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                                   FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

(MARK ONE)

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       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)

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

      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:

<TABLE>
<S>                                    <C>
         TITLE OF SECURITIES                         EXCHANGE ON WHICH REGISTERED
-------------------------------------  --------------------------------------------------------
    Common Stock, par value $.01                       American Stock Exchange
</TABLE>

          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.   Yes [ ]

     The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 19, 1999, was approximately $278,357,000. 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 19, 1999 was 15,873,370.

                      DOCUMENTS INCORPORATED BY REFERENCE

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<S>                                    <C>
              DOCUMENT                                    INCORPORATED AS TO
-------------------------------------  --------------------------------------------------------
       Proxy Statement for the                                 Part III
 1999 Annual Meeting of Stockholders
</TABLE>

================================================================================
<PAGE>
                               TABLE OF CONTENTS

                                     PART I
                                                 PAGE
                                                 ----
Item 1.  Business.............................     1
Item 2.  Properties...........................    14
Item 3.  Legal Proceedings....................    15
Item 4.  Submission of Matters to a Vote of
           Security Holders...................    16

                                    PART II

Item 5.  Market for Registrant's Common Equity
           and Related Stockholder Matters....    16
Item 6.  Selected Financial Data..............    17
Item 7.  Management's Discussion and Analysis
           of Financial Condition and
           Results of Operations..............    18
Item 7A. Quantitative and Qualitative
           Disclosures About Market Risk......    22
Item 8.  Financial Statements and
           Supplementary Data.................    23
Item 9.  Changes in and Disagreements With
           Accountants on Accounting and
           Financial Disclosure...............    23

                                    PART III

Item 10. Directors and Executive Officers of
           the Registrant.....................    23
Item 11. Executive Compensation...............    23
Item 12. Security Ownership of Certain
           Beneficial Owners and Management...    23
Item 13. Certain Relationships and Related
           Transactions.......................    23

                                    PART IV

Item 14. Exhibits, Financial Statement
           Schedules, and Reports on Form
           8-K................................    23

                                       i

<PAGE>
                                     PART I

ITEM 1.  BUSINESS

GENERAL

     We are a rapidly growing 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 38 processing
facilities located in eleven states and serve over 40,000 customers. At March 1,
1999, we employed approximately 1,200 persons full-time.

     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 treated prior to disposal in local publicly-operated
treatment works ("POTWs") or for which municipalities charge higher rates.
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:

         o   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;

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

         o   Industrial and commercial businesses outsourcing their wastewater
             treatment needs;

         o   Continued industrial and commercial expansion; and

         o   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. 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 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 Company than to
discharge the waste directly into the POTW. For example, it is currently more
economical

                                       1
<PAGE>
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,
treating 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) expand through
acquisitions; (ii) generate internal growth; (iii) enhance existing and acquired
operations; and (iv) operate our businesses on a decentralized basis. We intend
to implement this strategy as follows:

      o   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.

      o   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

                                       2
<PAGE>
          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 our existing liquid waste management
          facilities, and to amend our permits for certain facilities in order
          to receive additional liquid waste streams.

      o   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.

      o   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.

ACQUISITION ACTIVITY IN 1998

     During 1998, we acquired 29 liquid waste management businesses which
collectively had approximately $136.5 million of annual revenues in 1998. The 28
acquisitions completed by the Wastewater Division provided us entry into five
additional segments of the liquid waste management industry -- bulk liquid and
dated beverage processing and recovery, hazardous waste processing, biosolids
processing and recovery, solvent processing and recovery, and petroleum fuels
processing and recovery -- and gave us a presence in 22 new geographic markets
in North America. Through the acquisition completed by the Oilfield Waste
Division, we entered into the business of cleaning tanks, barges and other
vessels and containers used in the storage and transportation of oilfield waste.

RECENT DEVELOPMENTS

     From January 1, 1999 through March 19, 1999, we acquired six additional
business engaged in the collection, processing, recovery and disposal of liquid
waste, including Romic Environmental Technologies Corporation. Romic operates
liquid waste processing, and chemical and solvent recovery facilities in
California and Arizona. It also operates collection and transfer facilities in
California, Oregon and Washington. Romic had approximately $46.8 million of
revenues during 1998. The five other businesses acquired during this time period
collectively had approximately $8.2 million of revenues during 1998.

     To accommodate the growth in our business, we increased the size of our
credit facility in February 1999 from $100.0 million to $225.0 million.

     On March 17, 1999, we completed a public offering of 3,000,000 shares of
our common stock. The $56.8 million of net proceeds that we received from the
2,875,000 shares that we sold in this offering will be applied against the
outstanding balance of our credit facility, the vast majority of which
indebtedness was incurred in connection with acquisitions completed in 1998 and
1999. We anticipate that these net proceeds will be applied against the
outstanding balance of our credit facility by March 31, 1999.

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

                                       3
<PAGE>
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 two divisions -- the Wastewater Division
and the Oilfield Waste Division. The operations of these two divisions are
summarized below. See Note 15 to our consolidated financial statements for
certain financial data of these two divisions.

WASTEWATER DIVISION

     Our Wastewater Division contributed approximately 85.7% of our 1998
revenues. This Division receives fees to collect, process and dispose of liquid
waste such as industrial wastewater, grease and grit trap waste, bulk liquids
and dated beverages, and certain hazardous wastes. In addition, the 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
Wastewater Division are set forth below:

     INDUSTRIAL WASTEWATERS.  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. By-products
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.

     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 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.

                                       4
<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.

     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.

OILFIELD WASTE DIVISION

     The Oilfield Waste Division contributed approximately 14.3% of our 1998
revenues. 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 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 $3.0 million in September 1998 and an additional $6.0
million between October 1, 1998 and March 19, 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 new
agreement is extended by

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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.

     As part of our agreement with Newpark, we also secured the right to
immediately enter into the business of cleaning tanks, barges and other vessels
and containers used in the storage and transportation of oilfield waste and
acquired certain assets used in this business in exchange for a total price of
$2.2 million. We are currently operating this business at two locations in
Louisiana. Prior to the settlement, we were contractually prohibited from
engaging in this cleaning business within the states of Louisiana, Texas,
Mississippi and Alabama and the Gulf of Mexico.

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 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 to remain in
compliance with federal, state and local laws and regulations relating to the
protection of the environment.

  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

                                       6
<PAGE>
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.

     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. We do not accept RCRA-regulated
hazardous waste at any of our liquid waste processing facilities other than the
Detroit, Michigan, Tampa, Florida, East Palo Alto, California and Chandler,
Arizona facilities. Consequently, the majority of our activities are not subject
to the requirements adopted under Subtitle C of RCRA. Our facility in Detroit,
Michigan has never been granted a permit under RCRA and is continuing to operate
under interim status, as allowed by RCRA. In addition, a facility in East Palo
Alto, California that we acquired in January 1999 is operating under a RCRA
permit that expired in 1991, but that allows for ongoing operations. With
respect to both facilities, all necessary applications, renewal applications and
other documentation were timely filed and applicable regulations allow the
facilities to continue to operate. Furthermore, our subsidiary, Romic
Environmental Technologies Corporation, has 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.

     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 have the capital resources available to do
so, or that we would be able to adapt our operations.

     RCRA also indirectly affects our operations by prohibiting the disposal of
certain liquid wastes in landfills. This prohibition increases demand for the
services provided by the Wastewater Division.

     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

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<PAGE>
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.

     Other than certain administrative consent orders and agreements entered
into by our Romic subsidiary with respect to three drum reconditioning or
disposal sites to which it delivered waste, we are not aware of any claims
against us or any of our subsidiaries that are based on CERCLA. Nonetheless, the
identification of any additional 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 liquid 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.

     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 recently adopted by
the Louisiana Department of Natural Resources have increased the pre-treatment
testing to be conducted on oilfield waste delivered to our Louisiana landfarms.

     The closure of all of our landfarms is also regulated by state authorities.
In general, closure of a landfarm involves a multi-phase process whereby all
injection wells at the landfarm are plugged and abandoned, all surface equipment
is removed from the site, the treatment cells and perimeter containment levees
are removed and the surface of the site is contoured and vegetated. Additional
regulatory requirements include monitoring the surface runoff water, the soil
pore water and the groundwater for a period of five years. If, after five years,
the water quality meets the requirements specified in the state regulations, the
site is certified as closed.

     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

                                       8
<PAGE>
with positive or negative effects on us. It is possible that state or local
regulations could adversely affect our execution of our acquisition strategy.

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 1999 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:

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

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

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

         o   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

                                       9
<PAGE>
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:

         o   The acquired business may not achieve expected results.

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

         o   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.

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

         o   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 currently 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 $225.0 million 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 19, 1999, the
outstanding principal balance of the credit facility was approximately $105.0
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 market for the various by-products that we sell is also
very competitive and is served by several large companies and a number of
smaller, privately-owned companies. 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.

                                       10
<PAGE>
     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.

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 facility in Detroit, Michigan has never been granted a permit under
RCRA and is continuing to operate under interim status, as allowed by RCRA. In
addition, our facility in East Palo Alto, California, which we acquired in
January 1999, is operating under a RCRA permit that expired in 1991, but that
allows for ongoing operations. With respect to both facilities, all necessary
applications, renewal applications and other documentation were timely filed and
applicable regulations allow the facilities to continue to operate. However, 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:

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

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

         o   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

                                       11
<PAGE>
         o   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.

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.

     In January 1999, we acquired Romic Environmental Technologies Corporation.
Prior to becoming a subsidiary of the Company, Romic 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 study
to determine the nature of the contamination has been completed and Romic
submitted a corrective measures study to the EPA in March 1999. Based upon the
information gathered from these studies, as of December 31, 1998, Romic had
reserved approximately $2.2 million to cover its estimated costs at this
facility. However, the ultimate cost may exceed this reserve. Prior to becoming
a subsidiary of the Company, Romic had also entered into administrative consent
orders and agreements with the EPA and the California Department of Toxic
Substances Control relating to three drum reconditioning or disposal sites to
which it delivered waste. Based upon the studies and remedial actions completed,
as of December 31, 1998, Romic had reserved approximately $775,000 to cover its
share of the estimated costs for these sites. However, the ultimate cost may
exceed this reserve.

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

                                       12
<PAGE>
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 $12 5/8 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:

         o   Quarterly fluctuations in results of operations;

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

         o   Announcement and market acceptance of acquisitions;

         o   Changes in earnings estimates by analysts;

         o   Loss of key personnel;

         o   Changes in accounting principles or policies;

         o   Sales of common stock by existing stockholders;

         o   Announcements of key developments by competitors; and

         o   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.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to the operating
performance of these companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against the company. If similar litigation were
instituted against us, it could result in substantial costs and a diversion of
our management's attention and resources, which could have an adverse effect on
our business, results of operations and financial condition.

                                       13
<PAGE>
ITEM 2.  PROPERTIES

     Our corporate offices are located in Houston, Texas. The corporate offices
consist of approximately 12,115 square feet of office space occupied under a
lease which expires on June 1, 2002.

     The Wastewater Division operates 25 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
Universal Waste................  Tampa, Florida                     Household Hazardous Wastes                 Owned
National Solvent...............  Atlanta, Georgia                   Industrial Wastewaters                    Leased
Parallel KY. ..................  Louisville, Kentucky               Bulk Liquids and Dated Beverages           Owned
Re-Claim LA. ..................  Shreveport, Louisiana              Industrial Wastewaters                    Leased
City Environmental.............  Detroit, Michigan                  Hazardous Wastes; Industrial               Owned
                                                                      Wastewaters
Northern A-1...................  Kalkaska, Michigan                 Industrial Wastewaters                     Owned
Waste Stream...................  Weedsport, New York                Biosolids                                 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
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
Bio-Vac........................  Shreveport, Louisiana              Grease and Grit Trap Waste                 Owned
D&H Holding....................  Hammond, Indiana                   Industrial Wastewaters; Grease and        Leased
                                                                      Grit Trap Waste; Septage
Parallel FL. ..................  Bartow, Florida                    Bulk Liquids and Dated Beverages          Leased
Romic CA. .....................  East Palo Alto, California         Hazardous Wastes; Industrial               Owned
                                                                      Wastewaters
Romic AZ. .....................  Chandler, Arizona                  Hazardous Wastes; Industrial              Leased
                                                                      Wastewaters
Gateway Terminal...............  Carteret, New Jersey               Industrial Wastewaters                    Leased
</TABLE>

                                       14
<PAGE>
     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
Sanisidro, 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. 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.

     The Wastewater Division owns other real estate, buildings and physical
properties that it uses in its liquid waste collection operations. The
Wastewater Division also leases certain of its 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

     On August 7, 1998, we settled substantially all of the claims asserted
against us in the 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 will
not be material to our operating results. This 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
the 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.

     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. In March 1999, Romic submitted a corrective measures study for the facility
to the EPA. The EPA will review the corrective measures study and select a plan
for final site remediation. Based upon the information gathered from these
studies,

                                       15
<PAGE>
Romic's estimated costs for this site are expected to be $3.3 million, paid over
the next 30 years. These estimated costs have been discounted for present value
considerations at a rate of 5.6% to establish a reserve of $2.2 million.
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 California Department of Toxic Substances Control 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,
Romic's share of the estimated costs for these sites is expected to be $821,000,
paid over the next ten years. These estimated costs have been discounted for
present value considerations at a rate of 5.6% to establish a reserve of
$775,000. However, due to the complex, ongoing and evolving process of
investigating and remediating these sites, Romic's actual costs may exceed the
amount reserved.

     With regard to the Casmalia Resources site, if adequate funding is not
obtained by the EPA from certain sources to fund additional remedial phases for
which Romic and other potentially responsible parties have not been released
from liability, Romic could incur additional costs of up to $400,000 which would
likely be disbursed over 30 years. No reserve has been established by Romic for
this loss contingency.

     We are, from time to time, a party to litigation arising in the normal
course of our business, most of which involves claims for personal injury or
property damage incurred in connection with our operations. We are not currently
involved in any litigation that we believe will 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, 1997:
     Third Quarter (beginning August
     20)...............................................  $18 3/16   $13 1/8
     Fourth Quarter....................................   19 3/8     12 5/8
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
</TABLE>

     The number of holders of record of common stock at March 19, 1999 was 298.

                                       16
<PAGE>
     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 credit
facility.

ITEM 6.  SELECTED FINANCIAL DATA

     The consolidated income statement and balance sheet data below set forth
our consolidated financial data as of December 31, 1997 and 1998, and for the
years ended December 31, 1996, 1997 and 1998, derived from the consolidated
financial statements audited by Arthur Andersen LLP, which appear elsewhere in
this report. The consolidated income statement and balance sheet data as of
December 31, 1994 and 1995 and for the years ended December 31, 1994 and 1995
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,
                                       ------------------------------------------------------
                                         1994       1995       1996       1997        1998
                                       ---------  ---------  ---------  ---------  ----------
<S>                                    <C>        <C>        <C>        <C>        <C>
                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.............................  $   8,039  $  11,127  $  14,285  $  38,159  $  121,460
Operating expenses...................      7,422      9,776     11,369     21,353      79,027
Depreciation and amortization........        136        159        424      2,990       8,146
Selling, general and administrative
  expenses...........................        643        863      1,437      5,350      12,927
Pooling costs........................     --         --         --            400      --
                                       ---------  ---------  ---------  ---------  ----------
Income (loss) from operations........       (162)       329      1,055      8,066      21,360
Interest and other expense, net......        109        177        309      1,775       3,555
                                       ---------  ---------  ---------  ---------  ----------
Income (loss) before provision for
  income taxes.......................       (271)       152        746      6,291      17,805
                                       ---------  ---------  ---------  ---------  ----------
Net income (loss)....................  $    (182) $     103  $     491  $   3,875  $   10,772
                                       =========  =========  =========  =========  ==========
Basic earnings (loss) per share......  $   (0.11) $    0.06  $    0.23  $    0.65  $     1.04
Diluted earnings (loss) per share....  $   (0.11) $    0.06  $    0.23  $    0.55  $     0.93
Weighted average shares
outstanding..........................      1,700      1,700      2,117      5,937      10,317
Diluted weighted average shares
outstanding..........................      1,700      1,700      2,139      7,078      11,637
</TABLE>

BALANCE SHEET DATA:

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                       ------------------------------------------------------
                                         1994       1995       1996       1997        1998
                                       ---------  ---------  ---------  ---------  ----------
<S>                                    <C>        <C>        <C>        <C>        <C>
                                                           (IN THOUSANDS)
Working capital (deficit)............  $    (301) $    (576) $     223  $   2,122  $    2,936
Total assets.........................      1,410      3,007     46,851     55,016     252,165
Long-term obligations, including
  current
  maturities.........................      1,447      2,010     29,950     17,436      68,394
Stockholders' equity.................       (455)      (358)     1,538     20,906     124,944
</TABLE>

                                       17

<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, 1998 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

     We collect, process, recover and dispose of liquid waste through a number
of subsidiaries that are organized into two divisions. The Wastewater Division
collects, processes and disposes of liquid waste and recovers saleable
by-products from certain waste streams. We formed our Wastewater Division when
we acquired two companies in June 1997 in transactions that were accounted for
under the pooling-of-interests method of accounting. The Oilfield Waste Division
processes and disposes of waste generated in oil and gas exploration and
production. It was formed in December 1996 when we purchased five of our
Louisiana and Texas landfarms from certain subsidiaries of Waste Management,
Inc.

     From January 1, 1999 through March 19, 1999, we acquired six additional
businesses which collectively had approximately $55.0 million of revenues during
1998. Our cost for these acquisitions was approximately $35.4 million in cash
and debt, and 431,588 shares of common stock. The results of operations of these
six business are not included in the results of operations presented in this
report.

     The Wastewater Division generated $104.1 million, or 85.7%, of our revenues
for the year ended December 31, 1998. This Division derives revenues from two
principal sources: fees received for collecting and processing liquid waste
(such as industrial wastewater, grease and grit trap waste, bulk liquids and
dated beverages, and certain hazardous wastes), 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
waste streams. As a result of an acquisition that we completed in April 1998,
our 1998 by-product sales include revenues from the brokering of industrial and
fuel grade ethanol produced by third parties. In the second quarter of 1998, we
began curtailing these brokerage activities except where necessary to meet our
customers' volume and quality requirements. 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. We anticipate that revenues from collection and
processing fees, which have higher margins than by-product sales, will increase
at a faster rate than revenues from sales of by-products. We anticipate that the
Wastewater Division will represent a growing share of our business because of
its projected internal growth and future acquisitions.

     The Oilfield Waste Division generated $17.4 million, or 14.3%, of our
revenues for the year ended December 31, 1998. This Division derives revenues
from fees charged to customers for (i) processing and disposing of oil and gas
exploration and production waste, and (ii) cleaning tanks, barges and other
vessels and containers used in the storage and transportation of oilfield waste.
The fees charged for processing and disposing of oilfield waste are based on the
composition of the waste and vary significantly. Accordingly, we believe that
total revenues are a better indicator of performance than is the average fee
charged. 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 Wastewater
Division.

                                       18
<PAGE>
     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 new
33-month agreement with Newpark. In this agreement, Newpark agreed to pay us at
least $30.0 million. Newpark paid us $3.0 million in September 1998 and an
additional $6.0 million between October 1, 1998 and March 19, 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.

     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.

     Depreciation and amortization expenses relate to our landfarms and other
depreciable or amortizable assets. Landfarms, which constitute approximately
16.2% 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.

     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.

RESULTS OF OPERATIONS

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 Wastewater Division
contributed $18.2 million, or 47.7%, of 1997 revenues and $104.1 million, or
85.7%, of 1998 revenues. Wastewater Division revenues can be further broken down
into two categories: (i) collection and processing fees, and (ii) by-product
sales. Collection and processing fees generated $5.7 million, or 31.5%, and
$75.8 million, or 72.9%, of the Wastewater Division's revenues for 1997 and
1998, respectively. Revenues from collection and processing of waste increased
$70.1 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 68.5%, and $28.2 million, or 27.1%, of the Wastewater
Division's revenues for 1997 and 1998, respectively. Revenues from the sale of
by-products increased $15.8 million, or 126.2%, 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 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

                                       19
<PAGE>
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.

YEARS ENDED DECEMBER 31, 1997 AND 1996

     REVENUES.  Revenues for the year ended December 31, 1997 increased $23.9
million, or 167.1%, from $14.3 million for the year ended December 31, 1996 to
$38.2 million for the year ended December 31, 1997. Collection and processing
fees generated $2.1 million, or 15.6%, and $5.8 million, or 31.9%, of the
Wastewater Division's revenues for 1996 and 1997, respectively. Revenues from
collection and processing of waste increased $3.7 million, or 176.2%, due
primarily to an increase in the volume of waste processed. By-product sales
generated $11.4 million, or 84.4%, and $12.4 million, or 68.1%, of the
Wastewater Division's revenues for 1996 and 1997, respectively. Revenues from
the sale of by-products increased $1.0 million, or 8.8%, due primarily to an
increase in sales of fats, oils and feed proteins.

     The Oilfield Waste Division contributed $826,000, or 5.8%, of 1996 revenues
and $19.9 million, or 52.3%, of 1997 revenues. The Oilfield Waste Division's
revenues increased $19.1 million as a result of the inclusion of the Oilfield
Waste Division for all of 1997 as compared to less than one month in 1996.

     OPERATING EXPENSES.  Operating expenses increased $10.0 million, or 87.8%,
from $11.4 million in 1996 to $21.4 million in 1997, primarily due to the
inclusion of the Oilfield Waste Division for all of 1997 as compared to less
than one month in 1996. As a percentage of revenues, operating expenses
decreased from 79.6% for 1996 to 56.0% for 1997. This improvement reflects
higher operating margins derived by the Oilfield Waste Division as opposed to
the Wastewater Division.

     DEPRECIATION AND AMORTIZATION.  Depreciation and amortization expenses
increased $2.6 million, or 605.2%, from $424,000 in 1996 to $3.0 million in
1997. As a percentage of revenues, depreciation and amortization expenses
increased from 3.0% in 1996 to 7.8% in 1997. The increase in depreciation and
amortization expenses resulted primarily from the acquisition of the Oilfield
Waste Division.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses increased $4.4 million, or 300.1%, from $1.4 million in
1996 to $5.8 million in 1997. The majority of this increase related to the
inclusion of the Oilfield Waste Division for all of 1997 as compared to less
than one month in 1996. Selling, general and administrative expenses increased
from 10.1% of 1996 revenues to 15.1% of 1997 revenues, primarily due to higher
personnel costs and professional fees associated with being a public company and
establishing our corporate offices in Houston in May 1997.

     INTEREST AND OTHER EXPENSES.  Net interest and other expenses increased
$1.5 million, or 474.4%, from $309,000 in 1996 to $1.8 million in 1997. Net
interest and other expenses increased primarily as a result of interest expense
related to debt incurred in acquiring the Oilfield Waste Division in 1996 and
other businesses in 1997.

                                       20
<PAGE>
     INCOME TAXES.  The provision for income taxes increased $2.2 million, or
847.5%, from $255,000 in 1996 to $2.4 million in 1997. This increase resulted
primarily from additional taxable income. The effective tax rate for 1996 was
34.2% of income and the effective tax rate for 1997 was 38.4% of income.

LIQUIDITY AND CAPITAL RESOURCES

     We had net working capital of $2.9 million at December 31, 1998, compared
to net working capital of $2.1 million at December 31, 1997.

     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, 1998,
approximately $4.0 million of principal payments on debt obligations were
payable during the next twelve months. Capital expenditures for 1999 are
budgeted at $10.8 million. Approximately $9.9 million of this amount is budgeted
to be invested in the Wastewater Division for plant expansions, equipment and
vehicle upgrades. The remaining amounts are budgeted to be invested in the
Oilfield Waste Division for equipment.

     At December 31, 1998, we had established a $5.0 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 $12.6
million of financial assurance in the form of letters of credit and bonds.

     We have a $225.0 million credit facility with a group of banks under which
we may borrow to fund working capital requirements and acquisitions. The amount
of this credit facility was increased in February 1999 from $100.0 million to
$225.0 million. 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. We do not believe that these restrictions will have a material
adverse effect on our ability to fulfill our current acquisition program. The
debt outstanding under the 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 60 days by an individual
reasonably satisfactory to the lenders. At December 31, 1998, we had borrowed
approximately $63.5 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, 1998, amounts
outstanding under the credit facility were accruing interest at approximately
7.3% per year. We also have a $10.0 million credit facility with BankBoston,
N.A. under which we may borrow to purchase equipment. No amounts were
outstanding under this equipment credit facility as of December 31, 1998.

     Our capital resources consist of cash reserves, cash generated from
operations and funds available under our $225.0 million credit facility and the
equipment 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. We anticipate that future
acquisitions will be made using a combination of common stock and cash. We
currently have 820,161 shares of common stock available for issuance under our
acquisition shelf registration statement and we intend to register an additional
4,200,000 shares of common stock under the Securities Act of 1933 for use in
future acquisitions. Most of the cash to be used in future acquisitions is
expected to be derived from borrowings under our $225.0 million credit facility.
In addition, we may seek to raise additional equity capital for all or a
substantial part of the consideration to be paid for future acquisitions or to
reduce our debt.

     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

                                       21
<PAGE>
with an acquisition, we anticipate that the cash flows of the acquired business
will be sufficient to pay the contingent consideration.

YEAR 2000 COMPLIANCE

     Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, such
computer applications could fail or create erroneous results by or at the Year
2000. We are currently identifying which of our information technology and
non-information technology systems will be affected by Year 2000 issues.

     Our Year 2000 compliance program consists of three phases: identification
and assessment; remediation; and testing. For any given system, the phases occur
in sequential order, from identification and assessment of Year 2000 problems,
to remediation and, finally, to testing our solutions. However, as we acquire
additional businesses, each information technology and non-information
technology system of the acquired business must be independently identified and
assessed. As a result, all three phases of our Year 2000 compliance program may
occur simultaneously as they relate to different systems. Each phase may have a
varying timetable to completion, depending upon the system and the date when a
particular business was acquired by us.

     We have completed the identification and assessment of most of our
information technology systems, and those systems address or have been modified
to address Year 2000 problems. We will continue to assess the information
technology systems of businesses that we have recently acquired and that we may
acquire in the future. We are in the identification and assessment phase with
respect to non-information technology systems of currently-owned businesses. We
anticipate completing all phases of our Year 2000 compliance program by June 30,
1999, with the possible exception of the remediation and testing phases for
certain of our non-information technology systems. We cannot assure you,
however, that recently acquired businesses will be Year 2000 compliant. However,
to the extent feasible, we review the Year 2000 status of acquisition candidates
before we complete an acquisition.

     Our costs to date for our Year 2000 compliance program have not been
material. Although we have not completed our assessment of non-information
technology systems, we do not currently believe that the future costs associated
with our Year 2000 compliance program will be material.

     We are currently unable to determine our most reasonably likely worst case
Year 2000 scenario, because we have not identified and assessed all of our
non-information technology systems. Because most of our information technology
systems address or have been modified to address Year 2000 problems and because
most of our businesses do not employ a high degree of process or plant
automation, we do not anticipate that the Year 2000 will have a significant
impact on our operations. However, a failure to address all of our Year 2000
issues successfully could have a material adverse effect on our business,
results of operations and financial condition.

     This is a Year 2000 readiness disclosure statement within the meaning of
the Year 2000 Information and Readiness Disclosure Act (P.L. 105-271).

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 $225.0 million credit facility and our
$10.0 million equipment credit facility. As of December 31, 1998, $63.5 million
and $0 had been borrowed under the $225.0 million credit facility and the
equipment credit facility, respectively. As of December 31, 1998, amounts
outstanding under the $225.0 million credit facility were accruing interest at
approximately 7.3% per year.

                                       22
<PAGE>
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.

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 11, 1999.

ITEM 11.  EXECUTIVE COMPENSATION

     Incorporated by reference from the Proxy Statement for the Annual Meeting
of Stockholders to be held on May 11, 1999.

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 11, 1999.

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 11, 1999.

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
------------------------  ------------------------------------------------------------------------------------------
<C>                       <S>
           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).
           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 U S Liquids Inc. Registration Statement on Form S-3
                          (File No. 333-72403), effective March 11, 1999, is hereby incorporated by reference).
</TABLE>

                                       23
<PAGE>
<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                                    DESCRIPTION
------------------------  ------------------------------------------------------------------------------------------
           4.3       --   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).
<C>                       <S>
           4.4       --   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       --   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).
          10.9       --   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).
          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).
</TABLE>

                                       24
<PAGE>
<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                                    DESCRIPTION
------------------------  ------------------------------------------------------------------------------------------
          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).
<C>                       <S>
         *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).
          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      --   Purchase and Sale of Assets Agreement, dated December 31, 1998, among U S Liquids of
                          Texas, Inc., Mesa Processing, Inc. and Thomas B. Blanton. (Exhibit 10.74 of U S Liquids
                          Inc. Registration Statement on Form S-3 (File No. 333-72403), effective March 11, 1999, is
                          hereby incorporated by reference).
          10.27      --   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).
</TABLE>

                                       25
<PAGE>
<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                                    DESCRIPTION
------------------------  ------------------------------------------------------------------------------------------
         *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).
<C>                       <S>
          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      --   Warrant, dated August 25, 1997, issued by U S Liquids Inc. to Van Kasper & Company.
                          (Exhibit 10.45 of U S Liquids Inc. Registration Statement on Form S-1 (File No.
                          333-34875), effective September 18, 1997, is hereby incorporated by reference).
          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      --   Warrant, dated June 23, 1997, issued by U S Liquids Inc. to Bellmeade Capital Partners
                          (Exhibit 10.34 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).
          10.35      --   Warrant, dated June 23, 1997, issued by U S Liquids Inc. to Mark Liebovit (Exhibit 10.35
                          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).
          10.36      --   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).
         *10.40      --   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).
         +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

                                       26
<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 25, 1999                                 By: /s/Michael P. Lawlor
                                                          MICHAEL P. LAWLOR
                                                          CHAIRMAN OF THE BOARD AND
                                                          CHIEF EXECUTIVE OFFICER

Date:  March 25, 1999                                 By: /s/W. Gregory Orr
                                                          W. GREGORY ORR
                                                          DIRECTOR, PRESIDENT AND
                                                          CHIEF OPERATING OFFICER

Date:  March 25, 1998                                 By: /s/Earl J. Blackwell
                                                          EARL J. BLACKWELL
                                                          CHIEF FINANCIAL OFFICER,
                                                          SENIOR VICE PRESIDENT AND
                                                          SECRETARY
</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 25, 1999                                 By: /s/Michael P. Lawlor
                                                          MICHAEL P. LAWLOR
                                                          CHAIRMAN OF THE BOARD OF
                                                          DIRECTORS

Date:  March 25, 1999                                 By: /s/W. Gregory Orr
                                                          W. GREGORY ORR
                                                          DIRECTOR

Date:  March 25, 1999                                 By: /s/William A. Rothrock, IV
                                                          WILLIAM A. ROTHROCK, IV
                                                          DIRECTOR

Date:  March 25, 1999                                 By: /s/James F. McEneaney, Jr.
                                                          JAMES F. MCENEANEY, JR.
                                                          DIRECTOR

Date:  March 25, 1999                                 By: /s/Alfred Tyler 2nd
                                                          ALFRED TYLER 2ND
                                                          DIRECTOR

Date:  March 25, 1999                                 By: /s/Thomas B. Blanton
                                                          THOMAS B. BLANTON
                                                          DIRECTOR

Date:  March 25, 1999                                 By: /s/John N. Hatsopoulos
                                                          JOHN M. HATSOPOULOS
                                                          DIRECTOR

Date:  March 25, 1999                                 By: /s/Roger A. Ramsey
                                                          ROGER A. RAMSEY
                                                          DIRECTOR
</TABLE>

                                       27

<PAGE>
                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                        PAGE
                                        ----
<S>                                     <C>
U S LIQUIDS INC.
     Report of Independent Public
      Accountants....................    F-2
     Consolidated Balance Sheets.....    F-3
     Consolidated Statements of
      Income.........................    F-4
     Consolidated Statements of
      Stockholders' Equity...........    F-5
     Consolidated Statements of Cash
      Flows..........................    F-6
     Notes to Consolidated Financial
      Statements.....................    F-7
U S LIQUIDS INC. PREDECESSOR
     Report of Independent Public
      Accountants....................   F-24
     Balance Sheets..................   F-25
     Statements of Income............   F-26
     Notes to Financial Statements...   F-27
</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, 1997 and 1998,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. 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, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
March 22, 1999

                                      F-2
<PAGE>
                                U S LIQUIDS INC.
                          CONSOLIDATED BALANCE SHEETS
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
                                           DECEMBER 31,
                                       ---------------------
                                         1997        1988
                                       ---------  ----------
<S>                                    <C>        <C>
               ASSETS
CURRENT ASSETS:
     Cash and cash equivalents.......  $   2,203  $    3,285
     Accounts receivable, less
      allowances of $342 and $1,677,
      respectively...................      5,436      29,123
     Inventories.....................        567         672
     Prepaid expenses and other
      current assets.................        621       5,416
                                       ---------  ----------
          Total current assets.......  $   8,827  $   38,496
PROPERTY, PLANT AND EQUIPMENT, net...     39,110      85,958
INTANGIBLE ASSETS, net...............      6,078     125,871
OTHER ASSETS, net....................      1,001       1,840
                                       ---------  ----------
          Total assets...............  $  55,016  $  252,165
                                       =========  ==========

<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                    <C>        <C>
CURRENT LIABILITIES:
     Current maturities of long-term
      obligations....................  $     792  $    4,004
     Accounts payable................      2,154      11,611
     Accrued liabilities.............      3,759      15,445
     Current portion of contract
      reserve........................     --           4,500
                                       ---------  ----------
          Total current
             liabilities.............  $   6,705  $   35,560
LONG-TERM OBLIGATIONS, net of current
  maturities.........................     16,644      64,390
PROCESSING RESERVE...................      7,330       5,747
CLOSURE AND REMEDIATION RESERVES.....      3,275       4,952
CONTRACT RESERVE.....................     --          14,421
DEFERRED INCOME TAXES................        156       2,151
                                       ---------  ----------
          Total liabilities..........  $  34,110  $  127,221
                                       =========  ==========
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,
      7,303,164 and 12,497,946 shares
      issued and outstanding,
      respectively...................  $      73  $      125
     Additional paid-in capital......     17,190     110,404
     Retained earnings...............      3,643      14,415
                                       ---------  ----------
          Total stockholders'
             equity..................  $  20,906  $  124,944
                                       ---------  ----------
          Total liabilities and
             stockholders' equity....  $  55,016  $  252,165
                                       =========  ==========
</TABLE>

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

                                      F-3
<PAGE>
                                U S LIQUIDS INC.
                       CONSOLIDATED STATEMENTS OF INCOME
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                           YEARS ENDED DECEMBER 31,
                                       --------------------------------
                                         1996       1997        1998
                                       ---------  ---------  ----------
<S>                                    <C>        <C>        <C>
REVENUES.............................  $  14,285  $  38,159  $  121,460
OPERATING EXPENSES...................     11,369     21,353      79,027
DEPRECIATION & AMORITIZATION.........        424      2,990       8,146
SELLING, GENERAL AND ADMINISTRATIVE
  EXPENSES...........................      1,437      5,350      12,927
POOLING COSTS........................     --            400      --
                                       ---------  ---------  ----------
INCOME FROM OPERATIONS...............  $   1,055  $   8,066  $   21,360
INTEREST EXPENSE, net................        397      1,734       3,517
OTHER (INCOME) EXPENSE, net..........        (88)        41          38
                                       ---------  ---------  ----------
INCOME BEFORE PROVISION FOR INCOME
  TAXES..............................  $     746  $   6,291  $   17,805
PROVISION FOR INCOME TAXES...........        255      2,416       7,033
                                       ---------  ---------  ----------
NET INCOME...........................  $     491  $   3,875  $   10,772
                                       =========  =========  ==========
Basic Earnings per Common Share......  $    0.23  $    0.65  $     1.04
                                       =========  =========  ==========
Diluted Earnings per Common Share....  $    0.23  $    0.55  $     0.93
                                       =========  =========  ==========
Weighted Average Common Shares
Outstanding..........................      2,117      5,937      10,317
                                       =========  =========  ==========
Weighted Average Common and Common
  Equivalent Shares Outstanding......      2,139      7,078      11,637
                                       =========  =========  ==========
</TABLE>

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

                                      F-4
<PAGE>
                                U S LIQUIDS INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                         PREFERRED STOCK          COMMON STOCK         ADDITIONAL     RETAINED
                                        ------------------    ---------------------      PAID-IN      EARNINGS
                                        SHARES     AMOUNT       SHARES      AMOUNT       CAPITAL      (DEFICIT)
                                        -------    -------    ----------    -------    -----------    ---------
<S>                                     <C>        <C>        <C>           <C>        <C>            <C>
BALANCE, December 31, 1995               10,000    $   10      1,700,000     $  17      $        2     $   (387)
     Net income......................     --         --           --          --           --               491
     Issuance of common stock........     --         --        3,538,875        35             382       --
     Preferred stock dividends.......     --         --           --          --           --                (7)
     Issuance of stock warrants......     --         --           --          --               995       --
                                        -------    -------    ----------    -------    -----------    ---------
BALANCE, December 31, 1996...........    10,000    $   10      5,238,875     $  52      $    1,379     $     97
     Net income......................     --         --           --          --           --             3,875
     Distributions equal to the
       current income taxes of
       limited liability
       corporation...................     --         --           --          --           --              (171)
     Preferred stock dividends.......     --         --           --          --           --               (16)
     Warrants issued in connection
       with initial public
       offering......................     --         --           --          --               551       --
     Common stock issued in initial
       public offering, net of
       offering costs................     --         --        1,725,000        17          13,497       --
     Retirement of preferred stock...   (10,000)      (10 )       --          --           --            --
     Common stock issued in
       acquisitions..................     --         --          283,039         3           1,579         (142)
     45,000 warrants issued in
       connection with consulting
       agreement.....................     --         --           --          --               184       --
     Common stock options
       exercised.....................     --         --           56,250         1         --            --
                                        -------    -------    ----------    -------    -----------    ---------
BALANCE, December 31, 1997...........     --       $ --        7,303,164     $  73      $   17,190     $  3,643
                                        -------    -------    ----------    -------    -----------    ---------
     Net income......................     --         --           --          --           --            10,772
     20,000 warrants issued in
       connection with acquisition...     --         --           --          --               132       --
     Common stock issued in secondary
       public offering, net of
       offering costs................     --         --        3,450,000        35          60,318       --
     Common stock issued in
       acquisitions..................     --         --        1,634,198        16          32,639       --
     Common stock options
       exercised.....................     --         --          110,584         1             125       --
                                        -------    -------    ----------    -------    -----------    ---------
BALANCE, December 31, 1998...........     --       $ --       12,497,946     $ 125      $  110,404     $ 14,415
                                        =======    =======    ==========    =======    ===========    =========
</TABLE>

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

                                      F-5
<PAGE>
                                U S LIQUIDS INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                            YEAR ENDED DECEMBER 31,
                                       ----------------------------------
                                         1996       1997         1998
                                       ---------  ---------  ------------
<S>                                    <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...........................  $     491  $   3,875  $     10,772
Adjustments to reconcile net income
  to net cash provided by operating
  activities:
    Depreciation and amortization....        424      2,990         8,146
    Non-cash compensation recorded
       through issuance of
       warrants......................     --            184       --
    Net gain on sale of property,
       plant, and equipment..........     --            (65)         (147)
    Deferred income tax provision
       (benefit).....................       (121)        64         1,995
Changes in operating assets and
  liabilities, net of amounts
  acquired:
    Accounts receivable, net.........       (105)        68        (8,406)
    Inventories......................         44       (228)        1,017
    Prepaid expenses and other
       current assets................       (635)       479        (3,909)
    Intangible assets................         96        (31)          112
    Other assets.....................       (209)      (479)         (774)
    Accounts payable and accrued
       liabilities...................      1,567       (784)        6,622
    Closure, remediation and
       processing reserves...........        (13)      (503)       (1,406)
                                       ---------  ---------  ------------
         Net cash provided by
            operating activities.....  $   1,539  $   5,570  $     14,022
                                       ---------  ---------  ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Additions to property, plant and
       equipment.....................  $  (1,795) $  (4,829) $    (14,347)
    Proceeds from sale of property,
       plant, and equipment..........     --            206         1,143
    Net cash (paid for) acquired
       through acquisitions..........      5,985     (3,234)     (101,648)
                                       ---------  ---------  ------------
         Net cash provided by (used
            in) investing
            activities...............  $   4,190  $  (7,857) $   (114,352)
                                       ---------  ---------  ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Payments to stockholders and
       related parties...............  $    (139) $    (465) $    --
    Proceeds from issuance of
       long-term obligations.........      1,152     15,593       103,326
    Principal payments on long-term
       obligations...................     (1,650)   (30,111)      (61,893)
    Interest accrued on related-party
       notes payable.................         56     --           --
    Preferred stock dividends paid...     --            (16)      --
    Payments to retire preferred
       stock.........................     --            (10)      --
    Issuance of common stock.........        417     --           --
    Proceeds from initial public
       offering of common stock, net
       of offering costs.............     --         14,065       --
    Proceeds from additional public
       offering of common stock, net
       of offering costs.............     --         --            60,353
    Proceeds from exercise of stock
       options.......................     --              1           126
    Distributions equal to the
       current income taxes of
       limited liability
       corporation...................     --           (171)      --
                                       ---------  ---------  ------------
         Net cash provided by (used
            in) financing
            activities...............  $    (164) $  (1,114) $    101,912
                                       ---------  ---------  ------------
NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS...................  $   5,565  $  (3,401) $      1,082
CASH AND CASH EQUIVALENTS AT
  BEGINNING OF
  PERIOD.............................         39      5,604         2,203
                                       ---------  ---------  ------------
CASH AND CASH EQUIVALENTS AT END OF
  PERIOD.............................  $   5,604  $   2,203  $      3,285
                                       =========  =========  ============
SUPPLEMENTAL DISCLOSURES:
    Cash paid for interest...........  $     339  $   2,169  $      2,266
    Cash paid for income taxes.......          7      2,745         5,310
    Assets acquired under capital
       leases........................     --         --               164
    Liabilities assumed related to
       acquisitions..................     28,725      1,340         9,322
    Common stock, warrants and
       options issued for
       acquisitions..................        995      1,440        32,787
</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.

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 1996 and 1997 represent the operations of
the Company, including the combined revenues and net income of Mesa and AWW for
the pre-acquisition periods in 1996 of $13,459,000 and $479,000, respectively,
and combined revenues and net income in 1997 of $7,291,000 and $539,000,
respectively, as well as all other acquired companies' operations in 1997 and
1998 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. At December 31, 1997, 13 percent of total accounts receivable was
associated with one customer. There were no customers representing balances in
excess of 10 percent of the Company's total accounts receivable at December 31,
1998. Sales to one customer represented 43 percent of total revenues for the
year ended December 31, 1996. 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.

     In 1996 and 1997 the Company's customers were concentrated in the oil and
gas industry in Louisiana and Texas, the collection of liquid waste business in
Louisiana and Texas and the chemical processing and

                                      F-7
<PAGE>
                                U S LIQUIDS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 remain significant. Total sales to customers in Mexico represented
70 percent, 31 percent and 9 percent of total revenues for the years ended
December 31, 1996, 1997, and 1998, respectively. Accounts receivable from
customers in Mexico represented approximately 20 percent and zero percent of
total accounts receivable at December 31, 1997 and 1998, respectively. Sales to
Mexican customers are dollar-denominated and primarily are secured by letters of
credit. See Note 13.

     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>
                                                    BEGINNING
                                       BALANCE AT   BALANCE OF
                                       BEGINNING    PURCHASED    CHARGED TO                  BALANCE AT
                                       OF PERIOD    COMPANIES     EXPENSE     WRITE-OFFS    END OF PERIOD
                                       ----------   ----------   ----------   -----------   -------------
<S>                                    <C>          <C>          <C>          <C>           <C>
Year ended December 31, 1996.........    $   12          246           7         --            $   265
Year ended December 31, 1997.........    $  265           35          86           (44)        $   342
Year ended December 31, 1998.........    $  342        1,609         350          (624)        $ 1,677
</TABLE>

  INVENTORIES

     Inventories are stated at the lower of cost or market and, at December 31,
1997 and 1998, consisted of processed by-products of $435,000 and $378,000,
respectively, and unprocessed by-products of $132,000 and $294,000,
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.

  LONG-LIVED ASSETS

     Long-lived assets consist primarily of the excess of cost over net assets
of acquired businesses (goodwill), permits and deposits. Management continually
evaluates whether events or circumstances have occurred that indicate the
remaining estimated useful life of intangible assets and other long lived
assets, including property, plant and equipment, may warrant revision or that
remaining balances may not be recoverable.

  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 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.

                                      F-8
<PAGE>
                                U S LIQUIDS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  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, 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. At December 31, 1998 facility closure bonds and related
letters of credit totaling $5,217,000 are posted with the states of Louisiana,
Texas, Michigan and Florida.

  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. By-product sales are recognized when the by-product is
shipped to the buyer.

     The Company's revenues consist of the following:

<TABLE>
<CAPTION>
                                           YEARS ENDED DECEMBER 31,
                                       --------------------------------
                                         1996       1997        1998
                                       ---------  ---------  ----------
<S>                                    <C>        <C>        <C>
                                                (IN THOUSANDS)
By-product sales.....................  $  11,378  $  12,480  $   28,232
Collection, processing and disposal
  service revenues...................      2,907     25,679      93,228
                                       ---------  ---------  ----------
     Total...........................  $  14,285  $  38,159  $  121,460
                                       =========  =========  ==========
</TABLE>

  EARNINGS PER SHARE

     Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". Under these provisions, earnings per share amounts are based on the
weighted average number of shares of common stock and common stock

                                      F-9
<PAGE>
                                U S LIQUIDS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equivalents outstanding during the period. The weighted average number of shares
used to compute basic and diluted earnings per share for 1996, 1997, and 1998 is
illustrated below:

<TABLE>
<CAPTION>
                                           1996          1997           1998
                                       ------------  ------------  --------------
<S>                                    <C>           <C>           <C>
                                           (IN THOUSANDS, EXCEPT SHARE DATA)
Numerator:
     For basic and diluted earnings
     per share --
     Income available to common
     stockholders....................  $        491  $      3,875  $       10,772
                                       ============  ============  ==============
Denominator:
     For basic earnings per share --
     Weighted-average shares.........     2,116,909     5,937,435      10,316,739
                                       ============  ============  ==============
Effect of Dilutive Securities:
     Weighted-average stock options
     and warrants....................        21,657     1,140,670       1,320,467
                                       ============  ============  ==============
Denominator:
     For diluted earnings per
     share --
     Weighted-average shares and
       assumed conversions...........     2,138,566     7,078,105      11,637,206
                                       ============  ============  ==============
</TABLE>

     At 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.

  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.

  NEW ACCOUNTING PRONOUNCEMENTS

     In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The SOP provides guidance with respect to accounting for the
various types of costs incurred for computer software developed or obtained for
the Company's use. The Company intends to adopt SOP 98-1 in the first quarter of
1999 and believes that adoption will not have a significant effect on its
consolidated financial statements.

     In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities". At adoption, SOP 98-5 requires the Company to write off
any unamortized start-up costs as a cumulative change in accounting principle
and expense all future start-up costs as they are incurred. The Company intends
to adopt SOP 98-5 in the first quarter of 1999 and believes that adoption will
not have a significant effect on its consolidated financial statements.

     SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued in June 1998 and requires companies to recognize all
derivative instruments as assets or liabilities in the balance sheet and to
measure those instruments at fair value. SFAS No. 133 must be adopted by the
Company no later than January 1, 2000, although earlier application is
permitted. The Company is currently evaluating the potential impact of
implementing SFAS No. 133.

  OTHER

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

                                      F-10
<PAGE>
                                U S LIQUIDS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3.  ACQUISITIONS:

  1996 ACQUISITIONS

     Effective December 14, 1996, U S Liquids Inc. purchased certain assets and
assumed certain liabilities of Campbell Wells by issuing a long-term promissory
note for $27,800,000 and warrants to purchase 1,000,000 shares of U S Liquids
Inc. common stock at an exercise price of $2.00 per share (the "Campbell Wells
Acquisition") to Sanifill. The total purchase price includes a calculation of
the fair value of the warrants at their date of issuance using the Black-Scholes
pricing model with the following assumptions:

<TABLE>
<S>                                     <C>
Expected stock price volatility......     35.55%
Risk free interest rate..............      6.35%
Expected life of warrants............   10 years
</TABLE>

     The Campbell Wells Acquisition was accounted for under the purchase method
of accounting, and the net assets and results of operations since the date of
the Campbell Wells Acquisition are included in the consolidated financial
statements. Costs were allocated to the net assets acquired based on
management's estimate of the fair value of the acquired assets and liabilities
at the date of the Campbell Wells Acquisition. The purchase price has been
allocated as follows (in thousands):

<TABLE>
<S>                                    <C>
Acquired assets --
     Cash and cash equivalents.......  $    6,001
     Accounts receivable.............       3,980
     Prepaid expenses and other
     current assets..................          61
     Property, plant and equipment...      30,693
     Deferred income tax asset.......       1,628
     Other assets....................         271
Assumed liabilities --
     Accounts payable and accrued
     liabilities.....................      (1,966)
     Closure, remediation and cell
     processing reserves.............     (10,245)
     Deferred income tax liability...      (1,628)
                                       ----------
          Total purchase price.......  $   28,795
                                       ==========
</TABLE>

     The following table sets forth unaudited pro forma income statement data to
present the effect of the Campbell Wells Acquisition on the Company's results of
operations for the year ended December 31, 1996. The income statement data for
Campbell Wells may not necessarily be indicative of the results of operations
that would have been realized had Campbell Wells been operated as a stand alone
entity.

     As a wholly owned subsidiary of Sanifill, Campbell Wells maintained a
noninterest bearing intercompany account with Sanifill for recording
intercompany charges for costs and expenses, intercompany purchases of equipment
and additions under capital leases and intercompany transfers of cash, among
other transactions. It is not feasible to ascertain the amount of related
interest expense which would have been recorded in the statements of income had
Campbell Wells been operated as a stand-alone entity. The following unaudited
pro forma income statement data includes the revenues and net income of the
Company, plus the acquired operations of Campbell Wells, as if the Campbell
Wells Acquisition was effective on the first day of the year being reported.
<TABLE>
<CAPTION>
                                           YEAR ENDED
                                        DECEMBER 31, 1996
                                        -----------------
<S>                                     <C>
                                         (IN THOUSANDS)

<CAPTION>
                                           (UNAUDITED)
<S>                                     <C>
Revenues.............................        $31,138
Net income, excluding intercompany
interest expense.....................        $ 2,370
</TABLE>

                                      F-11
<PAGE>
                                U S LIQUIDS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Pro forma adjustments for all periods included in the preceding table
primarily relate to (a) the recording of interest expense on the debt incurred
to effect the Campbell Wells Acquisition, (b) the adjustment to depreciation
expense to reflect the revaluation of property, plant and equipment in
conjunction with the Campbell Wells Acquisition purchase price allocation, (c)
the adjustment of insurance expense to reflect the differences in insurance
expenses recorded by U S Liquids compared to the intercompany insurance expenses
allocated to Campbell Wells from Sanifill, and (d) the related income tax
effects of these adjustments. Pro forma balances do not include the effects of
the Company's initial public offering.

     The pro forma combined results presented above are not necessarily
indicative of actual results which might have occurred had the operations and
management teams of the Company and the acquired operations of Campbell Wells
been combined at the beginning of the period presented.

  1997 AND 1998 ACQUISITIONS

     As discussed in Note 1, in June 1997, the Company acquired the Mesa
companies and AWW through transactions accounted for as poolings-of-interests.
During the fourth quarter of 1997 the Company completed five additional
acquisitions and during 1998 twenty-nine acquisitions were completed. 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 options and shares of
stock for 1997 and $105,260,000 in cash and debt and 1,716,698 options, warrants
and shares of stock for 1998. The consolidated balance sheet as of December 31,
1997 and 1998 includes allocations of the respective purchase prices and the
1998 amounts are subject to final adjustment. The excess of the aggregate
purchase price over the fair value of the net assets acquired was approximately
$6,466,000 and $119,587,000 for 1997 and 1998, respectively.

     In addition, 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 $36,575,000 with the achieved goals providing approximately
$59,928,000 of pre-tax income. The contingent consideration is payable in cash
in the amount of $26,828,000 and in stock in the amount of $9,747,000. In some
instances, the cash portion can be paid in stock at the Company's option.

     The unaudited pro forma information set forth below represents the
revenues, net income and earnings per share of the Company, plus the 1997 and
1998 acquisitions, the Company's initial public offering in August 1997 and
additional public offering in June 1998, as if these transactions were all
effective on January 1, 1997; and includes certain pro forma adjustments,
including the adjustment of amortization expenses to reflect purchase price
allocations, recording of interest expense to reflect debt issued in connection
with the acquisitions, net of a reduction in interest expense on debt repaid in
connection with the Company's initial public offering in August 1997 and
additional public offering in June 1998 and certain

                                      F-12
<PAGE>
                                U S LIQUIDS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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>
                                           YEAR ENDED DECEMBER
                                                   31,
                                          ----------------------
                                             1997        1998
                                          ----------  ----------
<S>                                       <C>         <C>
                                              (IN THOUSANDS)

<CAPTION>
                                               (UNAUDITED)
<S>                                       <C>         <C>
Revenue.................................  $  176,632  $  175,605
Net income..............................      10,420      16,150
Basic earnings per common share.........        0.85        1.30
Diluted earnings per common share.......        0.77        1.18
</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 offering been
consummated at the beginning of the periods presented.

4.  PREPAID EXPENSES AND OTHER CURRENT ASSETS:

     Prepaid expenses and other current assets at December 31, 1997 and 1998,
consist of the following:

<TABLE>
<CAPTION>
                                            1997       1998
                                          ---------  ---------
<S>                                       <C>        <C>
                                             (IN THOUSANDS)
Prepaid insurance.......................  $     152  $   1,347
Current portion of note receivable......         --      1,157
Current deferred income tax asset.......        305     --
Income taxes receivable.................         --        515
Other...................................        164      2,397
                                          ---------  ---------
     Total..............................  $     621  $   5,416
                                          =========  =========
</TABLE>

5.  PROPERTY, PLANT AND EQUIPMENT:

     Property, plant and equipment at December 31, 1997 and 1998, consist of the
following:

<TABLE>
<CAPTION>
                                          DEPRECIABLE
                                             LIFE          1997        1998
                                        ---------------  ---------  ----------
<S>                                     <C>              <C>        <C>
                                            (YEARS)         (IN THOUSANDS)
Land.................................         --         $     739  $    5,786
Landfarm and processing sites........         25            15,289      16,983
Buildings and improvements...........        5-39           17,021      32,395
Machinery and equipment..............        3-15            6,972      25,416
Vehicles.............................         3-5            2,602       8,963
Furniture and fixtures...............         3-5              658       2,919
Construction in progress.............         --            --           3,567
                                                         ---------  ----------
     Total...........................                    $  43,281  $   96,029
Less-Accumulated depreciation........                       (4,171)    (10,071)
                                                         ---------  ----------
     Net property, plant and
     equipment.......................                    $  39,110  $   85,958
                                                         =========  ==========
</TABLE>

                                      F-13
<PAGE>
                                U S LIQUIDS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  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,
                                       -------------------------------
                                         1996       1997       1998
                                       ---------  ---------  ---------
<S>                                    <C>        <C>        <C>
                                               (IN THOUSANDS)
Operating expenses...................  $     421  $   2,820  $   7,210
Selling, general and administrative
  expenses...........................          3        170        936
                                       ---------  ---------  ---------
     Total depreciation and
       amortization expenses.........  $     424  $   2,990  $   8,146
                                       =========  =========  =========
</TABLE>

6.  INTANGIBLE ASSETS:

     Intangible assets at December 31, 1997 and 1998, consist of the following:

<TABLE>
<CAPTION>
                                         1997        1998
                                       ---------  ----------
<S>                                    <C>        <C>
                                          (IN THOUSANDS)
Goodwill.............................  $   5,755  $  126,074
Noncompete agreements................        327         984
Permits..............................         81         624
Other................................     --             188
                                       ---------  ----------
     Total...........................  $   6,163  $  127,870
Less -- Accumulated amortization.....        (85)     (1,999)
                                       ---------  ----------
     Net intangible assets...........  $   6,078  $  125,871
                                       =========  ==========
</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 year 1996, 1997 and 1998 was $11,000, $74,000 and $1,951,000,
respectively.

7.  ACCRUED LIABILITIES:

     Accrued liabilities at December 31, 1997 and 1998, consist of the
following:

<TABLE>
<CAPTION>
                                         1997       1998
                                       ---------  ---------
<S>                                    <C>        <C>
                                          (IN THOUSANDS)
Accrued salaries.....................  $     873  $   3,242
Income and other taxes payable.......        709        342
Current deferred income tax
  liability..........................     --            289
Accrued professional fees and legal
  reserves...........................      1,490      2,335
Accrued acquisition costs............     --          4,986
Other................................        687      4,251
                                       ---------  ---------
     Total accrued liabilities.......  $   3,759  $  15,445
                                       =========  =========
</TABLE>

8.  CONTRACT RESERVE

     The contract reserve at December 31, 1998 consists of the following:

<TABLE>
<CAPTION>
                                           (IN THOUSANDS)
                                           --------------
<S>                                        <C>
Total reserve...........................      $ 18,921
Less -- Current portion.................        (4,500)
                                           --------------
Contract reserve........................      $ 14,421
                                           ==============
</TABLE>

                                      F-14
<PAGE>
                                U S LIQUIDS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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 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 to the Company 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.

9.  INCOME TAXES:

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

<TABLE>
<CAPTION>
                                             YEARS ENDED DECEMBER 31,
                                          -------------------------------
                                            1996       1997       1998
                                          ---------  ---------  ---------
<S>                                       <C>        <C>        <C>
                                                  (IN THOUSANDS)
Current --
     Federal............................  $     327  $   2,253  $   4,272
     State..............................         49         99        286
                                          ---------  ---------  ---------
          Total.........................  $     376  $   2,352  $   4,558
                                          =========  =========  =========
Deferred --
     Federal............................  $    (107) $      62  $   2,192
     State..............................        (14)         2        283
                                          ---------  ---------  ---------
          Total.........................  $    (121) $      64  $   2,475
                                          ---------  ---------  ---------
          Provision for income taxes....  $     255  $   2,416  $   7,033
                                          =========  =========  =========
</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,
                                          -------------------------------
                                            1996       1997       1998
                                          ---------  ---------  ---------
<S>                                       <C>        <C>        <C>
                                                  (IN THOUSANDS)
Tax at statutory rate...................  $     253  $   2,202  $   6,232
Add --
     State taxes, net of federal
       benefit..........................         24         66        370
     Nondeductible expenses.............     --            157        150
     Other..............................        (22)        (9)       281
                                          ---------  ---------  ---------
          Total.........................  $     255  $   2,416  $   7,033
                                          =========  =========  =========
</TABLE>

     For purposes of the consolidated federal income tax return, the Company has
net operating loss carryforwards of $693,000 available to offset taxable income
of the Company in the future. The net

                                      F-15
<PAGE>
                                U S LIQUIDS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. While the Company expects to realize the
deferred tax assets in excess of the valuation allowance, changes in estimates
of future taxable income and tax laws may alter this expectation.

     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,
                                       --------------------
                                         1997       1998
                                       ---------  ---------
<S>                                    <C>        <C>
                                          (IN THOUSANDS)
Deferred income tax assets --
     Reserves........................  $  --      $     509
     Accrued expenses................        434        317
     Net operating losses............         41        266
     Other...........................         74         78
     Less:  Valuation allowance......     --           (229)
                                       ---------  ---------
          Total......................  $     549  $     941
                                       ---------  ---------
Deferred income tax liabilities --
     Property, plant and equipment...  $    (167) $  (1,185)
     Intangibles.....................     --           (939)
     Prepaid expenses................     --           (414)
     Investment in foreign
       corporation...................        (59)    --
     Other...........................       (174)      (843)
                                       ---------  ---------
          Total......................  $    (400) $  (3,381)
                                       ---------  ---------
          Net deferred income tax
             assets (liabilities)....  $     149  $  (2,440)
                                       =========  =========
</TABLE>

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

<TABLE>
<CAPTION>
                                           DECEMBER 31,
                                       --------------------
                                         1997       1998
                                       ---------  ---------
<S>                                    <C>        <C>
                                          (IN THOUSANDS)
Current deferred income tax assets
(liabilities) --
     Gross assets....................  $     521  $     404
     Gross liabilities...............       (216)      (693)
                                       ---------  ---------
          Total, net.................  $     305  $    (289)
Non-current deferred income tax
  assets (liabilities) --
     Gross assets....................        152        766
     Gross liabilities...............       (308)    (2,917)
                                       ---------  ---------
          Total, net.................  $    (156)    (2,151)
                                       ---------  ---------
          Net deferred income tax
             assets (liabilities)....  $     149  $  (2,440)
                                       =========  =========
</TABLE>

                                      F-16
<PAGE>
                                U S LIQUIDS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10.  LONG-TERM OBLIGATIONS:

     The Company's long-term obligations at December 31, 1997 and 1998, consist
of the following:

<TABLE>
<CAPTION>
                                         1997       1998
                                       ---------  ---------
<S>                                    <C>        <C>
                                          (IN THOUSANDS)
Revolving Credit Facility............  $  15,250  $  63,500
Notes payable to individuals,
  interest imputed at 7.5%, payable
  annually, maturing January 1999 to
  June 2000..........................      2,020      1,751
Notes payable to corporations,
  interest ranging from noninterest-
  bearing (imputed at 7.5%) to 11.5%,
  maturing March 1999 to December
  2000, unsecured....................        145      1,220
Obligations under capital leases,
  monthly payments ranging from
  $1,570 to $5,000, interest ranging
  from 5.9% to 10.2%, expiring within
  the next four years, secured by
  equipment and vehicles.............     --            992
Insurance premium notes, interest at
  8%, maturing January 1999 to
  September 1999, unsecured..........     --            884
Other................................         21         47
                                       ---------  ---------
                                          17,436     68,394
Less -- Current maturities of total
long-term obligations................       (792)    (4,004)
                                       ---------  ---------
     Total long-term obligations.....  $  16,644  $  64,390
                                       =========  =========
</TABLE>

     On December 19, 1997, the Company entered into a revolving credit facility
with a bank group in the amount of $50,000,000. In April 1998 the revolving
credit facility was increased to $100,000,000. This facility is secured by
substantially all of the assets of the Company. Availability under this credit
facility is tied to the Company's cash flows and liquidity. The credit facility
is available to fund working capital requirements and acquisitions. The credit
agreement requires the Company to comply with certain financial covenants and
requires the Company to obtain the lenders' consent before making any
acquisitions with a purchase price exceeding $15,000,000, 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 on April 10, 2001. 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 to of 1 percent per annum on the unused portion of the facility. As
of December 31, 1998, the Company had $35,755,00 available under this facility,
including $745,000 in letters of credit outstanding. See Note 16 regarding the
revolving credit facility.

     Effective December 31, 1998 the Company entered into a $10,000,000
equipment credit facility with a domestic bank. No amounts were outstanding
under the equipment credit facility as of December 31, 1998.

                                      F-17
<PAGE>
                                U S LIQUIDS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Principal payments of long-term debt and capital lease obligations in
excess of one year as of December 31, 1998, are as follows:

<TABLE>
<CAPTION>
                                        LONG-TERM     CAPITAL
                                           DEBT        LEASES
                                        ----------    --------
<S>                                     <C>           <C>
                                            (IN THOUSANDS)
Year Ending December 31,
     1999............................    $  3,684      $   406
     2000............................         218          369
     2001............................      63,500          291
     2002............................      --               85
     2003............................      --            --
     Thereafter......................      --            --
                                        ----------    --------
                                         $ 67,402      $ 1,151
     Less -- Amount representing
     interest........................      --             (159)
          Total......................    $ 67,402      $   992
                                        ==========    ========
</TABLE>

     Management estimates that the fair value of its debt obligations
approximates its historical value at December 31, 1998.

11.  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. 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, 1998, there were 125,000 nonqualified
stock options 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,
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 on the date of grant. Stock warrants issued as
compensation for consulting activities were expensed as incurred.

                                      F-18
<PAGE>
                                U S LIQUIDS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                               1996                   1997                    1998
                                       ---------------------  ---------------------  ----------------------
                                        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
     Granted (per share)
          1996 ($.02-$2.00)..........    301,875   1,000,000
          1997 ($.02-$16.00).........                           529,500     215,000
          1998 ($.02-$21.875)........                                                   888,500      20,000
     Exercised (per share)
          1997 ($.02)................                           (56,250)
          1998 ($.02-$14.125)........                                                  (110,583)
     Forfeitures (per share)
          1998 ($.02-$14.125)........                                                   (63,250)
                                       ---------  ----------  ---------  ----------  ----------  ----------
Options and warrants outstanding, end
  of year............................    301,875   1,000,000    775,125   1,215,000   1,489,792   1,235,000
                                       =========  ==========  =========  ==========  ==========  ==========
</TABLE>

     The Company accounts for its employee stock options under the Accounting
Principles Board Opinion No. 25, in which no compensation expense is recognized
for employee stock options if there is no intrinsic value at the date of grant.
Had compensation expense for these employee stock options been determined
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                     1996       1997       1998
                                                                   ---------  ---------  ---------
<S>                         <C>                                    <C>        <C>        <C>
Net income,                 As reported..........................  $     491  $   3,875  $  10,772
                            Pro forma............................        488      1,726      9,007
Basic earnings per share,   As reported..........................  $    0.23  $    0.65  $    1.04
                            Pro forma............................       0.23       0.29       0.87
Diluted earnings per share, As reported..........................  $    0.23  $    0.55  $    0.93
                            Pro forma............................       0.23       0.24       0.77
</TABLE>

     The effects of applying SFAS No. 123 in the disclosure may not be
indicative of future amounts.

     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>
                                           1996           1997              1998
                                        ----------   ---------------   --------------
<S>                                     <C>          <C>               <C>
Expected stock price volatility......       35.55%     37.06%-38.78%    34.91%-41.19%
Risk-free interest rate..............        6.17%       5.79%-6.47%      5.14%-5.99%
Expected life of options.............     10 years          10 years         10 years
Expected dividend yield..............       --             --                --
</TABLE>

     During 1998, 826,000 options were granted to employees which had a weighted
average fair value of $2.14 per option and a weighted average exercise price of
$20.62 per option.

                                      F-19
<PAGE>
                                U S LIQUIDS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes information about stock options outstanding
at December 31, 1998.
<TABLE>
<CAPTION>
                                                                     OPTIONS OUTSTANDING
                                         ----------------------------------------------------------------------------
                                                                                    WTD. AVG.
                                                                 NUMBER             REMAINING
                                            RANGE OF         OUTSTANDING AT      CONTRACTUAL LIFE        WTD. AVG.
                                         EXERCISE PRICES        12/31/98             (YEARS)          EXERCISE PRICE
                                         ---------------     ---------------     ----------------     ---------------
<S>                                      <C>                 <C>                 <C>                  <C>
                                          $          .02          253,125           8.6                   $   .02
                                              9.50-15.38          455,667           8.7                     10.20
                                            16.00-21.875          781,000           9.5                     21.00
                                         ---------------     ---------------        ---               ---------------
                                          $   .02-21.875        1,489,792           9.1                   $ 14.13
                                         ===============     ===============        ===               ===============

<CAPTION>

                                               OPTIONS EXERCISABLE
                                       -----------------------------------
                                           NUMBER
                                       EXERCISABLE AT         WTD. AVG.
                                          12/31/98         EXERCISE PRICE
                                       ---------------     ---------------
<S>                                      <C>               <C>
                                           127,500             $   .02
                                           153,174               10.13
                                            20,000               17.31
                                       ---------------     ---------------
                                           300,674             $  6.32
                                       ===============     ===============
</TABLE>

12.  EMPLOYEE BENEFITS:

     The Company sponsors a 401(k) and profit sharing plan under which all
eligible 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 recognized $303,000 in compensation expense related to
this plan for the year ended December 31, 1998.

13.  RELATED PARTY TRANSACTION:

     On December 31, 1998, the Company sold to a company owned by a director of
the Company substantially all of the assets used in the distribution of various
grades of fats, oils and feed proteins. These by-products had previously been
sold by the Company primarily to producers of livestock feed and various
chemicals located in Mexico. The purchase price for these assets was
approximately $1,700,000, of which approximately $1,100,000 is payable to the
Company in March 1999 and is included in prepaid expenses and other current
assets at December 31, 1998. The remainder of the purchase price is payable in
monthly installments continuing through February 1, 2004 and is included in
other assets at December 31, 1998. In connection with this sale, the Company
also agreed, for a period of one year, to sell to the director's company all
fats, oils and feed proteins that the Company recovers from certain waste
streams and that conform to certain specifications. The director's company may
extend this supply agreement for four additional one-year terms.

14.  COMMITMENTS AND CONTINGENCIES:

  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 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 a remaining period of 33
months. In the new agreement, Newpark agreed to pay the Company at least
$30,000,000. Newpark paid $6,000,000 under the terms of this agreement in 1998
and the Company recorded revenues as funds were received. The remaining amounts
are required to be paid 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 the
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

                                      F-20
<PAGE>
                                U S LIQUIDS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

new agreement for two additional one-year terms at an additional cost to Newpark
of approximately $8,000,000 per year.

     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 $171,000, $736,000 and $4,243,000 for the years ended
December 31, 1996, 1997 and 1998, respectively. The following table presents
future minimum rental payments under noncancelable operating leases:

<TABLE>
<CAPTION>
                                        OPERATING LEASES
                                        -----------------
<S>                                     <C>
                                         (IN THOUSANDS)
Year ending December 31 --
     1999............................        $ 2,315
     2000............................          1,801
     2001............................          1,286
     2002............................            895
     2003............................            767
     Thereafter......................          7,110
                                        -----------------
          Total......................        $14,174
                                        =================
</TABLE>

  LEGAL PROCEEDINGS

     Prior to the closing of the Campbell Wells Acquisition, three lawsuits were
brought against Campbell Wells based upon the operation of its Bourg, Louisiana
landfarm. In July 1997 an additional lawsuit was filed in connection with the
operation of the Bourg, Louisiana landfarm. On August 7, 1998, the Company
settled substantially all of the claims asserted against it in the four lawsuits
relating to the 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. Management believes the cost of these actions will not
be material to the Company's operating results.

     This settlement does not resolve certain claims asserted against the
Company by Acadian Shipyard, Inc. (Acadian), 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
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 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.

     Prior to the closing of the Campbell Wells Acquisition, a class action
lawsuit was filed in the Civil District Court for the Parrish of Orleans,
Louisiana against Campbell Wells seeking unspecified monetary

                                      F-21
<PAGE>
                                U S LIQUIDS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
damages allegedly suffered as a result of alleged air, water and soil
contamination in connection with ongoing operations at its Mermentau, Louisiana
landfarm. The Company has not been named as a defendant in this lawsuit;
however, there can be no assurance that the Company will not subsequently be
named as a defendant in this lawsuit.

     In connection with the Campbell Wells Acquisition, Sanifill and its
subsequent acquiror Waste Management, Inc. (WMI) agreed, with certain enumerated
exceptions, to retain responsibility for all liabilities of Campbell Wells as of
the closing date of the Campbell Wells Acquisition including, without
limitation, the contingent liabilities associated with such lawsuits. The
obligation of Sanifill and WMI to indemnify the Company is limited to
$10,000,000.

     In 1998, the Company settled a lawsuit originally filed by Judy Garcia,
et.al. in 1997 against Re-Claim Environmental in the 51stJudicial Court of
Harris County, Texas. The settlement did not have a material effect on the
Company's operating results.

     Prior to its acquisition by the Company in May 1998, Waste Stream
Environmental, Inc. (Waste Stream) had signed a document which purported to be a
letter of intent with Pocono Grow Fertilizer Corporation (Pocono Grow) relating
to the development of a waste treatment and recycling facility in eastern
Pennsylvania. After the Waste Stream acquisition was completed, the Company
notified Pocono Grow that it did not intend to pursue the project. Pocono Grow
asserted that the document was a binding agreement and that Waste Stream was in
breach of the agreement. On July 14, 1998 Waste Stream filed a suit for
declaratory judgement in Federal District Court in New York asking the court to
determine whether the document was binding or non-binding. On August 14, 1998,
Pocono Grow filed a counterclaim against Waste Stream and a third party
complaint against the Company alleging breach of contract and claiming damages
in excess of $10,000,000. Waste Stream and the Company intend to vigorously
defend the counterclaim and third party complaint and pursue the declaratory
judgement action. The Company believes that the ultimate disposition of this
claim will not be material to its consolidated financial position or results of
operations.

     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.

15.  SEGMENT INFORMATION:

     The Company operates with two business segments -- Oilfield Waste and
Wastewater.

     The Oilfield Waste segment treats and disposes of waste that is generated
in the exploration for and production of oil and natural gas. In addition, the
Oilfield Waste segment cleans tanks, barges and other vessels used in the
storage and transportation of oilfield waste.

     The Wastewater segment receives fees to collect, process and dispose of
liquid waste such as industrial wastewater, grease and grit trap waste, bulk
liquids and dated beverages, and certain hazardous wastes. In addition, the
Wastewater segment generates revenues from the sale of by-products recovered
from waste streams (including fats, oils, feed proteins, industrial and fuel
grade ethanol, solvents, aluminum, glass, plastic and cardboard).

     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.

                                      F-22
<PAGE>
                                U S LIQUIDS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following is a summary of key business segment information:

<TABLE>
<CAPTION>
                                            1996       1997        1998
                                          ---------  ---------  ----------
<S>                                       <C>        <C>        <C>
                                                   (IN THOUSANDS)
Revenue --
     Oilfield Waste.....................  $     826  $  19,948  $   17,402
     Wastewater.........................     13,459     18,211     104,058
                                          ---------  ---------  ----------
          Total.........................  $  14,285  $  38,159  $  121,460
                                          =========  =========  ==========
Income from operations --
     Oilfield Waste.....................  $     126  $   6,685  $    8,062
     Wastewater.........................        929      1,381      13,298
                                          ---------  ---------  ----------
          Total.........................  $   1,055  $   8,066  $   21,360
                                          =========  =========  ==========
Identifiable assets --
     Oilfield Waste.....................  $  41,152  $  34,071  $   33,513
     Wastewater.........................      5,699     17,870     211,702
     Corporate..........................     --          3,075       6,950
                                          ---------  ---------  ----------
          Total.........................  $  46,851  $  55,016  $  252,165
                                          =========  =========  ==========
Depreciation and amortization expense --
     Oilfield Waste.....................  $      78  $   2,266  $    2,384
     Wastewater.........................        346        645       5,496
     Corporate..........................     --             79         266
                                          ---------  ---------  ----------
          Total.........................  $     424  $   2,990  $    8,146
                                          =========  =========  ==========
Capital expenditures --
     Oilfield Waste.....................  $  --      $   2,042  $    1,192
     Wastewater.........................      1,795      2,278      11,808
     Corporate..........................     --            509       1,347
                                          ---------  ---------  ----------
          Total.........................  $   1,795  $   4,829  $   14,347
                                          =========  =========  ==========
</TABLE>

16.  SUBSEQUENT EVENTS (UNAUDITED):

  ACQUISITIONS

     Subsequent to December 31, 1998, the Company acquired six businesses
engaged in the collection, treatment and disposal of liquid wastes for
approximately $35,416,000 in cash and debt and 431,588 shares of the Company's
common stock using the purchase method of accounting.

  REVOLVING CREDIT FACILITY

     In February 1999, the Company increased the size of the revolving credit
facility from $100,000,000 to $225,000,000 with an expanded bank group. The
terms and conditions remained substantially the same with an extended maturity
date of February 2002.

  PUBLIC OFFERING

     In March 1999, the Company completed a public offering of 3,000,000 shares
of its common stock at $21 per share, in which the Company sold 2,875,000
shares. The proceeds to the Company of $56,756,000, which are net of
underwriting fees and offering costs, will be applied against the outstanding
balance of the revolving credit facility.

                                      F-23

<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To U S Liquids Inc.:

     We have audited the accompanying balance sheets of the U S Liquids Inc.
Predecessor, which represents certain assets acquired and liabilities assumed by
U S Liquids Inc. from Campbell Wells, L.P. and Campbell Wells NORM, L.P.
(collectively "Campbell Wells") which were wholly-owned subsidiaries of
Sanifill, Inc., as of December 31, 1995 and December 13, 1996, and the related
statements of income for the years ended December 31, 1994 and 1995 and for the
period ended December 13, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

     As discussed in Note 2, the accompanying financial statements have been
prepared pursuant to the purchase agreement effective December 14, 1996, between
Sanifill, Inc. and U S Liquids Inc. and were prepared for the purpose of
complying with Rule 3-05 of Regulation S-X of the Securities and Exchange
Commission and are not intended to be a complete presentation of Campbell Wells'
assets, liabilities, operating results or cash flows on a stand-alone basis.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the balance sheet of the U S Liquids Inc. Predecessor
as of December 31, 1995 and December 13, 1996, and the results of its operations
for the years ended December 31, 1994 and 1995 and for the period ended December
13, 1996, pursuant to the purchase agreement referred to in Note 2 and in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
June 26, 1997
(March 22, 1999
with respect to note 8)

                                      F-24
<PAGE>
                          U S LIQUIDS INC. PREDECESSOR
                                 BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                        DECEMBER 31,    DECEMBER 13,
                                            1995            1996
                                        ------------    ------------
<S>                                     <C>             <C>
               ASSETS
CURRENT ASSETS:
     Cash and cash equivalents.......     $    286        $  6,001
     Accounts receivable, less
      allowance of $200 and $172.....        6,393           4,053
     Prepaid expenses and other
     current assets..................          324              61
                                        ------------    ------------
          Total current assets.......     $  7,003        $ 10,115
PROPERTY, PLANT AND EQUIPMENT, net...       53,295          49,553
OTHER ASSETS.........................          243             232
                                        ------------    ------------
          Total assets...............     $ 60,541        $ 59,900
                                        ============    ============
  LIABILITIES AND NET INTERCOMPANY
               BALANCE
CURRENT LIABILITIES:
     Accounts payable................     $  2,875        $  1,621
     Accrued liabilities.............          115             336
                                        ------------    ------------
          Total current
        liabilities..................     $  2,990        $  1,957
CELL PROCESSING RESERVE..............        7,803           7,745
CLOSURE AND REMEDIATION RESERVES.....        2,619           1,969
DEFERRED INCOME TAXES................       12,571          14,554
                                        ------------    ------------
          Total liabilities..........     $ 25,983        $ 26,225
COMMITMENTS AND CONTINGENCIES
NET INTERCOMPANY BALANCE.............       34,558          33,675
                                        ------------    ------------
          Total liabilities and net
             intercompany balance....     $ 60,541        $ 59,900
                                        ============    ============
</TABLE>

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

                                      F-25
<PAGE>
                          U S LIQUIDS INC. PREDECESSOR
                              STATEMENTS OF INCOME
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                            YEAR ENDED
                                           DECEMBER 31,       PERIOD ENDED
                                       --------------------   DECEMBER 13,
                                         1994       1995          1996
                                       ---------  ---------   -------------
<S>                                    <C>        <C>         <C>
REVENUES.............................  $  14,847  $  15,119      $16,853
COST OF OPERATIONS...................      7,478      8,635        9,136
                                       ---------  ---------   -------------
     Gross profit....................  $   7,369  $   6,484      $ 7,717
SELLING, GENERAL AND ADMINISTRATIVE
  EXPENSES...........................      2,626      2,989        2,524
                                       ---------  ---------   -------------
     Income from operations..........  $   4,743  $   3,495      $ 5,193
INTEREST EXPENSE, excluding
  intercompany interest expense......        105        246          353
OTHER INCOME, net....................       (176)       (51)         (97)
                                       ---------  ---------   -------------
INCOME BEFORE PROVISION FOR INCOME
  TAXES..............................  $   4,814  $   3,300      $ 4,937
PROVISION FOR INCOME TAXES...........      1,945      1,400        2,044
                                       ---------  ---------   -------------
NET INCOME...........................  $   2,869  $   1,900      $ 2,893
                                       =========  =========   =============
</TABLE>

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

                                      F-26
<PAGE>
                          U S LIQUIDS INC. PREDECESSOR
                         NOTES TO FINANCIAL STATEMENTS

1.  THE ACQUISITION:

     Effective December 13, 1996, U S Liquids Inc. ("U S Liquids") purchased
certain assets and assumed certain liabilities of Campbell Wells, L.P. and
Campbell Wells NORM L.P. ("Campbell Wells" the "U S Liquids Inc.
Predecessor," or the "Company"), which were wholly-owned subsidiaries of
Sanifill, Inc. ("Sanifill"), by issuing a long-term promissory note for $27.8
million and warrants to purchase 1,000,000 shares of U S Liquids common stock at
an exercise price of $2.00 per share (the "Campbell Wells Acquisition").
Assets not purchased and excluded from the accompanying predecessor financial
statements for all periods presented include transfer stations and other related
assets of Campbell Wells previously sold by Sanifill to Newpark Resources, Inc.
(the "Newpark Transaction").

     The Company treats and disposes oilfield waste generated in the exploration
for and production of oil and natural gas. The Company has treatment facilities
located in Louisiana and Texas that service the Gulf Coast region of the United
States. The Company also treats oilfield naturally occurring radioactive
material at its treatment facility at Lacassine, Louisiana.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  BASIS OF PRESENTATION

     These financial statements have been prepared to present the financial
position and results of operations of Campbell Wells related to the assets
acquired and liabilities assumed by U S Liquids Inc. under the terms of the
Campbell Wells Acquisition described in Note 1 and in conformity with generally
accepted accounting principles.

     The balance sheets and statements of income may not necessarily be
indicative of the financial position or results of operations that would have
been realized had Campbell Wells been operated as a stand-alone entity. The
statements of income include the amounts allocated by Sanifill to Campbell Wells
for selling, general and administrative expenses based on a percentage of
revenues and direct payroll based costs. Management believes this allocation is
reasonable.

     As a wholly-owned subsidiary of Sanifill, Campbell Wells maintained a
noninterest-bearing intercompany account with Sanifill for recording
intercompany charges for costs and expenses, intercompany purchases of equipment
and additions under capital leases, and intercompany transfers of cash, among
other transactions. It is not feasible to ascertain the amount of related
interest expense which would have been recorded in the accompanying statements
of income had Campbell Wells been operated as a stand-alone entity. Sanifill did
not maintain debt balances specifically related to the operations of Campbell
Wells nor did Sanifill allocate any interest charges to Campbell Wells relating
to Sanifill's corporate debt. The interest expense reflected in the accompanying
statements of income represents the interest portion of capital lease payments
which were paid by Sanifill and directly charged to Campbell Wells.

     Due to the manner in which Sanifill intercompany transactions were recorded
and also due to carve out matters relating to intercompany transactions
associated with the portion of Campbell Wells which was sold by Sanifill to
Newpark, it is not feasible to present a detailed analysis of transactions
reflected in the intercompany balance with Sanifill. The change in the
intercompany balance with Sanifill (net of income) was ($409,000), $462,000, and
$3,776,000 for the years ended December 31, 1994, 1995 and for the period ended
December 13, 1996, respectively.

                                      F-27
<PAGE>
                          U S LIQUIDS INC. PREDECESSOR
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     It is also not feasible to present complete statements of cash flows,
including unaudited interim cash flow data, due to the nature and manner of
recording of intercompany transactions; however, the following information
presents certain cash flow data related to the operations of Campbell Wells:

                             CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                            YEAR ENDED
                                           DECEMBER 31,       PERIOD ENDED
                                       --------------------   DECEMBER 13,
                                         1994       1995          1996
                                       ---------  ---------   -------------
<S>                                    <C>        <C>         <C>
                                                  (IN THOUSANDS)
Cash flows from operating activities
  Net income.........................  $   2,869  $   1,900      $ 2,893
  Adjustments to reconcile net income
   to net cash provided by operating
   activities
     Depreciation....................      2,860      3,025        2,594
     Deferred income tax provision
     (benefit).......................      1,234       (413)       1,983
     Changes in operating assets and
     liabilities
       Accounts receivable...........     (3,118)       706        2,340
       Prepaid expenses and other
       current assets................         (8)      (130)         263
       Other assets..................        (41)        58           11
       Accounts payable and accrued
       liabilities...................       (228)     1,812       (1,033)
       Closure, remediation and cell
       processing reserves...........        340       (148)        (708)
                                       ---------  ---------   -------------
Net cash provided by operating
activities...........................  $   3,908  $   6,810      $ 8,343
                                       =========  =========   =============
</TABLE>

  USE OF ESTIMATES

     The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets acquired
and liabilities assumed, the disclosure of contingent assets acquired and
liabilities assumed 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.

  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. At December 31, 1995, two customers accounted for 17 percent and 11
percent, respectively, of the total accounts receivable balance. At December 13,
1996, 19 percent and 50 percent of the total accounts receivable are associated
with two customers, respectively.

     In 1994, one customer accounted for 19 percent of total revenues. During
1995, two customers accounted for 33 percent and 22 percent, respectively, of
total revenues. During 1996, two customers accounted for 41 percent and 31
percent, respectively, of total revenues.

     The Company's customers are concentrated in the oil and gas industry in
Louisiana and Texas.

  PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment is 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

                                      F-28
<PAGE>
                          U S LIQUIDS INC. PREDECESSOR
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

property disposals are included in other income or expense. Depreciation is
computed using the straight-line method.

  CLOSURE AND REMEDIATION RESERVES

     The closure and remediation reserves represent accruals for the total
estimated future costs associated with the ultimate closure of the Company's
landfarm facilities, including costs of decommissioning and statutory monitoring
costs required during the closure and subsequent postclosure periods. Management
periodically reviews the level of these reserves and adjusts them to reflect its
current estimate of the total costs necessary to complete the closure and
remediation of its landfarm facilities. In conjunction with U S Liquids'
acquisition of certain assets and assumption of certain liabilities of Campbell
Wells, Sanifill has agreed to maintain landfarm facility closure bonds and
related letters of credit totalling $4 million posted with the states of
Louisiana and Texas through December 31, 1997, at which time U S Liquids will
replace these closure bonds and letters of credit with similar instruments.

  REVENUE RECOGNITION AND CELL PROCESSING RESERVE

     When waste is unloaded at a given site, Campbell Wells recognizes the
related revenue and records a reserve for the estimated amount of expenses to be
incurred with the treatment of the oil field waste in order to match revenues
with their related costs. The related treatment costs are charged against the
reserve as such costs are incurred.

  INCOME TAXES

     The operations of Campbell Wells were included in the consolidated U.S.
federal income tax return of Sanifill, Inc., and no allocations of income taxes
were reflected in the historical statements of operations. For purposes of these
predecessor financial statements, current and deferred income taxes have been
provided on a separate return basis.

  NEW ACCOUNTING STANDARD

     Effective January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Under these provisions, the Company reviews certain long-lived assets for
impairment whenever events indicate that the carrying amount of an asset may not
be recoverable and recognizes an impairment loss under certain circumstances in
the amount by which the carrying value exceeds the fair value of the asset. In
making this assessment, the Company considered the estimated future undiscounted
cash flows of the Company's long-lived assets on the basis of continuing
operations, versus the current market value of such assets on a held for sale
basis. The adoption of SFAS No. 121 had no impact on the Company's financial
position or results of operations.

3.  PREPAID EXPENSES AND OTHER CURRENT ASSETS:

     Prepaid expenses and other current assets at December 31, 1995, and
December 13, 1996, consist of the following:

<TABLE>
<CAPTION>
                                         1995       1996
                                       ---------  ---------
<S>                                    <C>        <C>
                                          (IN THOUSANDS)
Closure bond.........................  $     211  $      --
Prepaid expenses.....................         33         43
Notes receivable, current portion....         33         16
Other................................         47          2
     Total...........................  $     324  $      61
                                       =========  =========
</TABLE>

                                      F-29
<PAGE>
                          U S LIQUIDS INC. PREDECESSOR
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4.  PROPERTY, PLANT AND EQUIPMENT:

     Property, plant and equipment at December 31, 1995, and December 13, 1996,
consist of the following:

<TABLE>
<CAPTION>
                                           DEPRECIABLE LIFE      1995        1996
                                           ----------------   ----------  ----------
<S>                                        <C>                <C>         <C>
                                               (YEARS)            (IN THOUSANDS)
Landfarm and treatment facilities.......       25             $   56,732  $   56,573
Buildings and improvements..............      10-12                  532         659
Machinery and equipment.................       3-5                 7,494       6,445
Vehicles................................       3-5                   826         755
Furniture and fixtures..................                             355         359
                                                              ----------  ----------
     Total..............................                      $   65,939  $   64,791
Less accumulated depreciation...........                         (12,644)    (15,238)
                                                              ----------  ----------
     Total..............................                      $   53,295  $   49,553
                                                              ==========  ==========
</TABLE>

     Included in property, plant and equipment at December 31, 1995, and
December 13, 1996 are approximately $3,133,000 and $3,133,000, respectively, of
assets held under capital leases.

5.  OTHER ASSETS:

     Other assets at December 31, 1995, and December 13, 1996, consist of the
following:

<TABLE>
<CAPTION>
                                            1995       1996
                                          ---------  ---------
<S>                                       <C>        <C>
                                             (IN THOUSANDS)
Note receivable.........................  $     196  $     196
Other...................................         47         36
                                          ---------  ---------
     Total..............................  $     243  $     232
                                          =========  =========
</TABLE>

6.  ACCRUED LIABILITIES:

     Accrued liabilities at December 31, 1995, and December 13, 1996, consist of
the following:

<TABLE>
<CAPTION>
                                            1995       1996
                                          ---------  ---------
<S>                                       <C>        <C>
                                             (IN THOUSANDS)
Engineering and testing fees............  $      13  $     140
Repairs and maintenance.................     --             96
Accrued salaries and benefits...........         21         55
Escrow deposits.........................         34     --
Accrued commissions.....................         33     --
Other...................................         14         45
                                          ---------  ---------
     Total..............................  $     115  $     336
                                          =========  =========
</TABLE>

                                      F-30
<PAGE>
                          U S LIQUIDS INC. PREDECESSOR
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

7.  INCOME TAXES

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

<TABLE>
<CAPTION>
                                                              PERIOD ENDED
                                                              DECEMBER 13,
                                         1994       1995          1996
                                       ---------  ---------   -------------
<S>                                    <C>        <C>         <C>
                                                  (IN THOUSANDS)
Current
     Federal.........................  $   2,750  $   1,622      $    40
     State...........................     (2,039)       191           21
                                       ---------  ---------   -------------
          Total......................  $     711  $   1,813      $    61
                                       ---------  ---------   -------------
Deferred
     Federal.........................  $  (1,211) $    (511)     $ 1,580
     State...........................      2,445         98          403
                                       ---------  ---------   -------------
          Total......................  $   1,234  $    (413)     $ 1,983
                                       ---------  ---------   -------------
                                       $   1,945  $   1,400      $ 2,044
                                       =========  =========   =============
</TABLE>

     The difference in income taxes provided (benefited) and the amounts
determined by applying the federal statutory tax rate to income (loss) before
provision (benefit) for income taxes result from the following:

<TABLE>
<CAPTION>
                                            YEAR ENDED
                                           DECEMBER 31,       PERIOD ENDED
                                       --------------------   DECEMBER 31,
                                         1994       1995          1996
                                       ---------  ---------   -------------
<S>                                    <C>        <C>         <C>
                                                  (IN THOUSANDS)
Tax at statutory rate................  $   1,585  $   1,104      $ 1,676
Add (deduct)
     State income taxes, net of
     federal benefit.................        269        191          280
     Nondeductible expenses..........         91        105           88
                                       ---------  ---------   -------------
          Total......................  $   1,945  $   1,400      $ 2,044
                                       =========  =========   =============
</TABLE>

     The tax effects of significant temporary differences representing deferred
income tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                        DECEMBER 31,    DECEMBER 31,
                                            1995            1996
                                        ------------    ------------
<S>                                     <C>             <C>
                                               (IN THOUSANDS)
Deferred income tax liabilities
     Property and equipment..........     $ (4,511)       $ (4,767)
     Landfarm treatment facility.....      (14,287)        (14,286)
     Other...........................       (1,729)         (2,924)
                                        ------------    ------------
          Total......................     $(20,527)       $(21,977)
                                        ------------    ------------
Deferred income tax assets
     Closure accrual.................     $  2,015        $  1,967
     Depletion.......................        2,338           2,344
     Processing reserve..............        3,373           3,373
     Other...........................          230            (261)
                                        ------------    ------------
          Total......................     $  7,956        $  7,423
                                        ------------    ------------
          Net deferred income tax
          liabilities................     $ 12,571        $ 14,554
                                        ============    ============
</TABLE>

                                      F-31
<PAGE>
                          U S LIQUIDS INC. PREDECESSOR
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

8.  COMMITMENTS AND CONTINGENCIES:

  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 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 a remaining period of 33
months. In the new agreement, Newpark agreed to pay the Company at least
$30,000,000. Newpark paid $6,000,000 under the terms of this agreement in 1998
and the Company recorded revenues as funds were received. The remaining amounts
are required to be paid 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 the
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.

     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 under noncancelable leases. Rent
expense was approximately $214,000, $202,000 and $214,000 for the years ended
December 31, 1994 and 1995, and for the period ended December 13, 1996,
respectively.

  LEGAL PROCEEDINGS

     Prior to the closing of the Campbell Wells Acquisition, three lawsuits were
brought against Campbell Wells based upon the operation of its Bourg, Louisiana
landfarm. In July 1997 an additional lawsuit was filed in connection with the
operation of the Bourg, Louisiana landfarm. On August 7, 1998, the Company
settled substantially all of the claims asserted against it in the four lawsuits
relating to the 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 were not material to the
Company's operating results.

     This settlement does not resolve certain claims asserted against the
Company by Acadian Shipyard, Inc. (Acadian), 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
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 any liability to Acadian and
intends to vigorously defend against these claims. Management does not believe
that this

                                      F-32
<PAGE>
                          U S LIQUIDS INC. PREDECESSOR
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

action will have a material adverse effect on the Company's business, results of
operations or financial condition.

     Prior to the closing of the Campbell Wells Acquisition, a class action
lawsuit was filed in the Civil District Court for the Parrish of Orleans,
Louisiana against Campbell Wells seeking unspecified monetary damages allegedly
suffered as a result of alleged air, water and soil contamination in connection
with ongoing operations at its Mermentau, Louisiana landfarm. The Company has
not been named as a defendant in this lawsuit; however, there can be no
assurance that the Company will not subsequently be named as a defendant in this
lawsuit.

     In connection with the Campbell Wells Acquisition, Sanifill and its
subsequent acquiror Waste Management, Inc. (WMI) agreed, with certain enumerated
exceptions, to retain responsibility for all liabilities of Campbell Wells as of
the closing date of the Campbell Wells Acquisition including, without
limitation, the contingent liabilities associated with such lawsuits. The
obligation of Sanifill and WMI to indemnify the Company is limited to
$10,000,000.

                                      F-33