##### 



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K/A
AMENDMENT NO. 1

| |  |   |  |                                                                                        
| |  | - |  | ---------------------------------------------------------------------------------------
| |  | x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934   
| |  |   |  |                                                                                        
| |  |   |  | For the fiscal year ended December 31, 2002                                            
| |  |   |  |                                                                                        
| |  |   |  | OR                                                                                     
| |  |   |  |                                                                                        
| |  | o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934



For the transition period from to

Commission file number: 001-13259

U S LIQUIDS INC.

(Exact name of Registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 76-0519797                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)

411 N. Sam Houston Parkway East, Suite 400, Houston, Texas 77060-3545
(Address of principal executive offices)

(281) 272-4500
(Registrants telephone number including area code)

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

|                              |  |                             
|----------------------------- |  | ----------------------------
|Title of Securities           |  | Exchange on which Registered
|                              |  |                             
|Common Stock, par value $0.01 |  | American Stock Exchange     

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

None


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

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

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

As of June 28, 2002, the last day of the registrants most recently
completed second fiscal quarter, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the registrant was
approximately $44,986,000. For purposes of calculating this amount only, all
the directors and executive officers of the registrant as of June 28, 2002 were
treated as affiliates.

The number of shares of common stock, $0.01 par value, of the registrant
outstanding at March 10, 2003 was 16,233,149.

DOCUMENTS INCORPORATED BY REFERENCE

None





---



##### 

TABLE OF CONTENTS



|                                             |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                      
|                                             | Item 1. Business                                                                             
|                                             | Item 2. Properties                                                                           
|                                             | Item 3. Legal Proceedings                                                                    
|                                             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                     
|                                             | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                             | Item 6. Selected Financial Data                                                              
|                                             | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                             | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                             | Item 8. Financial Statements and Supplementary Data                                          
|                                             | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 
|PART III                                    
|                                             | Item 10. Directors and Executive Officers of the Registrant                                  
|                                             | Item 11. Executive Compensation                                                              
|                                             | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                             | Item 13. Certain Relationships and Related Transactions                                      
|                                             | Item 14. Controls and Procedures                                                             
|PART IV                                     
|                                             | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|Consent of Deloitte & Touche LLP            
|Certification of CEO Pursuant to Section 906
|Certification of CFO Pursuant to Section 906

TABLE OF CONTENTS

U S Liquids Inc. (the Company) is filing this Annual Report on Form 10-K/A to
correct the consolidated financial statements as presented in Note 23.

| |          |          |                                                                                       |  |  |    |  |  | 
| | -------- | -------- | ------------------------------------------------------------------------------------- |  |  | -- |  |  | 
| |          | PART I   |                                                                                       |  |  |   
| | Item 1.  |          | Business                                                                              |  |  | 1  | 
| | Item 2.  |          | Properties                                                                            |  |  | 9  | 
| | Item 3.  |          | Legal Proceedings                                                                     |  |  | 11 | 
| | Item 4.  |          | Submission of Matters to a Vote of Security Holders                                   |  |  | 14 | 
| |          |          |                                                                                       |  |  |    |  | 
| |          | PART II  |                                                                                       |  |  |   
| | Item 5.  |          | Market for Registrant's Common Equity and Related Stockholder Matters                 |  |  | 15 | 
| | Item 6.  |          | Selected Financial Data                                                               |  |  | 15 | 
| | Item 7.  |          | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |  | 17 | 
| | Item 7A. |          | Quantitative and Qualitative Disclosures About Market Risk                            |  |  | 28 | 
| | Item 8.  |          | Financial Statements and Supplementary Data                                           |  |  | 29 | 
| | Item 9.  |          | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure  |  |  | 29 | 
| |          |          |                                                                                       |  |  |    |  | 
| |          | PART III |                                                                                       |  |  |   
| | Item 10. |          | Directors and Executive Officers of the Registrant                                    |  |  | 29 | 
| | Item 11. |          | Executive Compensation                                                                |  |  | 31 | 
| | Item 12. |          | Security Ownership of Certain Beneficial Owners and Management                        |  |  | 35 | 
| | Item 13. |          | Certain Relationships and Related Transactions                                        |  |  | 36 | 
| | Item 14. |          | Controls and Procedures                                                               |  |  | 36 | 
| |          |          |                                                                                       |  |  |    |  | 
| |          | PART IV  |                                                                                       |  |  |   
| | Item 15. |          | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  |  | 37 | 

This document contains forward-looking statements that are subject to
certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Key factors that could cause actual results to differ materially
from expectations include, but are not limited to: (1) our inability to extend
our credit facility or obtain alternative financing; (2) uncertainties caused
by our failure to comply with the terms of our credit facility; (3) the impact
that our financial condition may have on our customers, suppliers and
employees; (4) our general lack of liquidity; (5) the outcome of litigation and
administrative proceedings pending against us; (6) obtaining or maintaining of
governmental permits and approvals required for the operation of our
facilities; (7) changes in the laws and regulations governing our operations;
(8) the failure to comply with laws and regulations governing our operations;
and (9) the insufficiency of our insurance coverage or the impact of the
insolvency of Reliance Insurance Company.





---



##### 






PART I




Item 1. Business

Overview

We are a leading national provider of liquid waste management services,
including collection, processing, recovery and disposal services. Assuming the
sale of certain operations held for sale or closure, we operate 40 facilities
located in 16 states and serve over 10,000 customers in numerous industries. At
March 1, 2003, we employed approximately 890 persons full-time. We operate in
three divisions  the Commercial Wastewater Division, the Industrial
Wastewater Division and the Oilfield Waste Division. Our Commercial Wastewater
Division collects, processes and disposes nonhazardous liquid waste such as
industrial wastewater, bulk liquids and dated beverages. Our Industrial
Wastewater Division collects, processes and disposes hazardous and nonhazardous
liquid waste such as household hazardous wastes, industrial wastewater,
petroleum fuels and antifreeze. The Commercial and Industrial Wastewater
Divisions also generate revenue from the sale of by-products recovered from
certain waste streams, including oils, ethanol, solvents, plastic, cardboard,
aluminum, glass, industrial chemicals and recycled antifreeze products. Our
Oilfield Waste Division disposes waste that is generated in the exploration for
and production of oil and natural gas, primarily from the Gulf of Mexico and
land-based rigs in Louisiana, Texas and northern Mexico.

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.

Our Internet website is www.usliquids.com. We make available free of
charge on or through our Internet website our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission.

Financing Plans

Our revolving credit facility matures as of April 15, 2003. As of
December 31, 2002, we were not in compliance with certain financial covenants
of the facility. In addition, a quarterly interest payment of $1.8 million is
due under the credit facility on March 31, 2003 and we do not anticipate having
the funds available to make this payment. We are presently engaged in
discussions with our lenders to defer the payment due on March 31, 2003, extend
the maturity date of the facility and make certain other modifications to the
credit facility; however, there can be no assurance we will be successful in
obtaining any such deferral, extension or modification.

We are also actively engaged in discussions with a number of institutional
investors regarding an investment of capital in exchange for newly issued
equity or subordinated debt securities. We believe that obtaining this
investment will allow us to secure a new credit facility and that the new debt
and equity will allow us to repay the existing credit facility. There can be
no assurance we will be successful in arranging new financing and if we do, it
will result in substantial dilution to our existing stockholders.

Operations and Services Provided

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

We collect, process, recover and dispose liquid waste through a number of
subsidiaries that are organized into three divisions  the Commercial
Wastewater Division, the Industrial Wastewater Division and the Oilfield Waste
Division. The operations of these three divisions are summarized below. See
Note 21 to our consolidated financial statements for certain financial data of
these three divisions.

Commercial and Industrial Wastewater Divisions

Overview.The Commercial and Industrial Wastewater Divisions receive fees
to collect, process and dispose of hazardous and nonhazardous liquid waste. In
addition, the Divisions generate revenue from the sale of by-products recovered
from certain waste streams, including oils, ethanol, solvents, plastic,
cardboard, aluminum, glass, industrial chemicals and recycled antifreeze
products. The Commercial Wastewater Division receives and processes
nonhazardous waste such as industrial wastewater, bulk liquids and dated
beverages. The Industrial Wastewater Division collects and processes hazardous
and nonhazardous liquid waste such as household hazardous wastes, plating solutions, acids, flammable and reactive wastes,
industrial wastewater, petroleum fuels and antifreeze. The

1



---



##### 



Industrial Wastewater Division also processes certain sludges and solid hazardous wastes.
The Commercial Wastewater Division contributed approximately 47.2%, 47.1% and
55.1% of our 2002, 2001 and 2000 revenues from continuing operations,
respectively. The Industrial Wastewater Division contributed approximately
39.5%, 37.3% and 32.5% of our 2002, 2001 and 2000 revenues from continuing
operations, respectively.

Collection.We operate a fleet of vehicles including vacuum trucks,
trailers and other transportable containers that collect various types of
liquid waste from thousands of generators nationwide. Liquid waste is also
received from independent transporters servicing thousands of additional
generators, as well as waste shipped directly by the generators via truck, rail
or barge.

Processing.Using a variety of physical, chemical, thermal and biological
techniques, the liquid waste is broken down into constituent components.
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. Using
mechanical and gravity separation techniques, contaminated and
off-specification petroleum fuels and used oil are processed to produce a fuel
sold primarily to operators of industrial furnaces.

Recovery.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. In addition, we have
achieved a strong position in the solvent regeneration business, which
regenerates nonhazardous solvents.

Disposal.Once waste liquids have been processed, the residual materials
must be finally disposed. After thorough testing, solid and semi-solid
residues are shipped to an audited and approved independent Subtitle D landfill
and treated listed waste residues are sent to an audited and approved
independent Subtitle C landfill. Liquid waste residuals include wastewater,
which is pretreated and discharged into the publicly operated treatment works
(POTW), and solid materials, which are dried and disposed of in an
independent solid waste landfill. In some instances, such as printing and
cleaning solvents, the contaminants of concern are removed, and the reusable
constituents are recovered and returned to the generator for reuse.

Oilfield Waste Division

Overview.Through six processing facilities, we treat and dispose of
waste that is generated in the exploration for and production of oil and
natural gas. Oilfield waste residuals include saltwater, which is injected
into on-site disposal wells; recovered hydrocarbons, which are sold for re-use;
and soil, which is generally stockpiled but can be re-used for certain defined
applications. In addition, at two Louisiana locations, we clean tanks, barges
and other vessels used in the storage and transportation of oilfield waste.
The Oilfield Waste Division generated approximately 13.3%, 15.6% and 12.4% of
our 2002, 2001 and 2000 revenues from continuing operations, respectively.

Collection, Processing and Disposal.Oilfield wastes are processed using
site, soil, climate and biological activities interacting as a system to
degrade and/or immobilize constituents, thereby rendering the processed residue
suitable for the support of vegetative growth and providing for beneficial land
use. The process is designed to reduce oil and grease content, reduce chloride
concentrations and immobilize heavy metals.

The treatment process involves several distinct stages. Oilfield waste is
brought to the facilities in trucks and on barges, and the delivered waste
materials are then tested. Materials that 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.

In November 2002, we acquired six strategically located transfer stations
from Trinity Storage Services, L.P. located along the Intracoastal Waterway
adjacent to the Gulf of Mexico for approximately $3.0 million in cash and
warrants to purchase 100,000 shares of our common stock. These transfer
stations provide collection points for the receipt of offshore oilfield waste
from all of the major Gulf Coast markets.

Seasonality

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

2



---



##### 



Competition

The liquid waste industry is highly fragmented and very competitive.
Competition in each of the segments of the liquid waste industry in which we
operate is primarily on the basis of proximity to collection operations,
collection and processing fees charged and quality of service. Our Commercial
Wastewater Division competes with numerous smaller, regional providers of
liquid waste management services. Our Industrial Wastewater Division competes
with Philip Services Corporation, Safety Kleen Corp., Clean Harbors, Inc.,
Vivendi Environment SA, Waste Management, Inc. and a number of other public
and privately-held companies. Our Oilfield Waste Division competes with
Newpark Resources, Inc. and a number of smaller companies for oilfield waste
produced offshore and on land in the Gulf Coast region.

We believe that there are certain barriers to entry in the markets served
by our Industrial Wastewater Division and our Oilfield Waste Division. These
barriers include the need for specially equipped facilities and the licenses,
permits and trained personnel necessary to operate these facilities.

Regulatory Matters

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.

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 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 Environmental Protection Agency (EPA) the
authority to set pretreatment limits for direct and indirect industrial
discharges. In 2001, the EPA adopted new technology-based effluent limitations
guidelines for waste treatment facilities that treat or recover hazardous or
nonhazardous industrial waste or wastewater received from off-site and then
discharge pollutants into United States waters or POTWs. Although the
guidelines are based on particular technologies, the new guidelines do not
require a facility to use these technologies. Individual facilities may meet
the requirements using whatever types of technologies and process changes they
choose. Existing indirect discharge facilities such as ours must comply with
the new guidelines no later than December 22, 2003. We are currently comparing
our existing operations against the new guidelines to determine the
modifications necessary to bring our facilities into compliance with the new
guidelines. We anticipate that all of our facilities that are subject to these
new guidelines will be in compliance therewith by December 2003.

The Clean Water Act also 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. In addition, the Clean Water Act
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.

We believe that each of our operating facilities is currently in
substantial compliance with the applicable requirements promulgated pursuant to
the Clean Water Act.

RCRA. The Resource Conservation and Recovery Act of 1976 (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

3



---



##### 



comparable state statutes, that govern hazardous waste generators,
transporters and owners and operators of hazardous waste treatment, storage or
disposal facilities. These regulations impose detailed operating, inspection,
training and emergency preparedness and response standards and requirements for
closure, financial responsibility, manifesting of wastes, record-keeping and
reporting, as well as treatment standards for any hazardous wastes intended for
land disposal. RCRA-regulated hazardous waste is accepted for processing at our
Detroit, Michigan, Tampa, Florida, East Palo Alto, California and Chandler,
Arizona facilities and, therefore, each of these facilities is subject to the
requirements of Subtitle C of RCRA. Our East Palo Alto and Tampa facilities
have each been issued RCRA Part B permits. Our East Palo Alto facility is
operating under a California Department of Toxic Substances Control permit that
expired in 1991, but that allows for on-going operations. Our Chandler and
Detroit facilities have operated under interim status, as allowed by RCRA,
since 1994 and 1991, respectively. Applications for final Part B permits for
these facilities have been submitted to the appropriate regulatory authorities
and we are currently working with the authorities to obtain these final
permits. If we are unable to obtain final Part B permits, we may be required
to cease operations at these facilities, which in turn could have a material
adverse effect on our business, results of operations and financial condition.

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

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

RCRA regulations also require us to provide financial assurance that funds
will be available when needed for closure and post-closure care at our
RCRA-regulated facilities, the cost of which could be substantial. Such
regulations allow the financial assurance requirements to be satisfied by
various means, including letters of credit, surety bonds, trust funds, a
financial (net worth) test, and a guarantee by a parent corporation. Under
RCRA regulations, a company must pay the closure costs for a facility owned by
it upon the closure of the facility and thereafter pay post-closure care costs.

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

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

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

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

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

State and Local Regulations

Our waste processing facilities are subject to direct regulation by a
variety of state and local authorities. Typically, we are required to obtain
processing, wastewater discharge and air quality permits from state and local
authorities to operate these facilities and to comply

4



---



##### 



with applicable
regulations concerning, among other things, the generation and discharge of
odors and wastewater. In addition, state laws and regulations typically
govern the manner in which a waste processing facility may be closed and
require us to post financial assurance to assure that all waste will be treated
and a facility closed appropriately.

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

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

Factors Influencing Future Results and Accuracy of Forward-Looking Statements

In the normal course of our business, in an effort to 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 2003 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.

There are substantial risks associated with our current financial condition.

Our revolving credit facility expires on April 15, 2003. As of December
31, 2002, we were not in compliance with certain financial covenants of the
credit facility. In addition, a quarterly interest payment of $1.8 million is
due under the credit facility on March 31, 2003 and we do not anticipate having
the funds available to make this payment. We are presently engaged in
discussions with our lenders to defer the payment due on March 31, 2003, extend
the maturity date of the credit facility and make certain other modifications
to the credit facility; however, there can be no assurance that we will be
successful in obtaining any such deferral, extension or modification. Our
current financial condition could, if not resolved, have a material adverse
impact on our relationships with our customers, suppliers and employees.

Even if the maturity date of the credit facility is extended, there is no
assurance that we will be able to continue to satisfy the covenants of the
credit facility. A default under the credit facility could result in the
maturity of substantially all of our indebtedness being accelerated.

We are also actively engaged in discussions with a number of institutional
investors regarding an investment of capital in exchange for newly issued
equity or subordinated debt securities. There can be no assurance that we will
be successful in arranging new financing and it is likely that any
restructuring of our indebtedness will result in substantial dilution to
existing stockholders and a change in control of the Company.

Our auditors have stated in their report that the working capital deficit
caused by the close proximity of the maturity of our revolving credit facility
and the lack of compliance with our credit facility raises substantial doubts
about our ability to continue as a going concern. If we are unable to
successfully restructure our indebtedness, we may be required to seek
protection under the bankruptcy laws.

5



---



##### 



We have been named as a defendant in a securities class action lawsuit that could have a material adverse effect on our business.

We and certain of our current and former directors and officers have been
named as defendants in six securities class action lawsuits, which have been
consolidated into a single action styled In Re: U S Liquids Securities
Litigation, Case No. H-99-2785 in the United States District Court for the
Southern District of Texas. The plaintiffs complaint alleges, among other
things, that we violated Sections 11 and 15 of the Securities Act of 1933 by
failing to disclose allegedly material information regarding the operation of
our Detroit facility and our financial condition in the prospectus relating to
our March 1999 stock offering and in certain of our other public filings and
announcements. The remedies sought by the plaintiffs include unspecified
damages, attorneys and experts fees and costs, rescission to the extent any
members of the class still hold common stock and such other relief as the court
deems proper. Further proceedings and discovery in the lawsuit have been
suspended pending resolution of our dispute with our insurance carrier over
whether insurance coverage exists for the claims asserted by the plaintiffs.

If we are not successful in our defense of the class action claim, we
could have significant liability to plaintiffs lawyers and our stockholders.
In addition, if the court finds that the claims asserted by the plaintiffs are
not covered under our insurance policy, we will be forced to make such payments
ourselves. Such payments could have a material adverse effect on our business,
financial condition, results of operations and prospects, particularly if any
required payment is not entirely covered by insurance. Even if our defense
against such claims is successful, the litigation could result in substantial
costs and divert managements attention and resources, which could adversely
affect our business. See Item 3. Legal Proceedings, below, for a more detailed
discussion of this class action lawsuit.

We face potential environmental liability.

We possess and dispose of various types of hazardous and nonhazardous
wastes at our facilities. There may be various adverse consequences to us in
the event that a facility owned or operated by us (including any acquired
business) causes or caused environmental damage, in the event that waste
transported by us causes or caused environmental damage to another site, in the
event that we fail or failed to comply with applicable environmental and land
use laws and regulations or the terms of a permit or outstanding consent order,
in the event a facility owned or operated by us or the soil or groundwater
thereunder is or becomes contaminated or in the event that we are unable to
obtain a new permit upon the expiration of an earlier one. These adverse
consequences may include the imposition of substantial monetary penalties on
us, the issuance of an order requiring the curtailment or termination of the
operations involved or affected, the revocation or denial of permits or other
approvals necessary for continued operation or expansion of a facility, the
imposition of liability on us with respect of any environmental or natural
resources damage (including groundwater or soil contamination) at our
facilities or that our facilities caused to adjacent landowners or others or
environmental damage at another site associated with waste transported by us,
the imposition of liability on us under CERCLA, or under comparable state laws,
and criminal liability for us or our officers. In addition, citizens groups,
adjacent landowners or governmental entities could oppose the issuance of a
permit or approval to us or allege violations of the permits pursuant to which
we operate or laws or regulations to which we are subject. Any of the
foregoing could have a material adverse effect on our business, results of
operations, financial condition and prospects. CERCLA and comparable state
laws impose retroactive strict joint and several liability on various parties
that are, or have been, associated with a site at which there has been, or is
threatened, a release of any hazardous substance (as defined by CERCLA) into
the environment. Liability under RCRA, CERCLA and comparable state laws may
include responsibility for costs of site investigations, site clean up, site
monitoring, natural resources damages and property damages. Liabilities under
RCRA, CERCLA and comparable state laws can be very substantial and, if imposed
upon us, could have a material adverse effect on our business, results of
operations, financial condition and prospects.

We may have inadequate insurance.

While we maintain liability insurance, it is subject to coverage limits
and certain policies may 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,
financial condition and liquidity. We also retain the risk for our uninsured
employee group health claims deductibles, which are subject to an annual
aggregate stop loss limit on a claim basis and on an aggregate basis.

In October 2001, Reliance Insurance Company (Reliance), one of our
primary insurance carriers, was declared insolvent by the Insurance
Commissioner of the State of Pennsylvania and placed into liquidation. As a
result, insurance coverage is not available for any
claims asserted against us for which insurance coverage was to be provided by
Reliance and that were not resolved prior to Reliance being placed into
liquidation. To the extent that insurance coverage is not available to cover
settlement of any such claim asserted against us or a judgment entered against
us, we will have to pay the settlement or judgment. There can be no assurance
that the $3.7 million reserve existing as of December 31, 2002 will be
sufficient to cover amounts expected to be paid in connection with such claims.
In addition, there can be no assurance we will have the ability to pay any
such claims even though a reserve has been established. Any such claim, if

6



---



##### 



successful and of significant magnitude, could have a material adverse effect
on our business, results of operations, financial condition and liquidity. See
Item 3. Legal Proceedings, below.

We may not be able to execute our operating and cost savings strategy.

Key elements of our strategy are to improve the profitability and increase
the revenues of our existing operations. We intend to improve the
profitability of our existing operations by various means, including achieving
operating efficiencies and economies of scale. We have reduced operating costs
to improve profitability. We also intend to improve our profitability by
selling underperforming businesses, however there can be no assurance that we
will be successful in selling any of these businesses or that we will be able
to obtain any particular price for any such business. Our ability to increase
the revenues and profits of our existing operations will be affected by various
factors, including:



| |  |  | the demand for liquid waste collection, processing and disposal services;                                                   
| | - |  | ----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to expand the range of services offered to customers;                                                           
|
| |  |  | our ability to develop national and regional accounts for our
liquid waste management services and other marketing programs;
|
| |  |  | our ability to obtain a final Part B permit for our Detroit and Chandler, Arizona facilities;                               
|
| |  |  | our ability to integrate the Trinity transfer stations with our existing operations; and                                    
|
| |  |  | the demand for by-products we recover from certain waste streams.                                                           

Many of these factors are beyond our control, and there can be no
assurance that our operating and cost savings strategy will be successful or
that we will be able to generate cash flows adequate for our operations and to
support internal growth. Furthermore, 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 are not able to execute our operating and cost
savings strategy effectively, our business, results of operations and financial
condition could be materially and adversely affected.

Failure to obtain or maintain necessary financial assurance may have a material adverse effect on our business.

Many of our customers require us to post performance bonds to secure our
performance under the terms of a contract and to guarantee that we will pay
subcontractors and vendors. We are also required to provide financial
assurance in order to obtain or renew operating permits and to guarantee that
our permitted facilities will be closed in accordance with applicable law. We
establish financial assurance for these matters in different ways, depending on
the jurisdiction, including letters of credit, surety bonds, trust agreements
and traditional insurance. The market for financial assurance is tightening
and due to our current financial condition there can be no assurance that we
will be able to continue to obtain financial assurance on commercially
reasonable terms without providing additional collateral, which collateral may
not be available. Continued availability of such financial assurance in
sufficient amounts at acceptable rates is a vital aspect of our ongoing
operations, and our failure to obtain any such financial assurance would have a
material adverse effect on our business, results of operations and financial
condition. In January 2003, we made the initial payment on a ten-year finite
risk insurance policy. This policy provides up to $18 million toward the
projected closure obligations for our facilities, as well as up to $12.4
million of performance bonding capacity. Management believes that this policy
will satisfy all of our bonding needs for the foreseeable future but there can
be no assurance that this policy will be sufficient to satisfy all of our
future bonding needs.

Governmental regulations may have a material adverse effect on our business.

Government regulations have a substantial impact on our business. Each of
our products and services is dependent to varying degrees on the existence and
enforcement of federal, state and local environmental regulations. Any repeal
or relaxation of those regulations, or failure of governmental authorities to
enforce the regulations, could result in a decrease in demand for our products
and services. We also operate in a highly regulated environment. Our business
is subject to numerous federal, state and local laws and regulations governing
environmental protection, zoning, transportation, safety, health, land use and
other matters. These laws and regulations affect not only the costs of our
operations, but also our ability to offer a particular product or service. We
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. 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. In addition, our facilities in Chandler, Arizona and Detroit, Michigan
have never been granted Part B permits under RCRA and are continuing to operate
under interim status, as allowed by RCRA. Our facility in East Palo Alto,
California is operating under a California Department

7



---



##### 



of Toxic Substances
Control permit that expired in 1991, but that allows for ongoing operations.
Although applicable regulations allow these facilities to continue to operate,
we may not be successful in obtaining or maintaining these and other required
permits and approvals and that failure could have a material adverse effect on
our business, results of operations, financial condition and prospects.

Laws and regulations have changed frequently in the past and it is
reasonable to expect additional changes in the future. Changes in laws and
regulations, or in the interpretations of existing laws and regulations, could
have a material adverse effect on our business, results of operations,
financial condition and prospects by imposing conditions such as:



| |  |  | limitations on the construction of new liquid waste disposal,
transfer or processing facilities or on the expansion of existing
facilities;                             
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | limitations and regulations on collection and disposal prices, rates and volumes;                                                                                       
|
| |  |  | limitations or bans on disposal or transportation of out-of-state waste or certain categories of waste;                                                                 
|
| |  |  | mandates regarding the disposal of liquid waste;                                                                                                                        
|
| |  |  | mandates requiring significant capital and operating
expenditures to bring our facilities into compliance with new
guidelines implemented under the Clean Water Act; and
|
| |  |  | mandates requiring us to obtain additional permits or
approvals.                                                                                                        

In addition, 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.

We cannot predict the likely impact any such changes will have on our
business. 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, any of
which could have a material adverse effect on our business, results of
operations and financial condition.

The liquid waste management industry is very competitive.

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

We depend heavily on the oil and gas industry.

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

8



---



##### 



An increase in energy prices may have a material adverse effect on our business.

We operate a fleet of vehicles and other equipment in our operations. In
addition, we use significant amounts of energy in the processing of waste.
Energy prices are subject to volatility. A significant increase in energy
prices could have a material adverse effect on our business, results of
operations and financial condition.

The liquid waste management industry is cyclical and seasonal.

The demand for the services provided by our Industrial Wastewater Division
is generally cyclical and typically follows general economic trends. We expect
that the operations of the Oilfield Waste Division will experience certain
seasonal patterns consistent with oil and gas exploration and production
activity in the Gulf of Mexico. Generally, the volume of oilfield waste
delivered to the Oilfield Waste Division has been lowest in the first quarter
of each calendar year. Prices for oil and natural gas are expected to continue
to be volatile and affect demand for our oilfield waste services. Certain of
the Commercial Wastewater Divisions and the Industrial Wastewater Divisions
processing facilities in the Northeast and Midwest may be affected by adverse
weather conditions. The cyclical nature of our Industrial Wastewater Division
and future seasonal and quarterly fluctuation could materially and adversely
affect our business.

Our failure to maintain satisfactory labor relations could have a material adverse effect on our business.

We currently have approximately 890 full-time equivalent employees.
Approximately 60 of these employees are members of various labor unions. In
addition, we are currently negotiating a collective bargaining agreement
covering approximately 26 employees at our Detroit facility. Our inability to
negotiate acceptable contracts with any of these unions as existing agreements
expire could result in strikes by the affected workers and increased operating
costs as a result of higher wages or benefits paid to union members. If the
unionized employees were to engage in a strike or other work stoppage, or other
employees were to become unionized, we could experience a significant
disruption of our operations and higher on-going labor costs, which could have
a material adverse effect on our business, results of operations and financial
condition.

We rely on key personnel.

We are highly dependent on our executive officers and senior management.
The loss of the services of any of our current executive officers or senior
management could have a material adverse effect on our business, results of
operations and financial condition.




Item 2. Properties

Our corporate offices are located in Houston, Texas. The corporate offices
consist of approximately 20,000 square feet of office space occupied under a
lease which expires on June 30, 2007.

Assuming the sale of certain operations held for sale or closure, the
Commercial Wastewater Division and Industrial Wastewater Division together
operate 28 liquid waste processing and other facilities. We believe that the
specialized equipment, licenses and permits necessary to operate the 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 types of liquid waste most commonly managed:

|                  |  |                              |  |                                  |  |                |  |             
|----------------- |  | ---------------------------- |  | -------------------------------- |  | -------------- |  | ------------
|Facility          |  | Location                     |  | Liquid Wastes Managed            |  | Facility Type  |  | Owned/Leased
|                  |  |                              |  |                                  |  |                |  |             
|Parallel CA       |  | Rancho Cucamonga,
California |  | Bulk Liquids and
Dated Beverages |  | Processing     |  | Owned       
|                  |  |                              |  |                                  |  |                |  |             
|National Solvent  |  | Atlanta, Georgia             |  | Industrial Wastewaters           |  | Processing     |  | Leased      
|                  |  |                              |  |                                  |  |                |  |             
|First Source      |  | Rockaway, New Jersey         |  | Industrial Wastewaters           |  | Field Services |  | Leased      
|                  |  |                              |  |                                  |  |                |  |             
|D&H Holding       |  | Hammond, Indiana             |  | Industrial Wastewaters           |  | Processing     |  | Leased      
|                  |  |                              |  |                                  |  |                |  |             
|Parallel KY       |  | Louisville, Kentucky         |  | Bulk Liquids and
Dated Beverages |  | Processing     |  | Owned       
|                  |  |                              |  |                                  |  |                |  |             
|A&A Environmental |  | Carlisle, Pennsylvania       |  | Industrial Wastewaters           |  | Field Services |  | Leased      
|                  |  |                              |  |                                  |  |                |  |             
|                  |  | Baltimore, Maryland          |  | Industrial Wastewaters           |  | Processing     |  | Owned       
|                  |  |                              |  |                                  |  |                |  |             
|                  |  | Salisbury, Maryland          |  | Industrial Wastewaters           |  | Field Services |  | Leased      
|                  |  |                              |  |                                  |  |                |  |             
|                  |  | Stafford, Virginia           |  | Industrial Wastewaters           |  | Field Services |  | Leased      
|                  |  |                              |  |                                  |  |                |  |             

9



---



##### 



|                 |  |                               |  |                                          |  |                |  |             
|---------------- |  | ----------------------------- |  | ---------------------------------------- |  | -------------- |  | ------------
|Facility         |  | Location                      |  | Liquid Wastes Managed                    |  | Facility Type  |  | Owned/Leased
|                 |  |                               |  |                                          |  |                |  |             
|Northern A-1     |  | Kalkaska, Michigan            |  | Industrial Wastewaters                   |  | Processing     |  | Owned       
|                 |  |                               |  |                                          |  |                |  |             
|                 |  | Muskegon, Michigan            |  | Industrial Wastewaters                   |  | Field Services |  | Leased      
|                 |  |                               |  |                                          |  |                |  |             
|                 |  | Montague, Michigan            |  | Industrial Wastewaters                   |  | Field Services |  | Leased      
|                 |  |                               |  |                                          |  |                |  |             
|Safety First     |  | Kalkaska, Michigan            |  | N/A                                      |  | Other          |  | Leased      
|                 |  |                               |  |                                          |  |                |  |             
|                 |  | Traverse City, Michigan       |  | N/A                                      |  | Other          |  | Leased      
|                 |  |                               |  |                                          |  |                |  |             
|Gateway Terminal |  | Carteret, New Jersey          |  | Industrial Wastewaters                   |  | Processing     |  | Leased      
|                 |  |                               |  |                                          |  |                |  |             
|E-Max Allegheny  |  | Pittsburgh, Pennsylvania      |  | Industrial Wastewaters                   |  | Processing     |  | Leased      
|                 |  |                               |  |                                          |  |                |  |             
|Cactus           |  | Dallas, Texas                 |  | Industrial Wastewaters                   |  | Collection     |  | Owned       
|                 |  |                               |  |                                          |  |                |  |             
|Romic AZ         |  | Chandler, Arizona             |  | Hazardous Wastes;
Industrial Wastewaters |  | Processing     |  | Leased      
|                 |  |                               |  |                                          |  |                |  |             
|Romic CA         |  | East Palo Alto, California    |  | Hazardous Wastes;
Industrial Wastewaters |  | Processing     |  | Owned       
|                 |  |                               |  |                                          |  |                |  |             
|                 |  | Redwood City, California      |  | Hazardous Wastes;
Industrial Wastewaters |  | Processing     |  | Leased      
|                 |  |                               |  |                                          |  |                |  |             
|Romic Irwindale  |  | Irwindale, California         |  | Hazardous Wastes;
Industrial Wastewaters |  | Collection     |  | Leased      
|                 |  |                               |  |                                          |  |                |  |             
|Romic NW         |  | Clackamas, Oregon             |  | Hazardous Wastes;
Industrial Wastewaters |  | Collection     |  | Leased      
|                 |  |                               |  |                                          |  |                |  |             
|Romic Tacoma     |  | Tacoma, Washington            |  | Hazardous Wastes;
Industrial Wastewaters |  | Collection     |  | Leased      
|                 |  |                               |  |                                          |  |                |  |             
|USL Florida      |  | Tampa, Florida                |  | Hazardous Wastes;
Industrial Wastewaters |  | Processing     |  | Owned       
|                 |  |                               |  |                                          |  |                |  |             
|Waste Research   |  | Augusta, Georgia              |  | Industrial Wastewaters                   |  | Processing     |  | Owned       
|                 |  |                               |  |                                          |  |                |  |             
|                 |  | Macon, Georgia                |  | Industrial Wastewaters                   |  | Processing     |  | Owned       
|                 |  |                               |  |                                          |  |                |  |             
|                 |  | Winston-Salem, North
Carolina |  | Industrial Wastewaters                   |  | Field Services |  | Leased      
|                 |  |                               |  |                                          |  |                |  |             
|USL Detroit      |  | Detroit, Michigan             |  | Hazardous Wastes;
Industrial Wastewaters |  | Processing     |  | Owned       

10



---



##### 



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

|              |  |                           |  |               |  |             
|------------- |  | ------------------------- |  | ------------- |  | ------------
|Facility      |  | Location                  |  | Facility Type |  | Owned/Leased
|              |  |                           |  |               |  |             
|USL Louisiana |  | Bateman Island, Louisiana |  | Processing    |  | Leased      
|              |  |                           |  |               |  |             
|              |  | Bourg, Louisiana          |  | Processing    |  | Leased      
|              |  |                           |  |               |  |             
|              |  | Elm Grove, Louisiana      |  | Processing    |  | Owned       
|              |  |                           |  |               |  |             
|              |  | Mermentau, Louisiana      |  | Processing    |  | Owned       
|              |  |                           |  |               |  |             
|              |  | Bustamonte, Texas         |  | Processing    |  | Owned       
|              |  |                           |  |               |  |             
|              |  | San Isidro, Texas         |  | Processing    |  | Leased      

The Oilfield Waste Division also operates six transfer stations that
accept oilfield waste from customers and then transfer the waste to an
appropriate processing facility. The following table sets forth certain
information relating to each transfer station:

|              |  |                                |  |                  |  |             
|------------- |  | ------------------------------ |  | ---------------- |  | ------------
|Facility      |  | Location                       |  | Facility Type    |  | Owned/Leased
|              |  |                                |  |                  |  |             
|USL Louisiana |  | Berwick/Morgan City, Louisiana |  | Transfer Station |  | Leased      
|              |  |                                |  |                  |  |             
|              |  | Cameron, Louisiana             |  | Transfer Station |  | Leased      
|              |  |                                |  |                  |  |             
|              |  | Fourchon, Louisiana            |  | Transfer Station |  | Leased      
|              |  |                                |  |                  |  |             
|              |  | Intracoastal City, Louisiana   |  | Transfer Station |  | Leased      
|              |  |                                |  |                  |  |             
|              |  | Corpus Christi, Texas          |  | Transfer Station |  | Leased      
|              |  |                                |  |                  |  |             
|              |  | Galveston, Texas               |  | Transfer Station |  | Leased      

In addition to the facilities described above, we also own a facility in
Lacassine, Louisiana that was previously used for landfarming of oilfield waste
and naturally occurring radioactive material. This facility has been closed in
accordance with Louisiana law.

Our facilities satisfy our present requirements; however, we intend to
expand the 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

Regulatory Proceedings

In October 2002, U S Liquids of Detroit, Inc., one of our subsidiaries,
entered into an agreement with the U.S. Attorney in Detroit resolving the
investigation of our Detroit facility that was commenced by the EPA and the
Federal Bureau of Investigation (FBI) in August 1999. Under the terms of the
agreement, U S Liquids of Detroit entered a guilty plea to specified violations
of RCRA and the Rivers and Harbors Act and was placed on probation for five
years. The agreement requires, among other things, that we pay a $4.5 million
penalty and contribute $1.0 million to certain community service organizations.
These amounts will be paid over a five year period. The United States
District Court for the Eastern District of Michigan will determine at the end
of the probationary period whether and to what extent interest must be paid on
the deferred payments. During the fourth quarter of 2001, we took a charge of
$5.0 million to establish a reserve for this matter. After considering the net
present value of the total obligation, this reserve was reduced by $0.9 million
during the fourth quarter of 2002. An additional charge may be required if
interest is imposed by the court on the deferred payments. As of December 31,
2002, the remaining reserve was $3.9 million.

The EPA notified us in 1999 that liquid waste received by our former
Re-Claim Louisiana facility and stored off-site contained hazardous
constituents and, therefore, the waste could not be processed by the facility.
We believed that the waste could be handled as nonhazardous waste. A reserve
was established for costs to be incurred to deliver this waste to a third party
for processing and disposal. As of December 31, 2002, we had a remaining
reserve of approximately $0.2 million to process and dispose of the remaining
waste.

11



---



##### 



In the fourth quarter of 1999, the EPA notified us of certain alleged
violations of RCRA by our former Re-Claim Louisiana facility. Among other
things, the EPA alleged that the facility accepted waste from CERCLA sites that
it was not permitted to accept and then improperly disposed of such waste. In
July 2001, we entered into a consent agreement with the EPA resolving the EPAs
allegations. Under the terms of the consent agreement, we paid a civil penalty
of $200,000 to the EPA and made certain improvements to the facility. In May
2002, we received a subpoena from the U.S. Attorneys office in Shreveport,
Louisiana seeking various documents relating to the Re-Claim Louisiana facility
covering the same time frame and relating to the same activities as the EPAs
allegations described above. Based upon information available to us at the
time, we believed that the U.S. Attorneys office was conducting a criminal
investigation targeting a former employee of the Re-Claim Louisiana facility.
In December 2002, we received a follow-up subpoena seeking additional
documentation. Shortly thereafter, we were advised by the U.S. Attorneys
office that the Company has not been ruled out as a subject of this
investigation. We have cooperated, and will continue to cooperate, with the
U.S. Attorneys office in connection with its investigation. We do not believe
that the results of this investigation will have a material adverse effect on
our business, results of operations or financial condition.

We acquired Romic Environmental Technologies Corporation (Romic) in
January 1999. Prior to its acquisition by 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
remedial investigation of the facility was completed by Romic and forwarded to
the EPA. The EPA authorized Romic to conduct a pilot study utilizing in-situ
enhanced bio-remediation to determine whether that method will be an effective
corrective measure. Preliminary results from the pilot study were encouraging
and the study has been expanded. If the study is determined to be successful,
the EPA may approve this method or a combination of methods for final site
remediation. Prior to its acquisition by the Company, Romic had also 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 drum
reconditioning or disposal sites, Romic and a number of other potentially
responsible parties have entered into administrative consent orders and/or
agreements allocating each partys respective share of the cost of remediating
the sites. Romics share under these consent orders and/or agreements is as
follows: Bay Area  6.872%; Lorentz  5.62% and Casmalia Resources  0.29%.
Remediation is either underway or substantially completed at all three sites.
Based upon the information available, we have continued to maintain a reserve
to cover Romics estimated costs to remediate the East Palo Alto facility and
the three drum reconditioning or disposal sites. As of December 31, 2002, the
balance of this reserve was $2.8 million, of which $0.2 million is expected to
be paid in 2003. Management believes that this reserve is sufficient to
satisfy Romics obligations under the consent orders and agreements; however,
due to the complex, ongoing and evolving process of investigating and
remediating these sites, Romics actual costs may exceed the amount reserved.

The operations of the Innovative Services Group of our Commercial
Wastewater Division are subject to regulation by the U.S. Bureau of Alcohol,
Tobacco and Firearms (ATF). In addition to regulating the production,
distribution and sale of alcohol and alcohol containing products, the ATF is
also responsible for collecting the federal excise taxes (FET) that must be
paid on distilled spirits, wine and beer. If alcoholic beverages on which the
FET have been paid are returned to bond at our Parallel Products premises for
destruction, the party who has paid the FET on the destroyed product is
entitled to a refund. When our customers return distilled spirits, wine or
beer from commerce to one of our facilities for destruction, we generally file
a claim with the ATF on behalf of that customer for refund of the FET paid on
that product. The ATF periodically inspects the Parallel Products facilities
both to insure compliance with its regulations and to substantiate claims for
FET refunds. During 2000, the ATF conducted inspections at our Louisville,
Kentucky and Rancho Cucamonga, California facilities. At the conclusion of
these inspections, the ATF preliminarily notified us that it intended to deny
certain refund claims, some of which had already been paid by the ATF to our
customers, due to what the ATF alleges was inadequate, incomplete or
unsubstantiated supporting documentation. In addition, the ATF proposed a
civil penalty of $30,000 based on the alleged defects in our documentation.
During the third quarter of 2001, the ATF notified us that, in order to recoup
refund claims previously paid to our customers, the ATF was assessing taxes of
$1.175 million against the facilities. During the fourth quarter of 2001, we
offered to pay $450,000 to the ATF to resolve all of the ATFs claims against
the facilities and delivered a check for such amount to the ATF. Based upon
our discussions with the ATF, we believe that our offer will be accepted by the
ATF. The proposed assessment by the ATF does not address approximately
$525,000 of refund claims that we submitted on behalf of our customers that
either have already been denied or are likely to be denied as a result of the
alleged defects in our documentation. We are currently engaged in discussions
with the affected customers concerning the refund claims in question.
Settlements have been reached with certain customers and we believe that
satisfactory settlements can be reached with all of the other affected
customers. Based upon the information available, we have continued to
maintain a reserve for this matter. As of December 31, 2002, the total reserve
remaining was $0.4 million. Management believes that this reserve is
sufficient.

12



---



##### 



Litigation

During the third quarter of 1999, six purported securities class action
lawsuits were filed against the Company and certain of its current and former
officers and directors in the United States District Court for the Southern
District of Texas, Houston Division. These lawsuits were consolidated into a
single action styled In re: U S Liquids Securities Litigation, Case No.
H-99-2785, and the plaintiffs filed a consolidated complaint alleging
violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933
(Securities Act) on behalf of purchasers of the Companys common stock in our
March 1999 public offering and violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 promulgated
thereunder on behalf of purchasers of the Companys common stock during the
period beginning on May 12, 1998 and ending on August 25, 1999. The plaintiffs
generally allege that the defendants made false and misleading statements and
failed to disclose allegedly material information regarding the operations of
our Detroit facility and the Companys financial condition in the prospectus
relating to our March 1999 stock offering and in certain other public filings
and announcements made by the Company. The remedies sought by the plaintiffs
include designation of the action as a class action, unspecified damages,
attorneys and experts fees and costs, rescission to the extent any members of
the class still hold common stock, and such other relief as the court deems
proper. In January 2001, the court dismissed the claims asserted by the
plaintiffs under Sections 10(b) and 20(a) and Rule 10b-5 of the Exchange Act
and in April 2002 the court dismissed the claims asserted by the plaintiffs
under Section 12(a)(2) of the Securities Act. Accordingly, the lawsuit is
proceeding only with respect to the claims asserted under Sections 11 and 15 of
the Securities Act. In June 2002, the court determined that two individuals
designated by the plaintiffs are adequate class representatives for plaintiffs
claim under Section 11 of the Securities Act. In August 2002, the court
entered an order defining the plaintiff class as all persons who purchased or
otherwise acquired Company common stock pursuant or traceable to our March 1999
stock offering. Further proceedings and discovery of the lawsuit have been
suspended pending the resolution of our dispute with our insurance carrier over
whether insurance coverage exists for the claims asserted by the plaintiffs.
The Company and our insurance carrier have both moved for summary judgment on
the issue of whether such insurance coverage exists.

In addition, one stockholder of the Company has filed a lawsuit against
certain of the current and former officers and directors of the Company in
connection with the operation of our Detroit facility and the securities class
action described above. Benn Carmicia v. U S Liquids Inc., et al., was filed
in the United States District Court for the Southern District of Texas, Houston
Division, on September 15, 1999 and was subsequently consolidated with the
claims asserted in the securities class action described above. The plaintiff
purports to allege derivative claims on behalf of the Company against the
officers and directors for alleged breaches of fiduciary duty resulting from
their oversight of the Companys affairs. The lawsuit names the Company as a
nominal defendant and seeks compensatory and punitive damages on behalf of the
Company, interest, equitable and/or injunctive relief, costs and such other
relief as the court deems proper. We believe that the stockholder derivative
action was not properly brought and we have filed a motion to dismiss this
action in order to allow the Board of Directors to consider whether such
litigation is in the best interest of the Company and our stockholders. As of
the date of this report, no ruling has been made by the court on our motion to
dismiss. Since this lawsuit has been consolidated with the securities class
action, further proceedings in this lawsuit have been suspended pending the
resolution of our dispute with our insurance carrier over whether insurance
coverage exists for the claims asserted in the securities class action.

On April 21, 1998, we acquired substantially all of the assets of Parallel
Products, a California limited partnership (Parallel). In addition to the
consideration paid at closing, we agreed that, if the earnings before interest,
taxes, depreciation and amortization (EBITDA) of the businesses acquired from
Parallel exceeded a specified amount in any four consecutive quarters during
the three year period after the closing of the acquisition, we would pay to
Parallel an additional $2.1 million in cash and an additional $2.1 million in
Company common stock. During the third quarter of 2000, Parallel filed suit
against the Company alleging that the acquired businesses achieved the
specified EBITDA amount for the four quarters ended December 31, 1999 and for
the four quarters ended March 31, 2000. Parallel is seeking a declaratory
judgment that the EBITDA amount specified in the acquisition agreement has been
achieved and that it is entitled to receive the contingent cash and stock
payments described above. Parallel also alleges that it is entitled to recover
compensatory damages of $4.2 million, punitive damages, interest, attorneys
fees and costs, and such other relief as the court deems proper. We have
denied that we have any liability to Parallel and have filed a counterclaim
against Parallel alleging that Parallel breached certain of the representations
and warranties made to us in the acquisition agreement. This lawsuit is
currently set for trial on July 14, 2003.

From September 4, 1998 through September 3, 2000, Reliance Insurance
Company or one of its affiliated companies provided casualty insurance coverage
for the Company and its subsidiaries. In addition, Reliance provided similar
coverage, for pre-acquisition periods, for several companies that we acquired
between 1997 and 2000. During the Reliance coverage periods, various incidents
occurred that resulted in claims being made against the Company for which
insurance coverage was to be provided by Reliance. In some cases, the claim
resulted in a lawsuit being filed against the Company. Reliance had been
adjusting and/or defending these claims; however, in October 2001, Reliance was
declared insolvent by the Insurance Commissioner of the State of Pennsylvania
and placed into liquidation. As a result, insurance coverage is not available
for any claims or lawsuits that were not resolved prior to Reliance being
placed into liquidation. To the extent that insurance coverage is not available
to cover settlement of a claim asserted against the Company or a judgment
entered against the Company, the settlement or judgment would have to be paid
by the Company. Many states have established insurance

13



---



##### 



guarantee funds to pay claims insured by insolvent insurance companies;
however, the amount available from such funds for a single claim is generally
limited to the lesser of the amount of the insureds coverage and a dollar
amount specified by statute. During the fourth quarter of 2001, we established
a reserve to cover the estimated costs to satisfy our obligations with respect
to all such claims that were not resolved prior to Reliance being placed into
liquidation, net of the amounts expected to be received by the Company from
state insurance guarantee funds. Certain of these claims have been resolved
and we made payments totaling $0.5 million in October 2002. We have committed
to making additional payments of $1.0 million during 2003 and $0.7 million in
2004. After the fourth quarter claims resolution, the reserve was adjusted to
$3.7 million. Management believes that the reserve is sufficient to satisfy
our obligations with respect to such payments, as well as all remaining claims
for which insurance coverage was to be provided by Reliance; however, there can
be no assurance that our actual costs will not exceed the amount reserved.

In February 1998, we entered into an employment agreement with our former
chief financial officer, Earl J. Blackwell. The employment agreement provided,
among other things, that (i) if the agreement was terminated by Mr. Blackwell
without cause, Mr. Blackwell would not be entitled to receive any further
compensation or benefits under the agreement, and (ii) if the agreement was
terminated by Mr. Blackwell with cause, Mr. Blackwell would be entitled to
continue to receive his annual salary of $220,000 and employee benefits for the
remainder of the term of the agreement. On July 31, 2002, Mr. Blackwell
terminated his employment with us alleging that we breached the terms of his
employment agreement by usurping his duties and responsibilities as chief
financial officer. On October 2, 2002, Mr. Blackwell initiated an arbitration
proceeding against us seeking to recover approximately $1.1 million in damages,
interest, attorneys fees and costs. We deny that we have any liability to Mr.
Blackwell. The arbitration is currently scheduled to begin on May 7, 2003.

On September 9, 2002, Allan Rosen, a former employee of the Company, filed
suit in the Superior Court of Los Angeles County, California against us and
certain of our current and former officers. Mr. Rosen alleges, among other
things, that we breached various oral agreements relating to the compensation
to be paid to Mr. Rosen for his services and that he was wrongfully terminated
in October 2001 because, among other things, he complained about the
operational and accounting systems of certain of our subsidiaries and because
he refused to certify, for internal purposes, various financial information and
reports relating to the operations of such subsidiaries. Mr. Rosen is seeking
unspecified compensatory and punitive damages, interest, attorneys fees and
costs. Mr. Rosen is also seeking a declaratory judgment that a noncompete
provision contained in his employment agreement is not enforceable. We have
denied all of Mr. Rosens allegations and we deny that we have any liability to
Mr. Rosen.

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

It is not possible at this time to predict the impact the above lawsuits,
proceedings, investigations and inquiries may have on us, nor is it possible to
predict whether any other suits or claims may arise out of these matters in the
future. However, it is reasonably possible that the outcome of any present or
future litigation, proceedings, investigations or inquiries may have a material
adverse impact on our consolidated financial position or results of operations
in one or more future periods. We intend to defend ourself vigorously in all
the above matters.

We are 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 our consolidated financial
position or results of operations.




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

None.

14



---



##### 






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.

| |                               |                |  |   |      |                |  |     |      |  |  | 
| | ----------------------------- | -------------- |  | - | ---- | -------------- |  | --- | ---- |  |  | 
| |                               |                |  |   |      | Price Range of
| |                               |                |  |   |      | Common Stock  
| |                               |                |  |   |      |               
| |                               |                |  |   |      | High           |  | Low
| | Year Ended December 31, 2002: |                |  |   |      |                |  |     |     
| |                               | First Quarter  |  | $ | 5.55 |                |  | $   | 3.29 | 
| |                               | Second Quarter |  |   | 3.50 |                |  |     | 2.30 | 
| |                               | Third Quarter  |  |   | 3.15 |                |  |     | 0.50 | 
| |                               | Fourth Quarter |  |   | 0.79 |                |  |     | 0.38 | 
| |                               |                |  |   |      |                |  |     |      |  |  | 
| | Year Ended December 31, 2001: |                |  |   |      |                |  |     |     
| |                               | First Quarter  |  | $ | 4.20 |                |  | $   | 2.00 | 
| |                               | Second Quarter |  |   | 5.25 |                |  |     | 2.87 | 
| |                               | Third Quarter  |  |   | 6.25 |                |  |     | 4.25 | 
| |                               | Fourth Quarter |  |   | 5.75 |                |  |     | 4.85 | 

The number of holders of record of common stock at March 10, 2003 was 179.

We have not paid dividends on our common stock and do not anticipate
paying dividends in the foreseeable future. We are prohibited from declaring or
paying cash dividends on our capital stock under the terms of our revolving
credit facility.

On November 15, 2002, we completed the acquisition of six oilfield waste
transfer stations from Trinity Storage Services, L.P. In connection with the
closing of this transaction, we issued to Trinity warrants to purchase 100,000
shares of the Companys common stock. The warrants may be exercised at any
time before November 16, 2007. The exercise price for 50,000 of the shares
underlying such warrant is $1.98 per share. The exercise price for the
remaining 50,000 shares underlying such warrant is $2.475 per share. This sale
was exempt from registration under Section 4(2) of the Securities Act of 1933
since no public offering was involved.




Item 6. Selected Financial Data

The consolidated statements of operations and balance sheet data in the
table below set forth our consolidated financial data as of December 31, 2002
and 2001, and for the years ended December 31, 2002, 2001 and 2000, which is
derived from the audited financial statements which appear elsewhere in this
report. The consolidated statements of operations data for the years ended
December 31, 1999 and 1998 and the consolidated balance sheet data as of
December 31, 2000, 1999 and 1998 was derived from the audited financial
statements restated for discontinued operations which do not appear in this
report.

15



---



##### 



Statements of Operations Data:

|                                                                                                                               |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------ | -------- | ----------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------ | -
|                                                                                                                               |  | Years Ended December 31,
|                                                                                                                               |  |                         
|                                                                                                                               |  | 2002                     |          | 2001              |  | 2000                                  |         | 1999 |  | 1998
|                                                                                                                               |  |                          |          |                   |  |                                       |         |      |  |     
|                                                                                                                               |  |                          |          |                   |  | (In thousands, except per share data) |         |      |  |      |         |   |  |  
|                                                                                                                               |  | (As Restated) (a)        |          | (As Restated) (a) |  | (As Restated) (a)                     |         |      |  |      |         |   |  |  
|Revenues                                                                                                                       |  | $                        | 150,941  |                   |  | $                                     | 172,885 |      |  | $    | 175,621 |   |  | $ | 160,721 |   |  | $ | 67,790 |  
|Operating expenses                                                                                                             |  |                          | 109,616  |                   |  |                                       | 120,389 |      |  |      | 129,804 |   |  |   | 105,959 |   |  |   | 36,167 |  
|                                                                                                                               |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Operating margin                                                                                                               |  |                          | 41,325   |                   |  |                                       | 52,496  |      |  |      | 45,817  |   |  |   | 54,762  |   |  |   | 31,623 |  
|Depreciation and amortization                                                                                                  |  |                          | 10,936   |                   |  |                                       | 13,323  |      |  |      | 13,076  |   |  |   | 11,419  |   |  |   | 5,208  |  
|Selling, general and administrative expenses                                                                                   |  |                          | 25,199   |                   |  |                                       | 21,861  |      |  |      | 29,013  |   |  |   | 20,196  |   |  |   | 9,335  |  
|Goodwill impairment                                                                                                            |  |                          | 40,110   |                   |  |                                       |        |      |  |      |        |   |  |   |        |   |  |   |       |  
|Special charge (income), net                                                                                                   |  |                          | (3,383   | )                 |  |                                       | (1,603  | )    |  |      | 708     |   |  |   | 15,138  |   |  |   |       |  
|                                                                                                                               |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Income (loss) from operations                                                                                                  |  |                          | (31,537  | )                 |  |                                       | 18,915  |      |  |      | 3,020   |   |  |   | 8,009   |   |  |   | 17,080 |  
|Interest expense                                                                                                               |  |                          | 9,027    |                   |  |                                       | 9,622   |      |  |      | 10,854  |   |  |   | 6,977   |   |  |   | 3,547  |  
|Other income, net                                                                                                              |  |                          | (329     | )                 |  |                                       | (524    | )    |  |      | (304    | ) |  |   | (394    | ) |  |   | (127   | )
|                                                                                                                               |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Income (loss) from continuing operations before
income taxes and cumulative effect of change
in accounting principle           |  |                          | (40,235  | )                 |  |                                       | 9,817   |      |  |      | (7,530  | ) |  |   | 1,426   |   |  |   | 13,660 |  
|Provision (benefit) for income taxes                                                                                           |  |                          | (2,300   | )                 |  |                                       | 3,063   |      |  |      | 4,895   |   |  |   | 2,360   |   |  |   | 5,326  |  
|                                                                                                                               |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Income (loss) from continuing operations                                                                                       |  |                          | (37,935  | )                 |  |                                       | 6,754   |      |  |      | (12,425 | ) |  |   | (934    | ) |  |   | 8,334  |  
|                                                                                                                               |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Discontinued operations:                                                                                                       |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Income (loss) from discontinued operations
before income taxes                                                                 |  |                          | (20,208  | )                 |  |                                       | (7,947  | )    |  |      | (19,716 | ) |  |   | (65     | ) |  |   | 4,145  |  
|Income taxes                                                                                                                   |  |                          | 280      |                   |  |                                       | (4,000  | )    |  |      | (6,180  | ) |  |   | 243     |   |  |   | 1,707  |  
|                                                                                                                               |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Income (loss) on discontinued operations                                                                                       |  |                          | (20,488  | )                 |  |                                       | (3,947  | )    |  |      | (13,536 | ) |  |   | (308    | ) |  |   | 2,438  |  
|Cumulative effect of change in accounting
principle                                                                            |  |                          | 91,003   |                   |  |                                       |        |      |  |      |        |   |  |   |        |   |  |   |       |  
|                                                                                                                               |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Net income (loss)                                                                                                              |  | $                        | (149,426 | )                 |  | $                                     | 2,807   |      |  | $    | (25,961 | ) |  | $ | (1,242  | ) |  | $ | 10,772 |  
|                                                                                                                               |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Basic earnings (loss) per common share:                                                                                        |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Basic earnings (loss) per common share
from continuing operations before cumulative
effect of change in accounting principle   |  | $                        | (2.36    | )                 |  | $                                     | 0.42    |      |  | $    | (0.78   | ) |  | $ | (0.06   | ) |  | $ | 0.81   |  
|Discontinued operations                                                                                                        |  |                          | (1.27    | )                 |  |                                       | (0.25   | )    |  |      | (0.86   | ) |  |   | (0.02   | ) |  |   | 0.23   |  
|Cumulative effect of change in accounting principle                                                                            |  |                          | (5.66    | )                 |  |                                       |        |      |  |      |        |   |  |   |        |   |  |   |       |  
|                                                                                                                               |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Basic earnings (loss) per common share                                                                                         |  | $                        | (9.29    | )                 |  | $                                     | 0.17    |      |  | $    | (1.64   | ) |  | $ | (0.08   | ) |  | $ | 1.04   |  
|                                                                                                                               |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Diluted earnings (loss) per common share:                                                                                      |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Diluted earnings (loss) per common share
from continuing operations before cumulative
effect of change in accounting principle |  | $                        | (2.36    | )                 |  | $                                     | 0.40    |      |  | $    | (0.78   | ) |  | $ | (0.06   | ) |  | $ | 0.72   |  
|Discontinued operations                                                                                                        |  |                          | (1.27    | )                 |  |                                       | (0.23   | )    |  |      | (0.86   | ) |  |   | (0.02   | ) |  |   | 0.21   |  
|Cumulative effect of change in accounting principle                                                                            |  |                          | (5.66    | )                 |  |                                       |        |      |  |      |        |   |  |   |        |   |  |   |       |  
|                                                                                                                               |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Diluted earnings (loss) per common share                                                                                       |  | $                        | (9.29    | )                 |  | $                                     | 0.17    |      |  | $    | (1.64   | ) |  | $ | (0.08   | ) |  | $ | 0.93   |  
|                                                                                                                               |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Weighted average number of common shares
outstanding                                                                           |  |                          | 16,079   |                   |  |                                       | 15,988  |      |  |      | 15,798  |   |  |   | 15,324  |   |  |   | 10,317 |  
|                                                                                                                               |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Weighted average number of common and
common equivalent shares outstanding                                                     |  |                          | 16,079   |                   |  |                                       | 16,728  |      |  |      | 15,798  |   |  |   | 15,324  |   |  |   | 11,637 |  
|                                                                                                                               |  |                          |          |                   |  |                                       |         |      |  |      |         |   |  |   |         |   |  |   |        |  

16



---



##### 



Balance Sheet Data:

|                                                    |  |                    |         |                  |  |                  |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|--------------------------------------------------- |  | ------------------ | ------- | ---------------- |  | ---------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                    |  | As of December 31,
|                                                    |  |                   
|                                                    |  | 2002               |         | 2001             |  | 2000             |         | 1999 |  | 1998
|                                                    |  |                    |         |                  |  |                  |         |      |  |     
|                                                    |  |                    |         |                  |  | (In thousands)   |         |      |  |      |         |  |  |  
|                                                    |  | (As Restated)(a)   |         | (As Restated)(a) |  | (As Restated)(a) |         |      |  |      |         |  |  |  
|Working capital                                     |  | $                  | (75,919 | )                |  | $                | 4,817   |      |  | $    | 10,217  |  |  | $ | 10,189  |  |  | $ | 2,936   | 
|Total assets                                        |  |                    | 153,011 |                  |  |                  | 319,541 |      |  |      | 351,283 |  |  |   | 369,083 |  |  |   | 252,165 | 
|Long-term obligations, including
current maturities |  |                    | 81,146  |                  |  |                  | 91,928  |      |  |      | 111,519 |  |  |   | 104,826 |  |  |   | 68,394  | 
|Stockholders equity                                |  |                    | 17,930  |                  |  |                  | 167,290 |      |  |      | 164,286 |  |  |   | 190,148 |  |  |   | 124,944 | 

(a)  See Note 23 of the notes to the consolidated financial statements
regarding the restatement of the Companys 2002, 2001 and 2000 financial
statements.




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, 2002 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.

As discussed in Note 23 to the consolidated financial statements, the
Companys financial statements have been restated. The accompanying
Managements Discussion and Analysis of Financial Condition and Results of
Operations gives effect to that restatement.

Overview

Our subsidiaries are organized into three divisions  the Commercial
Wastewater Division, the Industrial Wastewater Division and the Oilfield Waste
Division. The Commercial Wastewater Division collects, processes and disposes
of nonhazardous liquid waste and recovers saleable by-products from certain
waste streams. The Industrial Wastewater Division collects, processes and
disposes of hazardous and nonhazardous waste and recovers saleable by-products
from certain waste streams. The Oilfield Waste Division processes and disposes
of waste generated in oil and gas exploration and production.

On November 6, 2002, we completed the sale of substantially all of the
Texas operations in our Commercial Wastewater Division. The transaction,
structured as an asset sale, included substantially all of our operations
principally involved in the collection and processing of grease and grit trap
waste, commercial wastewater treatment and field services in Houston, Dallas
and San Antonio. Gross proceeds from the sale, which were subject to certain
post-closing adjustments, amounted to $15.0 million.

During the quarter ended December 31, 2002, we decided to divest of or
suspend operations at several non-core and underperforming operations in our
Commercial Wastewater Division. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we have reported the assets, liabilities and
results of operations of these businesses and the Texas businesses referred to
above separately as discontinued operations and restated all prior period
financial information to present the results of continuing and discontinued
operations separately.

The Commercial Wastewater Division generated $71.2 million, or 47.2%, of
our revenues from continuing operations for the year ended December 31, 2002.
This Division derives revenues from two principal sources: fees received for
collecting, processing and disposing of nonhazardous liquid waste (such as
industrial wastewater, bulk liquids and dated beverages) and revenue obtained
from the sale of by-products, including industrial and fuel grade ethanol,
solvents, aluminum, glass, plastic and cardboard, recovered from certain waste
streams. Historically, some of our by-product sales involved the brokering of
industrial and fuel grade ethanol produced by third parties; however,
as of
December 31, 2001, we had essentially exited the ethanol brokerage business.
Collection and processing fees charged to customers vary per gallon by waste
stream according to the constituents of the waste, expenses associated with
processing the waste and competitive factors. By-products are commodities and
their prices fluctuate based on market conditions.

The Industrial Wastewater Division generated $59.6 million, or 39.5%, of
our revenues from continuing operations for the year ended December 31, 2002.
This Division derives revenues from fees charged to customers for collecting,
processing and disposing of
hazardous and nonhazardous liquid waste such as household hazardous wastes,
plating solutions, acids, flammable and reactive wastes,

17



---



##### 



and industrial
wastewater. Certain sludges and solid hazardous wastes are also processed. The
Industrial Wastewater Division also generates revenues from the sale of
by-products recovered from certain waste streams, including industrial
chemicals and recycled antifreeze products. The fees charged for processing and
disposing of hazardous waste vary significantly depending upon the constituents
of the waste. Collection and processing fees charged with respect to
nonhazardous liquid waste vary per gallon by waste stream according to the
constituents of the waste, expenses associated with processing the waste and
competitive factors.

The Oilfield Waste Division generated $20.1 million, or 13.3%, of our
revenues from continuing operations for the year ended December 31, 2002. This
Division derives revenues from fees charged to customers for processing and
disposing of oil and gas exploration and production waste, and cleaning tanks,
barges and other vessels and containers used in the storage and transportation
of oilfield waste. In order to match revenues with their related costs, when
waste is unloaded at one of our sites, we recognize the related revenue and
record a reserve for the estimated amount of expenses to be incurred to process
and dispose of the waste. As processing occurs, generally over nine to twelve
months, the reserve is depleted as expenses are incurred. Our operating margins
in the Oilfield Waste Division are typically higher than in the Commercial
Wastewater Division and in the Industrial Wastewater Division.

From the time of our formation in 1996 until June 30, 2002, Newpark
Resources, Inc. (Newpark) was the largest customer of the Oilfield Waste
Division. In 1998, we entered into a disposal agreement with Newpark whereby
we agreed to process specified amounts of oilfield waste each year for a period
of approximately three years in return for $30.0 million. Effective July 1,
2002, this disposal agreement was terminated. As part of the termination of
this disposal agreement, our related agreement not to compete with Newpark for
oilfield waste generated offshore and/or in inland waters of the Gulf Coast
region was also terminated. Although certain of our landfarms hold the permits
necessary to accept oilfield waste generated offshore and/or in inland waters
of the Gulf Coast region, in order to more effectively compete with Newpark and
other industry participants for such waste, on November 15, 2002, we purchased
from Trinity Storage Services, L.P. six oilfield waste transfer stations
located along the Gulf Coast of Louisiana and Texas for approximately $3.0
million in cash and warrants to purchase 100,000 shares of our common stock.
These transfer stations provide collection points for the receipt of offshore
oilfield waste from all of the major Gulf Coast markets.

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

Selling, general and administrative expenses include management, clerical
and administrative compensation and overhead relating to our corporate offices
and each of our operating sites, as well as professional services and costs.

Depreciation and amortization expenses relate to our landfarms and other
depreciable or amortizable assets. These assets are expensed over periods
ranging from three to 39 years. For operations previously classified as held
for sale, we suspended depreciation and adjusted amortization after giving
effect to the write-downs of the underlying assets.

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

Critical Accounting Policies

In response to the SECs Release No. 33-8040, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, we have identified the
accounting principles which we believe are most critical to our reported
financial status by considering accounting policies that involve the most
complex or subjective decisions or assessments. We identified our most
critical accounting policies to be those related to revenue recognition,
processing expenses, closure and remediation reserves and assessment of
goodwill impairment.

Revenue Recognition. In accordance with Staff Accounting Bulletin No.
101, Revenue Recognition, we recognize revenue from processing services when
material is unloaded at one of our facilities, if delivered by the customer, or
at the time of waste acceptance at the customers facility, if we collect the
materials from the customers facility. We recognize revenue at the time our
facility accepts the waste because the customer has passed the legal and
regulatory responsibility and associated risk of disposing the waste to us.
By-product sales are recognized when the by-product is shipped to the buyer.

Processing Expenses. Expenses associated with the waste processing cycle
can be broken down into two major components: those incurred within the same
accounting period as when the associated revenue is recognized and those
incurred after the accounting period in which the associated revenue was
recognized.

The majority of the expenses associated with the waste processing cycle
are incurred within the same accounting period as when the associated revenue
is recognized. These expenses include receiving personnel labor costs, lab
testing costs, compliance costs, and the
majority of the labor and equipment variable costs associated with the
waste treatment. The majority of the labor and equipment variable costs
associated with the treatment process are incurred within the first 30 days of
treatment.

18



---



##### 



Since revenue has been recognized at the time the service to the customer
was completed, we accrue the associated future expenses into a processing
reserve to establish a proper matching of revenues and all associated expenses.
Since the facilities have been operated the same way for several years, we
know what the treatment process costs us on a per unit basis. Thus, for every
unit of waste that is offloaded into the facility, we accrue an amount to
reflect the processing costs to be incurred subsequent to the initial
processing associated with that unit. As the treatment process concludes, we
will apply those actual costs incurred against the processing reserve.

Closure and Remediation Reserves. Our closure and remediation reserves
represent accruals for the total estimated costs associated with the ultimate
closure of our 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. The closure and remediation reserves include both our open and closed
facilities, as well as all third party sites for which we have been determined
to be a potentially responsible party and which require remediation. The
reserves required could be affected by changes in regulations, project
progress, technology changes or improvements, identification of changed
contamination levels, settlement of liability claims or other factors. The
reserves are then adjusted based on managements updated knowledge of the
applicable items above. We review the status of the reserves for each facility
and monitor all activity.

Goodwill Impairment.In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, effective January 1, 2002, material amounts of recorded
goodwill attributable to each of our reporting units were tested for impairment
by comparing the fair value of each reporting unit with its carrying value.
Fair value was determined using discounted cash flows, market sale transaction
multiples and comparable market capitalization multiples. Under SFAS No. 142,
an impairment test is required to be performed upon adoption and at least
annually thereafter. Significant estimates used in the methodologies include
estimates of future cash flows, future short-term and long-term growth rates,
weighted average cost of capital and estimates of market multiples for each of
the reportable units. On an ongoing basis (absent any impairment indicators),
we expect to perform our impairment tests during the first fiscal quarter.

Other critical accounting policies affecting judgments and estimates
include:

Allowance for Doubtful Accounts. We extend credit to customers and other
parties in the normal course of business. Estimated losses on accounts
receivable are provided through an allowance for doubtful accounts. In
evaluating the level of established reserves, management makes judgments
regarding the parties ability to make required payments, economic events and
other factors. As the financial condition of these parties change,
circumstances develop or additional information becomes available, adjustments
to the allowance for doubtful accounts may be required. We perform on-going
credit analyses of the accounts of our customers and provide allowances as
deemed necessary.

Income Taxes.We recognize deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Deferred tax assets and liabilities are
determined based on the differences between the financial statements carrying
amounts and the tax basis of assets and liabilities using enacted tax rates and
laws in effect in the years which the differences are expected to reverse. We
have established valuation allowances to reduce deferred income tax assets to
estimated realizable value.

Self-Insurance.We retain the risk for uninsured employee group health
clam deductibles which are subject to annual aggregate limits. Losses up to
the deductible amount are based upon the Companys known claims incurred and an
estimate of claims incurred but not reported. We have provided financial
assurance in the form of letters of credit to our insurance carrier. As claims
develop and additional information becomes available, adjustments to loss
reserves and the amount of such financial assurance may be required.

19



---



##### 



Special Charges

During each of the years ended December 31, 2002 and 2001, we recorded
special charges that increased net income. During the year ended December 31,
2000, we recorded special charges that reduced net income. Set forth below is
a description of these special charges.

2002 Adjustments and Insurance Settlement

|                                            |  |                |        |  
|------------------------------------------- |  | -------------- | ------ | -
|                                            |  | 2002 Special  
|Description                                 |  | Income        
|                                            |  |               
|                                            |  | (In thousands)
|Re-Claim Louisiana Lease Liability          |  | $              | (1,026 | )
|Insurance Claim Proceeds                    |  |                | (2,150 | )
|Detroit Fine Adjustment                     |  |                | (856   | )
|Reliance Bankruptcy Adjustment              |  |                | 727    |  
|Other Income, net                           |  |                | (78    | )
|                                            |  |               
|Total Special Income, net December 31, 2002 |  | $              | (3,383 | )
|                                            |  |               

As discussed below, in 2000, a reserve was set up for the remaining lease
liability at our former Re-Claim Louisiana facility due to the closing of the
facility. During the fourth quarter of 2002, we were able to negotiate a
cancellation of this lease by paying six months of rent in advance. As such,
the remaining liability of $1.0 million was reversed.

In addition to the claim filed and insurance proceeds received in 2001 (as
discussed below), we submitted a claim to one of our insurance companies for
losses incurred as a result of the temporary closing of our Detroit facility.
During the third quarter of 2002, we agreed to accept $2.4 million in complete
satisfaction of the claim under this policy. $2.15 million of this amount was
paid directly to us in September 2002 and the remainder was paid to the
attorneys representing us in this matter.

As discussed below, in 2001, a $5.0 million reserve was set up for the
possible settlement of the investigation of our Detroit facility. This amount
was adjusted during the fourth quarter of 2002 after considering the net
present value of the settlement reached in the fourth quarter.

As discussed below, in 2001, a $3.5 million reserve was set up for claims
not resolved before our former insurance carrier Reliance Insurance Company was
placed in liquidation. This amount was adjusted during the fourth quarter of
2002 after considering the net present value of certain settled obligations and
our estimate of the remaining possible claims.

2001 Regulatory and Legal Resolutions and Operations Held for Sale

|                                            |  |                |        |  
|------------------------------------------- |  | -------------- | ------ | -
|                                            |  | 2001          
|                                            |  | Special       
|Description                                 |  | Income        
|                                            |  |               
|                                            |  | (In thousands)
|National Steel Settlement                   |  | $              | (7,500 | )
|Insurance Claim Proceeds                    |  |                | (3,750 | )
|Detroit Fine                                |  |                | 5,000  |  
|Reliance Bankruptcy                         |  |                | 3,500  |  
|Goodwill Write-down                         |  |                | 1,155  |  
|Other Income, net                           |  |                | (8     | )
|                                            |  |               
|Total Special Income, net December 31, 2001 |  | $              | (1,603 | )
|                                            |  |               

During 2000, we filed suit against National Steel Corporation (National
Steel) for not properly identifying PCB contaminated materials as required by
law when delivered to our Detroit facility. In filing the suit, we were
seeking to recover the costs incurred and the losses suffered by the facility
as a result of National Steels non-disclosure. In April 2001, we entered into
a settlement agreement with National Steel. As part of the settlement
agreement, in April 2001, National Steel paid $7.5 million to us.

In addition to filing suit against National Steel, we also submitted a
claim under our property damage policy for losses incurred as a result of the
temporary closing of the Detroit facility in August 1999 and the delivery of
PCB contaminated waste to a landfill owned by Waste

20



---



##### 



Management, Inc. During
the third quarter of 2001, we agreed to accept $3.75 million in complete
satisfaction of our claim under the policy. The funds were paid to us in
August 2001.

In 1999, the EPA and the FBI executed a search warrant at the Detroit
facility seeking documentation relating to the facilitys operations. During
the fourth quarter of 2001, we established a reserve of $5.0 million for
amounts expected to be paid in connection with a possible settlement of this
matter. See Item 3. Legal Proceedings above.

Reliance Insurance Company (Reliance) provided casualty insurance
coverage for the Company. In October 2001, Reliance was declared insolvent by
the Insurance Commissioner of the State of Pennsylvania. As a result,
insurance coverage will not be available for any claims or lawsuits that were
not resolved prior to Reliance being placed into liquidation. During the
fourth quarter of 2001, $3.5 million was reserved for any claims or lawsuits
that were not resolved prior to Reliance being placed into liquidation.

During the fourth quarter of 2000, we approved the divestiture of certain
non-core operations and recorded special charges related thereto. During the
fourth quarter of 2001, the remaining assets classified as held for sale were
further adjusted to fair value resulting in a write-down of goodwill of
approximately $1.2 million. In December 2001, we made the decision to
assimilate the remaining operations back into our core business.

2000 Operations Held for Sale or Closure

|                                             |  |                |         |  
|-------------------------------------------- |  | -------------- | ------- | -
|                                             |  | 2000 Special  
|Description                                  |  | Charges       
|                                             |  |               
|                                             |  | (In thousands)
|Estimate of Losses on Sales                  |  | $              | 2,622   |  
|Re-Claim Louisiana Shut Down                 |  |                | 10,221  |  
|Legal Fees                                   |  |                | 208     |  
|PCB Costs at Detroit                         |  |                | 471     |  
|Disposal Agreement Termination               |  |                | (12,814 | )
|                                             |  |               
|Total Special Charges, net December 31, 2000 |  | $              | 708     |  
|                                             |  |               

During the fourth quarter of 2000, we recorded special charges relating
primarily to decisions to dispose of or suspend certain operations offset by
the favorable effect of the settlement of a dispute. The special charges
included (i) $2.6 million for estimated losses from the sale of certain
operations in the Commercial Wastewater Division, (ii) $10.2 million for the
closure of the Re-Claim Louisiana facility, which included approximately $1.6
million for processing costs and approximately $1.6 million for the remaining
lease liability, (iii) legal fees of $208,000 associated with (i) and (ii)
above, and (iv) additional charges of $471,000 for the disposal of PCB
contaminated materials at our Detroit facility. During this period, we also
recognized net pre-tax income of $12.8 million relating to the termination of a
disposal agreement with Waste Management, Inc. that was entered into in May
1998 in connection with the acquisition of the Detroit facility.

Results of Operations

Years Ended December 31, 2002 and 2001

Revenues.Revenues for the year ended December 31, 2002 decreased $21.9
million, or 12.7%, from $172.9 million for the year ended December 31, 2001 to
$150.9 million for the year ended December 31, 2002.

The Commercial Wastewater Division contributed $71.2 million, or 47.2%, of
2002 revenues and $81.4 million, or 47.1%, of 2001 revenues. Collection and
processing fees generated $59.6 million, or 83.7%, and $65.2 million, or 80.1%,
of the Commercial Wastewater Divisions revenues for 2002 and 2001,
respectively. Revenues from collection and processing of waste decreased $5.6
million, or 8.6%, due primarily to less event driven projects in 2002 compared
to 2001 mainly in the eastern United States. By-product sales generated the
remaining $11.6 million, or 16.3%, and $16.2 million, or 19.9%, of the
Commercial Wastewater Divisions revenues for 2002 and 2001, respectively. The
decrease in by-product sales was primarily due to exiting the brokered ethanol
business and decreased volumes of waste processed.

The Industrial Wastewater Division contributed $59.6 million, or 39.5%, of
2002 revenues and $64.4 million, or 37.3%, of 2001 revenues. The Industrial
Wastewater Divisions revenues decreased $4.8 million, or 7.4%, primarily due
to the impact of the slowdown
in the technology sector on our West Coast facility, offset in part by improved
performance at our Detroit facility of $2.1 million. Collection and processing
fees generated $54.0 million, or 90.6%, and $58.4 million, or 90.7%, of the
Industrial Wastewater Divisions

21



---



##### 



revenues for 2002 and 2001, respectively.
By-product sales generated the remaining $5.6 million, or 9.4%, and $6.0
million, or 9.3%, of the Industrial Wastewater Divisions revenues for 2002 and
2001, respectively.

The Oilfield Waste Division contributed $20.1 million, or 13.3%, of 2002
revenues and $27.1 million, or 15.6%, of 2001 revenues. The Oilfield Waste
Divisions revenues decreased approximately $7.0 million, or 25.8%, primarily
due to the non-renewal of our agreement with Newpark Resources, combined with a
reduction in the rig count in 2002 compared to 2001. The Newpark Resources
agreement generated approximately $9.6 million in revenues in 2001 compared to
approximately $4.7 million in 2002.

Operating Expenses.Operating expenses decreased $10.8 million, or 8.9%,
from $120.4 million for the year ended December 31, 2001 to $109.6 million for
the year ended December 31, 2002. As a percentage of revenues, operating
expenses increased from 69.6% in 2001 to 72.6% in 2002. The increase was
primarily due to those operations with decreased revenues in the Commercial
Wastewater Division that did not have a proportionate decrease in operating
expenses. In addition, operating costs were higher as a percentage of revenues
in the Oilfield Waste Division as a result of the non-renewal of our agreement
with Newpark Resources.

Depreciation and Amortization.Depreciation and amortization expenses
decreased $2.4 million, or 17.9%, from $13.3 million for the year ended
December 31, 2001 to $10.9 million for the year ended December 31, 2002. The
decrease was attributable primarily to the discontinued amortization of
goodwill in accordance with SFAS No. 142. Goodwill amortization from
continuing operations in the prior year period amounted to approximately $3.4
million. The decrease was partially offset by increased depreciation expense
of $0.5 million due to the implementation during 2002 of a new operating and
billing system. As a percentage of revenues, depreciation and amortization
expenses decreased from 7.7% in 2001 to 7.2% in 2002.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses increased $3.3 million, or 15.3%, from $21.9 million
for the year ended December 31, 2001 to $25.2 million for the year ended
December 31, 2002. The increase resulted primarily from severance expenses of
$1.8 million and increased professional fees of $0.8 million. As a percentage
of revenues, selling, general and administrative expenses increased from 12.6%
in 2001 to 16.7% in 2002.

Goodwill Impairment.During the third quarter of 2002, several goodwill
impairment indicators arose prompting us to perform the impairment test
dictated by SFAS No. 142. Based on the results of the test, in the quarter
ended September 30, 2002, we recorded a charge of $51.0 million. During the
fourth quarter of 2002, we sold the majority of our Texas operations and
recognized a goodwill impairment charge of $0.8 million related to the retained
Texas operations. Due to the implementation of SFAS No. 144, $11.7 million of
the impairment charge recorded in the third quarter of 2002 was reclassified
during the fourth quarter to discontinued operations.

Special Charge (Income), net.Special income, net increased from $1.6
million in 2001 to $3.4 million in 2002. The 2002 items consisted of (a) a
$1.0 million reduction of a reserve for the Re-Claim Louisiana lease liability
as a result of a negotiated cancellation of the lease, (b) $2.15 million
received from an insurance claim filed as a result of the closure of our
Detroit facility in August 1999, (c) a reduction of $0.9 million to adjust the
reserve initially established for the settlement of the investigation of the
Detroit facility to its net present value, (d) an additional reserve of $0.7
million to increase the reserve established as a result of the liquidation of
our former insurance carrier, Reliance, for any claims or lawsuits that were
not resolved prior to Reliance being placed into liquidation and (e)
miscellaneous income of $0.1 million. The 2001 items consisted of (a) $7.5
million received as a result of our settlement agreement with National Steel,
(b) $3.75 million received from a claim filed under a property damage policy as
a result of the closure of our Detroit facility, (c) a $5.0 million reserve for
the possible settlement of the investigation at our Detroit facility, (d) a
$3.5 million reserve as a result of the liquidation of Reliance, (e) a goodwill
write-down of $1.2 million as a result of an operation previously classified as
held for sale being adjusted to fair value and (f) miscellaneous income of
$0.08 million.

Interest Expense and Other Income, net.Interest expense and other
income, net decreased approximately $0.4 million, or 4.4%, from $9.1 million
for the year ended December 31, 2001 to $8.7 million for the year ended
December 31, 2002. This decrease resulted from reduced borrowings under our
revolving credit facility and lower interest rates offset partially by lower
levels of other income.

Income Taxes.We recognized an income tax benefit of $2.3 million for
the year ended December 31, 2002 as compared to an income tax expense of $3.1
million for the year ended December 31, 2001. The 2002 income tax benefit
primarily represents the portion of income taxes paid in prior years which we
could recover from carrying back losses. In the year ended December 31, 2001,
we provided income taxes on that years taxable income.

Cumulative Effect of Change in Accounting Principle.Effective January 1,
2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets, which
establishes new accounting and reporting requirements for goodwill and other
intangible assets. Under SFAS No. 142, all goodwill amortization ceased
effective January 1, 2002. Under SFAS No. 142, an impairment test is required
to be performed upon adoption and at least annually thereafter. The impairment
test is the result of adopting a fair value approach to testing goodwill as
compared to the previous method utilized in which evaluations of goodwill
impairment were made using the estimated future undiscounted cash flows
compared to the carrying amount. During 2002, we recognized total charges of
$91.0 million as a result of the adoption of SFAS No. 142. See Note 10 to our
consolidated financial statements for further information.

22



---



##### 



Years Ended December 31, 2001 and 2000

Revenues. Revenues for the year ended December 31, 2001 decreased $2.7
million, or 1.6%, from $175.6 million for the year ended December 31, 2000 to
$172.9 million for the year ended December 31, 2001.

The Commercial Wastewater Division contributed $81.4 million, or 47.1%, of
2001 revenues and $96.8 million, or 55.1%, of 2000 revenues. Collection and
processing fees generated $65.2 million, or 80.1%, and $66.4 million, or 68.6%,
of the Commercial Wastewater Divisions revenues for 2001 and 2000,
respectively. Revenues from collection and processing of waste decreased $1.2
million, or 1.8%, primarily due to the benefit in fiscal year 2000 of revenues
generated from a major oil spill project. By-product sales generated the
remaining $16.2 million, or 19.9%, and $30.4 million, or 31.4%, of the
Commercial Wastewater Divisions revenues for 2001 and 2000, respectively.
Revenues from the sale of by-products decreased $14.1 million, or 46.5%,
primarily due to lower brokered ethanol sales. As of December 31, 2001, we had
essentially exited the business of brokering ethanol produced by third parties.

The Industrial Wastewater Division contributed $64.4 million, or 37.3%, of
2001 revenues and $57.1 million, or 32.5%, of 2000 revenues. Collection and
processing fees generated $58.4 million, or 90.7%, and $52.2 million, or 91.3%,
of the Industrial Wastewater Divisions revenues for 2001 and 2000,
respectively. Revenues from the collection and processing of waste increased
$6.3 million, or 12.0%, primarily due to improved performance at our Detroit
facility of $6.1 million. By-product sales generated the remaining $6.0
million, or 9.3%, and $4.9 million, or 8.7%, of the Industrial Wastewater
Divisions revenues for 2001 and 2000, respectively.

The Oilfield Waste Division contributed $27.1 million, or 15.6%, of 2001
revenues and $21.7 million, or 12.4%, of 2000 revenues. The Oilfield Waste
Divisions revenues increased $5.4 million, or 24.7%, primarily due to
increased on-shore drilling activity.

Operating Expenses.Operating expenses decreased $9.4 million, or 7.3%,
from $129.8 million for the year ended December 31, 2000 to $120.4 million for
the year ended December 31, 2001. As a percentage of revenues, operating
expenses decreased from 73.9% in 2000 to 69.6% in 2001. This decrease resulted
from lower brokered ethanol sales, which produced margins in the range of -2.0%
to 2.0%. Operating improvements implemented at our Detroit facility also
contributed to this decrease, as well as our Oilfield Division, which
maintained its cost base with a significant revenue increase. Expenses also
improved due to a reduction in estimated uninsured losses of $1.4 million at
the end of the annual insurance year in August 2001.

Depreciation and Amortization. Depreciation and amortization expenses
increased $0.2 million, or 1.9%, from $13.1 million for the year ended December
31, 2000 to $13.3 million for the year ended December 31, 2001. As a
percentage of revenues, depreciation and amortization expenses increased from
7.4% in 2000 to 7.7% in 2001.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $7.2 million, or 24.7%, from $29.0 million
for the year ended December 31, 2000 to $21.9 million for the year ended
December 31, 2001. As a percentage of revenues, selling, general and
administrative expenses decreased from 16.5% in 2000 to 12.6% in 2001. This
improvement resulted primarily from decreased legal fees of $2.4 million and
decreased bad debt expense of $2.1 million. In addition, the 2000 fiscal year
included severance expenses of $2.1 million associated with the resignation of
a senior executive officer and the elimination of our market development
department.

Special Charge (Income), net.Special income, net in 2001 consisted of
(a) $7.5 million received as a result of our settlement agreement with National
Steel, (b) $3.75 million received from a claim filed under a property damage
policy as a result of the closure of our Detroit facility, (c) a $5.0 million
reserve for the possible settlement of the investigation at our Detroit
facility, (d) a $3.5 million reserve as a result of the liquidation of
Reliance for any claims or lawsuits that were not resolved prior to Reliance
being placed into liquidation, (e) a goodwill write-down of $1.2 million as a
result of an operation previously classified as held for sale adjusted to fair
value and (f) miscellaneous income of $0.08 million. Special charge, net in
2000 consisted of (a) $2.6 million associated with the decision to dispose of
an operation in the Commercial Wastewater Division, (b) $10.2 million for the
closure of the Re-Claim Louisiana facility, (c) $0.2 million for legal fees
associated with (a) and (b) above, (d) $0.5 million of additional charges for
the disposal of PCB contaminated materials at our Detroit facility and (e)
$12.8 million, net pre-tax income relating to the termination of a disposal
agreement with Waste Management, Inc.

Interest Expense and Other Income, net. Interest expense and other
income, net decreased $1.5 million, or 13.8%, from $10.6 million for the year
ended December 31, 2000 to $9.1 million for the year ended December 31, 2001.
This decrease resulted from lower interest rates and reduced borrowings.

Income Taxes. The provision for income taxes decreased $1.8 million, or
37.4%, from $4.9 million for the year ended December 31, 2000 to $3.1 million
for the year ended December 31, 2001 primarily due to the release of valuation
allowances on prior year book losses on operations held for sale.

23



---



##### 



Liquidity and Capital Resources

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. Our capital resources
consist of cash reserves, cash generated from operations and funds available
under our revolving credit facility.

At December 31, 2002, we had negative working capital of $75.9 million.
The working capital deficit is primarily the result of including our revolving
credit facility in current liabilities. The facility, which matures on April
15, 2003, had an outstanding balance of approximately $76.8 million at December
31, 2002. We are working with our lenders on the terms of a three-month
extension request that, if approved, is expected to satisfy our near-term
working capital needs and allow additional time to secure new financing. Based
on discussions with our lenders, we believe that any extension of the line of
credit past the April 15, 2003 maturity date is unlikely to be granted until
late March or early April 2003, if at all.

On March 31, 2003, a quarterly interest payment of $1.8 million is due on
the credit facility. We do not expect to have the funds available to make this
payment and have asked our lenders to defer the payment as part of the
requested extension of the maturity date of the credit facility. There can be
no assurance that we will be successful in obtaining an extension of the
maturity date of the credit facility or a deferral of the quarterly interest
payment due on March 31, 2003.

Our recent performance has caused us to violate various financial
covenants of our credit facility. Prior to December 31, 2002, our lenders had
been issuing short-term waivers. At December 31, 2002, we were not in
compliance with the Funded Debt to Adjusted EBITDA ratio set forth in the
credit agreement. Our lenders have not declared an event of default as a
result of our noncompliance with this ratio; however, they have retained the
right to do so.

During 2002, the terms of the credit facility were amended on multiple
occasions to remedy our non-compliance with certain financial covenants,
restrict borrowings available to us and to approve the sales and acquisition of
various of our operations. Furthermore, the amendments provided that the
amount of the credit facility will be permanently reduced by an amount equal to
one hundred percent of the net cash proceeds received from any sale of assets
not in the ordinary course of business, the issuance of certain debt or, with
certain specified exceptions, any issuance of equity. The terms of the credit
facility significantly limit our ability to enter into leases or obtain
additional debt outside of the facility. During the course of these
amendments, we agreed to retain financial advisors acceptable to the lenders.

Between December 31, 2002 and January 31, 2003, the terms of the credit
facility were further amended to increase the limitation on our debt balance to
4.00 times Adjusted EBITDA, as defined in the credit agreement, permit the
addback of EBITDA of up to $4.0 million of non-cash charges, and to require
monthly reporting of our Funded Debt to Adjusted EBITDA and accounts receivable
coverage ratios. Additionally, our lenders consented to the sale of various
assets aggregating $1.8 million in sales price, provided that the net cash
proceeds are used to reduce outstanding debts, and agreed to lend us up to $2.5
million to make payments on a finite risk bonding program. In March 2003, we
retained an investment banker to pursue the sale of a major business unit of
the Company. In exchange, the lenders eliminated the $3.4 million commitment
reduction that had been previously deferred from the original due date of
December 31, 2002.

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
certain individuals cease to serve as an executive officer of the Company and
are not replaced within sixty days by an individual reasonably satisfactory to
the lenders. The lenders have waived through April 15, 2003 an event of default
arising from the resignation of Michael P. Lawlor, our former Chief Executive
Officer. On August 29, 2002, William DeArman, the Chairman of the Board of
Directors, was appointed interim Chief Executive Officer. On October 31, 2002,
the Board of Directors made his position permanent. The lenders have continued
to waive the default arising from Mr. Lawlors departure, but have not yet
approved Mr. DeArmans appointment.

To address the factors that have caused the violations of our credit
agreement, our Board of Directors and management have taken the following
actions:



| |  |  | employed a new executive management team;                                                                                                                                 
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | engaged a financial advisor, as requested by our lenders, to focus on financial restructuring plans;                                                                      
|
| |  |  | implemented cost cutting measures such as reductions in
workforce and a temporary freeze on previously authorized pay
increases;                                          
|
| |  |  | sold substantially all of the Texas operations in our
Commercial Wastewater Division, and used a substantial portion of
the proceeds therefrom to reduce outstanding debt;

24



---



##### 





| |  |  | identified for sale or closure several additional
underperforming businesses; and                                                                    
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | acquired six oilfield waste transfer stations in Louisiana and
Texas to replace the business lost from the non-renewal of our
agreement with Newpark.

Management is also:



| |  |  | pursuing the sale of a major business unit of the Company as requested by our lenders;                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | exploring the possibility of selling other non-core operations;                                                               
|
| |  |  | analyzing each of the Companys operations for opportunities to
reduce costs, improve processes and increase efficiencies; and
|
| |  |  | actively seeking new financing and equity.                                                                                    

As of December 31, 2002 and March 10, 2003, we had outstanding borrowings
of approximately $76.8 million under our revolving credit facility. Letters of
credit under the credit facility totaled $8.2 million and $8.0 million as of
December 31, 2002 and March 10, 2003, respectively. Advances under the credit
facility currently bear interest at the prime rate plus 6.0%. This includes a
2% default penalty as a result of our non-compliance with the Funded Debt to
Adjusted EBITDA ratio. As of December 31, 2002 and March 10, 2003, amounts
outstanding under the credit facility were accruing interest at approximately
8.3% and 10.3%, respectively, excluding amortization of prepaid financing
costs. As of March 10, 2003, the unused portion of the credit facility was
$4.2 million, none of which was available.

We are also engaged in negotiations and due diligence with several
institutional investors regarding an investment in exchange for equity or
subordinated notes. We believe that this new capital would enable us to obtain
a new credit facility and that both sources of capital would pay off the
current credit facility and provide working capital. There can be no assurance
that we will be successful in our refinancing efforts and any refinancing
transaction is expected to result in substantial dilution to current
stockholders. Our auditors have stated in their report that the working
capital deficit caused by the close proximity of the maturity of our revolving
credit facility and the lack of compliance with our credit facility raises
substantial doubts about our ability to continue as a going concern. If we are
unable to successfully restructure our indebtedness, we may be required to seek
protection under the bankruptcy laws.

Operating Cash Flows

Cash flows from operations were $9.9 million and $24.6 million for the
years ended December 31, 2002 and 2001, respectively. Cash flows from
operations for the year ended December 31, 2001 benefited substantially from a
$7.5 million payment we received in April 2001 from National Steel as part of
the settlement of our lawsuit against them and the $3.8 million payment we
received in August 2001 from our insurance carrier for losses incurred as a
result of the temporary closure of our Detroit facility in 1999. Cash flows
for the year ended December 31, 2002 benefited substantially from a $2.2
million payment we received in September 2002 from our secondary insurance
carrier for losses incurred as a result of the temporary closure of our Detroit
facility in 1999. We had negative net working capital of $75.9 million at
December 31, 2002, compared to net working capital of $4.8 million at December
31, 2001. This decrease in net working capital is primarily due to the
classification of our credit facility as short-term.

At December 31, 2002, we had a $3.9 million reserve to provide for the
cost of future closures of facilities. The amount of this unfunded reserve is
based on the estimated total cost to close the facilities as calculated in
accordance with the applicable regulations. Regulatory agencies require us to
post financial assurance to assure that when a facility is closed, all waste at
the facility will be treated and the facility will be closed appropriately. As
of December 31, 2002, we had in place a total of $12.0 million of financial
assurance in the form of letters of credit and bonds to provide for the cost of
future closings of facilities. As of December 31, 2002, we also had a $2.8
million unfunded reserve to provide for the costs to remediate soil and
groundwater contamination at our facility in East Palo Alto, California, and
our share of the costs to remediate drum reconditioning or disposal sites
previously used by our subsidiaries. In 2003, we expect to pay approximately
$0.2 million of these remediation reserves.

At December 31, 2002, we also had a $3.7 million unfunded reserve for the
payment of insurance claims that will not be covered by Reliance Insurance
Company, our former insurance carrier that was placed into liquidation.
Certain of these insurance claims have been resolved and we have committed to
making payments of $1.0 million during 2003 and $0.7 million in 2004.
Additional payments above these commitments may be required but are unknown at
this time.

In October 2002, U S Liquids of Detroit, Inc., one of our subsidiaries,
entered into an agreement with the U.S. Attorney in Detroit resolving the
investigation of our Detroit facility that was commenced by the EPA and the FBI
in August 1999. Payments of penalties and other charges assessed by the
government totaling $5.5 million will be required over five years with $0.2
million paid in the fourth quarter of 2002, $1.2 million to be paid in 2003,
$1.0 million to be paid in each of 2004, 2005 and 2006, and $1.1 million to be
paid in 2007. In 2001, we recorded a $5.0 million unfunded reserve for these
payments. After considering the net present value of the total obligation,
this

25



---



##### 



reserve was reduced to $4.1 million during the fourth quarter of 2002. An
additional charge may be required if interest is imposed on the deferred
payments. See Item 3. Legal Proceedings.

Many of our customers require us to post performance bonds to secure our
performance under the terms of a contract and to guarantee that we will pay
subcontractors and vendors. We are also required to provide financial
assurance in order to obtain or renew operating permits and to guarantee that
our permitted facilities will be closed in accordance with applicable law. We
establish financial assurance for these matters in different ways, depending on
the jurisdiction, including letters of credit, surety bonds, trust agreements
and traditional insurance. The market for financial assurance is tightening
and due to our current financial condition there can be no assurance that we
will be able to continue to obtain financial assurance on commercially
reasonable terms without providing additional collateral, which collateral may
not be available. Continued availability of such financial assurance in
sufficient amounts at acceptable rates is a vital aspect of our ongoing
operations, and our failure to obtain any such financial assurance would have a
material adverse effect on our business, results of operations and financial
condition. In January 2003, we made the initial payment on a ten-year finite
risk insurance policy. This policy provides up to $18 million toward the
projected closure obligations for our facilities, as well as up to $12.4
million of performance bonding capacity. Management believes that this policy
will satisfy all of our bonding needs for the foreseeable future but there can
be no assurance that this policy will be sufficient to satisfy all of our
future bonding needs.

2003 operating cash flows from continuing operations are estimated to be
approximately $8.8 million. This amount is net of all projected interest
costs, expected payments on reserves and obligations on the Companys finite
risk bonding program. Operating cash flows will be the primary source of
funding our capital budget in 2003. Any remaining amounts will be used to fund
costs associated with our re-financing efforts and to reduce outstanding debts.
Projected interest costs have been calculated using the interest rates
currently in effect under our revolving credit facility and do not contemplate
a possible refinancing of our existing indebtedness. In addition, our
projected interest costs assume a 1.25% increase in the prime rate over the
course of the year.

Investing Activities

Capital expenditures
during 2002 were $7.7 million. The majority of the
capital expenditures were for plant expansions, equipment and vehicle upgrades,
as well as injection wells and excavation of disposal cells. In addition, on
November 15, 2002, we acquired six oilfield waste transfer stations from
Trinity. The total consideration for this acquisition was approximately $3.0
million in cash and warrants to purchase 100,000 shares of our common stock.

On November 6, 2002, we completed the sale of substantially all of our
Texas operations in the Commercial Wastewater Division for gross proceeds of
$15 million, of which $13.25 million was received at closing. Of the amount
received at closing, $9.0 million was used to pay down our debt balance, $2.5
million was used to complete the Trinity acquisition and $1.75 million was
retained for immediate working capital needs related to the sold businesses.

Capital expenditures for our continuing operations for 2003 are estimated
at approximately $6.1 million. Approximately $2.1 million of this amount is
scheduled to be invested in the Commercial Wastewater Division for vehicles and
plant improvements. Approximately $2.7 million is scheduled to be invested in
the Industrial Wastewater Division for plant improvements and expansion and
equipment. Approximately $1.2 million is budgeted for the Oilfield Waste
Division. The remaining $0.1 million will be used for software and computer
upgrades at our corporate headquarters.

Financing Activities

At December 31, 2002, approximately $78.5 million of principal payments on
debt obligations were payable during the next twelve months. These payments
are expected to be funded from operating cash flows and from borrowings against
our revolving credit facility, if the facility is extended.

26



---



##### 



Our future contractual obligations include:

|                                   |  |                        |        |      |  |      |       |      |  |      |       |            |  |                |       |  |  |   |       |  |  |   |        |  |  |   |         | 
|---------------------------------- |  | ---------------------- | ------ | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---------- |  | -------------- | ----- |  |  | - | ----- |  |  | - | ------ |  |  | - | ------- | 
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                        |        |      |  |      |       |      |  |      |       |            |  | (In thousands) |       |  |  |   |       |  |  |  
|                                   |  | Less than              |        |      |  |      |       |      |  |      |       |            |  |                |       |  |  |   |       |  |  |   |        |  |  |  
|Contractual Obligations            |  | 1 year                 |        | 2004 |  | 2005 |       | 2006 |  | 2007 |       | Thereafter |  | Total         
|                                   |  |                        |        |      |  |      |       |      |  |      |       |            |  |               
|Debt and Capital Lease
Obligations |  | $                      | 78,480 |      |  | $    | 821   |      |  | $    | 430   |            |  | $              | 424   |  |  | $ | 17    |  |  | $ | 982    |  |  | $ | 81,154  | 
|Operating Lease
Obligations        |  |                        | 3,493  |      |  |      | 2,551 |      |  |      | 1,953 |            |  |                | 1,609 |  |  |   | 1,282 |  |  |   | 8,650  |  |  |   | 19,538  | 
|Closure and Remediation
Reserves   |  |                        | 178    |      |  |      | 750   |      |  |      | 500   |            |  |                | 250   |  |  |   | 250   |  |  |   | 4,740  |  |  |   | 6,668   | 
|Detroit Settlement
Agreement       |  |                        | 908    |      |  |      | 605   |      |  |      | 684   |            |  |                | 773   |  |  |   | 974   |  |  |   |       |  |  |   | 3,944   | 
|Reliance Insolvency
Obligations    |  |                        | 788    |      |  |      | 610   |      |  |      |      |            |  |                |      |  |  |   |      |  |  |   |       |  |  |   | 1,398   | 
|Severance Obligations              |  |                        | 1,134  |      |  |      | 606   |      |  |      | 275   |            |  |                |      |  |  |   |      |  |  |   |       |  |  |   | 2,015   | 
|                                   |  |                        |        |      |  |      |       |      |  |      |       |            |  |                |       |  |  |   |       |  |  |   |        |  |  |   |         | 
|                                   |  | $                      | 84,981 |      |  | $    | 5,943 |      |  | $    | 3,842 |            |  | $              | 3,056 |  |  | $ | 2,523 |  |  | $ | 14,372 |  |  | $ | 114,717 | 
|                                   |  |                        |        |      |  |      |       |      |  |      |       |            |  |                |       |  |  |   |       |  |  |   |        |  |  |   |         | 

Our other commercial commitments expire as follows:

|                          |  |                                            |        |      |  |      |     |      |  |      |   |            |  |                |   |  |  |   |     |  |  |   |   |  |  |   |        | 
|------------------------- |  | ------------------------------------------ | ------ | ---- |  | ---- | --- | ---- |  | ---- | - | ---------- |  | -------------- | - |  |  | - | --- |  |  | - | - |  |  | - | ------ | 
|                          |  | Amount of Commitment Expiration Per Period
|                          |  |                                           
|                          |  |                                            |        |      |  |      |     |      |  |      |   |            |  | (In thousands) |   |  |  |   |     |  |  |  
|Other Commercial          |  | Less than                                  |        |      |  |      |     |      |  |      |   |            |  |                |   |  |  |   |     |  |  |   |   |  |  |  
|Commitments               |  | 1 year                                     |        | 2004 |  | 2005 |     | 2006 |  | 2007 |   | Thereafter |  | Total          |  
|                          |  |                                            |        |      |  |      |     |      |  |      |   |            |  |                |  
|Standby Letters
of Credit |  | $                                          | 8,190  |      |  | $    |    |      |  | $    |  |            |  | $              |  |  |  | $ | 253 |  |  | $ |  |  |  | $ | 8,443  | 
|Performance Bonds(1)      |  |                                            | 10,348 |      |  |      | 210 |      |  |      |  |            |  |                |  |  |  |   |    |  |  |   |  |  |  |   | 10,558 | 
|                          |  |                                            |        |      |  |      |     |      |  |      |   |            |  |                |   |  |  |   |     |  |  |   |   |  |  |   |        | 
|                          |  | $                                          | 18,538 |      |  | $    | 210 |      |  | $    |  |            |  | $              |  |  |  | $ | 253 |  |  | $ |  |  |  | $ | 19,001 | 
|                          |  |                                            |        |      |  |      |     |      |  |      |   |            |  |                |   |  |  |   |     |  |  |   |   |  |  |   |        | 

(1) Consists of short-term bonds
securing our performance under the terms of certain contracts with certain of our customers.

In January 2003, we entered into a ten-year finite risk insurance policy
to provide up to $18 million toward the projected closure obligations for our
facilities. $2.5 million was paid at inception with $2.3 million remaining due
in 2003, $0.5 million due in each of 2004 through 2006 and $0.4 million due in
each of 2007 through 2011. The total policy premium is $8.0 million. The
policy may be canceled on any anniversary date of the policy. In the event of
cancellation, 90% of all premium payments made, plus interest and less closure
costs paid, is refundable to the Company.

Related Party Transactions

On December 31, 1998, we sold to a company owned by a then director of the
Company substantially all of the assets used in the distribution of various
by-products of our grease processing facilities. This individual was no longer
a director of the Company as of December 31, 1999. As part of the purchase, we
recorded a note receivable; however, as of December 31, 2000, the uncollected
balance of approximately $550,000 was written off as the balance was deemed
uncollectible. The former director has been making modest payments totaling
approximately $83,000 for the year ended December 31, 2002.

On September 21, 2000, we acquired certain assets of Safari Environmental
Management Services LLC. In connection with the acquisition, we issued notes
payable to the three former owners of Safari. The total amount payable at
December 31, 2002 was $110,000 and is due in two remaining equal annual
installments on the anniversary date of the purchase.

27



---



##### 



New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, Accounting for Asset Retirement Obligations, that addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and associated costs. SFAS No. 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
the fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. The
provisions of SFAS No. 143 were effective for the Company as of January 1,
2003. We are evaluating the provisions of SFAS No. 143 and at present have not
determined the impact of adopting SFAS No. 143. Adoption of SFAS No. 143 could
have a material impact on our results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, that addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 requires that one accounting model be used for long-lived assets
to be disposed of by sale and broadens the presentation of discontinued
operations to include more disposal transactions. We adopted SFAS No. 144 on
January 1, 2002. See Note 6 to our consolidated financial statements for a
discussion regarding the impact of adoption of this statement.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt and an amendment of that statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No.
145 also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor
Carriers. SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS
No. 145 also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The provisions of this statement were required to be
adopted at various times during 2002 and did not have an impact on the December
31, 2002 financial statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally EITF Issue No. 94-3. We adopted the provisions of SFAS
No. 146 for restructuring activities initiated after December 31, 2002. SFAS
No. 146 requires that the liability for costs associated with an exist or
disposal activity be recognized when the liability is incurred. Under EITF
Issue No. 94-3, a liability for an exit cost was recognized at the date of
commitment to an exit plan. SFAS No. 146 also establishes that the liability
should initially be measured and recorded at fair value. Accordingly, SFAS No.
146 may affect the timing of recognizing future restructuring costs as well as
the amounts recognized. We will apply the effects of this statement on a
prospective basis.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS No.
123, which addresses alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. We adopted
the annual disclosure requirements as of December 31, 2002 and will begin
disclosing the required interim financial information for the quarter ending
March 31, 2003.

In November 2002, FASB Interpretation (FIN) No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others, elaborates on the disclosure to be made
by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. This Interpretation
also incorporates, without change, the guidance in FIN No. 34, which is being
superseded. As set forth in the Interpretation, the disclosures required are
designed to improve the transparency of the financial statement information
about the guarantors obligations and liquidity risks related to guarantees
issued. The fair values of guarantees entered into after December 31, 2002
must be recorded as a liability of the guarantor in its financial statements.
Existing guarantees as of December 31, 2002 are grandfathered from the
recognition provisions, unless they are later modified, but they are still
required to be disclosed. The disclosure requirements are effective for
periods ending after December 15, 2002. See Note 20 to our consolidated
financial statements for the required disclosures as of December 31, 2002.




Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, notes and capital leases payable, and debt
obligations. The book value of cash and cash equivalents, accounts receivable,
accounts payable and short-term notes payable are considered to be
representative of fair value because of the short maturity of these
instruments. We estimate that the fair value of all of our debt obligations
approximated $80.7 million as of December 31, 2002.

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

28



---



##### 



our revolving credit facility. As of March
10, 2003, $76.8 million had been borrowed under the revolving credit facility.
As of March 10, 2003, amounts outstanding under the revolving credit facility
were accruing interest at approximately 10.3% per year, excluding amortization
of prepaid financing costs. A ten percent increase in short-term interest
rates on the variable rate debts outstanding as of March 10, 2003 would
approximate 43 basis points. Such an increase in interest rates would increase
our annual interest expense by approximately $0.3 million assuming the amount
of debt outstanding remains constant.

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




Item 8. Financial Statements and Supplementary Data

The financial statements 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

A change in independent auditors from Arthur Andersen LLP to Deloitte &
Touche LLP was reported in a Current Report on Form 8-K dated June 14, 2002.




PART III

General




Item 10. Directors and Executive Officers of the Registrant

The following is a brief account of the business experience of each of our
directors and executive officers, including his principal occupation and
employment during the relevant period, and the name and principal business of
any corporation or other organization in which each person has been occupied or
employed. Directorships in certain companies presently held by a director or
executive officer are also set forth.

William M. DeArman (age 51) is a co-founder of the Company and has served
as the Chairman and Chief Executive Officer of the Company since August 2002
and as a director of the Company since May 2001. In 1989, Mr. DeArman
co-founded Republic Waste Industries, Inc. n/k/a Republic Services, Inc. From
1991 through 1996, he was a Vice President, Partner and Director of Sanders
Morris Mundy Inc. (now Sanders Morris Harris Inc.), a Houston based investment
firm. From 1997 to August 2002, Mr. DeArman devoted most of his time to
managing his personal investment portfolio. Mr. DeArman is also the manager
and majority owner of Premium Aircraft Parts LLC, a company engaged in the sale
of new and aftermarket aircraft parts. From 1975 to 1988, Mr. DeArman was an
officer, director and shareholder of Fitzgerald, DeArman & Roberts, Inc.
(FDR), an Oklahoma-based broker-dealer that was placed into bankruptcy in
1988. In 1987, the SEC alleged in civil and administrative actions that Mr.
DeArman violated certain registration requirements of the federal securities
laws relating to the sale of restricted securities and aided and abetted the
filing of false Schedules 13D, and Mr. DeArman consented to the entry of an
order permanently enjoining him from any such further violations of Sections
5(a) and 5(c) of the Securities Act and Section 13(d) of the Exchange Act. In
connection with the settlement of the SEC actions, Mr. DeArman agreed to be
suspended from association with any broker, dealer or investment adviser for a
period of 90 days. In 1988, the Oklahoma Department of Securities (ODS)
instituted an administrative action against FDR, Mr. DeArman, and certain other
agents of FDR alleging, in part, that Mr. DeArman failed to adequately
supervise such agents and aided and abetted in a scheme to induce purchases of
certain securities. In May 1989, Mr. DeArman and the ODS entered into a
consent decree whereby Mr. DeArman agreed to (i) refrain for four months from
acting as an agent or principal of any broker-dealer or any investment adviser
registered in Oklahoma, and (ii) refrain for one year from applying for
registration as a principal or assuming any supervisory duties with any
broker-dealer registered in Oklahoma. In addition, FDR and Mr. DeArman were
also the subject of various civil lawsuits filed by customers of FDR alleging
violations of Sections 5, 12 and 17 of the Securities Act, Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder. In 1988, Mr. DeArman filed for
bankruptcy pursuant to Chapter 7 under the U.S. Bankruptcy Code. Mr. DeArmans
term on the Board of Directors expires in 2005.

Cary M. Grossman (age 49) has served as Executive Vice President and Chief
Financial Officer of the Company since September 2002. Mr. Grossman joined the
Company from Pentacon, Inc., an industrial distribution company with 2001
revenues of $260 million. Mr. Grossman was a co-founder of Pentacon and served
as a director from 1998 to April 2001 and as Chairman of Pentacon from April
2001 to September 2002. Pentacon filed a voluntary petition for bankruptcy
under Chapter 11 of the Bankruptcy Code in May 2002 and sold substantially all
of its assets to Anixter International, Inc. in September 2002. From 1991
until joining the Company, Mr. Grossman was also the managing principal of
McFarland, Grossman & Company, a Houston based investment firm. Prior to that,
Mr. Grossman

29



---



##### 



practiced public accounting for 15 years. Mr. Grossman is a
certified public accountant and graduated from the University of Texas in 1976
with a Bachelors Degree in Business Administration.

John P. Miklich (age 42) has served as Executive Vice President and Chief
Operating Officer of the Company since July 2001 and as a director of the
Company since March 2002. Mr. Miklich has an extensive background in the
environmental industry, working for various divisions of Safety-Kleen Corp.
f/k/a Laidlaw Environmental Services, Inc. from 1986 to February 2001. Prior to
joining the Company, Mr. Miklich served as the Senior Vice President of the
Northeast Division of Safety-Kleen, where he had responsibility for operations,
sales, compliance, health and safety, and public relations. Mr. Miklichs term
on the Board of Directors expires in 2003.

Gary J. Van Rooyan (age 57) became Senior Vice President and General
Counsel of the Company in September 1998. Mr. Van Rooyan has been engaged in
the practice of law for over 27 years, nearly 17 of which have been in the
waste industry. From August 1996 until September 1998, Mr. Van Rooyan was
Senior Corporate Counsel for Browning-Ferris. From 1986 until August 1996, Mr.
Van Rooyan held positions as Regional General Counsel for various regions of
Browning- Ferris. From 1981 through 1985, Mr. Van Rooyan served as Senior
Counsel for the Dresser Atlas Oilfield Services Group of Dresser Industries.
From 1975 until 1981, Mr. Van Rooyan was engaged in the private practice of
law.

James C. Jackson (age 49) became Vice President and Chief Accounting
Officer of the Company in January 2003. From 1997 through 2002, Mr. Jackson
was Vice President & Controller of Pentacon, Inc. and its successor Anixter
Pentacon Inc. Pentacon filed a voluntary petition for bankruptcy under Chapter
11 of the Bankruptcy Code in May 2002 and sold substantially all of its assets
to Anixter International, Inc. in September 2002. From 1995 to 1997, Mr.
Jackson was the Director-Corporate Accounting and Consolidations of Cooper
Industries, Inc. From 1991 to 1995, he held various other accounting positions
with Cooper Industries. Prior to 1991, Mr. Jackson practiced public accounting
with Price Waterhouse for 15 years.

Steven J. Read (age 36) has served as Vice President and Treasurer of the
Company since October 1999. From April 1998 to October 1999, Mr. Read served as
Tax Director of the Company. From 1994 until 1998, Mr. Read was a Senior
Analyst in Finance, Acquisitions and Tax for TETRA Technologies, Inc. From 1993
until 1994, Mr. Read was a Finance Manager for American General Corporation.
From 1989 until 1993, Mr. Read held various positions at Ernst & Young, LLP.

Ralph G. Blasey, Jr. (age 68) became a director of the Company in December
2002. Currently, Mr. Blasey is the Vice President of Business Development of
Red Coats, Inc., a private company specializing in commercial office cleaning,
uniformed guard services and access control systems. From October 1982 to July
1989, Mr. Blasey owned and operated several privately-held companies. He
served as the President and a director of Weston International Corporation, a
Maryland corporation, from February 1974 to October 1982. From June 1962 to
January 1974, Mr. Blasey was a Vice President of National Savings and Trust of
Washington, D.C. Mr. Blasey was the Chairman of the Beverage Industry Council
of the Food Processing & Beverage Manufacturing Association from 1996 to 1998.
Mr. Blaseys term on the Board of Directors expires in 2003.

James F. McEneaney, Jr. (age 64) became a director of the Company in
October 1997. He is the retired President and Chief Operating Officer of Ryland
Homes, positions he held from 1980 to 1992. Mr. McEneaney also served as
Executive Vice President and a director of The Ryland Group, Inc. from 1981 to
1993. Mr. McEneaney also was a founder of The Fortress Group, Inc., which was
organized to consolidate home builders in North America. He served as the
companys Chief Executive Officer from July 1995 through December 1995, and as
a member of its Board of Directors from 1995 until May 1997. From August 1993
until 2002, Mr. McEneaney served as President of MacCan Associates, Inc., a
management consulting firm. Currently, Mr. McEneaney is a private investor.
Mr. McEneaneys term on the Board of Directors expires in 2004.

Alfred Tyler 2nd (age 60) became a director of the Company in June 1997.
Mr. Tyler has over 20 years experience in the environmental services industry,
most recently as the President and Chief Executive Officer of Enviro-Gro
Technologies, a provider of sludge management services. In 1992, Enviro-Gro was
sold to Wheelabrator Technologies and Mr. Tyler resigned his positions to
manage his other investments. From 1989 to the present, Mr. Tyler has been the
President and the sole stockholder of Weston Investments, Inc., a private
investment company. Mr. Tyler is also the President of Days Cove Reclamation
Company, a landfill operation and construction company, and a partner and
managing director of Bedford Capital Corporation, a New York consulting firm.
In addition, Mr. Tyler is a member of the Board of Directors of Synagro
Technologies, Inc. Mr. Tylers term on the Board of Directors expires in 2004.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors and persons who own more than 10% of the common stock of the
Company to file reports of ownership and changes of ownership with the
Securities and Exchange Commission
and to provide copies of those reports to us. Based on a review of the reports
we have received, or written representations that no reports were required to
be filed, we believe that during 2002 all Section 16(a) filing requirements
applicable to our officers, directors and 10% stockholders were met.

30



---



##### 






Item 11. Executive Compensation

The following table sets forth certain information with respect to the
compensation of each of the individuals who served as an executive officer of
the Company at any time during 2002.

SUMMARY COMPENSATION TABLE

|                                           |                              |      |      |        |  |       |                     |                  |        |          |   |                  |  |   |        |     |               |  |              |        |     |   |         |       | 
|------------------------------------------ | ---------------------------- | ---- | ---- | ------ |  | ----- | ------------------- | ---------------- | ------ | -------- | - | ---------------- |  | - | ------ | --- | ------------- |  | ------------ | ------ | --- | - | ------- | ----- | 
|                                           |                              |      |      |        |  |       |                     |                  |        |          |   |                  |  |   |        |     |               |  | Long-Term    |        |     |   |        
|                                           |                              |      |      |        |  |       |                     |                  |        |          |   |                  |  |   |        |     |               |  | Compensation |        |     |   |        
|                                           |                              |      |      |        |  |       | Annual Compensation |                  | Awards |          |   |                  | 
|                                           |                              |      |      |        |  |       |                     |                  |        |          |   |                  | 
|                                           |                              |      |      |        |  |       |                     |                  |        |          |   |                  |  |   | Other  |     |               |  |              |        | All
|                                           |                              |      |      |        |  |       |                     |                  |        |          |   |                  |  |   | Annual |     | Stock Options |  | Other       
|Name and Principal Position                |                              | Year |      | Salary |  | Bonus |                     | Compensation (1) |        | (Shares) |   | Compensation (2)
|                                           |                              |      |      |        |  |       |                     |                  |        |          |   |                 
|William M. DeArman,                        |                              |      | 2002 |        |  | $     | 71,077              |                  |        | $        | 0 |                  |  | $ | 0      |     |               |  | 300,000      |        |     | $ | 0       |      
|                                           | Chairman of the Board and    |      |      | 2001   |  |       |                     | N/A              |        |          |   | N/A              |  |   |        | N/A |               |  |              | N/A    |     |   |         | N/A   | 
|                                           | Chief Executive Officer(3)   |      |      | 2000   |  |       |                     | N/A              |        |          |   | N/A              |  |   |        | N/A |               |  |              | N/A    |     |   |         | N/A   | 
|                                           |                              |      |      |        |  |       |                     |                  |        |          |   |                  |  |   |        |     |               |  |              |        |     |   |        
|Cary M. Grossman,
Executive Vice President |                              |      | 2002 |        |  | $     | 55,385              |                  |        | $        | 0 |                  |  | $ | 0      |     |               |  | 250,000      |        |     | $ | 0       |      
|                                           | and Chief Financial          |      |      | 2001   |  |       |                     | N/A              |        |          |   | N/A              |  |   |        | N/A |               |  |              | N/A    |     |   |         | N/A   | 
|                                           | Officer(4)                   |      |      | 2000   |  |       |                     | N/A              |        |          |   | N/A              |  |   |        | N/A |               |  |              | N/A    |     |   |         | N/A   | 
|                                           |                              |      |      |        |  |       |                     |                  |        |          |   |                  |  |   |        |     |               |  |              |        |     |   |        
|John P. Miklich                            |                              |      | 2002 |        |  | $     | 200,000             |                  |        | $        | 0 |                  |  | $ | 0      |     |               |  | 75,000       |        |     | $ | 4,346   |      
|                                           | Executive Vice President and |      |      | 2001   |  |       |                     | 161,539          |        |          |   | 0                |  |   |        | 0   |               |  |              | 25,000 |     |   |         | 0     | 
|                                           | Chief Operating Officer(5)   |      |      | 2000   |  |       |                     | N/A              |        |          |   | N/A              |  |   |        | N/A |               |  |              | N/A    |     |   |         | N/A   | 
|                                           |                              |      |      |        |  |       |                     |                  |        |          |   |                  |  |   |        |     |               |  |              |        |     |   |        
|Gary J. Van Rooyan,                        |                              |      | 2002 |        |  | $     | 179,039             |                  |        | $        | 0 |                  |  | $ | 0      |     |               |  | 75,000       |        |     | $ | 5,372   |      
|                                           | Vice President and General   |      |      | 2001   |  |       |                     | 166,402          |        |          |   | 0                |  |   |        | 0   |               |  |              | 0      |     |   |         | 4,852 | 
|                                           | Counsel                      |      |      | 2000   |  |       |                     | 156,908          |        |          |   | 0                |  |   |        | 0   |               |  |              | 12,500 |     |   |         | 4,720 | 
|                                           |                              |      |      |        |  |       |                     |                  |        |          |   |                  |  |   |        |     |               |  |              |        |     |   |        
|Steven J. Read,                            |                              |      | 2002 |        |  | $     | 120,192             |                  |        | $        | 0 |                  |  | $ | 0      |     |               |  | 75,000       |        |     | $ | 3,311   |      
|                                           | Vice President and           |      |      | 2001   |  |       |                     | 107,885          |        |          |   | 0                |  |   |        | 0   |               |  |              | 0      |     |   |         | 3,108 | 
|                                           | Treasurer                    |      |      | 2000   |  |       |                     | 96,192           |        |          |   | 0                |  |   |        | 0   |               |  |              | 12,500 |     |   |         | 2,654 | 
|                                           |                              |      |      |        |  |       |                     |                  |        |          |   |                  |  |   |        |     |               |  |              |        |     |   |        
|Michael P. Lawlor,                         |                              |      | 2002 |        |  | $     | 250,578             |                  |        | $        | 0 |                  |  | $ | 0      |     |               |  | 0            |        |     | $ | 100,500 |      
|                                           | Former Chief Executive       |      |      | 2001   |  |       |                     | 325,000          |        |          |   | 0                |  |   |        | 0   |               |  |              | 0      |     |   |         | 5,250 | 
|                                           | Officer(6)                   |      |      | 2000   |  |       |                     | 325,000          |        |          |   | 0                |  |   |        | 0   |               |  |              | 0      |     |   |         | 5,250 | 
|                                           |                              |      |      |        |  |       |                     |                  |        |          |   |                  |  |   |        |     |               |  |              |        |     |   |        
|Earl J. Blackwell,                         |                              |      | 2002 |        |  | $     | 163,312             |                  |        | $        | 0 |                  |  | $ | 0      |     |               |  | 0            |        |     | $ | 4,899   |      
|                                           | Former Chief Financial       |      |      | 2001   |  |       |                     | 220,000          |        |          |   | 0                |  |   |        | 0   |               |  |              | 0      |     |   |         | 5,250 | 
|                                           | Officer(7)                   |      |      | 2000   |  |       |                     | 220,000          |        |          |   | 0                |  |   |        | 0   |               |  |              | 0      |     |   |         | 5,250 | 
|                                           |                              |      |      |        |  |       |                     |                  |        |          |   |                  |  |   |        |     |               |  |              |        |     |   |        
|Harry O. Nicodemus IV,                     |                              |      | 2002 |        |  | $     | 153,116             |                  |        | $        | 0 |                  |  | $ | 0      |     |               |  | 0            |        |     | $ | 4,159   |      
|                                           | Former Vice President and    |      |      | 2001   |  |       |                     | 142,885          |        |          |   | 0                |  |   |        | 0   |               |  |              | 0      |     |   |         | 4,096 | 
|                                           | Chief Accounting Officer(8)  |      |      | 2000   |  |       |                     | 122,692          |        |          |   | 0                |  |   |        | 0   |               |  |              | 12,500 |     |   |         | 3,017 | 
|                                           |                              |      |      |        |  |       |                     |                  |        |          |   |                  |  |   |        |     |               |  |              |        |     |   |        



---

|(1) |  | Excludes perquisites and other benefits, the aggregate amount of which
does not exceed the lesser of $50,000 or 10% of the total of such
officers annual salary and bonus.                                                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Excepting Mr. Lawlor, these figures represent contributions made by the
Company to the Companys 401(k) & Profit Sharing Plan on behalf of the
named officer. Mr. Lawlors All Other Compensation for 2002 includes
$95,000 of severance payments paid to Mr. Lawlor after his resignation in
August 2002.
|   
|(3) |  | Mr. DeArman was employed by the Company in August 2002.                                                                                                                                                                                                                                                   
|   
|(4) |  | Mr. Grossman was employed by the Company in September 2002.                                                                                                                                                                                                                                               
|   
|(5) |  | Mr. Miklich was employed by the Company in February 2001.                                                                                                                                                                                                                                                 
|   
|(6) |  | Mr. Lawlor resigned in August 2002.                                                                                                                                                                                                                                                                       
|   
|(7) |  | Mr. Blackwell terminated his employment with the Company in July 2002.                                                                                                                                                                                                                                    
|   
|(8) |  | Mr. Nicodemus left the Company in December 2002.                                                                                                                                                                                                                                                          

31



---



##### 



Options Granted

The following table sets forth information concerning stock options
granted during the last fiscal year to the named executive officers.

OPTION/SAR GRANTS IN 2002 (1)

|                      |  |                   |         |                   |  |                 |      |            |  |                   |      |  |  |  |          |  |  |   |         | 
|--------------------- |  | ----------------- | ------- | ----------------- |  | --------------- | ---- | ---------- |  | ----------------- | ---- |  |  |  | -------- |  |  | - | ------- | 
|                      |  | Individual Grants |         |                   |  |                 |      |            |  |                   |      |  |  |  |          |  |  |  
|                      |  |                   |         | Percentage of     |  |                 |      |            |  |                   |      |  |  |  |          | 
|                      |  | Options           |         | Total Options     |  | Exercise        |      |            |  |                   |      |  |  | 
|                      |  | Granted           |         | Granted to        |  | Price           |      | Expiration |  | Grant Date       
|Name                  |  | (Shares) (2)      |         | Employees in 2002 |  | (Per Share) (3) |      | Date       |  | Present Value (4)
|                      |  |                   |         |                   |  |                 |      |            |  |                  
|William M. DeArman    |  |                   | 300,000 |                   |  |                 | 22.3 |            |  | $                 | 0.50 |  |  |  | 9/23/12  |  |  | $ | 120,000 | 
|Cary M. Grossman      |  |                   | 250,000 |                   |  |                 | 19.0 |            |  | $                 | 0.50 |  |  |  | 9/23/12  |  |  | $ | 100,000 | 
|John P. Miklich       |  |                   | 75,000  |                   |  |                 | 5.7  |            |  | $                 | 0.39 |  |  |  | 12/30/12 |  |  | $ | 24,000  | 
|Gary J. Van Rooyan    |  |                   | 75,000  |                   |  |                 | 5.7  |            |  | $                 | 0.39 |  |  |  | 12/30/12 |  |  | $ | 24,000  | 
|Steven J. Read        |  |                   | 75,000  |                   |  |                 | 5.7  |            |  | $                 | 0.39 |  |  |  | 12/30/12 |  |  | $ | 24,000  | 
|Michael P. Lawlor     |  |                   | 0       |                   |  |                 | N/A  |            |  |                   | N/A  |  |  |  | N/A      |  |  |   | N/A     | 
|Earl J. Blackwell     |  |                   | 0       |                   |  |                 | N/A  |            |  |                   | N/A  |  |  |  | N/A      |  |  |   | N/A     | 
|Harry O. Nicodemus IV |  |                   | 0       |                   |  |                 | N/A  |            |  |                   | N/A  |  |  |  | N/A      |  |  |   | N/A     | 



---

|(1) |  | No stock appreciation rights were granted in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The options granted to Messrs. Miklich, Van Rooyan and Read are
exercisable 33.3% on the first anniversary date of the date of grant,
33.3% on the second anniversary of the date of grant, and 33.4% on the
third anniversary of the date of grant. The vesting schedules of the
options granted to Messrs. DeArman and Grossman are described below.
Options may be accelerated as a result of a change in control or other
events as described below.                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(3) |  | Exercise price is based upon fair market value on the date of the grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(4) |  | The Black-Scholes option pricing model was chosen to estimate the grant
date present value of the options set forth in this table. Our use of
this model should not be construed as an endorsement of its accuracy at
valuing options. All stock option valuation models, including the
Black-Scholes model, require a prediction about the future movement of the
stock price. The following assumptions were made for purposes of
calculating the grant date present value: an option term of 10 years,
volatility of 74.53% and 75.78% as of September 23, 2002 and December 30,
2002, respectively, no dividend yield, and interest rates of 3.68% as of
September 23, 2002 and 3.78% as of December 30, 2002. The real value of
the options in this table depend upon the actual performance of the common
stock during the applicable period.

Option Exercises and Fiscal Year-End Values

The following table provides certain information on stock option exercises
in 2002 by the named executive officers and the value of such officers
unexercised options at December 31, 2002.

AGGREGATED OPTION/SAR EXERCISES IN 2002 AND 12/31/02 OPTION/SAR VALUES (1)

|                      |  |                 |     |                |  |             |     |               |  |                              |        |                         |  |  |         |  |  |   |     |  |  |   |       | 
|--------------------- |  | --------------- | --- | -------------- |  | ----------- | --- | ------------- |  | ---------------------------- | ------ | ----------------------- |  |  | ------- |  |  | - | --- |  |  | - | ----- | 
|                      |  |                 |     |                |  |             |     |               |  | Number of Unexercised        |        | Value of Unexercised   
|                      |  |                 |     |                |  |             |     |               |  | Options at December 31, 2002 |        | In-the-Money Options at
|                      |  | Number of       |     |                |  |             |     | (Shares)      |  | December 31, 2002 (2)       
|                      |  | Shares Acquired |     |                |  |             |     |               |  |                             
|Name                  |  | on Exercise     |     | Value Realized |  | Exercisable |     | Unexercisable |  | Exercisable                  |        | Unexercisable          
|                      |  |                 |     |                |  |             |     |               |  |                              |        |                        
|William M. DeArman    |  |                 | N/A |                |  |             | N/A |               |  |                              | 25,000 |                         |  |  | 275,000 |  |  | $ | 0   |  |  | $ | 0     | 
|Cary M. Grossman      |  |                 | N/A |                |  |             | N/A |               |  |                              | 20,833 |                         |  |  | 229,167 |  |  |   | 0   |  |  |   | 0     | 
|John P. Miklich       |  |                 | N/A |                |  |             | N/A |               |  |                              | 8,333  |                         |  |  | 91,667  |  |  |   | 0   |  |  |   | 1,500 | 
|Gary J. Van Rooyan    |  |                 | N/A |                |  |             | N/A |               |  |                              | 65,833 |                         |  |  | 79,167  |  |  |   | 0   |  |  |   | 1,500 | 
|Steven J. Read        |  |                 | N/A |                |  |             | N/A |               |  |                              | 25,833 |                         |  |  | 79,167  |  |  |   | 0   |  |  |   | 1,500 | 
|Michael P. Lawlor     |  |                 | N/A |                |  |             | N/A |               |  |                              | 0      |                         |  |  | 0       |  |  |   | N/A |  |  |   | N/A   | 
|Earl J. Blackwell     |  |                 | N/A |                |  |             | N/A |               |  |                              | 0      |                         |  |  | 0       |  |  |   | N/A |  |  |   | N/A   | 
|Harry O. Nicodemus IV |  |                 | N/A |                |  |             | N/A |               |  |                              | 33,333 |                         |  |  | 4,167   |  |  |   | 0   |  |  |   | 0     | 

32



---



##### 





---

|(1) |  | No stock appreciation rights are outstanding.                                                                  
|--- |  | ---------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Based on the closing price of the common stock on the American Stock
Exchange on the final trading day of 2002.

Employment Contracts and Termination of Employment and Change in Control Arrangements

Messrs. DeArman, Grossman and Jackson have each entered into a severance
agreement with the Company. Under the terms of the severance agreements, if
the officers employment is terminated (i) by the Company without cause, or
(ii) by the officer for good reason, the officer will be entitled to receive
within thirty days after the date of termination (a) one years severance pay
for Messrs. DeArman and Grossman and six months severance pay for Mr. Jackson,
and (b) an amount (the Pro Rated Bonus Amount) equal to the product of (i)
the annual cash bonus, if any, paid to the officer for the last full fiscal
year ending during his period of employment or, if higher, the annual cash
bonus paid to the officer for the last fiscal year prior to the date that a
change of control of the Company occurred and (ii) a fraction, the numerator of
which is the number of days the officer was employed in the then current fiscal
year and the denominator of which is 365. For purposes of the severance
agreements, good reason means, among other things, relocation of the officer,
a reduction in compensation or responsibilities, a change in control of the
Company or the knowing or intentional commission of any criminal act under
federal or state law by any director or certain specified officers of the
Company while acting on behalf of the Company in his or her official capacity.
In addition, for one year after any such termination by the Company without
cause or by the officer for good reason, we are required to continue to provide
medical, dental and life insurance benefits to the officer and his family.
Under the terms of the severance agreements, we are also required to pay the
Pro Rated Bonus Amount to the officer if his employment is terminated (i) by
the Company because of the death or disability of the officer, or (ii) by the
officer other than for good reason.

In connection with their employment by the Company, Messrs. DeArman,
Grossman and Jackson were granted options to purchase up to 300,000, 250,000
and 75,000 shares of our common stock, respectively. The exercise price of the
options granted to Messrs. DeArman and Grossman is $0.50 per share and the
exercise price of the options granted to Mr. Jackson is $0.41 per share. With
respect to both Mr. DeArman and Mr. Grossman, the options vest monthly over the
36-month period commencing October 23, 2002. One-third of Mr. Jacksons
optioned shares will become exercisable on January 3, 2004 and an additional
one-third of Mr. Jacksons optioned shares will become exercisable every twelve
months thereafter. All of the optioned shares will immediately become
exercisable by Messrs. DeArman, Grossman and Jackson if a change in control of
the Company occurs. In addition, all of Messrs. DeArmans, Grossmans and
Jacksons optioned shares will immediately become exercisable if the officers
employment is terminated (i) by the Company without cause, or (ii) by the
officer for good reason.

Mr. Miklich entered into an employment agreement with the Company
effective as of July 15, 2001. Under the terms of the employment agreement,
Mr. Miklichs base salary for 2003 is $200,000. Mr. Miklich is also entitled
to participate in the Companys annual incentive compensation plan. Mr.
Miklichs employment agreement has a term of one year, with the term to be
extended an additional one year on each anniversary date of the employment
agreement, unless either party gives notice that the term of the employment
agreement should not be so extended. If Mr. Miklichs employment is terminated
by the Company without cause, Mr. Miklich will be entitled to receive a lump
sum payment equal to his then current base salary. In addition, Mr. Miklich
will continue to receive his employee benefits for a period of one year after
the termination date. If Mr. Miklichs employment is terminated by the Company
with cause, then Mr. Miklich will not be entitled to earn any further
compensation or benefits under his employment agreement. If the Company
undergoes a change in control, then, under certain circumstances, Mr. Miklich
will have the right to terminate his employment agreement and (i) require the
Company to pay him a lump sum amount equal to his then current base salary, and
(ii) cause all stock options previously granted to him to immediately become
exercisable. Any such payment will be in lieu of any further compensation or
benefits payable to Mr. Miklich under the employment agreement. The employment
agreement also contains a covenant by Mr. Miklich not to compete with the
Company at any time during his employment and for a period of one year after
the termination of his employment.

Messrs. Van Rooyan and Read have also entered into employment agreements
with the Company. Under the terms of the employment agreements, the 2003 base
salaries of Mr. Van Rooyan and Mr. Read are $200,000 and $140,000,
respectively, with each officer having the right to receive an annual bonus
based upon the performance of the employee and the results of the Companys
business and operations. Each employment agreement had an initial term of
three years with the term to be extended an additional one year on each
anniversary date of the employment agreement, unless either party gives notice
that the term of the employment agreement should not be
so extended. If the officers employment is terminated by the Company without
cause, the officer will continue to receive his base salary and employee
benefits for a period of one year after the termination date, and all stock
options granted to the officer will immediately become exercisable. If his
employment is terminated by the Company with cause, then the officer will not
be entitled to earn any further compensation or benefits under his employment
agreement. If the Company undergoes a change in control, then, under certain
circumstances, the officer will have the right to terminate his employment
agreement and (i) require the Company to pay to him a lump sum amount equal to
approximately three times his base amount, as defined in Section 280G of the
Internal Revenue Code of 1986, as amended, and (ii) cause all stock options
previously granted to him to immediately become exercisable. Any such payment
will be in lieu

33



---



##### 



of any further compensation or benefits payable to the officer
under the employment agreement. The employment agreement also contains a
covenant by the officer not to compete with the Company at any time during his
employment and for a period of two years after the termination of his
employment, except for a termination subsequent to a change in control or a
termination by the officer with cause.

Directors Compensation

Directors who are also employees of the Company or one of its subsidiaries
do not receive additional compensation for serving as directors. Each director
who is not an employee of the Company or one of its subsidiaries receives a fee
of $2,500 for each Board meeting and each committee member and chairman of each
committee receives $500 and $1,000, respectively, for each committee meeting
(unless held on the same day as a Board meeting) actually attended. Directors
are also reimbursed for out-of-pocket expenses incurred in attending meetings
of the Board of Directors or committees thereof.

Under the Companys Directors Stock Option Plan, each director who is not
an employee of the Company and has not been an employee of the Company at any
time during the twelve months preceding his initial election or appointment to
the Board is automatically granted an option to purchase 10,000 shares of
common stock at the time of his or her initial election or appointment. In
addition, each outside director is automatically granted an option to purchase
5,000 shares of common stock on January 1 of each year. These options have an
exercise price equal to the fair market value of the common stock on the date
of grant, vest in full on the date of the grant and expire at the earlier of
ten years from the date of grant or one year after the director ceases to be a
member of the Board.

Compensation Committee Interlocks and Insider Participation

Clayton Trier, who resigned from the Board of Directors in September 2002,
and Messrs. Blasey, DeArman, McEneaney and Tyler each served on the
Compensation Committee of the Board of Directors during 2002. Mr. DeArman
resigned from the Compensation Committee in August 2002 when he was appointed
Chief Executive Officer of the Company.

34



---



##### 






Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information regarding beneficial
ownership of the common stock as of February 28, 2003 by (i) each stockholder
of the Company who is known by the Company to beneficially own more than five
percent of the outstanding common stock, (ii) each director and executive
officer, and (iii) all directors and executive officers as a group. Unless
otherwise indicated, all persons listed have an address c/o the Companys
principal executive offices and have sole voting and investment power with
respect to their shares of common stock, except to the extent authority is
shared by spouses under applicable law.

|                                                                |                                                                                         |           |           |            |  |  |     |  | 
|--------------------------------------------------------------- | --------------------------------------------------------------------------------------- | --------- | --------- | ---------- |  |  | --- |  | 
|Name and Address                                                |                                                                                         | Number of |           | Percent of
|of Beneficial Owner                                             |                                                                                         | Shares    |           | Class     
|                                                                |                                                                                         |           |           |           
|William M. DeArman(1)                                           |                                                                                         |           | 373,333   |            |  |  | 2.3 | 
|Cary M. Grossman(2)                                             |                                                                                         |           | 48,611    |            |  |  | *   | 
|John P. Miklich(3)                                              |                                                                                         |           | 31,415    |            |  |  | *   | 
|Gary J. Van Rooyan(4)                                           |                                                                                         |           | 71,885    |            |  |  | *   | 
|Steven J. Read(5)                                               |                                                                                         |           | 34,478    |            |  |  | *   | 
|James C. Jackson                                                |                                                                                         |           | 0         |            |  |  | 0   | 
|Ralph G. Blasey, Jr.(6)                                         |                                                                                         |           | 15,000    |            |  |  | *   | 
|James F. McEneaney, Jr.(7)                                      |                                                                                         |           | 55,000    |            |  |  | *   | 
|Alfred Tyler 2nd(8)                                             |                                                                                         |           | 40,000    |            |  |  | *   | 
|Franklin Resources Inc.(9)                                      |                                                                                         |           | 975,700   |            |  |  | 6.0 | 
|                                                                | 777 Mariners Island Boulevard, 6th Fl
San Mateo, California 94404                       |           |           |            |  |  |     |  | 
|Laird Norton Financial Group, Inc.(10)                          |                                                                                         |           | 1,214,400 |            |  |  | 7.5 | 
|                                                                | 801 Second Avenue, Suite 1600
Seattle, Washington 98104                                 |           |           |            |  |  |     |  | 
|Sanifill, Inc.(11)                                              |                                                                                         |           | 1,000,000 |            |  |  | 5.8 | 
|                                                                | 1001 Fannin Street, Suite 4000
Houston, Texas 77002                                     |           |           |            |  |  |     |  | 
|Longwood Investment Advisors, Inc.(12)                          |                                                                                         |           | 945,600   |            |  |  | 5.8 | 
|                                                                | Three Radnor Corporate Center, Suite 300
100 Matsonford Road
Radnor, Pennsylvania 19087 |           |           |            |  |  |     |  | 
|Benson Associates, LLC(13)                                      |                                                                                         |           | 1,018,000 |            |  |  | 6.3 | 
|                                                                | 111 S.W. Fifth Avenue, Suite 2130
Portland, Oregon 97204                                |           |           |            |  |  |     |  | 
|All directors and executive officers as a group (9 persons)(14) |                                                                                         |           | 669,722   |            |  |  | 4.0 | 



---

|(1)  |  | Includes 200,000 shares held by a trust of which Mr. DeArman is the sole
beneficiary, 100,000 shares held by a broker for the benefit of Mr.
DeArman, and 73,333 shares which Mr. DeArman has the right to acquire
pursuant to the terms of certain stock options granted by the Company to
him.                                                                                                                                                                                                                                                                                                 
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(2)  |  | Represents shares which Mr. Grossman has the right to acquire pursuant to
the terms of a stock option granted by the Company to him.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|(3)  |  | Includes 10,000 shares held by a broker for the benefit of Mr. Miklich,
4,748 shares held by the U S Liquids Employees Stock Purchase Plan for the
benefit of Mr. Miklich and 16,667 shares which Mr. Miklich has the right
to acquire pursuant to the terms of a stock option granted by the Company
to him.                                                                                                                                                                                                                                                                                    
|    
|(4)  |  | Includes 3,072 shares held by the U S Liquids Employee Stock Purchase
Plan for Mr. Van Rooyan and 68,333 shares which Mr. Van Rooyan has the
right to acquire pursuant to the terms of certain stock options granted by
the Company to him.                                                                                                                                                                                                                                                                                                                                                      
|    
|(5)  |  | Includes 6,145 shares held by the U S Liquids Employee Stock Purchase
Plan for the benefit of Mr. Read and 28,333 shares which Mr. Read has the
right to acquire pursuant to the terms of certain stock options granted by
the Company to him.                                                                                                                                                                                                                                                                                                                                                   
|    
|(6)  |  | Represents shares which Mr. Blasey has the right to acquire pursuant to
the terms of certain stock options granted by the Company to him.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|(7)  |  | Includes 39,000 shares which Mr. McEneaney has the right to acquire
pursuant to the terms of certain stock options granted by the Company to
him.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|(8)  |  | Represents shares which Mr. Tyler has the right to acquire pursuant to
the terms of certain stock options granted by the Company to him.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    
|(9)  |  | Includes shares owned by one or more open or closed-end investment
companies or other managed accounts which are advised by direct and
indirect investment advisory subsidiaries of Franklin Resources, Inc. The
Schedule 13G/A filed by Franklin Resources on February 12, 2003 states
that (i) such advisory subsidiaries of Franklin Resources have sole
investment and/or voting power over such shares, and (ii) Charles B.
Johnson and Rupert H. Johnson, Jr. are the principal stockholders of
Franklin Resources and, thus, may each be deemed to be the beneficial
owner of such shares.
|    
|(10) |  | Includes shares owned by Laird Norton Trust Company, a wholly owned
subsidiary of Laird Norton Financial Group, Inc. The Schedule 13G/A filed
by Laird Norton Financial Group on February 14, 2003 states that Laird
Norton Financial Group shares the power to vote and dispose of such
shares.                                                                                                                                                                                                                                                                                                 
|    
|(11) |  | Represents shares which Sanifill, Inc. has the right to acquire pursuant
to the terms of a warrant issued by the Company to Sanifill.                                                                                                                                                                                                                                                                                                                                                                                                                                                            

35



---



##### 



|(12) |  | Represents shares owned by certain accounts for which Longwood Investment
Advisors, Inc. serves as investment advisor. The Schedule 13G filed by
Longwood Investment Advisors on March 22, 2002 states that Longwood
Investment Advisors, Robert A. Davidson and John P. McNiff share the power
to vote and dispose of all such shares.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(13) |  | Represents shares owned by certain accounts for which Benson Associates,
LLC serves as investment advisor. The Schedule 13G/A filed by Benson
Associates on February 15, 2003 states that Benson Associates has the sole
power to vote and dispose of such shares.                                                                     
|    
|(14) |  | Excludes 754,723 total shares subject to options granted to Messrs.
DeArman, Grossman, Van Rooyan, Jackson, Miklich and Read that are not
exercisable prior to May 1, 2003.                                                                                                                                                            
|    
|*    |  | Constitutes less than one percent of the outstanding common stock.                                                                                                                                                                                                                                                                     

The following table sets forth information as of December 31, 2002 with
respect to compensation plans under which equity securities of the Company are
authorized for issuance.

|                                                           |       |            |                   |                     |                   |      |                     |      |              |  |                     |         | 
|---------------------------------------------------------- | ----- | ---------- | ----------------- | ------------------- | ----------------- | ---- | ------------------- | ---- | ------------ |  | ------------------- | ------- | 
|                                                           |       |            |                   |                     |                   |      |                     |      |              |  | No. of Securities  
|                                                           |       |            |                   |                     |                   |      |                     |      |              |  | Remaining Available
|                                                           |       |            |                   |                     |                   |      |                     |      |              |  | for Future Issuance
|                                                           |       |            | No. of Securities |                     |                   |      |                     |      | Under Equity
|                                                           |       |            | to be Issued Upon |                     | Weighted-Average  |      | Compensation Plans 
|                                                           |       |            | Exercise of       |                     | Exercise Price of |      | (excluding         
|                                                           |       |            | Outstanding       |                     | Outstanding       |      | securities         
|                                                           |       |            | Options, Warrants |                     | Options,          |      | reflected in column
|Plan Category                                              |       | and Rights |                   | Warrants and Rights |                   | (A))
|                                                           |       |            |                   |                     |                   |     
|                                                           |       |            | (A)               |                     | (B)               |      | (C)                
|Equity Compensation
Plans Approved by
Security Holders     |       |            | 2,059,968         | (1)                 |                   | $    | 3.50                |      |              |  | 286,594             | (2)    
|Equity Compensation
Plans Not Approved
by Security Holders |       |            | 1,120,000         | (3)                 |                   | $    | 2.24                |      |              |  | 0                   |        
|                                                           |       |            |                   |                     |                   |      |                     |      |              |  |                     |        
|                                                           | Total |            |                   | 3,179,968           |                   |      | $                   | 3.05 |              |  |                     | 286,594 | 
|                                                           |       |            |                   |                     |                   |      |                     |      |              |  |                     |        



---

|(1) |  | Includes securities to be issued under the Amended and Restated Stock
Option Plan and the Directors Stock Option Plan. These plans were
approved by the stockholders of the Company prior to our initial public
offering of common stock in August 1997.                                                                                                                                                                                                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes 156,594 options available to be granted under the Amended and
Restated Stock Option Plan and 130,000 options available to be granted
under the Directors Stock Option Plan. The maximum number of shares of
common stock which may be issued pursuant to the exercise of options under
the Amended and Restated Stock Option Plan is adjusted on the first day of each
fiscal year of the Company to an amount equal to 15% of the outstanding
shares of common stock on such date, not to exceed a total of 3,000,000
shares.
|   
|(3) |  | Includes a warrant to purchase 1,000,000 shares of common stock issued in
connection with the acquisition of the Oilfield Waste Division in 1996, a
warrant to purchase 20,000 shares of common stock issued in connection
with an acquisition completed in January 1998 and warrants to purchase
100,000 shares of common stock issued in connection with the Trinity
acquisition in November 2002.                                                                                                                                    




Item 13. Certain Relationships and Related Transactions

None.




Item 14. Controls and Procedures

(a) Evaluation of disclosure controls and procedure:

During the ninety-day period preceding the filing of this report, we
carried out an evaluation, under the supervision and with the participation of
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rules 13a-14 and 15d-14. Based upon this
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures are effective to timely
alert them to any material information relating to the Company and its
consolidated subsidiaries that must be included in our periodic SEC filings.

(b) Changes in internal
controls.

Except as described in the following paragraph, there have been no
significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of the
evaluation described in subparagraph (a) above.

On April 29, 2003, we announced that, due to improper recording of job
costs and certain other items at one of our business units, we would restate
our results of operations for the years ended December 31, 2002, 2001 and 2000.
Following the conclusion of an
independent investigation of this business unit, we changed our operating and
accounting procedures to, among other things, provide more detailed reviews of
jobs in process, require more frequent physical inventories and establish
additional review and oversight control

36



---



##### 



procedures. In addition, we
implemented a procedure requiring that a regional controller who is not
involved in the daily operations of this business unit review the financial
statements and results of operations of the business unit. We also made
personnel changes at the business unit including, without limitation,
replacement of key accounting personnel of the business unit.




PART IV




Item 15. 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.                                                                                                                                                                                                                                                             
|   
|    |  | On November 20, 2002, we filed a Form 8-K announcing the sale of
substantially all of our Texas businesses in our Commercial Wastewater
Division. On December 12, 2002, we filed an amendment to this Form 8-K.                                                                  
|   
|(c) |  | Exhibits:                                                                                                                                                                                                                                                                        

|        |  |             |  |  |  | 
|------- |  | ----------- |  |  |  | 
|Exhibit
|No.     |  | Description
|        |  |            



|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   |  | Third Amended and Restated Bylaws of U S Liquids Inc. (Exhibit 3.2 of
the Form 10-Q for the quarter ended June 30, 2002 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 the U S
Liquids Inc. Registration Statement on Form S-3 (File No. 333-72403),
effective March 11, 1999, is hereby incorporated by reference).
|      
|4.3   |  | First Amendment to Second Amended and Restated Credit Agreement among U
S Liquids Inc., various financial institutions and Bank of America
National Trust and Savings Association, as Agent. (Exhibit 4.3 of the
Form 10-K for the year ended December 31, 1999 is hereby incorporated by
reference).                                                           
|      
|4.4   |  | Second Amendment to Second Amended and Restated Credit Agreement among U
S Liquids Inc., various financial institutions and Bank of America
National Trust and Savings Association, as Agent. (Exhibit 4.4 of the Form
10-K for the year ended December 31, 1999 is hereby incorporated by
reference).                                                          
|      
|4.5   |  | Third Amendment to Second Amended and Restated Credit Agreement among U
S Liquids Inc., various financial institutions and Bank of America
National Trust and Savings Association, as Agent. (Exhibit 4.7 of the Form
10-Q for the quarter ended June 30, 2000 is hereby incorporated by
reference).                                                            
|      
|4.6   |  | Fourth Amendment to Second Amended and Restated Credit Agreement among U
S Liquids Inc., various financial institutions and Bank of America
National Trust and Savings Association, as Agent. (Exhibit 4.6 of the Form
10-K for the year ended December 31, 2000 is hereby incorporated by
reference).                                                          

37



---



##### 





|4.7  |  | Fifth Amendment to Second Amended and Restated Credit Agreement among U
S Liquids Inc., various financial institutions and Bank of America
National Trust and Savings Association, as Agent. (Exhibit 4.9 of the Form
10-Q for the quarter ended September 30, 2001 is hereby incorporated by
reference).                       
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|4.8  |  | Sixth Amendment to Second Amended and Restated Credit Agreement among U
S Liquids Inc., various financial institutions and Bank of America
National Trust and Savings Association, as Agent. (Exhibit 4.8 of the
Form 10-K for the year ended December 31, 2001 is hereby incorporated by
reference).                           
|     
|4.9  |  | Seventh Amendment to Second Amended and Restated Credit Agreement among
U S Liquids Inc., various financial institutions and Bank of America
National Trust and Savings Association, as Agent. (Exhibit 4.9 of the
Form 10-K for the year ended December 31, 2001 is hereby incorporated by
reference).                         
|     
|4.10 |  | Eighth Amendment to Second Amended and Restated Credit Agreement among U
S Liquids Inc., various financial institutions and Bank of America
National Trust and Savings Association, as Agent. (Exhibit 4.10 of the
Form 10-K for the year ended December 31, 2001 is hereby incorporated by
reference).                         
|     
|4.11 |  | Letter Agreement, dated August 8, 2002, among U S Liquids Inc., various
financial institutions and Bank of America National Trust and Savings
Association, as Agent (Exhibit 4.14 of the Form 10-Q for the quarter ended
June 30, 2002 is hereby incorporated by reference).                                                    
|     
|4.12 |  | Ninth Amendment to Second Amended and Restated Credit Agreement among U
S Liquids Inc., various financial institutions and Bank of America
National Trust and Savings Association, as Agent (Exhibit 4.13 of the Form
10-Q for the quarter ended June 30, 2002 is hereby incorporated by
reference).                            
|     
|4.13 |  | Letter Agreement, dated October 4, 2002, among U S Liquids Inc., various
financial institutions and Bank of America National Trust and Savings
Association, as Agent (Exhibit 4.15 of the Form 10-Q for the quarter ended
September 30, 2002 is hereby incorporated by reference).                                              
|     
|4.14 |  | Tenth Amendment to Second Amended and Restated Credit Agreement among U
S Liquids Inc., various financial institutions and Bank of America
National Trust and Savings Association, as Agent (Exhibit 4.16 of the Form
10-Q for the quarter ended September 30, 2002 is hereby incorporated by
reference).                       
|     
|4.15 |  | Eleventh Amendment to Second Amended and Restated Credit Agreement among
U S Liquids Inc., various financial institutions and Bank of America
National Trust and Savings Association, as Agent. (Exhibit 4.15 of the
Form 10-K for the year ended December 31, 2002 filed March 27, 2003 is
hereby incorporated by reference.)  
|     
|4.16 |  | Twelfth Amendment to Second Amended and Restated Credit Agreement among
U S Liquids Inc., various financial institutions and Bank of America
National Trust and Savings Association, as Agent. (Exhibit 4.16 of the
Form 10-K for the year ended December 31, 2002 filed March 27, 2003 is
hereby incorporated by reference.)   
|     
|4.17 |  | Thirteenth Amendment to Second Amended and Restated Credit Agreement
among U S Liquids Inc., various financial institutions and Bank of America
National Trust and Savings Association, as Agent. (Exhibit 4.17 of the
Form 10-K for the year ended December 31, 2002 filed March 27, 2003 is
hereby incorporated by reference.)
|     
|4.18 |  | Security Agreement, dated December 17, 1997, executed by U S Liquids
Inc. and its subsidiaries in favor of Bank of America National Trust and
Savings Association. (Exhibit 4.6 of the Form 10-K for the year ended
December 31, 1997 is hereby incorporated by reference).                                                     
|     
|4.19 |  | 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).                                                                    

38



---



##### 





|**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   |  | 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).                                              
|       
|10.3   |  | 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).                                                               
|       
|10.4   |  | Estoppel and Waiver Agreement, dated February 15, 1999, between U S
Liquids Inc. and Sanifill, Inc. (Exhibit 10.4 of the Form 10-K for the
year ended December 31, 2002 filed March 27, 2003 is hereby incorporated
by reference.)                                                                                       
|       
|10.5   |  | General Release, Severance and Settlement Agreement, dated August 28,
2002, between U S Liquids Inc. and Michael P. Lawlor (Exhibit 10.28 of the
Form 10-Q for the quarter ended September 30, 2002 is hereby incorporated
by reference).                                                                                
|       
|*10.6  |  | Executive Severance Agreement, dated December 31, 2002, between U
S Liquids Inc. and William M. DeArman. (Exhibit 10.6 of the Form
10-K for the year ended December 31, 2002 filed March 27, 2003 is
hereby incorporated by reference.)                                                                                  
|       
|*10.7  |  | Executive Severance Agreement, dated December 31, 2002, between U
S Liquids Inc. and Cary M. Grossman. (Exhibit 10.7 of the Form
10-K for the year ended December 31, 2002 filed March 27, 2003 is
hereby incorporated by reference.)                                                                                    
|       
|*10.8  |  | Executive Severance Agreement, dated December 31, 2002, between U
S Liquids Inc. and James C. Jackson. (Exhibit 10.8 of the Form
10-K for the year ended December 31, 2002 filed March 27, 2003 is
hereby incorporated by reference.)                                                                                    
|       
|**10.9 |  | Purchase and Sale of Assets Agreement between U S Liquids of La.,
L.P. and U S Liquids Inc., on the first part, and Trinity Storage
Services, L.P. and CCBS, Inc., its general partner, on the second
part (Exhibit 10.34 of the Form 10-Q for the quarter ended
September 30, 2002 is hereby incorporated by reference).
|       
|*10.10 |  | Employment Agreement, dated September 1, 1999, between U S
Liquids Inc. and Steven J. Read, as amended. (Exhibit 10.10 of
the Form 10-K for the year ended December 31, 2000 is hereby
incorporated by reference).                                                                                                       
|       
|*10.11 |  | Employment Agreement, dated September 1, 1998, between U S
Liquids Inc. and Gary J. Van Rooyan, as amended. (Exhibit 10.26
of the Form 10-K for the year ended December 31, 2000 is hereby
incorporated by reference).                                                                                                   
|       
|10.12  |  | U S Liquids Inc. Amended and Restated Stock Option Plan (Exhibit 10.12
of the U S Liquids Inc. Registration Statement on Form S-1 (File No.
333-30065), effective August 19, 1997, is hereby incorporated by
reference).                                                                                                 
|       
|10.13  |  | U S Liquids Inc. Directors Stock Option Plan (Exhibit 10.13 of the U S
Liquids Inc. Registration Statement on Form S-1 (File No. 333-30065),
effective August 19, 1997, is hereby incorporated by reference).                                                                                                           
|       
|*10.14 |  | Employment Agreement, dated July 15, 2001, between U S Liquids
Inc. and John P. Miklich (Exhibit 10.27 of the Form 10-K for the year
ended December 31, 2001 is hereby incorporated by reference).                                                                                                                       
|       
|10.15  |  | Agreement, dated November 15, 2000, between U S Liquids Inc. and W.
Gregory Orr. (Exhibit 99.2 to the Form 8-K filed on November 21, 2000, is
hereby incorporated by reference).                                                                                                                                         

39



---



##### 





|**10.16 |  | Asset Purchase Agreement, dated November 1, 2002, between and
among Liquid Environmental Solutions of Texas, L.P., U S Liquids
Inc. and various subsidiaries of U S Liquids Inc. (Exhibit 10.31
of the Form 10-Q for the quarter ended September 30, 2002 is
hereby incorporated by reference).                                                                                                                                  
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        
|**10.17 |  | Transition Services Agreement, dated as of November 1, 2002,
between and among Liquid Environmental Solutions of Texas L.P.,
U S Liquids Inc. and various subsidiaries of U S Liquids Inc.
(Exhibit 10.32 of the Form 10-Q for the quarter ended September
30, 2002 is hereby incorporated by reference).                                                                                                                        
|        
|**10.18 |  | License Agreement, dated as of November 1, 2002, between Liquid
Environmental Solutions of Texas, L.P. and U S Liquids Inc.
(Exhibit 10.33 of the Form 10-Q for the quarter ended September
30, 2002 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   |  | 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).                                                                                                                                                                                  
|        
|21.1    |  | List of subsidiaries of U S Liquids Inc. (Exhibit 21.1 of the Form 10-K
for the year ended December 31, 2002 filed March 27, 2003 is hereby
incorporated by reference).                                                                                                                                                                                                                                                          
|        
|+23.1   |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                                                                                
|        
|+99.1   |  | Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                           
|        
|+99.2   |  | Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                           



---

|+  |  | Filed herewith                                                                              
|-- |  | --------------------------------------------------------------------------------------------
|  
|*  |  | Management Contract                                                                         
|  
|** |  | Schedules to this agreement will be furnished supplementally to the
Commission upon request.

40



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 on
Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly
authorized.

|                   |  |                                                                                              
|------------------ |  | ---------------------------------------------------------------------------------------------
|                   |  | U S Liquids Inc.                                                                             
|                  
|Date: July 2, 2003 |  | By: /s/William M. DeArmanWilliam M. DeArman
Chairman of the Board and
Chief Executive Officer
|                  
|Date: July 2, 2003 |  | By: /s/Cary M. GrossmanCary M. Grossman
Executive Vice President and
Chief Financial Officer 
|                  
|Date: July 2, 2003 |  | By: /s/James C. JacksonJames C. Jackson
Vice President and
Chief Accounting Officer          

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 1 on Form 10-K/A has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.

|                   |  |                                                                               
|------------------ |  | ------------------------------------------------------------------------------
|Date: July 2, 2003 |  | By: /s/William M. DeArmanWilliam M. DeArman
Chairman of the Board of Directors
|                  
|Date: July 2, 2003 |  | By: /s/James F. McEneaney, Jr.James F. McEneaney, Jr.
Director                
|                  
|Date: July 2, 2003 |  | By: /s/Alfred Tyler 2ndAlfred Tyler 2nd
Director                              
|                  
|Date: July 2, 2003 |  | By: /s/John P. MiklichJohn P. Miklich
Director                                
|                  
|Date: July 2, 2003 |  | By: /s/Ralph G. Blasey, Jr.Ralph G. Blasey, Jr.
Director                      

41



---



##### 



CERTIFICATION

I, William M. DeArman, certify that:

1.     I have reviewed this annual report on Form 10-K/A of U S Liquids Inc.;

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

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

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



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

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



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

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

U S LIQUIDS INC.

|                   |  |                                                                  
|------------------ |  | -----------------------------------------------------------------
|Date: July 2, 2003 |  | /s/ William M. DeArmanWilliam M. DeArman,
Chief Executive Officer

42



---



##### 



CERTIFICATION

I, Cary M. Grossman, certify that:

1.     I have reviewed this annual report on Form 10-K/A of U S Liquids Inc.;

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

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

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



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

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



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

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

U S LIQUIDS INC.

|                   |  |                                                              
|------------------ |  | -------------------------------------------------------------
|Date: July 2, 2003 |  | /s/ Cary M. GrossmanCary M. Grossman,
Chief Financial Officer

43



---



##### 



INDEX TO FINANCIAL STATEMENTS

U S LIQUIDS INC.

|                                                                                              |  |  |     | 
|--------------------------------------------------------------------------------------------- |  |  | --- | 
|Independent Auditors Report                                                                  |  |  | F-2 | 
|Consolidated Balance Sheets (As Restated)                                                     |  |  | F-3 | 
|Consolidated Statements of Operations (As Restated)                                           |  |  | F-4 | 
|Consolidated Statements of Comprehensive Income (Loss) and Stockholders Equity (As Restated) |  |  | F-5 | 
|Consolidated Statements of Cash Flows (As Restated)                                           |  |  | F-6 | 
|Notes to Consolidated Financial Statements                                                    |  |  | F-7 | 

F-1



---



##### 



INDEPENDENT AUDITORS REPORT

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, 2002 and
2001, and the related consolidated statements of operations, comprehensive
income (loss) and stockholders equity and cash flows for each of the three
years in the period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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.

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, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, at December 31, 2002, the Company has
negative working capital, was not in compliance with certain covenants of its
credit facility and has not obtained a waiver for the violation. The Company
is attempting to renegotiate the terms and covenants of the loan agreement and
is also seeking other sources of financing. The Companys difficulties in
meeting its credit facility covenants and its negative working capital position
discussed in Note 3 raise substantial doubt about its ability to continue as a
going concern. Managements plans in regard to these matters are also described
in Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

As discussed in Notes 6 and 10 to the financial statements, effective January
1, 2002, the Company changed its accounting for the disposal of long-lived
assets and for goodwill and intangible assets.

As discussed in Note 23, the accompanying consolidated financial statements
have been restated.

DELOITTE & TOUCHE LLP

Houston, Texas
February 18, 2003 (March 10, 2003 as to Note 3 and June 24, 2003 as to Note 23)

F-2



---



##### 



US LIQUIDS INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

|                                                         |                                                                                                                                    |                                                                       |                                            |                                      |        |                            |         |         |        |         |  | 
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------ | -------------------------- | ------- | ------- | ------ | ------- |  | 
|                                                         |                                                                                                                                    |                                                                       |                                            |                                      |        | December 31,              
|                                                         |                                                                                                                                    |                                                                       |                                            |                                      |        |                           
|                                                         |                                                                                                                                    |                                                                       |                                            |                                      |        | 2002                       |         | 2001   
|                                                         |                                                                                                                                    |                                                                       |                                            |                                      |        |                            |         |        
|                                                         |                                                                                                                                    |                                                                       |                                            |                                      |        | (As Restated, see Note 23)
|                                                         |                                                                                                                                    |                                                                       |                                            | ASSETS                               |        |                            |         |         |        |         |  | 
|CURRENT ASSETS:                                          |                                                                                                                                    |                                                                       |                                            |                                      |        |                            |         |        
|                                                         |                                                                                                                                    | Cash and cash equivalents                                             |                                            | $                                    | 4,068  |                            |         | $       | 1,498  |        
|                                                         |                                                                                                                                    | Accounts receivable, less allowances of $1,018 and $729, respectively |                                            |                                      | 32,165 |                            |         |         | 29,113 |        
|                                                         |                                                                                                                                    | Inventories                                                           |                                            |                                      | 1,536  |                            |         |         | 1,577  |        
|                                                         |                                                                                                                                    | Prepayments and other current assets                                  |                                            |                                      | 5,062  |                            |         |         | 7,614  |        
|                                                         |                                                                                                                                    | Current assets of discontinued operations                             |                                            |                                      | 2,853  |                            |         |         | 9,130  |        
|                                                         |                                                                                                                                    |                                                                       |                                            |                                      |        |                            |         |         |        |        
|                                                         |                                                                                                                                    |                                                                       | Total current assets                       |                                      |        | 45,684                     |         |         |        | 48,932  | 
|PROPERTY, PLANT AND EQUIPMENT, net                       |                                                                                                                                    |                                                                       | 86,295                                     |                                      |        |                            | 90,320  |        
|GOODWILL, net                                            |                                                                                                                                    |                                                                       | 13,459                                     |                                      |        |                            | 120,878 |        
|INTANGIBLE ASSETS, net                                   |                                                                                                                                    |                                                                       | 3,877                                      |                                      |        |                            | 2,844   |        
|OTHER ASSETS                                             |                                                                                                                                    |                                                                       | 2,213                                      |                                      |        |                            | 888     |        
|NONCURRENT ASSETS OF DISCONTINUED OPERATIONS             |                                                                                                                                    |                                                                       | 1,483                                      |                                      |        |                            | 55,679  |        
|                                                         |                                                                                                                                    |                                                                       |                                            |                                      |        |                            |         |         |        |        
|                                                         |                                                                                                                                    |                                                                       | Total assets                               |                                      |        | 153,011                    |         |         |        | 319,541 | 
|                                                         |                                                                                                                                    |                                                                       |                                            |                                      |        |                            |         |         |        |        
|                                                         |                                                                                                                                    |                                                                       |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |        |                            |         |         |        |         |  | 
|CURRENT LIABILITIES:                                     |                                                                                                                                    |                                                                       |                                            |                                      |        |                            |         |        
|                                                         |                                                                                                                                    | Current maturities of long-term obligations                           |                                            |                                      | 78,474 |                            |         |         | 2,801  |        
|                                                         |                                                                                                                                    | Accounts payable                                                      |                                            |                                      | 17,669 |                            |         |         | 11,444 |        
|                                                         |                                                                                                                                    | Accrued expenses and other current liabilities                        |                                            |                                      | 23,376 |                            |         |         | 25,658 |        
|                                                         |                                                                                                                                    | Current liabilities of discontinued operations                        |                                            |                                      | 2,084  |                            |         |         | 4,212  |        
|                                                         |                                                                                                                                    |                                                                       |                                            |                                      |        |                            |         |         |        |        
|                                                         |                                                                                                                                    |                                                                       | Total current liabilities                  |                                      |        | 121,603                    |         |         |        | 44,115  | 
|LONG-TERM OBLIGATIONS, net of current maturities         |                                                                                                                                    |                                                                       | 2,672                                      |                                      |        |                            | 89,127  |        
|PROCESSING RESERVE, net of current portion               |                                                                                                                                    |                                                                       | 3,007                                      |                                      |        |                            | 4,702   |        
|CLOSURE AND REMEDIATION RESERVES, net of current portion |                                                                                                                                    |                                                                       | 6,490                                      |                                      |        |                            | 7,555   |        
|OTHER LONG-TERM LIABILITIES                              |                                                                                                                                    |                                                                       | 882                                        |                                      |        |                            | 1,094   |        
|DEFERRED INCOME TAXES                                    |                                                                                                                                    |                                                                       |                                           |                                      |        |                            | 3,040   |        
|NONCURRENT LIABILITIES OF DISCONTINUED OPERATIONS        |                                                                                                                                    |                                                                       | 427                                        |                                      |        |                            | 2,618   |        
|                                                         |                                                                                                                                    |                                                                       |                                            |                                      |        |                            |         |         |        |        
|                                                         |                                                                                                                                    |                                                                       | Total liabilities                          |                                      |        | 135,081                    |         |         |        | 152,251 | 
|                                                         |                                                                                                                                    |                                                                       |                                            |                                      |        |                            |         |         |        |        
|COMMITMENTS AND CONTINGENCIES                            |                                                                                                                                    |                                                                       |                                            |                                      |        |                            |         |        
|STOCKHOLDERS EQUITY:                                    |                                                                                                                                    |                                                                       |                                            |                                      |        |                            |         |        
|                                                         | Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued or outstanding                                          |                                                                       |                                            |                                     |        |                            |         |        |       
|                                                         | Common stock, $0.01 par value, 30,000,000 shares authorized, 16,095,222 and 16,031,815
shares issued and outstanding, respectively |                                                                       |                                            | 161                                  |        |                            |         | 160     |       
|                                                         | Additional paid-in capital                                                                                                         |                                                                       |                                            | 177,166                              |        |                            |         | 177,134 |       
|                                                         | Accumulated deficit                                                                                                                |                                                                       |                                            | (159,407                             | )      |                            |         | (9,981  | )     
|                                                         | Accumulated other comprehensive income (loss)  foreign currency translation adjustment                                            |                                                                       |                                            | 10                                   |        |                            |         | (23     | )     
|                                                         |                                                                                                                                    |                                                                       |                                            |                                      |        |                            |         |         |        |        
|                                                         |                                                                                                                                    |                                                                       | Total stockholders equity                 |                                      |        | 17,930                     |         |         |        | 167,290 | 
|                                                         |                                                                                                                                    |                                                                       |                                            |                                      |        |                            |         |         |        |        
|                                                         |                                                                                                                                    |                                                                       | Total liabilities and stockholders equity |                                      | $      | 153,011                    |         |         | $      | 319,541 | 
|                                                         |                                                                                                                                    |                                                                       |                                            |                                      |        |                            |         |         |        |        

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

F-3



---



##### 



US LIQUIDS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

|                                                                                                                               |  |                            |          |      |  |      |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------- | -------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                                               |  | Years Ended December 31,  
|                                                                                                                               |  |                           
|                                                                                                                               |  | 2002                       |          | 2001 |  | 2000
|                                                                                                                               |  |                            |          |      |  |     
|                                                                                                                               |  | (As Restated, see Note 23)
|REVENUES                                                                                                                       |  | $                          | 150,941  |      |  | $    | 172,885 |   |  | $ | 175,621 |  
|OPERATING EXPENSES                                                                                                             |  |                            | 109,616  |      |  |      | 120,389 |   |  |   | 129,804 |  
|                                                                                                                               |  |                            |          |      |  |      |         |   |  |   |         |  
|OPERATING MARGIN                                                                                                               |  |                            | 41,325   |      |  |      | 52,496  |   |  |   | 45,817  |  
|DEPRECIATION AND AMORTIZATION                                                                                                  |  |                            | 10,936   |      |  |      | 13,323  |   |  |   | 13,076  |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                                                                   |  |                            | 25,199   |      |  |      | 21,861  |   |  |   | 29,013  |  
|GOODWILL IMPAIRMENT                                                                                                            |  |                            | 40,110   |      |  |      |        |   |  |   |        |  
|SPECIAL CHARGE (INCOME), net                                                                                                   |  |                            | (3,383   | )    |  |      | (1,603  | ) |  |   | 708     |  
|                                                                                                                               |  |                            |          |      |  |      |         |   |  |   |         |  
|INCOME (LOSS) FROM OPERATIONS                                                                                                  |  |                            | (31,537  | )    |  |      | 18,915  |   |  |   | 3,020   |  
|INTEREST EXPENSE                                                                                                               |  |                            | 9,027    |      |  |      | 9,622   |   |  |   | 10,854  |  
|OTHER INCOME, net                                                                                                              |  |                            | (329     | )    |  |      | (524    | ) |  |   | (304    | )
|                                                                                                                               |  |                            |          |      |  |      |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE           |  |                            | (40,235  | )    |  |      | 9,817   |   |  |   | (7,530  | )
|PROVISION (BENEFIT) FOR INCOME TAXES                                                                                           |  |                            | (2,300   | )    |  |      | 3,063   |   |  |   | 4,895   |  
|                                                                                                                               |  |                            |          |      |  |      |         |   |  |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                                                                                       |  |                            | (37,935  | )    |  |      | 6,754   |   |  |   | (12,425 | )
|                                                                                                                               |  |                            |          |      |  |      |         |   |  |   |         |  
|DISCONTINUED OPERATIONS (NOTE 6):                                                                                              |  |                            |          |      |  |      |         |   |  |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS BEFORE
INCOME TAXES (INCLUDING LOSS OF DISPOSAL OF
$8,088 IN 2002)                           |  |                            | (20,208  | )    |  |      | (7,947  | ) |  |   | (19,716 | )
|INCOME TAXES                                                                                                                   |  |                            | 280      |      |  |      | (4,000  | ) |  |   | (6,180  | )
|                                                                                                                               |  |                            |          |      |  |      |         |   |  |   |         |  
|LOSS ON DISCONTINUED OPERATIONS                                                                                                |  |                            | (20,488  | )    |  |      | (3,947  | ) |  |   | (13,536 | )
|CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE                                                                            |  |                            | 91,003   |      |  |      |        |   |  |   |        |  
|                                                                                                                               |  |                            |          |      |  |      |         |   |  |   |         |  
|NET INCOME (LOSS)                                                                                                              |  | $                          | (149,426 | )    |  | $    | 2,807   |   |  | $ | (25,961 | )
|                                                                                                                               |  |                            |          |      |  |      |         |   |  |   |         |  
|BASIC EARNINGS (LOSS) PER COMMON SHARE:                                                                                        |  |                            |          |      |  |      |         |   |  |   |         |  
|BASIC EARNINGS (LOSS) PER COMMON SHARE FROM
CONTINUING OPERATIONS BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE   |  | $                          | (2.36    | )    |  | $    | 0.42    |   |  | $ | (0.78   | )
|DISCONTINUED OPERATIONS                                                                                                        |  |                            | (1.27    | )    |  |      | (0.25   | ) |  |   | (0.86   | )
|CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE                                                                            |  |                            | (5.66    | )    |  |      |        |   |  |   |        |  
|                                                                                                                               |  |                            |          |      |  |      |         |   |  |   |         |  
|BASIC EARNINGS (LOSS) PER COMMON SHARE                                                                                         |  | $                          | (9.29    | )    |  | $    | 0.17    |   |  | $ | (1.64   | )
|                                                                                                                               |  |                            |          |      |  |      |         |   |  |   |         |  
|DILUTED EARNINGS (LOSS) PER COMMON SHARE:                                                                                      |  |                            |          |      |  |      |         |   |  |   |         |  
|DILUTED EARNINGS (LOSS) PER COMMON SHARE
FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE |  | $                          | (2.36    | )    |  | $    | 0.40    |   |  | $ | (0.78   | )
|DISCONTINUED OPERATIONS                                                                                                        |  |                            | (1.27    | )    |  |      | (0.23   | ) |  |   | (0.86   | )
|CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE                                                                            |  |                            | (5.66    | )    |  |      |        |   |  |   |        |  
|                                                                                                                               |  |                            |          |      |  |      |         |   |  |   |         |  
|DILUTED EARNINGS (LOSS) PER COMMON SHARE                                                                                       |  | $                          | (9.29    | )    |  | $    | 0.17    |   |  | $ | (1.64   | )
|                                                                                                                               |  |                            |          |      |  |      |         |   |  |   |         |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING                                                                           |  |                            | 16,079   |      |  |      | 15,988  |   |  |   | 15,798  |  
|                                                                                                                               |  |                            |          |      |  |      |         |   |  |   |         |  
|WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING                                                     |  |                            | 16,079   |      |  |      | 16,728  |   |  |   | 15,798  |  
|                                                                                                                               |  |                            |          |      |  |      |         |   |  |   |         |  

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

F-4



---



##### 



US LIQUIDS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) AND STOCKHOLDERS EQUITY
(In thousands)

|                                                      |                                                             |                                  |   |               |          |              |        |            |  |               |     |               |  |               |         |        |  |   |     |    |  |   |          |          |   |   |         |          |   | 
|----------------------------------------------------- | ----------------------------------------------------------- | -------------------------------- | - | ------------- | -------- | ------------ | ------ | ---------- |  | ------------- | --- | ------------- |  | ------------- | ------- | ------ |  | - | --- | -- |  | - | -------- | -------- | - | - | ------- | -------- | - | 
|                                                      |                                                             |                                  |   |               |          |              |        |            |  |               |     | Accumulated   |  |               |         |       
|                                                      |                                                             |                                  |   |               |          | Common Stock |        | Additional |  | Other         |     | Accumulated   |  | Total        
|                                                      |                                                             |                                  |   | Comprehensive |          |              |        | Paid-In    |  | Comprehensive |     | Earnings      |  | Stockholders
|                                                      |                                                             |                                  |   | Income (Loss) |          | Shares       |        | Amount     |  | Capital       |     | Income (Loss) |  | (Deficit)     |         | Equity
|                                                      |                                                             |                                  |   |               |          |              |        |            |  |               |     |               |  |               |         |       
|BALANCE, January 1, 2000                              |                                                             |                                  |   |               |          |              | 15,781 |            |  | $             | 158 |               |  | $             | 176,859 |        |  | $ | (42 | )  |  | $ | 13,173   |          |   | $ | 190,148 |         
|                                                      | Common stock issued in acquisitions                         |                                  |   |              |          |              |        | 22         |  |               |     |              |  |               |         | 75     |  |   |     |   |  |   |          |         |   |   |         | 75       |  
|                                                      | Common stock options exercised and
employee stock purchases |                                  |   |              |          |              |        | 16         |  |               |     |              |  |               |         | 5      |  |   |     |   |  |   |          |         |   |   |         | 5        |  
|Comprehensive Loss:                                   |                                                             |                                  |   |               |          |              |        |            |  |               |     |               |  |               |         |        |  |   |     |    |  |   |          |          |   |   |         |         
|                                                      | Foreign currency translation
adjustment                     |                                  | $ | 19            |          |              |        |           |  |               |     |              |  |               |         |       |  |   |     | 19 |  |   |          |         |   |   |         | 19       |  
|                                                      | Net loss (As restated, see Note 23)                         |                                  |   | (25,961       | )        |              |        |           |  |               |     |              |  |               |         |       |  |   |     |   |  |   |          | (25,961  | ) |   |         | (25,961  | )
|                                                      |                                                             |                                  |   |               |          |              |        |            |  |               |     |               |  |               |         |        |  |   |     |    |  |  
|                                                      |                                                             | Total (As restated, see Note 23) |   | $             | (25,942  | )            |        |            |  |               |     |               |  |               |         |        |  |   |     |    |  |   |          |          |   |   |         |          |   | 
|                                                      |                                                             |                                  |   |               |          |              |        |            |  |               |     |               |  |               |         |        |  |   |     |    |  |   |          |          |   |   |         |         
|BALANCE, December 31, 2000 (As restated,
see Note 23) |                                                             |                                  |   |               |          |              | 15,819 |            |  |               | 158 |               |  |               | 176,939 |        |  |   | (23 | )  |  |   | (12,788  | )        |   |   | 164,286 |         
|                                                      | Common stock options exercised and
employee stock purchases |                                  |   |              |          |              |        | 213        |  |               |     | 2             |  |               |         | 195    |  |   |     |   |  |   |          |         |   |   |         | 197      |  
|Comprehensive Income:                                 |                                                             |                                  |   |               |          |              |        |            |  |               |     |               |  |               |         |        |  |   |     |    |  |   |          |          |   |   |         |         
|                                                      | Net income (As restated, see Note 23)                       |                                  | $ | 2,807         |          |              |        |           |  |               |     |              |  |               |         |       |  |   |     |   |  |   |          | 2,807    |   |   |         | 2,807    |  
|                                                      |                                                             |                                  |   |               |          |              |        |            |  |               |     |               |  |               |         |        |  |   |     |    |  |  
|                                                      |                                                             | Total (As restated, see Note 23) |   | $             | 2,807    |              |        |            |  |               |     |               |  |               |         |        |  |   |     |    |  |   |          |          |   |   |         |          |   | 
|                                                      |                                                             |                                  |   |               |          |              |        |            |  |               |     |               |  |               |         |        |  |   |     |    |  |   |          |          |   |   |         |         
|BALANCE, December 31, 2001 (As restated,
see Note 23) |                                                             |                                  |   |               |          |              | 16,032 |            |  |               | 160 |               |  |               | 177,134 |        |  |   | (23 | )  |  |   | (9,981   | )        |   |   | 167,290 |         
|                                                      | Common stock options exercised and
employee stock purchases |                                  |   |              |          |              |        | 63         |  |               |     | 1             |  |               |         | 32     |  |   |     |   |  |   |          |         |   |   |         | 33       |  
|Comprehensive Loss:                                   |                                                             |                                  |   |               |          |              |        |            |  |               |     |               |  |               |         |        |  |   |     |    |  |   |          |          |   |   |         |         
|                                                      | Foreign currency translation
adjustment                     |                                  | $ | 33            |          |              |        |           |  |               |     |              |  |               |         |       |  |   |     | 33 |  |   |          |         |   |   |         | 33       |  
|                                                      | Net loss (As restated, see Note 23)                         |                                  |   | (149,426      | )        |              |        |           |  |               |     |              |  |               |         |       |  |   |     |   |  |   |          | (149,426 | ) |   |         | (149,426 | )
|                                                      |                                                             |                                  |   |               |          |              |        |            |  |               |     |               |  |               |         |        |  |   |     |    |  |   |          |          |   |   |         |         
|                                                      |                                                             | Total (As restated, see Note 23) |   | $             | (149,393 | )            |        |            |  |               |     |               |  |               |         |        |  |   |     |    |  |   |          |          |   |   |         |          |   | 
|                                                      |                                                             |                                  |   |               |          |              |        |            |  |               |     |               |  |               |         |        |  |   |     |    |  |   |          |          |   |   |         |         
|BALANCE, December 31, 2002 (As restated,
see Note 23) |                                                             |                                  |   |               |          |              | 16,095 |            |  | $             | 161 |               |  | $             | 177,166 |        |  | $ | 10  |    |  | $ | (159,407 | )        |   | $ | 17,930  |         
|                                                      |                                                             |                                  |   |               |          |              |        |            |  |               |     |               |  |               |         |        |  |   |     |    |  |   |          |          |   |   |         |         

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

F-5



---



##### 



US LIQUIDS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                                                    |                                                                                          |                                                          |                                                                     |         |      |                            |       |         |      |        |         |         |   |         |   | 
|------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------------------------------------- | ------- | ---- | -------------------------- | ----- | ------- | ---- | ------ | ------- | ------- | - | ------- | - | 
|                                                                    |                                                                                          |                                                          |                                                                     |         |      | Years Ended December 31,  
|                                                                    |                                                                                          |                                                          |                                                                     |         |      |                           
|                                                                    |                                                                                          |                                                          |                                                                     |         |      | 2002                       |       | 2001    |      | 2000  
|                                                                    |                                                                                          |                                                          |                                                                     |         |      |                            |       |         |      |       
|                                                                    |                                                                                          |                                                          |                                                                     |         |      | (As Restated, see Note 23)
|CASH FLOWS FROM OPERATING ACTIVITIES:                               |                                                                                          |                                                          |                                                                     |         |      |                            |       |         |      |        |         |        
|Net income (loss)                                                   |                                                                                          | $                                                        | (149,426                                                            | )       |      | $                          | 2,807 |         |      | $      | (25,961 | )      
|                                                                    | Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |                                                          |                                                                     |         |      |                            |       |         |      |        |         |         |  
|                                                                    | Change in accounting principle                                                           |                                                          |                                                                     | 91,003  |      |                            |       |        |      |        |         |        |  
|                                                                    | Asset write-downs and goodwill impairment                                                |                                                          |                                                                     | 51,827  |      |                            |       | 6,793   |      |        |         | 29,876  |  
|                                                                    | Loss on discontinued operations                                                          |                                                          |                                                                     | 8,088   |      |                            |       |        |      |        |         |        |  
|                                                                    | Depreciation and amortization                                                            |                                                          |                                                                     | 14,418  |      |                            |       | 17,513  |      |        |         | 19,234  |  
|                                                                    |                                                                                          | Net (gain) loss on sale of property, plant and equipment |                                                                     |         | (313 | )                          |       |         | (191 | )      |         |         | 8 |        
|                                                                    | Changes in operating assets and liabilities, net of
amounts acquired:                    |                                                          |                                                                     |         |      |                            |       |         |      |        |         |         |  
|                                                                    |                                                                                          |                                                          | Accounts receivable, net                                            |         |      | 2,395                      |       |         |      | 2,899  |         |         |   | (3,505  | )
|                                                                    |                                                                                          |                                                          | Inventories                                                         |         |      | 546                        |       |         |      | 94     |         |         |   | (224    | )
|                                                                    |                                                                                          |                                                          | Prepayments and other current assets                                |         |      | (453                       | )     |         |      | 2,272  |         |         |   | (608    | )
|                                                                    |                                                                                          |                                                          | Other assets                                                        |         |      | (2,616                     | )     |         |      | (1,308 | )       |         |   | 140     |  
|                                                                    |                                                                                          |                                                          | Accounts payable, accrued liabilities and other
current liabilities |         |      | (386                       | )     |         |      | (3,124 | )       |         |   | 358     |  
|                                                                    |                                                                                          |                                                          | Closure, remediation and processing reserves                        |         |      | (4,629                     | )     |         |      | (1,724 | )       |         |   | (915    | )
|                                                                    |                                                                                          |                                                          | Contract reserve and other long-term liabilities                    |         |      | (211                       | )     |         |      | (1,519 | )       |         |   | (10,314 | )
|                                                                    |                                                                                          |                                                          | Deferred income taxes                                               |         |      | (346                       | )     |         |      | (1,763 | )       |         |   | 1,888   |  
|                                                                    |                                                                                          |                                                          | Operations held for sale, net                                       |         |      |                           |       |         |      | 1,814  |         |         |   |        |  
|                                                                    |                                                                                          |                                                          |                                                                     |         |      |                            |       |         |      |        |         |        
|                                                                    | Net cash provided by operating activities                                                |                                                          |                                                                     | 9,897   |      |                            |       | 24,563  |      |        |         | 9,977   |  
|                                                                    |                                                                                          |                                                          |                                                                     |         |      |                            |       |         |      |        |         |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                               |                                                                                          |                                                          |                                                                     |         |      |                            |       |         |      |        |         |        
|                                                                    | Purchases of property, plant and equipment                                               |                                                          |                                                                     | (7,746  | )    |                            |       | (10,641 | )    |        |         | (19,192 | )
|                                                                    | Proceeds from sale of property, plant and equipment                                      |                                                          |                                                                     | 872     |      |                            |       | 1,072   |      |        |         | 973     |  
|                                                                    | Proceeds from sale of businesses                                                         |                                                          |                                                                     | 13,293  |      |                            |       | 3,947   |      |        |         |        |  
|                                                                    | Cash paid for acquisitions, net of subsequent purchase
adjustments                       |                                                          |                                                                     | (2,939  | )    |                            |       | (64     | )    |        |         | 14      |  
|                                                                    |                                                                                          |                                                          |                                                                     |         |      |                            |       |         |      |        |         |        
|                                                                    | Net cash provided by (used in) investing activities                                      |                                                          |                                                                     | 3,480   |      |                            |       | (5,686  | )    |        |         | (18,205 | )
|                                                                    |                                                                                          |                                                          |                                                                     |         |      |                            |       |         |      |        |         |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                               |                                                                                          |                                                          |                                                                     |         |      |                            |       |         |      |        |         |        
|                                                                    | Proceeds from issuance of long-term obligations                                          |                                                          |                                                                     | 9,114   |      |                            |       | 8,860   |      |        |         | 36,975  |  
|                                                                    | Principal payments on long-term obligations                                              |                                                          |                                                                     | (19,986 | )    |                            |       | (28,612 | )    |        |         | (29,993 | )
|                                                                    | Proceeds from exercise of stock options and employee stock
purchase plan                 |                                                          |                                                                     | 32      |      |                            |       | 197     |      |        |         | 5       |  
|                                                                    |                                                                                          |                                                          |                                                                     |         |      |                            |       |         |      |        |         |        
|                                                                    | Net cash provided by (used in) financing activities                                      |                                                          |                                                                     | (10,840 | )    |                            |       | (19,555 | )    |        |         | 6,987   |  
|                                                                    |                                                                                          |                                                          |                                                                     |         |      |                            |       |         |      |        |         |        
|EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH
AND CASH EQUIVALENTS |                                                                                          |                                                          | 33                                                                  |         |      |                            |      |         |      |        | 19      |        
|                                                                    |                                                                                          |                                                          |                                                                     |         |      |                            |       |         |      |        |         |        
|NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS                |                                                                                          |                                                          | 2,570                                                               |         |      |                            | (678  | )       |      |        | (1,222  | )      
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                    |                                                                                          |                                                          | 1,498                                                               |         |      |                            | 2,176 |         |      |        | 3,398   |        
|                                                                    |                                                                                          |                                                          |                                                                     |         |      |                            |       |         |      |        |         |        
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                          |                                                                                          | $                                                        | 4,068                                                               |         |      | $                          | 1,498 |         |      | $      | 2,176   |        
|                                                                    |                                                                                          |                                                          |                                                                     |         |      |                            |       |         |      |        |         |        
|SUPPLEMENTAL DISCLOSURES:                                           |                                                                                          |                                                          |                                                                     |         |      |                            |       |         |      |        |         |        
|                                                                    | Cash paid for interest and related financial fees                                        |                                                          | $                                                                   | 8,230   |      |                            | $     | 8,747   |      |        | $       | 10,639  |  
|                                                                    | Cash paid for income taxes                                                               |                                                          |                                                                     | 465     |      |                            |       | 400     |      |        |         | 534     |  
|                                                                    | Cash received for income taxes                                                           |                                                          |                                                                     | 1,933   |      |                            |       | 4,487   |      |        |         | 4,566   |  
|                                                                    | Assets acquired under capital leases                                                     |                                                          |                                                                     |        |      |                            |       |        |      |        |         | 426     |  
|                                                                    | Liabilities issued and assumed related to acquisitions                                   |                                                          |                                                                     |        |      |                            |       |        |      |        |         | 257     |  
|                                                                    | Common stock, warrants, and options issued for acquisitions                              |                                                          |                                                                     |        |      |                            |       |        |      |        |         | 75      |  

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

F-6



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION:

U S Liquids Inc. is a leading provider of liquid waste management
services, including collection, processing, recovery and disposal services.
The Company operates three divisions  the Commercial Wastewater Division, the
Industrial Wastewater Division and the Oilfield Waste Division. The Commercial
Wastewater Division collects, processes and disposes nonhazardous liquid waste
such as industrial wastewater, bulk liquids and dated beverages. The
Industrial Wastewater Division collects, processes and disposes of hazardous
and nonhazardous liquid waste such as household hazardous wastes, industrial
wastewater, petroleum fuels and antifreeze. The Commercial and Industrial
Wastewater Divisions also generate revenue from the sale of by-products
recovered from certain waste streams, including oils, ethanol, solvents,
plastics, cardboard, aluminum, glass, industrial chemicals and recycled
antifreeze products. The Oilfield Waste Division disposes waste that is
generated in the exploration for and production of oil and natural gas
primarily from the Gulf of Mexico and land based-rigs in Louisiana, Texas and
northern Mexico.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its majority owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.

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
materially from those estimates. Significant estimates made by management
include discontinued operations, the allowance for doubtful accounts, the
valuation allowance against deferred income tax assets, self-insurance,
processing reserves and reserves for the closure and remediation of facilities.

Cash Equivalents: Highly liquid investments with an original maturity of
three months or less are classified as cash equivalents. Cash equivalents are
stated at cost plus accrued interest, which approximates fair value.

Concentrations of Credit Risk: Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents and accounts receivable. The Company places its cash and
cash equivalents with high quality financial institutions and limits the amount
of credit exposure with any one institution. Concentrations of credit risk with
respect to accounts receivable are limited because a large number of
geographically diverse customers comprise the Companys customer base, thus
spreading the trade credit risk. At December 31, 2002 and 2001 no single group
or customer represented greater than 10% of total accounts receivable. The
Company controls credit risk through credit evaluations, credit limits, and
monitoring procedures.

Allowance for Doubtful Accounts: The Company extends credit to customers
and other parties in the normal course of business. Estimated losses on
accounts receivable are provided through an allowance for doubtful accounts.
In evaluating the level of established reserves, the Company makes judgments
regarding the parties ability to make required payments, economic events and
other factors. As the financial condition of these parties change,
circumstances develop or additional information becomes available, adjustments
to the allowance for doubtful accounts may be required. The Company 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):

F-7



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

|                             |  |              |       |               |  |            |     |            |  |               |       |  |  |  |        |   |  |   |       | 
|---------------------------- |  | ------------ | ----- | ------------- |  | ---------- | --- | ---------- |  | ------------- | ----- |  |  |  | ------ | - |  | - | ----- | 
|                             |  | Balance at   |       | Operation     |  |            |     |            |  | Write-Offs,   |       |  |  | 
|                             |  | Beginning of |       | Classified as |  | Charged to |     | net of     |  | Balance at   
|                             |  | Period       |       | Held for Sale |  | Expense    |     | Recoveries |  | End of Period
|                             |  |              |       |               |  |            |     |            |  |              
|Year ended
December 31, 2000 |  | $            | 1,818 |               |  |            | (18 | )          |  |               | 220   |  |  |  | (1,163 | ) |  | $ | 857   | 
|Year ended
December 31, 2001 |  | $            | 857   |               |  |            | 18  |            |  |               | 495   |  |  |  | (641   | ) |  | $ | 729   | 
|Year ended
December 31, 2002 |  | $            | 729   |               |  |            |    |            |  |               | 1,719 |  |  |  | (1,430 | ) |  | $ | 1,018 | 

Inventories: Inventories are stated at the lower of cost or market value.
At December 31, 2002 and 2001, inventories consisted of processed by-products
of $0.8 million and $1.0 million, respectively, and unprocessed by-products of
$0.7 million and $0.6 million, respectively. Cost is determined using the
first-in, first-out method.

Discontinued Operations: In December 2000, the Company approved the
divestiture of several of its non-core operations. The businesses that the
Company was marketing for sale and the portfolio of real estate that the
Company determined were surplus and was marketing for sale, were classified as
operations held for sale. The carrying values of these assets were written
down to estimated fair value, less costs to sell. These charges were based on
estimates and certain contingencies that could materially differ from actual
results and resolution of any such contingencies. In December 2001, the
Company made the decision to assimilate the remaining unsold operations back
into the Companys core business. During the fourth quarter of 2002, the
Company again approved the divestiture or suspension of several of its non-core
operations in the Commercial Wastewater Division. As a result of this decision
and the sale of substantially all of the Companys operations in Texas, in
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the Company
has reported the assets, liabilities and results of operations of those
businesses separately as discontinued operations and restated all prior period
financial information to present the results of continuing and discontinued
operations separately. See further discussion in Notes 4 and 6.

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

Intangible Assets: Intangible assets consist primarily of the excess of
cost over net assets of acquired businesses (goodwill), permits and noncompete
agreements. With the implementation of SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill is tested for impairment during the first quarter
of each year unless impairment indicators arise during an interim period. See
Note 10 for further discussion.

Depreciation and Amortization: Depreciation and amortization expenses of
continuing operations are excluded from operating expenses and selling, general
and administrative expenses in the consolidated statements of operations. The
expenses are as follows (in thousands):

F-8



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

|                                             |       |   |                          |        |      |   |       |        |  |   |       |        | 
|-------------------------------------------- | ----- | - | ------------------------ | ------ | ---- | - | ----- | ------ |  | - | ----- | ------ | 
|                                             |       |   | Years Ended December 31,
|                                             |       |   |                         
|                                             |       |   | 2002                     |        | 2001 |   | 2000 
|                                             |       |   |                          |        |      |   |      
|Operating expenses                           |       | $ | 9,229                    |        |      | $ | 8,740 |        |  | $ | 8,381 |       
|Selling, general and administrative expenses |       |   | 1,475                    |        |      |   | 963   |        |  |   | 940   |       
|Amortization expenses                        |       |   | 232                      |        |      |   | 3,620 |        |  |   | 3,755 |       
|                                             |       |   |                          |        |      |   |       |        |  |   |       |       
|                                             | Total |   | $                        | 10,936 |      |   | $     | 13,323 |  |   | $     | 13,076 | 
|                                             |       |   |                          |        |      |   |       |        |  |   |       |       

Depreciation and amortization expense included in discontinued operations
for the years ended December 31, 2002, 2001 and 2000 were $3.5 million, $4.2
million and $6.2 million, respectively.

Income Taxes: The Company recognizes deferred tax assets and liabilities
for expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Deferred tax assets and liabilities are
determined based on the differences between the financial statements carrying
amounts and the tax basis of assets and liabilities using enacted tax rates and
laws in effect in the years which the differences are expected to reverse. The
Company has established valuation allowances to reduce deferred income tax
assets to estimated realizable value.

Self-Insurance: The Company retains the risk for uninsured employee group
health claim deductibles which are subject to annual aggregate limits. Losses
up to the deductible amount are based upon the Companys known claims incurred
and an estimate of claims incurred but not reported. The Company has provided
financial assurance in the form of letters of credit to its insurance carrier.
As claims develop and additional information becomes available, adjustments to
loss reserves and the amount of such financial assurance may be required.

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 the related costs. The treatment costs are
charged against the reserve as such costs are incurred. The processing reserve
represents the estimated costs to process the volumes of waste on hand for
which revenue has been recognized.

Closure and Remediation Reserves: 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 postclosure
periods. The closure and remediation reserves relate to both open and closed
facilities, as well as all third party sites for which the Company has been
determined to be a potentially responsible party and which require remediation.
The reserves required could be affected by changes in regulations, project
progress, technology changes or improvements, identification of changed
contamination levels, settlement of liability claims, or other factors. The
reserves are then adjusted based on managements updated knowledge of the
applicable items above. The Company reviews the status of the reserves for each
facility and monitors all activity.

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 of waste acceptance at the customers facility, if
the Company collects the materials from the customers facility. The Company
recognizes revenue at the time waste is accepted since the customer has passed
the legal and regulatory responsibility and associated risk of disposing the
waste to the Company. By-product sales are recognized when the by-product is
shipped to the buyer.

Fair Value of Financial Instruments: The carrying amount of cash and cash
equivalents, accounts receivable, accounts payable and short-term notes payable
approximate fair values due to the short-term maturities of these instruments.
The carrying value of borrowings under the credit agreement approximate fair
value since the interest rates are indexed to the prime rate. The Company
estimates that the fair value of all of its debt obligations approximates $80.7
million and $92.0 million at December 31, 2002 and 2001, respectively.

F-9



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Translation of Foreign Currency: The U.S. dollar is the functional
currency for all of the Companys consolidated operations. In prior years, the
Canadian dollar was used as the functional currency for the Companys one
foreign (Canadian) entity. In 2001, the operations of the Canadian entity were
formally placed under the management team of the Innovative Services Group of
the Commercial Wastewater Division in the U.S. This change in management
structure was in recognition of the continuing inter-relationships between the
Canadian and U.S. operations. The Canadian operations are substantially funded
by the parent company and a substantial portion of its revenues are received in
U.S. dollars from U.S. customers. The effect of this change in functional
currency on the financial statements was not significant. The accumulated
translation effects of using foreign currencies other than the U.S. dollar
prior to this change are included in the foreign currency translation
adjustment in stockholders equity.

Recently Issued Accounting Standards: In June 2001, the Financial
Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset
Retirement Obligations, that addresses the financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets
and associated costs. SFAS No. 143 requires that the discounted fair value of
a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of the fair value can be made.
The associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. The provisions of SFAS No. 143 are effective
for the Company as of January 1, 2003. The Company is evaluating the
provisions of SFAS No. 143 and at present has not determined the impact of
adopting SFAS No. 143. Adoption of SFAS No. 143 could have a material impact
on the Companys results of operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt and an amendment of that statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No.
145 also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor
Carriers. SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS
No. 145 also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The provisions of this statement were required to be
adopted at various times during 2002 and did not have an impact on the December
31, 2002 financial statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally EITF Issue No. 94-3. The Company will adopt the
provisions of SFAS No. 146 for restructuring activities initiated after
December 31, 2002. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability
is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was
recognized at the date of commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at
fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amounts recognized. The Company will
apply the effects of this statement on a prospective basis.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure, an amendment of SFAS No.
123, which addresses alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company has adopted the annual disclosure requirements as of December 31, 2002
and will begin disclosing the required interim financial information for the
quarter ending March 31, 2003.

F-10



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In November 2002, FASB Interpretation (FIN) No. 45, Guarantors
Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, elaborates on the disclosure to be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. This Interpretation also incorporates, without change, the
guidance in FIN No. 34, which is being superceded. As set forth in the
Interpretation, the disclosures required are designed to improve the
transparency of the financial statement information about the guarantors
obligations and liquidity risks related to guarantees issued. The fair values
of guarantees entered into after December 31, 2002, must be recorded as a
liability of the guarantor in its financial statements. Existing guarantees as
of December 31, 2002 are grandfathered from the recognition provisions, unless
they are later modified, but they are still required to be disclosed. The
disclosure requirements are effective for periods ending after December 15,
2002. See Note 20 for the required disclosures as of December 31, 2002.

3. LIQUIDITY AND OUTLOOK:

At December 31, 2002, the Company had negative working capital of $75.9
million. The working capital deficit is primarily the result of including the
Companys revolving credit facility in current liabilities. The facility, which
matures on April 15, 2003, had an outstanding balance of approximately $76.8
million at December 31, 2002. The Company is working with its lenders on the
terms of a three-month extension request that, if approved, is expected to
satisfy near-term working capital needs and allow additional time to secure new
financing. Based on discussions with its lenders, the Company believes that
any extension of the line of credit past the April 15, 2003 maturity date is
unlikely to be granted until late March or early April 2003, if at all.

On March 31, 2003, a quarterly interest payment of $1.8 million is due on
the credit facility. The Company does not expect to have the funds available
to make this payment and has asked its lenders to defer the payment as part of
the requested extension of the maturity date of the credit facility. There can
be no assurance that the Company will be successful in obtaining an extension
of the maturity date of the credit facility or a deferral of the quarterly
interest payment due on March 31, 2003.

The Companys recent performance has caused it to violate various
financial covenants of its credit facility. Prior to December 31, 2002, the
Companys lenders had been issuing short-term waivers. At December 31, 2002,
the Company was not in compliance with the Funded Debt to Adjusted EBITDA ratio
set forth in the credit agreement. The Companys lenders have not declared an
event of default as a result of its noncompliance with this ratio; however, the
lenders have retained the right to do so.

During 2002, the terms of the credit facility were amended on multiple
occasions to remedy the Companys non-compliance with certain financial
covenants, restrict borrowings available to the Company and to approve the
sales and acquisition of various of the Companys operations. Furthermore, the
amendments provided that the amount of the credit facility will be permanently
reduced by an amount equal to one hundred percent of the net cash proceeds
received from any sale of assets not in the ordinary course of business, the
issuance of certain debt or, with certain specified exceptions, any issuance of
equity. The terms of the credit facility significantly limit the Companys
ability to enter into leases or obtain additional debt outside of the facility.
During the course of these amendments, the Company agreed to retain financial
advisors acceptable to the lenders.

Between December 31, 2002 and January 31, 2003, the terms of the credit
facility were further amended to increase the limitation on the Companys debt
balance to 4.00 times Adjusted EBITDA, as defined in the credit agreement,
permit the addback of EBITDA of up to $4.0 million of non-cash charges, and to
require monthly reporting of the Companys Funded Debt to Adjusted EBITDA and
accounts receivable coverage ratios. Additionally, the Companys lenders
consented to the sale of various assets aggregating $1.8 million in sales
price, provided that the net cash proceeds are used to reduce outstanding
debts, and agreed to lend the Company up to $2.5 million to make payments on a
finite risk bonding program. In March 2003, the Company retained an investment
banker to pursue the sale of a major business unit of the Company. In
exchange, the lenders eliminated the $3.4 million commitment reduction that had
been previously deferred from the original due date of December 31, 2002.

F-11



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 certain executives cease to serve as
an executive officer of the Company and are not replaced within sixty days by
an individual reasonably satisfactory to the lenders. The lenders have waived
through April 15, 2003 an event of default arising from the resignation of
Michael P. Lawlor, the Companys former Chief Executive Officer. On August 29,
2002, William DeArman, the Chairman of the Board of Directors, was appointed
interim Chief Executive Officer. On October 31, 2002, the Companys Board of
Directors made his position permanent. The lenders have continued to waive the
default arising from Mr. Lawlors departure, but have not approved Mr.
DeArmans appointment.

To address the factors that have caused the violations of the Companys
credit agreement, the Board of Directors and Company management have taken the
following actions:



| |  |  | employed a new executive management team;                                                                                                                                 
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | engaged a financial advisor, as requested by the Companys
lenders, to focus on financial restructuring plans;                                                            
|
| |  |  | implemented cost cutting measures such as reductions in
workforce and a temporary freeze on previously authorized pay
increases;                                          
|
| |  |  | sold substantially all of the Texas operations in the
Commercial Wastewater Division, and used a substantial portion of
the proceeds therefrom to reduce outstanding debt;
|
| |  |  | identified for sale or closure several additional
under-performing businesses; and                                                                                        
|
| |  |  | acquired six oilfield waste transfer stations in Louisiana
and Texas to replace the business lost from the non-renewal of the
contract with Newpark Resources, Inc.       

Management is also:



| |  |  | pursuing the sale of a major business unit of the Company as requested by the Companys lenders;                              
| | - |  | ------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | exploring the possibility of selling other non-core operations;                                                               
|
| |  |  | analyzing each of the Companys operations for opportunities
to reduce costs, improve processes and increase efficiencies; and
|
| |  |  | actively seeking new financing and equity.                                                                                    

As of December 31, 2002 and March 10, 2003, the Company had outstanding
borrowings of approximately $76.8 million under the credit facility. Letters
of credit under the facility totaled $8.2 million and $8.0 million as of
December 31, 2002 and March 10, 2003, respectively. Advances under the credit
facility currently bear interest at the prime rate plus 6.0%. This includes a
2% default penalty as a result of the Companys non-compliance with the Funded
Debt to Adjusted EBITDA ratio. As of December 31, 2002 and March 10, 2003,
amounts outstanding under the credit facility were accruing interest at
approximately 8.3% and 10.3%, respectively, excluding amortization of prepaid
financing costs. As of March 10, 2003, the unused portion of the credit
facility was $4.2 million, none of which was available.

The Company is engaged in negotiations and due diligence with several
institutional investors regarding an investment in exchange for equity or
subordinated notes. The Company believes that this new capital will enable it
to obtain a new credit facility and that both sources of capital will pay off
the current credit facility and provide working capital. There can be no
assurance that the Company will be successful in its refinancing efforts and
any

F-12



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

refinancing transaction is expected to result in substantial dilution to
current shareholders. If the Company is unable to successfully restructure its
indebtedness, it may be required to seek protection under the bankruptcy laws.

The consolidated financial statements have been prepared on a basis which
assumes that the Company will continue as a going concern and which
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

4. SPECIAL CHARGES:

2002 Adjustments and Insurance Settlement

|                                            |  |                |        |  
|------------------------------------------- |  | -------------- | ------ | -
|                                            |  | 2002 Special  
|Description                                 |  | Income        
|                                            |  |               
|                                            |  | (In thousands)
|Re-Claim Louisiana Lease Liability          |  | $              | (1,026 | )
|Insurance Claim Proceeds                    |  |                | (2,150 | )
|Detroit Fine Adjustment                     |  |                | (856   | )
|Reliance Bankruptcy Adjustment              |  |                | 727    |  
|Other Income, net                           |  |                | (78    | )
|                                            |  |                |        |  
|Total Special Income, net December 31, 2002 |  | $              | (3,383 | )
|                                            |  |                |        |  

As discussed below, in 2000, a reserve was set up for the remaining lease
liability at the Re-Claim Louisiana facility due to the closing of the
facility. During the fourth quarter of 2002, the Company was able to negotiate
a cancellation of this lease by paying six months of rent in advance. As such,
the remaining liability of $1.0 million was reversed.

In addition to the claim filed and insurance proceeds received in 2001 (as
discussed below), the Company submitted a claim to one of its insurance
companies for losses incurred as a result of the temporary closing of the
Detroit facility. During the third quarter of 2002, the Company agreed to
accept $2.4 million in complete satisfaction of the claim under the policy.
$2.15 million of this amount was paid directly to the Company in September 2002
and the remainder was paid to the attorneys representing the Company in this
matter.

As discussed below, in 2001, a $5.0 million reserve was set up for the
possible settlement of the investigation of the Companys Detroit facility.
This amount was adjusted during the fourth quarter after considering the net
present value of the settlement reached in the fourth quarter.

As discussed below, in 2001, a $3.5 million reserve was set up for claims
not resolved before the Companys former insurance carrier Reliance Insurance
Company was placed in liquidation. This amount was adjusted during the fourth
quarter after considering the net present value of certain settled obligations
and an estimate of the remaining possible claims.

F-13



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2001 Regulatory and Legal Resolutions and Operations Held for Sale

|                                            |  |                |        |  
|------------------------------------------- |  | -------------- | ------ | -
|                                            |  | 2001 Special  
|Description                                 |  | Income        
|                                            |  |               
|                                            |  | (In thousands)
|National Steel Settlement                   |  | $              | (7,500 | )
|Insurance Claim Proceeds                    |  |                | (3,750 | )
|Detroit Fine                                |  |                | 5,000  |  
|Reliance Bankruptcy                         |  |                | 3,500  |  
|Goodwill Write-down                         |  |                | 1,155  |  
|Other Income, net                           |  |                | (8     | )
|                                            |  |                |        |  
|Total Special Income, net December 31, 2001 |  | $              | (1,603 | )
|                                            |  |                |        |  

During 2000, the Company filed suit against National Steel Corporation
(National Steel) for not properly identifying PCB contaminated materials as
required by law when delivered to the Detroit facility. In filing the suit,
the Company was seeking to recover the costs incurred and the losses suffered
by the facility as a result of National Steels non-disclosure. In April 2001,
the Company entered into a settlement agreement with National Steel. As part
of the settlement agreement, in April 2001, National Steel paid $7.5 million to
the Company.

In addition to filing suit against National Steel, the Company also
submitted a claim under its property damage policy for losses incurred as a
result of the temporary closing of the Detroit facility in August 1999 and the
delivery of PCB contaminated waste to a landfill owned by Waste Management,
Inc. During the third quarter of 2001, the Company agreed to accept $3.75
million in complete satisfaction of its claim under the policy. The funds were
paid to the Company in August 2001.

As further discussed in Note 20, in 1999, the Environmental Protection
Agency (EPA) and the Federal Bureau of Investigation (FBI) executed a
search warrant at the Detroit facility seeking documentation relating to the
facilitys operations. During the fourth quarter of 2001, the Company
established a reserve of $5.0 million for amounts expected to be paid in
connection with a possible settlement of this matter.

Reliance Insurance Company (Reliance) provided casualty insurance
coverage for the Company. In October 2001, Reliance was declared insolvent by
the Insurance Commissioner of the State of Pennsylvania. As a result,
insurance coverage will not be available for any claims or lawsuits that were
not resolved prior to Reliance being placed into liquidation. During the
fourth quarter of 2001, $3.5 million was reserved for any claims or lawsuits
that were not resolved prior to Reliance being placed into liquidation. See
Note 20.

During the fourth quarter of 2000, the Company approved the divestiture of
several of its non-core operations and recorded special charges related
thereto. During the fourth quarter of 2001, the remaining assets classified as
held for sale were further adjusted to fair value resulting in a write-down of
goodwill of approximately $1.2 million. In December 2001, the Company made the
decision to assimilate the remaining operations back into the Companys core
business.

F-14



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2000 Operations Held for Sale or Closure

|                                             |  |                |         |  
|-------------------------------------------- |  | -------------- | ------- | -
|                                             |  | 2000 Special  
|Description                                  |  | Charges       
|                                             |  |               
|                                             |  | (In thousands)
|Estimate of Losses on Sales                  |  | $              | 2,622   |  
|Re-Claim Louisiana Shut Down                 |  |                | 10,221  |  
|Legal Fees                                   |  |                | 208     |  
|PCB Costs at Detroit                         |  |                | 471     |  
|Disposal Agreement Termination               |  |                | (12,814 | )
|                                             |  |                |         |  
|Total Special Charges, net December 31, 2000 |  | $              | 708     |  
|                                             |  |                |         |  

During the fourth quarter of 2000, the Company recorded special charges
relating primarily to decisions to dispose of or suspend certain operations
offset by the favorable effect of the settlement of a dispute. The special
charges included (i) $2.6 million for estimated losses from the sale of certain
operations in the Commercial Wastewater Division, (ii) $10.2 million for the
closure of the Re-Claim Louisiana facility, which included approximately $1.6
million for processing costs and approximately $1.6 million for the remaining
lease liability, (iii) legal fees of $208,000 associated with (i) and (ii)
above, and (iv) additional charges of $471,000 for the disposal of PCB
contaminated materials at the Companys Detroit facility. During this period,
the Company also recognized (v) net pre-tax income of $12.8 million relating to
the termination of a disposal agreement with Waste Management, Inc. that was
entered into in May 1998 in connection with the acquisition of its Detroit
facility.

5. ACQUISITIONS:

During the fourth quarter of 2002, the Company completed the acquisition
of six oilfield waste transfer stations along the Gulf Coast of Louisiana and
Texas from Trinity Storage Services, L.P. for approximately $3.0 million in
cash and warrants to purchase 100,000 shares of the Companys common stock.
50,000 of the warrants have an exercise price of $1.98 per share and the
remaining warrants have an exercise price of $2.48 per share. This acquisition
was accounted for under the purchase method of accounting. The excess of the
purchase price over the fair value of the net assets acquired was approximately
$2.6 million; however, the allocation was preliminary and is subject to future
adjustment based on final determination of the fair value of the assets
acquired. The results of operations would not have changed significantly had
this acquisition occurred on January 1, 2002.

During 2000, the Company acquired two businesses engaged in the
collection, processing and disposal of liquid wastes for approximately $0.5
million in cash and debt assumed. Both of these acquisitions were accounted
for under the purchase method of accounting. The excess of the aggregate
purchase price over the fair value of the net assets acquired was approximately
$0.4 million. The results of operations would not have changed significantly
had this acquisition occurred on January 1, 2000.

6. DISCONTINUED OPERATIONS:

Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, that addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale and broadens the presentation of discontinued
operations to include more disposal transactions. On November 6, 2002, the
Company completed the sale of substantially all of its Texas businesses in the
Commercial Wastewater Division. The transaction, structured as an asset sale,
included businesses principally involved in the collection and processing of
grease and grit trap waste, commercial wastewater treatment and field

F-15



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

services
in Houston, Dallas and San Antonio, Texas. Gross proceeds from the sale, which
were subject to certain post-closing adjustments, amounted to $15.0 million.
$9.9 million of the proceeds were used to reduce the amount outstanding under
the Companys credit facility, $1.75 million was retained to pay non-assumed
liabilities of the sold businesses
and $2.5 million was used to complete the Trinity acquisition described in Note
5 above.

During the fourth quarter of 2002, the Company decided to divest of or
suspend certain operations at several non-core and underperforming businesses
in the Commercial Wastewater Division. Some operations were divested of or
suspended during the fourth quarter of 2002 and the remaining operations are
expected to be divested prior to December 31, 2003. Under SFAS No.144, the
assets, liabilities and operating results of the businesses sold and the
divested/suspended operations have been restated and presented separately as
discontinued operations in both the Companys consolidated balance sheet and
statement of operations for all periods presented.

Assets and liabilities related to discontinued operations were as follows
(in thousands):

|                                                  |  |              |       |      |  |   |        | 
|------------------------------------------------- |  | ------------ | ----- | ---- |  | - | ------ | 
|                                                  |  | December 31,
|                                                  |  |             
|                                                  |  | 2002         |       | 2001
|                                                  |  |              |       |     
|Accounts receivable, net                          |  | $            | 2,326 |      |  | $ | 8,053  | 
|Other current assets                              |  |              | 527   |      |  |   | 1,077  | 
|                                                  |  |              |       |      |  |   |        | 
|Current assets of discontinued operations         |  | $            | 2,853 |      |  | $ | 9,130  | 
|                                                  |  |              |       |      |  |   |        | 
|Property, plant and equipment, net                |  | $            | 1,477 |      |  | $ | 19,580 | 
|Goodwill, net                                     |  |              |      |      |  |   | 35,180 | 
|Other long-term assets                            |  |              | 6     |      |  |   | 919    | 
|                                                  |  |              |       |      |  |   |        | 
|Noncurrent assets of discontinued operations      |  | $            | 1,483 |      |  | $ | 55,679 | 
|                                                  |  |              |       |      |  |   |        | 
|Accounts payable, net                             |  | $            | 1,517 |      |  | $ | 2,809  | 
|Other current liabilities                         |  |              | 567   |      |  |   | 1,403  | 
|                                                  |  |              |       |      |  |   |        | 
|Current liabilities of discontinued operations    |  | $            | 2,084 |      |  | $ | 4,212  | 
|                                                  |  |              |       |      |  |   |        | 
|Closure and remediation reserves                  |  | $            | 424   |      |  | $ | 2,293  | 
|Other noncurrent liabilities                      |  |              | 3     |      |  |   | 325    | 
|                                                  |  |              |       |      |  |   |        | 
|Noncurrent liabilities of discontinued operations |  | $            | 427   |      |  | $ | 2,618  | 
|                                                  |  |              |       |      |  |   |        | 

Revenues and pre-tax loss related to discontinued operations were as
follows (in thousands):

|             |  |                          |         |      |  |      |        |   |  |   |         |  
|------------ |  | ------------------------ | ------- | ---- |  | ---- | ------ | - |  | - | ------- | -
|             |  | Years Ended December 31,
|             |  |                         
|             |  | 2002                     |         | 2001 |  | 2000
|             |  |                          |         |      |  |     
|Revenue      |  | $                        | 37,525  |      |  | $    | 56,888 |   |  | $ | 71,934  |  
|Pre-tax loss |  | $                        | (20,208 | )    |  | $    | (7,947 | ) |  | $ | (19,716 | )

During the fourth quarter of 2000, the Companys Board of Directors voted
to sell certain non-core operations in the Commercial Wastewater Division. The
types of liquid waste managed at these facilities held for sale included
industrial wastewaters, biosolids and grease and grit trap waste. The Company
recorded charges on December 31, 2000, and during 2001 to write down the
carrying value of certain assets to fair value, less costs to sell. In
determining fair value, the Company considered, among other factors, the range
of preliminary purchase prices discussed with potential buyers. For operations
that were classified as held for sale, the Company suspended depreciation on
property, plant and equipment. In addition, the Company revalued goodwill and,
therefore, adjusted

F-16



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the related amortization. Had the Company not classified
any operations as held for sale, depreciation and amortization expenses for the
year ended December 31, 2001 would have been greater by $2.0 million. During
2001, certain operations were sold and additional losses were recognized.
During the fourth quarter of 2001, the
remaining assets classified as held for sale were further adjusted to fair
value. Subsequently, as a result of the Companys decision to assimilate the
remaining operations back into the Companys core business, the adjusted
carrying value of the assets, after giving effect to the write-downs, were
reclassified to held for use.

7. PREPAYMENTS AND OTHER CURRENT ASSETS:

|                                  |       |   |                |       |      |   |       |       | 
|--------------------------------- | ----- | - | -------------- | ----- | ---- | - | ----- | ----- | 
|                                  |       |   | December 31,  
|                                  |       |   |               
|                                  |       |   | 2002           |       | 2001
|                                  |       |   |                |       |     
|                                  |       |   | (In thousands)
|Prepaid insurance                 |       | $ | 1,473          |       |      | $ | 1,937 |      
|Prepaid bank fees                 |       |   | 732            |       |      |   | 119   |      
|Current deferred income tax asset |       |   |               |       |      |   | 2,954 |      
|Income taxes receivable           |       |   | 852            |       |      |   | 65    |      
|Other                             |       |   | 2,005          |       |      |   | 2,539 |      
|                                  |       |   |                |       |      |   |       |      
|                                  | Total |   | $              | 5,062 |      |   | $     | 7,614 | 
|                                  |       |   |                |       |      |   |       |      

8. PROPERTY, PLANT AND EQUIPMENT:

|                              |                                    |  |              |  |      |   |                |         |  |   |         |         | 
|----------------------------- | ---------------------------------- |  | ------------ |  | ---- | - | -------------- | ------- |  | - | ------- | ------- | 
|                              |                                    |  |              |  |      |   | December 31,  
|                              |                                    |  | Depreciable  |  |     
|                              |                                    |  | Life (Years) |  | 2002 |   | 2001          
|                              |                                    |  |              |  |      |   |               
|                              |                                    |  |              |  |      |   | (In thousands)
|Land                          |                                    |  |             |  |      | $ | 11,592         |         |  | $ | 11,583  |        
|Landfarm and processing sites |                                    |  | 25           |  |      |   | 16,324         |         |  |   | 15,827  |        
|Buildings and improvements    |                                    |  | 5-39         |  |      |   | 44,791         |         |  |   | 41,132  |        
|Machinery and equipment       |                                    |  | 3-15         |  |      |   | 33,906         |         |  |   | 31,468  |        
|Vehicles                      |                                    |  | 3-5          |  |      |   | 9,762          |         |  |   | 9,590   |        
|Furniture and fixtures        |                                    |  | 3-5          |  |      |   | 8,648          |         |  |   | 7,753   |        
|Construction in progress      |                                    |  |             |  |      |   | 3,934          |         |  |   | 5,036   |        
|                              |                                    |  |              |  |      |   |                |         |  |   |         |        
|                              | Total                              |  |              |  |      |   |                | 128,957 |  |   |         | 122,389 | 
|Less-Accumulated depreciation |                                    |  |              |  |      |   | (42,662        | )       |  |   | (32,069 | )      
|                              |                                    |  |              |  |      |   |                |         |  |   |         |        
|                              | Property, plant and equipment, net |  |              |  |      |   | $              | 86,295  |  |   | $       | 90,320  | 
|                              |                                    |  |              |  |      |   |                |         |  |   |         |        

9. INTANGIBLE ASSETS:

|                              |                        |   |                |       |      |   |       |       | 
|----------------------------- | ---------------------- | - | -------------- | ----- | ---- | - | ----- | ----- | 
|                              |                        |   | December 31,  
|                              |                        |   |               
|                              |                        |   | 2002           |       | 2001
|                              |                        |   |                |       |     
|                              |                        |   | (In thousands)
|Noncompete agreements         |                        | $ | 260            |       |      | $ | 255   |      
|Permits and other             |                        |   | 4,110          |       |      |   | 3,024 |      
|                              |                        |   |                |       |      |   |       |      
|                              | Total                  |   |                | 4,370 |      |   |       | 3,279 | 
|Less-Accumulated amortization |                        |   | (493           | )     |      |   | (435  | )    
|                              |                        |   |                |       |      |   |       |      
|                              | Intangible assets, net |   | $              | 3,877 |      |   | $     | 2,844 | 
|                              |                        |   |                |       |      |   |       |      

F-17



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. GOODWILL:

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets, which establishes new accounting and reporting
requirements for goodwill and other intangible assets. Under SFAS No. 142, all
goodwill amortization ceased effective January 1, 2002. As a result, $13.5
million of goodwill at
December 31, 2002 is no longer subject to amortization. Goodwill amortization
from continuing operations for the years ended December 31, 2001 and 2000 was
$3.4 million and $3.6 million, respectively, and for the year ended December
31, 2002 would have been approximately $3.4 million, excluding the impact of
goodwill impairments recorded during 2002. Under SFAS No. 142, an impairment
test is required to be performed upon adoption and at least annually
thereafter. The impairment test is the result of adopting a fair value
approach to testing goodwill as compared to the previous method utilized in
which evaluations of goodwill impairment were made using the estimated future
undiscounted cash flows compared to the carrying amount. Material amounts of
recorded goodwill attributable to each of the Companys reporting units were
tested for impairment by comparing the fair value of each reporting unit with
its carrying value. Fair value was determined using discounted cash flows,
market sale transaction multiples and comparable market capitalization
multiples. Significant estimates used in the methodologies include estimates of
future cash flows, future short-term and long-term growth rates, weighted
average cost of capital and estimates of market multiples for each of the
reportable units. On an ongoing basis (absent any impairment indicators), the
Company expects to perform its impairment tests during the first quarter.

Based on the initial impairment tests, the Company recognized a charge in
the first quarter of 2002 of $87.8 million to reduce the carrying values of
goodwill of the reporting units to their implied fair values. This first
quarter charge was net of a $3.2 million tax benefit. However, as a result of
the impairment recognized during the third quarter of 2002, as discussed below,
the tax benefit of $3.2 million was reversed. Thus, the net charge related to
the first quarter impairment was $91.0 million ($5.66 per share). During the
third quarter of 2002, the Company determined that impairment indicators
existed and performed another impairment test on existing goodwill. These
impairment indicators included the downward revision of the Companys revenues
and earnings guidance and the failure to maintain compliance with certain of
the financial covenants contained in the Companys credit facility. As a
result of this test, the Company recorded a charge in the third quarter of 2002
of $51.0 million. During the fourth quarter of 2002, the Company sold the
majority of its Texas operations included in the Commercial Wastewater Division
and recognized a goodwill impairment charge of $0.8 million related to the
retained Texas operations (an additional $2.4 million of goodwill was included
in loss on sale of discontinued operations as a result of the sale). The total
expense recognized during the third and fourth quarters was $51.8 million
($3.22 per share); however, as a result of adopting SFAS No. 144, $11.7 million
was reclassified to discontinued operations based on the third quarter
impairment test. Under SFAS No. 142, the impairment adjustment recognized at
adoption of the new rules was reflected as a cumulative effect of change in
accounting principle in the first quarter 2002 statement of operations. The
impairment adjustment recognized in the third and fourth quarters of 2002 was
recognized as an operating expense.

The carrying amount of goodwill attributable to each reportable segment
with goodwill balances and charges therein follows (in thousands):

|                      |       |   |              |         |            |   |             |        |             |   |               |        |  |   |         |     |  |   |       |        | 
|--------------------- | ----- | - | ------------ | ------- | ---------- | - | ----------- | ------ | ----------- | - | ------------- | ------ |  | - | ------- | --- |  | - | ----- | ------ | 
|                      |       |   |              |         |            |   |             |        |             |   |               |        |  |   | Trinity |     |  |   |      
|                      |       |   |              |         |            |   | Initial     |        | Q3 and Q4   |   | Acquisition & |        |  |   |        
|                      |       |   | December 31, |         | Impairment |   | Impairment  |        | Texas       |   | December 31, 
|                      |       |   | 2001         |         | Adjustment |   | Adjustments |        | Disposition |   | 2002         
|                      |       |   |              |         |            |   |             |        |             |   |              
|Commercial Wastewater |       | $ | 88,251       |         |            | $ | 51,864      |        |             | $ | 31,261        |        |  | $ | (2,387  | )   |  | $ | 2,739 |       
|Industrial Wastewater |       |   | 66,040       |         |            |   | 39,139      |        |             |   | 20,566        |        |  |   |        |     |  |   | 6,335 |       
|Oilfield Waste        |       |   | 1,767        |         |            |   |            |        |             |   |              |        |  |   | 2,618   |     |  |   | 4,385 |       
|                      |       |   |              |         |            |   |             |        |             |   |               |        |  |   |         |     |  |   |       |       
|                      | Total |   | $            | 156,058 |            |   | $           | 91,003 |             |   | $             | 51,827 |  |   | $       | 231 |  |   | $     | 13,459 | 
|                      |       |   |              |         |            |   |             |        |             |   |               |        |  |   |         |     |  |   |       |       

F-18



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The results of operations presented below for the year December 31, 2002
and adjusted results of operations for the years ended December 31, 2000 and
2001 reflect the operations of the Company had the Company adopted the
non-amortization provisions of SFAS No. 142 effective January 1, 2000 (in
thousands):

|                                                    |                                          |   |                          |       |      |   |        |       |   |   |         |       |  
|--------------------------------------------------- | ---------------------------------------- | - | ------------------------ | ----- | ---- | - | ------ | ----- | - | - | ------- | ----- | -
|                                                    |                                          |   | Years Ended December 31,
|                                                    |                                          |   |                         
|                                                    |                                          |   | 2002                     |       | 2001 |   | 2000  
|                                                    |                                          |   |                          |       |      |   |       
|Income (loss) from continuing operations            |                                          | $ | (37,935                  | )     |      | $ | 6,754  |       |   | $ | (12,425 | )    
|Add: Goodwill amortization, net of tax              |                                          |   |                         |       |      |   | 2,344  |       |   |   | 2,443   |      
|                                                    |                                          |   |                          |       |      |   |        |       |   |   |         |      
|Adjusted income (loss) from continuing operations   |                                          |   | (37,935                  | )     |      |   | 9,098  |       |   |   | (9,982  | )    
|                                                    |                                          |   |                          |       |      |   |        |       |   |   |         |      
|Loss on discontinued operations                     |                                          |   | (20,488                  | )     |      |   | (3,947 | )     |   |   | (13,536 | )    
|Add: Goodwill amortization, net of tax              |                                          |   |                         |       |      |   | 863    |       |   |   | 1,124   |      
|                                                    |                                          |   |                          |       |      |   |        |       |   |   |         |      
|Adjusted income (loss) from discontinued
operations |                                          |   | (20,488                  | )     |      |   | (3,084 | )     |   |   | (12,412 | )    
|                                                    |                                          |   |                          |       |      |   |        |       |   |   |         |      
|Adjusted income (loss)                              |                                          | $ | (58,423                  | )     |      | $ | 6,014  |       |   | $ | (22,394 | )    
|                                                    |                                          |   |                          |       |      |   |        |       |   |   |         |      
|Adjusted income (loss) per share:                   |                                          |   |                          |       |      |   |        |       |   |   |         |      
|Basic earnings (loss) per share -                   |                                          |   |                          |       |      |   |        |       |   |   |         |      
|                                                    | Income (loss) from continuing operations |   | $                        | (2.36 | )    |   | $      | 0.57  |   |   | $       | (0.63 | )
|                                                    | Loss from discontinued operations        |   |                          | (1.27 | )    |   |        | (0.19 | ) |   |         | (0.79 | )
|                                                    |                                          |   |                          |       |      |   |        |       |   |   |         |      
|                                                    | Adjusted income (loss)                   |   | $                        | (3.63 | )    |   | $      | 0.38  |   |   | $       | (1.42 | )
|                                                    |                                          |   |                          |       |      |   |        |       |   |   |         |      
|Diluted earnings (loss) per share -                 |                                          |   |                          |       |      |   |        |       |   |   |         |      
|                                                    | Income (loss) from continuing operations |   | $                        | (2.36 | )    |   | $      | 0.54  |   |   | $       | (0.63 | )
|                                                    | Loss from discontinued operations        |   |                          | (1.27 | )    |   |        | (0.18 | ) |   |         | (0.79 | )
|                                                    |                                          |   |                          |       |      |   |        |       |   |   |         |      
|                                                    | Adjusted income (loss)                   |   | $                        | (3.63 | )    |   | $      | 0.36  |   |   | $       | (1.42 | )
|                                                    |                                          |   |                          |       |      |   |        |       |   |   |         |      

11. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:

|                                                            |                                                      |   |                |        |      |   |       |        | 
|----------------------------------------------------------- | ---------------------------------------------------- | - | -------------- | ------ | ---- | - | ----- | ------ | 
|                                                            |                                                      |   | December 31,  
|                                                            |                                                      |   |               
|                                                            |                                                      |   | 2002           |        | 2001
|                                                            |                                                      |   |                |        |     
|                                                            |                                                      |   | (In thousands)
|Accrued wages and benefits                                  |                                                      | $ | 4,658          |        |      | $ | 4,966 |       
|Income and other taxes payable                              |                                                      |   | 1,779          |        |      |   | 1,651 |       
|Accrued professional fees and legal reserves                |                                                      |   | 1,666          |        |      |   | 1,430 |       
|Accrued special charges                                     |                                                      |   | 7,672          |        |      |   | 8,608 |       
|Current portion of accrued processing costs                 |                                                      |   | 2,395          |        |      |   | 2,384 |       
|Current portion of accrued closure and remediation reserves |                                                      |   | 178            |        |      |   | 465   |       
|Accrued insurance                                           |                                                      |   | 1,275          |        |      |   | 2,523 |       
|Other                                                       |                                                      |   | 3,753          |        |      |   | 3,631 |       
|                                                            |                                                      |   |                |        |      |   |       |       
|                                                            | Total accrued expenses and other current liabilities |   | $              | 23,376 |      |   | $     | 25,658 | 
|                                                            |                                                      |   |                |        |      |   |       |       

F-19



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. REVENUES:

The components of sales and service revenue are as follows (in
thousands):

|                                             |       |   |                          |         |      |   |         |         |  |   |         |         | 
|-------------------------------------------- | ----- | - | ------------------------ | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                             |       |   | Years Ended December 31,
|                                             |       |   |                         
|                                             |       |   | 2002                     |         | 2001 |   | 2000   
|                                             |       |   |                          |         |      |   |        
|Collection, processing and disposal services |       | $ | 133,718                  |         |      | $ | 150,631 |         |  | $ | 140,298 |        
|By-product sales                             |       |   | 17,223                   |         |      |   | 22,254  |         |  |   | 35,323  |        
|                                             |       |   |                          |         |      |   |         |         |  |   |         |        
|                                             | Total |   | $                        | 150,941 |      |   | $       | 172,885 |  |   | $       | 175,621 | 
|                                             |       |   |                          |         |      |   |         |         |  |   |         |        

13. INCOME TAXES:

The components of the provision (benefit) for income taxes with respect to
continuing operations are as follows (in thousands):

|           |         |       |                                      |        |                          |        |      |       |       |       |   |       |       |       | 
|---------- | ------- | ----- | ------------------------------------ | ------ | ------------------------ | ------ | ---- | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|           |         |       |                                      |        | Years Ended December 31,
|           |         |       |                                      |        |                         
|           |         |       |                                      |        | 2002                     |        | 2001 |       | 2000 
|           |         |       |                                      |        |                          |        |      |       |      
|Current -  |         |       |                                      |        |                          |        |      |       |       |       |   |      
|           | Federal |       | $                                    | (2,419 | )                        |        | $    | 209   |       |       | $ | (773  | )    
|           | State   |       |                                      | 205    |                          |        |      | 1,330 |       |       |   | 82    |      
|           |         |       |                                      |        |                          |        |      |       |       |       |   |       |      
|           |         | Total |                                      |        | (2,214                   | )      |      |       | 1,539 |       |   |       | (691  | )    
|           |         |       |                                      |        |                          |        |      |       |       |       |   |       |      
|Deferred - |         |       |                                      |        |                          |        |      |       |       |       |   |      
|           | Federal |       |                                      | 253    |                          |        |      | 950   |       |       |   | 5,030 |      
|           | State   |       |                                      | (339   | )                        |        |      | 574   |       |       |   | 556   |      
|           |         |       |                                      |        |                          |        |      |       |       |       |   |       |      
|           |         | Total |                                      |        | (86                      | )      |      |       | 1,524 |       |   |       | 5,586 |      
|           |         |       |                                      |        |                          |        |      |       |       |       |   |       |      
|           |         |       | Provision (benefit) for income taxes |        | $                        | (2,300 | )    |       | $     | 3,063 |   |       | $     | 4,895 | 
|           |         |       |                                      |        |                          |        |      |       |       |       |   |       |      

The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate of 35% to income (loss) before
provision (benefit) for income taxes and including the cumulative effect of
change in accounting principle is as follows (in thousands):

|                      |                                     |                                            |         |                          |        |      |       |        |       |   |        |       |       | 
|--------------------- | ----------------------------------- | ------------------------------------------ | ------- | ------------------------ | ------ | ---- | ----- | ------ | ----- | - | ------ | ----- | ----- | 
|                      |                                     |                                            |         | Years Ended December 31,
|                      |                                     |                                            |         |                         
|                      |                                     |                                            |         | 2002                     |        | 2001 |       | 2000  
|                      |                                     |                                            |         |                          |        |      |       |       
|Tax at statutory rate |                                     | $                                          | (45,933 | )                        |        | $    | 3,436 |        |       | $ | (2,636 | )    
|Add -                 |                                     |                                            |         |                          |        |      |       |        |       |   |        |      
|                      | State taxes, net of federal benefit |                                            |         | (2,436                   | )      |      |       | 1,438  |       |   |        | 610   |      
|                      | Nondeductible expenses              |                                            |         | 14,425                   |        |      |       | 2,158  |       |   |        | 454   |      
|                      | Change in valuation allowance       |                                            |         | 31,389                   |        |      |       | (5,023 | )     |   |        | 6,951 |      
|                      | Other                               |                                            |         | 255                      |        |      |       | 1,054  |       |   |        | (484  | )    
|                      |                                     |                                            |         |                          |        |      |       |        |       |   |        |      
|                      |                                     | Total provision (benefit) for income taxes |         | $                        | (2,300 | )    |       | $      | 3,063 |   |        | $     | 4,895 | 
|                      |                                     |                                            |         |                          |        |      |       |        |       |   |        |      

F-20



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

|                                                        |                                              |   |                |   |      |   |        |     |  
|------------------------------------------------------- | -------------------------------------------- | - | -------------- | - | ---- | - | ------ | --- | -
|                                                        |                                              |   | December 31,  
|                                                        |                                              |   |               
|                                                        |                                              |   | 2002           |   | 2001
|                                                        |                                              |   |                |   |     
|                                                        |                                              |   | (In thousands)
|Reserves                                                |                                              | $ | 2,688          |   |      | $ | 3,237  |    
|Intangible assets                                       |                                              |   | 21,840         |   |      |   | (8,278 | )  
|Accrued expenses                                        |                                              |   | 1,149          |   |      |   | 793    |    
|Net operating losses                                    |                                              |   | 9,151          |   |      |   | 3,185  |    
|Tax credits                                             |                                              |   | 3,058          |   |      |   | 2,656  |    
|Capital loss carryforwards                              |                                              |   | 49             |   |      |   | 49     |    
|Property, plant and equipment                           |                                              |   | (2,710         | ) |      |   | (2,314 | )  
|Prepaid expenses                                        |                                              |   | (571           | ) |      |   | (498   | )  
|Other                                                   |                                              |   | (540           | ) |      |   | 3,809  |    
|Valuation allowances against deferred income tax assets |                                              |   | (34,114        | ) |      |   | (2,725 | )  
|                                                        |                                              |   |                |   |      |   |        |    
|                                                        | Net deferred income tax assets (liabilities) |   | $              |  |      |   | $      | (86 | )
|                                                        |                                              |   |                |   |      |   |        |    



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | Net deferred income tax assets and liabilities with respect to continuing
operations are classified as follows:

|                                                      |                                          |                                              |   |                |   |      |   |         |        |  
|----------------------------------------------------- | ---------------------------------------- | -------------------------------------------- | - | -------------- | - | ---- | - | ------- | ------ | -
|                                                      |                                          |                                              |   | December 31,  
|                                                      |                                          |                                              |   |               
|                                                      |                                          |                                              |   | 2002           |   | 2001
|                                                      |                                          |                                              |   |                |   |     
|                                                      |                                          |                                              |   | (In thousands)
|Current deferred income tax assets (liabilities)-     |                                          |                                              |   |                |   |      |   |        
|                                                      | Gross assets                             |                                              | $ |               |   |      | $ | 3,414   |       
|                                                      | Gross liabilities                        |                                              |   |               |   |      |   | (460    | )     
|                                                      |                                          |                                              |   |                |   |      |   |        
|                                                      |                                          | Total, net                                   |   |                |  |      |   |         | 2,954  |  
|                                                      |                                          |                                              |   |                |   |      |   |        
|Non-current deferred income tax assets (liabilities)- |                                          |                                              |   |                |   |      |   |        
|                                                      | Gross assets, net of valuation allowance |                                              |   |               |   |      |   | 7,552   |       
|                                                      | Gross liabilities                        |                                              |   |               |   |      |   | (10,592 | )     
|                                                      |                                          |                                              |   |                |   |      |   |        
|                                                      |                                          | Total, net                                   |   |                |  |      |   |         | (3,040 | )
|                                                      |                                          |                                              |   |                |   |      |   |        
|                                                      |                                          | Net deferred income tax assets (liabilities) |   | $              |  |      |   | $       | (86    | )
|                                                      |                                          |                                              |   |                |   |      |   |        

For purposes of the United States consolidated federal income tax return,
as of December 31, 2002, the Company had estimated net operating loss
carryforwards of $22.9 million, tax credit carryforwards of approximately $3.0
million, and unused capital loss carryforwards of approximately $0.1 million
available to offset taxable income in the future. In connection with certain
acquisitions, ownership changes occurred resulting in various limitations on
net operating loss carryforwards. The net operating loss carryforwards will
begin to expire in 2008. The tax credit carryforwards will begin to expire in
2006 and the capital loss carryforwards will begin to expire in 2005. The
Company also has state net operating loss carryforwards available to offset
future state taxable income that may or may not be utilized in future periods.

F-21



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Valuation allowances have been established for uncertainties in
realizing the benefits of tax attribute carryforwards. As of December 31,
2002, the Company established a valuation allowance against all U.S. deferred
income tax assets. The valuation allowance increased approximately
$31.4
million during the year ended December 31, 2002. This increase is primarily
due to the impairment of deductible goodwill recognized as a result of the
adoption and implementation of SFAS No. 142 and due to the uncertainty of
realizing net operating loss carryforwards. The activity in the valuation
allowance is as follows (in thousands):

|                             |  |              |        |                |  |                |        |                |  |                |        |              |  |               |        |   |  |  |        |   |  |           |         |   |  |   |         |  
|---------------------------- |  | ------------ | ------ | -------------- |  | -------------- | ------ | -------------- |  | -------------- | ------ | ------------ |  | ------------- | ------ | - |  |  | ------ | - |  | --------- | ------- | - |  | - | ------- | -
|                             |  |              |        |                |  |                |        |                |  |                |        |              |  |               |        |   |  |  |        |   |  | Valuation |         |   |  |  
|                             |  |              |        |                |  | Uncertainty of |        | Uncertainty of |  | Uncertainty of |        | Valuation    |  | Allowance on  |        |   |  | 
|                             |  | Balance at   |        | Realization of |  | Realization of |        | Realization of |  | Allowance on   |        | SFAS No. 142 |  |               |        |  
|                             |  | Beginning of |        | Tax Loss       |  | Tax Credit     |        | Capital Loss   |  | Operations     |        | Goodwill     |  | Balance at   
|                             |  | Period       |        | Carryforwards  |  | Carryforwards  |        | Carryforwards  |  | Held for Sale  |        | Impairment   |  | End of Period
|                             |  |              |        |                |  |                |        |                |  |                |        |              |  |              
|Year ended
December 31, 2000 |  | $            | (657   | )              |  |                | (140   | )              |  |                |       |              |  |               |       |   |  |  | (6,951 | ) |  |           |        |   |  | $ | (7,748  | )
|Year ended
December 31, 2001 |  | $            | (7,748 | )              |  |                | 51     |                |  |                | (132   | )            |  |               | (1,847 | ) |  |  | 6,951  |   |  |           |        |   |  | $ | (2,725  | )
|Year ended
December 31, 2002 |  | $            | (2,725 | )              |  |                | (8,400 | )              |  |                | (2,926 | )            |  |               | 1,798  |   |  |  |       |   |  |           | (21,861 | ) |  | $ | (34,114 | )

The Company is required to provide for U.S. income taxes on unremitted
income (loss) of foreign subsidiaries as it is the intention of management to
discontinue its foreign operations. Unremitted losses of foreign subsidiaries
are approximately $3.6 million at December 31, 2002. No tax benefit for these
losses has been recorded due to the uncertainty of realization.

12. EARNINGS (LOSS) PER SHARE:

Earnings (loss) per share amounts are based on the weighted average number
of shares of common stock and common stock equivalents outstanding during the
period. The weighted average number of shares used to compute basic and
diluted earnings (loss) per share is as follows (in thousands, except share
data):

|                               |                                                    |  |                          |            |      |  |      |            |  |  |   |            |  
|------------------------------ | -------------------------------------------------- |  | ------------------------ | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | -
|                               |                                                    |  | Years Ended December 31,
|                               |                                                    |  |                         
|                               |                                                    |  | 2002                     |            | 2001 |  | 2000
|                               |                                                    |  |                          |            |      |  |     
|Numerator:                     |                                                    |  |                          |            |      |  |      |            |  |  |   |           
|                               | For basic and diluted earnings per share -         |  |                          |            |      |  |      |            |  |  |   |            |  
|                               | Net income (loss) available to common
stockholders |  | $                        | (149,426   | )    |  | $    | 2,807      |  |  | $ | (25,961    | )
|                               |                                                    |  |                          |            |      |  |      |            |  |  |   |            |  
|Denominator:                   |                                                    |  |                          |            |      |  |      |            |  |  |   |           
|                               | For basic earnings per share -                     |  |                          |            |      |  |      |            |  |  |   |            |  
|                               | Weighted average shares                            |  |                          | 16,079,020 |      |  |      | 15,988,272 |  |  |   | 15,797,505 |  
|Effect of Dilutive Securities: |                                                    |  |                          |            |      |  |      |            |  |  |   |           
|                               | Stock options and warrants                         |  |                          |           |      |  |      | 740,043    |  |  |   |           |  
|                               |                                                    |  |                          |            |      |  |      |            |  |  |   |            |  
|                               | For diluted earnings per share -                   |  |                          |            |      |  |      |            |  |  |   |            |  
|                               | Weighted average shares and assumed
conversions    |  |                          | 16,079,020 |      |  |      | 16,728,315 |  |  |   | 15,797,505 |  
|                               |                                                    |  |                          |            |      |  |      |            |  |  |   |            |  

For the years ended December 31, 2002 and 2000, the Company had net losses
which precluded recognizing the effect of dilutive securities of 3,179,968
shares and 2,703,209 shares, respectively, related to

F-22



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

outstanding stock options
and warrants, because to do so would have been anti-dilutive. For the year
ended December 31, 2001, 1,048,284 employee stock options and warrants were not
included in the computation of earnings per share because to do so would have
been anti-dilutive.

13. DEBT OBLIGATIONS:

|                                                                                                                                                                                                                |                             |   |                |        |      |   |        |        | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | - | -------------- | ------ | ---- | - | ------ | ------ | 
|                                                                                                                                                                                                                |                             |   | December 31,  
|                                                                                                                                                                                                                |                             |   |               
|                                                                                                                                                                                                                |                             |   | 2002           |        | 2001
|                                                                                                                                                                                                                |                             |   |                |        |     
|                                                                                                                                                                                                                |                             |   | (In thousands)
|Revolving credit facility                                                                                                                                                                                       |                             | $ | 76,815         |        |      | $ | 85,000 |       
|Notes payable to individuals, interest at 8.5%, maturing January 2008, secured                                                                                                                                  |                             |   | 1,055          |        |      |   | 1,067  |       
|Notes payable to employees and individuals (former shareholders of acquired
companies) interest ranging from non-interest bearing (accreting at 6.25%)
to 5.9%, maturing September 2004 to July 2006, unsecured |                             |   | 1,785          |        |      |   | 2,271  |       
|Obligations under capital leases, interest ranging from 5.3% to 10.0%, expiring
October 2003 to January 2005, secured by equipment and vehicles                                                                 |                             |   | 757            |        |      |   | 2,016  |       
|Insurance premium notes, interest at 4.5% to 9.0%, maturing February 2003
to August 2003, unsecured                                                                                                             |                             |   | 742            |        |      |   | 1,674  |       
|                                                                                                                                                                                                                |                             |   |                |        |      |   |        |       
|                                                                                                                                                                                                                | Total debt                  |   |                | 81,154 |      |   |        | 92,028 | 
|Less current maturities                                                                                                                                                                                         |                             |   | (78,474        | )      |      |   | (2,801 | )     
|Less debt associated with discontinued operations                                                                                                                                                               |                             |   | (8             | )      |      |   | (100   | )     
|                                                                                                                                                                                                                |                             |   |                |        |      |   |        |       
|                                                                                                                                                                                                                | Total long-term obligations |   | $              | 2,672  |      |   | $      | 89,127 | 
|                                                                                                                                                                                                                |                             |   |                |        |      |   |        |       

At December 31, 2002, approximately $78.5 million of principal payments on
debt obligations were payable during the next year. $76.8 million of these
payments represent amounts due under the Companys revolving credit facility,
which the Company intends to extend or refinance prior to April 2003. The
remaining $1.7 million of principal payments due are expected to be funded from
operating cash flows and, if necessary, from borrowings under the revolving
credit facility.

The Company has a revolving credit facility with a group of banks under
which it may borrow to fund working capital requirements. Amounts outstanding
under the credit facility are secured by a lien on substantially all of the
Companys assets. The credit facility, which matures on April 15, 2003,
contains affirmative, negative and subjective covenants, requires the Company
to comply with certain financial covenants and obtain the lenders consent
before making any acquisitions or dispositions of assets, and prohibits the
payment of cash dividends. Prior to the maturity of the credit facility on
April 15, 2003, the Company must either extend the term of the credit facility
or obtain an alternative source of financing. Because of the Companys recent
performance and conditions in the credit markets, the Company will likely be
required to seek an extension of the existing credit facility. There can be no
assurance that the Company will be successful in extending the term of the
facility, and any extension is likely to be for a period of approximately three
months. Therefore, the Company must ultimately secure near-term alternative
financing or potentially face default on its debt. See Note 3 for additional
discussion of the Companys revolving credit facility.

F-23



---



##### 



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, 2002, are as follows:

|                                    |       |   |                |        |         |   |     |     | 
|----------------------------------- | ----- | - | -------------- | ------ | ------- | - | --- | --- | 
|                                    |       |   | Long-Term      |        | Capital
|                                    |       |   | Debt           |        | Leases 
|                                    |       |   |                |        |        
|                                    |       |   | (In thousands)
|Less than 1 year                    |       | $ | 78,052         |        |         | $ | 464 |    
|1-2 years                           |       |   | 492            |        |         |   | 341 |    
|2-3 years                           |       |   | 430            |        |         |   |    |    
|3-4 years                           |       |   | 424            |        |         |   |    |    
|4-5 years                           |       |   | 17             |        |         |   |    |    
|Thereafter                          |       |   | 982            |        |         |   |    |    
|                                    |       |   |                |        |         |   |     |    
|                                    |       |   | 80,397         |        |         |   | 805 |    
|Less  Amount representing interest |       |   |               |        |         |   | (48 | )  
|                                    |       |   |                |        |         |   |     |    
|                                    | Total |   | $              | 80,397 |         |   | $   | 757 | 
|                                    |       |   |                |        |         |   |     |    

14. STOCK PLANS:

Stock Options and Warrants

The Company has a stock option plan which provides for a maximum
authorized number of shares equal to 15% of all outstanding common stock at the
beginning of each year, not to exceed a total of 3,000,000 shares. At December
31, 2002, 156,594 options were available to be granted under the plan. The
Company also has 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. As of December 31, 2002, 130,000 options were available
to be granted under this plan. The directors stock options vest on the date
of grant and expire after 10 years. All options for employees and directors
have an exercise price based on fair market value at the date of grant.

The Company issued 1,000,000 stock warrants in 1996 in connection with its
acquisition of the Oilfield Waste Division. All of the other outstanding
warrants were issued in connection with acquisitions. The outstanding warrants
at December 31, 2002 have a weighted average exercise price of $2.24.

F-24



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes activity related to stock options and
warrants:

|                                                      |                         |       |               |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |         |  
|----------------------------------------------------- | ----------------------- | ----- | ------------- |  | ------------------------ | -------- | --------- |  | ------- | - | --------- |  | ------- | -------- | --------- |  |  | - | --------- |  |  | --------- | --------- |  |  | ------- | -
|                                                      |                         |       |               |  | Years Ended December 31,
|                                                      |                         |       |               |  |                         
|                                                      |                         |       |               |  | 2000                     |          | 2001      |  | 2002   
|                                                      |                         |       |               |  |                          |          |           |  |        
|                                                      |                         |       |               |  | Options                  |          | Warrants  |  | Options |   | Warrants  |  | Options |          | Warrants 
|                                                      |                         |       |               |  |                          |          |           |  |         |   |           |  |         |          |          
|Options and warrants
outstanding, beginning of
period |                         |       | 1,378,182     |  |                          |          | 1,076,250 |  |         |   | 1,626,959 |  |         |          | 1,076,250 |  |  |   | 1,378,843 |  |  |           | 1,076,250 | 
|                                                      | Granted (per share)     |       |               |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  |           |           |  | 
|                                                      |                         | 2000: |               |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |        
|                                                      |                         |       | $2.25         |  |                          | 230,000  |           |  |         |  |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |         |  
|                                                      |                         |       | $4.88-$6.81   |  |                          | 262,500  |           |  |         |  |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |         |  
|                                                      |                         |       | $7.69-$8.63   |  |                          | 40,000   |           |  |         |  |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |         |  
|                                                      |                         | 2001: |               |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |        
|                                                      |                         |       | $2.19-$3.14   |  |                          |          |           |  |         |   |           |  |         | 53,000   |           |  |  |  |           |  |  |           |           |  |  |         |  
|                                                      |                         |       | $4.63-$6.50   |  |                          |          |           |  |         |   |           |  |         | 77,500   |           |  |  |  |           |  |  |           |           |  |  |         |  
|                                                      |                         | 2002: |               |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |        
|                                                      |                         |       | $0.39-$0.63   |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  | 1,284,000 |           |  |  |        |  
|                                                      |                         |       | $1.98-$2.48   |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  |          |           |  |  | 100,000 |  
|                                                      |                         |       | $3.31-$4.85   |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  | 27,500    |           |  |  |        |  
|                                                      |                         |       | $5.02-$5.68   |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  | 55,000    |           |  |  |        |  
|                                                      | Exercised (per share)   |       |               |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  |           |           |  | 
|                                                      |                         | 2000: |               |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |        
|                                                      |                         |       | $0.02         |  |                          | (2,500   | )         |  |         |  |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |         |  
|                                                      |                         | 2001: |               |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |        
|                                                      |                         |       | $0.02         |  |                          |          |           |  |         |   |           |  |         | (65,625  | )         |  |  |  |           |  |  |           |           |  |  |         |  
|                                                      |                         |       | $2.25         |  |                          |          |           |  |         |   |           |  |         | (5,334   | )         |  |  |  |           |  |  |           |           |  |  |         |  
|                                                      |                         | 2002: |               |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |        
|                                                      |                         |       | $0.02         |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  | (33,750   | )         |  |  |        |  
|                                                      |                         |       | $2.19-$2.25   |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  | (8,168    | )         |  |  |        |  
|                                                      | Forfeitures (per share) |       |               |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  |           |           |  | 
|                                                      |                         | 2000: |               |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |        
|                                                      |                         |       | $6.81-$9.50   |  |                          | (87,639  | )         |  |         |  |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |         |  
|                                                      |                         |       | $13.38-$19.25 |  |                          | (150,915 | )         |  |         |  |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |         |  
|                                                      |                         |       | $20.25-$21.88 |  |                          | (42,669  | )         |  |         |  |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |         |  
|                                                      |                         | 2001: |               |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |        
|                                                      |                         |       | $2.25         |  |                          |          |           |  |         |   |           |  |         | (41,191  | )         |  |  |  |           |  |  |           |           |  |  |         |  
|                                                      |                         |       | $4.88-$6.81   |  |                          |          |           |  |         |   |           |  |         | (49,798  | )         |  |  |  |           |  |  |           |           |  |  |         |  
|                                                      |                         |       | $7.50-$9.50   |  |                          |          |           |  |         |   |           |  |         | (15,000  | )         |  |  |  |           |  |  |           |           |  |  |         |  
|                                                      |                         |       | $15.13-$21.88 |  |                          |          |           |  |         |   |           |  |         | (201,668 | )         |  |  |  |           |  |  |           |           |  |  |         |  
|                                                      |                         | 2002: |               |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  |           |           |  |  |        
|                                                      |                         |       | $2.25         |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  | (44,788   | )         |  |  |        |  
|                                                      |                         |       | $4.88-$6.81   |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  | (130,003  | )         |  |  |        |  
|                                                      |                         |       | $7.69-$9.50   |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  | (343,333  | )         |  |  |        |  
|                                                      |                         |       | $11.40-$14.13 |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  | (5,000    | )         |  |  | (56,250 | )
|                                                      |                         |       | $18.25-$22.50 |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  | (120,333  | )         |  |  |        |  
|                                                      |                         |       |               |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  |           |           | 
|Options and warrants
outstanding, end of
period       |                         |       | 1,626,959     |  |                          |          | 1,076,250 |  |         |   | 1,378,843 |  |         |          | 1,076,250 |  |  |   | 2,059,968 |  |  |           | 1,120,000 | 
|                                                      |                         |       |               |  |                          |          |           |  |         |   |           |  |         |          |           |  |  |   |           |  |  |           |           | 

F-25



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes information about stock options outstanding
at December 31, 2002:

|                    |            |                     |         |                  |         |                 |     |              |     |                |       |          |      |  |         |         |         |  |       |      |      | 
|------------------- | ---------- | ------------------- | ------- | ---------------- | ------- | --------------- | --- | ------------ | --- | -------------- | ----- | -------- | ---- |  | ------- | ------- | ------- |  | ----- | ---- | ---- | 
|Options Outstanding |            | Options Exercisable
|                    |            |                    
|                    |            |                     |         | Number           |         | Weighed Average |     |              |     |                |       | Number   |      |  |         |        
|                    |            |                     |         | Outstanding at   |         | Remaining       |     | Weighted     |     | Exercisable at |       | Weighted
|Range of            |            | December 31,        |         | Contractual Life |         | Average         |     | December 31, |     | Average       
|Exercise Prices     |            | 2002                |         | (Years)          |         | Exercise Price  |     | 2002         |     | Exercise Price
|                    |            |                     |         |                  |         |                 |     |              |     |               
|$                   | 0.02-0.63  |                     |         | 1,367,750        |         |                 |     | 9.6          |     |                | $     | 0.41     |      |  |         | 139,587 |         |  | $     | 0.21 |     
|                    |            | 2.19-5.90           |         |                  | 283,519 |                 |     |              | 8.3 |                |       |          | 3.33 |  |         |         | 188,251 |  |       |      | 3.34 | 
|                    |            | 6.00-9.50           |         |                  | 191,699 |                 |     |              | 6.8 |                |       |          | 7.55 |  |         |         | 165,135 |  |       |      | 7.67 | 
|14.13-22.50         |            |                     | 217,000 |                  |         |                 | 5.9 |              |     |                | 19.59 |          |      |  | 217,000 |         |         |  | 19.59 |     
|                    |            |                     |         |                  |         |                 |     |              |     |                |       |          |      |  |         |         |         |  |       |      |     
|$                   | 0.02-22.50 |                     |         | 2,059,968        |         |                 |     | 8.8          |     |                | $     | 3.50     |      |  |         | 709,973 |         |  | $     | 8.70 |     
|                    |            |                     |         |                  |         |                 |     |              |     |                |       |          |      |  |         |         |         |  |       |      |     

Employee Stock Purchase Plan

The Companys Employee Stock Purchase Plan (ESPP) allows employees to
purchase shares from the Companys authorized but unissued shares of common
stock, shares of common stock reacquired by the Company or any combination
thereof. The ESPP is intended to qualify as an Employee Stock Purchase Plan
under section 423 of the Internal Revenue Code.

The Companys ESPP provides for maximum purchases of 500,000 shares in
aggregate. Full-time employees are eligible to purchase shares during six
month purchase periods with payroll deductions ranging from 1% to 10% of
compensation. No participant will be granted an option under the ESPP (i) if,
immediately after the grant, the participant would own stock and/or hold
outstanding options to purchase stock possessing 5% or more of the total
combined voting power or value of all classes of stock of the Company or (ii)
which permits the participants rights to purchase stock under all employee
stock purchase plans of the Company to accrue at a rate which exceeds $25,000
of fair market value of such stock (determined at the time such option is
granted) for each calendar year in which such option is outstanding at any
time. The purchase price per share is 85% of the lower of the market price on
the first or last business day of the purchase period. Effective January 1,
2003, the ESPP was suspended as the Company has reached the maximum number of
shares allowed in the plan.

SFAS 123 Disclosures

As permitted by SFAS No. 123, Accounting for Stock-Based Compensation,
the Company applies Accounting Principles Board (APB) Opinion 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for
its stock-based compensation plans. APB Opinion 25 does not require
compensation costs to be recorded on options which have exercise prices at
least equal to the market price of the stock on the date of grant. APB Opinion
25 also provides for no compensation to be recognized for ESPPs where the
discount does not exceed 15%. Accordingly, no compensation cost has been
recognized for the Companys stock-based plans. Had compensation cost for the
Companys stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
optional method prescribed by SFAS No. 123, the Companys net income (loss) and
net income (loss) per share would have been adjusted to the pro forma amounts
indicated below (in thousands, except per share data):

F-26



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

|                                   |  |                                                             |  |   |          |                          |  |      |       |      |  |   |         |   |  | 
|---------------------------------- |  | ----------------------------------------------------------- |  | - | -------- | ------------------------ |  | ---- | ----- | ---- |  | - | ------- | - |  | 
|                                   |  |                                                             |  |   |          | Years Ended December 31,
|                                   |  |                                                             |  |   |          |                         
|                                   |  |                                                             |  |   |          | 2002                     |  | 2001 |       | 2000
|                                   |  |                                                             |  |   |          |                          |  |      |       |     
|Net income (loss):                 |  | As reported                                                 |  | $ | (149,426 | )                        |  | $    | 2,807 |      |  | $ | (25,961 | )
|                                   |  | Deduct: Total stock-based
employee compensation expense {1} |  |   | (445     | )                        |  |      | (653  | )    |  |   | (485    | )
|                                   |  |                                                             |  |   |          |                          |  |      |       |      |  |   |         |   |  | 
|                                   |  | Pro forma                                                   |  | $ | (149,871 | )                        |  | $    | 2,154 |      |  | $ | (26,446 | )
|                                   |  |                                                             |  |   |          |                          |  |      |       |      |  |   |         |  
|Basic earnings (loss) per share:   |  | As reported                                                 |  | $ | (9.29    | )                        |  | $    | 0.17  |      |  | $ | (1.64   | )
|                                   |  | Pro forma                                                   |  |   | (9.32    | )                        |  |      | 0.13  |      |  |   | (1.67   | )
|Diluted earnings (loss) per
share: |  | As reported                                                 |  | $ | (9.29    | )                        |  | $    | 0.17  |      |  | $ | (1.64   | )
|                                   |  | Pro forma                                                   |  |   | (9.32    | )                        |  |      | 0.13  |      |  |   | (1.67   | )



---

|{1} |  | The total stock based employee compensation expense was determined under the fair value based method for
all awards, net of related tax effects.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

The effects of applying SFAS No. 123 in the disclosure may not be
indicative of future amounts as additional awards in future years are
anticipated.

The fair value of each employee stock option granted and purchase rights
exercised under the ESPP were estimated using the Black-Scholes pricing model
with the following assumptions:

|                                |  |                          |              |             |  |             |              |   |  |  |              |  
|------------------------------- |  | ------------------------ | ------------ | ----------- |  | ----------- | ------------ | - |  |  | ------------ | -
|                                |  | Years Ended December 31,
|                                |  |                         
|                                |  | 2002                     |              | 2001        |  | 2000       
|                                |  |                          |              |             |  |            
|Expected stock price volatility |  |                          | 25.15%-75.78 | %           |  |             | 46.61%-79.30 | % |  |  | 70.00%-80.71 | %
|Risk-free interest rate         |  |                          | 1.59%-5.43   | %           |  |             | 3.49%-6.70   | % |  |  | 5.05%-7.08   | %
|Expected life of options        |  | .5-10 years              |              | .5-10 years |  | .5-10 years
|Expected dividend/yield         |  |                          |             |             |  |             |             |   |  |  |             |  

During the years ended 2002, 2001 and 2000, 1,366,500, 130,500 and 532,500
options were granted to employees which had a weighted average fair value of
$0.58, $3.56 and $4.13 per option and a weighted average exercise price of
$0.72, $4.37 and $4.92 per option, respectively.

17. STOCK REPURCHASES:

During 2002 and 2001, the Company repurchased and subsequently reissued
80,450 and 28,000 shares of common stock to employees pursuant to the Companys
ESPP, respectively. See Note 16.

18. EMPLOYEE BENEFITS:

The Company sponsors a 401(k) retirement plan under which all employees
may choose to save a portion of their salary on a pretax basis, subject to
certain IRS limits. The Company matches employee contributions on a
discretionary basis and also provides for a discretionary profit sharing
contribution. Compensation expense of the Companys continuing operations
related to this plan was approximately $850,000 for the each of the years ended
December 31, 2002, 2001 and 2000.

F-27



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

19. RELATED PARTY TRANSACTIONS:

On December 31, 1998, the Company sold to a company owned by a then
director of the Company substantially all of the assets used in the
distribution of various by-products of the Companys grease processing
facilities. This individual was no longer a director of the Company as of
December 31, 1999. As part of the purchase, the Company recorded a note
receivable; however, as of December 31, 2000, the uncollected balance of
approximately $550,000 was written off as the balance was deemed uncollectible.
The former director has been making modest payments totaling approximately
$83,000 for the year ended December 31, 2002.

On September 21, 2000, the Company acquired certain assets of Safari
Environmental Management Services LLC. In connection with the acquisition, the
Company issued notes payable to the three former owners of Safari. The total
amount payable at December 31, 2002 was $110,000 and is due in two remaining
equal annual installments on the anniversary date of the purchase.

20. COMMITMENTS AND CONTINGENCIES:

Closure Bonds, Performance Bonds, Collateral Bonds and Letters of Credit

As of December 31, 2002, the Company had a total of $12.0 million of
financial assurance in the form of letters of credit and bonds to provide for
the ultimate closure of the Companys facilities.

Many of the Companys customers require that it post performance bonds to
secure its performance under the terms of a contract and to guarantee that it
will pay subcontractors and vendors. The Company is also required to provide
financial assurance in order to obtain or renew operating permits and to
guarantee that its permitted facilities will be closed in accordance with
applicable law. The Company establishes financial assurance for these matters
in different ways, depending on the jurisdiction, including letters of credit,
surety bonds, trust agreements and traditional insurance. The market for
financial assurance is tightening and due to the Companys current financial
condition there can be no assurance that it will be able to continue to obtain
financial assurance on commercially reasonable terms without providing
additional collateral, which collateral may not be available. Continued
availability of such financial assurance in sufficient amounts at acceptable
rates is a vital aspect of the Companys ongoing operations, and failure to
obtain any such financial assurance would have a material adverse effect on the
Companys business, results of operations and financial condition. As of
December 31, 2002 the Company had performance bonds totaling $10.6 million.

In January 2003, the Company made the initial payment on a ten-year finite
risk insurance policy. This policy provides up to $18 million toward the
projected closure obligations for the Companys facilities, as well as up to
$12.4 million of performance bonding capacity. The Company believes that this
policy will satisfy its bonding needs for the foreseeable future but there can
be no assurance that this policy will be sufficient to satisfy all of the
Companys bonding needs.

Guarantees and Other Assurances

As part of normal business, the Company and certain subsidiaries enter
into various agreements providing financial or performance assurance to third
parties on behalf of certain subsidiaries. Financial guarantees in excess of
one year as of December 31, 2002, are as follows (in thousands):

F-28



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

|                                         |  |           |     |         |  |         |     |         |  |         |    |            |  |       |    |  |  |   |    |  |  |   |     |  |  |   |       | 
|---------------------------------------- |  | --------- | --- | ------- |  | ------- | --- | ------- |  | ------- | -- | ---------- |  | ----- | -- |  |  | - | -- |  |  | - | --- |  |  | - | ----- | 
|                                         |  | Less than |     |         |  |         |     |         |  |         |    |            |  |       |    |  |  |   |    |  |  |   |     |  |  |  
|                                         |  | 1 year    |     | 2 years |  | 3 years |     | 4 years |  | 5 years |    | Thereafter |  | Total
|                                         |  |           |     |         |  |         |     |         |  |         |    |            |  |      
|Guarantee of Subsidiary Obligation       |  | $         | 168 |         |  | $       | 133 |         |  | $       | 22 |            |  | $     |   |  |  | $ |   |  |  | $ |    |  |  | $ | 323   | 
|Guarantee of Subsidiary Operating
Leases |  |           | 531 |         |  |         | 253 |         |  |         | 59 |            |  |       | 61 |  |  |   | 63 |  |  |   | 317 |  |  |   | 1,284 | 
|Guarantee of Lease Residual              |  |           | 194 |         |  |         |    |         |  |         |   |            |  |       |   |  |  |   |   |  |  |   |    |  |  |   | 194   | 
|                                         |  |           |     |         |  |         |     |         |  |         |    |            |  |       |    |  |  |   |    |  |  |   |     |  |  |   |       | 
|Total Guarantees                         |  | $         | 893 |         |  | $       | 386 |         |  | $       | 81 |            |  | $     | 61 |  |  | $ | 63 |  |  | $ | 317 |  |  | $ | 1,801 | 
|                                         |  |           |     |         |  |         |     |         |  |         |    |            |  |       |    |  |  |   |    |  |  |   |     |  |  |   |       | 

The Company believes the likelihood that it would be required to perform
or otherwise incur any significant losses associated with any of these
guarantees is remote.

Insurance

The Company maintains various types of insurance coverage for its business
including, without limitation, commercial general liability and commercial
automobile liability, workers compensation and employer liability, pollution
legal liability and a general umbrella policy. In addition, the Company is
partially self-insured for employee group health claims. During the fourth
quarter of 2001, the Company agreed to accept $1.1 million from one of its
insurance carriers in settlement of property damage and business interruption
claims made with respect to losses suffered as a result of an incident at its
Canadian facility in March 2000. 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. See Litigation below
for further discussion relating to the bankruptcy of one of the Companys
insurance carriers.

Noncompete and Oilfield Waste Disposal Agreements

Since the organization of the Company, Newpark Resources, Inc. has been
the largest customer of the Oilfield Waste Division. Newparks revenues
represented 24%, 35% and 48% of the Oilfield Waste Divisions revenues for the
years ended December 31, 2002, 2001 and 2000, respectively. Newpark elected
not to exercise its option to extend the term of its disposal agreement with
the Company and, therefore, the disposal agreement terminated on July 1, 2002.
As part of the termination of this disposal agreement, the Companys agreement
not to compete with Newpark in the Gulf Coast and inland waters markets was
also terminated. Although certain of the Companys landfarms hold the permits
necessary to accept oilfield waste generated offshore and/or in inland waters
of the Gulf Coast region, in order to more effectively compete with Newpark and
other industry participants for such waste, on November 15, 2002, the Company
purchased from Trinity Storage Services, L.P. six oilfield waste transfer
stations located along the Gulf Coast of Louisiana and Texas for approximately
$3.0 million in cash and warrants to purchase 100,000 shares of the Companys
common stock.

Waste Management, Inc. Leachate Agreement

In connection with the acquisition of the Companys Detroit facility from
Waste Management, Inc. (WMI) in 1998, the Company and WMI entered into an
agreement to which WMI agreed for a period of 20 years to deliver to the
Company for processing and disposal all landfill leachate (up to a maximum of
35 million gallons per year) from certain landfills operated by WMI. The
processing fee paid by WMI for delivered landfill leachate is to be adjusted to
reflect any increase in the Consumer Price Index. This agreement generated
revenues of $0.6 million, $0.6 million and $0.3 million for the years ended
December 31, 2002, 2001 and 2000, respectively.

Leases

The Company leases office facilities and certain equipment under
noncancelable operating leases for periods ranging from one to 20 years. Rent
expense was approximately $8.4 million, $9.6 million and $8.6 million for the
years ended December 31, 2002 and 2001 and 2000, respectively. The following
table presents future minimum rental payments under noncancelable operating
leases with terms in excess of one year:

F-29



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

|                         |                  |       |   |                  |        | 
|------------------------ | ---------------- | ----- | - | ---------------- | ------ | 
|                         |                  |       |   | Operating Leases
|                         |                  |       |   |                 
|                         |                  |       |   | (In thousands)  
|As of December 31, 2002: |                  |       |   |                 
|                         | Less than 1 year |       | $ | 3,493            |       
|                         | 1-2 years        |       |   | 2,551            |       
|                         | 2-3 years        |       |   | 1,953            |       
|                         | 3-4 years        |       |   | 1,609            |       
|                         | 4-5 years        |       |   | 1,282            |       
|                         | Thereafter       |       |   | 8,650            |       
|                         |                  |       |   |                  |       
|                         |                  | Total |   | $                | 19,538 | 
|                         |                  |       |   |                  |       

Regulatory Proceedings

In October 2002, U S Liquids of Detroit, Inc., a subsidiary of U S Liquids
Inc., entered into an agreement with the U.S. Attorney in Detroit resolving the
investigation of the Companys Detroit facility that was commenced by the EPA
and the FBI in August 1999. Under the terms of the agreement, U S Liquids of
Detroit entered a guilty plea to specified violations of the Resource
Conservation and Recovery Act of 1976 (RCRA) and the Rivers and Harbors Act
and was placed on probation for five years. The agreement requires, among
other things, that the Company pay a $4.5 million penalty and contribute $1.0
million to certain community service organizations without interest. These
amounts will be paid over a five-year period. The United States District Court
for the Eastern District of Michigan will determine at the end of the
probationary period whether and to what extent interest must be paid on the
deferred payments. During the fourth quarter of 2001, the Company recorded a
charge of $5.0 million to establish a reserve for this matter. After
considering the net present value of the total obligation, this reserve was
reduced by $0.9 million during the fourth quarter of 2002. An additional
charge may be required if interest is imposed by the court on the deferred
payments. As of December 31, 2002, the remaining reserve was $3.9 million.

The EPA notified the Company in 1999 that liquid waste received by its
former Re-Claim Louisiana facility and stored off-site contained hazardous
constituents and, therefore, the waste could not be processed by the facility.
The Company believed that the waste could be handled as nonhazardous waste. A
reserve was established for costs to be incurred to deliver this waste to a
third party for processing and disposal. As of December 31, 2002, the Company
had a remaining reserve of approximately $0.2 million to process and dispose of
the remaining waste.

In the fourth quarter of 1999, the EPA notified the Company of certain
alleged violations of RCRA by the Companys former Re-Claim Louisiana facility.
Among other things, the EPA alleged that the facility accepted waste from
sites that it was not permitted to accept waste from under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) and then
improperly disposed of such waste. In July 2001, the Company entered into a
consent agreement with the EPA resolving the EPAs allegations. Under the
terms of the consent agreement, the Company paid a civil penalty of $200,000 to
the EPA and made certain improvements to the facility. In May 2002, the
Company received a subpoena from the U.S. Attorneys office in Shreveport,
Louisiana seeking various documents relating to the Re-Claim Louisiana facility
covering the same time frame and relating to the same activities as the EPAs
allegations described above. Based upon information available to the Company
at the time, the Company believed that the U.S. Attorneys office was
conducting a criminal investigation targeting a former employee of the Re-Claim
Louisiana facility. In December 2002, the Company received a follow up
subpoena seeking additional documentation. Shortly thereafter, the Company was
advised by the U.S. Attorneys

F-30



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

office that the Company has not been ruled out as a subject of this
investigation. The Company has cooperated, and will continue to cooperate,
with the U.S. Attorneys office in connection with its investigation. The
Company does not believe that the results of this investigation will have a
material adverse effect on its business, results of operations or financial
condition.

The Company acquired Romic Environmental Technologies Corporation
(Romic) in January 1999. Prior to its acquisition by 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 remedial investigation of the facility was completed by
Romic and forwarded to the EPA. The EPA authorized Romic to conduct a pilot
study utilizing in-situ enhanced bio-remediation to determine whether that
method would be an effective corrective measure. Preliminary results from the
pilot study were encouraging and the study has been expanded. If the study is
determined to be successful, the EPA may approve this method or a combination
of methods for final site remediation. Prior to its acquisition by the
Company, Romic had also 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 drum reconditioning or disposal sites, Romic and a
number of other potentially responsible parties have entered into
administrative consent orders and/or agreements allocating each partys
respective share of the cost of remediating the sites. Romics share under
these consent orders and/or agreements is as follows: Bay Area  6.872%,
Lorentz  5.62% and Casmalia Resources  0.29%. Remediation is either
underway or substantially complete at all three sites. Based upon the
information currently available, the Company has continued to maintain a
reserve to cover Romics estimated costs to remediate the East Palo Alto
facility and the three drum reconditioning or disposal sites. As of December
31, 2002, the balance of this reserve was $2.8 million, of which $0.2 million
is classified as short-term and is expected to be paid in the next twelve
months. The Company believes that this reserve is sufficient to satisfy
Romics obligations under the consent orders and agreements; however, due to
the complex, ongoing and evolving process of investigating and remediating
these sites, Romics actual costs may exceed the amount reserved.

The operations of the Innovative Services Group of the Companys
Commercial Wastewater Division are subject to regulation by the U. S. Bureau of
Alcohol, Tobacco and Firearms (ATF). In addition to regulating the
production, distribution and sale of alcohol and alcohol containing products,
the ATF is also responsible for collecting the federal excise taxes (FET)
that must be paid on distilled spirits, wine and beer. If alcoholic beverages
on which the FET have been paid are returned to bond at the Companys premises
for destruction, the party who has paid the FET on the destroyed product is
entitled to a refund. When customers return distilled spirits, wine or beer
from commerce to one of the Companys facilities for destruction, the Company
generally files a claim with the ATF on behalf of that customer for refund of
the FET paid on that product. The ATF periodically inspects the Companys
facilities both to insure compliance with its regulations and to substantiate
claims for FET refunds. During 2000, the ATF conducted inspections at the
Companys Louisville, Kentucky and Rancho Cucamonga, California facilities. At
the conclusion of these inspections, the ATF preliminarily notified the Company
that it intended to deny certain refund claims, some of which had already been
paid by the ATF to the Companys customers, due to what the ATF alleges was
inadequate, incomplete or unsubstantiated supporting documentation. In
addition, the ATF proposed a civil penalty of $30,000 based on the alleged
defects in the Companys documentation. During the third quarter of 2001, the
ATF notified the Company that, in order to recoup refund claims previously paid
to its customers, the ATF was assessing taxes of $1.175 million against the
facilities. During the fourth quarter of 2001, the Company offered to pay
$450,000 to the ATF to resolve all of the ATFs claims against the facilities
and delivered a check for such amount to the ATF. Based upon discussions with
the ATF, the Company believes that the offer will be accepted by the ATF. The
proposed assessment by the ATF does not address approximately $525,000 of
refund claims that were submitted on behalf of the Companys customers that
either have already been denied or are likely to be denied as a result of the
alleged defects in the documentation. The Company is currently engaged in
discussions with the affected customers concerning the refund claims in

F-31



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

question. Settlements have been reached with certain customers and the Company
believes that satisfactory settlements can be reached with all of the
other affected customers. The Company continues to maintain a reserve for this
matter. As of December 31, 2002, the total reserve remaining was $0.4 million.

Litigation

During the third quarter of 1999, six purported securities class action
lawsuits were filed against the Company and certain of its current and former
officers and directors in the United States District Court for the Southern
District of Texas, Houston Division. These lawsuits have been consolidated
into a single action styled In re: U S Liquids Securities Litigation, Case No.
H-99-2785, and the plaintiffs have filed a consolidated complaint alleging
violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933
(Securities Act) on behalf of purchasers of the Companys common stock in the
Companys March 1999 public offering and violations of Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5
promulgated thereunder on behalf of purchasers of the Companys common stock
during the period beginning on May 12, 1998 and ending on August 25, 1999. The
plaintiffs generally allege that the defendants made false and misleading
statements and failed to disclose allegedly material information regarding the
operations of the Companys Detroit facility and the Companys financial
condition in the prospectus relating to the March 1999 stock offering and in
certain other public filings and announcements made by the Company. The
remedies sought by the plaintiffs include designation of the action as a class
action, unspecified damages, attorneys and experts fees and costs, rescission
to the extent any members of the class still hold common stock, and such other
relief as the court deems proper. In January 2001, the court dismissed the
claims asserted by the plaintiffs under Sections 10(b) and 20(a) and Rule 10b-5
of the Exchange Act and in April 2002 the court dismissed the claims asserted
by the plaintiffs under Section 12(a)(2) of the Securities Act. Accordingly,
the lawsuit is proceeding only with respect to the claims asserted under
Sections 11 and 15 of the Securities Act. In June 2002, the court determined
that two individuals designated by the plaintiffs are adequate class
representatives for plaintiffs claim under Section 11 of the Securities Act.
In August 2002, the court entered an order defining the plaintiff class as all
persons who purchased or otherwise acquired Company common stock pursuant or
traceable to the Companys March 1999 stock offering. Further proceedings and
discovery in the lawsuit have been suspended pending the resolution of the
Companys dispute with its insurance carrier over whether insurance coverage
exists for the claims asserted by the plaintiffs. The Company and its
insurance carrier have both moved for summary judgment on the issue of whether
such insurance coverage exists.

In addition, one stockholder of the Company has filed a lawsuit against
certain former and current officers and directors of the Company in connection
with the operation of its Detroit facility and the securities class action
described above. Benn Carmicia v. U S Liquids Inc., et al., was filed in the
United States District Court for the Southern District of Texas, Houston
Division, on September 15, 1999 and was subsequently consolidated with the
claims asserted in the securities class action described above. The plaintiff
alleges derivative claims on behalf of the Company against the officers and
directors for alleged breaches of fiduciary duty resulting from their oversight
of the Companys affairs. The lawsuit names the Company as a nominal defendant
and seeks compensatory and punitive damages on behalf of the Company, interest,
equitable and/or injunctive relief, costs and such other relief as the court
deems proper. The Company believes that the stockholder derivative action was
not properly brought and has filed a motion to dismiss this action in order to
allow the Board of Directors to consider whether such litigation is in the best
interest of the Company and its stockholders. As of the date of this report,
no ruling has been made by the court on the motion to dismiss. Since this
lawsuit has been consolidated with the securities class action, further
proceedings in this lawsuit have been suspended pending the resolution of the
Companys dispute with its insurance carrier over whether insurance coverage
exists for the claims asserted in the securities class action.

On April 21, 1998, the Company acquired substantially all of the assets of
Parallel Products, a California limited partnership (Parallel). In addition
to the consideration paid at closing, the Company agreed that, if the earnings
before interest, taxes, depreciation and amortization (EBITDA) of the
businesses acquired from Parallel exceeded a specified amount in any four
consecutive quarters during the three year period after the closing of the

F-32



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

acquisition, the Company would pay to Parallel an additional $2.1 million in
cash and an additional $2.1 million in the Companys common stock. During the
third quarter of 2000, Parallel filed suit against the Company alleging that
the acquired businesses achieved the specified EBITDA amount for the four
quarters ended December 31, 1999 and
for the four quarters ended March 31, 2000. Parallel is seeking a declaratory
judgment that the EBITDA amount specified in the acquisition agreement was
achieved and that it is entitled to receive the contingent cash and stock
payments described above. Parallel also alleges that it is entitled to recover
compensatory damages of $4.2 million, punitive damages, interest, attorneys
fees and costs, and such other relief as the court deems proper. The Company
has denied that it has any liability to Parallel and has filed a counterclaim
against Parallel alleging that Parallel breached certain of the representations
and warranties made in the acquisition agreement. This lawsuit is currently
set for trial on July 14, 2003.

From September 4, 1998 through September 3, 2000, Reliance Insurance
Company or one of its affiliated companies (Reliance) provided casualty
insurance coverage for the Company and its subsidiaries. In addition, Reliance
provided similar coverage, for pre-acquisition periods, for several companies
that the Company acquired between 1997 and 2000. During the Reliance coverage
periods, various incidents occurred that resulted in claims being made against
the Company for which insurance coverage was to be provided by Reliance. In
some cases, the claim resulted in a lawsuit being filed against the Company.
Reliance had been adjusting and/or defending these claims; however, in October
2001, Reliance was declared insolvent by the Insurance Commissioner of the
State of Pennsylvania and placed into liquidation. As a result, insurance
coverage is not available for any claims or lawsuits that were not resolved
prior to Reliance being placed into liquidation. To the extent that insurance
coverage is not available to cover settlement of a claim asserted against the
Company or a judgment entered against the Company, the settlement or judgment
would have to be paid by the Company. Many states have established insurance
guarantee funds to pay claims insured by insolvent insurance companies;
however, the amount available from such funds for a single claim is generally
limited to the lesser of the amount of the insureds coverage and a dollar
amount specified by statute. During the fourth quarter of 2001, the Company
established a reserve to cover the estimated costs to satisfy its obligations
with respect to all such claims that were not resolved prior to Reliance being
placed into liquidation, net of the amounts expected to be received by the
Company from state insurance guarantee funds. Certain of these claims have been
resolved and the Company made payments totaling $0.5 million in October 2002.
The Company has committed to making additional payments of $1.0 million during
2003 and $0.7 million in 2004. After the fourth quarter claims resolution, the
reserve was adjusted to $3.7 million. The Company believes that the reserve is
sufficient to satisfy its obligation with respect to such payments, as well as
remaining claims for which insurance coverage was to be provided by Reliance;
however, there can be no assurance that the Companys actual costs will not
exceed the amount reserved.

In February 1998, the Company entered into an employment agreement with
its former chief financial officer, Earl J. Blackwell. The employment
agreement provided, among other things, that (i) if the agreement was
terminated by Mr. Blackwell without cause, Mr. Blackwell would not be entitled
to receive any further compensation or benefits under the agreement, and (ii)
if the agreement was terminated by Mr. Blackwell with cause, Mr. Blackwell
would be entitled to continue to receive his annual salary of $220,000 and
employee benefits for the remainder of the term of the agreement. On July 31,
2002, Mr. Blackwell terminated his employment with the Company alleging that it
breached the terms of his employment agreement by usurping his duties and
responsibilities as chief financial officer. On October 2, 2002, Mr. Blackwell
initiated arbitration proceeding against the Company seeking to recover
approximately $1.1 million in damages, interest, attorneys fees and costs.
The Company denies that it has any liability to Mr. Blackwell. The arbitration
is currently scheduled to begin on May 7, 2003.

On September 9, 2002, Allan Rosen, a former employee of the Company, filed
suit in the Superior Court of Los Angeles County, California against the
Company and certain of its current and former officers. Mr. Rosen alleges,
among other things, that the Company breached various oral agreements relating
to the compensation to be paid to Mr. Rosen for his services and that he was
wrongfully terminated in October 2001 because, among other things, he
complained about the operational and accounting systems of certain of the
Companys subsidiaries and because he refused to certify, for internal
purposes, various financial information and reports relating to the

F-33



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

operations
of such subsidiaries. Mr. Rosen is seeking unspecified compensatory and
punitive damages, interest, attorneys fees and costs. Mr. Rosen is also
seeking a declaratory judgment that a noncompete provision contained in his
employment agreement is not enforceable. The Company denies that it has any
liability to Mr. Rosen.

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

It is not possible at this time to predict the impact the above lawsuits,
proceedings, investigations and inquiries may have on the Company, nor is it
possible to predict whether any other suits or claims may arise out of these
matters in the future. However, it is reasonably possible that the outcome of
any present or future litigation, proceedings, investigations or inquiries may
have a material adverse impact on the Companys consolidated financial
statements in one or more future periods. The Company intends to defend itself
vigorously in all the above matters.

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 statements.

21. SEGMENT INFORMATION:

The Companys subsidiaries are organized into three divisions  the
Commercial Wastewater Division, the Industrial Wastewater Division and the
Oilfield Waste Division. The Commercial Wastewater Division collects,
processes and disposes of nonhazardous liquid waste and recovers saleable
by-products from certain waste streams. The Industrial Wastewater Division
collects, processes and disposes of hazardous and nonhazardous waste and
recovers saleable by-products from certain waste streams. The Oilfield Waste
Division processes and disposes of waste generated in oil and gas exploration
and production. The following is a summary of key business segment
information (in thousands):

F-34



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

|                                                                                                                       |                       |       |   |                          |         |      |   |         |         |  |   |         |         |  
|---------------------------------------------------------------------------------------------------------------------- | --------------------- | ----- | - | ------------------------ | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | -
|                                                                                                                       |                       |       |   | Years Ended December 31,
|                                                                                                                       |                       |       |   |                         
|                                                                                                                       |                       |       |   | 2002                     |         | 2001 |   | 2000   
|                                                                                                                       |                       |       |   |                          |         |      |   |        
|Revenues-                                                                                                              |                       |       |   |                          |         |      |   |         |         |  |   |        
|                                                                                                                       | Oilfield Waste        |       | $ | 20,088                   |         |      | $ | 27,089  |         |  | $ | 21,720  |        
|                                                                                                                       | Commercial Wastewater |       |   | 71,223                   |         |      |   | 81,375  |         |  |   | 96,793  |        
|                                                                                                                       | Industrial Wastewater |       |   | 59,630                   |         |      |   | 64,421  |         |  |   | 57,108  |        
|                                                                                                                       |                       |       |   |                          |         |      |   |         |         |  |   |         |        
|                                                                                                                       |                       | Total |   | $                        | 150,941 |      |   | $       | 172,885 |  |   | $       | 175,621 |  
|                                                                                                                       |                       |       |   |                          |         |      |   |         |         |  |   |         |        
|Income (loss) from
continuing operations
before income taxes and
cumulative effect of
change in accounting
principle - |                       |       |   |                          |         |      |   |         |         |  |   |        
|                                                                                                                       | Oilfield Waste        |       | $ | 9,217                    |         |      | $ | 14,775  |         |  | $ | 10,304  |        
|                                                                                                                       | Commercial Wastewater |       |   | (12,705                  | )       |      |   | 6,094   |         |  |   | (8,658  | )      
|                                                                                                                       | Industrial Wastewater |       |   | (13,850                  | )       |      |   | 9,163   |         |  |   | 14,531  |        
|                                                                                                                       | Corporate             |       |   | (22,897                  | )       |      |   | (20,215 | )       |  |   | (23,707 | )      
|                                                                                                                       |                       |       |   |                          |         |      |   |         |         |  |   |         |        
|                                                                                                                       |                       | Total |   | $                        | (40,235 | )    |   | $       | 9,817   |  |   | $       | (7,530  | )
|                                                                                                                       |                       |       |   |                          |         |      |   |         |         |  |   |         |        
|Identifiable assets-                                                                                                   |                       |       |   |                          |         |      |   |         |         |  |   |        
|                                                                                                                       | Oilfield Waste        |       | $ | 39,415                   |         |      | $ | 36,999  |         |  | $ | 36,948  |        
|                                                                                                                       | Commercial Wastewater |       |   | 59,032                   |         |      |   | 169,001 |         |  |   | 186,865 |        
|                                                                                                                       | Industrial Wastewater |       |   | 48,347                   |         |      |   | 113,023 |         |  |   | 115,505 |        
|                                                                                                                       | Corporate             |       |   | 6,217                    |         |      |   | 518     |         |  |   | 11,965  |        
|                                                                                                                       |                       |       |   |                          |         |      |   |         |         |  |   |         |        
|                                                                                                                       |                       | Total |   | $                        | 153,011 |      |   | $       | 319,541 |  |   | $       | 351,283 |  
|                                                                                                                       |                       |       |   |                          |         |      |   |         |         |  |   |         |        
|Depreciation
and amortization expense-                                                                                 |                       |       |   |                          |         |      |   |         |         |  |   |        
|                                                                                                                       | Oilfield Waste        |       | $ | 2,534                    |         |      | $ | 2,558   |         |  | $ | 2,335   |        
|                                                                                                                       | Commercial Wastewater |       |   | 4,158                    |         |      |   | 5,180   |         |  |   | 5,400   |        
|                                                                                                                       | Industrial Wastewater |       |   | 2,928                    |         |      |   | 4,742   |         |  |   | 4,544   |        
|                                                                                                                       | Corporate             |       |   | 1,316                    |         |      |   | 843     |         |  |   | 797     |        
|                                                                                                                       |                       |       |   |                          |         |      |   |         |         |  |   |         |        
|                                                                                                                       |                       | Total |   | $                        | 10,936  |      |   | $       | 13,323  |  |   | $       | 13,076  |  
|                                                                                                                       |                       |       |   |                          |         |      |   |         |         |  |   |         |        
|Capital expenditures-                                                                                                  |                       |       |   |                          |         |      |   |         |         |  |   |        
|                                                                                                                       | Oilfield Waste        |       | $ | 1,442                    |         |      | $ | 2,167   |         |  | $ | 2,109   |        
|                                                                                                                       | Commercial Wastewater |       |   | 4,842                    |         |      |   | 5,238   |         |  |   | 11,866  |        
|                                                                                                                       | Industrial Wastewater |       |   | 902                      |         |      |   | 1,493   |         |  |   | 3,921   |        
|                                                                                                                       | Corporate             |       |   | 560                      |         |      |   | 1,743   |         |  |   | 1,296   |        
|                                                                                                                       |                       |       |   |                          |         |      |   |         |         |  |   |         |        
|                                                                                                                       |                       | Total |   | $                        | 7,746   |      |   | $       | 10,641  |  |   | $       | 19,192  |  
|                                                                                                                       |                       |       |   |                          |         |      |   |         |         |  |   |         |        

The following items should be noted in comparing the segment data set
forth above:



| |  |  | During the fourth quarter of 2002, the Company was able to
cancel its lease at its Re-Claim Louisiana facility resulting in the
reversal of the remaining lease liability of $1.0 million. This was
income to the Commercial Wastewater Division. See Note 4.                                                                                                                                 
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During the fourth quarter of 2002, the Company accrued $0.5
million for future severance payments as a result of its
restructuring plans. During the third quarter of 2002, the Company
accrued $1.1 million for future severance payments as a result of
the departure of its Chief Executive Officer. These charges were
corporate expenses.                                                
|
| |  |  | In the third quarter of 2002, $2.15 million was received in
connection with the Companys settlement of an additional insurance
claim. This was income to the Industrial Wastewater Division. See
Note 4.                                                                                                                                                                                     
|
| |  |  | During the third quarter of 2002, the Company recorded
charges for approximately $51.0 million for additional goodwill
impairment, which was classified as an operating expense. However,
as a result of reclassifying certain operations to discontinued, the
charge remaining in continuing operations is $40.1 million. See
Note 10 for a detail and the breakout of the charge by segment.
|
| |  |  | Assets decreased significantly in 2002 as a result of SFAS
No. 142. See Note 10 for a detail by segment.                                                                                                                                                                                                                                                                                      
|
| |  |  | In the second quarter of 2001, the Company received $7.5
million in connection with a settlement with National Steel. This
was income to the Industrial Wastewater Division. See Note 4.                                                                                                                                                                                                      

F-35



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



| |  |  | In the third quarter 2001, the Company received $3.75 million
in connection with the settlement of a claim under the Companys
property damage policy. This was income to the Industrial
Wastewater Division. See Note 4.                                                                                                                                                                                      
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During the fourth quarter of 2001, a charge of $5.0 million
was recorded relating to a proposed settlement with the U.S.
Attorney in Detroit. During the fourth quarter of 2002, after
consideration
of the net present value of the total obligation, the charge was
reduced by $0.9 million. This net charge was to the Companys
Industrial Wastewater Division. See Notes 4 and 20.                        
|
| |  |  | During the fourth quarter of 2001, a charge of $3.5 million
was recorded relating to the liquidation of one of the Companys
insurance carriers. During the fourth quarter of 2002, after
consideration of the net present value of known obligations and an
estimate of other possible claims, an additional charge was recorded
for $0.7 million. These charges were a corporate expense. See
Notes 4 and 20.
|
| |  |  | During the fourth quarter of 2001, a charge of approximately
$1.2 million was recorded to reduce the carrying value to fair value
of a business that was classified as held for sale and then later
incorporated back into the Companys core business. This was a
charge to the Companys Commercial Wastewater Division. See Notes 4
and 6.                                                                  
|
| |  |  | During the fourth quarter of 2000, approximately $12.8
million was recorded as anticipated losses on the sales of certain
operations and the shutdown of the Re-Claim Louisiana facility in
the Commercial Wastewater Division. See Note 4.                                                                                                                                                                    
|
| |  |  | Approximately $12.8 million was recorded as income to the
Industrial Wastewater Division during the fourth quarter of 2000
relating to the termination of a disposal agreement with Waste
Management, Inc. See Note 4.                                                                                                                                                                                         

22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

The operating results for each of the quarters in the years ended December
31, 2002 and 2001 have been restated to give effect to the restatement as
discussed in Note 23 to the Consolidated Financial Statements. Quarterly
financial information for the years ended December 31, 2002 and 2001 are
summarized as follows (in thousands, except per share data):

|                                                      |  |                                                       |         |         |  |         |        |         |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ----------------------------------------------------- | ------- | ------- |  | ------- | ------ | ------- |  | - | ------- | - |  | - | ------- | -
|                                                      |  | Year Ended December 31, 2002 (As Previously Reported)
|                                                      |  |                                                      
|                                                      |  | First                                                 |         | Second  |  | Third   |        | Fourth 
|                                                      |  | Quarter                                               |         | Quarter |  | Quarter |        | Quarter
|                                                      |  |                                                       |         |         |  |         |        |        
|Revenues                                              |  | $                                                     | 35,851  |         |  | $       | 39,311 |         |  | $ | 37,786  |   |  | $ | 37,855  |  
|Operating income (loss)                               |  |                                                       | 2,136   |         |  |         | 5,216  |         |  |   | (37,298 | ) |  |   | (1,150  | )
|Income (loss) from continuing
operations              |  |                                                       | 505     |         |  |         | 2,767  |         |  |   | (36,316 | ) |  |   | (4,041  | )
|Loss from discontinued operations                     |  |                                                       | (1,024  | )       |  |         | (777   | )       |  |   | (10,157 | ) |  |   | (8,530  | )
|Net income (loss)                                     |  |                                                       | (87,748 | )       |  |         | 1,990  |         |  |   | (50,247 | ) |  |   | (12,571 | )
|Earnings (loss) per share from
continuing operations: |  |                                                       |         |         |  |         |        |         |  |   |         |   |  |   |         |  
|Basic                                                 |  | $                                                     | 0.03    |         |  | $       | 0.17   |         |  | $ | (2.26   | ) |  | $ | (0.25   | )
|Diluted                                               |  |                                                       | 0.03    |         |  |         | 0.17   |         |  |   | (2.26   | ) |  |   | (0.25   | )
|Loss per share from discontinued
operations:          |  |                                                       |         |         |  |         |        |         |  |   |         |   |  |   |         |  
|Basic                                                 |  | $                                                     | (0.06   | )       |  | $       | (0.05  | )       |  | $ | (0.63   | ) |  | $ | (0.53   | )
|Diluted                                               |  |                                                       | (0.06   | )       |  |         | (0.05  | )       |  |   | (0.63   | ) |  |   | (0.53   | )
|Earnings (loss) per share:                            |  |                                                       |         |         |  |         |        |         |  |   |         |   |  |   |         |  
|Basic                                                 |  | $                                                     | (5.47   | )       |  | $       | 0.12   |         |  | $ | (3.12   | ) |  | $ | (0.78   | )
|Diluted                                               |  |                                                       | (5.47   | )       |  |         | 0.12   |         |  |   | (3.12   | ) |  |   | (0.78   | )

F-36



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

|                                                        |  |                                                       |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|------------------------------------------------------- |  | ----------------------------------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ | - |  | - | ------ | -
|                                                        |  | Year Ended December 31, 2001 (As Previously Reported)
|                                                        |  |                                                      
|                                                        |  | First                                                 |        | Second  |  | Third   |        | Fourth 
|                                                        |  | Quarter                                               |        | Quarter |  | Quarter |        | Quarter
|                                                        |  |                                                       |        |         |  |         |        |        
|Revenues                                                |  | $                                                     | 42,723 |         |  | $       | 44,848 |         |  | $ | 44,765 |   |  | $ | 41,088 |  
|Operating income (loss)                                 |  |                                                       | 3,831  |         |  |         | 11,701 |         |  |   | 9,522  |   |  |   | (5,168 | )
|Income (loss) from continuing
operations                |  |                                                       | 373    |         |  |         | 4,548  |         |  |   | 3,604  |   |  |   | (1,192 | )
|Income (loss) from discontinued
operations              |  |                                                       | 55     |         |  |         | 485    |         |  |   | (165   | ) |  |   | (4,322 | )
|Net income (loss)                                       |  |                                                       | 428    |         |  |         | 5,033  |         |  |   | 3,439  |   |  |   | (5,514 | )
|Earnings (loss) per share from
continuing operations:   |  |                                                       |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|Basic                                                   |  | $                                                     | 0.02   |         |  | $       | 0.29   |         |  | $ | 0.22   |   |  | $ | (0.07  | )
|Diluted                                                 |  |                                                       | 0.02   |         |  |         | 0.27   |         |  |   | 0.21   |   |  |   | (0.07  | )
|Earnings (loss) per share from
discontinued
operations: |  |                                                       |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|Basic                                                   |  | $                                                     | 0.01   |         |  | $       | 0.03   |         |  | $ | (0.01  | ) |  | $ | (0.27  | )
|Diluted                                                 |  |                                                       | 0.01   |         |  |         | 0.03   |         |  |   | (0.01  | ) |  |   | (0.27  | )
|Earnings (loss) per share:                              |  |                                                       |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|Basic                                                   |  | $                                                     | 0.03   |         |  | $       | 0.32   |         |  | $ | 0.21   |   |  | $ | (0.34  | )
|Diluted                                                 |  |                                                       | 0.03   |         |  |         | 0.30   |         |  |   | 0.20   |   |  |   | (0.34  | )

|                                                      |  |                                                         |         |         |  |         |        |         |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ------------------------------------------------------- | ------- | ------- |  | ------- | ------ | ------- |  | - | ------- | - |  | - | ------- | -
|                                                      |  | Year Ended December 31, 2002 (As Restated, see Note 23)
|                                                      |  |                                                        
|                                                      |  | First                                                   |         | Second  |  | Third   |        | Fourth 
|                                                      |  | Quarter                                                 |         | Quarter |  | Quarter |        | Quarter
|                                                      |  |                                                         |         |         |  |         |        |        
|Revenues                                              |  | $                                                       | 35,911  |         |  | $       | 39,311 |         |  | $ | 37,864  |   |  | $ | 37,855  |  
|Operating income (loss)                               |  |                                                         | 2,130   |         |  |         | 4,988  |         |  |   | (37,249 | ) |  |   | (1,406  | )
|Income (loss) from continuing
operations              |  |                                                         | 566     |         |  |         | 2,619  |         |  |   | (36,941 | ) |  |   | (4,179  | )
|Loss from discontinued operations                     |  |                                                         | (1,024  | )       |  |         | (777   | )       |  |   | (10,157 | ) |  |   | (8,530  | )
|Net income (loss)                                     |  |                                                         | (88,281 | )       |  |         | 1,842  |         |  |   | (50,278 | ) |  |   | (12,709 | )
|Earnings (loss) per share from
continuing operations: |  |                                                         |         |         |  |         |        |         |  |   |         |   |  |   |         |  
|Basic                                                 |  | $                                                       | 0.03    |         |  | $       | 0.16   |         |  | $ | (2.29   | ) |  | $ | (0.26   | )
|Diluted                                               |  |                                                         | 0.03    |         |  |         | 0.16   |         |  |   | (2.29   | ) |  |   | (0.26   | )
|Loss per share from discontinued
operations:          |  |                                                         |         |         |  |         |        |         |  |   |         |   |  |   |         |  
|Basic                                                 |  | $                                                       | (0.06   | )       |  | $       | (0.05  | )       |  | $ | (0.63   | ) |  | $ | (0.53   | )
|Diluted                                               |  |                                                         | (0.06   | )       |  |         | (0.05  | )       |  |   | (0.63   | ) |  |   | (0.53   | )
|Earnings (loss) per share:                            |  |                                                         |         |         |  |         |        |         |  |   |         |   |  |   |         |  
|Basic                                                 |  | $                                                       | (5.50   | )       |  | $       | 0.11   |         |  | $ | (3.12   | ) |  | $ | (0.79   | )
|Diluted                                               |  |                                                         | (5.27   | )       |  |         | 0.11   |         |  |   | (3.12   | ) |  |   | (0.79   | )

F-37



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

|                                                        |  |                                                         |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|------------------------------------------------------- |  | ------------------------------------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ | - |  | - | ------ | -
|                                                        |  | Year Ended December 31, 2001 (As Restated, see Note 23)
|                                                        |  |                                                        
|                                                        |  | First                                                   |        | Second  |  | Third   |        | Fourth 
|                                                        |  | Quarter                                                 |        | Quarter |  | Quarter |        | Quarter
|                                                        |  |                                                         |        |         |  |         |        |        
|Revenues                                                |  | $                                                       | 42,572 |         |  | $       | 44,848 |         |  | $ | 44,765 |   |  | $ | 40,700 |  
|Operating income (loss)                                 |  |                                                         | 3,578  |         |  |         | 11,662 |         |  |   | 9,452  |   |  |   | (5,777 | )
|Income (loss) from continuing
operations                |  |                                                         | 212    |         |  |         | 4,523  |         |  |   | 3,516  |   |  |   | (1,497 | )
|Income (loss) from discontinued
operations              |  |                                                         | 55     |         |  |         | 485    |         |  |   | (165   | ) |  |   | (4,322 | )
|Net income (loss)                                       |  |                                                         | 267    |         |  |         | 5,008  |         |  |   | 3,351  |   |  |   | (5,819 | )
|Earnings (loss) per share from
continuing operations:   |  |                                                         |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|Basic                                                   |  | $                                                       | 0.01   |         |  | $       | 0.28   |         |  | $ | 0.22   |   |  | $ | (0.09  | )
|Diluted                                                 |  |                                                         | 0.01   |         |  |         | 0.27   |         |  |   | 0.21   |   |  |   | (0.09  | )
|Earnings (loss) per share from
discontinued
operations: |  |                                                         |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|Basic                                                   |  | $                                                       | 0.01   |         |  | $       | 0.03   |         |  | $ | (0.01  | ) |  | $ | (0.27  | )
|Diluted                                                 |  |                                                         | 0.01   |         |  |         | 0.03   |         |  |   | (0.01  | ) |  |   | (0.27  | )
|Earnings (loss) per share:                              |  |                                                         |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|Basic                                                   |  | $                                                       | 0.02   |         |  | $       | 0.31   |         |  | $ | 0.21   |   |  | $ | (0.36  | )
|Diluted                                                 |  |                                                         | 0.02   |         |  |         | 0.30   |         |  |   | 0.20   |   |  |   | (0.36  | )

The sum of the individual quarterly earnings per share amounts may not
agree with the year-to-date earnings per share as each periods computation is
based on the weighted average number of shares outstanding during the period.

23. RESTATEMENT OF FINANCIAL STATEMENTS:

Subsequent to the issuance of the Companys December 31, 2002 consolidated
financial statements, the Company determined that it had made certain
accounting errors in the recording of job costs, valuation for inventory and
accounts receivable and certain other items at one of the Companys business
units during the three-year period ended December 31, 2002. The Company also
determined that the accounting for a building destroyed at this business unit
in 2001 and the subsequent insurance recovery related to that event was
inappropriate. As a result, the accompanying consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000 have been
restated from
the amounts previously reported. The table below presents the net income
(loss) impact of the restatements (in thousands):

|                       |                                              |   |                   |      |      |   |       |      |   |   |         |      |  
|---------------------- | -------------------------------------------- | - | ----------------- | ---- | ---- | - | ----- | ---- | - | - | ------- | ---- | -
|                       |                                              |   | Net Income (Loss)
|                       |                                              |   |                  
|                       |                                              |   | 2002              |      | 2001 |   | 2000 
|                       |                                              |   |                   |      |      |   |      
|As previously reported |                                              | $ | (148,576          | )    |      | $ | 3,386 |      |   | $ | (25,377 | )   
|Restatement items:     |                                              |   |                   |      |      |   |       |      |   |   |         |     
|                       | Insurance recoveries, net of asset write-off |   |                   | 219  |      |   |       | 63   |   |   |         |     |  
|                       | Write-off of improper capitalized job costs  |   |                   | (341 | )    |   |       | (167 | ) |   |         | (411 | )
|                       | Unbilled accounts receivable                 |   |                   | 138  |      |   |       | (539 | ) |   |         | (304 | )
|                       | Inventory valuation                          |   |                   | (99  | )    |   |       | (159 | ) |   |         |     |  
|                       | Other, net                                   |   |                   | (140 | )    |   |       | (107 | ) |   |         | (204 | )
|                       | Related tax effects                          |   |                   | (627 | )    |   |       | 330  |   |   |         | 335  |  
|                       |                                              |   |                   |      |      |   |       |      |   |   |         |     
|                       | Total                                        |   |                   | (850 | )    |   |       | (579 | ) |   |         | (584 | )
|As restated            |                                              | $ | (149,426          | )    |      | $ | 2,807 |      |   | $ | (25,961 | )   
|                       |                                              |   |                   |      |      |   |       |      |   |   |         |     

F-38



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of the significant effects of the restatement is as follows (in
thousands, except per share data):

|                                                                                                                     |  |                          |          |          |  |            |          |          |  |            |         |          |  |    |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | -------- | -------- |  | ---------- | -------- | -------- |  | ---------- | ------- | -------- |  | -- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                                     |  | Years Ended December 31,
|                                                                                                                     |  |                         
|                                                                                                                     |  | 2002                     |          | 2001     |  | 2000      
|                                                                                                                     |  |                          |          |          |  |           
|                                                                                                                     |  | As                       |          |          |  |            |          | As       |  |            |         |          |  | As |         |   |  |  
|                                                                                                                     |  | Previously               |          | As       |  | Previously |          | As       |  | Previously |         | As      
|                                                                                                                     |  | Reported                 |          | Restated |  | Reported   |          | Restated |  | Reported   |         | Restated
|                                                                                                                     |  |                          |          |          |  |            |          |          |  |            |         |         
|Revenues                                                                                                             |  | $                        | 150,803  |          |  | $          | 150,941  |          |  | $          | 173,424 |          |  | $  | 172,885 |   |  | $ | 175,925 |   |  | $ | 175,621 |  
|Operating expenses                                                                                                   |  |                          | 109,139  |          |  |            | 109,616  |          |  |            | 119,957 |          |  |    | 120,389 |   |  |   | 129,319 |   |  |   | 129,804 |  
|                                                                                                                     |  |                          |          |          |  |            |          |          |  |            |         |          |  |    |         |   |  |   |         |   |  |   |         |  
|Operating margin                                                                                                     |  |                          | 41,664   |          |  |            | 41,325   |          |  |            | 53,467  |          |  |    | 52,496  |   |  |   | 46,606  |   |  |   | 45,817  |  
|Depreciation and amortization                                                                                        |  |                          | 10,936   |          |  |            | 10,936   |          |  |            | 13,323  |          |  |    | 13,323  |   |  |   | 13,076  |   |  |   | 13,076  |  
|Selling, general and
administrative expenses                                                                         |  |                          | 25,097   |          |  |            | 25,199   |          |  |            | 21,861  |          |  |    | 21,861  |   |  |   | 28,883  |   |  |   | 29,013  |  
|Goodwill impairment                                                                                                  |  |                          | 40,110   |          |  |            | 40,110   |          |  |            |        |          |  |    |        |   |  |   |        |   |  |   |        |  
|Special charge (income), net                                                                                         |  |                          | (3,383   | )        |  |            | (3,383   | )        |  |            | (1,603  | )        |  |    | (1,603  | ) |  |   | 708     |   |  |   | 708     |  
|                                                                                                                     |  |                          |          |          |  |            |          |          |  |            |         |          |  |    |         |   |  |   |         |   |  |   |         |  
|Income
(loss) from operations                                                                                        |  |                          | (31,096  | )        |  |            | (31,537  | )        |  |            | 19,886  |          |  |    | 18,915  |   |  |   | 3,939   |   |  |   | 3,020   |  
|Interest expense                                                                                                     |  |                          | 9,027    |          |  |            | 9,027    |          |  |            | 9,622   |          |  |    | 9,622   |   |  |   | 10,854  |   |  |   | 10,854  |  
|Other income, net                                                                                                    |  |                          | (111     | )        |  |            | (329     | )        |  |            | (462    | )        |  |    | (524    | ) |  |   | (304    | ) |  |   | (304    | )
|                                                                                                                     |  |                          |          |          |  |            |          |          |  |            |         |          |  |    |         |   |  |   |         |   |  |   |         |  
|Income
(loss) from continuing
operations before cumulative
effect of change in accounting
principle and income taxes |  |                          | (40,012  | )        |  |            | (40,235  | )        |  |            | 10,726  |          |  |    | 9,817   |   |  |   | (6,611  | ) |  |   | (7,530  | )
|Provision
(benefit) for income taxes                                                                                 |  |                          | (2,927   | )        |  |            | (2,300   | )        |  |            | 3,393   |          |  |    | 3,063   |   |  |   | 5,230   |   |  |   | 4,895   |  
|                                                                                                                     |  |                          |          |          |  |            |          |          |  |            |         |          |  |    |         |   |  |   |         |   |  |   |         |  
|Income
(loss) from continuing operations                                                                             |  |                          | (37,085  | )        |  |            | (37,935  | )        |  |            | 7,333   |          |  |    | 6,754   |   |  |   | (11,841 | ) |  |   | (12,425 | )
|Loss from discontinued
operations, net of tax                                                                        |  |                          | (20,488  | )        |  |            | (20,488  | )        |  |            | (3,947  | )        |  |    | (3,947  | ) |  |   | (13,536 | ) |  |   | (13,536 | )
|Cumulative effect of change in
accounting principle                                                                  |  |                          | 91,003   |          |  |            | 91,003   |          |  |            |        |          |  |    |        |   |  |   |        |   |  |   |        |  
|                                                                                                                     |  |                          |          |          |  |            |          |          |  |            |         |          |  |    |         |   |  |   |         |   |  |   |         |  
|Net income (loss)                                                                                                    |  | $                        | (148,576 | )        |  | $          | (149,426 | )        |  | $          | 3,386   |          |  | $  | 2,807   |   |  | $ | (25,377 | ) |  | $ | (25,961 | )
|                                                                                                                     |  |                          |          |          |  |            |          |          |  |            |         |          |  |    |         |   |  |   |         |   |  |   |         |  
|Basic earnings (loss) per share:                                                                                     |  |                          |          |          |  |            |          |          |  |            |         |          |  |    |         |   |  |   |         |   |  |   |         |  
|Earnings (loss) from continuing
operations                                                                           |  | $                        | (2.31    | )        |  | $          | (2.36    | )        |  | $          | 0.46    |          |  | $  | 0.42    |   |  | $ | (0.75   | ) |  | $ | (0.78   | )
|Earnings (loss) from
discontinued operations                                                                         |  |                          | (1.27    | )        |  |            | (1.27    | )        |  |            | (0.25   | )        |  |    | (0.25   | ) |  |   | (0.86   | ) |  |   | (0.86   | )
|Cumulative effect of change in
accounting principle                                                                  |  |                          | (5.66    | )        |  |            | (5.66    | )        |  |            |        |          |  |    |        |   |  |   |        |   |  |   |        |  
|                                                                                                                     |  |                          |          |          |  |            |          |          |  |            |         |          |  |    |         |   |  |   |         |   |  |   |         |  
|Basic earnings (loss) per share                                                                                      |  | $                        | (9.24    | )        |  | $          | (9.29    | )        |  | $          | 0.21    |          |  | $  | 0.17    |   |  | $ | (1.61   | ) |  | $ | (1.64   | )
|                                                                                                                     |  |                          |          |          |  |            |          |          |  |            |         |          |  |    |         |   |  |   |         |   |  |   |         |  
|Diluted earnings (loss) per
share:                                                                                   |  |                          |          |          |  |            |          |          |  |            |         |          |  |    |         |   |  |   |         |   |  |   |         |  
|Earnings (loss) from continuing
operations                                                                           |  | $                        | (2.31    | )        |  | $          | (2.36    | )        |  | $          | 0.44    |          |  | $  | 0.40    |   |  | $ | (0.75   | ) |  | $ | (0.78   | )
|Earnings (loss) from
discontinued operations                                                                         |  |                          | (1.27    | )        |  |            | (1.27    | )        |  |            | (0.24   | )        |  |    | (0.23   | ) |  |   | (0.86   | ) |  |   | (0.86   | )
|Cumulative effect of change in
accounting principle                                                                  |  |                          | (5.66    | )        |  |            | (5.66    | )        |  |            |        |          |  |    |        |   |  |   |        |   |  |   |        |  
|                                                                                                                     |  |                          |          |          |  |            |          |          |  |            |         |          |  |    |         |   |  |   |         |   |  |   |         |  
|Diluted earnings (loss) per share                                                                                    |  | $                        | (9.24    | )        |  | $          | (9.29    | )        |  | $          | 0.20    |          |  | $  | 0.17    |   |  | $ | (1.61   | ) |  | $ | (1.64   | )
|                                                                                                                     |  |                          |          |          |  |            |          |          |  |            |         |          |  |    |         |   |  |   |         |   |  |   |         |  

F-39



---



##### 



U S LIQUIDS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

|                                               |  |              |          |          |  |            |          |          |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | ------------ | -------- | -------- |  | ---------- | -------- | -------- |  | - | ------- | - |  | - | ------- | -
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |          | 2001    
|                                               |  |              |          |         
|                                               |  | As           |          |          |  |            |          | As       |  |   |         |  
|                                               |  | Previously   |          | As       |  | Previously |          | As      
|                                               |  | Reported     |          | Restated |  | Reported   |          | Restated
|                                               |  |              |          |          |  |            |          |         
|Accounts receivable, net                       |  | $            | 33,102   |          |  | $          | 32,165   |          |  | $ | 30,086  |   |  | $ | 29,113  |  
|Inventories                                    |  |              | 2,058    |          |  |            | 1,536    |          |  |   | 1,736   |   |  |   | 1,577   |  
|Prepayments and other current assets           |  |              | 6,109    |          |  |            | 5,062    |          |  |   | 8,320   |   |  |   | 7,614   |  
|Total current assets                           |  |              | 48,190   |          |  |            | 45,684   |          |  |   | 50,770  |   |  |   | 48,932  |  
|Property, plant and equipment, net             |  |              | 85,750   |          |  |            | 86,295   |          |  |   | 90,258  |   |  |   | 90,320  |  
|Other assets                                   |  |              | 2,240    |          |  |            | 2,213    |          |  |   | 915     |   |  |   | 888     |  
|Total assets                                   |  |              | 154,999  |          |  |            | 153,011  |          |  |   | 321,344 |   |  |   | 319,541 |  
|Accrued expenses and other current liabilities |  |              | 23,351   |          |  |            | 23,376   |          |  |   | 25,671  |   |  |   | 25,658  |  
|Total current liabilities                      |  |              | 121,578  |          |  |            | 121,603  |          |  |   | 44,128  |   |  |   | 44,115  |  
|Long-term deferred income taxes                |  |              |         |          |  |            |         |          |  |   | 3,667   |   |  |   | 3,040   |  
|Total liabilities                              |  |              | 135,056  |          |  |            | 135,081  |          |  |   | 152,891 |   |  |   | 152,251 |  
|Accumulated deficit                            |  |              | (157,394 | )        |  |            | (159,407 | )        |  |   | (8,818  | ) |  |   | (9,981  | )
|Total shareholders equity                     |  |              | 19,943   |          |  |            | 17,930   |          |  |   | 168,453 |   |  |   | 167,290 |  
|Total liabilities and shareholders equity     |  | $            | 154,999  |          |  | $          | 153,011  |          |  | $ | 321,344 |   |  | $ | 319,541 |  

F-40



---



##### 



INDEX TO EXHIBITS

| |  |       |  |   |  |                                                                                                                                                       
| |  | ----- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | +23.1 |  |  |  | Consent of Deloitte & Touche LLP.                                                                                                                     
| |  |       |  |   |  |                                                                                                                                                       
| |  | +99.1 |  |  |  | Certification of Principal Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
| |  |       |  |   |  |                                                                                                                                                       
| |  | +99.2 |  |  |  | Certification of Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.



---

|+  |  | Filed herewith                                                                              
|-- |  | --------------------------------------------------------------------------------------------
|  
|*  |  | Management Contract                                                                         
|  
|** |  | Schedules to this agreement will be furnished supplementally to the
Commission upon request.