<PAGE>


                                    FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       OR

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

         FOR THE TRANSITION PERIOD FROM                TO
                                        --------------    --------------

                        COMMISSION FILE NUMBER: 001-13259

                                U S LIQUIDS INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

             DELAWARE                                   76-0519797
  (STATE OR OTHER JURISDICTION OF                    (I.R.S. EMPLOYER
   INCORPORATION OR ORGANIZATION)                    IDENTIFICATION NO.)

      411 N. SAM HOUSTON PARKWAY EAST, SUITE 400 HOUSTON, TEXAS 77060-3545
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                 (281) 272-4500
               (REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

       TITLE OF SECURITIES                     EXCHANGE ON WHICH REGISTERED
       -------------------                     ----------------------------
  Common Stock, par value $.01                    American Stock Exchange

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                      None

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

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

         The aggregate market value of the voting stock held by non-affiliates
of the registrant at March 28, 2000, was approximately $96,691,000. The
aggregate market value was computed by using the closing price of the common
stock as of that date on the American Stock Exchange. (For purposes of
calculating this amount only, all the directors and executive officers of the
registrant have been treated as affiliates.)

         The number of shares of common stock, $.01 par value, of the registrant
outstanding at March 28, 2000, was 15,785,868.

                       DOCUMENTS INCORPORATED BY REFERENCE

              DOCUMENT                                     INCORPORATED AS TO
              --------                                     ------------------
       Proxy Statement for the                                  Part III
 2000 Annual Meeting of Stockholders
<PAGE>


                                TABLE OF CONTENTS

                                     PART I
<TABLE>
<S>        <C>
Item 1.    Business..............................................................................................1
Item 2.    Properties ..........................................................................................12
Item 3.    Legal Proceedings ...................................................................................13
Item 4.    Submission of Matters to a Vote of Security Holders..................................................17


                                     PART II

Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters ...............................17
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 Disclosures About Market Risk...........................................24
Item 8.    Financial Statements and Supplementary Data..........................................................24
Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................25


                                    PART III

Item 10.   Directors and Executive Officers of the Registrant...................................................25
Item 11.   Executive Compensation...............................................................................25
Item 12.   Security Ownership of Certain Beneficial Owners and Management.......................................25
Item 13.   Certain Relationships and Related Transactions.......................................................25


                                     PART IV

Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................................25
</TABLE>

<PAGE>

                                     PART I

ITEM 1.  BUSINESS

GENERAL

         We are a leading national provider of liquid waste management
services, including collection, processing, recovery and disposal services.
Our primary focus of operations is industrial and commercial wastewater
treatment, although we also collect, process and dispose of oilfield waste.
We operate 45 processing facilities located in 13 states and Canada and serve
over 50,000 customers. At March 1, 2000, we employed approximately 1,350
persons full-time.

         The Company was organized in November 1996. Since that time, we have
grown significantly by acquiring businesses engaged in various aspects of the
liquid waste industry.

         Our executive offices are located at 411 N. Sam Houston Parkway East,
Suite 400, Houston, Texas 77060-3545, and our telephone number is (281)
272-4500. Our common stock is listed on the American Stock Exchange under the
trading symbol "USL."

INDUSTRY BACKGROUND

         The wastewater treatment market is generally divided into two
segments: industrial and commercial wastewater treatment, which may include
the treatment of some hazardous wastes, and municipal wastewater treatment.
Industrial and commercial companies produce various types of wastewater
(including hydrocarbon contaminated water, landfill leachate, dated beverages
and grease and grit trap waste) that must be processed prior to disposal in
local publicly-operated treatment works ("POTWs") or for which municipalities
charge higher rates. Industrial and commercial companies also produce various
types of hazardous waste that must be disposed of in accordance with federal
and state regulations. Similarly, oil and gas exploration and production
companies produce liquid waste that must be disposed of in accordance with
federal and state regulations. Municipalities utilize or contract with third
parties for the utilization of water treatment technology to treat municipal
wastewater.

         In the United States, the growth in demand for wastewater treatment
services has been driven by many factors, including:

                  -        Municipalities refusing to accept certain industrial
                           wastewaters due to limited treatment capabilities and
                           a lack of the resources needed to expand or modernize
                           their POTWs;

                  -        Industrial and commercial businesses avoiding POTW
                           surcharges by using others to process and dispose of
                           their wastewater;

                  -        Industrial and commercial businesses outsourcing
                           their wastewater treatment needs;

                  -        Continued industrial and commercial expansion; and

                  -        Increasingly strict regulations governing the
                           disposal of wastewater, as well as more stringent
                           enforcement of these regulations.

         REJECTION OF CERTAIN WASTEWATERS BY POTWS. In North America,
governmental regulation and enforcement have established strict standards for
potable water and the discharge of pollutants in wastewater. Municipalities have
spent billions of dollars building water purification and wastewater treatment
facilities. However, many of these municipalities are facing increasing
budgetary constraints and damage to their wastewater treatment facilities caused
by grease and other liquid wastes and have begun refusing to accept certain
liquid waste streams, thereby increasing the demand for wastewater treatment
services provided by the private sector. For example, the Dallas, Houston and
San Antonio POTWs do not accept grease or grit trap waste. Similarly, many POTWs
in the Northeast have ceased accepting commingled septage and grease trap waste.
In addition, in late 1997, the Houston POTWs ceased accepting septage generated
outside the Houston city limits.

         ECONOMIC BENEFIT OF PRETREATING CERTAIN WASTEWATERS. For years,
generators of industrial wastewater and other nonhazardous liquid waste have
discharged the waste directly into POTWs. However, the difficulties encountered
by POTWs in collecting and treating certain wastewaters have caused many
municipalities to increase the rates charged for accepting these wastewaters.
With respect to certain wastewaters, it is more economical for the generator to
deliver the waste to liquid waste management service providers such as the

                                        1
<PAGE>

Company than to discharge the waste directly into the POTW. For example, it is
currently more economical for many soft drink manufacturers to deliver their
dated beverages to us for processing and disposal than to discharge the
beverages directly into the POTW.

         OUTSOURCING BY INDUSTRIAL AND COMMERCIAL BUSINESSES. Industrial and
commercial businesses prefer to focus on their primary business activities and
to downsize and outsource secondary business activities in which they may not
have much expertise. By outsourcing their wastewater treatment needs, they can
free-up capital for investment in their primary products and business
activities, eliminate a significant portion of their overhead and transfer risk
to experts in the field.

         ECONOMIC EXPANSION. Many industrial companies have significantly
expanded their manufacturing and processing facilities. This industrial
expansion has increased the amount of wastewater generated. In addition,
continued commercial expansion throughout North America has generated additional
grease and grit trap waste and other liquid waste that must be processed by the
waste generators, POTWs or liquid waste management service providers such as the
Company.

         INCREASINGLY STRICT REGULATIONS. Heightened public concern about water
quality has caused federal, state and local governments to adopt increasingly
strict regulations governing the processing and disposal of industrial
wastewater and other liquid wastes. For example, effective as of October 1993,
Subtitle D of the Resource Conservation and Recovery Act of 1976 ("RCRA") banned
the disposal of untreated bulk liquid waste in landfills. In addition, effective
in March 1997, the Texas Natural Resource Conservation Commission implemented
state-wide "full pump" regulations requiring 100% evacuation of all grease and
grit traps and proper disposal of the full volume of each trap. Furthermore, in
January 1999, the United States Environmental Protection Agency (the "EPA")
proposed new regulations which would establish further restrictions on the
discharge of pollutants into U.S. waters and into POTWs by existing and new
facilities that treat or recover any hazardous or nonhazardous industrial waste,
wastewater or used material from off-site. Louisiana, Texas and certain other
oil and gas producing states have enacted comprehensive laws and regulations
governing the proper management of oilfield waste. Under Louisiana and Texas
regulations, if oilfield waste cannot be processed for discharge or disposed of
at the well where it is generated, it must be transported to a licensed oilfield
waste processing or disposal facility. In addition, federal regulations also
restrict, and in some cases prohibit entirely, the discharge of oilfield waste
into U.S. waters.

STRATEGY

         Our objective is to be the largest and most profitable liquid waste
management company in each of the markets in which we operate. We believe that
as we expand we are likely to benefit from numerous competitive advantages
relative to smaller operators, including servicing multiple customer locations,
processing a wide variety of liquid waste streams, achieving operating
efficiencies and increased economies of scale and adapting to changing
regulations. Our strategy for achieving this objective is to (i) generate
internal growth; (ii) expand through acquisitions; (iii) enhance existing and
acquired operations; and (iv) operate our businesses on a decentralized basis.
We intend to implement this strategy as follows:

                  -        INTERNAL GROWTH. To generate internal growth, we have
                           focused on increasing sales penetration in our
                           current and adjacent markets, soliciting new
                           commercial and industrial customers, expanding our
                           collection infrastructure, marketing upgraded
                           services to existing customers and, where
                           appropriate, raising prices. We believe there are a
                           number of liquid waste generators that would prefer
                           to have a single source provider for the collection,
                           processing and disposal of all of their liquid waste
                           streams, but are unable to do so because the liquid
                           waste management industry is highly fragmented.
                           Accordingly, we have positioned ourselves as a
                           multi-city, single source provider of liquid waste
                           management services for national and regional
                           generators of liquid waste. In addition, we intend to
                           expand the capacity and processing capabilities of
                           certain of our existing liquid waste management
                           facilities, and to amend our permits for certain
                           facilities in order to receive additional liquid
                           waste streams.

                  -        ACQUISITIONS. We pursue acquisitions of liquid waste
                           management businesses in existing and new geographic
                           markets. We also make smaller "tuck-in" acquisitions
                           in our existing markets in order to increase our
                           facility and equipment utilization and expand our
                           market penetration and range of services. In
                           considering new markets, we generally seek to acquire
                           a liquid waste processing facility that has the
                           customer base, technical skills and infrastructure
                           necessary to be a core business into which other
                           liquid waste operations can be consolidated. After we
                           have acquired a processing facility, we typically
                           seek to increase the utilization of the facility by
                           securing captive waste streams, which includes
                           acquiring collection companies and entering into
                           contracts to collect or accept all of the various
                           types of liquid waste generated by customers. We also
                           seek to acquire other liquid waste management
                           businesses that can be integrated into our existing
                           operations or utilized to provide additional liquid
                           waste management services to the same customer base.


                                     2
<PAGE>

                  -        OPERATIONAL ENHANCEMENTS. We intend to continue to
                           improve our operations through collection route
                           densification and consolidation and increased
                           facility and equipment utilization. We also expect to
                           realize cost savings by consolidating certain
                           administrative functions at our corporate offices,
                           such as cash management, human resources, finance and
                           insurance. To improve our operations, we have also
                           updated and enhanced the environmental compliance
                           programs at our facilities and provided additional
                           training to our employees.

                  -        DECENTRALIZED MANAGEMENT. We manage our various
                           businesses on a decentralized basis, with local
                           management maintaining responsibility for the
                           day-to-day operations, profitability and growth of
                           the business, while our executive officers exercise
                           strong strategic and financial oversight. We believe
                           that this structure will retain the entrepreneurial
                           spirit present in each of the acquired businesses and
                           allow us to capitalize on the considerable local and
                           regional market knowledge and customer relationships
                           possessed by local management.

OPERATIONS AND SERVICES PROVIDED

         Industrial and commercial businesses produce various types of
wastewater (including hydrocarbon contaminated water, landfill leachate, dated
beverages, grease and grit trap waste and certain hazardous wastes) that must be
disposed of in accordance with federal, state and local regulations. Similarly,
oil and gas exploration and production companies produce liquid waste that must
be disposed of in accordance with federal and state regulations. We accept
liquid waste from generators and independent collection companies, process the
liquid waste to remove contaminants and then dispose of the liquid waste in
accordance with applicable regulations. In addition, in certain instances, our
processing operations generate saleable by-products. Our services permit
generators of liquid waste to focus on their primary business activities, while
we perform the secondary operations of processing and disposing of their waste.

         We collect, process, recover and dispose of liquid waste through a
number of subsidiaries that are organized into three divisions -the
Commercial Wastewater Division, the Industrial Wastewater Division and the
Oilfield Waste Division. The operations of these three divisions are
summarized below. See Note 19 to our consolidated financial statements for
certain financial data of these three divisions. See Note 10 to our
consolidated financial statements for certain information about our foreign
operations.

     COMMERCIAL WASTEWATER DIVISION

         Our Commercial Wastewater Division contributed approximately 47.7%,
70.1% and 66.3% of our 1997, 1998 and 1999 revenues, respectively. This Division
receives fees to collect, process and dispose of nonhazardous liquid waste such
as industrial wastewater, grease and grit trap waste, and bulk liquids and dated
beverages. In addition, the Commercial Wastewater Division generates revenues
from the sale of by-products, including fats, oils, feed proteins, industrial
and fuel grade ethanol, solvents, aluminum, glass, plastic and cardboard,
recovered from waste streams. It operates a fleet of vehicles to collect waste
directly from customers, receives waste from independent transporters servicing
thousands of additional generators and also receives waste shipped directly by
the generators via rail and truck. Brief descriptions of the types of liquid
waste most commonly managed by the Commercial Wastewater Division are set forth
below:

         INDUSTRIAL WASTEWATERS. Nonhazardous industrial wastewaters such as
hydrocarbon contaminated water, landfill leachate and printing solvents are
transported to our facilities in vacuum trucks, trailers and other transportable
containers. Using a variety of physical, chemical, thermal and biological
techniques, the liquid waste is broken down into constituent components. Water
extracted from the liquid waste is pretreated and then discharged into the POTW
and solid materials are dried and disposed of in an independent solid waste
landfill. In some instances, such as printing solvents, the contaminated
materials are processed and returned to the generator for reuse.

         GREASE AND GRIT TRAP WASTE. Grease trap waste from restaurants and
other food manufacturing and preparation facilities and grit trap waste from car
washes is collected by our vehicles or independent parties and transported to
our facilities. Grease and grit trap waste is processed using a variety of
physical, chemical, thermal and biological techniques. Water extracted from the
liquid waste is pretreated and then discharged into the POTW and solid materials
are dried and disposed of in an independent solid waste landfill. Byproducts
recovered from grease trap waste are sold for use in producing various grades of
fats, oils and feed proteins.

         BULK LIQUIDS AND DATED BEVERAGES. We accept both liquid residuals and
dated packaged beverages from breweries, soft drink manufacturers and food
processors. Water extracted from the liquid waste is pretreated and then
discharged into the POTW. The remaining liquid waste is fermented and distilled
into both industrial and fuel grade ethanol, which is sold primarily to major
oil and chemical companies. Packaging of the dated beverages, whether aluminum,
glass, plastic or cardboard, is removed, separated and sold to recycling firms.

                                     3
<PAGE>

         BIOSOLIDS. We accept and process liquid and dry cake biosolids, or
sludge, from municipal wastewater treatment facilities and private businesses
and process these biosolids into a product that is sold for use as a fertilizer
and landfill cover.

         SEPTAGE. Septage is pumped from septic tanks by our vehicles or
independent parties and transported to our facilities. The septage is then
processed using a variety of physical, chemical, thermal and biological
techniques. Water extracted from the liquid waste is pretreated and then
discharged into the POTW and solid materials are dried and disposed of in an
independent solid waste landfill.

     INDUSTRIAL WASTEWATER DIVISION

         The Industrial Wastewater Division contributed approximately 15.6% and
25.7% of our 1998 and 1999 revenues, respectively. All of the entities whose
operations are included in the Industrial Wastewater Division were acquired
during 1998 and 1999 and, therefore, the Industrial Wastewater Division did not
contribute any revenues in 1997. This Division derives revenues from fees
charged to customers for collecting, processing and disposing of hazardous and
nonhazardous liquid waste such as household hazardous wastes, plating solutions,
acids, flammable and reactive wastes, industrial wastewater and petroleum fuels.
Certain sludges and solid hazardous wastes are also processed. The Industrial
Wastewater Division also generates revenues from the sale of by-products
recovered from certain waste streams, including industrial chemicals and
recycled antifreeze products. The Industrial Wastewater Division collects waste
directly from customers, receives waste from independent transporters and also
receives waste shipped directly by the generators via rail and truck. Brief
descriptions of the types of liquid waste most commonly managed by the
Industrial Wastewater Division are set forth below:

         HAZARDOUS WASTES. Hazardous wastes such as household hazardous wastes,
plating solutions, acids, and flammable and reactive wastes are transported to
certain of our facilities in trucks and other transportable containers and by
rail. Wastewaters suitable for treatment under the Clean Water Act are directed
into an appropriate process such as chemical precipitation or filtration. Sludge
and solid hazardous wastes are directed to our chemical fixation facility to be
pre-treated using chemical oxidation or reduction followed by fixation. After
testing, solid and semi-solid residues are shipped to an audited and approved
independent Subtitle D landfill and treated listed waste residues are sent to an
audited and approved independent Subtitle C landfill. Organic wastes that have
recoverable heat or solvent values are recycled using distillation techniques.
Solvents are sold back to the paint industry as thinners. Other organic wastes
are blended into fuels sold primarily to operators of cement or lime kiln
facilities.

         INDUSTRIAL WASTEWATERS. Hazardous and nonhazardous industrial
wastewaters such as hydrocarbon contaminated water, landfill leachate, inks
and dated chemicals are transported to our facilities in vacuum trucks,
trailers and other transportable containers. Using a variety of physical,
chemical, thermal and biological techniques, the liquid waste is broken down
into constituent components. Water extracted from the liquid waste is
pretreated and then discharged into the POTW and solid materials are dried
and disposed of in an independent solid waste landfill.

         PETROLEUM FUELS. Contaminated and off-specification petroleum fuels and
used oil are transported to our facilities in vacuum trucks, trailers and other
transportable oil containers. Using mechanical and gravity separation
techniques, these materials are processed to produce a fuel sold primarily to
operators of industrial furnaces. Resulting wastewater is transported to another
of our facilities for processing and disposal. Solid materials and sludges are
sent to one of our oilfield waste processing facilities.

         ANTIFREEZE. Spent antifreeze from automobile dealers, service centers
and a wide variety of automotive and heavy equipment industries is collected by
our vehicles and transported to our facilities. The spent antifreeze is then
processed using a variety of physical, chemical and thermal processes to recover
and purify ethylene glycol, the active ingredient in antifreeze. The end result
is antifreeze product meeting stringent ASTM specifications which is sold into
the wholesale coolant market.

     OILFIELD WASTE DIVISION

         The Oilfield Waste Division contributed approximately 52.3%, 14.3% and
8.0% of our 1997, 1998 and 1999 revenues, respectively. At our six oilfield
waste facilities located in Louisiana and Texas, the Oilfield Waste Division
treats and disposes of waste that is generated in the exploration for and
production of oil and natural gas. Oilfield waste consists primarily of
oil-based and water-based drilling fluids (which contain oil, grease, chlorides
and heavy metals), as well as cuttings, saltwater, workover and completion
fluids, production pit sludges and soil containing these materials. In addition,
at two Louisiana locations, the Oilfield Waste Division cleans tanks, barges and
other vessels used in the storage and transportation of oilfield waste.

         Landfarming, the treatment process utilized at our four Louisiana
oilfield waste facilities, involves several distinct stages. Oilfield waste is
brought to our facilities in trucks and on barges and the delivered waste
materials are then tested. Materials which do not qualify as permitted oilfield
waste under applicable regulations are rejected. Accepted waste is then loaded
into treatment cells, which are flooded

                                       4
<PAGE>

with fresh water and mixed to dissolve salts and soluble materials. Saltwater is
then pumped out through a collection system and typically disposed of at a
saltwater injection well on-site. This flooding process is typically repeated
several times. The remaining waste is then processed to remove organic
contamination through biological degradation. Total treatment of a cell takes
approximately nine to twelve months. In the final stage, the remaining material
is tested to ensure compliance with regulatory requirements. Thereafter, the
material is transported to on-site stockpile areas.

         The Oilfield Waste Division was formed in December 1996 when we
purchased five of our oilfield waste processing facilities from certain
subsidiaries of Waste Management, Inc. In connection with this acquisition, we
acquired a long-term disposal agreement with Newpark Resources, Inc. for the
processing and disposal of oilfield waste generated offshore in the Gulf Coast
region. This disposal agreement obligated Newpark to deliver to us specified
amounts of oilfield waste for treatment and disposal at certain of our Louisiana
landfarms. During 1998, however, a dispute arose between us and Newpark
concerning Newpark's obligations under the disposal agreement. In September
1998, we terminated the long-term disposal agreement and entered into a new
33-month agreement. In the new agreement, Newpark agreed to pay us at least
$30.0 million. Newpark paid us $6.0 million in 1998 and an additional $11.0
million of this amount in 1999. The remaining amounts are required to be paid to
us in monthly installments continuing through June 2001. Under the terms of the
new agreement, Newpark has the right, but not the obligation, to deliver
specified volumes of oilfield waste to certain of our Louisiana landfarms for a
period of three years without additional cost. Subject to certain conditions,
Newpark may extend the term of the new agreement for two additional one-year
terms at an additional cost of approximately $8.0 million per year.

         In addition, we also agreed that, until June 30, 2001, we would not (i)
accept from any customer other than Newpark any oilfield waste generated in a
marine environment or transported in a marine vessel, or (ii) engage in the site
remediation and closure business, in each case within the states of Louisiana,
Texas, Mississippi and Alabama, and the Gulf of Mexico. If the term of the
September 1998 agreement is extended by Newpark, the term of the prohibition on
our accepting this type of waste from other customers will also be extended for
a corresponding period of time.

SEASONALITY

         We expect that the operations of the Oilfield Waste Division will
experience certain seasonal patterns consistent with the oil and gas exploration
and production activity in the Gulf Coast. Generally, the volume of oilfield
waste delivered to the Oilfield Waste Division has been lowest in the first
quarter of each calendar year. Prices for oil and natural gas are expected to
continue to be volatile and affect demand for our oilfield waste services.
Certain of the Commercial Wastewater Division's processing facilities in the
Northeast and Midwest may be affected by adverse weather conditions.

COMPETITION

         The liquid waste industry is highly fragmented and very competitive.
Competition is primarily on the basis of proximity to collection operations,
collection and processing fees charged and quality of service. With respect to
certain waste streams (such as oilfield waste, bulk liquids and dated beverages)
we must compete with the generators of these waste streams, who continually
evaluate the decision whether to use internal disposal methods or utilize a
liquid waste management company such as us. We must also compete with area
landfills for certain waste streams. We compete with Newpark Resources, Inc. and
a number of smaller companies for oilfield waste produced on land in the Gulf
Coast region.

         We believe that there are certain barriers to entry in the liquid waste
industry. These barriers include the need for specially equipped facilities;
licenses, permits and trained personnel necessary to operate these facilities;
and formalized procedures for customer acceptance.

REGULATION

   GENERAL

         Our business operations are affected both directly and indirectly by
governmental regulations, including various federal, state and local pollution
control and health and safety programs that are administered and enforced by
regulatory agencies. These programs are applicable or potentially applicable to
one or more of our existing operations. Although we intend to make capital
expenditures to expand our liquid waste processing capabilities, we believe that
we are not presently required to make material capital expenditures in order to
comply with federal, state and local laws and regulations relating to the
protection of the environment.

                                     5
<PAGE>

   FEDERAL REGULATION

         The primary U.S. federal statutes affecting our business are summarized
below:

         THE CLEAN WATER ACT. We treat and discharge wastewaters at our liquid
waste facilities and at our oilfield waste landfarms. These activities are
subject to the requirements of the Clean Water Act and comparable state statutes
and federal and state enforcement of these regulations. The Clean Water Act
regulates the discharge of pollutants into waters of the United States. The
Clean Water Act establishes a system of standards, permits and enforcement
procedures for the discharge of pollutants from industrial and municipal
wastewater sources. The law sets treatment standards for industries and
wastewater treatment plants and provides federal grants to assist municipalities
in complying with the new standards. In addition to requiring permits for
industrial and municipal discharges directly into the waters of the United
States, the Clean Water Act also requires pretreatment of industrial wastewater
before discharge into municipal systems. The Clean Water Act gives the EPA the
authority to set pretreatment limits for direct and indirect industrial
discharges. In addition, the Clean Water Act prohibits certain discharges of oil
or hazardous substances and authorizes the federal government to remove or
arrange for removal of such oil or hazardous substances. The Clean Water Act
also requires the adoption of the National Contingency Plan to cover removal of
such materials. Under the Clean Water Act, the owner or operator of a vessel or
facility may be liable for penalties and costs incurred by the federal
government in responding to a discharge of oil or hazardous substances.

         The Clean Water Act also has a significant impact on the operations of
the Oilfield Waste Division's customers. EPA Region 6, which includes the
Oilfield Waste Division's current market, continues to issue new and amended
National Pollution Discharge Elimination System general permits further limiting
or restricting substantially all discharges of produced water from the Oil and
Gas Extraction Point Source Category into waters of the United States. The
combined effect of all of these permits closely approaches a "zero discharge"
standard affecting all waters except those of the Outer Continental Shelf. We
and many industry participants believe that these permits and the requirements
of the Clean Water Act may ultimately lead to a total prohibition of overboard
discharge in the Gulf of Mexico.

         With the exception of the matters described in Item 3. Legal
Proceedings, below, we believe that each of our operating facilities is
currently in substantial compliance with the applicable requirements promulgated
pursuant to the Clean Water Act.

         RCRA. RCRA is the principal federal statute governing hazardous and
solid waste generation, treatment, storage and disposal. RCRA and state
hazardous waste management programs govern the handling and disposal of
"hazardous waste." The EPA has issued regulations pursuant to RCRA, and states
have promulgated regulations under comparable state statutes, that govern
hazardous waste generators, transporters and owners and operators of hazardous
waste treatment, storage or disposal facilities. These regulations impose
detailed operating, inspection, training and emergency preparedness and response
standards and requirements for closure, financial responsibility, manifesting of
wastes, record-keeping and reporting, as well as treatment standards for any
hazardous wastes intended for land disposal. RCRA-regulated hazardous waste is
accepted for processing at our Detroit, Michigan, Tampa, Florida, East Palo
Alto, California and Chandler, Arizona facilities and, therefore, each of these
facilities is subject to the requirements of Subtitle C of RCRA. Our East Palo
Alto and Tampa facilities have each been issued RCRA Part B permits. Our East
Palo Alto facility is operating under a California Department of Toxic
Substances Control permit that expired in 1991, but that allows for on-going
operations. Our Chandler and Detroit facilities have operated under interim
status, as allowed by RCRA, since 1994 and 1991, respectively. Applications for
final Part B permits for these facilities have been submitted to the appropriate
regulatory authorities and we are currently working with the authorities to
obtain these final permits.

         The Oilfield Waste Division's facilities treat and dispose of
oilfield waste, which is exempt from classification as a RCRA-regulated
waste. At various times in the past, proposals have been made to rescind the
exemption that excludes oilfield waste from regulation under RCRA. The repeal
or modification of this exemption by administrative, legislative or judicial
process would require us to change our method of doing business and could
have a material adverse effect on our business, results of operations and
financial condition. There is no assurance that we would be able to adapt our
operations or that we would have the capital resources available to do so.

         RCRA also indirectly affects our operations by restricting the disposal
of certain liquid wastes and sludges in landfills. This restriction increases
demand for the services provided by the Commercial Wastewater and the Industrial
Wastewater Divisions.

         RCRA regulations also require us to provide financial assurance that
funds will be available when needed for closure and postclosure care at our
RCRA-regulated facilities, the cost of which could be substantial. Such
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 corporation. Under RCRA
regulations, a company must pay the closure costs for a facility owned by it
upon the closure of the facility and thereafter pay post-closure care costs.

                                        6
<PAGE>

         With the exception of the matters described in Item 3. Legal
Proceedings, below, we believe that each of our operating facilities is
currently in substantial compliance with the applicable requirements
promulgated pursuant to RCRA.

         CERCLA. The Comprehensive Environmental Response, Compensation and
Liability Act, as amended in 1986 ("CERCLA"), provides for immediate response
and removal actions coordinated by the EPA for releases of hazardous substances
into the environment and authorizes the government, or private parties, to
respond to the release or threatened release of hazardous substances. The
government may also order persons responsible for the release to perform any
necessary cleanup. Liability extends to the present owners and operators of
waste disposal facilities from which a release occurs, persons who owned or
operated such facilities at the time the hazardous substances were released,
persons who arranged for disposal or treatment of hazardous substances and waste
transporters who selected such facilities for treatment or disposal of hazardous
substances. CERCLA has been interpreted to create strict, joint and several
liability for the cost of removal and remediation, other necessary response
costs and damages for injury to natural resources.

         If our operations or facilities are responsible for the release of or
improper disposal of hazardous substances, we could incur CERCLA liability. We
may also incur CERCLA liability as a result of environmental contamination
caused by hazardous substances, the transportation, treatment or disposal of
which we arranged or which was arranged by the owners of a business that we have
acquired.

         With the exception of the matters described in Item 3. Legal
Proceedings, below, we are not aware of any material claims against us or any of
our subsidiaries that are based on CERCLA. Nonetheless, the identification of
any sites at which cleanup action is required could subject us to liabilities
which could have a material adverse effect on our business, results of
operations and financial condition.

         THE CLEAN AIR ACT. The Clean Air Act provides for federal, state and
local regulation of emissions of air pollutants into the atmosphere. Any
modification or construction of a facility with regulated air emissions must be
a permitted or authorized activity. The Clean Air Act provides for
administrative and judicial enforcement against owners and operators of
regulated facilities, including substantial penalties. In 1990, the Clean Air
Act was reauthorized and amended, substantially increasing the scope and
stringency of the Clean Air Act's regulations. Compliance with the Clean Air Act
is not expected to have a material adverse effect on our business, results of
operations or financial condition.

   STATE AND LOCAL REGULATIONS

         Our waste processing facilities are subject to direct regulation by a
variety of state and local authorities. Typically, we are required to obtain
processing, wastewater discharge and air quality permits from state and local
authorities to operate these facilities and to comply with applicable
regulations concerning, among other things, the generation and discharge of
odors and wastewater. In addition, state laws and regulations typically govern
the manner in which a waste processing facility may be closed and require us to
post financial assurance to assure that all waste will be treated and a facility
closed appropriately.

         Order 29-B of the Louisiana Department of Natural Resources contains
extensive rules regarding the generation, processing, storage, transportation
and disposal of oilfield waste. Under Order 29-B, on-site disposal of oilfield
waste is limited and subject to stringent guidelines. If these guidelines cannot
be met, oilfield waste must be transported and disposed of off-site in
accordance with the provisions of Order 29-B. Moreover, under Order 29-B, most,
if not all, active waste pits (a typical on-site disposal method used by inland
generators of oilfield waste) must be closed or modified to meet regulatory
standards; however, full enforcement of this portion of Order 29-B has been
deferred. The Texas Railroad Commission has also adopted detailed requirements
for the management and disposal of oilfield waste. Permits issued by state
regulatory agencies are required for each oilfield waste treatment facility
operating within Louisiana and Texas. We must perform tests before acceptance of
any oilfield waste, as well as during and after treatment to ensure compliance
with all regulatory requirements. Short-term emergency rules adopted by the
Louisiana Department of Natural Resources have increased the pretreatment
testing to be conducted on oilfield waste delivered to our Louisiana landfarms.

         The states in which we operate have their own laws and regulations that
may be more strict than comparable federal laws and regulations governing
hazardous and nonhazardous waste disposal, water and air pollution, releases and
cleanup of hazardous substances and liabilities for such matters. Our facilities
and operations are likely to be subject to many, if not all, of these laws and
regulations. In addition, states and localities into which we may expand, by
acquisition or otherwise, may now or in the future have regulations with
positive or negative effects on us. It is possible that state or local
regulations could adversely affect the execution of our acquisition strategy.

                                    7
<PAGE>

FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS

         In the normal course of our business, in an effort to help keep our
stockholders and the public informed about our operations, we may from time to
time issue or make certain statements, either in writing or orally, that are or
contain forward-looking statements, as that term is defined in the U.S. federal
securities laws. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of such
plans or strategies, projected or anticipated benefits from acquisitions made by
or to be made by us, or projections involving anticipated revenues, earnings or
other aspects of operating results. The words "may," "will," "expect,"
"anticipate," "believe," "estimate," "continue" and similar expressions are
intended to identify forward-looking statements. We caution readers that such
statements are not guarantees of future performance or events and are subject to
a number of factors that may tend to influence the accuracy of the statements
and the projections upon which the statements are based, including but not
limited to those discussed below. As noted elsewhere in this report, all phases
of our operations are subject to a number of uncertainties, risks and other
influences, many of which are outside of our control, and any one of which, or a
combination of which, could materially affect the results of our operations and
whether forward-looking statements made by us ultimately prove to be accurate.

         The following discussion outlines certain factors that could affect our
consolidated results of operations for 2000 and beyond and cause them to differ
materially from those that may be set forth in forward-looking statements made
by us or on our behalf.

RISKS RELATED TO OPERATING AND INTERNAL GROWTH STRATEGY

         Key elements of our strategy are to improve the profitability and
increase the revenues of our existing operations and any subsequently acquired
businesses. We intend to improve the profitability of our existing operations
and any subsequently acquired businesses by various means, including achieving
operating efficiencies and economies of scale. Our ability to increase the
revenues of our existing operations and any subsequently acquired businesses
will be affected by various factors, including:

                  -        The demand for liquid waste collection, processing
                           and disposal services;

                  -        Our ability to expand the range of services offered
                           to customers;

                  -        Our ability to develop national and regional accounts
                           for our liquid waste management services and other
                           marketing programs; and

                  -        The demand for by-products we recover from certain
                           liquid waste streams.

         Many of these factors are beyond our control, and there can be no
assurance that our operating and internal growth strategies will be successful
or that we will be able to generate cash flows adequate for our operations and
to support internal growth.

MANAGEMENT OF GROWTH

         To manage our growth effectively, we must implement and improve our
operational, financial and management information systems and controls, and
train, motivate and manage our employees. We periodically review and upgrade our
management information systems, as well as hire additional management and other
personnel in order to maintain the adequacy of our operational, financial and
management controls. If we fail to manage our growth effectively, our business,
results of operations and financial condition could be materially and adversely
affected.

RISKS RELATED TO OUR ACQUISITION STRATEGY AND ACQUISITION FINANCING

         The Company was organized in November 1996. Since that time, we have
experienced rapid growth, primarily through acquisitions, and we intend to
acquire additional liquid waste management businesses. We expect to face
competition for acquisition candidates, which may limit the number of
acquisition opportunities and may lead to higher acquisition prices. We may not
be able to identify, acquire or manage additional businesses profitably or to
integrate successfully any acquired businesses without material costs, delays or
other operational or financial problems. Businesses that we acquire may have
liabilities that we underestimate or do not discover during our pre-acquisition
investigations. These liabilities may include those arising from environmental
contamination or non-compliance by prior owners with environmental laws or
regulatory requirements, and for which we, as a successor owner or operator, may
be responsible. Certain environmental liabilities, even if not expressly assumed
by us, may be imposed on us under certain legal principles of successor
liability, including those under CERCLA. Further, each acquisition involves a
number of other special risks that could cause the acquired business to fail to
meet our expectations. For example:

                                      8
<PAGE>

                  -        The acquired business may not achieve expected
                           results.

                  -        We may not be able to retain key personnel of the
                           acquired business.

                  -        We may not be able to successfully integrate the
                           acquired business in a timely manner or we may incur
                           substantial costs, delays or other operational or
                           financial problems during the integration process.

                  -        It may be difficult to integrate a business with
                           personnel who have different business backgrounds and
                           corporate cultures than ours.

                  -        Our management group may not be able to effectively
                           manage the combined entity or to effectively
                           implement our acquisition program and internal growth
                           strategy simultaneously.

         We cannot readily predict the timing, size or success of our future
acquisitions or the associated capital requirements. We intend to finance future
acquisitions by using a combination of common stock and cash. If shares of
common stock are issued in connection with future acquisitions or earn-out
provisions of completed acquisitions, stockholders may experience dilution in
the net tangible book value of their stock. If our common stock does not
maintain a sufficient market value, or potential acquisition candidates are not
willing to accept common stock as part of the consideration for the sale of
their businesses, we may be required to use more of our cash resources, if
available, or incur indebtedness in order to continue our acquisition program.
We have a revolving credit facility with a group of banks under which we may
borrow to fund acquisitions and working capital requirements; however, under the
credit facility, the banks' consent is required for us to make certain
acquisitions or incur significant indebtedness (including, without limitation,
debt assumed in connection with acquisitions). As of March 28, 2000, the
outstanding principal balance of the credit facility was approximately $94.0
million. If we do not have sufficient cash resources to fund our acquisition
plans, our growth could be limited unless we are able to obtain additional
capital through debt or equity financings. We may not be able to obtain such
financing when required or such financing may only be available on terms and
conditions that are unacceptable to us.

COMPETITION

         The liquid waste management industry is highly fragmented and very
competitive. We compete with other liquid waste processing facilities and
alternative methods of disposal of certain waste streams provided by area
landfills and injection wells, as well as the alternative of illegal disposal.
In addition, competitive products and services have been and are likely to
continue to be developed and marketed by others. Furthermore, future
technological change and innovation may result in a reduction in the amount of
liquid waste being generated or alternative methods of processing and disposal
being developed. The markets for the various by-products that we sell are also
very competitive. With respect to our oilfield waste operations, we must compete
with alternative methods of off-site disposal of oilfield waste. We also face
competition from customers who develop or enhance their own methods of disposal
instead of using the services of liquid waste management companies. Future
technological change and innovation may increase the amount of internal oilfield
waste processing and disposal as well as the number of competitors in this
market. Increased use of internal processing and disposal methods and other
competitive factors could have a material adverse effect on our business,
results of operations and financial condition.

         Our competitors may be better capitalized, have greater name
recognition or be able to provide services or products at a lower cost. In
addition, as the liquid waste market matures, competition can be expected to
increase. As a result of these and other competitive factors, our strategy may
not be successful and we may not be able to generate adequate cash flows to fund
our operations.

FAILURE TO COMPLY WITH GOVERNMENTAL REGULATIONS

         Our business is subject to numerous federal, state and local laws,
regulations and policies that govern environmental protection, zoning and other
matters. These laws and regulations have changed frequently in the past and it
is reasonable to expect additional changes in the future. If existing regulatory
requirements change, we may be required to make significant capital and
operating expenditures. Although we believe that we are presently in material
compliance with applicable laws and regulations, our operations may not continue
to comply with future laws and regulations. Governmental authorities may seek to
impose fines and penalties on us or seek to revoke or deny the issuance or
renewal of operating permits for failure to comply with applicable laws and
regulations. Under these circumstances, we might be required to curtail or cease
operations or conduct site remediation until a particular problem is remedied,
which could have a material adverse effect on our business, results of
operations and financial condition.

                                      9
<PAGE>

POTENTIAL IMPACT OF GOVERNMENTAL INVESTIGATION OF OUR DETROIT FACILITY

         Our Detroit, Michigan facility is under investigation by the EPA and
the Federal Bureau of Investigation for possible violations of the Clean
Water Act, RCRA, and federal wire and mail fraud statutes. This investigation
was initiated as a result of allegations made by five current and former
employees of the facility that (i) the facility knowingly discharged into the
Detroit sewer system untreated hazardous liquid waste in violation of city
ordinances, the facility's permit and the Clean Water Act, and (ii) without
proper manifesting, the facility knowingly transported and disposed of
hazardous waste at an unpermitted treatment facility in violation of RCRA. We
are cooperating with the governmental agencies involved in this
investigation, but as of the date of this report, no announcement has been
made by any of the agencies regarding the investigation or any fines or
penalties that may be imposed against the facility. The imposition of a
substantial fine or penalty against the facility could have a material
adverse effect on our business, results of operations and financial condition.

SUSPENSION OF DETROIT FACILITY'S ELIGIBILITY TO RECEIVE CERCLA WASTE

         As a result of the allegations giving rise to the governmental
investigation of our Detroit facility, the EPA has notified us that the facility
is ineligible to receive waste generated as a result of removal or remedial
activities under CERCLA unless and until the EPA is satisfied that the facility
can again safely handle such waste. The Detroit facility's failure to regain its
eligibility to receive CERCLA waste would have an adverse impact upon the
operations of the facility.

IMPACT OF FAILURE TO OBTAIN OR MAINTAIN NECESSARY GOVERNMENTAL APPROVALS

         We operate in a highly regulated environment and are required to have
permits and approvals from federal, state and local governments. Any of these
permits or approvals or applications could be denied, revoked or modified under
various circumstances. In addition, if new environmental legislation or
regulations are enacted or existing legislation or regulations are amended or
are enforced differently, we might be required to obtain additional operating
permits or approvals. The process of obtaining or renewing a required permit or
approval can be lengthy and expensive and our efforts to obtain permits,
renewals or approvals may be opposed by citizens groups, adjacent landowners or
others. Our facilities in Chandler, Arizona and Detroit, Michigan have never
been granted Part B permits under RCRA and are continuing to operate under
interim status, as allowed by RCRA. In addition, our facility in East Palo Alto,
California is operating under a California Department of Toxic Substances
Control permit that expired in 1991, but that allows for on-going operations.
Although applicable regulations allow these facilities to continue to operate,
we may not be successful in obtaining or maintaining these and other required
permits and approvals and that failure could have a material adverse effect on
our business, results of operations and financial condition.

POTENTIAL ENVIRONMENTAL LIABILITY

         We may be subject to liability for environmental damage that our
processing facilities and collection operations may have caused or may cause
nearby landowners, particularly as a result of the contamination of drinking
water sources or soil, including damage resulting from conditions existing prior
to our acquisition of the facilities or operations. Liability may also arise
from any off-site environmental contamination caused by hazardous substances,
the transportation, treatment or disposal of which we arranged or which was
arranged by the owners of businesses that we have acquired. Any substantial
liabilities for environmental damage could have a material adverse effect on our
business, results of operations and financial condition. During the ordinary
course of our business, we may become involved in a variety of legal and
administrative proceedings relating to land use and environmental laws and
regulations, including actions or proceedings:

                  -        By governmental agencies seeking to impose civil or
                           criminal penalties on us;

                  -        By governmental agencies seeking to revoke or deny
                           renewal of one or more of our permits;

                  -        By citizens groups, adjacent landowners or
                           governmental agencies opposing the issuance of a
                           permit or approval to us or alleging violations of
                           the permits under which we operate; or

                  -        By citizens groups and adjacent landowners seeking to
                           impose liability on us for environmental damage at
                           any of our facilities (or facilities formerly owned
                           by us or any acquired business) or damage that those
                           facilities or other properties may have caused.

                                          10
<PAGE>

The adverse outcome of one or more of these proceedings could have a material
adverse effect on our business, results of operations and financial condition.

         During the ordinary course of our operations, we have from time to
time received, and expect that we may in the future receive, citations or
notices from governmental authorities that our operations are not in
compliance with our permits or certain applicable environmental or land use
laws and regulations. We generally seek to work with the authorities to
resolve the issues raised by these citations or notices. However, we may not
always be successful in this regard and future citations or notices could
have a material adverse effect on our business, results of operations and
financial condition.

INSUFFICIENCY OF INSURANCE

         While we maintain liability insurance, it is subject to coverage
limits and certain policies exclude coverage for damages resulting from
environmental contamination. Although there are currently numerous sources
from which such coverage may be obtained, it may not continue to be available
to us on commercially reasonable terms or the possible types of liabilities
that may be incurred by us may not be covered by our insurance. In addition,
our insurance carriers may not be able to meet their obligations under the
policies or the dollar amount of the liabilities may exceed our policy
limits. Even a partially uninsured claim, if successful and of significant
magnitude, could have a material adverse effect on our business, results of
operations and financial condition.

DEPENDENCE UPON OILFIELD WASTE EXEMPTION UNDER RCRA AND OTHER ENVIRONMENTAL
REGULATIONS

         Oilfield waste is currently exempt from the requirements of RCRA,
which is the principal federal statute governing the handling and disposal of
waste. In recent years, proposals have been made to rescind or modify this
exemption. The repeal or modification of the exemption covering oilfield
waste or modification of applicable regulations or interpretations regarding
the processing and disposal of oilfield waste would require us to alter our
method of processing and disposing of oilfield waste. This could have a
material adverse effect on our business, results of operations and financial
condition. Each of our operations is also dependent to varying degrees on the
existence and enforcement of local, state and federal environmental
regulations. Any repeal or relaxation of those regulations, or a failure of
governmental authorities to enforce the regulations, could result in
decreased demand for our services and, therefore, could have a material
adverse effect on our business, results of operations and financial
condition. Our operations may also be adversely affected by new regulations
or changes in other applicable regulations.

DEPENDENCE ON OIL AND GAS INDUSTRY

         Demand for our oilfield waste processing and disposal services
depends in large part upon the level of exploration for and production of oil
and gas, particularly in the Gulf Coast region. This demand, in turn, depends
on, among other things, oil and gas prices, expectations about future prices,
the cost of exploring for, producing and delivering oil and gas, the
discovery rate of new oil and gas reserves and the ability of oil and gas
companies to raise capital. Historically, prices for oil and gas have been
extremely volatile and have reacted to changes in the supply of and demand
for oil and natural gas, domestic and worldwide economic conditions and
political instability in oil-producing countries. Current levels of oil and
gas exploration and production activities may not be maintained. Prices for
oil and natural gas are expected to continue to be volatile and affect demand
for our oilfield waste services. A material decline in oil or natural gas
prices or exploration activities could materially affect the demand for our
oilfield waste services and, therefore, our business, results of operations
and financial condition.

RELIANCE ON KEY PERSONNEL

         We are highly dependent on our executive officers and senior
management, and we likely will depend on the senior management of any
significant business we acquire in the future. The loss of the services of
any of our current executive officers or key employees or any member of
senior management of any acquired business could have a material adverse
effect on our business, results of operations and financial condition. In
addition, debt outstanding under our credit facility may be accelerated by
the lenders if, among other things, Michael P. Lawlor, W. Gregory Orr or Earl
J. Blackwell ceases to serve as an executive officer of the Company and is
not replaced within 60 days by an individual reasonably satisfactory to the
lenders. We have tried to reduce some of this risk by maintaining key man
life insurance in the amount of $5.0 million on each of Messrs. Lawlor, Orr
and Blackwell.

VOLATILITY OF OUR STOCK PRICE

         Our common stock was first publicly traded on August 20, 1997 and
has traded from a low of $5 3/16 per share to a high of $26 3/8 per share. The
market price of our common stock could continue to fluctuate substantially
due to a variety of factors, including:

                                       11


<PAGE>

                  -        Quarterly fluctuations in results of operations;

                  -        Announcement of the results of the governmental
                           investigation of our Detroit facility;

                  -        Changes in the regulatory environment or market
                           conditions affecting the liquid waste management
                           industry;

                  -        Announcement and market acceptance of acquisitions;

                  -        Changes in earnings estimates by analysts;

                  -        Loss of key personnel;

                  -        Changes in accounting principles or policies;

                  -        Sales of common stock by existing stockholders;

                  -        Announcements of key developments by competitors; and

                  -        Economic and political conditions.

         The market price for our common stock may also be affected by our
ability to meet analysts' expectations. Any failure to meet such
expectations, even slightly, could have an adverse effect on the market price
of our common stock.

ITEM 2.  PROPERTIES

         Our corporate offices are located in Houston, Texas. The corporate
offices consist of approximately 20,000 square feet of office space occupied
under a lease which expires on June 1, 2002.

         The Commercial Wastewater Division operates 26 liquid waste
processing facilities. We believe that the specialized equipment, licenses
and permits necessary to operate these liquid waste processing facilities
create a significant barrier to entry into this industry. The following table
sets forth certain information relating to each such facility, including the
type of liquid wastes most commonly managed:

<TABLE>
<CAPTION>

          FACILITY                                   LOCATION                         LIQUID WASTES MANAGED        OWNED/LEASED
<S>                                           <C>                               <C>                                <C>

Parallel CA................................   Rancho Cucamonga, California      Bulk Liquids and Dated Beverages      Owned
Parallel FL................................   Bartow, Florida                   Bulk Liquids and Dated Beverages      Leased
National Solvent...........................   Atlanta, Georgia                  Industrial Wastewaters                Leased
D&H Holding................................   Hammond, Indiana                  Industrial Wastewaters; Grease and    Leased
                                                                                Grit Trap Waste; Septage

Parallel KY................................   Louisville, Kentucky              Bulk Liquids and Dated Beverages      Owned
Bio-Vac....................................   Shreveport, Louisiana             Grease and Grit Trap Waste            Owned
Re-Claim LA................................   Shreveport, Louisiana             Industrial Wastewaters                Leased
A&A Environmental..........................   Linthicum Heights, Maryland       Industrial Wastewaters                Owned
Northern A-1...............................   Kalkaska, Michigan                Industrial Wastewaters                Owned
Royal Recycling............................   Hamilton, Ontario, Canada         Dated Beverages                       Leased
Gateway Terminal...........................   Carteret, New Jersey              Industrial Wastewaters                Leased
Waste Stream...............................   Weedsport, New York               Biosolids                             Leased
E-Max Elwood...............................   Elwood City, Pennsylvania         Industrial Wastewaters                Leased
E-Max Allegheny............................   Pittsburgh, Pennsylvania          Industrial Wastewaters                Leased
Austin Liquid Disposal.....................   Austin, Texas                     Grease and Grit Trap Waste            Leased
Environment Management.....................   Austin, Texas                     Grease and Grit Trap Waste            Owned
Mesa.......................................   Dallas, Texas                     Grease and Grit Trap Waste            Owned
Amigo North................................   Giddings, Texas                   Petroleum Fuels                       Owned
Reclamation Technology.....................   Haltom City, Texas                Industrial Wastewaters; Grease and    Leased
                                                                                Grit Trap Waste

                                                                 12


<PAGE>

          FACILITY                                   LOCATION                         LIQUID WASTES MANAGED        OWNED/LEASED

American WasteWater........................   Houston, Texas                    Industrial Wastewaters; Grease and    Owned
                                                                                Grit Trap Waste; Septage
E. Allison.................................   Houston, Texas                    Grease and Grit Trap Waste            Leased
Re-Claim TX................................   Houston, Texas                    Industrial Wastewaters                Owned
South Texas (Mesa).........................   Los Fresnos, Texas                Grease and Grit Trap Waste            Owned
Waste Technologies.........................   San Antonio, Texas                Grease and Grit Trap Waste            Owned
Imperial (Mesa)............................   San Antonio, Texas                Grease and Grit Trap Waste            Owned
Amigo South................................   San Antonio, Texas                Petroleum Fuels                       Owned

</TABLE>

         The Industrial Wastewater Division operates six waste processing
facilities. The following table sets forth certain information relating to
each such facility, including the type of wastes most commonly managed:

<TABLE>
<CAPTION>

          FACILITY                                   LOCATION                   LIQUID WASTES MANAGED                  OWNED/LEASED
<S>                                           <C>                         <C>                                          <C>

Romic AZ...................................   Chandler, Arizona           Hazardous Wastes; Industrial Wastewaters        Leased
Romic CA...................................   East Palo Alto, California  Hazardous Wastes; Industrial Wastewaters        Owned
Universal Waste............................   Tampa, Florida              Household Hazardous Wastes                      Owned
Waste Research Augusta.....................   Augusta, Georgia            Industrial Wastewaters                          Owned
Waste Research Macon.......................   Macon, Georgia              Industrial Wastewaters                          Owned
City Environmental.........................   Detroit, Michigan           Hazardous Wastes; Industrial Wastewaters        Owned

</TABLE>

         The Oilfield Waste Division operates six oilfield waste processing
facilities and seven commercial saltwater injection wells. The following
table sets forth certain information relating to each processing facility.

<TABLE>
<CAPTION>

                                                                        AREA PERMITTED           APPROXIMATE
                                                                         FOR OILFIELD           SQUARE FOOTAGE
                                                                       WASTE PROCESSING            OF OFFICE
                    LOCATION                                             AND DISPOSAL              FACILITIES       OWNED/LEASED
<S>                                                                    <C>                      <C>                 <C>
Bateman Island, Louisiana..........................................      115 acres                  5,000             Leased
Bourg, Louisiana...................................................      140 acres                  5,000             Leased
Elm Grove, Louisiana...............................................      152 acres                    500             Owned
Mermentau, Louisiana...............................................      277 acres                 10,000             Owned
Bustamonte, Texas..................................................      120 acres                  1,000             Owned
San Isidro, Texas..................................................       80 acres                  1,000             Leased

</TABLE>

         In addition to the facilities described above, we also own a
facility in Lacassine, Louisiana consisting of approximately 8,000 square
feet of office and equipment storage space and approximately 130 acres of
undeveloped land that was previously used for landfarming of oilfield waste
and naturally occurring radioactive material ("NORM"). In January 1997, we
ceased accepting NORM at the Lacassine facility and began taking the steps
necessary to close this facility in accordance with Louisiana law. In June
1999, the Louisiana Department of Environmental Quality certified the
facility as closed. We also own a facility in Kansas City, Missouri that was
previously used for storage and bulking of various hazardous wastes and a
facility in Roseville, Michigan that was previously used for fuel blending
and solvent recycling. The Kansas City and Roseville facilities have not been
operational since 1992 and we have no plans to resume operations at either of
these facilities.

         We own other real estate, buildings and physical properties that we
use in our liquid waste collection operations. We also lease certain of our
collection and transportation facilities and administrative offices.

         All of our facilities satisfy our present needs; however, as part of
our internal growth strategy, we intend to expand the capacity and processing
capabilities of certain of our liquid waste processing facilities and
increase the number and types of permitted waste streams of such facilities.
We believe that the remaining capacity of each of the landfarms that we lease
is sufficient for at least 25 years; which, in each case, exceeds the
remaining term (including options) of the lease agreement for such facility.
We also believe that the remaining capacity at each of the landfarms that we
own is sufficient for at least 25 years.

ITEM 3.  LEGAL PROCEEDINGS

         In June 1999, we were notified that the Louisiana Department of
Environmental Quality (LDEQ) was seeking to terminate the discharge permit
held by our Re-Claim facility in Shreveport, Louisiana, which permit allows
the facility to discharge processed

                                       13

<PAGE>

wastewater into the waters of the State of Louisiana. In its notice, the LDEQ
alleged that the proposed termination was justified based upon, among other
things, the facility's failure to comply with the terms of its permit, two
releases (spills) that occurred at the facility, and the facility's
acceptance and processing of hazardous materials not covered by the terms of
its permit. In January 2000, we entered into a tentative settlement agreement
with the LDEQ resolving the LDEQ's allegations. A settlement agreement has
been prepared by the parties and signed by the Company, but this settlement
agreement will not become final until signed by the LDEQ and the Louisiana
Attorney General. The terms of the settlement agreement have been published
in accordance with Louisiana law and we anticipate that the settlement
agreement will become final during the second quarter of 2000. Under the
terms of the settlement agreement, we agreed to pay a civil assessment of
$525,000 to the LDEQ. In addition, we agreed to contribute $675,000 to
certain projects approved by the LDEQ to benefit the environment. In return,
the LDEQ agreed to take no further action on its notice of intent to
terminate the permit held by our facility.

         In the fourth quarter of 1999, the EPA notified us of certain
alleged violations of RCRA by our Re-Claim facility in Shreveport, Louisiana.
Among other things, the EPA alleged that the facility accepted waste from
CERCLA sites that it was not permitted to accept and improperly disposed
of such waste. Although we dispute the EPA's allegations, we are attempting
to negotiate a resolution with the EPA which may include a civil assessment,
modifications to our waste screening and waste processing procedures and/or
additional capital expenditures at the facility. We believe that the ultimate
outcome of this proceeding will not have a material adverse effect on our
business, results of operations or financial condition.

         The EPA has also notified us that it believes that approximately 3.0
million gallons of liquid waste received by our Re-Claim facility in
Shreveport, Louisiana and stored off-site may contain hazardous constituents
and, therefore, the waste cannot be processed by our facility. We believe
that the waste may be handled as nonhazardous waste in accordance with the
terms of the facility's permit. We are in the process of preparing a plan for
disposal of this waste. We have established a $2.5 million reserve, recorded
as an accrued liability, for costs to be incurred in the event that it is
ultimately determined that this waste must be delivered to a third party for
processing and disposal. Management believes that this reserve is sufficient
to cover all costs associated with a third party's disposal of the waste, if
necessary.

         In May 1998, we acquired from Waste Management, Inc. substantially
all of the assets of City Environmental, Inc. including, without limitation,
a hazardous and nonhazardous waste treatment facility located in Detroit,
Michigan. This facility has never been granted a final Part B permit under
RCRA, but has operated under interim status, as allowed by RCRA. On August
25, 1999, the EPA and the Federal Bureau of Investigation ("FBI") executed a
search warrant at this facility, seeking electronic data, files and other
documentation relating to the facility's receipt, processing and disposal of
hazardous waste. As a result of the execution of the search warrant, the
facility temporarily ceased operations. According to the affidavit attached
to the search warrant, after receiving a phone call from an employee at the
facility in May 1999, the EPA and the FBI began a joint investigation of the
facility. The investigation centers around allegations made by five current
and former employees at the facility that (i) the facility knowingly
discharged into the Detroit sewer system untreated hazardous liquid waste in
violation of city ordinances, the facility's permit and the Clean Water Act,
and (ii) without proper manifesting, the facility knowingly transported and
disposed of hazardous waste at an unpermitted treatment facility in violation
of RCRA. According to the affidavit, the facility has been knowingly
violating the Clean Water Act and RCRA since before we acquired the facility.
The on-site investigation of our facility by the EPA and the FBI was
completed in August 1999. It is our understanding that the investigation is
continuing, but as of the date of this report no announcement regarding the
investigation has been made by the EPA or the FBI.

         All costs, except potential fines or penalties, incurred or expected
to be incurred in connection with the investigation of our Detroit facility
have been reflected in our consolidated financial statements at December 31,
1999. See Note 3 to our consolidated financial statements. However, due to
the current status of the investigation, we are unable at this time to
project a reasonable estimate of potential fines or penalties (or range of
potential fines or penalties) that could be assessed against the facility.
Accordingly, we cannot project the ultimate outcome of the investigation or
its potential impact on us. The imposition of a substantial fine or penalty
against the facility could have a material adverse effect on our business,
results of operations, financial condition and liquidity.

         After the completion of the on-site investigation of our Detroit
facility, we began conducting routine tests of materials in waste
solidification vaults in preparation for the reopening of the facility.
During these tests, we discovered that certain waste which had been received
by the facility prior to its August 25, 1999 closing was contaminated with
PCBs and that this waste had contaminated other waste in several of the waste
solidification vaults and a liquid feed tank. We immediately made all
notifications required by law, including notifications to the Michigan
Department of Environmental Quality ("MDEQ") and the EPA. We also notified
Waste Management, Inc. that some of the PCB contaminated wastes may have been
inadvertently delivered to a Waste Management landfill for disposal. We
subsequently submitted to the EPA a workplan for the disposal of the PCB
contaminated materials and decontamination of the affected equipment. We
later entered into a consent order with the EPA that approved this workplan
and established enhanced procedures for

                                       14

<PAGE>

screening of materials delivered to the facility to detect PCB contamination.
Under the terms of the consent order, we paid $123,888 to the EPA in full
settlement of the EPA's claims for certain civil fines. Our contractors
completed the clean-up and decontamination of the facility in accordance with
the workplan and the facility was reopened for business on February 1, 2000.
We have determined that a subsidiary of National Steel Corporation generated
the PCB contaminated materials and that these materials were not properly
identified as required by law when delivered to our Detroit facility. We have
made demand upon and are attempting to negotiate a resolution with National
Steel regarding the damages suffered by our facility as a result of its
subsidiary's failure to disclose that its waste was contaminated with PCBs.
We have also submitted claims under our pollution liability and business
interruption insurance policies for losses incurred as a result of the
temporary closing of the facility. We have recorded all of the liabilities
incurred or expected to be incurred in connection with the cleanup of the PCB
contamination, without offset for any anticipated recovery from National
Steel or our insurers.

         Waste Management has asserted a claim against us for damages
relating to our Detroit facility's alleged disposal of PCB contaminated waste
at one of its landfills. Waste Management has submitted to the MDEQ and the
EPA a workplan for the disposal of any such improperly delivered PCB
contaminated waste, and Waste Management and the Company are currently
awaiting a response from the MDEQ and the EPA. We have made demand upon
National Steel for indemnification against any amounts ultimately determined
to be owing by us to Waste Management as a result of our Detroit facility's
delivery of PCB contaminated waste to Waste Management's landfill. We have
also submitted a claim under our pollution liability insurance for losses
incurred as a result of any such delivery. We have established a $1.3 million
reserve, recorded as an accrued liability, for costs to be incurred in the
event that it is ultimately determined that we are responsible for disposing
of any improperly delivered PCB contaminated waste, without offset for any
anticipated recovery from National Steel or our insurers.

         As previously reported, our Detroit facility has been operating
under interim status, as allowed by RCRA. Since we acquired the facility, we
have been working with the MDEQ to obtain our final Part B permit. By letter
dated September 17, 1999, the MDEQ notified us that it had determined that
the facility's application for a Part B permit was not administratively
complete and, therefore, the facility had lost its authority to process and
dispose of hazardous waste. Shortly thereafter, the MDEQ issued two letters
of warning ("LOWs") and a notice of violation ("NOV") to the facility
identifying various alleged deficiencies in the facility's application for a
Part B permit. We promptly notified the MDEQ that we disputed the allegations
contained in the September 17, 1999 letter, the LOWs and the NOV. On October
7, 1999, we entered into a consent order with the MDEQ resolving the
allegations set forth in the September 17, 1999 letter, the LOWs and the NOV.
Under the terms of the consent order, the facility was required, among other
things, to (i) submit to the MDEQ by November 22, 1999 additional drawings
and workplans regarding the maintenance and operation of the facility and any
revisions to the facility's Part B permit application necessitated by the
consent order, (ii) submit to the MDEQ within certain specified time frames
documentation establishing that certain cleanup work at the facility has been
completed, and certain procedures have been implemented at the facility, and
(iii) pay $37,500 to the MDEQ in full settlement of the MDEQ's claims for
certain civil fines and costs of surveillance and enforcement. We also agreed
to reimburse the MDEQ for all future costs incurred by the MDEQ in overseeing
the facility's compliance with the terms of the consent order. In December
1999, the MDEQ notified the facility that its application for a Part B permit
was administratively complete. On February 1, 2000, after complying with all
of the other terms and conditions of the consent order, the facility resumed
its operations under interim status, as allowed by RCRA. We are currently
working with the MDEQ to obtain a final Part B permit for the facility.

         During the fourth quarter of 1999, the EPA notified us that, as a
result of the allegations giving rise to the investigation of our Detroit
facility, it had determined that the facility was no longer eligible to
receive waste generated as a result of removal or remedial activities under
CERCLA. This notification further advised that, in order for the facility to
regain its eligibility to receive such CERCLA waste, the facility must
demonstrate that it can again safely handle such waste. In accordance with
the terms of the notice, we have asked the EPA to reconsider its
determination and we are currently awaiting a response to this request.
Although we believe that the EPA will ultimately determine that the facility,
as re-opened, can safely handle CERCLA waste, there can be no assurances
thereof. The facility's failure to regain its eligibility to receive CERCLA
waste would have an adverse impact upon the operations of the facility.

         In December 1999, we were notified by the EPA that D&H Holding Co.,
Inc., a company that we acquired in the fourth quarter of 1998, is a
potentially responsible party under CERCLA with respect to the Lenz Oil
Services Superfund Site in DuPage County, Illinois. Based upon the
information available to us at this time, we do not believe that the ultimate
outcome of this matter will have a material adverse effect on our business,
results of operations or financial condition. We intend to make demand upon
the former stockholders of D&H Holding for indemnification against any costs
that we may incur in connection with the remediation of this site. We have
established a $125,000 reserve, recorded as an accrued liability, to cover
any such costs, without offset for any anticipated recovery from the former
stockholders of D&H Holding.

                                       15

<PAGE>

         During the third quarter of 1999, six purported securities class
action lawsuits were filed against the Company and certain of its officers
and directors in the United States District Court for the Southern District
of Texas, Houston Division. These lawsuits have been consolidated into a
single action styled IN RE: U S LIQUIDS SECURITIES LITIGATION, Case No.
H-99-2785, and the plaintiffs have filed a consolidated complaint. The
consolidated complaint alleges violations of Sections 11, 12(a)(2) and 15 of
the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder on behalf of
purchasers of the Company's common stock during the period beginning on May
12, 1998 and ending on August 25, 1999, including purchasers of common stock
in the Company's March 1999 offering. The plaintiffs generally allege that
the defendants made false and misleading statements and failed to disclose
allegedly material information regarding the operations of the Company's
Detroit facility and the Company's financial condition in the prospectus
relating to the Company's March 1999 stock offering and in certain other
public filings and announcements made by the Company. The remedies sought by
the plaintiffs include designation of the action as a class action,
unspecified damages, attorneys' and experts' fees and costs, rescission to
the extent any members of the class still hold common stock, and such other
relief as the court deems proper.

         In addition, one shareholder of the Company has filed a lawsuit
against certain of the officers and directors of the Company in connection
with the operation of the Company's Detroit facility and the securities class
action described above. BENN CARMICIA V. U S LIQUIDS INC., ET AL., was filed
in the United States District Court for the Southern District of Texas,
Houston Division, on September 15, 1999 and was subsequently consolidated
with the claims asserted in the securities class action described above. The
plaintiff purports to allege derivative claims on behalf of the Company
against the officers and directors for alleged breaches of fiduciary duty
resulting from their oversight of the Company's affairs. The lawsuit names
the Company as a nominal defendant and seeks compensatory and punitive
damages on behalf of the Company, interest, equitable and/or injunctive
relief, costs and such other relief as the court deems proper.

         The outcome of these consolidated actions and the costs of defending
them cannot be predicted with certainty at this time. However, we believe
that the claims asserted in the purported securities class action are without
merit and the Company intends to vigorously defend itself and its officers
and directors against these claims. Moreover, we believe that the shareholder
derivative action was not properly brought and we have filed a motion to
dismiss this action in order to allow the Board of Directors to consider
whether such litigation is in the best interest of the Company and our
stockholders.

         During October and November of 1999, the California Department of
Toxic Substances Control ("DTSC") inspected our processing facility in East
Palo Alto, California, and our transfer facility in Redwood City, California.
On November 29, 1999, the DTSC issued a summary of violations identifying
various alleged violations of California hazardous waste management laws and
regulations by the facilities. The DTSC has not initiated a formal
enforcement action seeking penalties against either facility. There can be no
assurance, however, that a formal enforcement action will not subsequently be
brought against one or both facilities. Although we dispute the alleged
violations, we are attempting to negotiate a resolution with the DTSC. We
believe that the ultimate resolution of these matters will not have a
material adverse effect on our business, results of operations, or financial
condition.

         Prior to its acquisition by the Company in January 1999, Romic
Environmental Technologies Corporation had entered into an administrative
consent order with the EPA relating to the cleanup of soil and groundwater
contamination at its facility in East Palo Alto, California. A remedial
investigation of the facility has been completed by Romic and forwarded to
the EPA. Romic is nearing completion of a corrective measures study for
submission to the EPA. The EPA will review this study and approve a plan for
final site remediation. Based upon the information currently available, we
have established a reserve, recorded as an accrued liability, of $3.2 million
to cover Romic's estimated costs for this site. Management believes that this
reserve is sufficient to satisfy Romic's obligations under the consent order,
however, due to the complex, ongoing and evolving process of investigating
and remediating the facility, Romic's actual costs may exceed the amount
reserved.

         Prior to its acquisition by the Company, Romic had been notified by
the EPA and the DTSC that it was a potentially responsible party under
applicable environmental legislation with respect to the Bay Area Drum
Superfund Site in San Francisco, California, the Lorentz Barrel and Drum
Superfund Site in San Jose, California and the Casmalia Resources Hazardous
Waste Management Facility located near Santa Barbara, California, each of
which was a drum reconditioning or disposal site previously used by Romic.
With respect to each of these sites, Romic and a number of other potentially
responsible parties have entered into administrative consent orders and
agreements allocating each party's respective share of the cost of
remediating the sites. Romic's share under these consent orders and
agreements is as follows: Bay Area -- 6.872%; Lorentz -- 5.62% and Casmalia
Resources -- 0.29%. Based upon the studies and remedial actions completed, we
have established a reserve, recorded as an accrued liability, of $1.3 million
to cover Romic's share of the estimated costs for these sites. Management
believes that this reserve is sufficient to satisfy Romic's obligations under
the consent orders, however, due to the complex, ongoing and evolving process
of investigating and remediating these sites, Romic's actual costs may exceed
the amount reserved.

                                       16

<PAGE>

         On August 7, 1998, we settled substantially all of the claims
asserted against us in four lawsuits relating to our Bourg, Louisiana
landfarm. Under the terms of the settlement, we agreed to expand the buffer
zone and build a berm along the western boundary of our landfarm. The cost of
these actions was not material to our operating results. The settlement did
not resolve certain claims asserted against us by Acadian Shipyard, Inc., a
local barge company, in the FRILOUX ET AL. V. CAMPBELL WELLS CORPORATION case
pending in the 17th Judicial District Court for the Parish of Lafourche,
Louisiana. In the FRILOUX case, we asserted various claims for indemnity
and/or contribution against Acadian. Thereafter, in July 1998, Acadian filed
various counterclaims against us including, without limitation, claims for
defamation of business reputation and conspiracy to damage Acadian's business
reputation. In addition, Acadian requested unspecified monetary damages
allegedly suffered as a result of alleged environmental contamination in
connection with the ongoing operations at our Bourg, Louisiana landfarm. We
deny that we have any liability to Acadian and intend to vigorously defend
against these claims. We do not believe that this action will have a material
adverse effect on our business, results of operations, or financial condition.

         Our business is subject to numerous federal, state and local laws,
regulations and policies that govern environmental protection, zoning and
other matters. During the ordinary course of our business, we have become
involved in a variety of legal and administrative proceedings relating to
land use and environmental laws and regulations, including actions or
proceedings brought by governmental agencies, adjacent landowners, or
citizens' groups. In the majority of the situations where proceedings are
commenced by governmental agencies, the matters involved relate to alleged
technical violations of licenses or permits pursuant to which we operate or
are seeking to operate, or laws or regulations to which our operations are
subject or are the result of different interpretations of applicable
requirements. From time to time, we pay fines or penalties in governmental
proceedings relating to our operations. We believe that these matters will
not have a material adverse effect on our business, results of operations or
financial condition. However, the outcome of any particular proceeding cannot
be predicted with certainty, and the possibility remains that technological,
regulatory or enforcement developments, results of environmental studies, or
other factors could materially alter this expectation at any time.

         The Company and certain of our subsidiaries are also currently
involved in other civil litigation and governmental proceedings relating to
the conduct of their businesses. While the outcome of any particular lawsuit
or governmental investigation cannot be predicted with certainty, we believe
that these matters will not have a material adverse effect on our business,
results of operations or financial condition.

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

         No matters were submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders, through the
solicitation of proxies or otherwise.


                                     PART II

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

         Our common stock is traded on the American Stock Exchange under the
symbol "USL." The following table sets forth, for the periods indicated, the
range of the high and low sales prices for the common stock as reported on
the American Stock Exchange.

<TABLE>
<CAPTION>

                                                                         PRICE RANGE OF
                                                                          COMMON STOCK
                                                                          ------------

                                                                       HIGH          LOW
<S>                                                                   <C>           <C>

Year Ended December 31, 1998:

         First Quarter............................................    $20 3/4       $14 1/4
         Second Quarter...........................................     25 1/4        19
         Third Quarter............................................     23 1/8        14 5/8
         Fourth Quarter...........................................     23            14


                                       17


<PAGE>



Year Ended December 31, 1999:

         First Quarter............................................    $26 3/8       $19 1/2
         Second Quarter...........................................     21 7/8        17 9/16
         Third Quarter............................................     20 7/8         5 5/8
         Fourth Quarter...........................................      9 11/16       6 3/8

</TABLE>

         The number of holders of record of common stock at March 28, 2000
was 246.

         We have not paid dividends on our common stock and do not anticipate
paying dividends in the foreseeable future. We intend to retain future
earnings, if any, to finance the expansion of our operations and for general
corporate purposes, including future acquisitions. We are also prohibited
from declaring or paying cash dividends on our capital stock under the terms
of our revolving credit facility.

ITEM 6.  SELECTED FINANCIAL DATA

         The consolidated balance sheet and income statement data below set
forth our consolidated financial data as of December 31, 1998 and 1999, and
for the years ended December 31, 1997, 1998 and 1999, derived from the
consolidated financial statements audited by Arthur Andersen LLP, which
appear elsewhere in this report. The consolidated balance sheet and income
statement data as of December 31, 1995, 1996 and 1997, and for the years ended
December 31, 1995 and 1996, have been derived from the financial statements
audited by Arthur Andersen LLP which do not appear in this report.

INCOME STATEMENT DATA:

<TABLE>
<CAPTION>

                                                                               YEARS ENDED DECEMBER 31,
                                                          -------------------------------------------------------------------
                                                            1995          1996          1997            1998          1999
                                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                       <C>           <C>           <C>           <C>             <C>
Revenues..........................................        $11,127       $14,285       $38,159       $ 121,460       $231,783
Operating expenses................................          9,776        11,369        21,353          79,027        165,773
Depreciation and amortization.....................            159           424         2,990           8,146         16,595
Selling, general and administrative expenses......            863         1,437         5,750          12,927         26,242
Special charges...................................             --            --            --              --         15,138
                                                          -------       -------       -------       ---------       --------
Income from operations............................            329         1,055         8,066          21,360          8,035
Interest and other expense, net...................            177           309         1,775           3,555          6,674
                                                          -------       -------       -------       ---------       --------
Income before provision for income taxes..........            152           746         6,291          17,805          1,361
Provision for income taxes........................             49           255         2,416           7,033          2,603
                                                          -------       -------       -------       ---------       --------
Net income (loss).................................        $   103       $   491       $ 3,875       $  10,772       $ (1,242)
                                                          =======       =======       =======       =========       ========
Basic earnings (loss) per share...................        $  0.06       $  0.23       $  0.65       $    1.04       $  (0.08)
Diluted earnings (loss) per share.................        $  0.06       $  0.23       $  0.55       $    0.93       $  (0.08)
Weighted average shares outstanding...............          1,700         2,117         5,937          10,317         15,324
Diluted weighted average shares outstanding.......          1,700         2,139         7,078          11,637         15,324


BALANCE SHEET DATA:

<CAPTION>

                                                                                  AS OF DECEMBER 31,
                                                          -------------------------------------------------------------------
                                                            1995          1996          1997            1998          1999
                                                                                       (IN THOUSANDS)
<S>                                                       <C>           <C>           <C>           <C>             <C>
Working capital (deficit).........................        $  (576)      $   223       $ 2,122       $   2,936       $ 10,889
Total assets......................................           3007        46,851        55,016         252,165        369,083
Long-term obligations, including current
   maturities.....................................           2010        29,950        17,436          68,394        104,826
Stockholders' equity..............................           (358)        1,538        20,906         124,944        190,148

</TABLE>

                                       18

<PAGE>



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

         THE FOLLOWING DISCUSSION REVIEWS OUR OPERATIONS FOR THE THREE YEARS
ENDED DECEMBER 31, 1999 AND SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES AND THE OTHER FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS REPORT. THE INFORMATION IN THIS "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES. YOU CAN IDENTIFY THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH
AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "BELIEVE," "ESTIMATE," AND "CONTINUE"
OR SIMILAR WORDS. OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER
MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN "BUSINESS-FACTORS
INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS" IN ITEM 1
OF THIS REPORT.

OVERVIEW

         Prior to June 30, 1999, our subsidiaries were organized into two
divisions -- the Wastewater Division and the Oilfield Waste Division. However,
as the result of our acquisition of Romic Environmental Technologies Corporation
in January 1999 and in accordance with Statement of Financial Accounting
Standards No. 131, effective as of July 1, 1999, we created a third division
known as the Industrial Wastewater Division, and changed the name of the
Wastewater Division to the Commercial Wastewater Division. The Industrial
Wastewater Division includes the operations of Romic Environmental Technologies
Corporation and two other subsidiaries (USL City Environmental, Inc., and USL
City Environmental Services of Florida, Inc.) that were acquired during 1998 and
were previously included as part of the Wastewater Division.

         The Commercial Wastewater Division collects, processes and disposes of
nonhazardous liquid waste and recovers saleable by-products from certain waste
streams. The Industrial Wastewater Division collects, processes and disposes of
hazardous and nonhazardous waste and recovers saleable by-products from certain
waste streams. The Oilfield Waste Division processes and disposes of waste
generated in oil and gas exploration and production.

         The Commercial Wastewater Division generated $153.8 million, or 66.3%,
of our revenues for the year ended December 31, 1999. This Division derives
revenues from two principal sources: fees received for collecting, processing
and disposing of nonhazardous liquid waste (such as industrial wastewater,
grease and grit trap waste, and bulk liquids and dated beverages) and revenue
obtained from the sale of by-products, including fats, oils, feed proteins,
industrial and fuel grade ethanol, solvents, aluminum, glass, plastic and
cardboard, recovered from certain waste streams. Some of our by-product sales
involve the brokering of industrial and fuel grade ethanol produced by third
parties. Collection and processing fees charged to customers vary per gallon by
waste stream according to the constituents of the waste, expenses associated
with processing the waste and competitive factors. By-products are commodities
and their prices fluctuate based on market conditions.

         The Industrial Wastewater Division generated $59.5 million, or 25.7%,
of our revenues for the year ended December 31, 1999. This Division derives
revenues from fees charged to customers for collecting, processing and disposing
of hazardous and nonhazardous liquid waste such as household hazardous wastes,
plating solutions, acids, flammable and reactive wastes, and industrial
wastewater. Certain sludges and solid hazardous wastes are also processed. The
Industrial Wastewater Division also generates revenues from the sale of
by-products recovered from certain waste streams, including industrial chemicals
and recycled antifreeze products. The fees charged for processing and disposing
of hazardous waste vary significantly depending upon the constituents of the
waste. Collection and processing fees charged with respect to nonhazardous
liquid waste vary per gallon by waste stream according to the constituents of
the waste, expenses associated with processing the waste and competitive
factors.

         The Oilfield Waste Division generated $18.5 million, or 8.0%, of our
revenues for the year ended December 31, 1999. This Division derives revenues
from fees charged to customers for processing and disposing of oil and gas
exploration and production waste, and cleaning tanks, barges and other vessels
and containers used in the storage and transportation of oilfield waste. In
order to match revenues with their related costs, when waste is unloaded at one
of our sites, we recognize the related revenue and record a reserve for the
estimated amount of expenses to be incurred to process and dispose of the waste.
As processing occurs, generally over nine to twelve months, the reserve is
depleted as expenses are incurred. Our operating margins in the Oilfield Waste
Division are typically higher than in the Commercial Wastewater Division and in
the Industrial Wastewater Division.

         Newpark Resources, Inc. is the largest customer of the Oilfield Waste
Division. As described in "Business-Operations and Services Provided-Oilfield
Waste Division," in September 1998, we entered into a 33-month agreement with
Newpark. In this agreement, Newpark agreed to pay us at least $30.0 million.
Newpark paid us $6.0 million in 1998 and an additional $11.0 million of this
amount

                                        19
<PAGE>

in 1999. The remaining amounts are required to be paid to us in monthly
installments continuing through June 2001. These payments will permit Newpark to
deliver to us at no additional cost specified amounts of oilfield waste for
processing and disposal.

         During the third and fourth quarters of 1999, we recorded special
charges in the amount of $15.1 million. The components of these special
charges consisted of (i) $5.5 million for disposal of PCB contaminated
materials improperly delivered to our Detroit facility, the decontamination
of certain of our equipment exposed to the PCB contaminated materials and
fines imposed by regulatory authorities relating to our acceptance of the PCB
contaminated materials, (ii) $2.5 million for disposal of liquid waste
received by our Re-Claim facility in Shreveport, Louisiana, which waste is
the subject of a dispute between the Company and the EPA as to the proper
method of disposal, net of $443,000 received from our insurance carrier for
submitted claims, (iii) $2.0 million for fines imposed or expected to be
imposed by regulatory authorities relating to the operations of our Re-Claim
facility, (iv) $1.7 million for legal and professional fees we have incurred
or expect to incur for matters arising in connection with the governmental
proceedings relating to our Detroit and Re-Claim facilities and the purposed
securities class action and shareholder derivative action arising therefrom,
(v) $1.3 million for write-offs of capitalized acquisition costs related to
acquisitions not reasonably likely to occur as a result of the temporary cap
on our revolving credit facility and its related effects on our acquisition
program, (vi) $1.0 million for the cleanup of a spill at our Re-Claim
facility caused by an act of vandalism, (vii) $954,000 for severance and
contract termination costs related to certain personnel and acquisition
consultants as a result of the environmental issues at the Detroit and
Re-Claim facilities, the temporary cap on our revolving credit facility and
its related effects on our acquisition program, and (viii) $139,000 for other
costs related to the operations of our Detroit and Re-Claim facilities. These
special charges reduced net income by $10.4 million (net of taxes), or $0.68
per share, for the fiscal year ended December 31, 1999.

         Operating expenses include compensation and overhead related to
operations workers, supplies and other raw materials, transportation charges,
disposal fees paid to third parties, real estate lease payments and energy and
insurance costs applicable to waste processing and disposal operations.

         Selling, general and administrative expenses include management,
clerical and administrative compensation and overhead relating to our corporate
offices and each of our operating sites, as well as professional services and
costs. In the discussion of our 1997 results of operations, selling, general and
administrative expenses also include $400,000 of non-recurring pooling costs
associated with two acquisitions.

         Depreciation and amortization expenses relate to our landfarms and
other depreciable or amortizable assets. Landfarms, which constitute
approximately 11.5% of our net property, plant and equipment, are amortized
over 25 years. Other depreciable or amortizable assets are amortized over
periods ranging from three to 40 years. Amortization expenses relating to
acquisitions have increased over time as a result of amortization of goodwill
recorded in connection with our acquisitions.

         In connection with potential acquisitions, we incur and capitalize
certain transaction costs which include stock registration, legal, accounting,
consulting, engineering and other direct costs to complete the acquisitions.
Additionally, we incur charges for integration costs which include employee
termination, severance and relocation, lease termination and other one-time
charges related to the acquisitions, and these charges are capitalized using the
purchase method for business combinations when appropriate. We routinely
evaluate capitalized transaction and integration costs and expense those costs
related to acquisitions not likely to occur. Indirect acquisition costs, such as
executive salaries, general corporate overhead and other corporate services, are
expensed as incurred.

         The timing and magnitude of acquisitions, assimilation costs and the
seasonal nature of certain of our operations may materially affect operating
results. Accordingly, the operating results for any period are not necessarily
indicative of the results that may be achieved for any subsequent period.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1999 AND 1998

         REVENUES. Revenues for the year ended December 31, 1999 increased
$110.3 million, or 90.8%, from $121.5 million for the year ended December 31,
1998 to $231.8 million for the year ended December 31, 1999. The Commercial
Wastewater Division contributed $85.2 million, or 70.1%, of 1998 revenues and
$153.8 million, or 66.3%, of 1999 revenues. Collection and processing fees
generated $57.0 million, or 67.0%, and $123.5 million, or 80.3%, of the
Commercial Wastewater Division's revenues for 1998 and 1999, respectively.
Revenues from collection and processing of waste increased $66.5 million due to
acquisitions completed in late 1998 and during 1999. By-product sales generated
the remaining $28.2 million, or 33.0%, and $30.3 million, or 19.7%, of the
Commercial Wastewater Division's revenues for 1998 and 1999, respectively.
Revenues from the sale of by-products increased $2.1 million, or 7.4%,

                                 20


<PAGE>

primarily as a result of the acquisition of Royal Recycling, Ltd. offset by the
sale of the fats and oils distribution business in December 1998.

         The Industrial Wastewater Division contributed $18.9 million, or
15.6%, of 1998 revenues and $59.5 million, or 25.7%, of 1999 revenues.
Collection and processing fees generated $18.9 million, or 99.9%, and $54.5
million, or 91.6%, of the Industrial Wastewater Division's revenues for 1998
and 1999, respectively. Revenues from collection and processing of waste
increased $35.6 million due primarily to the acquisition of Romic
Environmental in January 1999. By-product sales generated the remaining $5.0
million, or 8.4%, of the Industrial Wastewater Division's revenues for 1999.
Revenue from the sale of by-products increased $5.0 million as a result of
the acquisition of Romic Environmental. The increase in revenues of the
Industrial Wastewater Division would have been greater still but for the
temporary closure of our Detroit facility commencing on August 25, 1999.
Revenues from the Detroit facility for the six month periods ended December
31, 1998 and 1999 were $12.2 million and $4.1 million, respectively.

         The Oilfield Waste Division contributed $17.4 million, or 14.3%, of
1998 revenues and $18.5 million, or 8.0%, of 1999 revenues. The Oilfield Waste
Division's revenues increased $1.1 million, or 6.3%, due primarily to the
restructuring of our agreement with Newpark Resources in September 1998.

         OPERATING EXPENSES. Operating expenses increased $86.8 million, or
110.0%, from $79.0 million for the year ended December 31, 1998 to $165.8
million for the year ended December 31, 1999. As a percentage of revenues,
operating expenses increased from 65.1% in 1998 to 71.5% in 1999. This
increase was due primarily to the continued growth of the Commercial
Wastewater and Industrial Wastewater Divisions, which have higher operating
expenses than the Oilfield Waste Division, and the decrease in revenues
without a proportionate decrease in operating expenses at our Detroit
facility.

         DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased $8.5 million, or 105.0%, from $8.1 million for the year ended December
31, 1998 to $16.6 million for the year ended December 31, 1999. As a percentage
of revenues, depreciation and amortization expenses increased from 6.7% in 1998
to 7.2% in 1999. This increase was attributable primarily to the decrease in
revenues from our Detroit facility with no corresponding decrease in
depreciation and amortization expenses.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $13.3 million, or 103.1%, from $12.9 million
for the year ended December 31, 1998 to $26.2 million for the year ended
December 31, 1999. As a percentage of revenues, selling, general and
administrative expenses were 10.6% in 1998 and 11.3% in 1999. This increase
resulted primarily from the decrease in revenues from our Detroit facility
without a proportionate decrease in selling, general and administrative
expenses.

         INTEREST AND OTHER EXPENSES. Net interest and other expenses increased
$3.1 million, or 86.1%, from $3.6 million for the year ended December 31, 1998
to $6.7 million for the year ended December 31, 1999. This increase resulted
primarily from interest expense incurred on borrowings used to fund the purchase
price for acquisitions completed in 1998 and 1999.

         INCOME TAXES. The provision for income taxes decreased $4.4 million, or
62.9%, from $7.0 million in 1998 to $2.6 million in 1999 as a result of
decreased taxable income. The effective tax rate for 1998 was 39.5%, compared to
a 191.3% rate for 1999. The tax rate increase was due to the increased
proportion of nondeductible expenses relative to pretax book income, as well as
the recording of a valuation reserve on state tax losses generated at our
Re-Claim facility in Shreveport, Louisiana.

YEARS ENDED DECEMBER 31, 1998 AND 1997

         REVENUES. Revenues for the year ended December 31, 1998 increased $83.3
million, or 218.3%, from $38.2 million for the year ended December 31, 1997 to
$121.5 million for the year ended December 31, 1998. The Commercial Wastewater
Division contributed $18.3 million, or 47.7%, of 1997 revenues and $85.2
million, or 70.1%, of 1998 revenues. Collection and processing fees generated
$5.7 million, or 31.3%, and $57.0 million, or 67.0%, of the Commercial
Wastewater Division's revenues for 1997 and 1998, respectively. Revenues from
collection and processing of waste increased $51.3 million due to acquisitions
completed during 1998 and the fourth quarter of 1997, as well as increased
pricing. By-product sales generated the remaining $12.5 million, or 68.7%, and
$28.2 million, or 33.0%, of the Commercial Wastewater Division's revenues for
1997 and 1998, respectively. Revenues from the sale of by-products increased
$15.8 million, or 126.4%, as a result of acquisitions completed in 1998 and the
fourth quarter of 1997. However, sales of fats, oils and feed proteins decreased
$1.2 million, or 9.7%, from 1997 to 1998 due to a reduction in commodities
prices.

         The Industrial Wastewater Division contributed $18.9 million, or 15.6%,
of 1998 revenues. Collection and processing fees generated virtually all of the
Industrial Wastewater Division's revenues for 1998. All of the entities whose
operations are included in the

                                     21
<PAGE>

Industrial Wastewater Division were acquired during 1998 and 1999 and,
therefore, the Industrial Wastewater Division did not contribute any revenues in
1997.

         The Oilfield Waste Division contributed $19.9 million, or 52.3%, of
1997 revenues and $17.4 million, or 14.3%, of 1998 revenues. The Oilfield Waste
Division's revenues decreased $2.5 million, or 12.8%, due to a decline in
drilling activity in the Gulf Coast region.

         OPERATING EXPENSES. Operating expenses increased $57.7 million, or
270.1%, from $21.4 million for the year ended December 31, 1997 to $79.0 million
for the year ended December 31, 1998. As a percentage of revenues, operating
expenses increased from 56.0% in 1997 to 65.1% in 1998. This increase was due
primarily to our transition from operating primarily as an oilfield waste
disposal company into an integrated liquid waste management company providing
collection, processing, recovery and disposal services.

         DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased $5.1 million, or 172.4%, from $3.0 million for the year ended December
31, 1997 to $8.1 million for the year ended December 31, 1998. As a percentage
of revenues, depreciation and amortization expenses decreased from 7.8% in 1997
to 6.7% in 1998. This decrease was also attributable primarily to our transition
from operating primarily as an oilfield waste disposal company into a less
capital-intensive integrated liquid waste management company. In addition, a
large percentage of our 1998 capital expenditures were incurred in the last
quarter of 1998.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $7.1 million, or 124.8%, from $5.8 million for
the year ended December 31, 1997 to $12.9 million for the year ended December
31, 1998. As a percentage of revenues, selling, general and administrative
expenses were 15.1% in 1997 and 10.6% in 1998. This improvement resulted
primarily from our ability to integrate business acquisitions without a
proportionate increase in general and administrative expenses.

         INTEREST AND OTHER EXPENSES. Net interest and other expenses increased
$1.8 million, or 100.3%, from $1.8 million for the year ended December 31, 1997
to $3.6 million for the year ended December 31, 1998. This increase resulted
primarily from interest expense incurred on borrowings used to fund the purchase
price for acquisitions completed in 1998.

         INCOME TAXES. The provision for income taxes increased $4.6 million, or
191.1%, from $2.4 million in 1997 to $7.0 million in 1998 as a result of
increased taxable income. The effective tax rate for 1997 was 38.4%, compared to
a 39.5% rate for 1998.

LIQUIDITY AND CAPITAL RESOURCES

         We had net working capital of $10.9 million at December 31, 1999,
compared to net working capital of $2.9 million at December 31, 1998. This
increase in working capital was due primarily to the growth in revenues, which
resulted in increased accounts receivable. Cash flows from operations were $14.0
million and $3.0 million for the years ended December 31, 1998 and 1999,
respectively. This significant change in cash flows was primarily attributable
to decreased earnings of the Detroit facility.

          Our capital requirements for continuing operations consist of our
general working capital needs, scheduled principal payments on our debt
obligations and capital leases, and planned capital expenditures. At December
31, 1999, approximately $5.3 million of principal payments on debt obligations
were payable during the next twelve months. Capital expenditures made during
1999 for our continuing operations were $17.2 million. The majority of the
capital expenditures were for plant expansions, equipment and vehicle upgrades.
Capital expenditures for our continuing operations for 2000 are estimated at
approximately $21.2 million. Approximately $12.7 million of this amount is
scheduled to be invested in the Commercial Wastewater Division for vehicles and
plant expansions. Approximately $4.8 million is scheduled to be invested in the
Industrial Wastewater Division for plant improvements and expansion and
equipment. Approximately $3.2 million is budgeted for equipment and injection
wells for the Oilfield Waste Division. The remaining $0.5 million will be used
for software and computer upgrades at our corporate headquarters.

         At December 31, 1999, we had a $4.9 million reserve to provide for the
cost of future closures of facilities. The amount of this unfunded reserve is
based on the estimated total cost to close the facilities as calculated in
accordance with the applicable regulations. Regulatory agencies require us to
post financial assurance to assure that all waste will be treated and the
facilities closed appropriately. We have in place a total of $8.8 million of
financial assurance in the form of letters of credit and bonds to provide for
the cost of future closings of facilities. As of December 31, 1999, we also had
a $4.5 million unfunded reserve to provide for the costs to remediate soil and
groundwater contamination at our facility in East Palo Alto, California, and our
share of the costs to remediate drum reconditioning or disposal sites previously
used by our subsidiaries.

                                      22
<PAGE>

         During the third and fourth quarters of 1999, we recorded special
charges in the amount of $15.1 million. The components of these special
charges consisted of (i) $5.5 million for disposal of PCB contaminated
materials improperly delivered to our Detroit facility, the decontamination
of certain of our equipment exposed to the PCB contaminated materials and
fines imposed by regulatory authorities relating to our acceptance of the PCB
contaminated materials, (ii) $2.5 million for disposal of liquid waste
received by our Re-Claim facility in Shreveport, Louisiana, which waste is
the subject of a dispute between the Company and the EPA as to the proper
method of disposal, net of $443,000 received from our insurance carrier for
submitted claims, (iii) $2.0 million for fines imposed or expected to be
imposed by regulatory authorities relating to the operations of our Re-Claim
facility, (iv) $1.7 million for legal and professional fees we have incurred
or expect to incur for matters arising in connection with the governmental
proceedings relating to our Detroit and Re-Claim facilities and the purposed
securities class action and shareholder derivative action arising therefrom,
(v) $1.3 million for write-offs of capitalized acquisition costs related to
acquisitions not reasonably likely to occur as a result of the temporary cap
on our revolving credit facility and its related effects on our acquisition
program, (vi) $1. 0 million for the cleanup of a spill at our Re-Claim
facility caused by an act of vandalism, (vii) $954,000 for severance and
contract termination costs related to certain personnel and acquisition
consultants as a result of the environmental issues at the Detroit and
Re-Claim facilities, the temporary cap on our revolving credit facility and
its related effects on our acquisition program, and (viii) $139,000 for other
costs related to the operations of our Detroit and Re-Claim facilities. We
have made demand upon and are attempting to negotiate a resolution with
National Steel Corporation regarding (a) the damages suffered by our Detroit
facility, and (b) the alleged damages suffered by Waste Management's
landfill, in each case as a result of National Steel's subsidiary's failure
to disclose that its waste was contaminated with PCBs. In addition, we have
submitted claims under our pollution liability and business interruption
insurance policies for losses incurred as a result of the temporary closing
of our Detroit facility.

         All costs, except potential fines or penalties, incurred or expected to
be incurred in connection with the investigation of our Detroit facility have
been reflected in our consolidated financial statements at December 31, 1999.
See Note 3 to our consolidated financial statements. However, due to the
current status of the investigation, we are unable at this time to project a
reasonable estimate of potential fines or penalties (or range of potential fines
or penalties) that could be assessed against the facility. Accordingly, we
cannot project the ultimate outcome of the investigation or its potential impact
on us. The imposition of a substantial fine or penalty against the facility
could have a material adverse effect on our business, results of operations,
financial condition and liquidity.

         Our provision for bad debts increased $2.6 million, or 742.9%, from
$350,000 for the year ended December 31, 1998 to $2.9 million for the year ended
December 31, 1999. This significant increase was due primarily to the refusal of
certain of our Detroit facility's customers to pay for services provided, as
well as our evaluation of other uncollectible balances on past due
receivables at other facilities.

         We have a revolving credit facility with a group of banks under which
we may borrow to fund working capital requirements and acquisitions. Amounts
outstanding under the credit facility are secured by a lien on all or
substantially all of our assets. The credit facility prohibits the payment of
dividends and requires us to comply with certain financial covenants. The credit
facility also places certain restrictions on, among other things, acquisitions
and other business combination transactions which we may consummate. As a result
of the PCB contamination occurring at our Detroit facility, a question arose
whether we were in compliance with certain covenants under the credit facility.
In October 1999, the banks granted us a waiver until January 14, 2000 of any
such non-compliance arising out of the PCB contamination. On January 14, 2000,
the terms of the revolving credit facility were amended to, among other things,
limit the total amount of debt outstanding under the credit facility, increase
certain interest rates payable under the credit facility and require bank
approval of a broader scope of acquisition transactions. Currently, the
aggregate principal amount of all debt outstanding under the credit facility may
not exceed $110 million. This cap will be increased to $125 million at such time
as the earnings before interest, taxes, depreciation and amortization ("EBITDA")
for the Detroit facility and the Company and its subsidiaries on a consolidated
basis (excluding any portion thereof attributable to acquisitions completed
after December 31, 1999) equals or exceeds the projected EBITDA contained in the
Company's budgets on a year-to-year basis as of the end of any month ending on
or after March 31, 2000. Thereafter, the cap will increase to $150 million and
to $175 million at such time as the EBITDA for our Detroit facility and the
Company and its subsidiaries on a consolidated basis (excluding any portion
thereof attributable to acquisitions completed after December 31, 1999) equals
or exceeds the projected EBITDA contained in the Company's budgets on a
year-to-date basis as of the end of any month ending on or after June 30, 2000
and October 31, 2000, respectively. The amount of the credit facility will be
reinstated to $225 million when the environmental issues relating to our Detroit
facility (including the PCB contamination and the investigation of the facility
by the FBI and the EPA) have been resolved in a manner reasonably satisfactory
to the banks. Under the terms of the amended credit facility, the banks' consent
is required to consummate any future acquisitions if the aggregate cash
consideration to be paid by the Company (including any debt assumed or issued)
in connection with the acquisition is greater than $1.0 million. At such time as
the amount that can be borrowed under the credit facility is increased to $150
million, the banks' consent for an acquisition will be required only if the
aggregate cash consideration to be paid by the Company (including any debt
assumed or issued) in connection with the acquisition is greater than $5.0
million.

                                     23
<PAGE>

         The debt outstanding under the revolving credit facility may be
accelerated by the lenders if, among other things, a change in control of the
Company occurs or Michael P. Lawlor, W. Gregory Orr or Earl J. Blackwell ceases
to serve as an executive officer of the Company and is not replaced within sixty
days by an individual reasonably satisfactory to the lenders. At December 31,
1999, we had borrowed approximately $93.0 million under the credit facility.
Advances under the credit facility bear interest, at our option, at the prime
rate or London Interbank Offered Rate, in each case, plus a margin which is
calculated quarterly based upon our ratio of indebtedness to cash flow. As of
December 31, 1999, amounts outstanding under the credit facility were accruing
interest at approximately 9.2% per year.

         During 1999, we had a $10.0 million credit facility with BankBoston,
N.A. under which we were able to borrow funds to purchase equipment. The
commitment for this facility expired on December 31, 1999, at which time we had
borrowed approximately $2.5 million. This amount is to be repaid in 60 monthly
installments of principal and interest at 8.1%.

         In September 1999, we repurchased and immediately cancelled 386,114
shares of our common stock for an aggregate purchase price of $3.0 million.

         Our capital resources consist of cash reserves, cash generated from
operations and funds available under our revolving credit facility. We expect
that these resources will be sufficient to fund continuing operations for at
least the next twelve months. In addition to capital required for our ongoing
operations, we will require additional capital to pursue our long-term
acquisition program. As described above, the terms of our revolving credit
facility currently impose significant limitations on our ability to use borrowed
funds to pay for acquisitions. In addition, the current price level of our
common stock makes raising additional equity capital for acquisitions or debt
repayment unattractive. Consequently, we anticipate consummating very few, if
any, acquisitions during the first six months of 2000.

         In certain of our acquisitions, we agreed to pay additional
consideration to the owners of the acquired business if the future pre-tax
earnings of the acquired business exceed certain negotiated levels or other
specified events occur. To the extent that any contingent consideration is
required to be paid in connection with an acquisition, we anticipate that the
cash flows of the acquired business will be sufficient to pay the cash component
of the contingent consideration.

YEAR 2000

         Our Year 2000 compliance program consisted of three phases:
identification and assessment; remediation; and testing, each of which phases
was completed prior to December 31, 1999. As of the date of this report, we have
not experienced any significant impact on our operations from the Year 2000, nor
have we experienced any significant disturbances or interruptions in our ability
to transact business with our customers, suppliers and service providers. We did
not incur any material costs in implementing our Year 2000 compliance program.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We do not utilize financial instruments for trading purposes and we do
not hold any derivative financial instruments that could expose us to
significant market risk. Our exposure to market risk for changes in interest
rates relates primarily to our obligations under our revolving credit facility.
As of December 31, 1999, $93.0 million and $2.5 million had been borrowed under
the revolving credit facility and the equipment credit facility, respectively.
As of December 31, 1999, amounts outstanding under the revolving credit facility
were accruing interest at approximately 9.2% per year and amounts outstanding
under the equipment credit facility were accruing interest at approximately 8.1%
per year. A ten percent increase in short-term interest rates on the variable
rate debts outstanding at the end of 1999 would approximate 78 basis points.
Such an increase in interest rates would increase our interest expense by
approximately $725,000 assuming the amount of debt outstanding remains constant.

         The above sensitivity analysis for interest rate risk excludes accounts
receivable, accounts payable and accrued liabilities because of the short-term
maturity of such instruments. The analysis does not consider the effect this
movement may have on other variables including changes in revenue volumes that
could be indirectly attributed to changes in interest rates. The actions that
management would take in response to such a change are also not considered. If
it were possible to quantify this impact, the results could well be different
than the sensitivity effects shown above.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements and supplementary data required by this item
are included in this report beginning on page F-1.

                                   24
<PAGE>

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

         Incorporated by reference from the Proxy Statement for the Annual
Meeting of Stockholders to be held on May 9, 2000.

ITEM 11. EXECUTIVE COMPENSATION

         Incorporated by reference from the Proxy Statement for the Annual
Meeting of Stockholders to be held on May 9, 2000.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Incorporated by reference from the Proxy Statement for the Annual
Meeting of Stockholders to be held on May 9, 2000.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Incorporated by reference from the Proxy Statement for the Annual
Meeting of Stockholders to be held on May 9, 2000.

                                     PART IV

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

(a)      Financial Statements are filed as part of this report:

         See Index to Financial Statements on Page F-1 of this Report.

         All schedules for which provision is made in the applicable accounting
         regulations of the Commission are not required under the related
         instructions, are inapplicable, or the information is included in the
         consolidated financial statements, and therefore have been omitted.

(b)      Reports on Form 8-K

         None

(c)      Exhibits:

<TABLE>
<CAPTION>
              Exhibit
                 No.                               Description
                 ---                               -----------
                 <S>             <C>
                 3.1             -- Second Amended and Restated Certificate of
                                    Incorporation of U S Liquids Inc. (Exhibit
                                    3.1 of the U S Liquids Inc. Registration
                                    Statement on Form S-1 (File No. 333-30065),
                                    effective August 19, 1997, is hereby
                                    incorporated by reference).

                 3.2             -- Amended and Restated Bylaws of U S Liquids
                                    Inc. (Exhibit 3.2 of the U S Liquids Inc.
                                    Registration Statement on Form S-1 (File No.
                                    333-30065), effective August 19, 1997, is
                                    hereby incorporated by reference).

                 4.1             -- Form of Certificate Evidencing Ownership of
                                    Common Stock of U S Liquids Inc. (Exhibit
                                    4.1 of the U S Liquids Inc. Registration
                                    Statement on Form S-1 (File No. 333-30065),
                                    effective August 19, 1997, is hereby
                                    incorporated by reference).

                                       25
<PAGE>

                 4.2             -- Second Amended and Restated Credit
                                    Agreement, dated February 3, 1999, among U S
                                    Liquids Inc., various financial institutions
                                    and Bank of America National Trust and
                                    Savings Association, as Agent. (Exhibit 4.2
                                    of the U S Liquids Inc. Registration Statement
                                    on Form S-3 (File No. 333-72403), effective March
                                    11, 1999, is hereby incorporated by reference).

                +4.3             -- First Amendment to Second Amended and
                                    Restated Credit Agreement, dated April
                                    22, 1999, among U S Liquids Inc., various
                                    financial institutions and Bank of America
                                    National Trust and Savings Association, as
                                    Agent.

                +4.4             -- Second Amendment to Second Amended and
                                    Restated Credit Agreement, dated January
                                    14, 2000, among U S Liquids Inc., various
                                    financial institutions and Bank of America
                                    National Trust and Savings Association,
                                    as Agent.

                 4.5             -- Security Agreement, dated December 17,
                                    1997, executed by U S Liquids Inc. and its
                                    subsidiaries in favor of Bank of America
                                    National Trust and Savings Association.
                                    (Exhibit 4.6 of the Form 10-K for the year
                                    ended December 31, 1997 is hereby
                                    incorporated by reference).

                 4.6             -- Company Pledge Agreement, dated December
                                    17, 1997, executed by U S Liquids Inc. in
                                    favor of Bank of America National Trust and
                                    Savings Association. (Exhibit 4.7 of the
                                    Form 10-K for the year ended December 31,
                                    1997 is hereby incorporated by reference).

                10.1             -- Asset Purchase Agreement, dated December
                                    2, 1996, among U S Liquids Inc., Sanifill,
                                    Inc. and certain affiliates of Sanifill,
                                    Inc. (Exhibit 10.1 of the U S Liquids Inc.
                                    Registration Statement on Form S-1 (File No.
                                    333-30065), effective August 19, 1997, is
                                    hereby incorporated by reference).

                10.2             -- Seller Noncompetition Agreement, dated
                                    December 13, 1996, between U S Liquids Inc.
                                    and Sanifill, Inc. (Exhibit 10.2 of the U S
                                    Liquids Inc. Registration Statement on Form
                                    S-1 (File No. 333-30065), effective August
                                    19, 1997, is hereby incorporated by
                                    reference).

                10.3             -- Buyer Noncompetition Agreement, dated
                                    December 13, 1996, between Sanifill, Inc.
                                    and U S Liquids Inc. (Exhibit 10.3 of the U
                                    S Liquids Inc. Registration Statement on
                                    Form S-1 (File No. 333-30065), effective
                                    August 19, 1997, is hereby incorporated by
                                    reference).

                10.4             -- Estoppel and Waiver Agreement, dated
                                    April 10, 1998, between U S Liquids Inc. and
                                    Sanifill, Inc. (Exhibit 10.59 of U S Liquids
                                    Inc. Registration Statement on Form S-1
                                    (File No. 333-52121), effective June 4,
                                    1998, is hereby incorporated by reference).

                10.5             -- Settlement of Arbitration and Release
                                    between U S Liquids Inc. and Newpark
                                    Resources, Inc. (Exhibit 99.1 to the Form
                                    8-K filed on September 25, 1998 is hereby
                                    incorporated by reference).

                10.6             -- Payment Agreement, dated December 31,
                                    1998, among U S Liquids Inc., Newpark
                                    Resources, Inc., and Newpark Environmental
                                    Services, Inc. (Exhibit 10.4 of U S Liquids
                                    Inc. Registration Statement on Form S-3
                                    (File No. 333-72403), effective March 11,
                                    1999, is hereby incorporated by reference).

                10.7             -- Option Agreement, dated December 31,
                                    1998, among U S Liquids Inc., Newpark
                                    Resources, Inc. and Newpark Environmental
                                    Services, Inc. (Exhibit 10.5 of U S Liquids
                                    Inc. Registration Statement on Form S-3
                                    (File No. 333-72403), effective March 11,
                                    1999, is hereby incorporated by reference).

              + 10.8             -- Amendment to Option Agreement, dated
                                    January 10, 2000, among U S Liquids Inc.,
                                    Newpark Resources, Inc. and Newpark
                                    Environmental Services, Inc.

                10.9             -- Miscellaneous Agreement, dated September
                                    16, 1998, between Newpark Resources, Inc.
                                    and U S Liquids Inc. (Exhibit 99.4 to the
                                    Form 8-K filed on September 25, 1998 is
                                    hereby incorporated by reference).

                10.10            -- Asset Purchase Agreement, dated September
                                    16, 1998, between Newpark Environmental
                                    Services, Inc. and U S Liquids Inc. (Exhibit
                                    99.5 to the Form 8-K filed on September 25,
                                    1998 is hereby incorporated by reference).


                                       26
<PAGE>

                10.11            -- Form of Nonqualified Stock Option
                                    Agreement between U S Liquids Inc. and
                                    certain individuals (Exhibit 10.11 of the U
                                    S Liquids Inc. Registration Statement on
                                    Form S-1 (File No. 333-30065), effective
                                    August 19, 1997, is hereby incorporated by
                                    reference).

                10.12            -- U S Liquids Inc. Amended and Restated
                                    Stock Option Plan (Exhibit 10.12 of the U S
                                    Liquids Inc. Registration Statement on Form
                                    S-1 (File No. 333-30065), effective August
                                    19, 1997, is hereby incorporated by
                                    reference).

                10.13            -- U S Liquids Inc. Directors' Stock Option
                                    Plan (Exhibit 10.13 of the U S Liquids Inc.
                                    Registration Statement on Form S-1 (File
                                    No. 333-30065), effective August 19, 1997,
                                    is hereby incorporated by reference).

                10.14            -- Form of Grant of Incentive Stock Option
                                    Agreement (Exhibit 10.14 of the U S Liquids
                                    Inc. Registration Statement on Form S-1
                                    (File No. 333-30065), effective August 19,
                                    1997, is hereby incorporated by reference).

               *10.15            -- Employment Agreement, dated February 13,
                                    1998, between U S Liquids Inc. and W.
                                    Gregory Orr. (Exhibit 10.15 of the Form 10-K
                                    for the year ended December 31, 1997 is
                                    hereby incorporated by reference).

               *10.16            -- Employment Agreement, dated February 13,
                                    1998, between U S Liquids Inc. and Earl J.
                                    Blackwell. (Exhibit 10.16 of the Form 10-K
                                    for the year ended December 31, 1997 is
                                    hereby incorporated by reference).

                10.17            -- Agreement and Plan of Merger, dated April
                                    15, 1998, among The National Solvent
                                    Exchange Corp., U S Liquids Inc., NS
                                    Acquisition Corp., Ronald T. Calloway and
                                    Maxwell R. Calloway. (Exhibit 2.1 to the
                                    Form 8-K filed on April 30, 1998 is hereby
                                    incorporated by reference).

                10.18            -- Agreement and Plan of Reorganization,
                                    dated April 21, 1998, among U S Liquids
                                    Inc., Amigo Acquisition, Inc., Amigo
                                    Diversified Services, Inc., Raoul Garza and
                                    Alex Salas. (Exhibit 2.4 to the Form 8-K
                                    filed on May 6, 1998 is hereby incorporated
                                    by reference).

                10.19            -- Agreement for Purchase and Sale of
                                    Assets, dated April 21, 1998, among US
                                    Parallel Products of California, Parallel
                                    Products of Kentucky, Inc., Parallel
                                    Products of Florida, Inc., Parallel
                                    Products, DWA of Belvedere Company, The
                                    Estate of David W. Allen, David W. Allen
                                    Trust No. 1, Peter Allen, Neal Koehler and
                                    Richard Eastman. (Exhibit 2.1 to the Form
                                    8-K filed on May 6, 1998 is hereby
                                    incorporated by reference).

                10.20            -- Stock Purchase Agreement, dated April 21,
                                    1998, among U S Liquids Northeast, Inc., U S
                                    Liquids Inc., Waste Stream Environmental,
                                    Inc., C. Wesley Gregory, Jr. and Donald E.
                                    Gordon. (Exhibit 2.2 to the Form 8-K filed
                                    on May 6, 1998 is hereby incorporated by
                                    reference).

                10.21            -- Stock Purchase Agreement, dated April 21,
                                    1998, among U S Liquids Northeast, Inc., U S
                                    Liquids Inc., Earthlands, Inc., C. Wesley
                                    Gregory, III, C. Wesley Gregory, Jr. and
                                    Donald E. Gordon. (Exhibit 2.3 to the Form
                                    8-K filed on May 6, 1998 is hereby
                                    incorporated by reference).

                10.22            -- Form of Stock Distribution Agreement,
                                    dated June 16, 1997, between U S Liquids
                                    Inc. and the former stockholders of American
                                    WasteWater Inc. (Exhibit 10.22 of the U S
                                    Liquids Inc. Registration Statement on Form
                                    S-1 (File No. 333-30065), effective August
                                    19, 1997, is hereby incorporated by
                                    reference).

               *10.23            -- Stock Distribution Agreement, dated June
                                    16, 1997, between U S Liquids Inc. and W.
                                    Gregory Orr (Exhibit 10.23 of the U S
                                    Liquids Inc. Registration Statement on Form
                                    S-1 (File No. 333-30065), effective August
                                    19, 1997, is hereby incorporated by
                                    reference).

                                       27
<PAGE>

                10.24            -- Purchase and Sale of Assets Agreement,
                                    dated May 8, 1998, among US City
                                    Environmental Services of Florida, Inc.,
                                    City Management Corporation and USA Waste
                                    Services, Inc. (Exhibit 10.67 of U S Liquids
                                    Inc. Registration Statement on Form S-1
                                    (File No. 333-52121), effective June 4,
                                    1998, is hereby incorporated by reference).

                10.25            -- Estoppel, Waiver and Amendment Agreement,
                                    dated June 16, 1997, between Sanifill, Inc.
                                    and U S Liquids Inc. (Exhibit 10.27 of the U
                                    S Liquids Inc. Registration Statement on
                                    Form S-1 (File No. 333- 30065), effective
                                    August 19, 1997, is hereby incorporated by
                                    reference).

                10.26            -- Stock Purchase Agreement between U S
                                    Liquids Inc., Romic Environmental
                                    Technologies Corporation, H. Michael
                                    Schneider, Peter D. Schneider, Thomas R.
                                    Schneider, Barbara R. Morrison, Custodian
                                    for Justin W. Morrison, Barbara R. Morrison,
                                    Custodian for Melissa L. Morrison, Barbara
                                    Morrison, Michael R. Schneider, Custodian
                                    for Bridgette M. Schneider, Laura Schneider,
                                    Peter D. Schneider, Custodian for Patrick
                                    Keil Schneider, Peter D. Schneider,
                                    Custodian for Keil Patrick Schneider, Thomas
                                    R. Schneider, Custodian for Jessica L.
                                    Schneider, Thomas R. Schneider, Custodian
                                    for Brandon T. Schneider, Loreen Schneider,
                                    John Morrison, and H. Michael Schneider and
                                    Lisa L. Schneider, Trustees for Schneider
                                    Living Trust dated 12/28/81 (Exhibit 2.1 to
                                    the Form 8-K filed on January 29, 1999 is
                                    hereby incorporated by reference).

                10.27            -- Warrant, dated December 13, 1996, issued
                                    by U S Liquids Inc. to Sanifill, Inc.
                                    (Exhibit 10.31 of the U S Liquids Inc.
                                    Registration Statement on Form S-1 (File No.
                                    333-30065), effective August 19, 1997, is
                                    hereby incorporated by reference).

               *10.28            -- Employment Agreement, dated September 1,
                                    1998, between U S Liquids Inc. and Gary J.
                                    Van Rooyan. (Exhibit 10.73 to the Form 10-Q
                                    for the quarter ended September 30, 1998 is
                                    hereby incorporated by reference).

                10.29            -- Stock Purchase Agreement, dated May 8,
                                    1998, among U S Liquids Inc., United Waste
                                    Systems, Inc. and USA Waste Services, Inc.
                                    (Exhibit 10.68 of U S Liquids Inc.
                                    Registration Statement on Form S-1 (File No.
                                    333-52121), effective June 4, 1998, is
                                    hereby incorporated by reference).

                10.30            -- Leachate Treatment Agreement, dated May
                                    8, 1998, between City Management Corporation
                                    and US City Environmental, Inc. (Exhibit
                                    10.69 of U S Liquids Inc. Registration
                                    Statement on Form S-1 (File No. 333-52121),
                                    effective June 4, 1998, is hereby
                                    incorporated by reference).

                10.31            -- Disposal Agreement, dated May 8, 1998,
                                    between City Management Corporation and US
                                    City Environmental, Inc. (Exhibit 10.70 of U
                                    S Liquids Inc. Registration Statement on
                                    Form S-1 (File No. 333-52121), effective
                                    June 4, 1998, is hereby incorporated by
                                    reference).

              +*10.32            -- Employment Agreement, dated September 1,
                                    1999, between U S Liquids Inc. and Harry O.
                                    Nicodemus IV.

                10.33            -- Warrant Agreement among U S Liquids Inc.,
                                    Van Kasper & Company and Sanders Morris
                                    Mundy Inc. (Exhibit 10.33 of the U S Liquids
                                    Inc. Registration Statement on Form S-1
                                    (File No. 333-34875), effective September
                                    18, 1997, is hereby incorporated by
                                    reference).

                10.34            -- Noncompetition Agreement of September 16,
                                    1998 between U S Liquids Inc. and Newpark
                                    Resources, Inc. (Exhibit 99.3 to the Form
                                    8-K filed on September 25, 1998 is hereby
                                    incorporated by reference).

               *10.35            -- Employment Agreement, dated July 2, 1997,
                                    between U S Liquids Inc. and Michael P.
                                    Lawlor (Exhibit 10.40 of the U S Liquids
                                    Inc. Registration Statement on Form S-1
                                    (File No. 333-30065), effective August 19,
                                    1997, is hereby incorporated by reference).

                                       28
<PAGE>

                10.36            -- Amendment No. 1 to Warrant Agreement,
                                    dated April 20, 1998, among U S Liquids
                                    Inc., Van Kasper & Company and Sanders
                                    Morris Mundy Inc. (Exhibit 10.61 of U S
                                    Liquids Inc. Registration Statement on Form
                                    S-1 (File No. 333-52121), effective June 4,
                                    1998, is hereby incorporated by reference).

                10.37            -- Purchase and Sale of Assets Agreement,
                                    dated May 8, 1998, among US City
                                    Environmental, Inc., City Management
                                    Corporation and USA Waste Services, Inc.
                                    (Exhibit 10.66 of U S Liquids Inc.
                                    Registration Statement on Form S-1 (File No.
                                    333-52121), effective June 4, 1998, is
                                    hereby incorporated by reference).

               *10.38            -- Stock Distribution Agreement, dated June
                                    16, 1997, between U S Liquids Inc. and Earl
                                    J. Blackwell (Exhibit 10.38 of the U S
                                    Liquids Inc. Registration Statement on Form
                                    S-1 (File No. 333-30065), effective August
                                    19, 1997, is hereby incorporated by
                                    reference).

                10.39            -- Stock Distribution Agreement, dated June
                                    16, 1997, between U S Liquids Inc. and
                                    William M. DeArman (Exhibit 10.39 of the U S
                                    Liquids Inc. Registration Statement on Form
                                    S-1 (File No. 333- 30065), effective August
                                    19, 1997, is hereby incorporated by
                                    reference).

                +21.1            -- List of subsidiaries of U S Liquids Inc.

                +23.1            -- Consent of Arthur Andersen LLP.

                +27.1            -- Financial Data Schedule.
</TABLE>
--------------------
+ Filed herewith
* Management Contract

                                       29
<PAGE>

                                   SIGNATURES

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


                                                  U S Liquids Inc.
<TABLE>
<S>                                   <C>
Date:      March 28, 2000             By: /s/ Michael P. Lawlor
                                          --------------------------------------
                                              Michael P. Lawlor
                                              Chairman of the Board and
                                              Chief Executive Officer

Date:      March 28, 2000             By: /s/ W. Gregory Orr
                                          --------------------------------------
                                              W. Gregory Orr
                                              Director, President and
                                              Chief Operating Officer

Date:      March 28, 2000             By: /s/ Earl J. Blackwell
                                          --------------------------------------
                                              Earl J. Blackwell
                                              Chief Financial Officer,
                                              Senior Vice President and
                                              Secretary

Date:      March 28, 2000             By: /s/ Harry O. Nicodemus, IV
                                          --------------------------------------
                                              Harry O. Nicodemus, IV
                                              Vice President and Controller
</TABLE>

         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.

<TABLE>
<S>                                   <C>
Date:      March 28, 2000             By: /s/ Michael P. Lawlor
                                          --------------------------------------
                                              Michael P. Lawlor
                                              Chairman of the Board of
                                              Directors

Date:      March 28, 2000             By: /s/ W. Gregory Orr
                                          --------------------------------------
                                              W. Gregory Orr
                                              Director

Date:      March 28, 2000             By: /s/ William A. Rothrock, IV
                                          --------------------------------------
                                              William A. Rothrock, IV
                                              Director

                                      30
<PAGE>


Date:      March 28, 2000             By: /s/ James F. McEneaney, Jr.
                                          --------------------------------------
                                              James F. McEneaney, Jr.
                                              Director

Date:      March 28, 2000             By: /s/ Alfred Tyler 2nd
                                          --------------------------------------
                                              Alfred Tyler 2nd
                                              Director

Date:      March 28, 2000             By: /s/ John N. Hatsopoulos
                                         ---------------------------------------
                                              John N. Hatsopoulos
                                              Director

Date:      March 28, 2000             By: /s/ Roger A. Ramsey
                                         ---------------------------------------
                                              Roger A. Ramsey
                                              Director
</TABLE>

                                       31
<PAGE>


                          INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S>                                                                           <C>
U S  LIQUIDS INC.

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

   Consolidated Balance Sheets.............................................   F-3

   Consolidated Statements of Operations...................................   F-4

   Consolidated Statements of Stockholders' Equity.........................   F-5

   Consolidated Statements of Cash Flows...................................   F-6

   Notes to Consolidated Financial Statements..............................   F-7
</TABLE>
                                             F-1
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To U S Liquids Inc.:

We have audited the accompanying consolidated balance sheets of U S Liquids
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and
1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 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 audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of U S
Liquids Inc. and subsidiaries as of December 31, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.



ARTHUR ANDERSEN LLP

Houston, Texas
February 28, 2000

                                                 F-2
<PAGE>

                                           U S LIQUIDS INC.

                                     CONSOLIDATED BALANCE SHEETS
                           (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                 ASSETS                                                   DECEMBER 31,
                                                                                                  -----------------------------
                                                                                                     1998              1999
                                                                                                  ------------      -----------
<S>                                                                                                  <C>              <C>
CURRENT ASSETS:

   Cash and cash equivalents.................................................................        $  3,285         $  3,398
   Accounts receivable, less allowances of  $1,677 and $3,063, respectively..................          29,123           40,098
   Inventories...............................................................................             672            2,029
   Prepaid expenses and other current assets.................................................           5,416           12,653
                                                                                                     --------         --------
      Total current assets...................................................................        $ 38,496         $ 58,178

PROPERTY, PLANT AND EQUIPMENT, net...........................................................          85,958          115,625
INTANGIBLE ASSETS, net ......................................................................         125,871          193,033
OTHER ASSETS, net............................................................................           1,840            2,247
                                                                                                     --------         --------
      Total assets...........................................................................        $252,165         $369,083
                                                                                                     --------         --------
                                                                                                     --------         --------

                                 LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

   Current maturities of long-term obligations...............................................        $  4,004         $  5,327
   Accounts payable..........................................................................          11,611           15,239
   Accrued liabilities.......................................................................          15,445           22,923
   Current portion of contract reserve.......................................................           4,500            4,500
                                                                                                     --------         --------
      Total current liabilities..............................................................        $ 35,560         $ 47,989

LONG-TERM OBLIGATIONS, net of current maturities.............................................          64,390           99,499
PROCESSING RESERVE...........................................................................           5,747            4,630
CLOSURE AND REMEDIATION RESERVES.............................................................           4,952            8,878
CONTRACT RESERVE, net of current portion ....................................................          14,421           11,566
DEFERRED INCOME TAXES........................................................................           2,151            6,373
                                                                                                     --------         --------
      Total liabilities......................................................................        $127,221         $178,935

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued or outstanding          $      -         $      -
   Common stock, $.01 par value, 30,000,000 shares authorized, 12,497,946 and 15,780,868
      shares issued and outstanding, respectively............................................             125              158
   Additional paid-in capital................................................................         110,404          176,859
   Retained earnings.........................................................................          14,415           13,173
   Accumulated Other Comprehensive Loss
      Foreign currency translation adjustment ...............................................               -              (42)
                                                                                                     --------         --------
        Total stockholders' equity...........................................................        $124,944         $190,148
                                                                                                     --------         --------
        Total liabilities and stockholders' equity...........................................        $252,165         $369,083
                                                                                                     --------         --------
                                                                                                     --------         --------
</TABLE>

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

                                              F-3
<PAGE>

                                     U S LIQUIDS INC.

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

<TABLE>
<CAPTION>
                                                                                       YEARS ENDED DECEMBER 31,
                                                                              -------------------------------------------
                                                                                1997             1998              1999
                                                                              ---------        ---------         --------
<S>                                                                           <C>              <C>               <C>

REVENUES........................................................              $ 38,159          $121,460         $231,783
OPERATING EXPENSES..............................................                21,353            79,027          165,773
DEPRECIATION & AMORTIZATION.....................................                 2,990             8,146           16,595
SELLING, GENERAL AND ADMINISTRATIVE
    EXPENSES....................................................                 5,750            12,927           26,242
SPECIAL CHARGES.................................................                     -                 -           15,138
                                                                              --------          --------         --------
INCOME FROM OPERATIONS..........................................              $  8,066          $ 21,360         $  8,035
INTEREST EXPENSE, net...........................................                 1,734             3,517            6,803
OTHER (INCOME) EXPENSE, net.....................................                    41                38             (129)
                                                                              --------          --------         --------
INCOME BEFORE PROVISION FOR INCOME TAXES.......................               $  6,291          $ 17,805         $  1,361
PROVISION FOR INCOME TAXES......................................                 2,416             7,033            2,603
                                                                              --------          --------         --------
NET INCOME (LOSS)...............................................              $  3,875          $ 10,772         $ (1,242)
                                                                              --------          --------         --------
                                                                              --------          --------         --------
Basic Earnings (Loss) per Common Share..........................              $   0.65          $   1.04         $  (0.08)
                                                                              --------          --------         --------
                                                                              --------          --------         --------
Diluted Earnings (Loss) per Common Share........................              $   0.55          $   0.93         $  (0.08)
                                                                              --------          --------         --------
                                                                              --------          --------         --------
Weighted Average Common Shares Outstanding......................                 5,937            10,317           15,324
                                                                              --------          --------         --------
                                                                              --------          --------         --------
Weighted Average Common and Common Equivalent Shares
    Outstanding.................................................                 7,078            11,637           15,324
                                                                              --------          --------         --------
                                                                              --------          --------         --------
</TABLE>

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

                                         F-4
<PAGE>

<TABLE>
<CAPTION>
                                US LIQUIDS, INC.
        CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
                                                                                                   ACCUM.
                                         COMPRE-                                       ADDITIONAL  COMPRE-                TOTAL
                                         HENSIVE   PREFERRED STOCK     COMMON STOCK     PAID-IN    HENSIVE  RETAINED  STOCKHOLDERS'
                                          LOSS    SHARES     AMOUNT  SHARES    AMOUNT   CAPITAL     LOSS    EARNINGS      EQUITY
                                          ------  ------     ------  ------    ------   -------     ------  --------      ------
<S>                                      <C>      <C>        <C>     <C>       <C>     <C>         <C>      <C>       <C>
BALANCE, December 31, 1996                     -      10       $ 10   5,239     $ 52   $  1,379        -    $    97   $  1,538
  Distributions equal to the
  current income taxes of
  limited liability corporation                -       -          -       -        -          -        -       (171)      (171)
  Preferred stock dividends                    -       -          -       -        -          -        -        (16)       (16)
  Warrants issued in connection
  with initial public offering                 -       -          -       -        -        551        -          -        551
  Common stock issued in initial
  public offering, net of
  offering costs                               -       -          -   1,725       17     13,497        -          -     13,514
  Retirement of preferred stock                -     (10)       (10)      -        -          -        -          -        (10)
  Common stock issued in
  acquisitions                                 -       -          -     283        3      1,579        -       (142)     1,440
  45,000 warrants issued in
  connection with consulting
  agreement                                    -       -          -       -        -        184        -          -        184
  Common stock options exercised               -       -          -      56        1          -        -          -          1
  Net income                                   -       -          -       -        -          -        -      3,875      3,875
                                         -------     ---       ----  ------     ----   --------     ----    -------   --------

BALANCE, December 31, 1997                     -       -       $  -   7,303    $  73   $ 17,190        -    $ 3,643   $ 20,906
  20,000 warrants issued in
  connection with acquisition                  -       -          -       -        -        132        -          -        132
  Common stock issued in
  secondary public offering,
  net of offering costs                        -       -          -   3,450       35     60,318        -          -     60,353
  Common stock issued in
  acquisitions                                 -       -          -   1,634       16     32,639        -          -     32,655
  Common stock options exercised               -       -          -     111        1        125        -          -        126
  Net income                                   -       -          -       -        -          -        -     10,772     10,772
                                         -------     ---       ----  ------     ----   --------     ----    -------   --------

BALANCE, December 31, 1998                     -       -       $  -  12,498    $ 125   $110,404        -    $14,415   $124,944
  Common stock issued in
  secondary public offering,
  net of offering costs                        -       -          -   2,875       29     56,463        -          -     56,492
  Common stock issued for
  acquisitions                                 -       -          -     636        6     12,846        -          -     12,852
  Common stock options and
  warrants exercised                           -       -          -     158        2        142        -          -        144
  Repurchase and cancellation
  of common stock                              -       -          -    (386)      (4)    (2,996)       -          -     (3,000)
Comprehensive Loss:
  Foreign currency translation
  adjustments                            $   (42)                                                   $(42)                  (42)
  Net loss                                (1,242)      -          -       -        -          -        -     (1,242)    (1,242)
                                         -------

                                         $(1,284)      -          -       -        -          -        -          -          -
                                         =======     ---       ----  ------     ----   --------     ----    -------   --------

BALANCE, December 31, 1999                             -       $  -  15,781     $158   $176,859     $(42)   $13,173   $190,148
                                                     ===       ====  ======     ====   ========     ====    =======   ========
</TABLE>

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

                                       F-5
<PAGE>

<TABLE>
<CAPTION>
                                U S LIQUIDS INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                                                                              YEARS ENDED DECEMBER 31,
                                                                                --------------------------------------------------
                                                                                    1997               1998             1999
                                                                                --------------     -------------    --------------
<S>                                                                             <C>                <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).....................................................               $  3,875        $   10,772         $  (1,242)
Adjustments to reconcile net income (loss) to net cash provided
      by operating activities:
   Depreciation and amortization......................................                  2,990             8,146            16,595
   Non-cash compensation recorded through issuance of warrants........                    184                 -                 -
   Net (gain) loss on sale of property, plant, and equipment .........                    (65)             (147)              122
   Deferred income tax provision (benefit)............................                     64             1,995              (340)
   Changes in operating assets and liabilities, net of amounts
      acquired:
      Accounts receivable, net........................................                     68            (8,406)           (4,196)
      Inventories.....................................................                   (228)            1,017              (745)
      Prepaid expenses and other current assets.......................                    479            (3,909)           (2,426)
      Intangible assets...............................................                    (31)              112              (785)
      Other assets....................................................                   (479)             (774)             (778)
      Accounts payable and accrued liabilities........................                   (784)            6,622               (1)
      Closure, remediation and processing reserves....................                   (503)           (1,406)           (3,193)
                                                                                --------------     -------------    --------------
        Net cash provided by operating activities.....................               $  5,570        $   14,022         $   3,011
                                                                                --------------     -------------    --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property, plant and equipment.........................               $ (4,829)       $  (14,347)        $ (17,223)
   Proceeds from sale of property, plant, and equipment...............                    206             1,143             1,688
   Net cash  paid for acquisitions....................................                 (3,234)         (101,648)          (69,177)
                                                                                --------------     -------------    --------------
        Net cash used in investing activities.........................               $ (7,857)       $ (114,852)        $ (84,712)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Payments to stockholders and related parties.......................               $   (465)       $        -             $   -
   Proceeds from issuance of long-term obligations....................                 15,593           103,326            96,270
   Principal payments on long-term obligations........................                (30,111)          (61,893)          (68,050)
   Preferred stock dividends paid.....................................                    (16)                -                 -
   Payments to retire preferred stock.................................                    (10)                -                 -
   Proceeds from initial public offering of common stock, net of
      offering costs..................................................                 14,065                 -                 -
   Repurchase and cancellation of common stock........................                      -                 -            (3,000)
   Proceeds from additional public offerings of common stock, net of
      offering costs..................................................                      -            60,353            56,492
   Proceeds from exercise of stock options............................                      1               126               144

   Distributions equal to the current income taxes of limited
     liability corporation............................................                   (171)                -                 -
                                                                                --------------     -------------    --------------
       Net cash provided by (used in) financing activities............               $ (1,114)       $  101,912         $  81,856
                                                                                --------------     -------------    --------------
EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS                         -                 -         $     (42)
                                                                                --------------     -------------    --------------
NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS .......................................................               $ (3,401)       $    1,082         $     113
CASH AND CASH EQUIVALENTS AT BEGINNING OF
   PERIOD.............................................................                  5,604             2,203             3,285
                                                                                --------------     -------------    --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................               $  2,203        $    3,285         $   3,398
                                                                                ==============     =============    ==============
SUPPLEMENTAL DISCLOSURES:
   Cash paid for interest.............................................               $  2,169        $    2,266         $   6,870
   Cash paid for income taxes.........................................                  2,745             5,310             5,786
   Assets acquired under capital leases...............................                      -               164             2,723
   Liabilities issued and assumed related to acquisitions.............                  1,340             9,322             8,293
   Common stock, warrants and options issued for acquisitions.........                  1,440            32,787            12,852
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
                                       F-6
<PAGE>

                                U S LIQUIDS INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       BUSINESS AND ORGANIZATION:

         U S Liquids Inc. and subsidiaries (collectively "U S Liquids" or the
"Company") was founded November 18, 1996, and is a leading provider of
services for the collection, processing, recovery and disposal of liquid
waste in North America. On December 13, 1996, the Company acquired its
Oilfield Waste Division from Campbell Wells, L.P. and Campbell Wells NORM,
L.P. (referred to as "Campbell Wells" or "the Predecessor" to the extent of
the operations so acquired) which were wholly owned subsidiaries of Sanifill,
Inc. ("Sanifill") through a transaction accounted for as a purchase. The
Oilfield Waste Division treats and disposes of oilfield waste generated in
oil and gas exploration and production. In June 1997, the Company formed the
basis of its Wastewater Division by acquiring Mesa Processing, Inc., T&T
Grease Services, Inc. and Phoenix Fats & Oils, Inc. (the "Mesa companies" or
"Mesa") and American WasteWater ("AWW"). The acquisitions of Mesa and AWW
were accounted for under the pooling-of-interests method of accounting. The
Wastewater Division collects, processes and disposes of liquid waste and
recovers by-products from these waste streams. During 1998 and 1999 the
Company continued acquiring companies, principally for the Wastewater
Division. As of July 1, 1999 the Company created a third division, known as
the Industrial Wastewater Division, and changed the name of the Wastewater
Division to the Commercial Wastewater Division. The Industrial Wastewater
Division derives revenues from fees charged for the collection, processing
and disposal of hazardous and non-hazardous wastes, while the Commercial
Wastewater Division handles nonhazardous wastes.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

         The consolidated financial statements include the accounts of the
Company after elimination of all significant intercompany accounts and
transactions. The consolidated financial statements for 1997 represent the
operations of the Company, including the combined revenues and net income of
Mesa and AWW for the pre-acquisition periods in 1997 of $7,291,000 and
$539,000, respectively, as well as all other acquired companies' operations
in 1997, 1998 and 1999 from their respective dates of acquisition.

USE OF ESTIMATES

         The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

RISK FACTORS

         Risk factors of the Company include, but are not limited to,
compliance with governmental and environmental regulations, potential
environmental liability, and risks related to the Company's acquisition
strategy and acquisition financing.

CASH AND CASH EQUIVALENTS

         All highly liquid investments with an original maturity of three
months or less are classified as cash equivalents.

CONCENTRATIONS OF CREDIT RISK

         Accounts receivable potentially subject the Company to
concentrations of credit risk. There were no customers representing balances
in excess of 10 percent of the Company's total accounts receivable at
December 31, 1998 or 1999. Sales to two customers represented 22 percent and
17 percent, respectively, of total revenues for the year ended December 31,
1997. No customer represented more than 10 percent of total revenues for the
year ended December 31, 1998 or 1999.

                                       F-7
<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         In 1997 the Company's customers were concentrated in the oil and gas
industry in Louisiana and Texas, the collection of liquid waste in Louisiana
and Texas and the chemical processing and livestock feed industries in
Mexico. In 1998, the Company expanded its industry and geographic customer
base through the acquisitions of several businesses. However, the amount of
revenues generated from customers in the Louisiana and Texas markets remained
significant. Total sales to customers in Mexico represented 31 percent and 9
percent of total revenues for the years ended December 31, 1997, and 1998,
respectively. Due to the sale in December 1998 of the assets used in the
distribution of grease by-products, there were no sales to customers in
Mexico in 1999. Sales to Mexican customers were dollar-denominated and were
primarily secured by letters of credit. See Note 17.

         Management performs ongoing credit analyses of the accounts of its
customers and provides allowances as deemed necessary. The activity in the
allowance for doubtful accounts is as follows (in thousands):
<TABLE>
<CAPTION>
                                                    BALANCE     BEGINNING
                                                      AT        BALANCE OF                              BALANCE AT
                                                   BEGINNING    PURCHASED    CHARGED TO                   END OF
                                                   OF PERIOD    COMPANIES     EXPENSE      WRITE-OFFS     PERIOD
                                                   ---------    ---------    ----------    ----------   ----------
<S>                                                <C>          <C>          <C>           <C>          <C>
Year ended December 31, 1997.....................  $     265    $      35   $      86      $     (44)    $    342

Year ended December 31, 1998.....................  $     342    $   1,609   $     350      $    (624)    $  1,677

Year Ended December 31, 1999.....................  $   1,677    $     742   $   2,923      $  (2,279)    $  3,063
</TABLE>

INVENTORIES

         Inventories are stated at the lower of cost or market and, at
December 31, 1998 and 1999, consisted of processed by-products of $378,000
and $1,490,000, respectively, and unprocessed by-products of $294,000 and
$539,000, respectively. Cost is determined using the first-in, first-out
(FIFO) method.

PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment are recorded at cost. Improvements or
betterments which significantly extend the life of an asset are capitalized.
Expenditures for maintenance and repair costs are charged to operations as
incurred. The cost of assets retired or otherwise disposed of and the related
accumulated depreciation are eliminated from the accounts in the year of
disposal. Gains and losses resulting from property disposals are included in
other income or expense. Depreciation is computed using the straight-line
method. The Company periodically reviews its properties for possible
impairment, which is calculated based on the undiscounted cash flows to be
generated from the applicable asset, whenever events or changes in
circumstances might indicate that the carrying amount of an asset may not be
recoverable.

INTANGIBLE AND OTHER ASSETS

         Intangible and other assets consist primarily of the excess of cost
over net assets of acquired businesses (goodwill), permits and deposits. The
Company evaluates the useful life of goodwill for each acquisition, which is
amortized on a straight-line basis generally over forty years. Management
periodically evaluates recorded goodwill balances, net of accumulated
amortization, for impairment based on the undiscounted cash flows associated
with the asset compared to the carrying amount of that asset. Management
believes that there have been no events or circumstances that warrant
revision to the remaining useful life or affect the recoverability of
goodwill in any of its business units.

INCOME TAXES

         The Company files a consolidated return for federal income tax
purposes. Income taxes for the Company are provided under the liability
method considering the income tax effects of transactions reported in the
consolidated financial statements which are different from the income tax
return. The deferred income tax assets and liabilities represent the future
income tax consequences of those differences, which

                                       F-8
<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

will either be taxable or deductible when the underlying assets or
liabilities are realized or settled. Prior to May 1997, AWW was a limited
liability company (LLC), as defined by the Internal Revenue Code, whereby it
was not subject to taxation for federal income tax purposes. Under LLC
status, the equity owners reported their shares of AWW's federal taxable
earnings or losses on their personal income tax returns. In May 1997, AWW
converted to a C Corporation for federal income tax purposes and has recorded
current and deferred income tax assets and liabilities existing on the date
of conversion.

PROCESSING RESERVE

        The Company records a processing reserve for the estimated amount of
expenses to be incurred with the treatment of waste in order to match
revenues with their related costs. The related treatment costs are charged
against the reserve as such costs are incurred, which generally cover a
period of nine to twelve months for the Oilfield Waste Division. At year end,
the processing reserve represents the estimated costs to process the volumes
of waste on hand for which revenue has already been recognized.

CLOSURE AND REMEDIATION RESERVES

        As of December 31, 1998 and 1999, the closure and remediation
reserves represent accruals for the total estimated costs associated with the
ultimate closure of the Company's landfarm facilities and certain other
facilities, including costs of decommissioning, statutory monitoring costs
and incremental direct administrative costs required during the closure and
subsequent postclosure periods. Management periodically reviews the level of
these reserves and will adjust such reserves if estimated costs change over
the remaining estimated life of the facilities.

REVENUE RECOGNITION

        The Company recognizes revenue from processing services when material
is unloaded at the Company's facilities, if delivered by the customer, or at
the time the service is performed, if the Company collects the materials from
the customer's location. The Company recognizes revenue at the time the
Company's facilities accept the waste because the customer has passed the
legal and regulatory responsibility and associated risk of disposing the
waste to the Company. By-product sales are recognized when the by-product is
shipped to the buyer.

        On December 3, 1999 the United States Securities and Exchange
Commission ("SEC") staff released Staff Accounting Bulletin (SAB) No. 101,
REVENUE RECOGNITION, to provide guidance on the recognition, presentation and
disclosure of revenue in financial statements. The Company has reviewed its
revenue recognition procedures for each business segment and is satisfied
that it is in compliance with the requirements of SAB No. 101.

FAIR VALUE OF FINANCIAL INSTRUMENTS

        The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable, notes and leases payable, and debt
obligations. The book value of cash and cash equivalents, accounts receivable,
accounts payable and short-term notes payable are considered to be
representative of fair value because of the short maturity of these
instruments. The Company believes that the carrying value of its borrowings
under the credit agreement approximate their fair value as they bear interest
at rates indexed to the LIBOR rate.

TRANSLATION OF FOREIGN CURRENCY

        The U.S. dollar is the functional currency for substantially all of
the Company's consolidated operations. For certain wholly-owned foreign
equity investments, the functional currency is the local currency. The
accumulated translation effects for equity investments using functional
currencies other than the U.S. dollar are included in the foreign currency
translation adjustment in stockholders' equity. For these operations, all
gains and losses from currency translations are included in comprehensive
loss. Prior to 1999 the Company had no foreign investments.

                                       F-9
<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NEW ACCOUNTING PRONOUNCEMENTS

        In June 1998 the FASB issued SFAS No. 133 - "Accounting for
Derivative Instruments and Hedging Activities". In June 1999, the FASB issued
SFAS 137, which amended the effective adoption date of SFAS 133. This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts,
and for hedging activities. The statement, as amended and which is to be
applied prospectively, is effective for the Company's quarter ending March
31, 2001. The Company is currently evaluating the impact of SFAS No. 133 on
its future results of operations and financial position.

OTHER

        Certain prior year amounts have been reclassified to conform with the
current year presentation.

3.      SPECIAL CHARGES

        During the third and fourth quarters of 1999, the Company recorded
special charges in the amount of $15.1 million. The components of these
special charges consisted of (i) $5.5 million for disposal of PCB
contaminated material improperly delivered to the Company's Detroit facility,
the decontamination of certain equipment exposed to the PCB contaminated
materials and fines imposed by regulatory authorities relating to the
facility's acceptance of the PCB contaminated materials, (ii) $2.5 million
for disposal of liquid waste received by the Company's Re-Claim facility in
Shreveport, Louisiana, which waste is the subject of a dispute between the
Company and the Environmental Protection Agency ("EPA") as to the proper
method of disposal, net of $443,000 received from the Company's insurance
carrier for submitted claims, (iii) $2.0 million for fines imposed or
expected to be imposed by regulatory authorities relating to the operations
of the Re-Claim facility, (iv) $1.7 million for legal and professional fees
incurred or expected to be to incurred for matters arising in connection with
the governmental proceedings relating to the Detroit and Re-Claim facilities
and the purposed securities class action and shareholder derivative action
arising therefrom, (v) $1.3 million for write-offs of capitalized acquisition
costs related to acquisitions not reasonably likely to occur because of the
temporary cap on the Company's revolving credit facility and its related
effects on the Company's acquisition program, (vi) $1.0 million for the
cleanup of a spill at the Re-Claim facility caused by an act of vandalism,
(vii) $954,000 for severance and contract termination costs related to
certain personnel and acquisition consultants as a result of the
environmental issues at the Detroit and Re-Claim facilities, the temporary
cap on the Company's revolving credit facility and its related effects on the
Company's acquisition program, and (viii) $139,000 for other costs related to
the operations of the Detroit and Re-Claim facilities. These special charges
reduced net income by $10.4 million (net of taxes), or $0.68 per share, for
the fiscal year ended December 31, 1999. As of December 31, 1999, $9.5
million of these special charges remained in accrued liabilities. See Note 8.
See Note 18, "Regulatory Proceedings" for further discussion of incidents
giving rise to certain of the special charges. See Note 13 for further
discussion of the temporary cap on the Company's revolving credit facility.

4.      ACQUISITIONS:

1997 ACQUISITIONS

        During the fourth quarter of 1997 the Company completed five
acquisitions. The acquisitions were accounted for under the purchase method
of accounting, except for one acquisition which was accounted for as a
pooling-of-interests. Results of operations of companies that were acquired
were included in the consolidated financial statements from the dates of such
acquisitions. The costs of acquisitions were $5,238,000 in cash and debt and
345,539 shares of stock for 1997. The excess of the aggregate purchase price
over the fair value of the net assets acquired was approximately $6,466,000
for 1997.

1998 AND 1999 ACQUISITIONS

        During 1998 and 1999 the Company completed 29 and 22 acquisitions
respectively. The acquisitions were accounted for under the purchase method
of accounting. Results of operations of companies that were acquired were
included in the consolidated financial statements from the dates of such
acquisitions. The costs of acquisitions were $109,720,000 in cash and debt
and 1,716,698 shares of stock for 1998 and $72,864,000 in cash and debt and
635,355 shares of stock for 1999. The consolidated balance sheets as of
December 31, 1998 and 1999 include allocations of the respective purchase
prices and the 1999 amounts are subject to final adjustment pending
additional information regarding the assets and liabilities of the entities
acquired. The excess of the aggregate purchase price over the fair value of
the net assets acquired was approximately $125,404,000 and $65,142,000 for
1998 and 1999, respectively.

                                       F-10
<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

        The unaudited pro forma information set forth below represents the
revenues, net income (loss) and earnings (loss) per share of the Company, the
1998 and 1999 acquisitions, and the Company's secondary public offerings in
June 1998 and March 1999, as if these transactions were all effective on
January 1, 1998; and includes certain pro forma adjustments, including the
adjustment of amortization expenses to reflect purchase price allocations,
interest expense to reflect debt issued in connection with the acquisitions,
and certain reductions of salaries and benefits payable to the previous
owners of the businesses acquired which were agreed to in connection with the
acquisitions, and the related income tax effects of these adjustments.

<TABLE>
<CAPTION>
                                                                                      YEARS ENDED DECEMBER 31,
                                                                                    ----------------------------
                                                                                       1998              1999
                                                                                    ----------        ----------
                                                                                           (IN THOUSANDS)
<S>                                                                                 <C>               <C>
Revenues....................................................................        $  265,327        $  249,349
Net income (loss)...........................................................        $   16,549        $   (1,190)
Basic earnings (loss) per common share......................................        $     1.08        $    (0.08)
Diluted earnings (loss) per common share....................................        $     0.99        $    (0.08)
</TABLE>

        The unaudited pro forma information is presented for informational
purposes only and is not necessarily indicative of the results of operations
that actually would have been achieved had the acquisitions and offerings been
consummated at the beginning of the periods presented.

        The Company has agreed in connection with certain transactions to pay
additional amounts to the sellers upon the achievement by the acquired
businesses of certain negotiated goals, such as targeted earnings levels.
Although the amount and timing of any payments of additional contingent
consideration depend on whether and when these goals are met, the maximum
aggregate amount of contingent consideration potentially payable if all
payment goals are met is $40,526,000 with the achieved goals providing
approximately $57,951,000 of pre-tax income. The contingent consideration is
payable in cash in the amount of $30,253,000 and in stock in the amount of
$10,273,000. In some instances, the cash portion can be paid in stock at the
Company's option.

5.      PREPAID EXPENSES AND OTHER CURRENT ASSETS:

        Prepaid expenses and other current assets at December 31, 1998 and
1999, consist of the following:
<TABLE>
<CAPTION>
                                                                                       1998               1999
                                                                                    -----------       ------------
                                                                                              ( IN THOUSANDS)
<S>                                                                                 <C>               <C>
Prepaid insurance..........................................................            $  1,347           $  2,189
Current portion of note receivable.........................................               1,157                 46
Current deferred income tax asset..........................................                  -               3,841
Income taxes receivable....................................................                 515              4,001
Other......................................................................               2,397              2,576
                                                                                   ------------       ------------
      Total................................................................            $  5,416           $ 12,653
                                                                                   ============       ============
</TABLE>

                                       F-11
<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.       PROPERTY, PLANT AND EQUIPMENT:

         Property, plant and equipment at December 31, 1998 and 1999, consist of
the following:

<TABLE>
<CAPTION>
                                                                     DEPRECIABLE LIFE
                                                                         (YEARS)              1998            1999
                                                                     ----------------     -------------   -------------
                                                                                                 (IN THOUSANDS)
<S>                                                                  <C>                    <C>            <C>
Land...............................................................          -              $    5,786     $   12,568
Landfarm and processing sites......................................          25                 16,983         17,062
Buildings and improvements.........................................         5-39                32,395         43,328
Machinery and equipment............................................         3-15                25,416         40,171
Vehicles...........................................................         3-5                  8,963         12,828
Furniture and fixtures.............................................         3-5                  2,919          5,069
Construction in progress...........................................          -                   3,567          4,934
                                                                                            ----------     ----------
       Total.......................................................                         $   96,029     $  135,960
Less-Accumulated depreciation......................................                            (10,071)       (20,335)
                                                                                            ==========     ==========
       Net property, plant and equipment...........................                         $   85,958     $  115,625
                                                                                            ==========     ==========
</TABLE>


DEPRECIATION AND AMORTIZATION EXPENSES

      Depreciation and amortization expenses excluded from operating expenses
and selling, general and administrative expenses in the consolidated statements
of income are presented as follows:

<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                                     -----------------------------------
                                                                       1997          1998         1999
                                                                     --------      --------     --------
                                                                                 (IN THOUSANDS)
<S>                                                                  <C>           <C>          <C>
Operating expenses.................................................  $  2,820      $  7,210     $ 15,664
Selling, general and administrative expenses.......................       170           936          931
                                                                     --------      --------     --------
   Total depreciation and amortization expenses....................  $  2,990      $  8,146     $ 16,595
                                                                     ========      ========     ========
</TABLE>


7.       INTANGIBLE ASSETS:

         Intangible assets at December 31, 1998 and 1999, consist of the
following:

<TABLE>
<CAPTION>
                                                                         1998             1999
                                                                      ----------       ----------
                                                                              (IN THOUSANDS)
<S>                                                                   <C>              <C>
Goodwill...........................................................   $  126,074       $  197,352
Noncompete agreements..............................................        1,172            1,206
Permits............................................................          624            1,483
                                                                      ----------       ----------
        Total .....................................................   $  127,870       $  200,041
                                                                      ----------       ----------
Less- Accumulated amortization.....................................       (1,999)          (7,008)
        Net intangible assets .....................................   $  125,871       $  193,033
                                                                      ==========       ==========
</TABLE>


           Intangible assets are recorded at cost and are being amortized on a
straight-line basis over five to forty years. Amortization expense of intangible
assets for the years 1997, 1998 and 1999 were $74,000, $1,951,000 and
$4,972,000, respectively.


                                        F-12
<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.       ACCRUED LIABILITIES:

         Accrued liabilities at December 31, 1998 and 1999, consist of the
following:
<TABLE>
<CAPTION>
                                                                        1998            1999
                                                                      --------       ---------
                                                                            (IN THOUSANDS)
<S>                                                                   <C>            <C>
Accrued salaries...................................................   $  3,242       $   3,608
Income and other taxes payable.....................................        342             698
Current deferred income tax liability..............................        289               -
Accrued professional fees and legal reserves.......................      2,335           1,321
Accrued acquisition costs..........................................      4,986           2,972
Accrued special charges............................................          -           9,505
Accrued processing costs...........................................         42           1,404
Other..............................................................      4,209           3,415
                                                                      --------       ---------
   Total accrued liabilities.......................................   $ 15,445       $  22,923
                                                                      ========       =========
</TABLE>

9.       CONTRACT RESERVE:

     The contract reserve at December 31, 1998 and 1999, consists of the
following:
<TABLE>
<CAPTION>
                                                                        1998           1999
                                                                      --------       ---------
                                                                          (IN THOUSANDS)
     <S>                                                              <C>            <C>
     Total reserve..................................................  $ 18,921       $ 16,066
     Less - Current portion.........................................    (4,500)        (4,500)
                                                                      --------       ---------
     Contract reserve...............................................  $ 14,421       $ 11,566
                                                                      ========       ========
</TABLE>
         The contract reserve represents the estimated deferred acquisition
costs associated with the purchase of City Environmental, Inc. (CEI) from
Waste Management, Inc. (WMI) in May 1998. In connection with the acquisition
of the assets of CEI, the Company and WMI entered into a disposal agreement
pursuant to which it agreed, for a period of 20 years, to deliver to certain
landfills operated by WMI, all of the nonhazardous waste generated from the
operations of CEI. During each of the first five years of this arrangement,
the amount to be paid by the Company to WMI for the first 120,000 cubic yards
of delivered waste will be above market prices. During each of the remaining
15 years of this arrangement, the amount paid will be at market prices. In
addition, WMI agreed, for a period of 20 years, to deliver to the Company for
processing and disposal all landfill leachate (up to a maximum of 35 million
gallons per year) from certain landfills operated by WMI. The processing fee
paid by WMI for delivered landfill leachate and the market price portion of
the landfill fee paid by the Company to WMI for delivered nonhazardous waste
will be adjusted to reflect any increase in the consumer price index. The
Company also agreed, for a period of 14 years commencing on May 2003, to pay
to WMI a monthly royalty fee equal to 6% of the net revenues derived from the
assets of CEI. The balance in the contract reserve account represents
management's estimate of the excess current and future payments for landfill
fees above market prices to be paid by the Company to WMI during the first
five years of the landfill disposal agreement. On December 20, 1999, the
Company notified WMI that the Company was exercising its right to terminate
the disposal agreement under the "force majeure" provision, as a result of the
temporary closure of the Detroit facility. WMI has notified the Company that
the termination of the disposal agreement constituted a breach of the
agreement by the Company. The Company vigorously disputes WMI's position and
believes that the dispute will be resolved in its favor.

10.      REVENUES:

The components of domestic and foreign revenue are as follows:
<TABLE>
<CAPTION>
                                                                     YEARS ENDED DECEMBER 31,
                                                                 --------------------------------
                                                                  1997         1998        1999
                                                                 -------     --------    --------
                                                                           (IN THOUSANDS)
     <S>                                                         <C>         <C>         <C>
     United States.............................................  $38,159     $121,460    $226,566
     Canada....................................................      -           -          5,217
                                                                 -------     --------    --------
        Total..................................................  $38,159     $121,460    $231,783
                                                                 =======     ========    ========
</TABLE>
                                        F-13
<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The sales and service revenue components are as follows:
<TABLE>
<CAPTION>
                                                                            YEARS ENDED DECEMBER 31,
                                                                   ---------------------------------------
                                                                     1997           1998           1999
                                                                   --------       ---------      ---------
                                                                                (IN THOUSANDS)
<S>                                                                <C>            <C>            <C>
Collection, processing and disposal service revenues.............  $ 25,679       $  93,228      $ 196,579
By-product sales.................................................    12,480          28,232         35,204
                                                                   --------       ---------      ---------
   Total ........................................................  $ 38,159       $ 121,460      $ 231,783
                                                                   ========       =========      =========
</TABLE>

11.      INCOME TAXES:

         For financial reporting purposes, income before provision for income
taxes, showing domestic and international sources is as follows:

<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                                   ---------------------------------------
                                                                     1997           1998           1999
                                                                   --------       ---------      ---------
                                                                               (IN THOUSANDS)
     <S>                                                           <C>            <C>             <C>
     United States..............................................    $6,291         $17,805         $  984
     Canada.....................................................      -               -               377
                                                                   --------       ---------       --------
     Income before provision for income taxes...................    $6,291         $17,805         $1,361
                                                                   ========       =========       ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                                   ---------------------------------------
                                                                     1997           1998           1999
                                                                   --------       ---------      ---------
                                                                               (IN THOUSANDS)
     <S>                                                           <C>            <C>             <C>
Current
     Federal.....................................................   $ 2,253        $ 4,272         $ 2,492
     State.......................................................        99            286             313
     Foreign.....................................................         -              -             138
                                                                   --------       ---------       --------
         Total...................................................   $ 2,352        $ 4,558         $ 2,943
                                                                   ========       =========       ========
Deferred
     Federal.....................................................   $    62        $ 2,192         $ (296)
     State.......................................................         2            283            (44)
                                                                   --------       ---------       --------
         Total...................................................   $    64        $ 2,475         $ (340)
                                                                   --------       ---------       --------
         Provision for income taxes .............................   $ 2,416        $ 7,033         $ 2,603
                                                                   ========       =========       ========
</TABLE>

         The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before provision for income
taxes result from the following:

<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                                   ---------------------------------------
                                                                     1997           1998           1999
                                                                   --------       ---------      ---------
                                                                               (IN THOUSANDS)
<S>                                                                <C>            <C>             <C>
Tax at statutory rate............................................   $ 2,202        $ 6,232         $   476
Add-
   State taxes, net of federal benefit...........................        66            370             175
   Differences in foreign tax rates..............................         -              -               6
   Nondeductible expenses........................................       157            150           1,372
   Increase in valuation allowance...............................         -              -             427
   Other.........................................................        (9)           281             147
                                                                   --------       ---------       --------
         Total...................................................   $ 2,416        $ 7,033         $ 2,603
                                                                   ========       ========        ========
</TABLE>
                                        F-14
<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         For purposes of the consolidated federal income tax return, the
Company has net operating loss carryforwards of $1,826,000 available to
offset taxable income of the Company in the future. The net operating loss
carryforwards will begin to expire in 2011. In connection with certain
acquisitions, ownership changes occurred resulting in various limitations on
certain tax attributes. Valuation allowances have been established for
uncertainties in realizing the benefits of tax loss carryforwards.

         Deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates to differences
between the financial reporting and the tax bases of existing assets and
liabilities. The tax effects of significant temporary differences representing
deferred income tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                          ----------------------
                                                            1998          1999
                                                          --------      --------
                                                              (IN THOUSANDS)
<S>                                                       <C>           <C>
Deferred income tax assets
   Reserves.............................................   $   509           864
   Accrued expenses.....................................       317         3,571
   Net operating losses.................................       266           693
   Other................................................        78            83
   Less: Valuation allowance............................      (229)         (657)
                                                          --------      --------
         Total..........................................   $   941       $ 4,554
                                                          --------      --------
Deferred income tax liabilities
   Property, plant and equipment........................   $(1,185)      $(3,035)
   Intangible assets....................................      (939)       (3,006)
   Prepaid expenses.....................................      (414)         (158)
   Other................................................      (843)         (887)
                                                          --------      --------
         Total..........................................   $(3,381)      $(7,086)
                                                          --------      --------
         Net deferred income tax liabilities............   $(2,440)      $(2,532)
                                                          ========      ========
</TABLE>


         Net deferred income tax assets and liabilities are comprised of the
following:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                          ----------------------
                                                            1998          1999
                                                          --------      --------
                                                              (IN THOUSANDS)
<S>                                                       <C>           <C>
Current deferred income tax assets (liabilities)

   Gross assets.........................................   $   404       $ 3,999
   Gross liabilities....................................      (693)         (158)
                                                          --------      --------
         Total, net.....................................   $  (289)      $ 3,841
Non-current deferred income tax assets (liabilities)
   Gross assets.........................................       766         1,084
   Gross liabilities....................................    (2,917)       (7,457)
                                                          --------      --------
         Total, net.....................................    (2,151)       (6,373)
                                                          --------      --------
         Net deferred income tax liabilities............   $(2,440)      $(2,532)
                                                          ========      ========
</TABLE>

12.      EARNINGS PER SHARE:

         Earnings per share amounts are based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. The weighted average number of shares used to compute

                                        F-15
<PAGE>

basic and diluted earnings per share for 1997, 1998, and 1999 is illustrated
below:

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                1997              1998              1999
                                                             ------------     ------------       -----------
                                                                     (IN THOUSANDS, EXCEPT SHARE DATA)
   <S>                                                       <C>              <C>                <C>
   Numerator:
          For basic and diluted earnings per share--
          Income (loss) available to common stockholders      $     3,875      $    10,772       $    (1,242)
                                                             ============     ============      ============
   Denominator:
          For basic earnings per share--
          Weighted-average shares                               5,937,435       10,316,739        15,323,910
                                                             ------------     ------------       -----------
   Effect of Dilutive Securities:
          Weighted-average stock options and warrants           1,140,670        1,320,467              -
                                                             ------------     ------------       -----------
   Denominator:
          For diluted earnings per share--
          Weighted-average shares and assumed conversions       7,078,105       11,637,206        15,323,910
                                                             ============     ============      ============
</TABLE>

         For the year ended December 31, 1998, the Company had 625,000
employee stock options which were not included in the computation of diluted
earnings per share because to do so would have been antidilutive for the
period presented. For the year ended December 31, 1999 the Company had a loss
which precluded calculating the effect of 1,201,000 stock options and warrants
because to do so would reduce the loss per share.

13.      LONG-TERM OBLIGATIONS:

         The Company's long-term obligations at December 31, 1998 and 1999,
consist of the following:

<TABLE>
<CAPTION>
                                                                                   1998          1999
                                                                                ---------     ---------
                                                                                     (IN THOUSANDS)
<S>                                                                             <C>           <C>
Revolving Credit Facility......................................................  $ 63,500      $ 93,000
Note payable to individuals, interest at 8.5%, maturing January 2008,
   unsecured...................................................................         -         1,087
Notes payable to employees and individuals (former shareholders of
   acquired companies) interest ranging from non-interest bearing to 5.9%,
   maturing March 2000 to July 2006, unsecured.................................     1,751         5,459
Notes payable to corporations, interest ranging from 8.4% to 8.6% maturing
   November 2000 to May 2001, unsecured........................................     1,220           101
Obligations under capital leases, monthly payments ranging from $117 to
   $23,892, interest ranging from 5.1% to 17.1%, expiring within the next
   six years, secured by equipment and vehicles................................       992         3,792
Insurance premium notes, interest at 8%, maturing June 2000, unsecured.........       884         1,387
Other..........................................................................        47             -
                                                                                ---------     ---------
                                                                                   68,394       104,826
Less - Current maturities of total long-term obligations.......................    (4,004)       (5,327)
                                                                                ---------     ---------
       Total long-term obligations.............................................  $ 64,390      $ 99,499
                                                                                =========     =========
</TABLE>

         In February 1999 the Company increased its revolving credit facility,
which may be used for working capital requirements and acquisitions, to $225
million. As discussed below the facility cannot currently exceed $110 million.
Amounts outstanding under the facility are secured by a lien

                                       F-16
<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


on substantially all of the assets of the Company. Availability under the
credit facility is tied to the Company's cash flows and liquidity. The credit
agreement requires the Company to comply with certain financial covenants,
obtain the lenders' consent before making any acquisitions above a specified
purchase price, and prohibits the payment of cash dividends. The debt may be
accelerated upon a change in control of the Company or the departure of
senior management without a suitable replacement. Interest on the outstanding
balance is due quarterly and the facility matures in February 2002. Advances
bear interest, at the Company's option, at the prime rate or London Interbank
Offered Rate ("LIBOR"), in each case, plus a margin which is calculated
quarterly based upon the Company's ratio of indebtedness to cash flow. The
Company has agreed to pay a commitment fee varying from 0.3% to 0.5% on the
unused portion of the facility. As of December 31, 1999 the unused portion of
the facility was $132 million of which $17 million was available, including
$745,000 in letters of credit outstanding.

         As a result of the PCB contamination occurring at the Company's
Detroit facility, a question arose whether the Company was in compliance with
certain covenants under the credit facility. In October 1999, the banks
granted the Company a waiver until January 14, 2000 of any such non-compliance
arising out of the PCB contamination. On January 14, 2000, the terms of the
revolving credit facility were amended to, among other things, limit the total
amount of debt outstanding under the credit facility, increase certain
interest rates payable under the credit facility and require bank approval for
a broader scope of acquisition transactions. Currently, the aggregate
principal amount of all debt outstanding under the credit facility may not
exceed $110 million. This cap will be increased to $125 million at such time
as the earnings before interest, taxes, depreciation and amortization
("EBITDA") for the Detroit facility and the Company and its subsidiaries on a
consolidated basis (excluding any portion thereof attributable to acquisitions
completed after December 31, 1999) equals or exceeds the projected EBITDA
contained in the Company's budgets on a year-to-date basis as of the end of
any month ending on or after March 31, 2000. Thereafter, the cap will increase
to $150 million and to $175 million at such time as the EBITDA for the Detroit
facility and the Company and its subsidiaries on a consolidated basis
(excluding any portion thereof attributable to acquisitions completed after
December 31, 1999) equals or exceeds the projected EBITDA contained in the
Company's budgets on a year-to-date basis as of the end of any month ending on
or after June 30, 2000 and October 31, 2000, respectively. The amount of the
credit facility will be reinstated to $225 million when the environmental
issues relating to the Detroit facility (including the PCB contamination and
the investigation of the facility by the FBI and the EPA) have been resolved
in a manner reasonably satisfactory to the banks. Under the terms of the
amended credit facility, the banks' consent is required to consummate any
future acquisitions if the aggregate cash consideration to be paid by the
Company (including any debt assumed or issued) in connection with the
acquisition is greater than $1 million. At such time as the amount that can be
borrowed under the credit facility is increased to $150 million, the banks'
consent for an acquisition will be required only if the aggregate cash
consideration to be paid by the Company (including any debt assumed or issued)
in connection with the acquisition is greater than $5 million.

         Principal payments of long-term debt and capital lease obligations in
excess of one year as of December 31,1999, are as follows:

<TABLE>
<CAPTION>
                                                                    LONG-TERM      CAPITAL
                                                                       DEBT        LEASES
                                                                   -----------   -----------
    YEAR ENDING DECEMBER 31,                                             (IN THOUSANDS)
                 <S>                                                <C>           <C>
                 2000............................................   $    4,346    $    1,342
                 2001............................................          510         1,158
                 2002............................................       93,447           784
                 2003............................................          441           657
                 2004............................................          436           490
                 Thereafter......................................        1,854             6
                                                                   -----------   -----------
                                                                    $  101,034         4,437
                 Less - Amount representing interest.............            -          (645)
                                                                   -----------   -----------
                      Total......................................   $  101,034    $    3,792
                                                                   ===========   ===========
</TABLE>

         Management estimates that the fair value of its debt obligations
approximates its historical value at December 31, 1999.

                                       F-17
<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14.      STOCK OPTIONS AND WARRANTS:

         On November 20, 1996, U S Liquids established a stock option plan
which provides, as amended, for a maximum authorized number of shares equal
to 15% of all outstanding common stock at the end of each year, not to exceed
a total of 3,000,000 shares. At December 31, 1999 746,000 options were
available to be granted under the plan. Options vest equally in three annual
installments, commencing on the first anniversary of the date upon which the
options were granted, and expire after being outstanding for a period of 10
years. During June 1997, U S Liquids established a directors' stock option
plan which provides for granting 10,000 options to each director upon their
initial election and 5,000 options each year thereafter. The directors' stock
options vest on the date of grant and expire after 10 years. At December 31,
1999, there were 119,500 nonqualified stock options to non-employees granted
for corporate development purposes which are contingent upon the successful
completion of certain corporate development activities and, accordingly, no
calculation of the fair value of the nonqualified stock options will be
determined or recorded until the realization of such contingencies. The
Company issued stock warrants in connection with its Campbell Wells
Acquisition, its initial public offering, and as compensation for corporate
consulting. Warrants issued in connection with acquisitions or common stock
offerings are capitalized based on the fair market value of the warrants on
the date of grant. Stock warrants and options issued as compensation for
consulting activities were expensed as incurred.

         The following table summarizes activity under the Company's stock
option plans and warrants granted:

<TABLE>
<CAPTION>
                                                       1997                          1998                           1999
                                              ----------------------        -----------------------         ---------------------
                                              OPTIONS       WARRANTS        OPTIONS        WARRANTS         OPTIONS      WARRANTS
                                              -------       --------        -------        --------         -------      --------
<S>                                           <C>           <C>               <C>          <C>             <C>           <C>
Options and warrants outstanding,
  beginning of year                           301,875       1,000,000         775,125      1,215,000       1,489,792     1,235,000

       Granted (per share)

                   1997 ($.02-$ 16.00)        529,500         215,000

                   1998 ($.02-$21.875)                                        888,500         20,000

                   1999 ($6.688-$22.50)                                                                      845,722             -

       Exercised (per share)

                   1997 ($.02)                (56,250)

                   1998 ($.02-$14.125)                                       (110,583)

                   1999 ($.02-$11.40)                                                                        (76,000)      (85,184)

       Forfeitures (per share)

                   1998 ($.02-$14.125)                                        (63,250)

                   1999 ($.02-$21.875)                                                                      (881,332)      (73,566)
                                              -------       ---------       ---------      ---------       ---------     ---------
Options and warrants outstanding, end of
  year                                        775,125       1,215,000       1,489,792      1,235,000       1,378,182     1,076,250
                                              =======       =========       =========      =========       =========     =========
</TABLE>

                                     F-18
<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
                                         OPTIONS OUTSTANDING                                             OPTIONS EXERCISABLE
------------------------------------------------------------------------------------------      -----------------------------------
                                                   WTD. AVG.
                            NUMBER                 REMAINING                                         NUMBER
    RANGE OF            OUTSTANDING AT          CONTRACTUAL LIFE            WTD. AVG.            EXERCISABLE AT        WTD. AVG.
EXERCISE PRICES            12/31/99                 (YEARS)              EXERCISE PRICE             12/31/99         EXERCISE PRICE
-----------------      -----------------       -------------------      ------------------      -----------------    --------------
<S>                         <C>                       <C>                  <C>                       <C>               <C>
  $        .02              190,125                   6.9                  $      .02                190,125           $    .02
    6.69-15.38              488,139                   8.1                        9.53                282,306               9.87
   16.00-22.50              699,918                   8.9                       20.11                161,852              20.41
  ------------            ---------                   ---                  ----------                -------           --------
  $  .02-22.50            1,378,182                   8.4                  $    13.59                634,283           $   9.61
  ============            =========                   ===                  ==========                =======           ========
</TABLE>

         As permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company applies APB Opinion 25, "Accounting for Stock
Issued to Employees", and related interpretations in accounting for its
stock-based compensation plans. APB Opinion 25 does not require compensation
costs to be recorded on options which have exercise prices at least equal to
the market price of the stock on the date of grant. Accordingly, no
compensation cost has been recognized for the Company's stock-based plans.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the optional method prescribed by SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would have been
reduced to the pro forma amounts indicated below (in thousands, except per
share data):

<TABLE>
<CAPTION>
                                                                      1997          1998         1999
                                                                    ---------      -------     ---------
<S>                                                                 <C>            <C>         <C>
Net income (loss),                   As  reported                   $   3,875      $10,772     $  (1,242)
                                     Pro forma                          1,726        9,007        (6,987)

Basic earnings (loss) per share,     As  reported                   $    0.65      $  1.04     $    (.08)
                                     Pro forma                           0.29         0.87     $    (.46)

Diluted earnings (loss) per share,   As reported                    $    0.55      $  0.93     $    (.08)
                                     Pro forma                           0.24         0.77     $    (.46)
</TABLE>

         The effects of applying SFAS No. 123 in the disclosure may not be
indicative of future amounts. SFAS No. 123 does not apply to options awarded
prior to 1995 and additional awards in future years are anticipated.

         The fair value of each employee stock option was estimated on the
date of grant using the Black-Scholes pricing model with the following
assumptions:
<TABLE>
<CAPTION>
                                                                                 1997               1998                  1999
                                                                            -------------       -------------        -------------
          <S>                                                               <C>                 <C>                  <C>
          Expected stock price volatility.................................  37.06%-38.78%       34.91%-41.19%        49.16%-86.03%
          Risk-free interest rate.........................................    5.79%-6.47%         5.14%-5.99%          5.20%-6.61%
          Expected life of options........................................       10 years            10 years             10 years
          Expected dividend/yield.........................................           -                    -                    -
</TABLE>

         During 1999, 845,722 options were granted to employees which had a
weighted average fair value of $12.89 per option and a weighted average
exercise price of $18.42 per option.

15.   STOCK REPURCHASE AND CANCELLATION:

         In September 1999 the Company repurchased and immediately cancelled
386,114 shares of its common stock for an aggregate purchase price of
$3,000,000.
                                         F-19
<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16.   EMPLOYEE BENEFITS:

      The Company sponsors a 401(k) retirement plan established in 1998 under
which all employees may choose to save a portion of their salary on a pretax
basis, subject to certain IRS limits. The Company matches employee
contributions on a discretionary basis and also provides for a discretionary
profit sharing contribution. The Company recorded $303,000 and $716,000 in
compensation expense related to this plan for the years ended December 31,
1998 and 1999, respectively.

17.   RELATED PARTY TRANSACTION:

      On December 31, 1998, the Company sold to a company owned by a then
director of the Company substantially all of the assets used in the
distribution of various by-products of the Company's grease processing
facilities. These by-products had previously been sold by the Company
primarily to producers of livestock feed and chemicals located in Mexico. The
purchase price for these assets was approximately $1,700,000, of which
approximately $1,100,000 was included in prepaid expenses and other current
assets at December 31, 1998 and was paid to the Company in March 1999. The
remainder of the purchase price is payable in monthly installments continuing
through February 1, 2004 and is included in other assets. The uncollected
balance at December 31, 1999 is $582,654. The Company has agreed to sell to
the former director's company at market value all fats, oils and feed
proteins that the Company recovers from certain waste streams and that
conform to certain specifications through December 2000. The former
director's company may extend this supply agreement for three additional
one-year terms.

      On May 15, 1999 the Company acquired the common stock of Royal
Recycling Ltd., a Canadian corporation. In connection with the acquisition,
the Company issued notes payable to the former shareholder of Royal who
subsequently became an employee of the Company. The notes payable were issued
to cover additional payments of the purchase price and to extinguish the
"earn-out" provisions of the Purchase and Sale Agreement. The total amount
payable at December 31, 1999 was $1,914,517, with $864,155 paid in January
2000. The remaining balance will be repaid by July 2000.

      On July 29, 1999 the Company acquired substantially all of the assets
of EMAX, Inc. In connection with the acquisition the Company agreed to pay a
portion of the purchase price over seven years plus interest at 5.9% per
annum to the shareholders of EMAX, Inc. One of the shareholders was an
employee of U S Liquids Inc. at December 31, 1999. The balance outstanding at
December 31, 1999 was $3,000,000, of which $1,500,000 was owed to the USL
employee.

18.   COMMITMENTS AND CONTINGENCIES:

CLOSURE BONDS & LETTERS OF CREDIT

      At December 31, 1999 bonds and letters of credit for the ultimate
closure of facilities totaling $8,756,674 were posted with the states of
Louisiana, Texas, Michigan, Pennsylvania, California, Georgia, Missouri and
Florida.

INSURANCE

      The Company maintains various types of insurance coverage for its
business including, without limitation, commercial general liability and
commercial auto liability, workers' compensation and employer liability,
pollution legal liability and a general umbrella policy. The Company has not
incurred significant claims or losses in excess of its insurance limits
during the periods presented in the accompanying consolidated financial
statements.

NONCOMPETE AND OILFIELD WASTE DISPOSAL AGREEMENTS

      In connection with the Campbell Wells Acquisition, the Company acquired
a long-term disposal agreement with Newpark Resources, Inc. (Newpark) for the
processing and disposal of oilfield waste generated offshore in the Gulf
Coast region. This disposal


                                   F-20

<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

agreement obligated Newpark to deliver to the Company specified amounts of
oilfield waste for treatment and disposal at certain of the Louisiana
landfarms. However, during 1998, a dispute arose between the Company and
Newpark concerning Newpark's obligations under the disposal agreement. In
September 1998, the Company terminated the long-term disposal agreement and
entered into a new agreement with Newpark covering the remaining 33 month
period. In the new agreement, Newpark agreed to pay the Company at least
$30,000,000. Newpark paid $6,000,000 in 1998 under the terms of this
agreement, a portion of which satisfied amounts owed to the Company under the
prior agreement, and another $11,000,000 in 1999. Due to prior collection
uncertainties, the Company has in the past, and intends in the future, to
account for these payments as revenues as they are collected. The remaining
amounts are required to be paid in monthly installments continuing through
June 2001. The contract is cancellable at the Company's option, upon
Newpark's failure to make timely payments. Under the terms of the new
agreement, Newpark has the right, but not the obligation, to deliver
specified volumes of oilfield waste to certain of the Company's Louisiana
landfarms for a period of three years without additional cost. The processing
costs associated with volumes delivered under this agreement are accrued when
such volumes, if any, are received. Subject to certain conditions, Newpark
may extend the term of the new agreement for two additional one-year terms at
an additional cost to Newpark of approximately $8,000,000 per year. With the
Company's consent, Newpark may deliver additional amounts of oilfield waste
to the Company for processing and disposal at a specified price per barrel.

         In addition, the Company also agreed that, until June 30, 2001, it
would not (i) accept from any customer other than Newpark any oilfield waste
generated in a marine environment or transported in a marine vessel, or (ii)
engage in the site remediation and closure business, in each case within the
states of Louisiana, Texas, Mississippi and Alabama, and the Gulf of Mexico. If
the term of the new agreement is extended by Newpark, the term of the
prohibition on the Company accepting this type of waste from other customers
will also be extended for a corresponding period of time.

LEASES

         The Company leases office facilities and certain equipment under
noncancelable operating leases for periods ranging from one to 26 years. Rent
expense was approximately $736,000, $4,243,000 and $8,452,000 for the years
ended December 31, 1997, 1998 and 1999, respectively. The following table
presents future minimum rental payments under noncancelable operating leases
with terms in excess of one year:

<TABLE>
<CAPTION>
                                                            OPERATING LEASES
                                                            ----------------
                                                             (IN THOUSANDS)
<S>                                                              <C>
      Year ending December 31-
                             2000................                $ 2,937
                             2001................                  2,493
                             2002................                  1,977
                             2003................                  1,724
                             2004................                  1,456
                             Thereafter..........                 11,131
                                                                 -------
                                 Total...........                $21,718
                                                                 =======
</TABLE>

                                         F-21
<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

REGULATORY PROCEEDINGS

         In May 1998, the Company acquired from Waste Management, Inc.
substantially all of the assets of City Environmental, Inc. including,
without limitation, a hazardous and nonhazardous waste treatment facility
located in Detroit, Michigan. This facility has never been granted a final
Part B permit under the Resource and Recovery Act of 1976 ("RCRA"), but has
operated under interim status, as allowed by RCRA. On August 25, 1999, the
EPA and the Federal Bureau of Investigation ("FBI") executed a search warrant
at this facility, seeking electronic data, files and other documentation
relating to the facility's receipt, processing and disposal of hazardous
waste. As a result of the execution of the search warrant, the facility
temporarily ceased operations. According to the affidavit attached to the
search warrant, after receiving a phone call from an employee at the facility
in May 1999, the EPA and the FBI began a joint investigation of the facility.
The investigation centers around allegations made by five current and former
employees at the facility that (i) the facility knowingly discharged into the
Detroit sewer system untreated hazardous liquid waste in violation of city
ordinances, the facility's permit and the Clean Water Act, and (ii) without
proper manifesting, the facility knowingly transported and disposed of
hazardous waste at an unpermitted treatment facility in violation of RCRA.
According to the affidavit, the facility has been knowingly violating the
Clean Water Act and RCRA since 1997, which was before the Company acquired
the facility. The on-site investigation of the facility by the EPA and the
FBI was completed in August 1999. It is the Company's understanding that the
investigation is continuing, but as of the date of the release of these
financial statements no announcement regarding the investigation has been
made by the EPA or the FBI. Due to the early status of the investigation, the
Company has concluded that it is unable to determine a reasonable estimate of
potential fines or penalties (or range of fines or penalties) it could be
assessed. Accordingly, the Company cannot project the ultimate outcome of the
foregoing matter or its potential impact on the Company. The imposition of a
substantial fine or penalty against the facility could have a material
adverse effect on the business, results of operations, financial condition
and liquidity of the Company. A reasonable estimate of a material obligation,
if any, is expected to be possible later in 2000 when further information may
be obtained from the governmental agencies involved in this matter.

         After the completion of the on-site investigation of its Detroit
facility, the Company began conducting routine tests of materials in waste
solidification vaults in preparation for the reopening of the facility.
During these tests, the Company discovered that certain waste which had been
received by the facility prior to its August 25, 1999 closing was
contaminated with PCBs and that this waste had contaminated other waste in
several of the waste solidification vaults and a liquid feed tank. The
Company immediately made all notifications required by law, including
notifications to the Michigan Department of Environmental Quality ("MDEQ")
and the EPA. The Company also notified Waste Management, Inc. that some of
the PCB contaminated wastes may have been inadvertently delivered to a Waste
Management landfill for disposal. The Company subsequently submitted to the
EPA a workplan for the disposal of the PCB contaminated materials and
decontamination of the affected equipment. The Company later entered into a
consent order with the EPA that approved this work plan and established
enhanced procedures for screening of materials delivered to the facility to
detect PCB contamination. Under the terms of the consent order, the Company
paid $123,888 to the EPA in full settlement of the EPA's claims for certain
civil fines. In January 2000, the Company's contractors completed the
clean-up and decontamination of the facility in accordance with the workplan
and the facility was reopened for business on February 1, 2000. The Company
has determined that a subsidiary of National Steel Corporation generated the
PCB contaminated materials and that these materials were not properly
identified as required by law when delivered to the Detroit facility. The
Company has made demand upon and is attempting to negotiate a resolution with
National Steel regarding the damages suffered by the Detroit facility as a
result of its subsidiary's failure to disclose that its waste was
contaminated with PCBs. The Company has also submitted claims under its
pollution liability and business interruption insurance policies for losses
incurred as a result of the temporary closure of the facility. The Company
has recorded all of the liabilities incurred or expected to be incurred in
connection with the cleanup of the PCB contamination, without offset for any
anticipated recovery from National Steel or the Company's insurers. At
December 31, 1999, $3.6 million remained accrued of the original $4.2 million
reserve.

         Waste Management has asserted a claim against the Company for
damages relating to the Detroit facility's alleged disposal of PCB
contaminated waste at one of Waste Management's landfills. Waste Management
has submitted to the MDEQ and the EPA a workplan for the disposal of any such
improperly delivered PCB contaminated waste, and Waste Management and the
Company are currently awaiting a response from the MDEQ and the EPA. The
Company has made demand upon National Steel for indemnification against any
amounts ultimately determined to be owing by the Company to Waste Management
as a result of the Detroit facility's delivery of PCB contaminated waste to
Waste Management's landfill. The Company has established a $1.3 million
reserve as of December 31, 1999, recorded as an accrued liability, for costs
to be incurred in the event that it is ultimately determined that the Company
is responsible for disposing of any improperly delivered PCB contaminated
waste, without offset for any anticipated recovery from National Steel or the
Company's insurers.

                                         F-22
<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         As previously reported, the Company's Detroit facility has been
operating under interim status, as allowed by RCRA. Since the Company acquired
the facility, it has been working with the MDEQ to obtain a final Part B
permit. By letter dated September 17, 1999, the MDEQ notified the Company that
it had determined that the facility's application for a Part B permit was not
administratively complete and, therefore, the facility had lost its authority
to process and dispose of hazardous waste. Shortly thereafter, the MDEQ issued
two letters of warning ("LOWs") and a notice of violation ("NOV") to the
facility identifying various alleged deficiencies in the facility's
application for a Part B permit. The Company promptly notified the MDEQ that
it disputed the allegations contained in the September 17, 1999 letter, the
LOWs and the NOV. On October 7, 1999, the Company entered into a consent order
with the MDEQ resolving the allegations set forth in the September 17, 1999
letter, the LOWs and the NOV. Under the terms of the consent order, the
facility was required, among other things, to (i) submit to the MDEQ by
November 22, 1999 additional drawings and workplans regarding the maintenance
and operation of the facility and any revisions to the facility's Part B
permit application necessitated by the consent order, (ii) submit to the MDEQ
within certain specified time frames documentation establishing that certain
cleanup work at the facility has been completed, and certain procedures have
been implemented at the facility, and (iii) pay $37,500 to the MDEQ in full
settlement of the MDEQ's claims for certain civil fines and costs of
surveillance and enforcement. The Company also agreed to reimburse the MDEQ
for all future costs incurred by the MDEQ in overseeing the facility's
compliance with the terms of the consent order. In December 1999, the MDEQ
notified the facility that its application for a Part B permit was
administratively complete. On February 1, 2000, after complying with all the
other terms and conditions of the consent order, the facility resumed its
operations under interim status, as allowed by RCRA. The Company is currently
working with the MDEQ to obtain a final Part B permit for the facility.

             During the fourth quarter of 1999, the EPA notified the Company
that, as a result of the allegations giving rise to the investigation of the
Detroit facility, it had determined that the facility was no longer eligible
to receive waste generated as a result of removal or remedial activities under
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"). This notification further advised that, in order for the facility
to regain its eligibility to receive such CERCLA waste, the facility must
demonstrate that it can again safely handle such waste. In accordance with the
terms of the notice, the Company has asked the EPA to reconsider its
determination and the Company is currently awaiting a response to this
request. Although the Company believes that the EPA will ultimately determine
that the facility, as re-opened, can safely handle CERCLA waste, there can be
no assurances thereof. The facility's failure to regain its eligibility to
receive CERCLA waste would have a material adverse effect upon the operations
of the facility.

         In June 1999, the Company was notified that the Louisiana Department
of Environmental Quality (LDEQ) was seeking to terminate the discharge permit
held by the Re-Claim facility in Shreveport, Louisiana, which permit allows
the facility to discharge processed wastewater into the waters of the State
of Louisiana. In its notice, the LDEQ alleged that the proposed termination
was justified based upon, among other things, the facility's failure to
comply with the terms of its permit, two releases (spills) that occurred at
the facility, and the facility's acceptance and processing of hazardous
materials not covered by the terms of its permit. In January 2000, the
Company entered into a tentative settlement agreement with the LDEQ resolving
the LDEQ's allegations. A settlement agreement has been prepared by the
parties and signed by the Company, but this settlement agreement will not
become final until signed by the LDEQ and the Louisiana Attorney General. The
terms of the settlement agreement have been published in accordance with
Louisiana law and the Company anticipates that the settlement agreement will
become final during the second quarter of 2000. Under the terms of the
settlement agreement, the Company agreed to pay a civil assessment of
$525,000 to the LDEQ. In addition, the Company agreed to contribute $675,000
to certain projects approved by the LDEQ to benefit the environment. In
return, the LDEQ agreed to take no further action on its notice of intent to
terminate the permit held by the facility. These charges, which total $1.2
million, remain accrued as of December 31, 1999.

                                         F-23
<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         In the fourth quarter of 1999, the EPA notified the Company of
certain alleged violations of RCRA by the Re-Claim facility in Shreveport,
Louisiana. Among other things, the EPA alleged that the facility accepted
waste from CERCLA sites that it was not permitted to accept and improperly
disposed of such waste. Although the Company disputes the EPA's allegations,
the Company is attempting to negotiate a resolution with the EPA which may
include a civil assessment, modifications to the facility's waste screening
and waste processing procedures and/or additional capital expenditures at the
facility. The Company believes that the ultimate outcome of this proceeding
will not have a material adverse effect on its business, results of operations
or financial condition.

         The EPA has also notified the Company that it believes that
approximately 3.0 million gallons of liquid waste received by the Re-Claim
facility in Shreveport, Louisiana and stored off-site may contain hazardous
constituents and, therefore, the waste cannot be processed by the facility.
The Company believes that the waste may be handled as nonhazardous waste in
accordance with the terms of the facility's permit. The Company is in the
process of preparing a plan for disposal of this waste. The Company has
established a $2.5 million reserve, of which $1.5 million remains accrued at
December 31, 1999, for costs to be incurred in the event that it is
ultimately determined that this waste must be delivered to a third party for
processing and disposal. Management believes that this reserve is sufficient
to cover all costs associated with a third party's disposal of the waste, if
necessary.

         During October and November of 1999, the California Department of
Toxic Substances Control ("DTSC") inspected the Company's processing facility
in East Palo Alto, California, and the Company's transportation facility in
Redwood City, California. On November 29, 1999, the DTSC issued a summary of
violations to each facility identifying various alleged violations of
California hazardous waste management laws and regulations. The DTSC has not
initiated a formal enforcement action seeking penalties against either
facility. There can be no assurance, however, that a formal enforcement action
will not subsequently be brought against one or both facilities. Although the
Company disputes the alleged violations, the Company is attempting to
negotiate a resolution with the DTSC. The Company believes that the ultimate
resolution of these matters will not have a material adverse effect on its
business, results of operations, or financial condition.

         Prior to its acquisition by the Company in January 1999, Romic
Environmental Technologies Corporation had entered into an administrative
consent order with the EPA relating to the cleanup of soil and groundwater
contamination at its facility in East Palo Alto, California. A remedial
investigation of the facility has been completed by Romic and forwarded to
the EPA. Romic is nearing completion of a corrective measures study for
submission to the EPA. The EPA will review this study and approve a plan for
final site remediation. Based upon the information currently available, the
Company has established a reserve, recorded as an accrued liability as of
December 31, 1999, of $3.2 million to cover Romic's estimated costs for this
site. Management believes that this reserve is sufficient to satisfy Romic's
obligations under the consent order, however, due to the complex, ongoing and
evolving process of investigating and remediating the facility, Romic's
actual costs may exceed the amount reserved.

                                         F-24
<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         Prior to its acquisition by the Company, Romic had been notified by
the EPA and the DTSC that it was a potentially responsible party under
applicable environmental legislation with respect to the Bay Area Drum
Superfund Site in San Francisco, California, the Lorentz Barrel and Drum
Superfund Site in San Jose, California and the Casmalia Resources Hazardous
Waste Management Facility located near Santa Barbara, California, each of
which was a drum reconditioning or disposal site previously used by Romic.
With respect to each of these sites, Romic and a number of other potentially
responsible parties have entered into administrative consent orders and
agreements allocating each party's respective share of the cost of
remediating the sites. Romic's share under these consent orders and
agreements is as follows: Bay Area -- 6.872%; Lorentz -- 5.62% and Casmalia
Resources -- 0.29%. Based upon the studies and remedial actions completed,
the Company has established a reserve, recorded as an accrued liability at
December 31, 1999, of $1.3 million to cover Romic's share of the estimated
costs for these sites. Management believes that this reserve is sufficient to
satisfy Romic's obligations under the consent orders, however, due to the
complex, ongoing and evolving process of investigating and remediating these
sites, Romic's actual costs may exceed the amount reserved.

         In December 1999, the Company was notified by the EPA that D&H
Holding Co., Inc., a business the Company acquired in the fourth quarter of
1998, is a potentially responsible party under CERCLA with respect to the
Lenz Oil Services Superfund Site in DuPage County, Illinois. Based upon the
information available at this time, the Company does not believe that the
ultimate outcome of this matter will have a material adverse effect on its
business, results of operations or financial condition. The Company intends
to make demand upon the former stockholders of D&H Holding for
indemnification against any costs that the Company may incur in connection
with the remediation of this site. The Company has reserved $125,000,
recorded as an accrued liability at December 31, 1999, to cover any such
costs, without offset for any anticipated recovery from the former
stockholders of D&H Holding.

LITIGATION

         During the third quarter of 1999, six purported securities class
action lawsuits were filed against the Company and certain of its officers and
directors in the United States District Court for the Southern District of
Texas, Houston Division. These lawsuits have been consolidated into a single
action styled IN RE: U S LIQUIDS SECURITIES LITIGATION, Case No. H-99-2785,
and the plaintiffs have filed a consolidated complaint. The consolidated
complaint alleges violations of Sections 11, 12(a)(2) and 15 of the Securities
Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder on behalf of purchasers of the
Company's common stock during the period beginning on May 12, 1998 and ending
on August 25, 1999, including purchasers of common stock in the Company's
March 1999 offering. The plaintiffs generally allege that the defendants made
false and misleading statements and failed to disclose allegedly material
information regarding the operations of the Company's Detroit facility and the
Company's financial condition in the prospectus relating to the Company's
March 1999 stock offering and in certain other public filings and
announcements made by the Company. The remedies sought by the plaintiffs
include designation of the action as a class action, unspecified damages,
attorneys' and experts' fees and costs, rescission to the extent any members
of the class still hold common stock, and such other relief as the court deems
proper.

         In addition, one shareholder of the Company has filed a lawsuit
against certain of the officers and directors of the Company in connection
with the operations of the Company's Detroit facility and the securities class
action described above. This lawsuit was filed in the United States District
Court for the Southern District of Texas, Houston Division, on September 15,
1999 and was subsequently consolidated with the claims asserted in the
securities class action described above. The plaintiff purports to allege
derivative claims on behalf of the Company against the officers and directors
for alleged breaches of fiduciary duty resulting from their oversight of the
Company's affairs. The lawsuit names the Company as a nominal defendant and
seeks compensatory and punitive damages on behalf of the Company, interest,
equitable and/or injunctive relief, costs and such other relief as the court
deems proper.

         The outcome of these consolidated actions and the costs of defending
them cannot be predicted with certainty at this time. However, the Company
believes that the claims asserted in the purported securities class action are
without merit and the Company intends to vigorously defend itself and its
officers and directors against these claims. Moreover, the Company believes
that the shareholder derivative action was not properly brought and the
Company has filed a motion to dismiss this action in order to allow the Board
of Directors to consider whether such litigation is in the best interest of
the Company and its stockholders.

                                       F-25

<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         On August 7, 1998, the Company settled substantially all of the
claims asserted against it in four lawsuits relating to its Bourg, Louisiana
landfarm. Under the terms of the settlement, the Company agreed to expand
the buffer zone and build a berm along the western boundary of the landfarm.
The cost of these actions was not material to the Company's operating
results. The settlement did not resolve certain claims asserted against the
Company by Acadian Shipyard, Inc., a local barge company, in the FRILOUX ET
AL. V. CAMPBELL WELLS CORPORATION case pending in the 17th Judicial District
Court for the Parish of Lafourche, Louisiana. In the FRILOUX case, the
Company asserted various claims for indemnity and/or contribution against
Acadian. Thereafter, in July 1998, Acadian filed various counterclaims
against the Company including, without limitation, claims for defamation of
business reputation and conspiracy to damage Acadian's business reputation.
In addition, Acadian requested unspecified monetary damages allegedly
suffered as a result of alleged environmental contamination in connection
with the ongoing operations at the Bourg, Louisiana landfarm. The Company
denies that it has any liability to Acadian and intends to vigorously defend
against these claims. Management does not believe that this action will have
a material adverse effect on the Company's business, results of operations,
or financial condition.

         The Company is involved in various other legal actions arising in the
ordinary course of business. Management does not believe that the outcome of
such legal actions will have a material adverse effect on the Company's
consolidated financial position or results of operations.

19.       SEGMENT INFORMATION:

         Prior to June 30, 1999, the Company's subsidiaries were organized
into two divisions - the Wastewater Division and the Oilfield Waste Division.
However, as the result of the acquisition of Romic Environmental Technologies
Corporation in January 1999 and in accordance with Statement of Financial
Accounting Standards No. 131, effective as of July 1, 1999, the Company
created a third division

                                   F-26

<PAGE>

                                U S LIQUIDS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

known as the Industrial Wastewater Division, and changed the name of the
Wastewater Division to the Commercial Wastewater Division. The Industrial
Wastewater Division includes the operations of Romic Environmental
Technologies Corporation and two other subsidiaries (USL City Environmental,
Inc., and USL City Environmental Services of Florida, Inc.) that were acquired
during 1998 and were previously included as part of the Wastewater Division.

             The Commercial Wastewater Division collects, processes and
disposes of nonhazardous liquid waste and recovers saleable by-products from
certain waste streams. The Industrial Wastewater Division collects, processes
and disposes of hazardous and nonhazardous waste and recovers saleable
by-products from certain waste streams. The Oilfield Waste Division processes
and disposes of waste generated in oil and gas exploration and production.

             The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. For purposes of
this presentation, general corporate expenses have been allocated between
operating segments on a pro rata basis based on income from operations before
such expenses.

             The following is a summary of key business segment information:
<TABLE>
<CAPTION>
                                                                                  1997                1998              1999
                                                                              ------------       --------------      ------------
                                                                                                (IN THOUSANDS)
<S>                                                                            <C>                 <C>                 <C>
Revenues-
   Oilfield Waste.........................................................     $ 19,948            $  17,402           $ 18,542
   Commercial Wastewater..................................................       18,211               85,161            153,708
   Industrial Wastewater..................................................            -               18,897             59,533
                                                                               --------            ---------           --------
       Total..............................................................     $ 38,159            $ 121,460           $231,783
                                                                               ========            =========           ========
Income (loss) from operations-
   Oilfield Waste.........................................................     $  6,685            $   8,062           $  9,298
   Commercial Wastewater..................................................        1,381                7,040             (2,367)
   Industrial Wastewater..................................................            -                6,258              1,104
                                                                               --------            ---------           --------
       Total..............................................................     $  8,066            $  21,360           $  8,035
                                                                               ========            =========           ========
Identifiable assets-
   Oilfield Waste.........................................................     $ 34,071            $  33,513           $ 36,163
   Commercial Wastewater..................................................       17,870              150,550            217,021
   Industrial Wastewater..................................................            -               61,152            105,846
   Corporate..............................................................        3,075                6,950             10,053
                                                                               --------            ---------           --------
       Total..............................................................     $ 55,016            $ 252,165           $369,083
                                                                               ========            =========           ========
Depreciation and amortization expense-
   Oilfield Waste.........................................................     $  2,266            $   2,384           $  2,689
   Commercial Wastewater..................................................          645                4,258              9,467
   Industrial Wastewater..................................................            -                1,238              3,894
   Corporate..............................................................           79                  266                545
                                                                               --------            ---------           --------
       Total..............................................................     $  2,990            $   8,146           $ 16,595
                                                                               ========            =========           ========
Capital expenditures-
   Oilfield Waste.........................................................     $  2,042            $   1,192           $    305
   Commercial Wastewater..................................................        2,278               11,374             12,828
   Industrial Wastewater..................................................            -                  434              2,497
   Corporate..............................................................          509                1,347              1,593
                                                                               --------            ---------           --------
       Total..............................................................     $  4,829            $  14,347           $ 17,223
                                                                               ========            =========           ========
Interest (income) expense, net
   Oilfield Waste.........................................................     $  1,627            $      (8)          $      8
   Commercial Wastewater..................................................          262                  138                 35
   Industrial Wastewater..................................................            -                    1                129
   Corporate..............................................................         (155)               3,386              6,631
                                                                               --------            ---------           --------
       Total..............................................................     $  1,734            $   3,517           $  6,803
                                                                               ========            =========           ========
</TABLE>

                                                F-27