facility was
reduced from $100 million to $78 million. The capacity
under other tranches is unchanged, and as a result, the total
capacity of the facility is unchanged. In connection with the
amendment, the Company has paid an aggregate fee of $100,000 to
the lenders under Tranche B-Prime, which are, respectively,
affiliates of the Companys two largest stockholders, Carl
C. Icahn and affiliates and Stephen Feinberg and affiliates.

Project Services Division Project

The Project Services Division is presently
involved as a subcontractor in a project that is among the
largest being handled by any of the Companys businesses. A
general contractor on the project has advised PSD that it is in
breach of certain obligations under the contract for the
project, and the Company believes that litigation may ensue. The
Company has recorded a loss on the project of $2.4 million
for the year ended December 31, 2002. There can be no
assurance that the Company will not recognize further losses,
which could be material, on this project or on any other large
project undertaken by the Project Services Division currently or
in the future.

Limited Market for the Common Stock

Of the shares of common stock issued or to be
issued in connection with the Plan, 91% were issued to the
Oldcos syndicate debt holders. While the Companys
common stock began trading on the NASDAQ stock market on
May 22, 2000, it was delisted on July 9, 2002, and it
is currently traded in the pink sheets and listed on the Toronto
Stock Exchange. As a result, there is little liquidity for the
common stock.

Litigation Risks

The Companys business includes health,
safety and environmental risks, and, as a result, the Company
becomes subject from time to time to legal or administrative
proceedings whose outcome is uncertain and which may involve
substantial legal costs and penalties. See Item 3. Legal
Proceedings. The Company is unable to predict the outcome of all
of its pending matters, and there can be no assurance that the
ultimate resolution of such matters will not have a material
adverse effect on the financial condition of the Company.

During 2001 the Company revised its insurance
program to, among other things, increase the deductible on
various coverages. Currently, the deductible is $1 million
on most coverages and $2 million for property.

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Thus for many cases the Company is effectively
self-insured. Although the Company does not believe that the
deductible from any single case would have a material effect on
its financial condition, it is impossible to predict the impact
of cumulative deductibles over time.


Effect of Common Stock Available for Future
Sale

Sales of a substantial number of shares of common
stock, or the perception that such sales could occur, could
adversely affect prevailing market prices of the common stock.
The Company has reserved 9,132,423 shares of common stock for
issuance under its convertible PIK debt and unsecured
convertible notes. Furthermore, the Company has reserved shares
of common stock for issuance totaling 1,040,000 shares under the
Stock Option Plan, 1,000,000 under the Officers Plan of
which a maximum of 352,390 can ever be issued, 400,000 in the
Directors Plan, and 1,200,000 under the 2002 Plan. The Company
issued 3,638,466 shares of common stock to the Icahn group and
the Feinberg group in connection with the Companys April
2002 credit financing described elsewhere herein (see
 Control by Principal Stockholders).
These shares, as well as all others held by these stockholders,
are subject to registration rights, and, accordingly, could be
issued into the public market at any time. No prediction can be
made regarding the effect that future sales of shares of common
stock will have on the market price of currently outstanding
shares.

Limitations on Change of Control

The Board of Directors of the Company is
authorized to issue preferred stock in one or more series, with
such terms, conditions and preferences as it deems appropriate,
without stockholder action. Although the Company has no present
plans to issue any shares of preferred stock, such shares could
be issued in a manner that could render more difficult, or
discourage, an attempt to obtain control of the Company by means
of a tender offer, merger, proxy contest or otherwise. The
Company currently has no stockholder rights plan.

Limitations in Credit Facilities and
Certificate of Incorporation

The Companys credit facility and revolving
operating facility contain financial and other covenants that
limit the Companys ability to make acquisitions or
investments, incur indebtedness, create liens, sell assets,
engage in mergers or acquisitions and pay cash dividends. Its
Certificate of Incorporation contains restrictions on business
combinations. These restrictions could restrict corporate
activities and limit the ability of the Company to react quickly
to adverse economic conditions, effect future financings or take
advantage of business opportunities that may arise.

Competition

The Company operates in a highly competitive
environment. The publicity relating to the Companys
financial difficulties since its emergence from bankruptcy has
eroded its financial position. The Company primarily provides
services to industrial companies. Many other companies offer the
same or similar services and compete with the Company on a
number of bases including, but not limited to (i) price;
(ii) quality of service; (iii) proximity to the
client; (iv) local or regional presence;
(v) technology; (vi) safety performance; and
(vii) financial strength. Many of these companies have
greater financial resources than the Company either nationally
or in the particular locale in which they operate. Moreover, the
Company continues to be affected by the damage to its reputation
caused by the bankruptcy of Oldco.

Dependence on Outsourcing

The Companys growth is dependent on the
continuation of outsourcing within industrial enterprises. As
enterprises focus on their core business, they are perceived to
be increasingly outsourcing non-core, non-revenue-generating
activities in order to reduce costs. Such activities can often
be performed on a more cost-effective basis by specialized
industrial service and metal recovery companies that have
greater expertise, technology advantages or economies of scale.
In addition, many industrial enterprises have sought to reduce
the number of vendors of industrial and resource recovery
services by purchasing services only from those suppliers that
can provide a total service solution, thereby
providing further administrative and cost

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reductions. If the pace of either of these trends
slows or reverses, it could have a material adverse effect on
the Companys financial position and results of operations.


Environmental and Regulatory Risks

Environmental Regulations.The Companys operations are
subject to comprehensive laws and regulations related to the
protection of the environment. Such laws and regulations, among
other things (i) regulate the nature of the industrial
by-products and wastes that the Company can accept for
processing at its treatment, storage and disposal facilities,
the nature of the treatment it can provide at such facilities
and the location and expansion of such facilities,
(ii) impose liability for remediation and clean-up of
environmental contamination, including spills or releases of
certain industrial by-products and waste materials resulting
from shipping of waste off-site or past and present operations
at the Companys facilities and (iii) may require
financial assurance that funds will be available for the
clean-up and remediation or the closure and, in some cases,
post-closure care of sites. Such laws and regulations also
require manifests to be completed and delivered in connection
with any shipment of prescribed materials so that the movement
and disposal of such materials can be traced and the persons
responsible for any mishandling of such materials identified.
Because the Company provides its customers with services
designed to protect the environment by cleaning and removing
waste materials or substances from customers equipment or
sites, the Company is subject to regulations that impose
liability on persons involved in handling, processing,
generating or transporting hazardous materials. Regulatory
requirements may also be imposed as conditions of operating
permits or licenses both initially and upon renewal or
modification. The Company must properly remove, handle, treat,
recycle or dispose of waste materials or incur liability.
Transportation, transfer, storage and disposal of waste is
difficult and accidents may occur. These laws and regulations
are stringent and are likely to become more stringent. Existing
laws and regulations, and new laws and regulations, may require
the Company to modify, supplement, replace or curtail its
operating methods or to modify or replace facilities or
equipment at costs which may be substantial without any
corresponding increase in revenues.

Hazardous substances are present in some of the
processing, transfer, storage, disposal and landfill facilities
owned or used by the Company. Remediation may be required at
these sites at substantial cost. The Company has developed or is
developing cost estimates that are periodically reviewed and
updated, and maintains reserves for these matters based on such
cost estimates. Estimates of the Companys liability for
remediation of a particular site and the method and ultimate
cost of remediation entail a number of assumptions and are
inherently difficult. There can be no assurance that the
ultimate cost and expense of corrective action will not
substantially exceed reserves and have a material adverse impact
on the Companys operations or financial condition.
Moreover, governments have from time to time required companies
to remediate sites where materials were properly disposed
because those governments have instituted higher standards.
Thus, even proper disposal of waste does not assure the Company
relief from future liability.

In the normal course of its business and as a
result of the extensive governmental regulation of industrial,
environmental and metal recovery services, the Company has been
the subject of administrative and judicial proceedings by
regulators and has been subject to requirements to remediate
environmental contamination or to take corrective action. There
will be administrative or court proceedings in the future in
connection with the Companys present and future operations
or the operations of acquired businesses. In such proceedings in
the past, the Company has been subject to monetary fines and
certain orders requiring the Company to take remedial action. In
the future, the Company may be subject to monetary fines,
penalties, remediation, clean-up or stop orders, injunctions or
orders to cease or suspend certain of its practices. The outcome
of any proceeding and associated costs and expenses could have a
material adverse impact on the operations or financial condition
of the Company.

The demand for certain of the Companys
services may be adversely affected by the amendment or repeal of
federal, state, provincial or foreign laws and regulations or by
changes in the enforcement policies of the regulatory agencies
concerning such laws and regulations.

Public Concerns.There is a high level of public
concern over industrial by-products recovery and waste
management operations, including the location and operation of
transfer, processing, storage and disposal

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facilities and the collection, processing or
handling of industrial by-products and waste materials,
particularly hazardous materials. Zoning, permit and licensing
applications and proceedings and regulatory enforcement
proceedings are all matters open to public scrutiny and comment.
As a result, from time to time, the Company has been, and may in
the future be, subject to citizen opposition and adverse
publicity which may have a negative effect on its operations and
delay or limit the expansion and development of operating
properties and could have a material adverse effect on its
operations or financial condition.


Environmental Liabilities and Insurance
Coverage.The Company is subject
to potential liability for personal injuries caused by releases
of hazardous substances and for remediation of risks posed by
hazardous substances. Consistent with industry trends, the
Company may not be able to obtain adequate amounts of
environmental impairment insurance at a reasonable premium to
cover liability to third parties for environmental damage.
Accordingly, if the Company were to incur liability for
environmental damage either not provided for under such coverage
or in excess of such coverage, the Companys financial
condition and results of operations could be materially and
adversely affected.

Jurisdictional Restrictions on Waste
Transfers.In the past, various
states, provinces, counties and municipalities have attempted to
restrict the flow of waste across and within their borders, and
various U.S. and Canadian federal, provincial, state,
county and municipal governments may seek to do the same in the
future. Any such strictures may result in the Company incurring
increased third-party disposal costs in connection with
alternate disposal arrangements.

For a more detailed description of the impact of
environmental and other governmental regulation upon the
Company, see Government Regulation in Item 1.
Business.

Bonding

In order to bid on certain industrial outsourcing
or waste management contracts, the Company, like other bidders,
is required to post various types of surety bonds. The Company
is also required to provide financial assurance that funds will
be available when needed for closure and post-closure care at
certain of its treatment, storage and disposal facilities, the
costs of which could be substantial. Such bidding requirements
and such laws and regulations allow the financial assurance
requirements to be satisfied by various means, including letters
of credit, surety bonds, trust funds, a financial (net worth)
test or a guarantee by a parent company. There is no assurance
that the Company will obtain or continue to have adequate
bonding facilities available to satisfy bonding requirements.
Because of the tightening surety market and the Companys
limited financial resources, the Company has recently been
unable to obtain a sufficiently large bonding facility. This has
had an adverse effect on the Companys financial position.

Reliance on Key Employees

The Companys success is dependent in part
on its ability to retain and motivate its officers and key
employees. The Predecessor Companys financial difficulties
and the Companys recent financial difficulties have had
and continue to have a detrimental effect on its ability to
attract and retain key officers and employees. As a result, the
Company has experienced over the last year, and continues to
experience, high employee turnover. There can be no assurance
that the Company will be able to retain or employ qualified
management and technical personnel. While the Company has
entered into employment agreements with certain members of its
senior management, should any of these persons be unable or
unwilling to continue their employment with the Company, the
business prospects of the Company could be materially and
adversely affected.

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Commodity Price and Credit Risks

The Company is exposed to commodity price risk
during the period that it has title to scrap that is held in
inventory for processing and/or resale. Scrap prices are
volatile due to numerous factors beyond the control of the
Company, including general economic conditions, labor costs,
competition, import duties, tariffs and currency exchange rates.
In an increasing price environment, competitive conditions will
determine how much of the scrap price increases can be passed on
to the Companys customers. There can be no assurance that
the Company will not have a significant net exposure due to
significant price swings or failure of a counterparty to perform
pursuant to the contract.

Insurance Carrier Risk

The Company retains liability for workers
compensation claims, auto and general liability, for up to
$1 million for any single occurrence and for property
claims up to $2 million. To the extent that any insurance
carrier is unable to meet their obligations under existing
insurance policies, the Company would be liable for the
defaulted amount. (See Note 8 of Notes to Consolidated
Financial Statements for a discussion of an issue relating to
Reliance Insurance.)

Risks Associated with Acquisitions

Between 1996 and 1998 the Predecessor Company
completed over 40 acquisitions. In connection with these
acquisitions, there may be liabilities that the Predecessor
Company failed to discover, including liabilities arising from
pollution of the environment or non-compliance with
environmental laws by prior owners, for which the Company, as a
successor owner, may be responsible. Indemnities and warranties
for such liabilities from sellers, if obtained, may not fully
cover the liabilities due to their limited scope, amounts or
duration, the financial limitations of the indemnitor or
warrantor or other reasons.




Item
7A.     Quantitative and Qualitative
Disclosures About Market Risk

The Company is exposed to financial risk
resulting from volatility in foreign exchange rates, interest
rates and commodity prices. The Company seeks to minimize these
risks through its regular operating and financing activities
and, when deemed appropriate, through the use of derivative
financial instruments. In 2002, there were no derivative
instruments used. See Note 16 of Notes to Consolidated
Financial Statements.

Foreign Currency Rate Risk

The revenue and expenses of the Companys
Canadian and European subsidiaries are generally denominated
using the local currency. The functional currency of these
subsidiaries is the local currency and therefore, foreign
currency translation adjustments made on consolidation are
reflected as a component of stockholders equity (deficit)
as stated in the Companys accounting policies. Changes in
the foreign exchange rates compared to the United States dollar
can have an effect on the Companys revenue and
profitability. The sensitivity of the net loss from continuing
operations before tax to the changing foreign currency rates is
not significant based on the 2002 operating results from foreign
subsidiaries.

Interest Rate Risk

Substantially all of the Companys long-term
debt bears interest at a fixed rate. Borrowings under the
revolving operating facility bear interest at a floating rate
based on the Wells Fargo Bank prime rate or LIBOR rate. At
December 31, 2002, the Company had borrowings of
$34.0 million under the revolving operating facility. In
addition, letters of credit outstanding have been charged
against the borrowing capacity under the revolving operating
facility. The Company does not believe that its exposure to
interest rate risk at December 31, 2002 was significant.

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Commodity Price Risk

Prices in the Metals Services Group are
established and adjusted monthly by the major steel producers.
The price of ferrous scrap is a significant factor influencing
the profitability of the Metals Services Group. The Company
manages its commodity price risk by acquiring ferrous metal
scrap as it is needed for its customers and by turning its
inventory approximately every 30 days. While a 10% change
in scrap prices could potentially impact the companys
inventory value by approximately $2 million, the company
employs a number of measures to anticipate and/or mitigate the
effect of these price swings. These measures include regular
scrap purchase price adjustments, frequent inventory turnover
and forward selling initiatives.

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data




REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Philip Services Corporation:

We have audited the accompanying consolidated
balance sheet of Philip Services Corporation and subsidiaries as
of December 31, 2002, and the related consolidated
statements of earnings, stockholders equity (deficit), and
cash flows for the year then ended. In connection with our audit
of the consolidated financial statements, we also have audited
the financial statement schedule. These consolidated financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on
our audit.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Philip Services
Corporation and subsidiaries as of December 31, 2002, and
the consolidated results of their operations and their cash
flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
Also in our opinion, the related financial statement schedule,
when considered in relation to the consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.

The accompanying consolidated financial
statements and financial statement schedule have been prepared
assuming that Philip Services Corporation and subsidiaries will
continue as a going concern. As discussed in Note 9 to the
consolidated financial statements, the Companys existing
revolving operating facility was to expire on April 8, 2003
and has been extended to June 2, 2003. The Companys
inability to secure a replacement facility by April 8,
2003, raises substantial doubt about its ability to continue as
a going concern. Managements plans in regard to these
matters are also described in Note 9. The consolidated
financial statements and financial statement schedule do not
include any adjustments that might result from the outcome of
this uncertainty.

As discussed in Note 12 to the consolidated
financial statements, the Company elected early adoption of
Statement of Financial Accounting Standards (SFAS) No. 143,
Accounting for Asset Retirement Obligations.

As discussed in Note 24 to the consolidated
financial statements, the Company changed, effective
January 1, 2002, its method of accounting and reporting for
asset impairments and discontinued operations as required by
SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets.



| |             
| | ------------
| | /s/ KPMG LLP
| |             
| | KPMG LLP    

Houston, Texas

March 21, 2003, except for Note 9,


which is as of April 9, 2003


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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Philip Services Corporation:

In our opinion, the accompanying consolidated
balance sheet and related consolidated statements of earnings,
stockholders equity and cash flows present fairly, in all
material respects, the financial position of Philip Services
Corporation and its subsidiaries at December 31, 2001 and
the results of their operations and their cash flows for the
year ended December 31, 2001 and for the nine months ended
December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in Item
15(a)(2) of Part III herein presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
These financial statements and the financial statement schedule
are the responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements and financial statement schedule 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 audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

As discussed in Note 9 to the consolidated
financial statements, the Companys revolving operating
facility was due to expire on April 8, 2003 and has been
extended only to June 2, 2003. Managements plans in
regard to this matter are also discussed in Note 9.



| |                               
| | ------------------------------
| | /s/ PRICEWATERHOUSECOOPERS LLP
| |                               
| | PricewaterhouseCoopers LLP    

Chicago, Illinois

March 20, 2002, except for Notes 3 and 21,
as to which the date is March 2, 2003.


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PHILIP SERVICES CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)


|                                                    |                                                                                                       |                                             |         |              |         |  |         |         |         | 
|--------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------- | ------------ | ------- |  | ------- | ------- | ------- | 
|                                                    |                                                                                                       | December 31,                                |         | December 31,
|                                                    |                                                                                                       | 2002                                        |         | 2001        
|                                                    |                                                                                                       |                                             |         |             
|ASSETS                                             
|Current assets                                      |                                                                                                       |                                             |         |              |         |  |         |        
|                                                    | Cash and cash equivalents, including restricted
    cash of $1,525 and $5,612, respectively           |                                             | $       | 10,998       |         |  | $       | 9,201   |        
|                                                    | Accounts receivable (net of allowance for
    doubtful accounts of $19,552 and $36,784, respectively) |                                             |         | 206,050      |         |  |         | 233,494 |        
|                                                    | Inventory for resale                                                                                  |                                             |         | 38,402       |         |  |         | 33,038  |        
|                                                    | Assets held for sale                                                                                  |                                             |         | 21,385       |         |  |         |        |        
|                                                    | Other current assets                                                                                  |                                             |         | 55,225       |         |  |         | 50,281  |        
|                                                    |                                                                                                       |                                             |         |              |         |  |         |        
|                                                    |                                                                                                       | Total current assets                        |         |              | 332,060 |  |         |         | 326,014 | 
|Property, plant and equipment                       |                                                                                                       |                                             | 211,203 |              |         |  | 255,652 |        
|Other assets                                        |                                                                                                       |                                             | 57,747  |              |         |  | 57,737  |        
|                                                    |                                                                                                       |                                             |         |              |         |  |         |        
|                                                    |                                                                                                       | Total assets                                |         | $            | 601,010 |  |         | $       | 639,403 | 
|                                                    |                                                                                                       |                                             |         |              |         |  |         |        
|                                                   
|LIABILITIES AND STOCKHOLDERS
    DEFICIT          
|Current liabilities                                 |                                                                                                       |                                             |         |              |         |  |         |        
|                                                    | Bank overdraft                                                                                        |                                             | $       | 14,687       |         |  | $       | 20,024  |        
|                                                    | Accounts payable                                                                                      |                                             |         | 74,301       |         |  |         | 82,690  |        
|                                                    | Accrued liabilities                                                                                   |                                             |         | 109,880      |         |  |         | 115,574 |        
|                                                    | Current borrowings on operating facility                                                              |                                             |         | 34,002       |         |  |         | 12,129  |        
|                                                    | Current maturities of long-term debt                                                                  |                                             |         | 2,947        |         |  |         | 2,692   |        
|                                                    |                                                                                                       |                                             |         |              |         |  |         |        
|                                                    |                                                                                                       | Total current liabilities                   |         |              | 235,817 |  |         |         | 233,109 | 
|Long-term debt                                      |                                                                                                       |                                             | 355,153 |              |         |  | 339,392 |        
|Deferred income taxes                               |                                                                                                       |                                             | 6,175   |              |         |  | 7,882   |        
|Other liabilities                                   |                                                                                                       |                                             | 67,415  |              |         |  | 70,051  |        
|Commitments and contingencies (Notes 20 and
    22) |                                                                                                       |                                             |        |              |         |  |        |        
|Stockholders deficit                               |                                                                                                       |                                             | (63,550 | )            |         |  | (11,031 | )      
|                                                    |                                                                                                       |                                             |         |              |         |  |         |        
|                                                    |                                                                                                       | Total liabilities and stockholders deficit |         | $            | 601,010 |  |         | $       | 639,403 | 
|                                                    |                                                                                                       |                                             |         |              |         |  |         |        

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

43



---



##### Table of Contents



PHILIP SERVICES CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share
amounts)


|                                                                                                                             |                                                         |                    |           |                    |       |                     |           |                      |       |   |         |       |       |   |         |   |  | 
|---------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------ | --------- | ------------------ | ----- | ------------------- | --------- | -------------------- | ----- | - | ------- | ----- | ----- | - | ------- | - |  | 
|                                                                                                                             |                                                         |                    |           |                    |       |                     |           | Predecessor Company 
|                                                                                                                             |                                                         |                    |           |                    |       |                     |           |                     
|                                                                                                                             |                                                         | For the Year Ended |           | For the Year Ended |       | For the Nine Months |           | For the Three Months
|                                                                                                                             |                                                         | December 31,       |           | December 31,       |       | Ended December 31,  |           | Ended March 31,     
|                                                                                                                             |                                                         | 2002               |           | 2001               |       | 2000                |           | 2000                
|                                                                                                                             |                                                         |                    |           |                    |       |                     |           |                     
|                                                                                                                             |                                                         |                    |           |                    |       |                     |           | (unaudited)         
|Revenue                                                                                                                      |                                                         | $                  | 1,118,460 |                    |       | $                   | 1,144,753 |                      |       | $ | 916,996 |       |       | $ | 382,589 |  
|Operating expenses                                                                                                           |                                                         |                    | 953,051   |                    |       |                     | 987,023   |                      |       |   | 797,308 |       |       |   | 333,817 |  
|Selling, general and administrative costs                                                                                    |                                                         |                    | 106,758   |                    |       |                     | 147,111   |                      |       |   | 98,379  |       |       |   | 31,783  |  
|Depreciation and amortization                                                                                                |                                                         |                    | 40,341    |                    |       |                     | 40,001    |                      |       |   | 31,484  |       |       |   | 11,388  |  
|Asset impairment and other unusual costs
    (Note 13)                                                                       |                                                         |                    | 10,889    |                    |       |                     | 11,935    |                      |       |   | 17,117  |       |       |   |        |  
|                                                                                                                             |                                                         |                    |           |                    |       |                     |           |                      |       |   |         |       |       |   |         |  
|Income (loss) from operations                                                                                                |                                                         |                    | 7,421     |                    |       |                     | (41,317   | )                    |       |   | (27,292 | )     |       |   | 5,601   |  
|Interest expense                                                                                                             |                                                         |                    | 50,849    |                    |       |                     | 39,301    |                      |       |   | 28,983  |       |       |   | 854     |  
|Other (income) and expense  net                                                                                             |                                                         |                    | 87        |                    |       |                     | 1,252     |                      |       |   | (4,827  | )     |       |   | (11,636 | )
|                                                                                                                             |                                                         |                    |           |                    |       |                     |           |                      |       |   |         |       |       |   |         |  
|Income (loss) from continuing operations before
    income taxes and cumulative effect of change in accounting
    principle |                                                         |                    | (43,515   | )                  |       |                     | (81,870   | )                    |       |   | (51,448 | )     |       |   | 16,383  |  
|Reorganization costs (Note 14)                                                                                               |                                                         |                    |          |                    |       |                     |          |                      |       |   |        |       |       |   | 20,607  |  
|Provision for income taxes (Note 18)                                                                                         |                                                         |                    | 1,790     |                    |       |                     | 840       |                      |       |   | 3,863   |       |       |   | 732     |  
|                                                                                                                             |                                                         |                    |           |                    |       |                     |           |                      |       |   |         |       |       |   |         |  
|Loss from continuing operations before cumulative
    effect of change in accounting principle                               |                                                         |                    | (45,305   | )                  |       |                     | (82,710   | )                    |       |   | (55,311 | )     |       |   | (4,956  | )
|Cumulative effect of change in accounting
    principle, net of taxes (Note 12)                                              |                                                         |                    | (2,423    | )                  |       |                     |          |                      |       |   |        |       |       |   |        |  
|Income (loss) from discontinued operations, net
    of taxes (Note 3)                                                        |                                                         |                    | (11,469   | )                  |       |                     | 4,575     |                      |       |   | 9,802   |       |       |   | 5,425   |  
|Fresh start adjustment (Note 1)                                                                                              |                                                         |                    |          |                    |       |                     |          |                      |       |   |        |       |       |   | 45,290  |  
|                                                                                                                             |                                                         |                    |           |                    |       |                     |           |                      |       |   |         |       |       |   |         |  
|Net income (loss)                                                                                                            |                                                         | $                  | (59,197   | )                  |       | $                   | (78,135   | )                    |       | $ | (45,509 | )     |       | $ | 45,759  |  
|                                                                                                                             |                                                         |                    |           |                    |       |                     |           |                      |       |   |         |       |       |   |         |  
|Basic and diluted income (loss) per common share                                                                             |                                                         |                    |           |                    |       |                     |           |                      |       |   |         |       |       |   |         |  
|                                                                                                                             | Continuing operations                                   |                    | $         | (1.68              | )     |                     | $         | (3.44                | )     |   | $       | (2.30 | )     |   |         |   | 
|                                                                                                                             | Cumulative effect of change in accounting
    principle |                    |           | (.09               | )     |                     |           |                     |       |   |         |      |       |   |         |   | 
|                                                                                                                             | Discontinued operations                                 |                    |           | (.43               | )     |                     |           | .19                  |       |   |         | .41   |       |   |         |   | 
|                                                                                                                             |                                                         |                    |           |                    |       |                     |           |                      |       |   |         |       |       |   |         |  
|                                                                                                                             |                                                         | Net loss           |           | $                  | (2.20 | )                   |           | $                    | (3.25 | ) |         | $     | (1.89 | ) |         |   |  | 
|                                                                                                                             |                                                         |                    |           |                    |       |                     |           |                      |       |   |         |       |       |   |         |  
|Basic and diluted common shares outstanding                                                                                  |                                                         |                    | 26,873    |                    |       |                     | 24,060    |                      |       |   | 24,037  |       |       |   |         |  
|                                                                                                                             |                                                         |                    |           |                    |       |                     |           |                      |       |   |         |       |       |   |         |  

These consolidated financial statements contain
information relating to Philip Services Corporation, a Delaware
corporation, and its subsidiaries, and Philip Services Corp., an
Ontario company, and its subsidiaries, which has been compiled
by management of PSC. On April 7, 2000, Oldco and certain
of its Canadian subsidiaries transferred substantially all of
their assets and liabilities (except for liabilities subject to
compromise) to the Company at fair value. The liabilities
subject to compromise of $726.5 million were retained by
Oldco and certain of its Canadian subsidiaries. As a result,
Oldco remains insolvent. Management of PSC has determined that
consolidated financial information of the Predecessor Company
may be of limited interest to the stockholders of PSC and has
therefore included such information in this document. The
consolidated financial information of the Predecessor Company
does not reflect the effects of the application of fresh start
reporting. Readers should, therefore, review this material with
caution and not rely on the information disclosed for the
Predecessor Company.

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

44



---



##### Table of Contents






PHILIP SERVICES CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

(In thousands)


|                                                                            |  |        |            |                    |  |               |            |                  |  |   |         |   |  |   |          |  
|--------------------------------------------------------------------------- |  | ------ | ---------- | ------------------ |  | ------------- | ---------- | ---------------- |  | - | ------- | - |  | - | -------- | -
|                                                                            |  |        |            |                    |  | Other         |            |                 
|                                                                            |  |        |            |                    |  | Accumulated   |            |                 
|                                                                            |  |        |            |                    |  | Comprehensive |            | Total           
|                                                                            |  | Common |            | Retained           |  | Earnings      |            | Stockholders   
|                                                                            |  | Stock  |            | Earnings (Deficit) |  | (Loss)        |            | Equity (Deficit)
|                                                                            |  |        |            |                    |  |               |            |                 
|Predecessor Company                                                         |  |        |            |                    |  |               |            |                  |  |   |         |   |  |   |          |  
|Balance, December 31, 1999 (unaudited)                                      |  | $      | 1,351,482  |                    |  | $             | (1,925,789 | )                |  | $ | (66,826 | ) |  | $ | (641,133 | )
|Comprehensive loss:                                                         |  |        |            |                    |  |               |            |                  |  |   |         |   |  |   |          |  
|Net earnings                                                                |  |        |           |                    |  |               | 469        |                  |  |   |        |   |  |   |         |  
|Foreign currency translation adjustments                                    |  |        |           |                    |  |               |           |                  |  |   | (4,061  | ) |  |   |         |  
|Total comprehensive loss                                                    |  |        |           |                    |  |               |           |                  |  |   |        |   |  |   | (3,592   | )
|                                                                            |  |        |            |                    |  |               |            |                  |  |   |         |   |  |   |          |  
|Balance, March 31, 2000 (unaudited)                                         |  | $      | 1,351,482  |                    |  | $             | (1,925,320 | )                |  | $ | (70,887 | ) |  | $ | (644,725 | )
|                                                                            |  |        |            |                    |  |               |            |                  |  |   |         |   |  |   |          |  
|Fresh start adjustments                                                     |  |        | (1,233,188 | )                  |  |               | 1,880,030  |                  |  |   | 70,887  |   |  |   | (717,729 | )
|                                                                            |  |        |            |                    |  |               |            |                  |  |   |         |   |  |   |          |  
|                                                                           
|Philip Services Corporation                                                 |  |        |            |                    |  |               |            |                  |  |   |         |   |  |   |          |  
|Balance, Fresh Start, March 31, 2000                                        |  | $      | 118,294    |                    |  | $             |           |                  |  | $ |        |   |  | $ | 118,294  |  
|Shares of common stock issued                                               |  |        | 250        |                    |  |               |           |                  |  |   |        |   |  |   | 250      |  
|Comprehensive loss:                                                         |  |        |            |                    |  |               |            |                  |  |   |         |   |  |   |          |  
|Net loss                                                                    |  |        |           |                    |  |               | (45,509    | )                |  |   |        |   |  |   |         |  
|Foreign currency translation adjustments                                    |  |        |            |                    |  |               |           |                  |  |   | (2,453  | ) |  |   |         |  
|Total comprehensive loss                                                    |  |        |           |                    |  |               |           |                  |  |   |        |   |  |   | (47,962  | )
|                                                                            |  |        |            |                    |  |               |            |                  |  |   |         |   |  |   |          |  
|Balance, December 31, 2000                                                  |  |        | 118,544    |                    |  |               | (45,509    | )                |  |   | (2,453  | ) |  |   | 70,582   |  
|Shares of common stock issued for PIK debt
    conversion                   |  |        | 200        |                    |  |               |           |                  |  |   |        |   |  |   | 200      |  
|Restricted shares of common stock issued under
    stock compensation plans |  |        | 792        |                    |  |               |           |                  |  |   |        |   |  |   | 792      |  
|Unearned value of restricted stock compensation                             |  |        | (616       | )                  |  |               |           |                  |  |   |        |   |  |   | (616     | )
|Comprehensive loss:                                                         |  |        |            |                    |  |               |            |                  |  |   |         |   |  |   |          |  
|Net loss                                                                    |  |        |           |                    |  |               | (78,135    | )                |  |   |        |   |  |   |         |  
|Foreign currency translation adjustments                                    |  |        |           |                    |  |               |           |                  |  |   | (3,854  | ) |  |   |         |  
|Total comprehensive loss                                                    |  |        |           |                    |  |               |           |                  |  |   |        |   |  |   | (81,989  | )
|                                                                            |  |        |            |                    |  |               |            |                  |  |   |         |   |  |   |          |  
|Balance, December 31, 2001                                                  |  |        | 118,920    |                    |  |               | (123,644   | )                |  |   | (6,307  | ) |  |   | (11,031  | )
|Shares of common stock issued in conjunction with
    new debt issuances    |  |        | 3,748      |                    |  |               |           |                  |  |   |        |   |  |   | 3,748    |  
|Restricted shares of common stock issued under
    stock compensation plans |  |        | 64         |                    |  |               |           |                  |  |   |        |   |  |   | 64       |  
|Unearned value of restricted stock compensation                             |  |        | 73         |                    |  |               |           |                  |  |   |        |   |  |   | 73       |  
|Comprehensive loss:                                                         |  |        |            |                    |  |               |            |                  |  |   |         |   |  |   |          |  
|Net loss                                                                    |  |        |           |                    |  |               | (59,197    | )                |  |   |        |   |  |   |         |  
|Foreign currency translation adjustments                                    |  |        |           |                    |  |               |           |                  |  |   | 2,793   |   |  |   |         |  
|Total comprehensive loss                                                    |  |        |           |                    |  |               |           |                  |  |   |        |   |  |   | (56,404  | )
|                                                                            |  |        |            |                    |  |               |            |                  |  |   |         |   |  |   |          |  
|Balance, December 31, 2002                                                  |  | $      | 122,805    |                    |  | $             | (182,841   | )                |  | $ | (3,514  | ) |  | $ | (63,550  | )
|                                                                            |  |        |            |                    |  |               |            |                  |  |   |         |   |  |   |          |  

These consolidated financial statements contain
information relating to Philip Services Corporation, a Delaware
corporation and its subsidiaries, and Philip Services Corp., an
Ontario company, and its subsidiaries, which has been compiled
by management of PSC. On April 7, 2000, Oldco and certain
of its Canadian subsidiaries transferred substantially all of
their assets and liabilities (except for liabilities subject to
compromise) to the Company at fair value. The liabilities
subject to compromise of $726.5 million were retained by
Oldco and certain of its Canadian subsidiaries. As a result,
Oldco remains insolvent. Management of PSC has determined that
consolidated financial information of the Predecessor Company
may be of limited interest to the stockholders of PSC and has
therefore included such information in this document. The
consolidated financial information of the Predecessor Company
does not reflect the effects of the application of fresh start
reporting. Readers should, therefore, review this material with
caution and not rely on the information disclosed for the
Predecessor Company.

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

45



---



##### Table of Contents






PHILIP SERVICES CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                                              |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |        |  
|----------------------------------------------------------------------------- | ----------------------------- | ------------ | ------- | ------------ | - | ----------------- | ------- | ------------------- | - | - | ------- | ------ |  | - | ------- | ------ | -
|                                                                              |                               |              |         |              |   |                   |         | Predecessor Company
|                                                                              |                               |              |         |              |   |                   |         |                    
|                                                                              |                               | For the      |         | For the      |   | For the           |         | For the            
|                                                                              |                               | Year Ended   |         | Year Ended   |   | Nine Months Ended |         | Three Months Ended 
|                                                                              |                               | December 31, |         | December 31, |   | December 31,      |         | March 31,          
|                                                                              |                               | 2002         |         | 2001         |   | 2000              |         | 2000               
|                                                                              |                               |              |         |              |   |                   |         |                    
|                                                                              |                               |              |         |              |   |                   |         | (Unaudited)        
|Operating Activities                                                          |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |       
|Net loss from continuing operations                                           |                               | $            | (45,305 | )            |   | $                 | (82,710 | )                   |   | $ | (55,311 | )      |  | $ | (4,956  | )     
|Items included in earnings not affecting cash                                 |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |       
|                                                                              | Depreciation and amortization |              |         | 40,341       |   |                   |         | 40,001              |   |   |         | 31,484 |  |   |         | 11,388 |  
|                                                                              | Accrued but unpaid interest   |              |         | 17,651       |   |                   |         | 15,818              |   |   |         | 10,888 |  |   |         |       |  
|                                                                              | Deferred income taxes         |              |         | (340         | ) |                   |         | 1,148               |   |   |         | 2,849  |  |   |         |       |  
|                                                                              | (Gain) loss on sale of assets |              |         | 1,827        |   |                   |         | (461                | ) |   |         |       |  |   |         | (7,820 | )
|                                                                              | Non-cash other costs          |              |         | 137          |   |                   |         | 4,368               |   |   |         | 5,683  |  |   |         |       |  
|                                                                              |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |       
|Cash flow before changes in assets and liabilities                            |                               |              | 14,311  |              |   |                   | (21,836 | )                   |   |   | (4,407  | )      |  |   | (1,388  | )     
|Changes in assets and liabilities                                             |                               |              | (3,450  | )            |   |                   | 34,928  |                     |   |   | 62,840  |        |  |   | (17,444 | )     
|                                                                              |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |       
|Cash provided by (used in) continuing operating
    activities                |                               |              | 10,861  |              |   |                   | 13,092  |                     |   |   | 58,433  |        |  |   | (18,832 | )     
|Cash provided by (used in) discontinued operating
    activities              |                               |              | (11,069 | )            |   |                   | (26,191 | )                   |   |   | 37,914  |        |  |   | 3,746   |       
|                                                                              |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |       
|Cash provided by (used in) operating activities                               |                               |              | (208    | )            |   |                   | (13,099 | )                   |   |   | 96,347  |        |  |   | (15,086 | )     
|                                                                              |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |       
|Investing Activities                                                          |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |       
|Proceeds from sale of operations                                              |                               |              | 5,910   |              |   |                   | 12,716  |                     |   |   |        |        |  |   |        |       
|Purchase of property, plant and equipment                                     |                               |              | (27,999 | )            |   |                   | (44,440 | )                   |   |   | (36,154 | )      |  |   | (8,403  | )     
|Proceeds from sale of assets                                                  |                               |              | 5,587   |              |   |                   | 6,505   |                     |   |   | 3,053   |        |  |   | 11,379  |       
|                                                                              |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |       
|Cash provided by (used in) continuing investing
    activities                |                               |              | (16,502 | )            |   |                   | (25,219 | )                   |   |   | (33,101 | )      |  |   | 2,976   |       
|Cash provided by(used in) investing activities of
    discontinued operations |                               |              | (2,154  | )            |   |                   | (1,068  | )                   |   |   | (1,648  | )      |  |   | 1,545   |       
|                                                                              |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |       
|Cash provided by (used in) investing activities                               |                               |              | (18,656 | )            |   |                   | (26,287 | )                   |   |   | (34,749 | )      |  |   | 4,521   |       
|                                                                              |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |       
|Financing Activities                                                          |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |       
|Proceeds from short and long-term debt                                        |                               |              | 23,061  |              |   |                   | 85,871  |                     |   |   |        |        |  |   |        |       
|Principal payments on short and long-term debt                                |                               |              | (2,400  | )            |   |                   | (76,031 | )                   |   |   | (55,217 | )      |  |   | (1,205  | )     
|Common stock issued for cash                                                  |                               |              |        |              |   |                   |        |                     |   |   | 250     |        |  |   |        |       
|                                                                              |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |       
|Cash provided by (used in) continuing financing
    activities                |                               |              | 20,661  |              |   |                   | 9,840   |                     |   |   | (54,967 | )      |  |   | (1,205  | )     
|Cash used in financing activities of discontinued
    operations              |                               |              |        |              |   |                   |        |                     |   |   |        |        |  |   | (92     | )     
|                                                                              |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |       
|Cash provided by (used in) financing activities                               |                               |              | 20,661  |              |   |                   | 9,840   |                     |   |   | (54,967 | )      |  |   | (1,297  | )     
|                                                                              |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |       
|Net change in cash for the period                                             |                               |              | 1,797   |              |   |                   | (29,546 | )                   |   |   | 6,631   |        |  |   | (11,862 | )     
|Cash and equivalents, beginning of period                                     |                               |              | 9,201   |              |   |                   | 38,747  |                     |   |   | 32,116  |        |  |   | 48,316  |       
|                                                                              |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |       
|Cash and equivalents, end of period                                           |                               | $            | 10,998  |              |   | $                 | 9,201   |                     |   | $ | 38,747  |        |  | $ | 36,454  |       
|                                                                              |                               |              |         |              |   |                   |         |                     |   |   |         |        |  |   |         |       

These consolidated financial statements contain
information relating to Philip Services Corporation, a Delaware
corporation, and its subsidiaries, and Philip Services Corp., an
Ontario company, and its subsidiaries, which has been compiled
by management of PSC. On April 7, 2000, Oldco and certain
of its Canadian subsidiaries transferred substantially all of
their assets and liabilities (except for liabilities subject to
compromise) to the Company at fair value. The liabilities
subject to compromise of $726.5 million were retained by
Oldco and certain of its Canadian subsidiaries. As a result,
Oldco remains insolvent. Management of PSC has determined that
consolidated financial information of the Predecessor Company
may be of limited interest to the stockholders of PSC and has
therefore included such information in this document. The
consolidated financial information of the Predecessor Company
does not reflect the effects of the application of fresh start
reporting. Readers should, therefore, review this material with
caution and not rely on the information disclosed for the
Predecessor Company.

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

46



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##### Table of Contents






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(1)     Basis of
Presentation

These Consolidated Financial Statements contain
information relating to Philip Services Corporation
(PSC), a Delaware corporation, and its subsidiaries,
which has been prepared by management, and information relating
to Philip Services Corp., an Ontario corporation, and its
subsidiaries, which has been compiled by management of PSC. On
April 7, 2000, Oldco and certain of its Canadian
subsidiaries transferred substantially all of their assets and
liabilities (except for liabilities subject to compromise) to
the Company at fair value. The liabilities subject to compromise
of $726.5 million were retained by Oldco and certain of its
Canadian subsidiaries. As a result, Oldco remains insolvent.
Management of PSC has determined that certain consolidated
financial information of the Predecessor Company may be of
limited interest to the stockholders of PSC and has therefore
included such information in this document. The consolidated
financial information of the Predecessor Company does not
reflect the effects of the application of fresh start reporting
and is unaudited. Readers should, therefore, review this
material with caution and not rely on the information disclosed
for the Predecessor Company. The Company is an industrial
services and metals services company that provides industrial
outsourcing, environmental services and metals services to major
industry sectors throughout North America.

The Consolidated Financial Statements of the
Company have been prepared in U.S. dollars using accounting
principles generally accepted in the United States of America
except that the consolidated financial statements of the
Predecessor Company have been prepared on the basis of
accounting principles applicable to a going concern, which would
assume that the Predecessor Company would realize the carrying
value of its assets and satisfy its obligations and commitments
except as otherwise disclosed, in the normal course of business.
However, because of the reorganization and the circumstances
relating to this event, the Predecessor Company is insolvent,
and, therefore, will not be able to realize the carrying value
of its assets and satisfy its obligations and commitments. The
financial statements of the Predecessor Company do not give
effect to any adjustments to the carrying value of assets or
amounts and priority of liabilities that would be necessary
under the basis of accounting principles that would be
applicable to an insolvent company.



| |                                                 
| | ------------------------------------------------
| | Bankruptcy filing and plan of
    reorganization

On June 25, 1999, Oldco and substantially
all of its wholly owned subsidiaries located in the United
States (the U.S. Debtors), filed voluntary
petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code with the United States Bankruptcy Court
for the District of Delaware (the U.S. Court).
Oldco and substantially all of its wholly owned subsidiaries
located in Canada (the Canadian Debtors) commenced
proceedings under the Companies Creditors Arrangements Act
in Canada in the Ontario Superior Court of Justice (the
Canadian Court) on the same date.

On July 12, 1999, the U.S. Debtors
filed a Joint Plan of Reorganization (the
U.S. Plan) with the U.S. Court and on
July 15, 1999, the Canadian Debtors filed a Plan of
Compromise and Arrangement (the Canadian Plan) with
the Canadian Court. In August 1999, a number of motions were
brought before the Canadian Court challenging the fairness of
the Canadian Plan. As a result, Oldco filed an amended plan in
the U.S. Court on September 21, 1999 (the
Amended U.S. Plan) and an amended plan in the
Canadian Court on September 24, 1999 (the Amended
Canadian Plan). On November 2, 1999, Oldco filed a
Supplement to the Amended Canadian Plan (the Canadian Plan
Supplement). The Canadian Plan Supplement amended and
restated the Amended Canadian Plan and provided that
substantially all of the assets of the Canadian Debtors be
transferred to new companies that, on the implementation of the
Amended U.S. Plan, became wholly owned subsidiaries of PSC.
All the shares held by Oldco in PSC were cancelled under the
Amended U.S. Plan. On November 5, 1999, Oldcos
lenders voted to approve the Canadian Plan Supplement. On
November 26, 1999, a hearing was held in the Canadian Court
at which the Canadian Plan Supplement was sanctioned. On
November 30, 1999, the Amended U.S. Plan was confirmed
in the U.S. Court. On March 8, 2000, the Canadian Plan
Supplement was amended to permit the sale of the UK Metals
business and to address certain tax restructuring issues. On
March 20, 2000, a similar amendment was made by the
U.S. Court with respect to the Amended U.S. Plan. The
Amended U.S. Plan and the Canadian Plan

47



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##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


Supplement (collectively the Plan)
became effective on April 7, 2000. Under the Plan, PSC
emerged from bankruptcy protection as a new public entity.

Under the Plan, members of Oldcos secured
credit facility received $250 million of senior secured
term debt, $100 million of convertible secured
payment-in-kind debt and 91% of the shares of common stock of
PSC. The senior secured term debt was reduced to
$235.8 million on Plan implementation due to the repayment
of $14.2 million from proceeds of asset sales. The secured
payment-in-kind debt is convertible into 25% of the shares of
common stock of PSC on a fully diluted basis as of the Plan
effective date. The Plan also provided for the conversion of
certain specified impaired unsecured claims, into
$60 million of unsecured payment-in-kind notes and 5% of
the shares of common stock of PSC as of the Plan effective date.
The Plan allowed certain holders of unsecured claims to receive
$1.50 in face amount of unsecured convertible notes in exchange
for every $1.00 in unsecured payment-in-kind notes that such
holder would have received under the Plan. The aggregate amount
of unsecured convertible notes issued was not to exceed
$18 million. PSC also issued 1.5% of its shares of common
stock to Canadian and U.S. class action plaintiffs to
settle all class action claims. Other potential equity claimants
received 0.5% of the shares of common stock of PSC and the
stockholders of Oldco received 2% of the shares of common stock
of PSC.



| |                      
| | ---------------------
| | Fresh start reporting

The Company adopted fresh start reporting in
accordance with the AICPAs Statement of
Position 90-7, Financial Reporting by Entities in
Reorganization under the Bankruptcy Code. For financial
reporting purposes, the effective date of the Plan was
considered to be March 31, 2000. Under the principles of
fresh start reporting, the Company is required to determine its
reorganization value. The reorganization value of the Company
was determined with the assistance of independent advisors. The
methodology employed involved the estimation of an enterprise
value (i.e. the fair market value of the corporations debt
and stockholders equity) which was approximately
$500 million. The significant factors used in the
determination of the reorganization value were the industries in
which the Company operates, the general economic conditions that
impact the Company and the application of certain valuation
methodologies, which included a discounted cash flow analysis
based on two years cashflow projections prepared by
management with discount rates of between 11% and 12% and an
analysis of comparable publicly traded company multiples and
sales transactions. The reorganization value was then allocated
to the Companys assets and liabilities based on their fair
values. No significant adjustments were made to the
Companys assets and liabilities under fresh start
reporting as their fair values approximated recorded amounts at
March 31, 2000. In conjunction with fresh start reporting,
$1,880,030 of retained deficit was eliminated on March 31,
2000.

The Consolidated Statement of Earnings for the
three months ended March 31, 2000 reflects fresh start
adjustments of $45.3 million. This amount comprises the
gain on the debt discharge of $24.0 million and
$21.3 million relating to the Predecessor Companys
disposition of the UK Metals business on April 7, 2000.

Due to the changes in the financial structure of
the Company and the application of fresh start reporting as a
result of the consummation of the Plan, the consolidated
financial statements of the Company issued subsequent to Plan
implementation are not comparable with the consolidated
financial statements issued by the Predecessor Company prior to
Plan implementation. A black line has been drawn on the
accompanying Consolidated Financial Statements to separate and
distinguish between the Company and Predecessor Company.

[This black line does not appear in the
electronically filed version of this Form 10-K]



| |                 
| | ----------------
| | Reclassification

Certain reclassifications of prior periods
data have been made to conform with the current period reporting.

48



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##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


(2)     Significant
Accounting Policies



| |                 
| | ----------------
| | Use of estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
requires the Company and the Predecessor Company to make
estimates and assumptions that affect reported amounts of
assets, liabilities, income and expenses and disclosures of
contingencies. Actual results could differ from the estimates
and judgments made in preparing these financial statements.
Significant items subject to such estimates and assumptions
include the carrying value of property, inventories and deferred
income taxes assets; environmental liabilities; insurance
claims; and accrued closure costs.



| |                            
| | ---------------------------
| | Principles of consolidation

These consolidated financial statements include
the accounts of the Company and all of its majority owned
subsidiaries. All intercompany transactions have been eliminated
on consolidation. The equity method of accounting is used for
investment ownership ranging from 20% to 50%.



| |                    
| | -------------------
| | Revenue recognition

Revenue from industrial services is recorded as
the services are performed, using the percentage-of-completion
basis for fixed rate contracts and
as-the-related-service-is-provided basis for time and material
contracts. Revenue from by-product recovery operations is
recognized along with the related costs of treatment, disposal
and transportation at the time of performance of services.
Revenue from the direct sale of recovered commodities and steel
products or for contracts where the Company brokers materials
between two parties, takes title to the product and assumes the
risks and rewards of ownership is recognized at the time of
customer acceptance. If the Company is acting as an agent in
those transactions, then only the commission on the transaction
is recorded.

The Company uses the percentage-of-completion
basis to account for its fixed price contracts. Under this
method, revenue is recognized as work progresses in the ratio
that costs bear to estimated total costs for each contract.
Unapproved claims are recorded to the extent of costs incurred
and include no profit element. Contract costs include all direct
material and labor costs and those indirect costs related to
contract performance. Selling, general and administrative costs
are charged to expense as incurred. Provisions for estimated
losses on incomplete contracts are recorded in the period in
which such losses are determined. Changes in estimates or
differences in the actual cost to complete the contract could
result in recognition of differences in earnings.



| |                          
| | -------------------------
| | Cash and cash equivalents

Cash and cash equivalents consist of cash on
deposit and term deposits in money market instruments with
original maturity dates of less than three months from the date
they are acquired. Additionally, there are certain cash and cash
equivalents which are restricted for use in association with the
Companys insurance programs. The balances of such
restricted cash and cash equivalents were $1,525 and $5,612 at
December 31, 2002 and 2001, respectively.



| |                         
| | ------------------------
| | Accounts receivable, net

The Companys receivables are recorded when
billed or accrued and represent claims against third parties
that will be settled in cash. The carrying value of the
Companys receivables, net of allowance for doubtful
accounts, represents their estimated net realizable value. The
Company estimates its allowance for doubtful accounts based on
historical trends, type of customer, the age of the outstanding
receivables and existing economic conditions. If events or
changes in circumstances indicate that specific receivable
balances may be impaired, further consideration is given to the
collectibility of those balances and the allowance is adjusted

49



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##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


accordingly. Past-due receivables balances are
written-off when the Companys internal collection efforts
have been unsuccessful in collecting the amount due.



| |          
| | ---------
| | Inventory

Inventory is recorded at the lower of average
purchased cost or market.



| |                              
| | -----------------------------
| | Property, plant and equipment

In accordance with fresh start reporting,
property, plant and equipment were reflected at their fair value
as of March 31, 2000. Additions to property, plant and
equipment subsequent to this date are recorded at cost.
Property, plant and equipment are depreciated over their
estimated useful lives generally on the following basis:
buildings 20 to 40 years straight-line; equipment 3 to
20 years straight-line. Landfill sites and improvements
thereto are recorded at cost and amortized over the life of the
landfill site based on the estimated landfill capacity utilized
during the year. Operating costs associated with landfill sites
are charged to operations as incurred. Assets under development
include the direct cost of land, buildings and equipment
acquired for future use together with engineering, legal and
other costs incurred before the assets are brought into
operation.

Under the provisions of SOP 98-1, the
Company capitalizes costs associated with software developed or
obtained for internal use when both the preliminary project
stage is completed and management deems it probable the project
will be completed and used to perform the function intended.
Capitalized costs include only external direct costs of
materials and services consumed in developing or obtaining
internal-use software, and payroll and payroll-related costs for
employees who are directly associated with and who devote time
to the internal-use software project. Capitalization of such
costs cease when the project is substantially complete and ready
for its intended purpose.

The Company includes as part of the cost of its
property, plant and equipment, all financing costs incurred
prior to the asset becoming available for operation. No
significant amounts of interest were capitalized during the
periods presented.



| |                                    
| | -----------------------------------
| | Impairment of long lived
    assets

The Company reviews long-lived assets, including
property, plant and equipment, for impairment whenever events or
changes in circumstances indicate that the carrying amount of
such an asset may not be recoverable. Management will determine
whether there has been a permanent impairment on such assets
held for use in the business by comparing anticipated
undiscounted future cash flows from operating activities
involving the asset to the carrying value of the asset. The
amount of any resulting impairment will be calculated using the
present value of the same cash flows. Long-lived assets to be
disposed of are valued at the lower of carrying amount or net
realizable value.



| |                       
| | ----------------------
| | Restricted investments

Restricted investments, which have been
classified as held to maturity, are carried at cost, which
approximates fair market value.



| |                        
| | -----------------------
| | Environmental liability

The Company accrues environmental remediation
costs associated with identified sites where an assessment has
indicated that cleanup costs are probable and can be reasonably
estimated. Such accruals are based on currently available
information, estimated timing of remedial actions, existing
technology and enacted laws and regulations. The liability for
environmental and closure costs is disclosed in the consolidated
balance sheet under accrued liabilities and other liabilities.
Costs to dispose of waste materials located at the
Companys industrial services facilities are included in
accrued liabilities.

50



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##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




| |                      
| | ---------------------
| | Financial instruments

The Companys accounts receivable, accounts
payable and long-term debt constitute financial instruments. The
Companys accounts receivable and accounts payable
approximated their fair value as at December 31, 2002 and
December 31, 2001. The fair value of the Companys
long-term debt is discussed in Note 9 to the Consolidated
Financial Statements. Concentration of credit risk in accounts
receivable is limited, due to the large number of customers the
Company services throughout North America. The Company performs
ongoing credit evaluations of its customers, but does not
require collateral to support customer accounts receivable. The
Company establishes an allowance for doubtful accounts based on
the credit risk applicable to particular customers and
historical and other information.



| |             
| | ------------
| | Income taxes

Deferred income taxes are determined based on the
difference between the financial reporting and tax bases of
assets and liabilities. The deferred income tax provision
represents the change during the reporting period in the
deferred tax assets and liabilities, net of the effect of
discontinued operations and the cumulative effect of a change in
accounting principle. Deferred tax assets include tax loss and
credit carryforwards and are reduced by a valuation allowance
if, based on available evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.



| |                             
| | ----------------------------
| | Foreign currency translation

The functional currency of the Companys
foreign subsidiaries is its respective local currency. The
assets and liabilities denominated in a foreign currency for
foreign operations are translated at exchange rates in effect at
the balance sheet date. The resulting gains and losses are
reflected in the other accumulated comprehensive loss in
stockholders equity (deficit).



| |                         
| | ------------------------
| | Stock-based compensation

The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of
Accounting Principles Board (APB) No. 25
Accounting for Stock Issued to Employees, and
complies with the disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation and SFAS
No. 148, Accounting for Stock Based Compensation,
Transition and Disclosure. Under APB No. 25,
compensation cost, if any, is recognized over the respective
vesting period based on the difference on the date of grant,
between the fair value of the Companys common stock and
the grant price. The Company accounts for stock-based awards to
non-employees in accordance with SFAS No. 148, SFAS
No. 123 and EITF 96-18. An expense is recognized for
common stock or stock options issued for services rendered by
non-employees based on the estimated fair value of the security
exchanged.

SFAS No. 148 defines a fair value based
method of accounting for employee stock options. Under this fair
value method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the
exercise period. However, Statement No. 148, acting as an
update to Statement No. 123, allows an entity to continue
to measure compensation cost in accordance with Accounting
Principle Board Statement No. 25 (APB 25).
The Company has elected to measure compensation costs related to
stock options in accordance with APB 25 and recognizes no
compensation expense for stock options granted at or above the
grant date stock price. Accordingly, the Company has adopted the
disclosure only provisions of SFAS No. 148.

The Company has four stock-based compensation
plans and one special stock option allotment as described
further in Note 17. If compensation costs were measured
using the fair value of the Companys stock options on the
date of grant, in accordance with SFAS No. 148, the Company
would have recognized

51



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##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


compensation costs for the years ended
December 31, 2002, 2001 and 2000 in the manner exhibited in
the below table.

|                                                    |  |              |         |              |  |                   |         |   |  |   |         |  
|--------------------------------------------------- |  | ------------ | ------- | ------------ |  | ----------------- | ------- | - |  | - | ------- | -
|                                                    |  | Year Ended   |         | Year Ended   |  |                  
|                                                    |  | December 31, |         | December 31, |  | Nine Months Ended
|                                                    |  | 2002         |         | 2001         |  | December 31, 2000
|                                                    |  |              |         |              |  |                  
|Net loss as reported                                |  | $            | (59,197 | )            |  | $                 | (78,135 | ) |  | $ | (45,509 | )
|Compensation expense recorded, net of taxes         |  |              | (89     | )            |  |                   | (114    | ) |  |   |        |  
|Additional compensation expense under FAS 123       |  |              | 540     |              |  |                   | 926     |   |  |   | 617     |  
|                                                    |  |              |         |              |  |                   |         |   |  |   |         |  
|Pro forma net loss                                  |  | $            | (59,648 | )            |  | $                 | (78,947 | ) |  | $ | (46,126 | )
|                                                    |  |              |         |              |  |                   |         |   |  |   |         |  
|Basic and diluted common shares outstanding         |  |              | 26,873  |              |  |                   | 24,060  |   |  |   | 24,037  |  
|                                                    |  |              |         |              |  |                   |         |   |  |   |         |  
|Basic and diluted earnings per share, as reported   |  | $            | (2.20   | )            |  | $                 | (3.25   | ) |  | $ | (1.89   | )
|                                                    |  |              |         |              |  |                   |         |   |  |   |         |  
|Basic and diluted earnings per share,
    pro forma |  | $            | (2.22   | )            |  | $                 | (3.28   | ) |  | $ | (1.92   | )
|                                                    |  |              |         |              |  |                   |         |   |  |   |         |  

The compensation costs shown in the above table
were calculated using the Black-Scholes option valuation model.
The weighted average fair value of options granted during the
year ended December 31, 2002, was $0.19. Such valuation
uses the following assumptions: (i) risk free interest rate
of 4.61%, (ii) expected volatility of 1.00,
(iii) expected option life of approximately 5 years
and (iv) no annualized dividend yield. Using the
Black-Scholes option valuation model, the weighted average fair
value of options granted during the year ended December 31,
2001, was $0.76. Such valuation uses the following assumptions:
(i) risk free interest rate of 4.67%, (ii) expected
volatility of 0.95, (iii) expected option life of
approximately 5 years and (iv) no annualized dividend
yield. For 2000, using the Black-Scholes option valuation model,
the weighted average fair value of options granted during the
year ended December 31, 2001, was $4.06. Such valuation
uses the following assumptions: (i) risk free interest rate
of 5.09%, (ii) expected volatility of 0.76,
(iii) expected option life ranging from 5 to 10 years
and (iv) no annualized dividend yield.

(3)     Discontinued
Operations and Divestitures(in
thousands)



| |                        
| | -----------------------
| | Discontinued operations

For the twelve-months ended December 31,
2002, 2001 and 2000, the Company recognized before-tax income
(loss) on discontinued operations of $(12,559), $5,736 and
$15,663, respectively. The before-tax income (loss) from
discontinued operations results from the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the fourth quarter of 2002, the facts and
    circumstances surrounding the Companys business units
    divested to Fluor were such that they met Statement of Financial
    Accounting Standards No. 144 Accounting for the
    Impairment or Disposal of Long-Lived Assets (SFAS
    No. 144) guidelines (See Note 24) requiring the
    operations to be accounted for as discontinued operations whose
    assets are held for sale. As such, the Company recorded the
    results of operations for the these businesses as discontinued
    on the Consolidated Statement of Earnings for the year ended
    December 31, 2002 and recorded the related assets of the
    division as held for sale on the 2002 Consolidated
    Balance Sheet. The businesses divested to Fluor generated
    revenue of approximately $260,254, $302,925 and $262,649, and
    before-tax income (loss) from discontinued operations of
    approximately $(8,301), $3,769 and $16,072, in 2002, 2001 and
    2000, respectively. On March 2, 2003, the Project Services
    Division was sold for net proceeds of $21,200. The working
    capital of these business units sold, of approximately $43,000,
    was retained by PSC. Company management has not yet completed
    the calculation of the gain/loss on the Fluor divestiture.
|
| |  | Additionally, during the fourth quarter of 2002,
    the facts and circumstances surrounding the Companys
    business plans for the Canadian Ferrous Division were such that
    they met SFAS No. 144 guidelines (See Note 24)
    requiring the operations to be accounted for as discontinued
    operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

52



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##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | whose assets are held for sale. As such, the
    Company recorded the results of operations for the Canadian
    Ferrous Division as discontinued on the Consolidated Statement
    of Earnings and recorded the related assets of the division as
    held for sale on the 2002 Consolidated Balance
    Sheet. The Companys Canadian Ferrous Division generated
    revenue of approximately $40,081, $44,797 and $49,622, and
    before-tax income from discontinued operations of approximately
    $1,411, $3,978 and $374, in 2002, 2001 and 2000, respectively.
    Subsequent to December 31, 2002, certain assets of the
    Canadian Ferrous Division were sold for net proceeds of $3,800
    and a gain on the divestiture transaction was recorded in the
    amount of $1,400.                                                                                                                                                                                                                                                                    
|
| |  | The impairment of assets ultimately sold related
    to the Companys Demolition and Decommissioning
    (D&D) business resulted in a loss for the
    twelve-months ended December 31, 2002 of $(2,804), in
    addition to before-tax loss from discontinued operations of
    $(4,109), $(3,038) and $(1,329), in 2002, 2001 and 2000,
    respectively. Operations associated with these assets generated
    revenues of $3,107, $14,740 and $21,324 in 2002, 2001 and 2000,
    respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The sale of certain other assets during 2002,
    with a net book value of $2,930 generated a gain for the
    twelve-months ended December 31, 2002 of $2,341, in
    addition to before-tax income from discontinued operations of
    $203, $1,027 and $1,347 in 2002, 2001 and 2000, respectively.
    Operations associated with these assets generated revenues of
    $464, $2,940 and $3,313 in 2002, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | A charge of $1,300 for the impairment of assets
    held for sale as of December 31, 2002. The net book value
    of the assets was $1,970 after impairment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | On May 18, 1999, Oldco sold its investment
    in Philip Utilities Management Corp. (PUMC) for cash
    proceeds of approximately $70,100 resulting in a gain of
    $39,100. The operations of PUMC (previously reported as the
    utilities management segment) have been treated as discontinued
    operations. In December 1998, Oldco made the decision to
    discontinue its non-ferrous and copper operations segments. A
    sale of certain of the aluminum operations (included in
    non-ferrous operations) closed on January 11, 1999 for
    total consideration of approximately $69,500. Revenue from the
    discontinued non-ferrous, copper and utilities management
    operations, net of intercompany revenue was $6,077 and
    before-tax income (loss) from discontinued operations was $(801)
    in 2000. The remaining operations in these segments were closed
    or sold during 1999 and 2000 except for three operations with
    annual revenue of approximately $7,000, which were transferred
    to continuing operations.



| |                                                           
| | ----------------------------------------------------------
| | Summary of all discontinued operations of the
    Company:

|                                  |  |                     |         |                   |  |                     |         |             |  |   |         |  |  |   |         | 
|--------------------------------- |  | ------------------- | ------- | ----------------- |  | ------------------- | ------- | ----------- |  | - | ------- |  |  | - | ------- | 
|                                  |  |                     |         |                   |  | Predecessor Company
|                                  |  | Twelve Months Ended |         |                   |  |                    
|                                  |  | December 31,        |         | Nine Months Ended |  | Three Months Ended 
|                                  |  |                     |         | December 31,      |  | March 31,          
|                                  |  | 2002                |         | 2001              |  | 2000                |         | 2000       
|                                  |  |                     |         |                   |  |                     |         |            
|                                  |  |                     |         |                   |  |                     |         | (Unaudited)
|Revenue                           |  | $                   | 303,906 |                   |  | $                   | 365,402 |             |  | $ | 241,458 |  |  | $ | 101,527 | 
|Income (loss) before income taxes |  |                     | (12,559 | )                 |  |                     | 5,736   |             |  |   | 10,114  |  |  |   | 5,549   | 
|Income taxes (benefit)            |  |                     | (1,090  | )                 |  |                     | 1,161   |             |  |   | 312     |  |  |   | 124     | 
|                                  |  |                     |         |                   |  |                     |         |             |  |   |         |  |  |   |         | 
|Net income (loss)                 |  | $                   | (11,469 | )                 |  | $                   | 4,575   |             |  | $ | 9,802   |  |  | $ | 5,425   | 
|                                  |  |                     |         |                   |  |                     |         |             |  |   |         |  |  |   |         | 



| |             
| | ------------
| | Divestitures

During 2001, the Company determined that its
Paint Services operations were not a strategic fit with the rest
of the business units and obtained a signed commitment from a
buyer to purchase the business. Consequently, $6,800 was charged
to Other income and expense  net in
recognition of the loss on the sale

53



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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


of the Paint Services business. The Paint
Services sale was completed during the first quarter of 2002.
Also during 2001, the Company sold its metals recycling and mill
services business in Montreal for net proceeds of $10,300. The
business, which was part of the Metals Services Group, generated
revenue of $3,000 and $8,200 and income from operations of $300
and $1,300 in 2001 and 2000, respectively. The gain on sale of
$4,300 is included in Other income and expense 
net. Additionally, various European operations of the
Industrial Services Group were sold in 2001 for net proceeds of
$2,000. These European operations generated revenue of $7,500
and $11,400, and loss from operations of $(1,400) and $(1,900)
in 2001 and 2000, respectively. No significant gain or loss was
realized on the sale of the European operations.

On April 7, 2000, Oldco sold its metals
recycling and mill services business in the United Kingdom for
net proceeds of $47,700. The business, which was part of the
Metals Services Group, generated annual revenue of $29,900 and
income from operations of $2,400 in 2000. The gain realized on
the sale of the United Kingdom metals recycling and mill
services business is included in Other income and
expense  net.

(4)     Accounts
Receivable(in thousands)

|                                |  |              |         |              |  |   |         |  
|------------------------------- |  | ------------ | ------- | ------------ |  | - | ------- | -
|                                |  | December 31, |         | December 31,
|                                |  | 2002         |         | 2001        
|                                |  |              |         |             
|Billed trade receivables        |  | $            | 204,364 |              |  | $ | 229,834 |  
|Accrued revenue not yet billed  |  |              | 21,238  |              |  |   | 40,444  |  
|                                |  |              |         |              |  |   |         |  
|Total accounts receivable       |  |              | 225,602 |              |  |   | 270,278 |  
|Allowance for doubtful accounts |  |              | (19,552 | )            |  |   | (36,784 | )
|                                |  |              |         |              |  |   |         |  
|Net accounts receivable         |  | $            | 206,050 |              |  | $ | 233,494 |  
|                                |  |              |         |              |  |   |         |  

(5)     Other Current
Assets(in thousands)

|                            |  |              |        |              |  |   |        | 
|--------------------------- |  | ------------ | ------ | ------------ |  | - | ------ | 
|                            |  | December 31, |        | December 31,
|                            |  | 2002         |        | 2001        
|                            |  |              |        |             
|Costs in excess of billings |  | $            | 16,032 |              |  | $ | 14,939 | 
|Non-trade receivables(a)    |  |              | 15,899 |              |  |   | 15,405 | 
|Consumable supplies         |  |              | 9,230  |              |  |   | 10,616 | 
|Other                       |  |              | 14,064 |              |  |   | 9,321  | 
|                            |  |              |        |              |  |   |        | 
|                            |  | $            | 55,225 |              |  | $ | 50,281 | 
|                            |  |              |        |              |  |   |        | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Non-trade receivables include a $10,425 remaining
    principal balance of a net $19,812 note receivable shown net of
    an imputed interest discount of $1,188. This non-trade
    receivable is due from a third-party insurance company and was
    recorded in June 2002, in accordance with a settlement agreement
    entered into by the Company and the third-party insurance
    company in relation to certain environmental sites involving the
    Company. The remaining principal balance of the note receivable,
    together with interest, was subsequently collected by the
    Company in February 2003.

54



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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


(6)     Property,
Plant and Equipment(in thousands)

|                         |  |                   |         |                   |  |          |         |      |  |              |         |          |  |   |         |  |  |   |        |  |  |   |         | 
|------------------------ |  | ----------------- | ------- | ----------------- |  | -------- | ------- | ---- |  | ------------ | ------- | -------- |  | - | ------- |  |  | - | ------ |  |  | - | ------- | 
|                         |  |                   |         |                  
|                         |  | December 31, 2002 |         | December 31, 2001
|                         |  |                   |         |                  
|                         |  |                   |         | Accumulated       |  | Net Book |         |      |  | Accumulated  |         | Net Book
|                         |  | Cost              |         | Depreciation      |  | Value    |         | Cost |  | Depreciation |         | Value   
|                         |  |                   |         |                   |  |          |         |      |  |              |         |         
|Land                     |  | $                 | 34,619  |                   |  | $        |        |      |  | $            | 34,619  |          |  | $ | 37,595  |  |  | $ |       |  |  | $ | 37,595  | 
|Landfill sites           |  |                   | 14,919  |                   |  |          | 8,953   |      |  |              | 5,966   |          |  |   | 11,426  |  |  |   | 2,774  |  |  |   | 8,652   | 
|Buildings                |  |                   | 56,475  |                   |  |          | 13,226  |      |  |              | 43,249  |          |  |   | 68,170  |  |  |   | 9,825  |  |  |   | 58,345  | 
|Equipment                |  |                   | 194,655 |                   |  |          | 78,245  |      |  |              | 116,410 |          |  |   | 203,860 |  |  |   | 59,905 |  |  |   | 143,955 | 
|Assets under development |  |                   | 10,959  |                   |  |          |        |      |  |              | 10,959  |          |  |   | 7,105   |  |  |   |       |  |  |   | 7,105   | 
|                         |  |                   |         |                   |  |          |         |      |  |              |         |          |  |   |         |  |  |   |        |  |  |   |         | 
|                         |  | $                 | 311,627 |                   |  | $        | 100,424 |      |  | $            | 211,203 |          |  | $ | 328,156 |  |  | $ | 72,504 |  |  | $ | 255,652 | 
|                         |  |                   |         |                   |  |          |         |      |  |              |         |          |  |   |         |  |  |   |        |  |  |   |         | 

(7)     Other Assets(in thousands)

|                          |  |              |        |              |  |   |        | 
|------------------------- |  | ------------ | ------ | ------------ |  | - | ------ | 
|                          |  | December 31, |        | December 31,
|                          |  | 2002         |        | 2001        
|                          |  |              |        |             
|Restricted investments(a) |  | $            | 38,082 |              |  | $ | 40,513 | 
|Other                     |  |              | 19,665 |              |  |   | 17,224 | 
|                          |  |              |        |              |  |   |        | 
|                          |  | $            | 57,747 |              |  | $ | 57,737 | 
|                          |  |              |        |              |  |   |        | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The majority of the Companys restricted
    investments are controlled by the Companys wholly-owned
    insurance subsidiary and totaled approximately $37,836 at
    December 31, 2002 ($38,390 at December 31, 2001). The
    insurance subsidiarys restricted investments had been
    pledged as security for the Companys insurance
    liabilities. The restricted investments are held primarily in US
    and foreign government and commercial debt instruments rated AA
    or better by Moodys and Standard & Poors. At
    December 31, 2002, restricted investments controlled by the
    Companys wholly-owned insurance subsidiary are comprised
    of $28,091 of cash and cash equivalents and $9,745 in bonds with
    maturities from January 2003 through December 2007.

(8)     Accrued
Liabilities(in thousands)

Accrued liabilities consist of the following:

|                                                |  |              |         |              |  |   |         | 
|----------------------------------------------- |  | ------------ | ------- | ------------ |  | - | ------- | 
|                                                |  | December 31, |         | December 31,
|                                                |  | 2002         |         | 2001        
|                                                |  |              |         |             
|Insurance claims outstanding(a),(b)             |  | $            | 49,633  |              |  | $ | 50,476  | 
|Accrued employee compensation and benefit costs |  |              | 19,008  |              |  |   | 15,665  | 
|Accrued purchases                               |  |              | 4,299   |              |  |   | 6,404   | 
|Accrued closure costs(c)                        |  |              | 7,538   |              |  |   | 6,155   | 
|Billings in excess of costs                     |  |              | 4,627   |              |  |   | 7,209   | 
|Accrued waste material disposal costs           |  |              | 2,934   |              |  |   | 3,942   | 
|Accrued environmental costs                     |  |              | 4,581   |              |  |   | 4,582   | 
|Accrued other                                   |  |              | 16,640  |              |  |   | 20,707  | 
|Income taxes payable                            |  |              | 620     |              |  |   | 434     | 
|                                                |  |              |         |              |  |   |         | 
|                                                |  | $            | 109,880 |              |  | $ | 115,574 | 
|                                                |  |              |         |              |  |   |         | 



---



|    |                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The Company determines its insurance claims
    liability using actuarial principles on an undiscounted basis.
    The Company retains liability for (i) workers
    compensation claims of up to $1,000 for any one

55



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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | occurrence; (ii) auto and general liability
    claims of up to $1,000 for any one occurrence; and
    (iii) certain property claims of up to $2,000 for any one
    occurrence. To the extent that any insurance carrier is unable
    to meet its obligations under existing insurance policies, the
    Company could be liable for the defaulted amount. From time to
    time, other retention amounts apply because claims arise under
    policies of subsidiary, acquired or predecessor companies.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Various insurance policies prior to June of 1999,
    including workers compensation policies, were placed with
    Reliance Insurance Company and/or its former subsidiary
    companies (Reliance Insurance). On October 3,
    2001, the Insurance Commissioner of Pennsylvania placed Reliance
    Insurance into liquidation. State guaranty associations have
    been ordered to assume the insured obligations of Reliance
    Insurance, subject to statutory limitations. Until such plans
    are finalized by the various state associations, there is a risk
    that the Company could be liable for some portion of the
    Companys claims which are contractually covered by
    Reliance. Cash and letters of credit on deposit with Reliance
    Insurance are specifically dedicated to the Companys
    retained liability of up to $500 per occurrence and should not
    be pooled or otherwise used to settle Reliance Insurance
    liabilities. The Company has recorded a reserve to reflect the
    potential exposure pending further clarification of the
    liabilities by the courts. The reserve balance was $3,700 and
    $4,700 at December 31, 2002 and 2001, respectively.
|   
|(c) | Accrued closure costs are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                 |  |              |       |           |  |             |       |          |  |              |      |   |  |   |        |   |  |   |       | 
|---------------- |  | ------------ | ----- | --------- |  | ----------- | ----- | -------- |  | ------------ | ---- | - |  | - | ------ | - |  | - | ----- | 
|                 |  | Balance at   |       |           |  |             |       |          |  | Balance at  
|                 |  | December 31, |       |           |  |             |       |          |  | December 31,
|                 |  | 2001         |       | Additions |  | Adjustments |       | Spending |  | 2002        
|                 |  |              |       |           |  |             |       |          |  |             
|Severance        |  | $            | 910   |           |  | $           | 2,552 |          |  | $            | (637 | ) |  | $ | (1,845 | ) |  | $ | 980   | 
|Other exit costs |  |              | 5,245 |           |  |             | 4,432 |          |  |              | 260  |   |  |   | (3,379 | ) |  |   | 6,558 | 
|                 |  |              |       |           |  |             |       |          |  |              |      |   |  |   |        |   |  |   |       | 
|                 |  | $            | 6,155 |           |  | $           | 6,984 |          |  | $            | (377 | ) |  | $ | (5,224 | ) |  | $ | 7,538 | 
|                 |  |              |       |           |  |             |       |          |  |              |      |   |  |   |        |   |  |   |       | 

|                 |  |              |        |           |  |             |       |          |  |              |        |   |  |   |        |   |  |   |       | 
|---------------- |  | ------------ | ------ | --------- |  | ----------- | ----- | -------- |  | ------------ | ------ | - |  | - | ------ | - |  | - | ----- | 
|                 |  | Balance at   |        |           |  |             |       |          |  | Balance at  
|                 |  | December 31, |        |           |  |             |       |          |  | December 31,
|                 |  | 2000         |        | Additions |  | Adjustments |       | Spending |  | 2001        
|                 |  |              |        |           |  |             |       |          |  |             
|Severance        |  | $            | 4,318  |           |  | $           | 577   |          |  | $            | (261   | ) |  | $ | (3,724 | ) |  | $ | 910   | 
|Other exit costs |  |              | 7,183  |           |  |             | 3,733 |          |  |              | (871   | ) |  |   | (4,800 | ) |  |   | 5,245 | 
|                 |  |              |        |           |  |             |       |          |  |              |        |   |  |   |        |   |  |   |       | 
|                 |  | $            | 11,501 |           |  | $           | 4,310 |          |  | $            | (1,132 | ) |  | $ | (8,524 | ) |  | $ | 6,155 | 
|                 |  |              |        |           |  |             |       |          |  |              |        |   |  |   |        |   |  |   |       | 

|                 |  |            |        |           |  |             |        |          |  |              |   |  |  |   |         |   |  |   |        | 
|---------------- |  | ---------- | ------ | --------- |  | ----------- | ------ | -------- |  | ------------ | - |  |  | - | ------- | - |  | - | ------ | 
|                 |  | Balance at |        |           |  |             |        |          |  | Balance at  
|                 |  | March 31,  |        |           |  |             |        |          |  | December 31,
|                 |  | 2000       |        | Additions |  | Adjustments |        | Spending |  | 2000        
|                 |  |            |        |           |  |             |        |          |  |             
|Severance        |  | $          | 3,954  |           |  | $           | 4,827  |          |  |              |  |  |  | $ | (4,464  | ) |  | $ | 4,318  | 
|Other exit costs |  |            | 9,235  |           |  |             | 6,846  |          |  |              |  |  |  |   | (8,897  | ) |  |   | 7,183  | 
|                 |  |            |        |           |  |             |        |          |  |              |   |  |  |   |         |   |  |   |        | 
|                 |  | $          | 13,189 |           |  | $           | 11,673 |          |  |              |  |  |  | $ | (13,361 | ) |  | $ | 11,501 | 
|                 |  |            |        |           |  |             |        |          |  |              |   |  |  |   |         |   |  |   |        | 

Additions and adjustments have been recorded as
Asset Impairment and Other Unusual Costs in the Consolidated
Statements of Earnings (see Note 13).

56



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##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|    |                                                          
|--- | ---------------------------------------------------------
|(9) | Long-Term Debt(in
    thousands except per share amounts)

|                                                                                                                                                                                                          |                                     |              |         |              |  |   |         |         | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ------------ | ------- | ------------ |  | - | ------- | ------- | 
|                                                                                                                                                                                                          |                                     | December 31, |         | December 31,
|                                                                                                                                                                                                          |                                     | 2002         |         | 2001        
|                                                                                                                                                                                                          |                                     |              |         |             
|Credit facility                                                                                                                                                                                           |                                     |              |         |              |  |   |         |        
|                                                                                                                                                                                                          | Term debt(a)                        |              | $       | 170,905      |  |   | $       | 170,905 | 
|                                                                                                                                                                                                          | Convertible payment-in-kind debt(a) |              |         | 131,458      |  |   |         | 118,997 | 
|Unsecured payment-in-kind notes(b)                                                                                                                                                                        |                                     |              | 48,698  |              |  |   | 43,508  |        
|Revolving operating facility(c)                                                                                                                                                                           |                                     |              | 34,002  |              |  |   | 12,129  |        
|Loans collateralized by certain assets having a
    net book value of $8,155 bearing interest at a weighted average
    fixed rate of 8.0% (2001-5.9%) maturing at various dates up to
    2020           |                                     |              | 3,847   |              |  |   | 4,332   |        
|Loans collateralized by certain assets having a
    net book value of $3,607 bearing interest at prime plus a
    weighted average floating rate of 2% (2001-2%) maturing at
    various dates up to 2003 |                                     |              | 1,763   |              |  |   | 2,038   |        
|Obligations under capital leases on equipment
    bearing interest at rates varying from 5% to 12% maturing at
    various dates to 2008                                                                  |                                     |              | 1,429   |              |  |   | 2,304   |        
|                                                                                                                                                                                                          |                                     |              |         |              |  |   |         |        
|                                                                                                                                                                                                          |                                     |              | 392,102 |              |  |   | 354,213 |        
|Less current maturities of long-term debt                                                                                                                                                                 |                                     |              | 2,947   |              |  |   | 2,692   |        
|Less current borrowings on operating facility                                                                                                                                                             |                                     |              | 34,002  |              |  |   | 12,129  |        
|                                                                                                                                                                                                          |                                     |              |         |              |  |   |         |        
|                                                                                                                                                                                                          |                                     | $            | 355,153 |              |  | $ | 339,392 |        
|                                                                                                                                                                                                          |                                     |              |         |              |  |   |         |        



---



|    |                                               
|--- | ----------------------------------------------
|(a) | Term Debt and Convertible Payment-In-Kind Debt



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of March 31, 2000, the Company entered
    into its existing credit facility (the Credit
    Facility). Concurrently, the Company entered into the
    revolving operating facility, which initially provided for
    borrowings up to $175,000, subject to a borrowing base formula
    calculated on accounts receivable (the Credit Facility and
    revolving operating facility, together the Existing Senior
    Debt). The Credit Facility provides term debt of $235,825
    (term debt) and $100,000 in convertible
    payment-in-kind debt (PIK debt). The credit facility
    matures on March 31, 2005, and bears interest at a fixed
    rate of 9% for the term debt and 10% for the PIK debt. Interest
    payments on the term debt are due quarterly in arrears, up to a
    maximum of $20,000 in the first year, and on the PIK debt,
    interest is payable in full on March 31, 2005. The term
    debt or any part thereof and/or all of the PIK debt may be
    prepaid and redeemed by the Company at any time during the
    agreement once the revolving operating facility has been
    terminated. The Company must pay a redemption premium of between
    1% and 5% on the amount of the term debt being redeemed and
    between 8.33% and 25.00% on the amount of the PIK debt being
    redeemed, excluding mandatory prepayments. The PIK debt is
    convertible by the lenders at any time into shares of common
    stock of PSC at an initial conversion price of $11.72 per share,
    which was in excess of the fair market value of PSC on a per
    share basis determined based upon an enterprise valuation. The
    carrying value of the term debt was $170,905 as at
    December 31, 2002.
|
| | The Company generally is required to repay the
    term debt first and then the PIK debt in an amount equal to:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) 25% of the net asset-sale proceeds from
    the disposition of assets sold other than in the ordinary course
    of business after first paying off various tranches of senior
    debt and collateralizing letters of credit;
|
| | (ii) the net proceeds from any foreign
    subsidiary dispositions in excess of $1,000 annually.                                                                                                                                  

57



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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company was also required yearly for the
    first two years and quarterly thereafter, to repay the term debt
    first and then the PIK debt in an amount equal to 75% of the
    cash flow available for debt service. Through December 31,
    2002, no repayments have been required under this provision.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | The Existing Senior Debt is guaranteed jointly
    and severally by PSC and substantially all of its direct and
    indirect wholly owned subsidiaries and are collateralized by
    security interests in the assets of PSC and substantially all of
    its direct and indirect wholly owned subsidiaries and a pledge
    of securities of substantially all of its direct and indirect
    wholly owned subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | The Existing Senior Debt contains cross-default
    provisions as well as certain restrictive covenant provisions,
    including limitations on the incurrence of indebtedness, the
    sale of assets, the incurrence of liens, the making of specified
    investments and the payment of cash dividends. In addition, the
    Company is required to satisfy, among other things, certain
    financial covenants, including specified amounts of EBITDA and
    maximum capital expenditures. At December 31, 2002, the
    Company was in compliance with the covenants under the Existing
    Senior Debt. However, the qualified opinion of the
    Companys independent accountants for the Consolidated
    Financial Statements at December 31, 2002, constitutes an
    event of default (as defined in the credit agreements) under
    both the revolving operating facility and the Credit Facility.
    The Company received a waiver of this default from the lenders
    under each facility in connection with the extension of the
    revolving operating facility. Additionally, because the
    revolving operating facility expires on June 2, 2003, and
    at the date of this filing, the Company has not secured a
    replacement facility, the Company is unable to project
    compliance with its credit facilities through 2003. In the event
    the Company is unable to secure the replacement facility by
    June 2, 2003, and the revolving operating facility is not
    further extended, the Company will be unable to meet its
    obligations. This would result in an event of default under both
    the Credit Facility and the revolving operating facility. Upon
    the occurrence and continuation of an event of default, the
    Companys lenders under the Credit Facility and revolving
    operating facility may, among other things, declare all
    obligations under such facility to be immediately due and
    payable. If an acceleration of the indebtedness under either of
    the facilities has occurred, an event of default will occur
    under the Companys indentures with respect to the
    unsecured payment-in-kind-notes described below.

(b) Unsecured Payment-in-Kind Notes



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On April 7, 2000, the Company issued an
    aggregate amount of $48,000 of unsecured payment-in-kind notes
    (unsecured notes). The unsecured notes mature on
    April 15, 2010 and bear interest at a fixed rate of 6%. The
    interest is payable semi-annually on April 15 and
    October 15, and can be paid up to April 15, 2005, in
    cash or additional unsecured notes, at the option of the
    Company. The Company had issued an additional $7,645 of
    unsecured notes as of December 31, 2002, in payment of
    interest. If a change in control occurs, the Company is required
    to make an offer to purchase an amount of unsecured notes equal
    to the present value of the remaining scheduled payments of
    principal and interest, discounted at 16%, plus accrued interest
    thereon. The unsecured notes will bear interest at a rate of 12%
    from the date of a change in control until such time as the
    unsecured notes are redeemed. The unsecured notes provide for
    annual mandatory sinking fund payments equal to 20% of the
    aggregate principal amount of the outstanding unsecured notes at
    April 15, 2005, plus all accrued and unpaid interest
    thereon, commencing April 15, 2006. At December 31,
    2002, the unsecured notes were recorded at $42,679
    (December 31, 2001  $38,129).
|
| | On April 7, 2000, the Company issued an
    aggregate amount of $18,000 of unsecured convertible
    payment-in-kind notes (unsecured convertible notes).
    The unsecured convertible notes mature on April 15, 2020,
    and bear interest at a fixed rate of 3% starting April 15,
    2003. The interest is payable semi-annually on April 15 and
    October 15. The unsecured convertible notes may be
    converted at any time into shares of common stock of PSC at an
    initial conversion price of $30 per share. If a change in
    control occurs, the Company is required to make an offer to
    purchase an amount of unsecured convertible notes equal to
    between 64% and 100% of the principal amount of unsecured
    convertible notes outstanding, plus                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | accrued interest thereon. The unsecured
    convertible notes will bear interest at a rate of 12% from the
    date of a change in control until such time as the unsecured
    convertible notes are redeemed. As of December 31, 2002,
    unsecured convertible notes with a face value of $709 had been
    converted into 23,644 shares of common stock pursuant to the
    terms of the indenture covering the unsecured convertible notes.
    At December 31, 2002, the unsecured convertible notes were
    recorded at $6,019 (December 31, 2001  $5,379).
|
| | The unsecured notes contain provisions whereby an
    acceleration under the facilities causes a default under the
    unsecured notes. In addition, the facilities contain provisions
    whereby a default under the unsecured notes causes a default
    under the facilities.                                                                                                                                                                                                                                                                                    



|    |  |                             
|--- |  | ----------------------------
|(c) |  | Revolving operating facility



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The revolving operating facility provides for a
    revolving line of credit, subject to a borrowing base formula
    calculated on accounts receivable, of up to $195,000. At
    December 31, 2002, the Companys borrowing base
    formula limited the availability of the revolving operating
    facility to $153,714. The Company had undrawn capacity under the
    revolving operating facility of $26,937, net of borrowings of
    $34,002 and outstanding letters of credit of $92,775. The
    revolving operating facility was scheduled to mature on
    April 8, 2003 and has been extended to June 2, 2003.                                                    
|
| | The Company intends to use the period of the
    extension to prepare to restructure its balance sheet and
    refinance its debt. It is anticipated that the restructuring
    will be effected through a proceeding under Chapter 11 of
    the Bankruptcy Code. To this end, the Company has retained
    bankruptcy counsel and is consulting with its significant
    stockholders, its lenders and its other advisors. Among other
    things, the Company is in discussions with its lenders
    concerning debtor-in-possession financing though there can be no
    assurances that such financing will be available or obtained.                                      
|
| | Under the amendment of the revolving operating
    facility executed with the lenders as of April 8, 2003, the
    lending commitment under Tranche A of the facility was
    reduced from $100,000 to $78,000. The capacity under other
    tranches is unchanged, and as a result, the total capacity of
    the facility is unchanged. In connection with the amendment, the
    Company has paid an aggregate fee of $100 to the lenders under
    Tranche B-Prime, which are, respectively, affiliates of the
    Companys two largest stockholders, Carl C. Icahn and
    affiliates and Stephen Feinberg and affiliates.                                                
|
| | Borrowings under the revolving operating facility
    bear interest at a rate equal to the base rate (which is based
    on the Wells Fargo Bank prime rate) plus 1% on
    Tranche A advances, 3% on Tranche B-Prime advances,
    and the greater of 11.5% or the base rate plus 5% on Tranche
    Sub-B advances or at the option of the Company on Tranche A
    advances at a rate equal to the LIBOR rate plus 3%. A letter of
    credit issuance fee of .25% plus an annual fee of 2.75% is
    charged on the amount of all outstanding letters of credit
    issued under Tranche A. Letters of credit issued under
    Tranche Sub-B bear an annual fee of 10.075%.
|
| | Under the revolving operating facility, the
    Company is required to pay an annual service/ agency fee equal
    to $900 and a monthly loan servicing fee equal to $20 for
    Tranches A and B-Prime. The Tranche Sub-B Agency fee is $10
    paid monthly. In addition, the Company is required to pay
    monthly an unused line of credit fee equal to 0.375%, 0.75% and
    2.0% per annum on the average unused portion of Tranche A,
    Tranche B-Prime and Tranche Sub-B, respectively.                                                                                                                                                                              



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(d) |  | The various components of long-term debt
    described in Note 9 (the Companys Public Debt
    Instruments) are financial instruments. The Companys
    Public Debt Instruments were discounted from face value to their
    fair market value on March 31, 2000. As of
    December 31, 2000, the carrying value at that time
    approximated fair market value. During 2001 and 2002, there have
    been changes in market interest rates, a general decline in the
    availability of credit and disappointing financial performance
    by the Company. It is likely that these factors have caused the
    fair market value of the Companys Public Debt Instruments
    to be materially less than the current carrying value. There is
    no public market in the

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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


Companys Public Debt Instruments, and,
therefore, the Company is unable to determine their fair market
value.

(e)      The
aggregate amount of payments required to meet long-term debt
installments in each of the next five years is as follows:

|           |  |   |         | 
|---------- |  | - | ------- | 
|2003       |  | $ | 36,949  | 
|2004       |  |   | 1,956   | 
|2005       |  |   | 303,044 | 
|2006       |  |   | 8,907   | 
|2007       |  |   | 8,660   | 
|Thereafter |  |   | 32,586  | 

(10)     Other
Liabilities(in thousands)

|                            |  |              |        |              |  |   |        | 
|--------------------------- |  | ------------ | ------ | ------------ |  | - | ------ | 
|                            |  | December 31, |        | December 31,
|                            |  | 2002         |        | 2001        
|                            |  |              |        |             
|Accrued environmental costs |  | $            | 62,771 |              |  | $ | 67,821 | 
|Other                       |  |              | 4,644  |              |  |   | 2,230  | 
|                            |  |              |        |              |  |   |        | 
|                            |  | $            | 67,415 |              |  | $ | 70,051 | 
|                            |  |              |        |              |  |   |        | 

(11)     Statement of
Cash Flows(in thousands)



| |                                      
| | -------------------------------------
| | Changes in assets and
    liabilities

|                                                                |  |              |         |              |  |                   |         |                     |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ------------ | ------- | ------------ |  | ----------------- | ------- | ------------------- |  | - | ------- | - |  | - | ------- | -
|                                                                |  |              |         |              |  |                   |         | Predecessor Company
|                                                                |  |              |         |              |  |                   |         |                    
|                                                                |  | Year Ended   |         | Year Ended   |  | Nine Months Ended |         | Three Months Ended 
|                                                                |  | December 31, |         | December 31, |  | December 31,      |         | March 31,          
|                                                                |  | 2002         |         | 2001         |  | 2000              |         | 2000               
|                                                                |  |              |         |              |  |                   |         |                    
|                                                                |  |              |         |              |  |                   |         | (unaudited)        
|Accounts receivable                                             |  | $            | 27,444  |              |  | $                 | 31,978  |                     |  | $ | 51,094  |   |  | $ | (385    | )
|Inventory for resale                                            |  |              | (5,364  | )            |  |                   | 9,243   |                     |  |   | (7,254  | ) |  |   | (1,515  | )
|Other Assets                                                    |  |              | (1,206  | )            |  |                   | 17,415  |                     |  |   | 59,685  |   |  |   | (611    | )
|Accounts payable, accrued liabilities and other
    liabilities |  |              | (24,547 | )            |  |                   | (23,363 | )                   |  |   | (39,750 | ) |  |   | (16,872 | )
|Income taxes payable                                            |  |              | 223     |              |  |                   | (345    | )                   |  |   | (935    | ) |  |   | 1,939   |  
|                                                                |  |              |         |              |  |                   |         |                     |  |   |         |   |  |   |         |  
|                                                                |  | $            | (3,450  | )            |  | $                 | 34,928  |                     |  | $ | 62,840  |   |  | $ | (17,444 | )
|                                                                |  |              |         |              |  |                   |         |                     |  |   |         |   |  |   |         |  

60



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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


Supplemental
cash flow information

The supplemental cash flow disclosures and
non-cash transactions are as follows:

|                                                                         |  |              |        |              |  |                   |        |                     |  |   |        |  |  |   |       | 
|------------------------------------------------------------------------ |  | ------------ | ------ | ------------ |  | ----------------- | ------ | ------------------- |  | - | ------ |  |  | - | ----- | 
|                                                                         |  |              |        |              |  |                   |        | Predecessor Company
|                                                                         |  |              |        |              |  |                   |        |                    
|                                                                         |  | Year Ended   |        | Year Ended   |  | Nine Months Ended |        | Three Months Ended 
|                                                                         |  | December 31, |        | December 31, |  | December 31,      |        | March 31,          
|                                                                         |  | 2002         |        | 2001         |  | 2000              |        | 2000               
|                                                                         |  |              |        |              |  |                   |        |                    
|                                                                         |  |              |        |              |  |                   |        | (unaudited)        
|Supplemental disclosures:                                                |  |              |        |              |  |                   |        |                     |  |   |        |  |  |   |       | 
|Interest paid                                                            |  | $            | 31,638 |              |  | $                 | 17,854 |                     |  | $ | 13,502 |  |  | $ | 951   | 
|Income taxes paid                                                        |  |              | 712    |              |  |                   | 2,641  |                     |  |   | 3,668  |  |  |   | 2,248 | 
|Debt incurred on the purchase of property and
    equipment              |  |              | 450    |              |  |                   | 1,510  |                     |  |   | 1,785  |  |  |   | 2,782 | 
|Notes receivable issued/paid on the sale/purchase
    of equipment       |  |              |       |              |  |                   | 1,663  |                     |  |   | 1,610  |  |  |   |      | 
|Conversion of unsecured payment-in-kind notes                            |  |              | 709    |              |  |                   | 200    |                     |  |   |       |  |  |   |      | 
|Deferred stock compensation costs                                        |  |              | 137    |              |  |                   | 176    |                     |  |   |       |  |  |   |      | 
|Shares of common stock issued in conjunction with
    new debt issuances |  |              | 3,748  |              |  |                   |       |                     |  |   |       |  |  |   |      | 

(12)     Cumulative
Effect of Change in Accounting
Principle(in thousands)

The Company elected early adoption of Statement
of Financial Accounting Standard No. 143 Accounting
for Asset Retirement Obligations (FAS 143).
The only Company location impacted by the adoption of FAS 143
was the Companys sole operating landfill located in
Hamilton, Ontario. While FAS 143 adoption did have an impact on
the Companys accounting for its landfill asset, it did not
change the basic landfill accounting followed historically by
the Company. In general, the Company has historically recognized
expenses associated with both amortization of capitalized costs
and future closure and post-closure obligations on a
units-of-consumption basis as airspace is consumed over the life
of the landfill. This practice, referred to as life cycle
accounting within the waste industry, will continue to be
followed upon adoption of FAS 143, except as discussed below.

Under the new FAS 143 rules, costs associated
with future final capping activities that occur during the
operating life of a landfill, which are currently recognized on
an undiscounted basis over the operating life of the landfill as
airspace is consumed, will be accounted for as an asset
retirement obligation, on a discounted basis. Under the new FAS
143 rules, the Company will record a landfill retirement
obligation that relates to its closure and post-closure
activities over the operating life of the landfill as the
landfill airspace is consumed and the asset retirement
obligation is incurred. Upon adoption of FAS 143, the Company
recorded a landfill retirement obligation of $3,006 in addition
to the $2,608 obligation that was previously reflected on the
Companys books prior to FAS 143 adoption. In accordance
with FAS 143, the Company also added accretion expense to the
obligation of $857 for a total landfill retirement obligation at
December 31, 2002, of $6,471. The Companys asset
retirement obligation was determined based on its estimated fair
value, which was measured on a present value basis, using a
credit-adjusted, risk-free rate of 7.5% coupled with an
inflation rate of 2.0%. Accretion expense was and will continue
to be added to the landfill retirement obligation using the
effective interest method. All landfill retirement costs arising
from closure and post-closure obligations were capitalized as
part of the landfill asset and are being amortized using the
Companys existing landfill accounting practices. At
December 31, 2002, the gross value of landfill asset
retirement costs was $3,006, which was offset by $2,933 of
accumulated depreciation. The $2,933 of accumulated depreciation
coupled with the $857 of obligation accretion offset by a tax
benefit of $1,367 total the $2,423 cumulative effect of change
in accounting principle as shown on the face of the 2002
Statement of Earnings.

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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


(13)     Asset
Impairment and Other Unusual Costs(in
thousands)

2002

The Companys asset impairment and other
unusual costs are composed of the following:

|                                                             |                                                           |   |        |       | 
|------------------------------------------------------------ | --------------------------------------------------------- | - | ------ | ----- | 
|Business units, locations or activities to be
    exited:    |                                                           |   |        |      
|                                                             | Assets written down to estimated net realizable
    value |   | $      | 570   | 
|                                                             | Severance costs                                           |   |        | 1,915 | 
|                                                             | Other exiting costs                                       |   |        | 4,692 | 
|Business units, locations or activities to be
    continued: |                                                           |   |        |      
|                                                             | Assets written down to estimated net realizable
    value |   |        | 531   | 
|                                                             | Process re-engineering costs                              |   |        | 3,181 | 
|                                                             |                                                           |   |        |      
|                                                             |                                                           | $ | 10,889 |      
|                                                             |                                                           |   |        |      

In the first quarter of 2002, the Company decided
to close the corporate headquarters in Rosemont, Illinois and
the corporate governance functions were moved to the shared
service operations in Houston. Included in the unusual costs for
the twelve-month period is $6,607 in cash cost for severance and
other exit cost to be incurred at these locations. Twelve
employees were terminated as a result of these restructurings.
In the fourth fiscal quarter of 2002, the Companys Metals
Services Group terminated an existing mill service agreement
with a customer and concurrently leased certain equipment back
to a third party. An assessment of the recoverability of the net
asset value for this equipment resulted in a non-cash asset
impairment charge of $570. Additionally, a $531 non-cash asset
impairment charge was recorded for certain impaired equipment of
the Companys waste management services business. The
Company also incurred costs in 2002 related to its PSC Way
project which was a project designed to standardize business
processes to allow it to operate more efficiently and share
information and best practices. This initiative includes
defining common business processes related to transactional
functions as well as client relationships and includes
establishing a common management systems platform. The total
cash costs for the PSC Way initiative in 2002 were $5,717, of
which $2,536 was capitalized to fixed assets and $3,181 is
included in other unusual costs as process re-engineering costs.

2001

The Companys asset impairment and other
unusual costs were composed of the following:

|                                                             |                                                           |   |        |       | 
|------------------------------------------------------------ | --------------------------------------------------------- | - | ------ | ----- | 
|Business units, locations or activities to be
    exited:    |                                                           |   |        |      
|                                                             | Assets written down to estimated net realizable
    value |   | $      | 204   | 
|                                                             | Severance costs                                           |   |        | 316   | 
|                                                             | Other exiting costs                                       |   |        | 2,862 | 
|Business units, locations or activities to be
    continued: |                                                           |   |        |      
|                                                             | Assets written down to estimated net realizable
    value |   |        | 1,809 | 
|                                                             | Process re-engineering costs                              |   |        | 6,744 | 
|                                                             |                                                           |   |        |      
|                                                             |                                                           | $ | 11,935 |      
|                                                             |                                                           |   |        |      

During 2001, the Company continued to seek
operating efficiencies and identified locations or business
units to be closed, resulting in non-cash costs for asset
impairments of $204 and $3,178 in cash costs for severance and
other exit costs to be incurred at these locations.
Approximately 48 employees were terminated as a result of these
restructurings, all which had been terminated at
December 31, 2002. In addition, a patent infringement
lawsuit was settled during the year in which the Company agreed
to discontinue the use of certain equipment parts at an ongoing
operation. An assessment of the recoverability of the net asset
value for this equipment resulted in a non-cash asset impairment
charge of $1,809. The total cash costs for the PSC

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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


Way initiative in 2001 were $12,166, of which
$5,422 was capitalized to fixed assets and $6,744 is included in
other unusual costs as process re-engineering costs.

2000

The Companys asset impairment and other
unusual costs were composed of the following:

|                                                             |                                                           |   |        |       | 
|------------------------------------------------------------ | --------------------------------------------------------- | - | ------ | ----- | 
|Business units, locations or activities to be
    exited:    |                                                           |   |        |      
|                                                             | Assets written down to estimated net realizable
    value |   | $      | 5,683 | 
|                                                             | Severance costs                                           |   |        | 4,828 | 
|                                                             | Other exiting costs                                       |   |        | 1,163 | 
|Business units, locations or activities to be
    continued: |                                                           |   |        |      
|                                                             | Process re-engineering costs                              |   |        | 5,443 | 
|                                                             |                                                           |   |        |      
|                                                             |                                                           | $ | 17,117 |      
|                                                             |                                                           |   |        |      

In the fourth quarter of 2000, the Company made
the decision to exit its European industrial outsourcing
operations due to its limited geographical presence following
the sale of the UK Metals business in the second quarter,
resulting in $4,057 in non-cash costs for asset impairments and
$757 in cash costs related to severance and other exit costs.
Additionally, the Company made the decision in 2000 to close
and/or consolidate several locations, resulting in cash costs of
$5,234 for severance and other exit costs and $1,626 in non-cash
costs relating to asset impairments. Approximately 132 employees
were to be terminated as a result of these restructurings, all
which had been terminated as of December 31, 2002. The
total cash costs for the PSC Way initiative in 2000 were $8,636,
of which $3,193 was capitalized to fixed assets and $5,443 is
included in other unusual costs as process re-engineering costs.

(14)     Reorganization
Costs(in thousands)

The expenses resulting from Oldcos
reorganization for the three months ended March 31, 2000
have been segregated from expenses related to operations in the
accompanying Consolidated Statements of Earnings and include
$17,908 for professional fees and $2,699 for other
reorganization costs.

(15)     Earnings Per
Share(in thousands)

|                                                                                    |  |                   |         |                   |  |   |         |  
|----------------------------------------------------------------------------------- |  | ----------------- | ------- | ----------------- |  | - | ------- | -
|                                                                                    |  | Year Ended        |         | Year Ended       
|                                                                                    |  | December 31, 2002 |         | December 31, 2001
|                                                                                    |  |                   |         |                  
|Net loss for the period  basic and
    diluted                                     |  | $                 | (59,197 | )                 |  | $ | (78,135 | )
|                                                                                    |  |                   |         |                   |  |   |         |  
|Number of shares of common stock outstanding                                        |  |                   | 27,859  |                   |  |   | 24,296  |  
|Effect of using weighted average shares of common
    stock outstanding             |  |                   | (880    | )                 |  |   | (16     | )
|Restricted shares issued  unvested                                                 |  |                   | (106    | )                 |  |   | (220    | )
|                                                                                    |  |                   |         |                   |  |   |         |  
|Basic and diluted weighted average number of
    shares of common stock outstanding |  |                   | 26,873  |                   |  |   | 24,060  |  
|                                                                                    |  |                   |         |                   |  |   |         |  

|                        |                                                  |                         |         |                   |       |   |         |         |        |  
|----------------------- | ------------------------------------------------ | ----------------------- | ------- | ----------------- | ----- | - | ------- | ------- | ------ | -
|                        |                                                  | Year Ended              |         | Year Ended       
|                        |                                                  | December 30, 2002       |         | December 30, 2001
|                        |                                                  |                         |         |                  
|Net loss for the period |                                                  | $                       | (59,197 | )                 |       | $ | (78,135 | )      
|                        | Other comprehensive income (loss), net of taxes: |                         |         |                   |       |   |         |         |       
|                        |                                                  | Translation adjustments |         |                   | 2,793 |   |         |         | (3,854 | )
|                        |                                                  |                         |         |                   |       |   |         |        
|                        | Comprehensive loss                               |                         | $       | (56,404           | )     |   | $       | (81,989 | )     
|                        |                                                  |                         |         |                   |       |   |         |        

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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


(16)     Derivative
Financial and Commodity Instruments

At both December 31, 2002 and
December 31, 2001, the Company had no derivative
instruments outstanding. The Predecessor Company utilized
interest rate swaps and collars to fix the interest rate on a
portion of its floating rate debt and thereby manage the
interest rate risk associated therewith. The credit risk of
counter party fulfillment on all such contracts is mitigated by
dealing only with credit worthy major public financial
institutions.

(17)     Common Stock
and Stock-Based Compensation Plans(in
thousands except number of shares/ options and per share amounts)

Common
stock

|                                     |                        |              |            |              |  |   |            |  | 
|------------------------------------ | ---------------------- | ------------ | ---------- | ------------ |  | - | ---------- |  | 
|                                     |                        | December 31, |            | December 31,
|                                     |                        | 2002         |            | 2001        
|                                     |                        |              |            |             
|Share capital consists of-           |                        |              |            |              |  |   |            | 
|Authorized:                          |                        |              |            |              |  |   |            | 
|10,000,000 shares of preferred stock |                        |              |            |              |  |   |            | 
|90,000,000 shares of common stock    |                        |              |            |              |  |   |            | 
|Outstanding:                         |                        |              |            |              |  |   |            | 
|                                     | Shares of common stock |              |            |              |  |   |            |  | 
|Number                               |                        |              | 27,858,990 |              |  |   | 24,295,818 | 
|Dollars                              |                        | $            | 122,805    |              |  | $ | 118,920    | 

The table below outlines the outstanding share
capital of the Company. The Company has allotted and reserved
9,132,423 shares of common stock issuable under the PIK
debt and the unsecured convertible notes. As of
December 31, 2002, the Company had issued 23,644 of
these shares.

|                                      |  |              |            |        |  |   |         | 
|------------------------------------- |  | ------------ | ---------- | ------ |  | - | ------- | 
|                                      |  |             
|                                      |  | Common Stock
|                                      |  |             
|                                      |  | Number       |            | Amount
|                                      |  |              |            |       
|Balance  December 31, 2000           |  |              | 24,041,946 |        |  | $ | 118,544 | 
|Shares issued in 3% note conversion   |  |              | 23,174     |        |  |   | 200     | 
|Restricted stock issued               |  |              | 230,698    |        |  |   | 176     | 
|                                      |  |              |            |        |  |   |         | 
|Balance  December 31, 2001           |  |              | 24,295,818 |        |  | $ | 118,920 | 
|Shares issued in 3% note conversion   |  |              | 470        |        |  |   | 1       | 
|Restricted stock issued               |  |              | 77,716     |        |  |   | 136     | 
|Restricted stock cancelled            |  |              | (153,480   | )      |  |   |        | 
|Shares issued with new debt issuances |  |              | 3,638,466  |        |  |   | 3,748   | 
|                                      |  |              |            |        |  |   |         | 
|Balance  December 31, 2002           |  |              | 27,858,990 |        |  | $ | 122,805 | 
|                                      |  |              |            |        |  |   |         | 

Stock-based
compensation plans

As discussed in Note 2, the Company has four
stock-based compensation plans and one special stock option
allotment plan. These plans are discussed individually in
greater detail below.

2000 Stock
Option Plan

The Company has allotted and reserved 1,040,000
shares of common stock under the Philip Services Corporation
Stock Option Plan (2000 Plan) of which 840,000 may
be granted to officers and employees and 200,000 may be granted
to non-employee directors. Under the 2000 Plan, options
generally vest annually over a four-year period. The options
have a term of not more than ten years from the date of grant.
Options granted under the 2000 Plan can be either incentive
stock options, which are intended to meet the requirement of
Section 422 of the Internal Revenue Code, or non-qualified
stock options. Shares underlying awards that are forfeited may
be re-granted. The Company has granted options covering
1,084,557 shares under the 2000 Plan as of December 31,
2002, to officers and employees at a weighted average exercise
price of $6.83. Options to

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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


officers and employees covering 200,745 and
72,053 shares are exercisable as of December 31, 2002, and
2001, respectively, both at a weighted average exercise price of
$6.83. The Company has also granted options covering 190,000
shares to directors under the 2000 Plan as of December 31,
2002, at a weighted average exercise price of $6.83 per share.
All of those options remain outstanding as of December 31,
2002. Directors options covering 125,947 and 79,722 shares
are exercisable as of December 31, 2002, and 2001,
respectively, both at a weighted average exercise price of $6.83.

|                                         |           |        |         |                  |   |   |      |      | 
|---------------------------------------- | --------- | ------ | ------- | ---------------- | - | - | ---- | ---- | 
|                                         |           |        |         | Weighted Average
|                                         |           | Shares |         | Exercise Price  
|                                         |           |        |         |                 
|Options outstanding at March 31, 2000    |           |        |        |                  |   | $ |     |     
|                                         | Granted   |        |         | 901,000          |   |   |      | 6.83 | 
|                                         | Exercised |        |         |                 |   |   |      |     | 
|                                         | Forfeited |        |         | (313,000         | ) |   |      | 6.83 | 
|                                         |           |        |         |                  |   |   |      |     
|Options outstanding at December 31, 2000 |           |        | 588,000 |                  |   | $ | 6.83 |     
|                                         | Granted   |        |         | 353,557          |   |   |      | 6.83 | 
|                                         | Exercised |        |         |                 |   |   |      |     | 
|                                         | Forfeited |        |         | (72,629          | ) |   |      | 6.83 | 
|                                         |           |        |         |                  |   |   |      |     
|Options outstanding at December 31, 2001 |           |        | 868,928 |                  |   | $ | 6.83 |     
|                                         | Granted   |        |         | 20,000           |   |   |      | 6.83 | 
|                                         | Exercised |        |         |                 |   |   |      |     | 
|                                         | Forfeited |        |         | (377,476         | ) |   |      | 6.83 | 
|                                         |           |        |         |                  |   |   |      |     
|Options Outstanding at December 31, 2002 |           |        | 511,452 |                  |   | $ | 6.83 |     
|                                         |           |        |         |                  |   |   |      |     

Officers
Stock-Based Bonus Plan

The Company has reserved 1,000,000 shares of
common stock for issuance under the Philip Services Corporation
Officers Stock-Based Bonus Plan (Officers
Plan). Under the Officers Plan, various types of
awards may be made including restricted common stock, options to
purchase shares of common stock, stock appreciation rights, or
phantom stock rights. Participation in the Officers Plan
is limited to officers of the Company and its subsidiaries.
Generally awards vest evenly over a four-year period from the
date of grant. Upon the adoption of the 2002 Stock-Based
Compensation Plan, the Officers Plan was supplanted. No
further grants will be made under the Officers Plan, but
outstanding awards will be maintained until they are exercised,
forfeited or expire. Under the Officers Plan, options
generally vest annually over a four-year period. The options
have a term of not more than ten years from the date of grant.
Options granted under the Officers Plan can be either
incentive stock options, which are intended to meet the
requirement of Section 422 of the Internal Revenue Code, or
non-qualified stock options. As of December 31, 2002, the
Company had granted options covering 400,000 shares under the
Officers Plan at a weighted average exercise price of
$0.54 of which 75,000 has been forfeited. As of
December 31, 2002, options covering 72,656 shares were
exercisable under the Officers Plan at a weighted average
exercise price of $0.69. As of December 31, 2001, there
were no options granted or exercisable under the Officers
Plan.

|                                         |           |        |         |                  |   |   |      |      | 
|---------------------------------------- | --------- | ------ | ------- | ---------------- | - | - | ---- | ---- | 
|                                         |           |        |         | Weighted Average
|                                         |           | Shares |         | Exercise Price  
|                                         |           |        |         |                 
|Options outstanding at December 31, 2001 |           |        |        |                  |   | $ |     |     
|                                         | Granted   |        |         | 400,000          |   |   |      | 0.54 | 
|                                         | Exercised |        |         |                 |   |   |      |     | 
|                                         | Forfeited |        |         | (75,000          | ) |   |      | 0.50 | 
|                                         |           |        |         |                  |   |   |      |     
|Options Outstanding at December 31, 2002 |           |        | 325,000 |                  |   | $ | 0.54 |     
|                                         |           |        |         |                  |   |   |      |     

2002 Stock-Based
Bonus Plan

The Company has reserved 1,200,000 shares of
common stock for issuance under the Philip Services Corporation
(2002) Stock-Based Bonus Plan (2002 Plan) of which
1,000,000 may be granted to officers

65



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##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


and employees and 200,000 may be granted to
directors. Under the 2002 Plan, various types of awards may be
made including restricted common stock, options to purchase
shares of common stock, stock appreciation rights, or phantom
stock rights. Generally awards vest evenly over a four-year
period from the date of grant. Options under the 2002 Plan have
a term of not more than ten years from the date of grant and can
be either incentive stock options, which are intended to meet
the requirement of Section 422 of the Internal Revenue
Code, or non-qualified stock options. As of December 31,
2002, the Company had granted options covering 475,000 shares to
employees under the 2002 Plan at a weighted average exercise
price of $0.50 and options covering 100,000 shares to an officer
at an exercise price of $0.50. As of December 31, 2002,
there were no options exercisable under the 2002 Plan.

|                                         |           |        |         |                  |  |   |      |      | 
|---------------------------------------- | --------- | ------ | ------- | ---------------- |  | - | ---- | ---- | 
|                                         |           |        |         | Weighted Average
|                                         |           | Shares |         | Exercise Price  
|                                         |           |        |         |                 
|Options outstanding at December 31, 2001 |           |        |        |                  |  | $ |     |     
|                                         | Granted   |        |         | 575,000          |  |   |      | 0.50 | 
|                                         | Exercised |        |         |                 |  |   |      |     | 
|                                         | Forfeited |        |         |                 |  |   |      |     | 
|                                         |           |        |         |                  |  |   |      |     
|Options Outstanding at December 31, 2002 |           |        | 575,000 |                  |  | $ | 0.50 |     
|                                         |           |        |         |                  |  |   |      |     

Special-Allotment
of Stock Options

During 2000, the Company granted a
special-allotment of 1,000,000 common stock options to the
Companys then CEO, Mr. Anthony G. Fernandes, at
exercise prices ranging from $5.96 to $8.69 per share. These
stock option exercise prices were in excess of the
Companys fair market value on a per share basis determined
based on an enterprise valuation as discussed in Note 1.
Upon the departure of Mr. Fernandes from the Company on
March 31, 2002, 500,000 of the special-allotment options
had vested and will be exercisable at their weighted average
exercise price of $5.96 until their expiration on April 7,
2010. The balance of these special-allotment options were
cancelled.

Restricted Stock
Plans

As of December 31, 2002, the Company had
granted 269,131 shares of restricted stock pursuant to the
Officers Plan. Of these, 221,741 shares had been forfeited
as of December 31, 2002, resulting in a net restricted
stock issuance of 47,390 shares as of December 31, 2002.
Additionally, under its 2001 Non-Employee Directors Restricted
Stock Plan (Directors Plan), the Company has
reserved 400,000 shares of common stock for issuance. Under the
Directors Plan, shares of restricted common stock with a market
value of twenty-five hundred dollars will be granted on the
first business day of each fiscal quarter during the term of the
Directors Stock Plan to each non-employee director. One-quarter
of the shares granted as of each grant date will vest on each of
the first four anniversaries of such grant date except with
respect to the initial grant of shares. As of December 31,
2002, 107,544 shares of restricted stock had been granted under
the Directors Plan.

Summary of Restricted Stock Issued and Vested:

|                                  |  |                   |        |                |  |   |         | 
|--------------------------------- |  | ----------------- | ------ | -------------- |  | - | ------- | 
|                                  |  |                  
|                                  |  | December 31, 2002
|                                  |  |                  
|                                  |  | Officers Plan    |        | Directors Plan
|                                  |  |                   |        |               
|Shares of restricted stock issued |  |                   | 47,390 |                |  |   | 107,544 | 
|Shares of restricted stock vested |  |                   | 22,283 |                |  |   | 26,185  | 
|Fair value at issuance            |  | $                 | 163    |                |  | $ | 149     | 



|     |                               
|---- | ------------------------------
|(18) | Income Taxes(in
    thousands)

The Company accounts for income taxes under SFAS
No. 109, Accounting for Income Taxes. Under
SFAS No. 109, the Company provides deferred income taxes
for the tax effects of temporary differences between the
financial reporting and income tax bases of the Companys
assets and liabilities.

66



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##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


The Company is organized under the laws of the
State of Delaware and is regarded as a United States corporation
for the purposes of this note. The Predecessor Company was
organized under the laws of Ontario and is regarded as a
Canadian corporation for purposes of this note.

The Company has net operating loss carryforwards
in the U.S. of approximately $361,000. The US net operating
loss carryforwards expire between the years 2007 and 2022. The
Company has approximately $102,000 in excess interest deductions
carryforwards which carry forward indefinitely.

Distribution of the new common stock of the
Company to the Companys creditors pursuant to the Plan has
resulted in an ownership change as defined in Section 382
of the Internal Revenue Code. As a result, the Companys
ability to utilize $144,000 of its net operating loss
carryforwards and its excess interest deduction carryforwards is
limited.

Certain future events may result in the net
operating loss and excess interest deduction carryforwards being
utilized in the Companys future income tax returns, which
the Company will record as a reduction in the valuation
allowance. To the extent the utilized amount relates to a period
prior to the reorganization, the associated credit will be to
additional paid-in capital in accordance with the principles of
fresh start reporting. To the extent the utilized amount relates
to a period subsequent to the reorganization, the associated
credit will be to the tax provision.

|                                                                                 |  |              |         |              |  |                   |         |                    |  |   |         |   |  |   |        | 
|-------------------------------------------------------------------------------- |  | ------------ | ------- | ------------ |  | ----------------- | ------- | ------------------ |  | - | ------- | - |  | - | ------ | 
|                                                                                 |  |              |         |              |  |                   |         | Predecessor       
|                                                                                 |  |              |         |              |  |                   |         | Company           
|                                                                                 |  |              |         |              |  |                   |         |                   
|                                                                                 |  | Year Ended   |         | Year Ended   |  | Nine Months Ended |         | Three Months Ended
|                                                                                 |  | December 31, |         | December 31, |  | December 31,      |         | March 31,         
|                                                                                 |  | 2002         |         | 2001         |  | 2000              |         | 2000              
|                                                                                 |  |              |         |              |  |                   |         |                   
|                                                                                 |  |              |         |              |  |                   |         | (unaudited)       
|Income (loss) from continuing operations before
    tax and reorganization costs |  |              |         |              |  |                   |         |                    |  |   |         |   |  |   |        | 
|U.S.                                                                             |  | $            | (43,705 | )            |  | $                 | (84,747 | )                  |  | $ | (45,079 | ) |  | $ | 9,275  | 
|Non U.S.                                                                         |  |              | 190     |              |  |                   | 2,877   |                    |  |   | (6,369  | ) |  |   | 7,108  | 
|                                                                                 |  |              |         |              |  |                   |         |                    |  |   |         |   |  |   |        | 
|Total                                                                            |  | $            | (43,515 | )            |  | $                 | (81,870 | )                  |  | $ | (51,448 | ) |  | $ | 16,383 | 
|                                                                                 |  |              |         |              |  |                   |         |                    |  |   |         |   |  |   |        | 

Federal, state and foreign provision for income
taxes are as follows:

|                         |          |              |       |              |  |                   |     |                    |   |   |       |       |  |   |     |     |  
|------------------------ | -------- | ------------ | ----- | ------------ |  | ----------------- | --- | ------------------ | - | - | ----- | ----- |  | - | --- | --- | -
|                         |          |              |       |              |  |                   |     | Predecessor       
|                         |          |              |       |              |  |                   |     | Company           
|                         |          |              |       |              |  |                   |     |                   
|                         |          | Year Ended   |       | Year Ended   |  | Nine Months Ended |     | Three Months Ended
|                         |          | December 31, |       | December 31, |  | December 31,      |     | March 31,         
|                         |          | 2002         |       | 2001         |  | 2000              |     | 2000              
|                         |          |              |       |              |  |                   |     |                   
|                         |          |              |       |              |  |                   |     | (unaudited)       
|U.S.  Federal and state |          |              |       |              |  |                   |     |                    |   |   |       |       |  |   |     |    
|                         | Current  |              | $     | 299          |  |                   | $   | 600                |   |   | $     | 858   |  |   | $   | 601 |  
|                         | Deferred |              |       |             |  |                   |     |                   |   |   |       |      |  |   |     |    |  
|                         |          |              |       |              |  |                   |     |                    |   |   |       |       |  |   |     |    
|                         |          |              | 299   |              |  |                   | 600 |                    |   |   | 858   |       |  |   | 601 |    
|                         |          |              |       |              |  |                   |     |                    |   |   |       |       |  |   |     |    
|Non- U.S                 |          |              |       |              |  |                   |     |                    |   |   |       |       |  |   |     |    
|                         | Current  |              |       | 599          |  |                   |     | 253                |   |   |       | 202   |  |   |     | 166 |  
|                         | Deferred |              |       | 892          |  |                   |     | (13                | ) |   |       | 2,803 |  |   |     | (35 | )
|                         |          |              |       |              |  |                   |     |                    |   |   |       |       |  |   |     |    
|                         |          |              | 1,491 |              |  |                   | 240 |                    |   |   | 3,005 |       |  |   | 131 |    
|                         |          |              |       |              |  |                   |     |                    |   |   |       |       |  |   |     |    
|Total                    |          | $            | 1,790 |              |  | $                 | 840 |                    |   | $ | 3,863 |       |  | $ | 732 |    
|                         |          |              |       |              |  |                   |     |                    |   |   |       |       |  |   |     |    

67



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##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


The Companys provision for income taxes
comprise the following:

|                                                                     |                                               |              |         |              |  |                   |         |                    |  |   |         |       |  |   |        |     | 
|-------------------------------------------------------------------- | --------------------------------------------- | ------------ | ------- | ------------ |  | ----------------- | ------- | ------------------ |  | - | ------- | ----- |  | - | ------ | --- | 
|                                                                     |                                               |              |         |              |  |                   |         | Predecessor       
|                                                                     |                                               |              |         |              |  |                   |         | Company           
|                                                                     |                                               |              |         |              |  |                   |         |                   
|                                                                     |                                               | Year Ended   |         | Year Ended   |  | Nine Months Ended |         | Three Months Ended
|                                                                     |                                               | December 31, |         | December 31, |  | December 31,      |         | March 31,         
|                                                                     |                                               | 2002         |         | 2001         |  | 2000              |         | 2000              
|                                                                     |                                               |              |         |              |  |                   |         |                   
|                                                                     |                                               |              |         |              |  |                   |         | (unaudited)       
|Income tax benefit based on statutory effective
    income tax rates |                                               | $            | (15,230 | )            |  | $                 | (28,512 | )                  |  | $ | (17,682 | )     |  | $ | (1,588 | )  
|(Increase) decrease in income tax benefit
    resulting from:        |                                               |              |         |              |  |                   |         |                    |  |   |         |       |  |   |        |    
|                                                                     | Tax rate differentials in other jurisdictions |              |         | 182          |  |                   |         | 225                |  |   |         | 476   |  |   |        | 134 | 
|                                                                     | Domestic taxes on foreign earned income       |              |         |             |  |                   |         | 1,750              |  |   |         | 1,998 |  |   |        |    | 
|                                                                     | Non-deductible expenses                       |              |         | 928          |  |                   |         | 568                |  |   |         | 933   |  |   |        | 113 | 
|Other non-deductible expenses relating to special
    charges        |                                               |              |        |              |  |                   |        |                    |  |   | 839     |       |  |   | 988    |    
|Valuation allowance                                                  |                                               |              | 14,868  |              |  |                   | 28,752  |                    |  |   | 17,887  |       |  |   | 2,244  |    
|Other                                                                |                                               |              | 1,042   |              |  |                   | (1,943  | )                  |  |   | (588    | )     |  |   | (1,159 | )  
|                                                                     |                                               |              |         |              |  |                   |         |                    |  |   |         |       |  |   |        |    
|Provision for income taxes                                           |                                               | $            | 1,790   |              |  | $                 | 840     |                    |  | $ | 3,863   |       |  | $ | 732    |    
|                                                                     |                                               |              |         |              |  |                   |         |                    |  |   |         |       |  |   |        |    

The provisions for income tax in 2002, 2001 and
2000 result from taxes on profits in certain foreign
jurisdictions and state income taxes on profits in certain
states.

The net deferred tax liability consists of the
following temporary differences:

|                                                                       |  |              |          |              |  |   |          |  
|---------------------------------------------------------------------- |  | ------------ | -------- | ------------ |  | - | -------- | -
|                                                                       |  | December 31, |          | December 31,
|                                                                       |  | 2002         |          | 2001        
|                                                                       |  |              |          |             
|Net operating loss and excess interest
    deduction
    carryforwards |  | $            | (162,956 | )            |  | $ | (137,164 | )
|Accruals not yet deductible and asset basis
    differences            |  |              | (96,487  | )            |  |   | (94,058  | )
|Other                                                                  |  |              | (182     | )            |  |   | (389     | )
|Valuation allowance                                                    |  |              | 265,800  |              |  |   | 239,493  |  
|                                                                       |  |              |          |              |  |   |          |  
|Net deferred tax liability                                             |  | $            | 6,175    |              |  | $ | 7,882    |  
|                                                                       |  |              |          |              |  |   |          |  

The net operating loss carryforwards expire
between the years 2007 and 2022. In assessing the value of the
deferred tax assets, management considers whether it is more
likely than not that all of the deferred tax assets will be
realized. Projected future income tax planning strategies and
the expected reversal of deferred tax liabilities are considered
in making this assessment. The Company determined that, at this
time, based on the level of historical taxable income and
projections for future taxable income over the periods in which
the net operating losses are deductible, it is more likely than
not that the Company will not realize the benefits of its
deferred tax assets. The December 31, 2002, valuation
allowance increased by $26,307 of which $14,868 relates to the
change in deferred tax assets from continuing operations, $3,459
relates to the change in deferred tax assets from discontinued
operations, and $7,980 relates to adjustments made to the
deferred tax assets on finalization of the Companys 2001
federal tax return. The December 31, 2001, valuation
allowance increased by $37,740 of which $27,887 relates to the
change in deferred tax assets and $9,853 relates to adjustments
made to the deferred tax assets on finalization of the
Companys 2000 federal tax return.

68



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##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


Provisions have not been made for
U.S. income taxes on approximately $14,043 of undistributed
earnings of foreign subsidiaries as these earnings are
considered indefinitely reinvested. These earnings could become
subject to U.S. income taxes if they were remitted as
dividends, were lent to the Company or a U.S. subsidiary or
if the Company should sell its stock in the subsidiaries. If
such earnings were not considered indefinitely reinvested,
deferred U.S. income taxes would have been provided of
approximately $4,915.

(19)     Related
Parties(in thousands)

The Companys two largest stockholders, Carl
C. Icahn and Stephen Feinberg, participate in the companys
revolving operating facilities and the term debt and PIK
facilities through entities they control. Mr. Icahn
controlled approximately $187,084 and $184,000 of the
Companys total debt that for the years ended
December 31, 2002, and 2001, respectively and was
associated with approximately $18,604 and $14,000 in interest
expense and fees for the years ended December 31, 2002, and
2001, respectively. Mr. Feinberg controlled approximately
$102,547 and $60,000 of the Companys total debt that for
the years ended December 31, 2002, and 2001, respectively,
and was associated with approximately $10,252 and $4,500 in
interest expense and fees for the years ended December 31,
2002, and 2001, respectively. In addition, entities controlled
by these stockholders received shares of common stock in
connection with the companys April 2002 mezzanine
financing. Also, in connection with the April 2003 revolving
operating facility amendment, a fee of $100 was paid to the
lenders under Tranche B-Prime, which are, respectively,
affiliates of the Companys two largest stockholders, Carl
C. Icahn and affiliates and Stephen Feinberg and affiliates.

The Company has utilized the services of SBI and
Company, Inc. (SBI) for information technology
services associated with the PSC Way business reengineering
project. SBI is partially owned by entities controlled by one of
the Companys largest stockholders, Stephen Feinberg (see
Item 12. Security Ownership of Certain Beneficial Owners
and Management). Fees paid to SBI totaled $2,700 and $8,500
during 2002 and 2001, respectively.

(20)     Commitments(in thousands)

Future rental payments required under operating
leases for premises and equipment are as follows:

|                    |  |   |        | 
|------------------- |  | - | ------ | 
|2003                |  | $ | 13,261 | 
|2004                |  |   | 8,335  | 
|2005                |  |   | 6,030  | 
|2006                |  |   | 3,686  | 
|2007 and thereafter |  |   | 4,444  | 

Rental expense amounted to $33,127 and $29,948
for the years ended December 31, 2002, and 2001, and
$15,772 for the nine-months ended December 31, 2000,
respectively. Letters of credit issued by the Company amounted
to $92,775 and 84,282 at December 31, 2002 and 2001,
respectively.

(21)     Segmented
Information(in thousands)

The Companys business operations are
organized into the following three segments:



| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Industrial Services Group includes operations
    that perform industrial cleaning, maintenance, and environmental
    services.                                                    
|
| |  | The Metals Services Group, whose primary
    operations include ferrous and non-ferrous scrap collection and
    processing, brokerage and transportation and on-site mill
    services.
|
| |  | The Project Services Division includes operations
    that perform refractory, catalyst and union mechanical and
    turnaround services.                                               

69



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##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


|                              |  |                              |         |          |  |          |         |           |  |       |         |   |  |   |         |   |  |   |           | 
|----------------------------- |  | ---------------------------- | ------- | -------- |  | -------- | ------- | --------- |  | ----- | ------- | - |  | - | ------- | - |  | - | --------- | 
|                              |  |                             
|                              |  | Year Ended December 31, 2002
|                              |  |                             
|                              |  | Industrial                   |         | Metals   |  | Project  |         |          
|                              |  | Services                     |         | Services |  | Services |         | Corporate |  | Total
|                              |  |                              |         |          |  |          |         |           |  |      
|Revenue                       |  | $                            | 530,160 |          |  | $        | 483,878 |           |  | $     | 104,422 |   |  | $ |        |   |  | $ | 1,118,460 | 
|Income (loss) from operations |  |                              | 25,218  |          |  |          | 7,073   |           |  |       | (4,607  | ) |  |   | (20,263 | ) |  |   | 7,421     | 
|Total assets                  |  |                              | 262,337 |          |  |          | 163,745 |           |  |       | 86,883  |   |  |   | 88,045  |   |  |   | 601,010   | 
|Depreciation and amortization |  |                              | 28,363  |          |  |          | 7,579   |           |  |       | 1,330   |   |  |   | 3,069   |   |  |   | 40,341    | 
|Capital expenditures          |  |                              | 19,140  |          |  |          | 6,684   |           |  |       |        |   |  |   | 2,625   |   |  |   | 28,449    | 
|Equity investments            |  |                              |        |          |  |          | 254     |           |  |       |        |   |  |   | 250     |   |  |   | 504       | 

|                              |  |                              |         |          |  |          |         |           |  |       |         |   |  |   |         |   |  |   |           |  
|----------------------------- |  | ---------------------------- | ------- | -------- |  | -------- | ------- | --------- |  | ----- | ------- | - |  | - | ------- | - |  | - | --------- | -
|                              |  |                             
|                              |  | Year Ended December 31, 2001
|                              |  |                             
|                              |  | Industrial                   |         | Metals   |  | Project  |         |          
|                              |  | Services                     |         | Services |  | Services |         | Corporate |  | Total
|                              |  |                              |         |          |  |          |         |           |  |      
|Revenue                       |  | $                            | 572,147 |          |  | $        | 467,684 |           |  | $     | 104,922 |   |  | $ |        |   |  | $ | 1,144,753 |  
|Income (loss) from operations |  |                              | 9,691   |          |  |          | (26,434 | )         |  |       | (6,371  | ) |  |   | (18,203 | ) |  |   | (41,317   | )
|Total assets                  |  |                              | 268,028 |          |  |          | 183,140 |           |  |       | 106,864 |   |  |   | 81,371  |   |  |   | 639,403   |  
|Depreciation and amortization |  |                              | 27,616  |          |  |          | 7,862   |           |  |       | 850     |   |  |   | 3,673   |   |  |   | 40,001    |  
|Capital expenditures          |  |                              | 31,198  |          |  |          | 8,515   |           |  |       |        |   |  |   | 7,900   |   |  |   | 47,613    |  
|Equity investments            |  |                              |        |          |  |          | 704     |           |  |       |        |   |  |   | 1,358   |   |  |   | 2,062     |  

|                              |  |                                     |         |          |  |          |         |           |  |       |        |   |  |   |         |   |  |   |         |  
|----------------------------- |  | ----------------------------------- | ------- | -------- |  | -------- | ------- | --------- |  | ----- | ------ | - |  | - | ------- | - |  | - | ------- | -
|                              |  |                                    
|                              |  | Nine Months Ended December 31, 2000
|                              |  |                                    
|                              |  | Industrial                          |         | Metals   |  | Project  |         |          
|                              |  | Services                            |         | Services |  | Services |         | Corporate |  | Total
|                              |  |                                     |         |          |  |          |         |           |  |      
|Revenue                       |  | $                                   | 443,107 |          |  | $        | 391,210 |           |  | $     | 82,679 |   |  | $ |        |   |  | $ | 916,996 |  
|Income (loss) from operations |  |                                     | (7,461  | )        |  |          | 327     |           |  |       | (2,863 | ) |  |   | (17,295 | ) |  |   | (27,292 | )
|Total assets                  |  |                                     | 308,510 |          |  |          | 222,331 |           |  |       | 82,892 |   |  |   | 108,816 |   |  |   | 722,549 |  
|Depreciation and amortization |  |                                     | 19,838  |          |  |          | 5,956   |           |  |       | 2,279  |   |  |   | 3,411   |   |  |   | 31,484  |  
|Capital expenditures          |  |                                     | 24,640  |          |  |          | 9,837   |           |  |       |       |   |  |   | 5,072   |   |  |   | 39,549  |  
|Equity investments            |  |                                     |        |          |  |          | 2,978   |           |  |       |       |   |  |   | 1,637   |   |  |   | 4,615   |  
|                             

|                              |  |                                               |         |          |  |          |         |           |  |       |         |  |  |   |         |   |  |   |         | 
|----------------------------- |  | --------------------------------------------- | ------- | -------- |  | -------- | ------- | --------- |  | ----- | ------- |  |  | - | ------- | - |  | - | ------- | 
|                              |  |                                              
|                              |  | Predecessor Company                          
|                              |  |                                              
|                              |  |                                              
|                              |  | Three Months Ended March 31, 2000 (unaudited)
|                              |  |                                              
|                              |  | Industrial                                    |         | Metals   |  | Project  |         |          
|                              |  | Services                                      |         | Services |  | Services |         | Corporate |  | Total
|                              |  |                                               |         |          |  |          |         |           |  |      
|Revenue                       |  | $                                             | 138,138 |          |  | $        | 214,098 |           |  | $     | 30,353  |  |  | $ |        |   |  | $ | 382,589 | 
|Income (loss) from operations |  |                                               | (1,035  | )        |  |          | 8,074   |           |  |       | 1,227   |  |  |   | (2,665  | ) |  |   | 5,601   | 
|Total assets                  |  |                                               | 300,620 |          |  |          | 295,085 |           |  |       | 110,509 |  |  |   | 161,541 |   |  |   | 867,755 | 
|Depreciation and amortization |  |                                               | 6,874   |          |  |          | 3,195   |           |  |       | 598     |  |  |   | 721     |   |  |   | 11,388  | 
|Capital expenditures          |  |                                               | 6,119   |          |  |          | 5,037   |           |  |       |        |  |  |   | 29      |   |  |   | 11,185  | 
|Equity investments            |  |                                               |        |          |  |          | 5,848   |           |  |       |        |  |  |   |        |   |  |   | 5,848   | 

70



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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


The geographical segmentation of the
Companys and Predecessor Companys businesses is as
follows:

|              |  |                   |           |                   |  |                   |         |                    |  |         |           |            |  |                     |         |            |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 
|------------- |  | ----------------- | --------- | ----------------- |  | ----------------- | ------- | ------------------ |  | ------- | --------- | ---------- |  | ------------------- | ------- | ---------- |  | - | ------- |  |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|              |  |                   |           |                   |  |                   |         |                    |  |         |           |            |  |                    
|              |  |                   |           |                   |  |                   |         |                    |  |         |           |            |  | Predecessor Company
|              |  |                   |           |                   |  |                   |         |                    |  |         |           |            |  |                    
|              |  |                   |           |                   |  |                   |         |                   
|              |  | Year Ended        |           | Year Ended        |  | Nine Months Ended |         | Three Months Ended
|              |  | December 31, 2002 |           | December 31, 2001 |  | December 31, 2000 |         | March 31, 2000    
|              |  |                   |           |                   |  |                   |         |                   
|              |  |                   |           |                   |  |                   |         |                   
|              |  |                   |           |                   |  |                   |         | (unaudited)       
|              |  |                   |           | Long-Lived        |  |                   |         | Long-Lived         |  |         |           | Long-Lived |  |                     |         | Long-Lived
|              |  | Revenue           |           | Assets            |  | Revenue           |         | Assets             |  | Revenue |           | Assets     |  | Revenue             |         | Assets    
|              |  |                   |           |                   |  |                   |         |                    |  |         |           |            |  |                     |         |           
|United States |  | $                 | 957,198   |                   |  | $                 | 197,435 |                    |  | $       | 1,026,914 |            |  | $                   | 219,959 |            |  | $ | 805,190 |  |  | $ | 218,046 |  |  | $ | 323,163 |  |  | $ | 215,656 | 
|Canada        |  |                   | 161,262   |                   |  |                   | 31,261  |                    |  |         | 110,217   |            |  |                     | 51,534  |            |  |   | 101,494 |  |  |   | 62,712  |  |  |   | 25,266  |  |  |   | 72,007  | 
|Other         |  |                   |          |                   |  |                   | 40,254  |                    |  |         | 7,622     |            |  |                     | 41,896  |            |  |   | 10,312  |  |  |   | 45,002  |  |  |   | 34,160  |  |  |   | 65,111  | 
|              |  |                   |           |                   |  |                   |         |                    |  |         |           |            |  |                     |         |            |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 
|              |  | $                 | 1,118,460 |                   |  | $                 | 268,950 |                    |  | $       | 1,144,753 |            |  | $                   | 313,389 |            |  | $ | 916,996 |  |  | $ | 325,760 |  |  | $ | 382,589 |  |  | $ | 352,774 | 
|              |  |                   |           |                   |  |                   |         |                    |  |         |           |            |  |                     |         |            |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 

(22)     Contingencies(in thousands)

(a) The Company (together with the
industries in which it operates) is subject to federal, state,
local and foreign (particularly Canadian) environmental laws and
regulations concerning discharges to the air, soil, surface and
subsurface waters and the generation, handling, storage,
transportation, treatment and disposal of waste materials and
hazardous substances. The Company and the industries in which it
operates are also subject to other federal, state, local and
foreign (particularly Canadian) laws and regulations including
those that require the Company to remove or mitigate the effects
of the disposal or release of certain materials at various sites.

It is impossible to predict precisely what effect
these laws and regulations will have on the Company in the
future. Compliance with environmental laws and regulations may
result in, among other things, capital expenditures, costs and
liabilities. Management believes, based on past experience and
its best assessment of future events, that these environmental
liabilities and costs will be assessed and paid over an extended
period of time. The Company believes that it will be able to
fund such liabilities and costs in the ordinary course of
business.

Certain of the Companys facilities are
environmentally impaired in part as a result of operating
practices at the sites prior to their acquisition by the
Company. The Company has established procedures to periodically
evaluate these sites, giving consideration to the nature and
extent of the contamination. The Company has provided for the
remediation of these sites based upon managements judgment
and prior experience. The Company has estimated the liability to
remediate these sites to be $54,193 (December 31,
2001  $55,899).

Certain subsidiaries of the Company have been
named as potentially responsible or liable parties under
U.S. federal and state superfund laws in connection with
various sites. It is alleged that the Company and its
subsidiaries or their predecessors transported waste to the
sites, disposed of waste at the sites, or operated the sites in
question. The Company has reviewed the nature and extent of the
allegations, the number, connection and financial ability of
other named and unnamed potentially responsible parties and the
nature and estimated cost of the likely remedy. Based on its
review, the Company has accrued its estimate of its liability to
remediate these sites at $13,159 (December 31,
2001  $16,504). If it is determined that more
expensive remediation approaches may be required in the future,
the Company could incur additional obligations, which could be
material.

71



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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


The liabilities discussed above are disclosed in
the Consolidated Balance Sheets as follows:

|                    |  |              |        |              |  |   |        | 
|------------------- |  | ------------ | ------ | ------------ |  | - | ------ | 
|                    |  | December 31, |        | December 31,
|                    |  | 2002         |        | 2001        
|                    |  |              |        |             
|Accrued liabilities |  | $            | 4,581  |              |  | $ | 4,582  | 
|Other liabilities   |  |              | 62,771 |              |  |   | 67,821 | 
|                    |  |              |        |              |  |   |        | 
|                    |  | $            | 67,352 |              |  | $ | 72,403 | 
|                    |  |              |        |              |  |   |        | 

Estimates of the Companys liability for
remediation of a particular site and the method and ultimate
cost of remediation require a number of assumptions and are
inherently difficult, and the ultimate outcome may differ from
current estimates. As additional information becomes available,
estimates are adjusted. It is possible that technological,
regulatory or enforcement developments, the results of
environmental studies or other factors could alter estimates and
necessitate the recording of additional liabilities, which could
be material. Moreover, because PSC has disposed of waste
materials at numerous third-party disposal facilities, it is
possible that PSC will be identified as a potentially
responsible party at additional sites. The impact of such future
events cannot be estimated at the current time.

(b) The Company is not currently a party to
any material pending legal proceedings, other than routine
matters incidental to the business, and no material developments
have occurred in any proceedings except as described below.

(c) The Company is a defendant in lawsuits
for which the Company has insurance coverage. Each of these
suits is, in the event of an adverse verdict, subject to a
deductible. Although the Company does not believe that the
uninsured liability from any of these suits would be material,
it is not possible to predict the effect of the cumulative
deductibles. The Company is named as a defendant in a number of
other lawsuits, which have arisen in the ordinary course of its
business. The Company believes that except as otherwise reported
herein, neither the insured litigation nor the other litigation
is likely to have a material adverse effect on its business or
financial condition. The Company is, however, unable to predict
the outcome of certain of the forgoing matters and cannot
provide assurance that these or future matters will not have a
material adverse effect on the results of operations or
financial condition of the Company.

(d) Sparrows Point Scrap Processing, LLC.
(SPSP) is a joint venture operation the Company has
with AMG Resources Corporation to provide ferrous scrap and
scrap handling services to Bethlehem Steel Corporation. Sales to
SPSP were $6 and $1,200 in 2002 and 2001, respectively. Accounts
receivable-net due to the Company were $0 million and $500
at December 31, 2002 and 2001 respectively. Although the
Company wrote off the remaining investment (approximately
$1,800) in SPSP during 2001 after assessing the recoverability
of the investment, a contingency remains for the Companys
guarantee of 50% of the operating losses of the joint venture.
The amount or timing of any future gains or losses cannot be
reliably estimated at this time. Additionally, the Company has
exposure for its share of financial guarantees with respect to
future lease commitments of $10,400 and debt obligations of
approximately $600.

72



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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


(23)     Unaudited
Quarterly Financial Data(in thousands, except per share
amounts)

The table below sets forth consolidated operating
results by fiscal quarter for the years ended December 31,
2002 and 2001.

|                                                                                                                             |                                                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |       |  
|---------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | - | - | ------- | ----- | - | - | ------- | ----- | - | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                             |                                                         |         |         |        
|                                                                                                                             |                                                         | 2002    |         | 2001   
|                                                                                                                             |                                                         |         |         |        
|                                                                                                                             |                                                         | Fourth  |         | Third   |   | Second  |         | First   |   | Fourth  |         | Third   |   | Second  |         | First  
|                                                                                                                             |                                                         | Quarter |         | Quarter |   | Quarter |         | Quarter |   | Quarter |         | Quarter |   | Quarter |         | Quarter
|                                                                                                                             |                                                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |        
|Revenue                                                                                                                      |                                                         | $       | 288,053 |         |   | $       | 287,968 |         |   | $       | 289,435 |         |   | $       | 253,004 |         |   | $ | 251,652 |       |   | $ | 270,680 |       |   | $ | 305,731 |       |   | $ | 316,690 |      
|Operating expenses                                                                                                           |                                                         |         | 252,803 |         |   |         | 248,047 |         |   |         | 232,565 |         |   |         | 219,636 |         |   |   | 222,200 |       |   |   | 235,919 |       |   |   | 261,403 |       |   |   | 267,501 |      
|Selling, general and administrative costs                                                                                    |                                                         |         | 28,837  |         |   |         | 22,530  |         |   |         | 29,203  |         |   |         | 26,188  |         |   |   | 48,135  |       |   |   | 30,047  |       |   |   | 28,918  |       |   |   | 40,011  |      
|Asset impairment and other unusual costs                                                                                     |                                                         |         | 2,206   |         |   |         | 1,269   |         |   |         | 2,814   |         |   |         | 4,600   |         |   |   | 4,622   |       |   |   | 1,166   |       |   |   | 3,350   |       |   |   | 2,797   |      
|Depreciation and amortization                                                                                                |                                                         |         | 11,610  |         |   |         | 9,621   |         |   |         | 9,625   |         |   |         | 9,485   |         |   |   | 9,859   |       |   |   | 9,707   |       |   |   | 10,221  |       |   |   | 10,214  |      
|                                                                                                                             |                                                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |      
|Income (loss) from operations                                                                                                |                                                         |         | (7,403  | )       |   |         | 6,501   |         |   |         | 15,228  |         |   |         | (6,905  | )       |   |   | (33,164 | )     |   |   | (6,159  | )     |   |   | 1,839   |       |   |   | (3,833  | )    
|Interest expense                                                                                                             |                                                         |         | 13,401  |         |   |         | 14,134  |         |   |         | 12,869  |         |   |         | 10,445  |         |   |   | 10,524  |       |   |   | 9,793   |       |   |   | 9,511   |       |   |   | 9,473   |      
|Other (income) and expense  net                                                                                             |                                                         |         | 1,630   |         |   |         | (2,374  | )       |   |         | 1,437   |         |   |         | (606    | )       |   |   | 5,147   |       |   |   | 1,176   |       |   |   | (4,405  | )     |   |   | (666    | )    
|                                                                                                                             |                                                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |      
|Income (loss) from continuing operations before
    income taxes and cumulative effect of change in accounting
    principle |                                                         |         | (22,434 | )       |   |         | (5,259  | )       |   |         | 922     |         |   |         | (16,744 | )       |   |   | (48,835 | )     |   |   | (17,128 | )     |   |   | (3,267  | )     |   |   | (12,640 | )    
|Provision for income taxes                                                                                                   |                                                         |         | 701     |         |   |         | 448     |         |   |         | 423     |         |   |         | 218     |         |   |   | 663     |       |   |   | (307    | )     |   |   | 118     |       |   |   | 366     |      
|                                                                                                                             |                                                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |      
|Income (loss) from continuing operations before
    cumulative effect of change in accounting principle                      |                                                         |         | (23,135 | )       |   |         | (5,707  | )       |   |         | 499     |         |   |         | (16,962 | )       |   |   | (49,498 | )     |   |   | (16,821 | )     |   |   | (3,385  | )     |   |   | (13,006 | )    
|Cumulative effect of change in accounting
    principle, net of taxes                                                        |                                                         |         | (2,423  | )       |   |         |        |         |   |         |        |         |   |         |        |         |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |      
|Income (loss) from discontinued operations, net
    of taxes                                                                 |                                                         |         | (5,180  | )       |   |         | (7,753  | )       |   |         | (6,766  | )       |   |         | 8,230   |         |   |   | (1,318  | )     |   |   | (1,854  | )     |   |   | 3,948   |       |   |   | 3,799   |      
|                                                                                                                             |                                                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |      
|Net income (loss)                                                                                                            |                                                         | $       | (30,738 | )       |   | $       | (13,460 | )       |   | $       | (6,267  | )       |   | $       | (8,732  | )       |   | $ | (50,816 | )     |   | $ | (18,675 | )     |   | $ | 563     |       |   | $ | (9,207  | )    
|                                                                                                                             |                                                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |      
|Basic and diluted income (loss) per common share                                                                             |                                                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |      
|                                                                                                                             | Continuing operations                                   |         | $       | (0.86   | ) |         | $       | (0.21   | ) |         | $       | 0.02    |   |         | $       | (0.63   | ) |   | $       | (2.06 | ) |   | $       | (0.70 | ) |   | $       | (0.14 | ) |   | $       | (0.54 | )
|                                                                                                                             | Cumulative effect of change in accounting
    principle |         |         | (0.09   | ) |         |         |        |   |         |         |        |   |         |         |        |   |   |         |      |   |   |         |      |   |   |         |      |   |   |         |      |  
|                                                                                                                             | Discontinued operations                                 |         |         | (0.20   | ) |         |         | (0.29   | ) |         |         | (0.25   | ) |         |         | 0.31    |   |   |         | (0.05 | ) |   |         | (0.08 | ) |   |         | 0.16  |   |   |         | 0.16  |  
|                                                                                                                             |                                                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |      
|                                                                                                                             |                                                         | $       | (1.15   | )       |   | $       | (0.50   | )       |   | $       | (0.23   | )       |   | $       | (0.32   | )       |   | $ | (2.11   | )     |   | $ | (0.78   | )     |   | $ | 0.02    |       |   | $ | (0.38   | )    
|                                                                                                                             |                                                         |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |   |         |       |   |   |         |       |   |   |         |       |   |   |         |      

Certain reclassifications of prior period and
reported 2002 period data have been made to conform with the
2002 full-year reporting.

73



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NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


(24)     New
Accounting Pronouncements

In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 141, Business
Combinations. This statement addresses financial
accounting and reporting for business combinations and
supersedes APB Opinion No. 16, Business
Combinations and FASB Statement No. 38,
Accounting for Preacquisition Contingencies of Purchased
Enterprises. The provisions of this statement apply to all
business combinations initiated after September 30, 2001.
The Companys adoption of Statement No. 141 on
January 1, 2002 did not have a material effect on the
Companys consolidated financial statements.

In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets. This Statement addresses
financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. The Companys adoption of
Statement No. 142 on January 1, 2002 did not have a
material effect on the Companys consolidated financial
statements.

In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligations. The statement applies to
legal obligations associated with the retirement of long-lived
assets, except for certain obligations of lessees. The
provisions of this statement are required to be applied for
fiscal years beginning after June 15, 2002, with early
adoption of the Statement encouraged by the FASB. The Company
elected early adoption of Statement 143 in December 2002,
resulting in the recording of certain asset retirement
obligations and corresponding long-lived assets. Additionally,
the adoption of Statement No. 143 resulted in a charge of
$2,423, net of tax, recognized on the companys
consolidated statement of earnings as a cumulative effect of a
change in accounting principle.

In August 2001, the FASB issued Statement of
Financial Accounting Standards No. 144 Accounting for
the Impairment or Disposal of Long-Lived Assets. This
statement supersedes FASB Statement 121. This statement
addresses financial accounting and reporting for long-lived
assets impaired or disposed of by sale. The provisions of this
statement are effective for financial statements issued for
fiscal years beginning after December 15, 2001. The Company
adopted Statement 144 on January 1, 2002. The adoption of
Statement 144 has resulted in the recognition of discontinued
operations for disposals subsequent to December 31, 2001,
that would not have been recognized as such prior to the
adoption.

In April 2002, the FASB issued Statement of
Financial Accounting Standards No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, which
was effective for the Company beginning June 1, 2002.
Statement 145 rescinds FASB Statement No. 4, 44, 64 and
amends SFAS No. 13, Accounting for Leases, to
provide guidance for income statement classification and gains
and losses on extinguishment of debt and eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. The Companys adoption of
Statement No. 145 in June 2002 did not have a material
effect on the Companys consolidated financial statements.

In July 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting
for Costs Associated with Exit or Disposal Activities.
Statement No. 146 addresses significant issues regarding
the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including
restructuring activities that are currently accounted for
pursuant to the guidance set forth in EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity. SFAS
No. 146 is effective for the Company in January 2003. The
Companys adoption of Statement No. 146 on
January 1, 2003 did not have a material effect on the
Companys consolidated financial statements.

In October 2002, the FASB issued Statement of
Financial Accounting Standards No. 147, Acquisitions
of Certain Financial Institutions. This pronouncement
relates to accounting for acquisitions and the impairment or
disposal of certain long-term customer-relationship intangible
assets of financial institutions.

74



---



##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


The pronouncement is effective for reporting
periods beginning after October 1, 2002. The Companys
adoption of Statement No. 147 in October 2002 did not have
a material effect on the Companys consolidated financial
statements.

In December 2002, the FASB issued Statement of
Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation, Transition and Disclosure.
Statement No. 148 amends Statement No. 123 and
requires prominent disclosures in both annual and interim
financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. Statement No. 148 is effective
for fiscal years ending after December 15, 2002. The
Companys adoption of Statement No. 148 in December
2002, did not have a material effect on the Companys
consolidated financial statements.

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, An Interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB
Interpretation No. 34 (FIN 45).
FIN 45 clarifies the requirements of FASB Statement
No. 5, Accounting For Contingencies relating to
the guarantors accounting for, and disclosure of the
issuance of certain types of guarantees. The disclosure
provisions of the Interpretation are effective for financial
statements of interim or annual reports that end after
December 15, 2002, irrespective of the guarantors
year-end. The Companys adoption of FIN 45 did not
have a material impact in the Companys consolidated
financial statements.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest
Entities (FIN 46). FIN 46 requires
that unconsolidated variable interest entities be consolidated
by their primary beneficiaries. A primary beneficiary is the
party that absorbs a majority of the entitys expected
losses or residual benefits. FIN 46 applies immediately to
variable interest entities created after January 31, 2003,
and to existing variable interest entities in the periods
beginning after June 15, 2003. The Company has yet to
determine the impact that the adoption of FIN 46 will have
on the Companys consolidated financial statements.

75



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The Company expects to amend this Form 10-K
prior to April 30, 2003, to provide the information called
for by Items 10, 11, 12 and 13.






|         |                       
|-------- | ----------------------
|Item 14. | Control and Procedures

Based upon an evaluation within 90 days
prior to the filing date of this report, the Chairman of the
Board and the Senior Vice President and Chief Financial Officer
of the Company concluded that the Companys disclosure
controls and procedures are effective. There have been no
significant changes in the Companys internal controls or
in other factors that could significantly affect the
Companys internal controls subsequent to the date of
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a)(1) Financial Statements

The following financial statements and
independent auditors report required by the Item are filed
herewith under Item 8.



| |                                                                   
| | ------------------------------------------------------------------
| | (i) Report of Independent Accountants                             
|
| | (ii) Consolidated Balance Sheets                                  
|
| | (iii) Consolidated Statements of Earnings                         
|
| | (iv) Consolidated Statements of
    Stockholders Equity (Deficit)
|
| | (v) Consolidated Statements of Cash Flows                         
|
| | (vi) Notes to the Consolidated Financial
    Statements           

(2) Schedule II 
Valuation and Qualifying Accounts

(b) Reports on Form 8-K

The Company filed a Form 8-K dated
November 21, 2002 announcing that it was combining the
activities of its Industrial Outsourcing Group and its
Environmental Services Group and related matters.

(c) Exhibits

|        |     |             |  |                                                                                                                                        
|------- | --- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | 3.1 |             |  | Amended and Restated Certificate of Incorporation.                                                                                     
|        | 3.2 |             |  | Amended By-Laws (incorporated by reference to
    Exhibit 3.2 to the registrants Annual Report on
    Form 10-K filed March 29, 2001).

76



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                
|------- | ----- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.1  |             |  | Credit Agreement, dated as of March 31,
    2000, between the registrant and various of its lenders, with
    Canadian Imperial Bank of Commerce acting as Administrative
    Agent (incorporated by reference to Exhibit 99.1 to the
    registrants Current Report on Form 8-K filed
    May 8, 2000).                                      
|        | 10.2  |             |  | Loan Agreement, dated as of March 31, 2000,
    between the registrant and certain of its lenders, with Foothill
    Capital Corporation acting as Arranger and Administrative Agent
    (incorporated by reference to Exhibit 99.2 to the
    registrants Current Report on Form 8-K filed
    May 8, 2000).                                 
|        | 10.3  |             |  | Registration Rights Agreement, dated as of
    March 31, 2000 between the registrant and certain
    securities holders (incorporated by reference to
    Exhibit 99.4 to the registrants Current Report on
    Form 8-K filed May 8, 2000).                                                                                                  
|        | 10.4  |             |  | Philip Services Corporation Performance Unit
    Bonus Plan (incorporated by reference to Exhibit 10.6 to
    the registrants Quarterly Report on Form 10-Q filed
    August 14, 2001).                                                                                                                                                       
|        | 10.5  |             |  | Philip Services Corporation Stock Option Plan
    (incorporated by reference to Exhibit 99.7 to the
    registrants Current Report on Form 8-K filed
    May 8, 2000).                                                                                                                                                                        
|        | 10.6  |             |  | First amendment to Credit Agreement, dated as of
    March 8, 2001, between the registrant and various of its
    lenders, with Canadian Imperial Bank of Commerce acting as
    Administrative Agent (incorporated by reference to
    Exhibit 10.8 to the registrants Annual Report on
    Form 10-K filed March 29, 2001).                 
|        | 10.7  |             |  | Second amendment to Credit Agreement, dated as of
    March 28, 2001, between the registrant and various of its
    lenders, with Canadian Imperial Bank of Commerce acting as
    Administrative Agent (incorporated by reference to
    Exhibit 10.9 to the registrants Annual Report on
    Form 10-K filed March 29, 2001).               
|        | 10.8  |             |  | Amendment Number One, dated March 28, 2001,
    to Loan Agreement between the registrant and certain of its
    lenders, with Foothill Capital Corporation acting as Arranger
    and Administrative Agent (incorporated by reference to
    Exhibit 10.10 to the registrants Annual Report on
    Form 10-K filed March 29, 2001).           
|        | 10.9  |             |  | Indenture, dated as of April 7, 2000,
    relating to the registrants 6% Subordinated Notes due
    April 15, 2010 (incorporated by reference to
    Exhibit 10.11 to the registrants Quarterly Report on
    Form 10-Q filed May 21, 2001).                                                                                                 
|        | 10.10 |             |  | Indenture, dated as of April 7, 2000,
    relating to the registrants 3% Convertible Subordinated
    Notes due April 15, 2020 (incorporated by reference to
    Exhibit 10.12 to the registrants Quarterly Report on
    Form 10-Q filed May 21, 2001).                                                                                     
|        | 10.11 |             |  | Third amendment to Credit Agreement, dated as of
    May 18, 2001, between the registrant and various of its
    lenders, with Canadian Imperial Bank of Commerce acting as
    Administrative Agent (incorporated by reference to
    Exhibit 10.13 to the registrants Quarterly Report on
    Form 10-Q filed May 21, 2001).                
|        | 10.12 |             |  | Amendment Number Two, dated May 18, 2001, to
    Loan Agreement between the registrant and certain of its
    lenders, with Foothill Capital Corporation acting as Arranger
    and Administrative Agent (incorporated by reference to
    Exhibit 10.14 to the registrants Quarterly Report on
    Form 10-Q filed May 21, 2001).            
|        | 10.13 |             |  | Amended and Restated Philip Services Corporation
    Nonemployee Directors Restricted Stock Plan.                                                                                                                                                                                                                                              
|        | 10.14 |             |  | Philip Services Corporation Officers
    Stock-Based Bonus Plan (incorporated by reference to the
    registrants Definitive Proxy Statement on
    Schedule 14A filed March 29, 2001).                                                                                                                                                      
|        | 10.15 |             |  | Fourth amendment to Credit Agreement, dated as of
    November 19, 2001, between the registrant and various of
    its lenders, with Canadian Imperial Bank of Commerce acting as
    Administrative Agent (incorporated by reference to
    Exhibit 10.17 to the registrants Quarterly Report on
    Form 10-Q filed November 19, 2001).     
|        | 10.16 |             |  | Amendment Number Three, dated November 19,
    2001, to Loan Agreement between the registrant and certain of
    its lenders, with Foothill Capital Corporation acting as
    Arranger and Administrative Agent (incorporated by reference to
    Exhibit 10.18 to the registrants Quarterly Report on
    Form 10-Q filed November 19, 2001).

77



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|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.17 |             |  | Amendment Number Four, dated January 29,
    2002, to Loan Agreement between the registrant and certain of
    its lenders, with Foothill Capital Corporation acting as
    Arranger and Administrative Agent (incorporated by reference to
    Exhibit 10.17 to the registrants Annual Report on
    Form 10-K filed April 15, 2002).                                                                                         
|        | 10.18 |             |  | Amendment Number Five, dated February 19,
    2002, to Loan Agreement between the registrant and certain of
    its lenders, with Foothill Capital Corporation acting as
    Arranger and Administrative Agent (incorporated by reference to
    Exhibit 10.18 to the registrants Annual Report on
    Form 10-K filed April 15, 2002).                                                                                        
|        | 10.19 |             |  | Amendment Number Six, dated March 8, 2002,
    to Loan Agreement between the registrant and certain of its
    lenders, with Foothill Capital Corporation acting as Arranger
    and Administrative Agent (incorporated by reference to
    Exhibit 10.19 to the registrants Annual Report on
    Form 10-K filed April 15, 2002).                                                                                             
|        | 10.20 |             |  | Fifth amendment to Credit Agreement, dated as of
    April 12, 2002, between the registrant and various of its
    lenders, with Canadian Imperial Bank of Commerce acting as
    Administrative Agent (incorporated by reference to
    Exhibit 10.20 to the registrants Annual Report on
    Form 10-K filed April 15, 2002).                                                                                                
|        | 10.21 |             |  | Amendment Number Seven, dated April 12,
    2002, to Loan Agreement between the registrant and certain of
    its lenders, with Foothill Capital Corporation acting as
    Arranger and Administrative Agent (incorporated by reference to
    Exhibit 10.21 to the registrants Annual Report on
    Form 10-K filed April 15, 2002).                                                                                          
|        | 10.22 |             |  | Amended and Restated Registration Rights
    Agreement, dated as of April 12, 2002, between the
    registrant and certain securities holders (incorporated by
    reference to Exhibit 10.22 to the registrants Annual
    Report on Form 10-K filed April 15, 2002).                                                                                                                                                         
|        | 10.23 |             |  | Employment Agreement with Michael W. Ramirez.
    (incorporated by reference to Exhibit 10.23 to the
    registrants Quarterly Report on Form 10-Q filed
    August 14, 2002).                                                                                                                                                                                                                                                 
|        | 10.24 |             |  | Amendment Number Eight, dated June 2002, to Loan
    Agreement between the registrant and certain of its lenders,
    with Foothill Capital Corporation acting as Arranger and
    Administrative Agent (incorporated by reference to
    Exhibit 10.24 to the registrants Quarterly Report on
    Form 10-Q filed August 14, 2002).                                                                                           
|        | 10.25 |             |  | Collateral Agency and Intercreditor Agreement,
    dated as of March 31, 2000, among the registrant, Foothill
    Capital Corporation, acting as Collateral Agent and Revolver
    Agent, and Canadian Imperial Bank of Commerce, acting as Secured
    PIK/Term Agent (incorporated by reference to Exhibit 10.25
    to the registrants Quarterly Report on Form 10-Q
    filed August 14, 2002).                            
|        | 10.26 |             |  | Amendment Number One to the Collateral Agency and
    Intercreditor Agreement, dated as of April 12, 2002 among
    the registrant, Foothill Capital Corporation, acting as
    Collateral Agent and Revolver Agent, and Canadian Imperial Bank
    of Commerce, acting as Security PIK/Term Agent (incorporated by
    reference to Exhibit 10.26 to the registrants
    Quarterly report on Form 10-Q filed August 14, 2002).
|        | 10.27 |             |  | Philip Services Corporation
    (2002) Stock-Based Bonus Plan (incorporated by reference to
    Appendix 2 to the registrants Definitive Proxy
    Statement on Schedule 14A filed November 21, 2002).                                                                                                                                                                                                                         
|        | 10.28 |             |  | Membership Interest and Asset Purchase Agreement
    dated as of March 2, 2003 among the registrant, PSC
    Industrial Outsourcing, Inc., Fluor Enterprises, Inc. and Plant
    Performance Services LLC (incorporated by reference to
    Exhibit 10.1 to the registrants Current Report on
    Form 8-K filed March 13, 2003)                                                                                               
|        | 10.29 |             |  | Amendment Number Nine to Loan Agreement, dated as
    of April 8, 2003 among the registrant and various of its
    lenders, with Foothill Capital Corporation acting as Arrangement
    Administrative Agent (incorporated by reference to
    Exhibit 10.1 to the registrants Current Report on
    Form 8-K filed April 10, 2003)                                                                                            
|        | 10.30 |             |  | Employment Agreement, dated as of
    February 1, 2003, between the registrant and Robert J.
    Millstone.                                                                                                                                                                                                                                                                                                                     

78



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|        |       |             |  |                                                                                                                                                                                                       
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.31 |             |  | Sixth amendment to Credit Agreement, dated as of
    March 7, 2003, between the registrant and various of its
    lenders, with Canadian Imperial Bank of Commerce acting as
    Administrative Agent.
|        | 21    |             |  | Subsidiaries of the registrant                                                                                                                                                                        
|        | 24    |             |  | Power of attorney                                                                                                                                                                                     
|        | 99.1  |             |  | Certification Pursuant to 18 U.S.C.
    Section 1350.                                                                                                                                                 
|        | 99.2  |             |  | Certification Pursuant to 18 U.S.C.
    Section 1350.                                                                                                                                                 

79



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SIGNATURE PAGE

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

Dated: April 15, 2003



| |                            
| | ---------------------------
| | PHILIP SERVICES CORPORATION



| |     |                     
| | --- | --------------------
| | By: | /s/ ROBERT L. KNAUSS

| |                              
| | -----------------------------
| |                              
| | Robert L. Knauss             
| | Chairman                     
| | (Principal Executive Officer)



| |     |                       
| | --- | ----------------------
| | By: | /s/ MICHAEL W. RAMIREZ

| |                                                  
| | -------------------------------------------------
| |                                                  
| | Michael W. Ramirez                               
| | Senior Vice President and Chief Financial Officer
| | (Principal Financial and Accounting
    Officer) 

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                     |  |                                                            |  |                |  | 
|------------------------------------ |  | ---------------------------------------------------------- |  | -------------- |  | 
|                                     |  |                                                            |  |               
|Signature                            |  | Title                                                      |  | Date          
|                                     |  |                                                            |  |               
|                                    
|*Harold First                        |  | Director                                                   |  | April 15, 2003
|                                    
|*Edmund B. Frost                     |  | Director                                                   |  | April 15, 2003
|                                    
|/s/ ROBERT L. KNAUSSRobert L. Knauss |  | Chairman and Director                                      |  | April 15, 2003
|                                    
|*Robert J. Mitchell                  |  | Director                                                   |  | April 15, 2003
|                                    
|*Stanley N. Nortman                  |  | Director                                                   |  | April 15, 2003
|                                    
|*Felix Pardo                         |  | Director                                                   |  | April 15, 2003
|                                    
|*By:                                 |  | /s/ ROBERT L. KNAUSSRobert L. Knauss,
    Attorney-in-Fact |  |                |  | 

80



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SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

(in thousands)


|                                         |                             |              |   |           |  |            |   |               |  |  |   |        |  |  |   |        | 
|---------------------------------------- | --------------------------- | ------------ | - | --------- |  | ---------- | - | ------------- |  |  | - | ------ |  |  | - | ------ | 
|                                         |                             |              |   | Charge to |  |            |   |              
|                                         |                             |              |   | Costs     |  |            |   |              
|                                         |                             | Beginning of |   | and       |  |            |   |              
|Description                              |                             | Period       |   | Expenses  |  | Deductions |   | End of Period
|                                         |                             |              |   |           |  |            |   |              
|Year ended December 31, 2002             |                             |              |   |           |  |            |   |               |  |  |   |        |  |  |   |       
|                                         | Allowance for bad debts     |              | $ | 36,784    |  |            | $ | 7,651         |  |  | $ | 24,883 |  |  | $ | 19,552 | 
|                                         | Accrued environmental costs |              | $ | 72,403    |  |            | $ | 6,030         |  |  | $ | 11,081 |  |  | $ | 67,352 | 
|Year ended December 31, 2001             |                             |              |   |           |  |            |   |               |  |  |   |        |  |  |   |       
|                                         | Allowance for bad debts     |              | $ | 20,980    |  |            | $ | 23,747        |  |  | $ | 7,943  |  |  | $ | 36,784 | 
|                                         | Accrued environmental costs |              | $ | 75,435    |  |            | $ | 1,876         |  |  | $ | 4,908  |  |  | $ | 72,403 | 
|Nine months ended December 31,
    2000* |                             |              |   |           |  |            |   |               |  |  |   |        |  |  |   |       
|                                         | Allowance for bad debts     |              | $ | 14,299    |  |            | $ | 10,202        |  |  | $ | 3,521  |  |  | $ | 20,980 | 
|                                         | Accrued environmental costs |              | $ | 81,774    |  |            | $ |              |  |  | $ | 6,339  |  |  | $ | 75,435 | 



---



|  |                                                                                               
|- | ----------------------------------------------------------------------------------------------
|* | Beginning of year is March 31, 2000 which is
    the date the Company emerged from bankruptcy.

81



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##### Table of Contents






CERTIFICATIONS

I, Robert L. Knauss, certify that:

1. I have reviewed this annual report on
Form 10-K of Philip Services Corporation;

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

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

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



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) Presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

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



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) All significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |     |                     
| | --- | --------------------
| | By: | /s/ ROBERT L. KNAUSS

| |                                 
| | --------------------------------
| |                                 
| | Name: Robert L. Knauss          
| | Title: Chairman of the Board and
| | Principal Executive
    Officer 

Date: April 15, 2003

82



---



##### Table of Contents



I, Michael W. Ramirez, certify that:

1. I have reviewed this annual report on
Form 10-K of Philip Services Corporation;

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

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

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



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) Presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

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



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) All significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |     |                       
| | --- | ----------------------
| | By: | /s/ MICHAEL W. RAMIREZ

| |                                 
| | --------------------------------
| |                                 
| | Name: Michael W. Ramirez        
| | Title: Senior Vice President and
| | Chief Financial
    Officer     

Date: April 15, 2003

83



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##### Table of Contents



EXHIBIT INDEX

|        |       |             |  |                                                                                                                                                                                                                                                                                                                                           
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 3.1   |             |  | Amended and Restated Certificate of Incorporation.                                                                                                                                                                                                                                                                                        
|        | 3.2   |             |  | Amended By-Laws (incorporated by reference to
    Exhibit 3.2 to the registrants Annual Report on
    Form 10-K filed March 29, 2001).                                                                                                                                                                                                   
|        | 10.1  |             |  | Credit Agreement, dated as of March 31,
    2000, between the registrant and various of its lenders, with
    Canadian Imperial Bank of Commerce acting as Administrative
    Agent (incorporated by reference to Exhibit 99.1 to the
    registrants Current Report on Form 8-K filed
    May 8, 2000).                                 
|        | 10.2  |             |  | Loan Agreement, dated as of March 31, 2000,
    between the registrant and certain of its lenders, with Foothill
    Capital Corporation acting as Arranger and Administrative Agent
    (incorporated by reference to Exhibit 99.2 to the
    registrants Current Report on Form 8-K filed
    May 8, 2000).                            
|        | 10.3  |             |  | Registration Rights Agreement, dated as of
    March 31, 2000 between the registrant and certain
    securities holders (incorporated by reference to
    Exhibit 99.4 to the registrants Current Report on
    Form 8-K filed May 8, 2000).                                                                                             
|        | 10.4  |             |  | Philip Services Corporation Performance Unit
    Bonus Plan (incorporated by reference to Exhibit 10.6 to
    the registrants Quarterly Report on Form 10-Q filed
    August 14, 2001).                                                                                                                                                  
|        | 10.5  |             |  | Philip Services Corporation Stock Option Plan
    (incorporated by reference to Exhibit 99.7 to the
    registrants Current Report on Form 8-K filed
    May 8, 2000).                                                                                                                                                                   
|        | 10.6  |             |  | First amendment to Credit Agreement, dated as of
    March 8, 2001, between the registrant and various of its
    lenders, with Canadian Imperial Bank of Commerce acting as
    Administrative Agent (incorporated by reference to
    Exhibit 10.8 to the registrants Annual Report on
    Form 10-K filed March 29, 2001).            
|        | 10.7  |             |  | Second amendment to Credit Agreement, dated as of
    March 28, 2001, between the registrant and various of its
    lenders, with Canadian Imperial Bank of Commerce acting as
    Administrative Agent (incorporated by reference to
    Exhibit 10.9 to the registrants Annual Report on
    Form 10-K filed March 29, 2001).          
|        | 10.8  |             |  | Amendment Number One, dated March 28, 2001,
    to Loan Agreement between the registrant and certain of its
    lenders, with Foothill Capital Corporation acting as Arranger
    and Administrative Agent (incorporated by reference to
    Exhibit 10.10 to the registrants Annual Report on
    Form 10-K filed March 29, 2001).      
|        | 10.9  |             |  | Indenture, dated as of April 7, 2000,
    relating to the registrants 6% Subordinated Notes due
    April 15, 2010 (incorporated by reference to
    Exhibit 10.11 to the registrants Quarterly Report on
    Form 10-Q filed May 21, 2001).                                                                                            
|        | 10.10 |             |  | Indenture, dated as of April 7, 2000,
    relating to the registrants 3% Convertible Subordinated
    Notes due April 15, 2020 (incorporated by reference to
    Exhibit 10.12 to the registrants Quarterly Report on
    Form 10-Q filed May 21, 2001).                                                                                
|        | 10.11 |             |  | Third amendment to Credit Agreement, dated as of
    May 18, 2001, between the registrant and various of its
    lenders, with Canadian Imperial Bank of Commerce acting as
    Administrative Agent (incorporated by reference to
    Exhibit 10.13 to the registrants Quarterly Report on
    Form 10-Q filed May 21, 2001).           
|        | 10.12 |             |  | Amendment Number Two, dated May 18, 2001, to
    Loan Agreement between the registrant and certain of its
    lenders, with Foothill Capital Corporation acting as Arranger
    and Administrative Agent (incorporated by reference to
    Exhibit 10.14 to the registrants Quarterly Report on
    Form 10-Q filed May 21, 2001).       
|        | 10.13 |             |  | Amended and Restated Philip Services Corporation
    Nonemployee Directors Restricted Stock Plan.                                                                                                                                                                                                                                         
|        | 10.14 |             |  | Philip Services Corporation Officers
    Stock-Based Bonus Plan (incorporated by reference to the
    registrants Definitive Proxy Statement on
    Schedule 14A filed March 29, 2001).                                                                                                                                                 
|        | 10.15 |             |  | Fourth amendment to Credit Agreement, dated as of
    November 19, 2001, between the registrant and various of
    its lenders, with Canadian Imperial Bank of Commerce acting as
    Administrative Agent (incorporated by reference to
    Exhibit 10.17 to the registrants Quarterly Report on
    Form 10-Q filed November 19, 2001).



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.16 |             |  | Amendment Number Three, dated November 19,
    2001, to Loan Agreement between the registrant and certain of
    its lenders, with Foothill Capital Corporation acting as
    Arranger and Administrative Agent (incorporated by reference to
    Exhibit 10.18 to the registrants Quarterly Report on
    Form 10-Q filed November 19, 2001).                                                                                 
|        | 10.17 |             |  | Amendment Number Four, dated January 29,
    2002, to Loan Agreement between the registrant and certain of
    its lenders, with Foothill Capital Corporation acting as
    Arranger and Administrative Agent (incorporated by reference to
    Exhibit 10.17 to the registrants Annual Report on
    Form 10-K filed April 15, 2002).                                                                                         
|        | 10.18 |             |  | Amendment Number Five, dated February 19,
    2002, to Loan Agreement between the registrant and certain of
    its lenders, with Foothill Capital Corporation acting as
    Arranger and Administrative Agent (incorporated by reference to
    Exhibit 10.18 to the registrants Annual Report on
    Form 10-K filed April 15, 2002).                                                                                        
|        | 10.19 |             |  | Amendment Number Six, dated March 8, 2002,
    to Loan Agreement between the registrant and certain of its
    lenders, with Foothill Capital Corporation acting as Arranger
    and Administrative Agent (incorporated by reference to
    Exhibit 10.19 to the registrants Annual Report on
    Form 10-K filed April 15, 2002).                                                                                             
|        | 10.20 |             |  | Fifth amendment to Credit Agreement, dated as of
    April 12, 2002, between the registrant and various of its
    lenders, with Canadian Imperial Bank of Commerce acting as
    Administrative Agent (incorporated by reference to
    Exhibit 10.20 to the registrants Annual Report on
    Form 10-K filed April 15, 2002).                                                                                                
|        | 10.21 |             |  | Amendment Number Seven, dated April 12,
    2002, to Loan Agreement between the registrant and certain of
    its lenders, with Foothill Capital Corporation acting as
    Arranger and Administrative Agent (incorporated by reference to
    Exhibit 10.21 to the registrants Annual Report on
    Form 10-K filed April 15, 2002).                                                                                          
|        | 10.22 |             |  | Amended and Restated Registration Rights
    Agreement, dated as of April 12, 2002, between the
    registrant and certain securities holders (incorporated by
    reference to Exhibit 10.22 to the registrants Annual
    Report on Form 10-K filed April 15, 2002).                                                                                                                                                         
|        | 10.23 |             |  | Employment Agreement with Michael W. Ramirez.
    (incorporated by reference to Exhibit 10.23 to the
    registrants Quarterly Report on Form 10-Q filed
    August 14, 2002).                                                                                                                                                                                                                                                 
|        | 10.24 |             |  | Amendment Number Eight, dated June 2002, to Loan
    Agreement between the registrant and certain of its lenders,
    with Foothill Capital Corporation acting as Arranger and
    Administrative Agent (incorporated by reference to
    Exhibit 10.24 to the registrants Quarterly Report on
    Form 10-Q filed August 14, 2002).                                                                                           
|        | 10.25 |             |  | Collateral Agency and Intercreditor Agreement,
    dated as of March 31, 2000, among the registrant, Foothill
    Capital Corporation, acting as Collateral Agent and Revolver
    Agent, and Canadian Imperial Bank of Commerce, acting as Secured
    PIK/Term Agent (incorporated by reference to Exhibit 10.25
    to the registrants Quarterly Report on Form 10-Q
    filed August 14, 2002).                            
|        | 10.26 |             |  | Amendment Number One to the Collateral Agency and
    Intercreditor Agreement, dated as of April 12, 2002 among
    the registrant, Foothill Capital Corporation, acting as
    Collateral Agent and Revolver Agent, and Canadian Imperial Bank
    of Commerce, acting as Security PIK/Term Agent (incorporated by
    reference to Exhibit 10.26 to the registrants
    Quarterly report on Form 10-Q filed August 14, 2002).
|        | 10.27 |             |  | Philip Services Corporation
    (2002) Stock-Based Bonus Plan (incorporated by reference to
    Appendix 2 to the registrants Definitive Proxy
    Statement on Schedule 14A filed November 21, 2002).                                                                                                                                                                                                                         
|        | 10.28 |             |  | Membership Interest and Asset Purchase Agreement
    dated as of March 2, 2003 among the registrant, PSC
    Industrial Outsourcing, Inc., Fluor Enterprises, Inc. and Plant
    Performance Services LLC (incorporated by reference to
    Exhibit 10.1 to the registrants Current Report on
    Form 8-K filed March 13, 2003)                                                                                               
|        | 10.29 |             |  | Amendment Number Nine to Loan Agreement, dated as
    of April 8, 2003 among the registrant and various of its
    lenders, with Foothill Capital Corporation acting as Arrangement
    Administrative Agent (incorporated by reference to
    Exhibit 10.1 to the registrants Current Report on
    Form 8-K filed April 10, 2003)                                                                                            



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                       
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.30 |             |  | Employment Agreement, dated as of
    February 1, 2003, between the registrant and Robert J.
    Millstone.                                                                                           
|        | 10.31 |             |  | Sixth amendment to Credit Agreement, dated as of
    March 7, 2003, between the registrant and various of its
    lenders, with Canadian Imperial Bank of Commerce acting as
    Administrative Agent.
|        | 21    |             |  | Subsidiaries of the registrant                                                                                                                                                                        
|        | 24    |             |  | Power of attorney                                                                                                                                                                                     
|        | 99.1  |             |  | Certification Pursuant to 18 U.S.C.
    Section 1350.                                                                                                                                                 
|        | 99.2  |             |  | Certification Pursuant to 18 U.S.C.
    Section 1350.