SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September~~March 3031, ~~2002~~2003

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

For the transition period from to

Commission File Number: 001-13259

U S LIQUIDS INC.

~~Delaware~~ (~~State~~Exact orname ~~other jurisdiction~~ of ~~incorporation~~registrant oras specified ~~organization)~~in ~~76-0519797~~its ~~(I.R.S. Employer Identification Number~~charter)

411 N. Sam Houston Parkway East, Suite 400 Houston, Texas 77060-3545 281-272-4500 (Address and telephone number of registrant’s principal executive offices)


Delaware		76-0519797
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification Number)

~~Indicate~~411 byN. ~~check~~Sam ~~mark~~Houston ~~whether~~Parkway ~~the~~East, ~~registrant (1)~~Suite ~~has~~400, ~~filed~~Houston, ~~all~~Texas ~~reports~~77060-3545 ~~required to be filed by Section 13 or 15~~281-272-4500 (d)Address ofand ~~the~~telephone ~~Securities~~number ~~Exchange Act~~ of ~~1934~~ ~~during the preceding 12 months (or for such shorter period that the~~ registrant’s ~~was~~principal ~~required~~executive ~~to file such reports~~offices)~~, and (2) has been subject to such~~ ~~filing requirements for the past 90 days. [X] Yes [ ] No~~

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. x Yes o No

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Common Stock, $0.01 par value 16,~~095~~233,~~222~~149 shares as of ~~November~~June 1125, ~~2002~~2003

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATION
Exhibit Index
Letter Agreement dated 10/4/2002
14th Amendment to 2nd Amended Credit Agreement
10th Amend. to 2nd Amended Credit Agreement
15th Amendment to 2nd Amended Credit Agreement
General Release, Severance & Settlement Agmt.
Certification of CEO Pursuant to Section 906
Term Sheet for Employment - William M. DeArman
Certification of CFO Pursuant to Section 906
Term Sheet for Employment - Cary M. Grossman
Asset Purchase Agreement dated 11/1/2002
Transition Services Agreement
License Agreement
Purchase & Sale of Assets Agreement
Certification of Principal Executive Officer
Certification of Principal Financial Officer

U S LIQUIDS INC. FORM 10-Q FOR THE QUARTER ENDED ~~SEPTEMBER~~MARCH 3031, ~~2002~~2003 INDEX

			Page		~~Page~~
PART I — FINANCIAL INFORMATION				1	1
		ITEM 1.		Financial Statements	1
	ITEM 1. Financial Statements			1
		-	Condensed Consolidated Balance Sheets as of December 31, 2001 and September 30, 2002 (unaudited)		1
	- Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002 (unaudited)			1
		-	Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2001 and 2002 (unaudited)		2
	- Condensed Consolidated Statements of Operations for the three month periods ended March 31, 2003 and 2002 (unaudited)			2
		-	Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2001 and 2002 (unaudited)		3
	- Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2003 and 2002 (unaudited)			3
		-	Notes to Condensed Consolidated Financial Statements (unaudited)		4
	- Notes to Condensed Consolidated Financial Statements (unaudited)			4
		ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
		ITEM 3.		Quantitative and Qualitative Disclosures about Market Risk	28
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			29
		ITEM 4.		Controls and Procedures	29
	ITEM 4. Controls and Procedures			29
PART II - OTHER INFORMATION					29
PART II — OTHER INFORMATION				30
		ITEM 1.		Legal Proceedings	29
	ITEM 1. Legal Proceedings			30
		ITEM 2.		Changes in Securities and Use of Proceeds	32
	ITEM 2. Changes in Securities and Use of Proceeds			34
		ITEM 3.		Defaults upon Senior Securities	32
	ITEM 3. Defaults Upon Senior Securities			34
		ITEM 4.		Submission of Matters to a Vote of Security Holders	32
	ITEM 4. Submission of Matters to a Vote of Security Holders			34
		ITEM 5.		Other Information	32
	ITEM 5. Other Information			34
		ITEM 6.		Exhibits and Reports on Form 8-K	32
	ITEM 6. Exhibits and Reports on Form 8-K			34
SIGNATURES					34
Signatures				35
CERTIFICATION					35
Certification				36

PART I — FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS

~~ITEM~~U 1S LIQUIDS INC. CONDENSED ~~FINANCIAL~~CONSOLIDATED ~~STATEMENTS~~BALANCE SHEETS (In thousands, except per share data) (Unaudited)

U S LIQUIDS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)


				March 31, 2003			December 31, 2002

ASSETS
CURRENT ASSETS:
		Cash and cash equivalents		$	1,681		$	4,068
		Accounts receivable, less allowances of $1,046 and $1,018, respectively			27,147			32,165
		Inventories			1,596			1,536
		Prepayments and other current assets			4,510			5,062
		Current assets of discontinued operations			2,270			2,853

			Total current assets		37,204			45,684
PROPERTY, PLANT AND EQUIPMENT, net					84,193			86,295
GOODWILL, net					13,469			13,459
INTANGIBLE ASSETS, net					4,094			3,877
OTHER ASSETS					5,676			2,213
NONCURRENT ASSETS OF DISCONTINUED OPERATIONS					1,120			1,483

			Total assets	$	145,756		$	153,011

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
		Current maturities of long-term obligations		$	77,859		$	78,474
		Accounts payable			15,629			17,669
		Accrued expenses and other current liabilities			20,787			23,376
		Current liabilities of discontinued operations			2,408			2,084

			Total current liabilities		116,683			121,603
LONG-TERM OBLIGATIONS, net of current maturities					2,536			2,672
PROCESSING RESERVE, net of current portion					2,803			3,007
CLOSURE AND REMEDIATION RESERVES, net of current portion					3,870			6,490
OTHER LONG-TERM LIABILITIES					744			882
NONCURRENT LIABILITIES OF DISCONTINUED OPERATIONS					427			427

			Total liabilities		127,063			135,081

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, 16,233,149 and 16,095,222 shares issued and outstanding, respectively				162			161
	Additional paid-in capital				177,213			177,166
	Accumulated deficit				(158,692	)		(159,407	)
	Accumulated other comprehensive income — foreign currency translation adjustment				10			10

			Total stockholders’ equity		18,693			17,930

			Total liabilities and stockholders’ equity	$	145,756		$	153,011

				DECEMBER 31,			SEPTEMBER 30,
				2001			2002
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents			$	1,498		$	7,247
	Accounts receivable, less allowances of $1,092 and $852, respectively				38,139			34,607
	Inventories				2,485			2,774
	Prepaid expenses and other current assets				8,648			8,812
		Total current assets			50,770			53,440
PROPERTY, PLANT AND EQUIPMENT, net					109,838			103,617
GOODWILL, net					156,058			14,005
OTHER ASSETS, net					4,210			4,383
		Total assets		$	320,876		$	175,445
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Current maturities of long-term obligations			$	2,891		$	88,496
	Accounts payable				14,253			16,118
	Accrued expenses and other current liabilities				26,984			23,192
		Total current liabilities			44,128			127,806
LONG-TERM OBLIGATIONS, net of current maturities					89,137			3,021
PROCESSING RESERVES, net of current					4,702			3,180
CLOSURE AND REMEDIATION RESERVES, net of current					9,848			6,884
OTHER LONG-TERM LIABILITIES					1,094			2,039
DEFERRED INCOME TAXES					3,514			—
		Total liabilities			152,423			142,930
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, 16,031,815 and 16,095,222 shares issued and outstanding, respectively				160			161
	Additional paid-in capital				177,134			177,166
	Retained deficit				(8,818	)		(144,823	)
	Accumulated other comprehensive income (loss) — foreign currency translation adjustment				(23	)		11
		Total stockholders’ equity			168,453			32,515
			Total liabilities and stockholders’ equity	$	320,876		$	175,445

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

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

U S LIQUIDS INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (INIn ~~THOUSANDS~~thousands, ~~EXCEPT~~except ~~PER~~per ~~SHARE~~share ~~DATA~~data) (~~UNAUDITED~~Unaudited)

	THREE MONTHS ENDED						NINE MONTHS ENDED
	Three Months Ended March 31,
	SEPTEMBER 30,						SEPTEMBER 30,
	2003			2002
	2001			2002			2001			2002
				(As Restated,
REVENUES	$	58,438		$	48,368		$	178,546		$	143,952
				see Note 12)
OPERATING EXPENSES		41,682			36,914			131,299			104,166
REVENUES	$	36,830		$	35,911
GROSS MARGIN		16,756			11,454			47,247			39,786
OPERATING EXPENSES		27,926			25,176
DEPRECIATION AND AMORTIZATION		4,463			3,507			13,091			11,040
OPERATING MARGIN		8,904			10,735
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		6,877			6,859			19,710			20,423
DEPRECIATION AND AMORTIZATION		2,678			2,690
GOODWILL IMPAIRMENT		—			51,050			—			51,050
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		5,143			5,915
SPECIAL INCOME, net		(2,988	)		(1,840	)		(9,747	)		(1,178	)
SPECIAL INCOME		(304	)		—
INCOME (LOSS) FROM OPERATIONS		8,404			(48,122	)		24,193			(41,549	)
INCOME FROM OPERATIONS		1,387			2,130
INTEREST EXPENSE, net		2,169			2,245			7,638			6,151
INTEREST EXPENSE		3,332			1,662
OTHER INCOME, net		(1867	)		(1162	)		~~(233~~	)		(8	)
INCOME (LOSS) BEFORE INCOME TAXES		6,253			(50,366	)		16,788			(47,692	)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		(1,878	)		630
PROVISION (BENEFIT) FOR INCOME TAXES		2,814			(3,893	)		7,888			(2,690	)
PROVISION FOR INCOME TAXES		45			64
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		—			3,774			—			91,003
INCOME (LOSS) FROM CONTINUING OPERATIONS		(1,923	)		566
NET INCOME (LOSS)	$	3,439		$	(50,247	)	$	8,900		$	(136,005	)
DISCONTINUED OPERATIONS (NOTE 5):
BASIC EARNINGS (LOSS) PER COMMON SHARE:
LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES		(70	)		(1,480	)
BASIC EARNINGS (LOSS) PER COMMON SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE	$	0.21		$	(2.89	)	$	0.56		$	(2.80	)
INCOME TAXES		—			(456	)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE	$	—		$	(0.23	)	$	—		$	(5.66	)
LOSS FROM DISCONTINUED OPERATIONS		(70	)		(1,024	)
BASIC EARNINGS (LOSS) PER COMMON SHARE	$	0.21		$	(3.12	)	$	0.56		$	(8.46	)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		(2,708	)		87,823
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
NET INCOME (LOSS)	$	715		$	(88,281	)
DILUTED EARNINGS (LOSS) PER COMMON SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE	$	0.20		$	(2.89	)	$	0.53		$	(2.80	)
BASIC EARNINGS (LOSS) PER COMMON SHARE:
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE	$	—		$	(0.23	)	$	—		$	(5.66	)
BASIC EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE	$	(0.12	)	$	0.03
DILUTED EARNINGS (LOSS) PER COMMON SHARE	$	0.20		$	(3.12	)	$	0.53		$	(8.46	)
DISCONTINUED OPERATIONS		(0.00	)		(0.06	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING		16,021			16,091			15,975			16,074
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		0.17			(5.47	)
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING		16,851			16,091			16,688			16,074
BASIC EARNINGS (LOSS) PER COMMON SHARE	$	0.04		$	(5.50	)
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
DILUTED EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE	$	(0.12	)	$	0.03
DISCONTINUED OPERATIONS		(0.00	)		(0.06	)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		0.17			(5.24	)
DILUTED EARNINGS (LOSS) PER COMMON SHARE	$	0.04		$	(5.27	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING		16,215			16,050
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING		16,318			16,747

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

U S LIQUIDS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (INIn ~~THOUSANDS~~thousands) (~~UNAUDITED~~Unaudited)

				NINE MONTHS
				Three Months Ended March 31,
				ENDED SEPTEMBER 30,
				2003			2002
				2001			2002
							(As Restated,
							see Note 12)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)				$	~~8,900~~715		$	(~~136~~88,~~005~~281	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Adjustments to reconcile net income (loss) to net cash used in operating activities:
	Change in accounting principle				—(2,708	)		91,003
	Goodwill impairment				—			51,050
	Depreciation and amortization				2,678			3,890
	Depreciation and amortization				13,091			11,040
	Net (gain) loss on sale of property, plant and equipment				30			(120	)
	Net (gain) loss on sale of property, plant, and equipment				(76	)		22
	Loss on discontinued operations				74			—
	Changes in operating assets and liabilities:
		Accounts receivable, net			(14,~~650~~113	)		34,~~573~~349
		Inventories			(~~144~~59	)		(~~289~~83	)
		Prepaid expenses and other current assets			(2,970	)		(2,705	)
		Prepayments and other current assets			551			(2,064	)
		Other assets			(779	)		(502	)
		Current assets of discontinued operations			410			—
		Accounts payable, accrued expenses and other current liabilities			(7,167	)		(1,964	)
		Intangible assets			(233	)		(206	)
		Other long-term liabilities			(1,456	)		946
		Other assets			(3,453	)		136
		Closure, remediation and processing reserves			(1,443	)		(4,486	)
		Long-term assets of discontinued operations			38			—
		Deferred income tax provision (benefit)			6,307			(994	)
		Accounts payable, accrued liabilities and other current liabilities			(4,544	)		(5,542	)
		Operations held for sale, net			1,814			—
		Current liabilities of discontinued operations			330			—
			Net cash provided by operating activities		14,427			10,689
		Closure, remediation and processing reserves			(330	)		(543	)
		Other long-term liabilities			(138	)		(54	)
		Deferred income taxes			—			(3,578	)
	Net cash used in operating activities				(2,526	)		(1,093	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of property, plant and equipment				(~~4,785~~427	)		(41,~~988~~496	)
	Proceeds from sale of property, plant and equipment				~~987~~1			~~450~~365
	Proceeds from sale of businesses				31,~~947~~280			43—
	Cash paid for acquisitions, net of subsequent purchase adjustments				(6410	)		—
	Net cash provided by (used in) investing activities		~~Net cash provided by (used in) investing activities~~		85844			(41,~~495~~131	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from issuance of long-term obligations				62,~~860~~500			73,~~319~~000
	Principal payments on long-term obligations				(223,~~681~~253	)		(~~7,830~~985	)
	Proceeds from exercise of stock options and employee stock purchase plan				~~185~~48			3225
			Net cash used in financing activities		(15,636	)		(479	)
	Net cash provided by (used in) financing activities				(705	)		2,040
EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS					—			34
NET DECREASE IN CASH AND CASH EQUIVALENTS					(2,387	)		(184	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS					(1,124	)		5,749
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD					4,068			1,498
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD					2,176			1,498
CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	1,681		$	1,314
CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	1,052		$	7,247
SUPPLEMENTAL DISCLOSURES:
	Cash paid for interest and related financial fees			$	7,675		$	7,850
	Cash paid for interest and related financing fees			$	2,337		$	4,491
	Cash paid for income taxes			$	~~247~~3		$	~~465~~3
	Cash received for income taxes			$	~~260~~287		$	642

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

UUS S LIQUIDS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BUSINESS AND ORGANIZATION:

U S Liquids Inc. ~~and subsidiaries (collectively “U S Liquids” or the “Company”) was founded November 18, 1996 and~~ is a leading provider of ~~services~~liquid ~~for~~waste ~~the~~management services, including collection, processing, recovery and disposal ofservices. The ~~liquid~~Company ~~waste~~operates infour ~~North~~divisions ~~America. On~~— ~~December 13,~~the ~~1996~~Commercial Wastewater Division, the Industrial ~~Company~~Wastewater ~~acquired~~Division, ~~its~~the Oilfield Waste Division ~~from Sanifill,~~and ~~Inc~~the Beverage Division. ~~through~~The aCommercial ~~transaction~~Wastewater ~~accounted~~Division ~~for~~provides as a ~~purchase.~~variety ~~The Oilfield~~of ~~Waste~~environmental ~~Division~~services ~~treats~~and collects, processes and disposes of ~~oilfield~~various ~~waste~~types ~~generated in oil and gas~~of ~~exploration~~nonhazardous ~~and~~liquid ~~production~~waste. InThe ~~June~~Industrial ~~1997,~~Wastewater ~~the~~Division ~~Company~~collects, processes ~~formed~~and ~~the~~disposes ~~basis~~ of ~~its Wastewater~~hazardous ~~Division~~and bynonhazardous ~~acquiring~~liquid ~~additional~~waste ~~companies.~~such ~~These acquisitions were~~as ~~accounted~~household ~~for~~hazardous ~~under~~wastes, ~~the~~industrial ~~pooling-of-interests~~wastewater, ~~method~~petroleum offuels ~~accounting~~and antifreeze. The ~~Wastewater~~ Beverage Division collects, processes and disposes of ~~nonhazardous~~dated beverages ~~liquid~~and other consumer products containing alcohol or sugar. The ~~waste~~Industrial and ~~recovers~~Beverage Divisions also generate revenue from the sale of by-products recovered from certain waste streams., ~~During~~including ~~1998~~oils, ~~and~~ethanol, ~~1999~~solvents, ~~the~~plastics, ~~Company~~cardboard, ~~continued~~aluminum, ~~acquiring companies~~glass, ~~principally~~industrial ~~for~~chemicals ~~the Wastewater~~and ~~Division~~recycled antifreeze products. OnThe ~~July 1,~~Oilfield ~~1999,~~Waste Division disposes waste that is generated in the ~~Company~~exploration ~~created~~for aand ~~third~~production ~~division,~~of ~~known~~oil asand ~~the~~natural gas ~~Industrial~~primarily ~~Wastewater~~from ~~Division~~the Gulf of Mexico and land-based rigs in Louisiana, Texas and northern ~~changed~~Mexico. ~~the~~Prior ~~name~~to ofJanuary 1, 2003, the ~~Wastewater~~Beverage Division’s results towere included in the results of the Commercial Wastewater Division. ~~The~~Effective January 1, ~~Industrial~~2003, ~~Wastewater~~the Beverage Division ~~derives~~ ~~revenues~~was ~~from~~separated ~~fees~~as ~~charged~~a ~~for~~fourth ~~the~~division. Prior ~~collection,~~year ~~processing~~information ~~and~~has ~~disposal of~~been ~~hazardous~~reclassified ~~and~~to ~~nonhazardous~~conform ~~liquid~~to ~~wastes~~the current year presentation. See Note 11.

2. BASIS OF PRESENTATION:

The interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted ~~accounting~~ ~~principles~~in the United States of America, have been condensed or omitted pursuant to those rules and regulations; although management believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting ~~only~~ of only normal recurring adjustments, necessary to fairly present the financial position, results of operations and cash flows with respect to the interim condensed consolidated financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. All intercompany accounts and transactions have been eliminated in consolidation.

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

It The ~~is suggested that these~~ interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and ~~notes~~ notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, ~~2001~~2002, as filed with the SEC on July 3, 2003. Refer to Note 12 for the restatement information relating to the quarter ending March 31, 2002.

3. ~~CREDIT~~ ~~FACILITIES~~LIQUIDITY AND OUTLOOK:

At The ~~September 30,~~Company’s ~~2002,~~capital ~~approximately~~requirements ~~$88.5 million~~for continuing operations consist of general working capital needs, scheduled principal payments on ~~debt~~ its debt obligations ~~were~~and ~~payable~~capital ~~during~~leases, ~~the~~funding ~~next~~of ~~twelve~~the ~~months.~~Company’s ~~$87.0 million~~finite ofrisk bonding ~~these~~program, ~~payments~~certain ~~represent~~contractual ~~amounts~~commitments ~~due~~and ~~under~~planned ~~the~~capital expenditures. The Company’s capital resources consist of cash reserves, cash generated from operations and funds available under its revolving credit facility. On March 31, ~~which~~2003, the Company ~~intends~~received toa ~~extend~~short-term orextension ~~refinance~~of ~~prior~~the tocredit ~~April~~facility ~~2003.~~to ~~The~~provide ~~remaining~~for ~~$1.5 million~~its ofnear-term ~~principal~~working ~~payments~~capital ~~due~~needs ~~are~~and ~~expected~~allow toadditional betime ~~funded~~to ~~from~~secure ~~operating~~new ~~cash~~financing. ~~flows~~The ~~and~~facility, ifwhich ~~necessary,~~matures ~~from~~on ~~borrowings~~July 31, ~~under~~2003, ~~the~~had an ~~revolving~~outstanding ~~credit~~balance ~~facility~~of $76.8 million at March 31, 2003.

The Company ~~has~~continues ato ~~revolving~~review ~~credit~~all ~~facility with a group~~ of ~~banks~~its ~~under~~alternatives ~~which it may borrow~~ to ~~fund~~reduce ~~working capital requirements~~its indebtedness. ~~Amounts~~These ~~outstanding~~alternatives ~~under the~~include ~~credit~~sales ~~facility~~of ~~are~~assets ~~secured~~or byoperating divisions aor ~~lien~~issuance onof ~~substantially~~common ~~all~~stock ofor ~~the~~other ~~Company’s assets~~securities. The ~~credit~~proceeds ~~facility,~~of ~~which matures on April 15, 2003, contains~~any ~~affirmative,~~such ~~negative~~transaction ~~and~~would ~~subjective~~be ~~covenants,~~used ~~requires the Company~~ to ~~comply with~~reduce ~~certain financial covenants and obtain~~ the ~~lenders~~Company’s ~~consent~~outstanding ~~before~~debt. ~~making~~There ~~any~~can ~~acquisitions~~be orno ~~dispositions of assets~~assurance, ~~and prohibits the payment of cash dividends. Prior to the maturity of the credit facility on April 15~~however, ~~2003,~~that ~~the Company~~any ~~must~~such ~~either~~transaction ~~extend~~will ~~the~~be ~~term of the credit facility or obtain an~~successfully ~~alternative source of financing~~consummated. ~~Because~~Any ofrefinancing ~~the~~or ~~Company’s~~business ~~recent~~sale ~~performance and~~transaction ~~conditions in the credit markets, it~~ is ~~likely~~expected ~~that it will need~~ to ~~seek an~~ ~~extension~~result ofin ~~the~~either ~~existing~~substantial ~~credit~~dilution ~~facility.~~to ~~However,~~current ~~there~~stockholders ~~can~~or ~~be no assurance~~significant ~~that~~reduction ~~the Company will be successful~~ in ~~either extending~~ the ~~term~~size of the ~~facility~~ ~~or obtaining alternative financing~~Company.

During the first quarter of 2002, the terms of the credit facility were amended to, among other things, extend the maturity date to April 15, 2003, reduce the amount of the credit facility from $111.25 million to $99.7 million, increase the interest rates payable under the credit facility, limit the amount of capital expenditures that the Company makes, and waive its noncompliance with and modify the terms of certain financial covenants. In addition, the amount of the credit facility was permanently reduced by $250,000 on each of June 30, 2002 and September 30, 2002, and is required to be further reduced by $4.6 million on December 31, 2002 and by $2.1 million on March 31, 2003. Furthermore, the amendments provided that the amount of the credit facility will be permanently reduced by an amount equal to one

UUS S LIQUIDS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (~~CONTINUED~~Continued) (UNAUDITED)

~~hundred~~ The ~~percent~~Company’s recent performance has caused it to violate various financial covenants of its credit facility. Previously, the ~~net~~Company’s ~~cash~~lenders had ~~proceeds~~been ~~received~~issuing ~~from~~short-term ~~any~~waivers. ~~sale~~However, as of ~~assets~~the date of this report, the Company is not in compliance with certain financial covenants set forth in the ~~ordinary~~credit agreement. Noncompliance with these provisions permits the lenders ~~course~~to, ofamong ~~business~~other things, accelerate the ~~issuance~~debt ofunder ~~certain~~the ~~debt~~credit ~~or,~~facility ~~with~~and foreclose ~~certain~~on ~~specified~~the collateral provided. The Company’s lenders have not declared ~~exceptions,~~an ~~any~~event ~~issuance~~of default as a result of ~~equity~~its noncompliance; however, they have retained the right to do so. The ~~terms~~Company ofis in discussions with its lenders regarding amending the credit facility to, among other things, further extend ~~significantly~~the ~~limit~~maturity date of the facility, provide for the Company’s ~~ability~~liquidity toneeds and ~~enter~~bring the Company into ~~leases~~compliance orwith ~~obtain~~the various financial covenants ~~additional~~contained ~~debt~~therein. ~~outside~~There can be no assurance that the Company will be successful in obtaining an extension of the maturity date of the credit facility or amendments to any of the financial covenants or terms contained therein.

~~During~~ The ~~1999,~~report issued by the Company’s ~~had~~auditors aon ~~$10.0~~the Company’s December ~~million~~31, 2002 ~~credit~~financial ~~facility~~statements ~~with~~stated ~~BankBoston, N.A.~~that ~~under~~the ~~which~~working itcapital ~~was~~deficit ~~able~~caused toby ~~borrow~~the close ~~funds~~proximity toof ~~purchase~~the ~~equipment.~~maturity ~~The commitment~~of ~~for~~the ~~this~~revolving credit facility, ~~expired~~and onthe recent ~~December 31,~~lack ~~1999~~of compliance with the credit facility, atraise ~~which~~substantial ~~time~~doubt about the Company’s ~~had~~ability ~~borrowed~~to ~~approximately~~continue $2as a going concern.~~5 million.~~ ~~This~~If ~~amount~~the Company is unable ~~being~~to ~~repaid~~successfully ~~in 60 monthly~~restructure ~~installments~~its ofindebtedness, ~~principal~~it ~~and~~may ~~interest~~be required to seek protection under the bankruptcy laws.

~~Outlook~~ During the first quarter of 2003, the terms of the credit facility were amended to change certain financial covenants, add additional weekly and monthly financial covenants, and make various enhancements to the collateral documentation securing the loans. The amendment also requires that the Company take certain steps to reduce its leverage, including the sale of one or more businesses that generated in 2002 or are expected to generate in 2003 at least $3.0 million in aggregate earnings before deduction for interest, taxes, depreciation and amortization. In exchange, the maturity date of the credit facility was extended to July 31, 2003, previously scheduled loan commitment reductions were eliminated, and, subject to weekly restrictions, availability under the credit facility was increased by approximately $3.5 million during the months of April through July 2003. As the Company sells certain businesses per the amendment above, the sale of such assets could result in an impairment below the current carrying value.

~~The~~ In ~~Company’s~~July ~~recent~~2003, ~~performance~~the ~~has~~terms ~~caused~~of itthe tocredit ~~violate~~facility ~~various~~were ~~financial~~further amended to (1) ~~covenants~~renew ofuntil ~~its~~December 31, ~~credit~~2003 ~~agreement~~approximately $8.0 million ~~Although~~of letters of credit issued on the Company’s ~~lenders~~behalf, ~~have~~and ~~been~~(2) defer until July 31, 2003 the $0.6 ~~issuing~~million ~~short-term~~interest ~~waivers~~payment ~~and~~scheduled ~~amendments~~for ~~addressing~~payment ~~these~~on ~~violations~~June 30, ~~the~~2003. In return, the Company ~~expects~~agreed to ~~again~~cash becollateralize ~~out~~all ofobligations ~~compliance~~under ~~with~~the ~~certain~~letters ~~financial covenants,~~of ~~pending~~credit ~~another~~described ~~amendment~~above ofon ~~its~~or ~~line~~before the termination of the credit, atfacility. ~~December 31~~In addition, ~~2002~~the Company agreed that it would not borrow any additional funds under the credit facility without the prior consent of its lenders.

~~Between~~ The ~~July 18,~~debt outstanding ~~2002~~under ~~and November 12, 2002,~~ the ~~terms of the~~ credit facility ~~were~~ ~~further~~may ~~amended~~be ~~to,~~accelerated ~~among~~by ~~other things, limit~~ the ~~amount~~lenders ~~of additional borrowings under the facility to $1.0 million~~if, ~~require that $1.2 million of the~~ ~~insurance~~among ~~proceeds~~other ~~received during the third quarter of 2002 be paid to the lenders and applied against the debt reduction required to be made on December 31~~things, ~~2002, require the engagement of~~ a ~~financial~~change ~~advisor~~in ~~acceptable~~control ~~to the lenders, permit the sale~~ of the Company’s ~~Texas~~occurs ~~businesses~~or ~~in the Commercial~~certain ~~Wastewater~~individuals ~~Division,~~cease ~~permit the use of a portion of the Texas sales proceeds~~ to ~~complete~~ ~~the~~serve ~~acquisition~~as ofan ~~certain~~executive ~~assets~~officer of ~~Trinity Storage Services, L.P., and waive~~ the Company~~’s non-compliance~~ ~~with~~ and ~~modify~~are ~~the terms of certain of the financial covenants.~~not ~~The~~replaced ~~amendments~~within ~~also~~sixty ~~eliminated~~days ~~the~~by ~~Company’s~~an ~~ability~~individual toreasonably ~~borrow~~satisfactory ~~funds at LIBOR, which is expected~~ to ~~increase interest expense by approximately $100,000 per~~the ~~month~~lenders. The ~~amendments~~lenders tohave ~~the~~waived ~~financial~~through ~~covenants reduced the limitation on the Company’s annual capital expenditures~~July 31, ~~increased~~2003 ~~the limitation on its annual rent expenses, require that it maintain~~ an ~~accounts~~event ~~receivable coverage ratio~~ of ~~not less than 0.32:1 and adjusted the debt to adjusted EBITDA ratio for the~~default ~~prior~~arising ~~twelve-month~~from ~~period required to be met at~~ the ~~end~~resignation of ~~each~~Michael ~~quarter~~P. ~~The Company~~Lawlor, ~~maintained its debt balance below~~ the ~~required 3.70 times adjusted EBITDA for the twelve-month period ended September 30, 2002. The~~ Company’s ~~actual~~ ~~debt~~former ~~balance on September 30, 2002 was 3.50 times adjusted EBITDA for~~Chief ~~the~~Executive ~~prior twelve-month period~~Officer. On ~~December~~August 3129, 2002, ~~this~~William ~~limitation will be reduced to 3.00 times adjusted EBITDA~~DeArman, ~~as defined in~~ the ~~credit~~Chairman ~~agreement.~~of ~~The~~the ~~Company~~Board ~~does~~of ~~not~~Directors, ~~expect~~was toappointed beinterim ~~able~~Chief toExecutive ~~meet this debt limitation~~Officer. InOn ~~that~~October ~~event~~31, 2002, the ~~Company~~Board ~~will~~of ~~have~~Directors tomade ~~obtain~~his anposition ~~additional~~permanent. ~~waiver~~The orlenders ~~amendment from~~have ~~the~~continued ~~lenders prior~~ to ~~year-end.~~waive ~~There can be no assurance that~~ the ~~Company~~default ~~will be~~arising ~~able to obtain an additional waiver or amendment~~ from ~~the~~Mr. Lawlor’s ~~lenders~~departure, inbut ~~the~~have ~~event~~not ofapproved ~~default~~Mr. DeArman’s appointment.

~~The~~ To ~~debt~~address ~~outstanding under~~ the ~~credit facility may be accelerated by the lenders if, among other things, a change in control of the~~ Company’s ~~occurs~~liquidity or John P. Miklich or Cary M. Grossman ceases to serve as an executive officer of the Company and is not replaced within sixty days by an individual reasonably satisfactory to the lenders. The lenders have waived through December 31problems, ~~2002 an event of default arising from~~ the ~~resignation of Michael P. Lawlor. On August 29, 2002, William DeArman, the Chairman of the~~ Board of Directors, ~~was appointed interim Chief Executive Officer (“CEO”). The Company’s Board of Directors has requested that Mr. DeArman become permanent CEO~~ and ~~he has~~ ~~agreed. The~~ Company ~~plans~~management tohave ~~request~~taken ~~that~~ the ~~lenders~~following ~~accept Mr. DeArman as a~~actions: ~~satisfactory replacement for Mr. Lawlor. There can be no assurance that Mr.~~ ~~DeArman’s appointment will be approved by the lenders.~~

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 the Texas businesses, and used a substantial portion of the proceeds to reduce outstanding debt; and

UUS S LIQUIDS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (~~CONTINUED~~Continued) (UNAUDITED)

• implemented cost cutting measures such as reductions in workforce and a temporary freeze on previously authorized pay increases; • sold substantially all of the Texas and Northeast 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 underperforming businesses; and • acquired six oilfield waste transfer stations in Louisiana and Texas to replace the business lost from the non-renewal of the ~~contract~~agreement with Newpark Resources, Inc.

Management is also:

• pursuing the sale of certain businesses; • 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.

• As ~~analyzing~~of ~~each~~March 31, of2003 and June 25, 2003, the Company’s ~~operations~~had ~~for~~outstanding borrowings ~~opportunities~~of to$76.8 million ~~reduce~~and ~~costs~~$79.8 million, ~~improve~~respectively, ~~processes~~under the credit facility. Letters of credit under the facility totaled $8.0 million as of both March 31, 2003 and ~~increase~~June 25, ~~efficiencies;~~2003. Advances under the credit facility of up to $85.3 million currently bear interest at the prime rate plus 4.0% and advances above $85.3 million bear interest at the prime rate plus 6.0%. As of both of March 31, 2003 and June 25, 2003, amounts outstanding under the credit facility were accruing interest at approximately 8.3%, excluding amortization of financing costs. As of June 25, 2003, the unused portion of the credit facility was $1.2 million, none of which was available.

• The ~~exploring~~condensed ~~other~~consolidated ~~opportunities~~financial ~~for~~statements ~~financing~~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 condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

~~Management~~4. isSPECIAL ~~working aggressively on the above matters and is continuing to~~INCOME: ~~explore opportunities for further improvement.~~

At Reliance ~~September 30,~~Insurance ~~2002, the~~ Company ~~had~~(“Reliance”) ~~borrowed~~provided ~~approximately~~casualty ~~$87.0 million~~insurance ~~under~~coverage for the ~~credit facility~~Company. AsIn ofOctober ~~November 11~~2001, ~~2002,~~Reliance was declared insolvent by the ~~balance~~Insurance Commissioner of the ~~credit facility~~State ~~had~~of ~~been~~Pennsylvania. ~~reduced~~As toa ~~$76.8 million~~result, insurance bycoverage ~~using~~will ~~the~~not ~~proceeds~~be ~~from~~available ~~the~~for ~~sale~~any claims or lawsuits asserted ofagainst the Company’s ~~Texas~~for ~~businesses~~which ~~and~~ insurance ~~proceeds~~coverage ~~received~~was onto abe ~~claim~~provided by Reliance ~~related~~and that were not resolved prior to Reliance being placed into liquidation. During the ~~temporary~~fourth ~~closure~~quarter of ~~its~~2001, ~~Detroit~~an ~~facility~~initial inreserve ~~1999~~of $3.5 million ~~Advances~~was ~~under~~established ~~the~~for ~~credit~~any ~~facility~~claims ~~currently~~or ~~bear~~lawsuits ~~interest~~that atwere ~~the~~not ~~prime~~resolved ~~rate~~prior ~~plus~~to ~~4.0%.~~Reliance Asbeing ofplaced ~~September 30,~~into ~~2002~~liquidation. ~~and~~Subsequent ~~November 11,~~adjustments ~~2002,~~have ~~amounts~~been ~~outstanding~~made ~~under~~to the ~~credit~~reserve ~~facility~~based ~~were~~on ~~accruing~~settled ~~interest~~obligations atand ~~approximately~~known 12claims.5% ~~and~~During ~~13.0%~~the ~~per~~first ~~year~~quarter of 2003, ~~respectively~~as a result of a review of potential claims and related costs, the reserve was reduced by $0.3 million resulting in special income of a like amount.

~~Despite these actions, it is still unlikely that the Company will be in compliance at December 31, 2002 with the funded debt to adjusted EBITDA ratio~~5. ~~The~~ ~~Company~~DISCONTINUED ~~intends to seek a waiver to this covenant prior to year-end.~~OPERATIONS: ~~However, there can be no assurance that such a waiver or amendment will be~~ obtained. Additionally, based on discussions with its lenders, the Company believes that any extension of the line of credit past the April 15, 2003 maturity date will require improvements in its operations and is unlikely to be granted until late March or early April 2003, if at all. Management is exploring other alternatives for financing; however, those options are highly uncertain.

4. ~~SPECIAL~~Effective ~~ITEMS~~January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” that addresses the financial accounting

2001 Special Income, Net

During 2000, the Company filed suit against National Steel Corporation for failing to properly identify PCB contaminated materials as required by law when delivered to the Company’s 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 a 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 insurance policy for losses incurred as a result of the temporary closing of the Detroit facility in August 1999. During the third quarter of 2001, the Company agreed to accept $3.75 million in complete satisfaction of its claim under this policy. These funds were received by the Company in August 2001.

During the fourth quarter of 2000, the Company recorded special charges relating primarily to decisions to dispose of or suspend certain of its non-core operations. Effective July 31, 2001, part of the Company’s Northeast operations was sold. An additional loss of $0.7 million was provided for this sale at June 30, 2001 based on the information available. In August and September 2001, additional portions of the Northeast operations were sold and losses of $0.8 million were recognized as a result of these sales.

2002 Special Income, Net

In connection with special charges recorded in the fourth quarter of 2000, an accrual was made to cover the cost of disposing of certain waste located at the Company’s Re-Claim facility in Houston, Texas. The disposal of this waste did not begin until the second quarter of 2002, at which time it was determined that a portion of the waste required incineration, thus making the disposal of the waste more costly. During the second quarter of 2002, the Company recorded a special charge of $0.7 million to cover these additional disposal costs. During

UUS S LIQUIDS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (~~CONTINUED~~Continued) (UNAUDITED)

and reporting for the ~~third~~impairment ~~quarter~~or disposal of ~~2002,~~long-lived assets. SFAS No. ~~management~~144 ~~reassessed~~requires ~~the~~that ~~reserve~~one accounting model be used for long-lived assets to be disposed of by sale and ~~determined~~broadens anthe ~~additional~~presentation $0of discontinued operations to include more disposal transactions.3 On November ~~million~~6, ~~was~~2002, the Company completed ~~required~~the tosale ~~process~~of substantially all ~~remaining~~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 services in Houston, Dallas and San Antonio, Texas.

In During ~~addition to~~ the ~~claim~~fourth ~~filed~~quarter ~~and~~of ~~insurance proceeds received as discussed above~~2002, the Company ~~submitted~~decided ato ~~claim~~divest ~~with~~of ~~another~~or suspend ~~insurance~~certain ~~company~~operations ~~for~~at ~~losses incurred~~several asnon-core aand ~~result~~underperforming ofbusinesses in the ~~temporary~~Commercial ~~closing~~Wastewater ofDivision. ~~the~~Some ~~Detroit~~operations ~~facility.~~were ~~During~~divested of or suspended during the ~~third~~fourth quarter of 2002, and the ~~Company~~remaining ~~agreed~~operations ~~to accept $2.4 million in~~are ~~complete~~expected ~~satisfaction~~to ofbe ~~its~~divested ~~claim~~prior ~~under~~to ~~this~~December 31, ~~policy~~2003. ~~$2.15 million~~During ~~of this amount was paid directly to~~ the ~~Company~~first inquarter of ~~September~~2003, ~~2002 and~~ the ~~remainder~~remaining ~~was paid~~portions toof the ~~attorneys representing the~~ Company’s inNortheast ~~this~~operations ~~matter~~were sold.

5. ~~GOODWILL~~Under ~~AND~~SFAS ~~OTHER~~No. 144, ~~INTANGIBLE~~the ~~ASSETS~~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 condensed consolidated balance sheet and statement of operations for all periods presented.

~~Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible~~ Assets~~,” which~~ ~~establishes new accounting~~ and ~~reporting~~liabilities ~~requirements~~related for goodwill and other intangible assets. Under SFAS No. 142, all goodwill amortization ceased effective January 1, 2002. As a result, $14.0 million of goodwill at September 30, 2002 is no longer subject to ~~amortization.~~discontinued ~~Goodwill~~operations ~~amortization~~were for the three and nine month periods ended September 30, 2002 would have otherwise been approximately $1.1 million and $3.4 million, respectively. 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~~follows: ~~in which evaluations of goodwill impairment were made by the Company using the~~ estimated future undiscounted cash flows compared to the assets 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 fiscal quarter.

Based on the initial impairment tests, the Company recognized a charge in the first quarter of 2002 of $87.2 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 $3.8 million tax benefit. However, as a result of the impairment recognized during the third quarter of 2002, as discussed below, the tax benefit of $3.8 million was reversed. Thus, the net charge related to the first quarter impairment was $91.0 million ($5.66 per share, on a year to date basis). During the third quarter of 2002, the Company determined that impairment indicators existed and performed another impairment test on existing goodwill. These additional impairment indicators included the departure of the Company’s CEO, the significant drop in the Company’s stock price and the downward revision of its revenues and earnings guidance, resulting in a 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 ($3.18 per share, on a year to date basis). 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 quarter of 2002 was recognized as an operating expense.


	March 31,		December 31,
	2003		2002

	(In thousands)
	(Unaudited)
Accounts receivable, net	$	1,806	$	2,326
Other current assets		464		527

Current assets of discontinued operations	$	2,270	$	2,853

Property, plant and equipment, net	$	1,115	$	1,477
Other long-term assets		5		6

Noncurrent assets of discontinued operations	$	1,120	$	1,483

Accounts payable	$	1,748	$	1,517
Other current liabilities		660		567

Current liabilities of discontinued operations	$	2,408	$	2,084

Closure and remediation reserves	$	424	$	424
Other noncurrent liabilities		3		3

Noncurrent liabilities of discontinued operations	$	427	$	427

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

				Initial		Third Quarter
		December 31,		Impairment		Impairment		September 30,
		2001		Adjustment		Adjustment		2002
Commercial Wastewater		$	88,251	$	51,864	$	30,484	$	5,903
Industrial Wastewater			66,040		39,139		20,566		6,335
Oilfield Waste			1,767		—		—		1,767
	Total	$	156,058	$	91,003	$	51,050	$	14,005

UUS S LIQUIDS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (~~CONTINUED~~Continued) (UNAUDITED)

~~The~~ Revenues ~~unaudited results of operations presented below for the three~~ and ~~nine months~~pre-tax ~~ended~~loss ~~September 30,~~related ~~2002~~to ~~and~~discontinued ~~adjusted results of~~ operations ~~for~~were ~~the three~~as ~~and nine months ended September 30, 2001 reflect the operations of the Company had the Company adopted the non-amortization provisions of SFAS No. 142 effective January 1, 2001~~follows:

			Three Months Ended						Nine Months Ended
		Three Months Ended March 31,
			September 30,						September 30,
		2003			2002
			2001			2002			2001		2002
		(In thousands)
			(In thousands)
		(Unaudited)
			(Unaudited)
Revenue		$	3,142		$	9,927
Net income (loss)			$	3,439		$	(50,247	)	$	8,900	$	(136,005	)
Pre-tax loss			(70	)		(1,480	)
Add: Cumulative effect of change in accounting principle, net of tax				—			3,774			—		91,003
Add: Goodwill amortization, net of tax				620			—			1,879		—
Adjusted net income (loss)			$	4,059		$	(46,473	)	$	10,779	$	(45,002	)
Basic earnings (loss) per share:
	Reported net income (loss)		$	0.21		$	(3.12	)	$	0.56	$	(8.46	)
	Cumulative effect of change in accounting principle, net of tax			—			0.23			—		5.66
	Goodwill amortization, net of tax			0.04			—			0.11		—
	Adjusted net income (loss)		$	0.25		$	(2.89	)	$	0.67	$	(2.80	)
Diluted earnings (loss) per share:
	Reported net income (loss)		$	0.20		$	(3.12	)	$	0.53	$	(8.46	)
	Cumulative effect of change in accounting principle, net of tax			—			0.23			—		5.66
	Goodwill amortization, net of tax			0.04			—			0.12		—
	Adjusted net income (loss)		$	0.24		$	(2.89	)	$	0.65	$	(2.80	)

6. ~~INVENTORIES~~ ADOPTION OF ACCOUNTING PRONOUNCEMENTS:

~~Inventories~~SFAS ~~are stated at the lower of cost or market and, at December 31, 2001 and September 30, 2002, consisted of processed by-products of $1~~No.1 ~~million and~~143 ~~$0.8 million, respectively, and unprocessed by-products of $1.4 million and~~ ~~$2.0 million, respectively. Cost is determined using the first-in, first-out (FIFO) method.~~

Effective January 1, 2003, the Company adopted 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 Company processes and disposes both hazardous and nonhazardous waste as well as waste generated in the exploration for and production of oil and natural gas. With respect to the Company’s facilities that process nonhazardous waste, including the facilities of the Beverage Division, an asset retirement obligation was not deemed necessary due to the minimal requirements to close and clean up the facilities; however, for the facilities that process hazardous waste and the landfarms operated by the Oilfield Waste Division, an asset retirement obligation was established in accordance with SFAS No. 143 due to the costs necessary to close and clean up these facilities. The cost of retiring a hazardous waste facility typically includes the cost of cleaning the facility or dismantling the facility and hauling the debris to a hazardous waste landfill. Sampling and analytical costs would also be incurred. The cost of retiring a landfarm consists of removal of levees and roads, post-closure monitoring, plugging and abandoning injection and monitoring wells and other costs. Historically, the Company has recorded the gross estimated retirement costs of its facilities. During the first quarter, the Company recognized $2.7 million of income as a result of adoption of SFAS No. 143. The Company’s asset retirement obligations are included within the closure and remediation reserves, net of current portion, on the condensed consolidated balance sheet. See the table below for a detail of the Company’s asset retirement obligations (in thousands, unaudited):


Balance at January 1, 2003	$	2,937
Cumulative effect of change in accounting principle		(2,708	)
Long-lived asset		214
2003 accretion		14

Balance at March 31, 2003	$	457

SFAS No. 142

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 March

UUS S LIQUIDS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (~~CONTINUED~~Continued) (UNAUDITED)

731, 2003 is no longer subject to amortization. ~~DEPRECIATION~~ ~~AND~~Under ~~AMORTIZATION~~SFAS ~~EXPENSES~~No. 142, an impairment test is required to be performed upon adoption and at least annually thereafter. Absent any impairment indicators, the Company performs its impairment tests during the first quarter of each year. 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.

~~Depreciation~~ Based ~~and~~on ~~amortization~~the ~~expenses~~initial ~~excluded~~impairment ~~from~~tests, ~~operating~~the ~~expenses~~Company ~~and~~recognized a charge in ~~selling~~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 2002 charge was net of a $3.2 million tax benefit. However, ~~general~~as ~~and~~a ~~administrative~~result of ~~expenses~~an inimpairment recognized during the ~~condensed~~third ~~consolidated~~quarter of 2002, there was no ~~statements~~longer an expected tax benefit. Thus, the net charge related to the first quarter impairment was revised to $91.0 million. Under SFAS No. 142, the impairment adjustment recognized upon adoption was reflected as a cumulative effect of ~~operations~~change ~~are~~in ~~presented~~accounting principle in the first quarter of 2002. Subsequent impairment adjustments will be recognized as ~~follows:~~operating expenses.

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2001		2002		2001		2002
		(In thousands)
		(Unaudited)
Operating expenses		$	2,927	$	3,059	$	8,603	$	9,525
Selling, general and administrative expenses			274		379		828		1,160
Amortization expenses			1,262		69		3,660		355
	Total depreciation and amortization expense	$	4,463	$	3,507	$	13,091	$	11,040

In accordance with SFAS No. 142, the Company conducted its annual impairment test during the first quarter of 2003. This test indicated that there was no further impairment of the carrying values of the goodwill of the reporting units.

~~8. EARNINGS~~SFAS ~~PER SHARE~~No. 148

~~The~~ In ~~weighted~~December ~~average~~2002, ~~number~~the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123 “Accounting for Stock Based Compensation,” to provide alternative methods of ~~shares~~transition ~~used~~for a voluntary change to ~~compute~~the ~~basic~~fair value based methods of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and ~~diluted~~interim ~~earnings~~financial ~~per~~statements ~~share~~about the method of accounting for ~~the~~stock ~~three~~based employee compensation and ~~nine~~the ~~month~~effect ~~periods~~of ~~ended~~the ~~September~~method used on reported results. The Company continues to apply the rules for stock-based compensation contained in Accounting Principles Board Opinion No. 3025, “Accounting for Stock Issued to ~~2001~~Employees” using the intrinsic value method. The pro forma effect on net income and ~~2002,~~earnings ~~respectively,~~per isshare ~~illustrated~~of the fair value based method of accounting for stock-based compensation as required by SFAS No. 123 and SFAS No. 148 is disclosed below:

		Three Months Ended					Nine Months Ended
		September 30,					September 30,
		2001		2002			2001		2002
		(In thousands, except share data)
		(Unaudited)
Numerator:
	For basic and diluted earnings per share —
	Net income (loss) available to common stockholders	$	3,439	$	(50,247	)	$	8,900	$	(136,005	)
Denominator:
	For basic earnings per share —
	Weighted-average shares		16,020,534		16,091,003			15,974,903		16,073,560
Effect of dilutive securities:
	Stock options and warrants		830,131		—			712,611		—
Denominator:
	For diluted earnings per share —
	Weighted-average shares and assumed conversions		16,850,665		16,091,003			16,687,514		16,073,560

For the periods ended September 30, 2001 and 2002, there were 1,073,620 and 2,908,270 employee stock options and warrants, respectively, which were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the periods presented.

UUS S LIQUIDS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (~~CONTINUED~~Continued) (UNAUDITED)

9. COMPREHENSIVE INCOME (LOSS)


		Three Months Ended March 31,

		2003			2002

		(In thousands)
		(Unaudited)
Net income (loss):	As reported	$	715		$	(88,281	)
	Deduct: Total stock-based employee compensation expense(1)		(78	)		(203	)

	Pro forma	$	637		$	(88,484	)

Basic earnings (loss) per share:	As reported	$	0.04		$	(5.50	)
	Pro forma		0.04			(5.51	)

Diluted earnings (loss) per share:	As reported	$	0.04		$	(5.27	)
	Pro forma		0.04			(5.28	)

(1) The ~~Company’s~~total ~~comprehensive~~stock-based ~~income~~employee ~~(loss),~~compensation ~~which~~expense ~~encompasses~~was ~~net~~determined ~~income~~under ~~(loss) and~~the ~~currency~~fair ~~translation~~value ~~adjustments~~based method for all awards, isnet asof ~~follows:~~ related tax effects.

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2001		2002			2001		2002
	(In thousands)
	(Unaudited)
Net income (loss)	$	3,439	$	(50,247	)	$	8,900	$	(136,005	)
Currency translation adjustments		—		(61	)		—		34
Comprehensive income (loss)	$	3,439	$	(50,308	)	$	8,900	$	(135,971	)

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.

~~10. NEW~~FIN ~~ACCOUNTING PRONOUNCEMENTS~~No. 45

In ~~June~~November ~~2001~~2002, ~~the~~FASB ~~Financial~~Interpretation ~~Accounting Standards Board~~ (“~~FASB~~FIN”) ~~issued SFAS~~ No. ~~143~~ 45, “Guarantor’s Accounting and Disclosure Requirements for ~~Asset~~Guarantees, ~~Retirement~~Including ~~Obligations~~Indirect Guarantees of Indebtedness of Others,” ~~that~~was ~~addresses~~issued ~~financial accounting~~to ~~and~~elaborate ~~reporting~~on ~~for~~the disclosure ~~obligations~~to ~~associated~~be ~~with~~made ~~the~~by ~~retirement~~a ~~of tangible~~guarantor ~~long-lived~~in ~~assets~~its interim and ~~associated~~annual ~~costs.~~financial statements ~~SFAS~~about ~~No. 143~~its ~~requires~~obligations under certain guarantees that ~~the~~ ~~discounted~~it ~~fair~~has ~~value~~made. This ofInterpretation aalso ~~liability~~incorporates, ~~for~~without anchange, ~~asset~~the ~~retirement~~guidance ~~obligation~~in beFIN No. ~~recognized~~34, inwhich ~~the~~is ~~period~~being superceded. As set forth in ~~which~~the itInterpretation, isthe disclosures ~~incurred~~required ifare adesigned ~~reasonable~~to ~~estimate~~improve the transparency of the financial statement information about the ~~fair~~guarantor’s ~~value~~obligations ~~can~~and beliquidity ~~made~~risks related to guarantees. The ~~associated~~fair ~~asset~~values ~~retirement~~of ~~costs~~guarantees ~~are~~entered into after ~~capitalized~~December 31, 2002 must be recorded as ~~part~~a liability of the ~~carrying~~guarantor ~~amount~~in its financial statements. Existing guarantees as of December 31, 2002 are grandfathered from the ~~long-lived~~recognition ~~asset.~~provisions, ~~The~~unless they are later modified, ~~provisions~~but ofthey ~~SFAS~~must Nostill be disclosed. ~~143~~ ~~will~~The bedisclosure ~~effective~~requirements are effective for ~~the~~periods ~~Company~~ending asafter ~~of January~~December 115, ~~2003~~ 2002. The Company isdid ~~considering~~not make any new guarantees during the ~~provisions~~first quarter of ~~SFAS No~~2003. ~~143~~ ~~and~~The attable ~~present has~~below ~~not~~sets ~~determined~~forth the estimated ~~impact~~fair value of ~~adopting~~the ~~SFAS~~Company’s ~~No.~~guarantees as of March ~~143.~~31, 2003 (in thousands, unaudited):

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. The Company adopted SFAS No. 144 on January 1, 2002. Adoption of this statement did not have a material impact on the consolidated financial statements of the Company.


	Less than		1-2		2-3		3-4		4-5
	1 year		years		years		years		years		Thereafter		Total

Guarantee of Subsidiary Obligation	$	170	$	106	$	5	$	—	$	—	$	—	$	281
Guarantee of Subsidiary Operating Leases		444		200		59		61		63		302		1,129
Guarantee of Lease Residual		189		—		—		—		—		—		189

Total Guarantees	$	803	$	306	$	64	$	61	$	63	$	302	$	1,599

In The ~~April~~Company ~~2002,~~believes the ~~FASB~~likelihood 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,~~it ~~SFAS~~would ~~No. 64, “Extinguishments~~be ofrequired ~~Debt Made~~ to ~~Satisfy Sinking-Fund Requirements.” SFAS No.~~perform ~~145~~or ~~also~~otherwise ~~rescinds~~incur ~~SFAS~~any ~~No. 44,~~significant ~~“Accounting~~losses ~~for~~associated ~~Intangible~~with ~~Assets~~any of ~~Motor~~these ~~Carriers.”~~guarantees ~~SFAS~~is Noremote. ~~145~~ ~~also~~The ~~amends~~fair ~~SFAS~~value ~~No. 13,~~of ~~“Accounting for Leases,” to eliminate an inconsistency between~~ the ~~required~~Company’s ~~accounting~~guarantees ~~for~~included ~~sale-leaseback~~in ~~transactions and~~ the ~~required~~table ~~accounting~~above ~~for certain lease modifications that have economic effects that~~ are ~~similar~~recorded toin ~~sale-leaseback~~accrued ~~transactions.~~liabilities ~~SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings,~~ or ~~describe~~are ~~their~~reflected ~~applicability~~in ~~under~~the ~~changed~~Operating ~~conditions.~~Lease ~~The~~Obligations ~~provisions~~line ~~related to the rescission~~ of ~~SFAS No. 4~~the ~~will be applied in fiscal years beginning after May 15, 2002. The provisions~~ related to SFAS No. 13 will be effective for transactions occurring after May 15, 2002. All other provisions will be effective for financial statements issued on or after May 15, 2002, with early application encouraged. The Company does not believe that SFAS No. 145 will have a material effect on its consolidated 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.

UUS S LIQUIDS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (~~CONTINUED~~Continued) (UNAUDITED)

~~11. OPERATIONS~~Contractual ~~HELD~~Obligation ~~FOR~~table ~~SALE~~set forth in the Liquidity and Capital Resources section of Management’s Discussion and Analysis.

~~During~~SFAS ~~the fourth quarter of 2000, the Company’s Board of Directors approved a plan to sell certain non-core operations in the Commercial Wastewater Division~~No. The types of liquid waste managed at these facilities held for sale included industrial wastewaters, biosolids and grease and grit trap waste. As discussed in Notes 2 and 3 to the financial statements in the Company’s Annual Report on Form ~~10-K for the year ended December 31, 2001, the Company recorded charges to~~150 ~~write down the carrying value of certain assets to fair value, less costs to~~ sell. In determining fair value, the Company considered, among other things, 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 the related amortization. Had the Company not classified any operations as held for sale, depreciation and amortization expenses for the three and nine month periods ended September 30, 2001 would have been greater by $0.4 million and $1.6 million, respectively. 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 senior management’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. The results of operations of these businesses are fully included in revenues and expenses in the condensed consolidated statements of operations.

~~12.~~ ~~COMMITMENTS~~During ~~AND~~May ~~CONTINGENCIES~~2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the adoption of SFAS No. 150 to have a significant impact on its operating results or financial position.

~~Regulatory~~7. ~~Proceedings~~INVENTORIES:

In Inventories ~~October~~are ~~2002,~~stated Uat ~~S Liquids of Detroit, Inc., a subsidiary of~~ the ~~Company, entered~~lower ~~into an agreement with the U.S. Attorney in Detroit resolving the investigation~~ of ~~the~~cost ~~Company’s~~or ~~Detroit~~market ~~facility that was commenced by the Environmental Protection Agency (“EPA”)~~ and ~~the~~at ~~Federal Bureau of Investigation in August 1999. Under the terms of the agreement~~March 31, ~~U S Liquids of Detroit~~ ~~agreed~~2003 ~~to enter a guilty plea to specified violations of the Resource Conservation~~ and ~~Recovery Act of 1976 and the Rivers and Harbors Act. The agreement requires~~December 31, ~~among other things~~2002, ~~that~~consisted ~~the~~of ~~Company~~processed ~~pay~~by-products aof $40.59 million ~~penalty~~ and ~~contribute~~ $1.0.8 million, torespectively, ~~certain~~and ~~community~~unprocessed ~~service organizations. These amounts will be paid over a five~~by-~~year~~products ~~period. In addition, the agreement provides that the United States District Court for the Eastern District~~ of ~~Michigan~~ ~~will~~$0.7 million ~~determine whether~~ and ~~to what extent interest must be paid on the~~ ~~deferred payments. During the fourth quarter of 2001, the Company took a charge of a~~ $5.0.7 million, ~~to establish a reserve for this matter~~respectively. ~~Management believes~~Cost ~~this reserve~~ is ~~sufficient~~determined ~~after~~using ~~considering~~ the ~~net~~first-in, ~~present value of~~first-out ~~the total obligation~~method. ~~An additional charge may be required if interest is~~ ~~imposed by the court on the deferred payments.~~

The EPA notified the Company in 1999 that liquid waste received by its Re-Claim Louisiana facility and stored off-site contained hazardous constituents and, therefore, the waste could not be processed by the facility8. ~~The~~DEPRECIATION ~~Company believed~~AND ~~that~~AMORTIZATION ~~the waste could be handled as nonhazardous waste. A reserve was~~EXPENSES: ~~established for costs to be incurred in the event that this waste had to be~~ delivered to a third party for processing and disposal. As previously reported, the Re-Claim Louisiana facility ceased on-going operations in early 2001. As of September 30, 2002, the Company had a remaining reserve of approximately $0.2 million for the estimated cost to process and dispose of the remaining waste.

~~The~~ Depreciation ~~Company~~and ~~acquired~~amortization ~~Romic~~expenses ~~Environmental~~of ~~Technologies~~continuing ~~Corporation~~operations ~~(“Romic”) in~~are ~~January~~aggregated ~~1999.~~for ~~Prior~~financial toreporting ~~its~~purposes ~~acquisition~~and byexcluded ~~the~~from ~~Company, Romic had entered into~~operating anexpenses ~~administrative consent order with the EPA relating to the cleanup of soil~~ and ~~groundwater contamination at its facility in East Palo Alto~~selling, ~~California.~~general ~~A remedial investigation of the facility was completed by Romic~~ and ~~forwarded~~administrative ~~to the~~expenses ~~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~~condensed ~~and~~consolidated ~~the~~statements ~~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~~operations. ~~Prior~~Had ~~to its acquisition by~~ the ~~Company,~~expenses ~~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 Franciscoallocated, ~~California,~~ the ~~Lorentz Barrel and Drum Superfund Site in San Jose, California~~ ~~and~~expenses ~~the~~would ~~Casmalia~~have ~~Resources~~been ~~Hazardous~~attributed ~~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 ofexpense ~~these~~category ~~drum reconditioning~~as ~~or disposal sites, Romic and a number of other potentially~~follows: ~~responsible parties have entered into administrative consent orders and/or~~ ~~agreements allocating each party’s respective share of the cost of remediating the~~


		Three Months Ended March 31,

		2003		2002

		(In thousands)
		(Unaudited)
Operating expenses		$	2,295	$	2,264
Selling, general and administrative expenses			367		359
Amortization expenses			16		67

	Total depreciation and amortization expenses	$	2,678	$	2,690

9. 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:

UUS S LIQUIDS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (~~CONTINUED~~Continued) (UNAUDITED)

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 September 30, 2002, the balance of this reserve was $2.8 million, of which $0.3 million is classified as short-term and is expected to be paid in the next twelve months. 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.


		Three Months Ended March 31,

		2003		2002

		(In thousands, except share data)
		(Unaudited)
Numerator:
	For basic and diluted earnings per share -
	Net income (loss) available to common stockholders	$	715	$	(88,281	)

Denominator:
	For basic earnings per share -
	Weighted average shares		16,214,758		16,049,537
Effect of Dilutive Securities:
	Stock options and warrants		103,685		697,108

	For diluted earnings per share -
	Weighted average shares and assumed conversions		16,318,443		16,746,645

~~The~~ For ~~operations of~~ the ~~Innovative~~periods ~~Services~~ended ~~Group of the Company’s Commercial Wastewater Division are subject to regulation by the U. S. Bureau of Alcohol~~March 31, ~~Tobacco~~ ~~and~~2003 ~~Firearms (“ATF”). In addition to regulating the production, distribution~~ and ~~sale of alcohol and alcohol containing products~~2002, the ~~ATF~~weighted isaverage ~~also~~diluted ~~responsible~~shares ~~for~~outstanding ~~collecting~~excluded ~~the federal excise taxes (“FET”) that must be paid on distilled spirits~~3,092,299 ~~wine~~ and ~~beer. If alcoholic beverages on which the FET have been paid are returned to bond at the Company’s premises for destruction~~1, ~~the party who has paid the FET on the destroyed product is entitled to a refund. When customers return distilled spirits~~159,119 ~~wine~~stock oroptions 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~~warrants, ~~the ATF conducted inspections at the Company’s Louisville~~respectively, ~~Kentucky~~where ~~and Rancho Cucamonga, California facilities. At~~ the ~~conclusion~~exercise ofprices ~~these~~were ~~inspections,~~less ~~the~~than ~~ATF preliminarily notified~~ the ~~Company~~closing ~~that~~market itprice ~~intended to deny certain refund claims, some~~ of ~~which had already been paid by~~ the ~~ATF to the~~ Company’s ~~customers,~~stock ~~due~~because toincluding 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 the Company’s 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~~shares towould ~~the ATF. Based upon~~have ~~discussions~~had ~~with~~an ~~the~~antidilutive ~~ATF,~~effect ~~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~~income 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 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. Based upon the information available, the Company has continued to maintain a reserve for this matter. As of September(loss) ~~30,~~per ~~2002, the total reserve remaining was $0~~share.~~5 million. Management believes that this~~ ~~reserve is sufficient.~~

~~Litigation~~10. COMMITMENTS AND CONTINGENCIES:

~~During~~Regulatory ~~the third quarter of 1999, six purported securities class action~~Proceedings ~~lawsuits were filed against the Company and certain of its officers and~~ directors in the United States District Court for the Southern District of Texas, Houston Division. These lawsuits have been consolidated into a single action styled In re: U S Liquids Securities Litigation, Case No. H-99-2785, and the plaintiffs have filed a consolidated complaint 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~~the ~~2002~~fourth quarter of 1999, the ~~court~~Environmental ~~determined~~Protection ~~that~~Agency ~~two~~(“EPA”) notified ~~individuals~~the ~~designated~~Company byof certain alleged violations of the Resource Conservation ~~plaintiffs~~and ~~are~~Recovery ~~adequate~~Act ~~class~~of ~~representatives~~1976 ~~for~~by ~~plaintiffs~~the Company’s ~~claim~~former Re-Claim Louisiana facility. Among other things, the EPA alleged that the facility accepted waste from Superfund remediation sites under the Comprehensive Environmental Response, ~~Section 11~~Compensation and Liability Act that it was not permitted to accept and then improperly disposed of such waste. In July 2001, the ~~Securities~~Company ~~Act~~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 ~~August~~May 2002, the Company ~~court~~received ~~entered~~a ansubpoena ~~order~~from the U.S. Attorney’s office in Shreveport, ~~defining~~Louisiana seeking various documents relating to the ~~plaintiff~~Re-Claim ~~class~~Louisiana facility covering the same time frame and relating to the same activities as ~~all~~the ~~persons~~EPA’s allegations ~~who~~described ~~purchased~~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 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 has also been advised by the U.S. Attorney’s office in Fort Worth, Texas that it is considering bringing a civil claim against the Company under the Federal False Claims Act to recover monies paid by the federal government to the Company for processing and disposing of the allegedly unpermitted waste. The Company does not believe that the results of the investigation by the U.S. Attorney’s office in Shreveport or any such civil action by the U.S. Attorney’s office in Fort Worth will

UUS S LIQUIDS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (~~CONTINUED~~Continued) (UNAUDITED)

orhave ~~otherwise~~a ~~acquired~~material ~~Company~~adverse ~~common~~effect ~~stock pursuant or traceable to the Company’s March 1999 stock offering. The lawsuit is currently set for trial~~ on ~~April 14,~~ ~~2003;~~its ~~however~~business, ~~further~~results ~~proceedings and discovery in the lawsuit have been suspended pending the resolution~~ of ~~the~~operations ~~Company’s dispute with its~~or ~~insurance~~financial ~~carrier over whether insurance coverage exists for the claims asserted by the plaintiffs~~condition.

In During ~~addition,~~October ~~one~~and ~~stockholder~~November of1999, the ~~Company~~California ~~has~~Department ~~filed~~of ~~a lawsuit against certain~~Toxic ~~former~~Substances ~~and~~Control ~~current~~(“DTSC”) ~~officers~~inspected ~~and directors of~~ the Company ~~in connection with the operation of the Company~~’s ~~Detroit~~processing facility ~~and~~in ~~the securities class action~~East ~~described~~Palo ~~above. Benn Carmicia v. U S Liquids Inc.~~Alto, ~~et al.~~California, ~~was~~and ~~filed in~~ the ~~United~~ ~~States~~Company’s ~~District~~transfer ~~Court~~facility ~~for~~in ~~the~~Redwood ~~Southern District of Texas~~City, ~~Houston~~ ~~Division,~~California. onOn ~~September~~November 1529, 1999, ~~and was subsequently consolidated with~~ the ~~claims~~ ~~asserted~~DTSC inissued ~~the~~a ~~securities~~summary ~~class action described above. The plaintiff purports to allege derivative claims on behalf~~ of ~~the Company against the~~violations ~~officers~~identifying ~~and~~various ~~directors for~~ alleged ~~breaches~~violations of ~~fiduciary~~California ~~duty~~hazardous ~~resulting~~waste ~~from~~management ~~their~~laws ~~oversight~~and ofregulations by the ~~Company’s affairs~~facilities. The ~~lawsuit~~Company ~~names~~disputed the ~~Company as a~~alleged ~~nominal~~violations. ~~defendant~~Between ~~and~~December ~~seeks~~1999 ~~compensatory~~ and ~~punitive~~December ~~damages~~2002, onthe ~~behalf~~DTSC ~~of the~~conducted ~~Company,~~several ~~interest,~~more ~~equitable~~inspections ~~and/or~~at ~~injunctive~~the ~~relief,~~two ~~costs~~facilities and ~~such~~noted other violations, ~~relief~~which as the ~~court~~Company ~~deems~~also ~~proper~~disputed. ~~The~~In ~~Company~~June ~~believes~~2003, ~~that~~ the ~~stockholder derivative~~Company ~~action~~received ~~was~~notice from ~~not~~the ~~properly~~DTSC ~~brought~~of ~~and~~its ~~has~~intention ~~filed a motion~~ to ~~dismiss this~~commence enforcement action inwith ~~order~~regard to ~~allow the Board of Directors to consider whether such~~ ~~litigation~~these isviolations. inThe ~~the best interest of the~~ Company ~~and~~does ~~its~~not ~~stockholders.~~anticipate Asthat ~~of the date of~~ this ~~report,~~enforcement noaction will ~~ruling~~have ~~has~~a ~~been~~material ~~made~~adverse byeffect ~~the court~~ on ~~the~~its ~~motion~~business, ~~to dismiss.~~results ~~This~~of ~~lawsuit~~operations isor financial ~~currently set for trial in February 2003~~condition.

On The ~~April 21,~~Company ~~1998,~~acquired ~~the~~Romic ~~Company~~Environmental ~~acquired~~Technologies ~~substantially~~Corporation (“Romic”) ~~all~~in ofJanuary 1999. Prior to its acquisition by the ~~assets~~Company, ofRomic had ~~Parallel~~entered ~~Products,~~into aan ~~California~~administrative ~~limited~~consent ~~partnership~~order ~~(“Parallel”).~~with Inthe ~~addition~~ EPA relating to the cleanup ~~consideration~~of ~~paid~~soil and groundwater contamination at ~~closing,~~its ~~the~~facility ~~Company~~in ~~agreed~~East ~~that~~Palo Alto, ifCalifornia. A remedial investigation of the ~~earnings before~~facility ~~interest,~~was ~~taxes,~~completed ~~depreciation~~by Romic and ~~amortization~~forwarded ~~(“EBITDA”)~~to of the ~~businesses~~ ~~acquired~~EPA. ~~from~~The ~~Parallel~~EPA ~~exceeded~~authorized Romic to conduct a ~~specified~~pilot study ~~amount~~utilizing in-situ ~~any~~enhanced ~~four~~bio-remediation to determine whether that ~~consecutive~~method ~~quarters~~would ~~during~~be an effective corrective measure. Preliminary results from the pilot ~~three~~study ~~year~~were ~~period~~encouraging ~~after~~and the ~~closing~~study ofhas been expanded. If the study is ~~acquisition~~determined to be successful, the ~~Company~~EPA ~~would~~may ~~pay~~approve tothis ~~Parallel~~method anor ~~additional~~a ~~$2.1 million in~~combination ~~cash~~of ~~and~~methods anfor ~~additional~~final $2site remediation.~~1 million~~ inPrior ~~the~~to ~~Company’s~~its ~~common~~acquisition ~~stock.~~by ~~During~~ the ~~third~~Company, ~~quarter~~Romic ofhad ~~2000,~~also ~~Parallel~~been ~~filed~~notified ~~suit~~by ~~against~~the EPA and the ~~Company~~California ~~alleging~~Department of Toxic Substances Control that it was a potentially responsible party under ~~the~~applicable ~~acquired~~environmental ~~businesses~~legislation ~~achieved~~with respect to the ~~specified~~Bay ~~EBITDA~~Area ~~amount~~Drum Superfund ~~for~~Site in San Francisco, California, the ~~four~~Lorentz Barrel and Drum ~~quarters~~Superfund ~~ended~~Site ~~December 31~~in San Jose, ~~1999~~California and ~~for~~ the ~~four~~Casmalia ~~quarters~~Resources ~~ended March 31,~~Hazardous ~~2000.~~Waste ~~Parallel~~Management isFacility ~~seeking~~located anear ~~declaratory~~Santa ~~judgment~~Barbara, ~~that~~California, ~~the~~each ~~EBITDA~~of ~~amount~~which ~~specified~~was ina ~~the~~drum ~~acquisition~~reconditioning ~~agreement~~or ~~was~~disposal ~~achieved~~site ~~and~~previously ~~that~~used itby isRomic. ~~entitled~~With respect to ~~receive~~ ~~the~~each ~~contingent~~of ~~cash~~these drum reconditioning or disposal sites, Romic and ~~stock~~a number ~~payments~~of ~~described~~other ~~above.~~potentially ~~Parallel~~responsible ~~also~~parties have entered into ~~alleges~~administrative ~~that~~consent itorders isand/or ~~entitled~~agreements toallocating ~~recover~~each ~~compensatory~~party’s respective ~~damages~~share of ~~$4.2 million, punitive~~the ~~damages,~~cost ~~interest,~~of ~~attorneys~~remediating the sites. Romic’s ~~fees~~share under these consent orders and/or ~~costs~~agreements is as follows: Bay Area — 6.872%, Lorentz — 5.62% and ~~such~~Casmalia ~~other~~Resources ~~relief~~— as0.29%. Remediation is either ~~the~~underway ~~court~~or ~~deems~~substantially ~~proper~~complete at all three sites. ~~The~~Based upon the information currently available, the Company has ~~denied~~continued ~~that~~to itmaintain ~~has~~a reserve ~~any~~to ~~liability~~cover Romic’s estimated costs to remediate the East Palo Alto ~~Parallel~~facility and ~~has~~the ~~filed~~three adrum ~~counterclaim~~reconditioning ~~against~~or ~~Parallel~~disposal ~~alleging~~sites. ~~that~~As ~~Parallel~~of March 31, ~~breached~~2003, ~~certain~~the balance of ~~the~~this ~~representations~~reserve was $2.5 million, of which $0.3 million is classified as short-term and ~~warranties~~is ~~made~~expected to be paid in the ~~acquisition agreement~~next twelve months. The ~~This~~Company ~~lawsuit~~believes that this reserve is ~~currently~~sufficient ~~set~~to ~~for~~satisfy ~~trial~~Romic’s obligations onunder ~~July 14~~the consent orders and agreements; however, ~~2003~~due to the complex, ongoing and evolving process of investigating and remediating these sites, Romic’s actual costs may exceed the amount reserved.

~~During~~ The operations of the ~~third~~Beverage ~~quarter~~Division are subject to regulation by the U. S. Bureau of ~~2002~~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 ~~settled~~premises for destruction, the ~~claims~~party ~~asserted~~who has paid the FET on the ~~against~~destroyed itproduct byis ~~Keith~~entitled ~~Betts~~to a refund. When customers return distilled spirits, ~~Betts~~wine ~~Pump~~or ~~and~~beer ~~Betts~~from ~~Environmental~~commerce to one of the Company’s facilities for destruction, ~~Inc~~the Company generally files a claim with the ATF on behalf of that customer for refund of the FET paid on that product. The ~~cost~~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 ~~settlement~~Company ~~was~~that ~~not~~it ~~material~~intended to deny certain refund claims, some of which had already been paid by the ~~operating~~ATF ~~results~~to the Company’s customers, due to what the ATF alleged 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

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 may not be 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 Company’s 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. As of September 30, 2002, the balance of this reserve was $3.5 million. Certain of these claims have been resolved and the Company has 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 considering the known payments at this time, management believes that the reserve is sufficient to satisfy the Company’s obligations with respect to all such 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.

UUS S LIQUIDS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (~~CONTINUED~~Continued) (UNAUDITED)

InCompany ~~February 1998~~that, ~~the~~in ~~Company~~order ~~entered~~to ~~into~~recoup anrefund ~~employment~~claims ~~agreement~~previously ~~with~~paid to its ~~former~~customers, ~~chief~~the ~~financial~~ATF ~~officer,~~was ~~Earl~~assessing Jtaxes of $1.175 million ~~Blackwell~~against the facilities. ~~The~~During ~~employment~~the ~~agreement provided,~~fourth ~~among~~quarter ~~other~~of ~~things~~2001, ~~that~~the ~~(i) if~~Company ~~the~~offered ~~agreement~~to ~~was~~pay $450,000 ~~terminated~~to bythe ~~Mr. Blackwell~~ATF ~~without~~to ~~cause,~~resolve ~~Mr. Blackwell~~all ~~would~~of ~~not~~the beATF’s ~~entitled~~claims toagainst ~~receive~~the ~~any~~facilities ~~further~~and ~~compensation~~delivered ora ~~benefits~~check ~~under~~for such amount to the ~~agreement,~~ATF. ~~and~~The ~~(ii) if~~ATF ~~the~~recently ~~agreement~~accepted ~~was~~the ~~terminated~~Company’s byoffer ~~Mr. Blackwell~~and ~~with~~the ~~cause,~~settlement ~~Mr. Blackwell~~has ~~would~~become befinal. ~~entitled~~The ~~to continue~~assessment paid to ~~receive~~the ~~his~~ATF ~~annual~~does ~~salary~~not ofaddress approximately $~~220~~525,000 ~~and~~of ~~employee~~refund ~~benefits~~claims ~~for~~that ~~the~~were ~~remainder~~submitted ofon ~~the~~behalf ~~term~~ of the ~~agreement.~~Company’s Oncustomers ~~July 31,~~that ~~2002,~~either ~~Mr. Blackwell~~have already been ~~terminated~~denied ~~his~~or ~~employment~~are ~~with~~likely ~~the~~to ~~Company~~be ~~alleging~~denied ~~that~~as a result of the ~~Company~~alleged ~~breached~~ defects in the documentation. ~~terms~~The ofCompany ~~his~~has ~~employment~~been ~~agreement~~engaged byin ~~usurping~~discussions ~~his~~with ~~duties~~the ~~and~~affected ~~responsibilities~~customers asconcerning ~~chief~~the ~~financial~~refund ~~officer~~claims ofin ~~the~~question ~~Company.~~and Onsettlements ~~October 2,~~have been ~~2002,~~reached ~~Mr. Blackwell~~with ~~initiated~~all anof ~~arbitration~~those ~~proceeding~~customers ~~against~~whose claims the Company has identified. ~~seeking~~The Company continues to ~~recover~~maintain ~~approximately~~a ~~$1.1 million~~reserve infor ~~damages,~~this ~~interest,~~matter ~~attorneys’~~to cover any ~~fees~~potential ~~and~~claims ~~costs.~~that ~~The~~have ~~Company~~not ~~denies~~been ~~that~~previously itidentified. ~~has~~As ~~any~~of ~~liability~~March 31, 2003, tothe Mrtotal reserve remaining was $0.3 ~~Blackwell~~million.

On ~~September~~April 929, ~~2002~~2003, ~~Allan Rosen, a former employee of~~ the Company, ~~filed~~announced ~~suit in~~that, ~~the~~due ~~Superior~~to ~~Court~~improper recording of ~~Los~~job ~~Angeles~~costs ~~County,~~and ~~California~~certain ~~against~~other ~~the~~items ~~Company~~at ~~and certain~~one of its ~~current~~business ~~and former officers. Mr. Rosen alleges~~units, ~~among other things, that~~ the Company ~~breached various oral agreements relating to the~~ ~~compensation~~would torestate beits ~~paid~~results toof ~~Mr. Rosen~~operations for ~~his~~the ~~services~~years (and ~~that~~quarters ~~he was~~within) ~~wrongfully~~ended ~~terminated in October 2001 because~~December 31, ~~among other things~~2002, he2001 ~~complained about the operational~~ and ~~accounting~~2000. ~~systems~~In ofconnection ~~certain~~with ~~subsidiaries~~this of announcement, the Company ~~and~~contacted ~~because he refused to certify, for~~ the ~~Company's~~SEC ~~internal~~which ~~purposes,~~has ~~various~~initiated ~~financial~~an ~~information~~informal ~~and~~investigation ~~reports relating to the operations~~ of ~~such subsidiaries. Mr.~~ ~~Rosen~~the isissues ~~seeking~~leading ~~unspecified~~to ~~compensatory~~the ~~and punitive damages, interest, attorneys’ fees and costs~~restatement. ~~Mr. Rosen~~The isCompany ~~also~~intends ~~seeking~~to acooperate ~~declaratory judgment~~fully ~~that~~with athe ~~noncompete~~SEC ~~provision contained~~ in ~~his~~this ~~employment agreement is not enforceable~~investigation. ~~The~~Refer ~~Company~~to ~~denies~~Note ~~that~~12 itfor ~~has~~amounts ~~any~~relating ~~liability~~ to the Mrrestatement. ~~Rosen.~~

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. As discussed below, further proceedings and discovery in the lawsuit have been suspended pending the resolution of the Company’s litigation with its insurance carrier over whether insurance coverage exists for the claims asserted by the plaintiffs.

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

US LIQUIDS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

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 litigation with its insurance carrier.

After the filing of the securities class action lawsuits and the shareholder derivative action described above, the Company made demand on its insurance carrier, National Union Fire Insurance Company of Pittsburgh, PA, to defend the Company and its named representatives. National Union declined to defend the Company and its named representatives and filed a declaratory action in the United States District Court for the Southern District of Texas, Houston Division to determine its legal rights under the Company’s insurance policy. The Company and National Union subsequently filed motions for summary judgment to determine whether coverage is available under the insurance policy. During the second quarter of 2003, the court granted National Union’s motion for summary judgment that it is not obligated to defend or indemnify the Company or its named representatives in the consolidated action. The Company intends to appeal the court’s ruling. Proceedings in the consolidated action will continue to be suspended pending the outcome of the Company’s appeal.

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 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. The trial in this case, which was originally set for July 14, 2003, has been rescheduled for October 20, 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 $0.3 million during the quarter ended March 31, 2003. The Company has committed to making additional payments of $0.7 million during 2003

US LIQUIDS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

and $0.7 million in 2004. After reviewing the remaining known claims, the reserve was adjusted to $3.2 million during the quarter ended March 31, 2003 (see Note 4). The Company believes that the reserve is sufficient to satisfy its obligation with respect to all known 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 an arbitration proceeding against the Company seeking to recover approximately $1.1 million in damages, interest, attorneys’ fees and costs. The Company has denied that it has any liability to Mr. Blackwell. The arbitration hearing took place on May 7 and 8, 2003. The outcome of the arbitration has not yet been determined.

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 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 is 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.

13. 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 accounting policies of the segments are the same as those for the Company described in the summary of significant accounting policies set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the SEC. The following is a summary of key business segment information:

U S LIQUIDS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)

			Three Months Ended						Nine Months Ended
			September 30,						September 30,
			2001			2002			2001			2002
			(In thousands)
			(Unaudited)
Revenue —
	Commercial Wastewater		$	34,408		$	29,095		$	109,605		$	83,375
	Industrial Wastewater			16,805			15,177			48,370			45,317
	Oilfield Waste			7,225			4,096			20,571			15,260
		Total	$	58,438		$	48,368		$	178,546		$	143,952
Income (loss) before income taxes —
	Commercial Wastewater		$	1,292		$	(27,038	)	$	6,131		$	(25,265	)
	Industrial Wastewater			5,086			(17,026	)		12,982			(14,914	)
	Oilfield Waste			4,228			1,513			11,695			8,412
	Corporate			(4,353	)		(7,815	)		(14,020	)		(15,925	)
		Total	$	6,253		$	(50,366	)	$	16,788		$	(47,692	)
Depreciation and amortization expense —
	Commercial Wastewater		$	2,321		$	1,844		$	7,014		$	6,072
	Industrial Wastewater			1,198			728			3,538			2,182
	Oilfield Waste			732			602			1,901			1,800
	Corporate			212			333			638			986
		Total	$	4,463		$	3,507		$	13,091		$	11,040
Capital expenditures —
	Commercial Wastewater		$	878		$	1,121		$	2,104		$	2,504
	Industrial Wastewater			508			358			905			811
	Oilfield Waste			22			30			826			1,119
	Corporate			354			44			950			554
		Total	$	1,762		$	1,553		$	4,785		$	4,988

			December 31,		September 30,
			2001		2002
			(In thousands)
					(Unaudited)
Identifiable assets —
	Commercial Wastewater		$	170,336	$	80,671
	Industrial Wastewater			113,023		49,511
	Oilfield Waste			36,999		36,270
	Corporate			518		8,993
		Total	$	320,876	$	175,445

In addition to the regular operations discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, below, the following items should be noted in comparing the segment data set forth above:

• Receipt in April 2001 of $7.5 million in connection with the Company’s settlement agreement with National Steel. This receipt was recorded as income to the Industrial Wastewater Division. See Note 4.

U S LIQUIDS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)

• Receipt in August 2001 of $3.75 million in connection with the Company’s settlement of a claim under its property damage policy. This receipt was recorded as income to the Industrial Wastewater Division. See Note 4.

• During the second and third quarters of 2001, the Company recorded $0.8 million and $0.7 million, respectively, for additional losses related to sales of several operations in the Northeast. These expenses were recorded to the Commercial Wastewater Division. See Note 4. • During the second and third quarters of 2002, the Company recorded $0.7 million and $0.3 million, respectively, to cover costs to process waste at the Company’s Re-Claim Houston facility. These expenses were recorded to the Commercial Wastewater Division. See Note 4. • Receipt in September 2002 of $2.15 million in connection with the Company’s settlement of an additional insurance claim. This receipt was recorded as income to the Industrial Wastewater Division. See Note 4. • During the third quarter of 2002, the Company recorded $1.1 million for severance as a result of the departure of its CEO. This was recorded as a corporate expense. • During the third quarter of 2002, the Company recorded approximately $51.0 million for additional goodwill impairment as an operating expense. See Note 5 for a breakout between segments. • Assets decreased significantly as a result of SFAS No. 142. See Note 5 for a breakout between segments.

14. SUBSEQUENT EVENTS

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 trap waste, commercial wastewater treatment and field services in Houston, Dallas and San Antonio, Texas. Gross proceeds from the sale, which are subject to certain post-closing adjustments, amounted to $15 million, of which $13.25 million was received at closing. $9.0 million of the proceeds were used to reduce the amount outstanding under the Company’s credit facility, $1.75 million was retained for immediate working capital needs of the sold businesses and $2.5 million was used to complete the Trinity acquisition described below.

Effective November 15, 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. The Louisiana transfer stations are located in Cameron, Fourchon, Berwick/Morgan City and Intracoastal City. The Texas facilities are located in Galveston and Corpus Christi. Two of these facilities are located on the Intracoastal Waterway, with easy access to the Company’s oilfield waste processing and disposal facilities.

US LIQUIDS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

11. SEGMENT INFORMATION:

As of January 1, 2003, the Company’s reporting was re-organized into four divisions — the Commercial Wastewater Division, the Industrial Wastewater Division, the Oilfield Waste Division and the Beverage Division. See Note 1 for a description of the operations of each division. The Company’s corporate division consists primarily of overhead, such as salaries, benefits, professional fees and interest expense. The results of the Beverage Division were previously included in the results of the Commercial Wastewater Division. Prior year information has been reclassified to conform to the current year presentation. The following is a summary of key business segment information:


			Three Months Ended March 31,

			2003			2002

			(In thousands)
			(Unaudited)
Revenues-
	Oilfield Waste		$	5,697		$	5,410
	Commercial Wastewater			10,981			11,586
	Industrial Wastewater			14,751			13,889
	Beverage			5,401			5,026

		Total	$	36,830		$	35,911

Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle -
	Oilfield Waste		$	1,588		$	2,966
	Commercial Wastewater			109			773
	Industrial Wastewater			1,231			7
	Beverage			458			545
	Corporate			(5,264	)		(3,661	)

		Total	$	(1,878	)	$	630

Depreciation and amortization expense-
	Oilfield Waste		$	601		$	558
	Commercial Wastewater			716			817
	Industrial Wastewater			772			729
	Beverage			254			270
	Corporate			335			316

		Total	$	2,678		$	2,690

Capital Expenditures-
	Oilfield Waste		$	177		$	410
	Commercial Wastewater			125			651
	Industrial Wastewater			36			127
	Beverage			80			—
	Corporate			9			308

		Total	$	427		$	1,496

US LIQUIDS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)


			March 31, 2003		December 31, 2002

			(In thousands)
			(Unaudited)
Identifiable Assets-
	Oilfield Waste		$	39,249	$	39,415
	Commercial Wastewater			37,369		42,685
	Industrial Wastewater			48,175		48,347
	Beverage			15,321		16,347
	Corporate			5,642		6,217

		Total	$	145,756	$	153,011

12. RESTATEMENT OF FINANCIAL STATEMENTS:

On April 29, 2003, the Company announced that, due to improper recording of job costs and certain other items at one of its business units, the Company would restate its results of operations for the years ended December 31, 2002, 2001 and 2000. Refer to Note 23 in the Company’s Form 10-K/A for a detail of the restatement for the respective years. See table below for a detail of the restatement for the quarter ended March 31, 2002:


	For the Quarter Ended March 31, 2002

	As Previously
	Reported			As Restated

	(In thousands)
	(Unaudited)
Revenues	$	35,851		$	35,911
Operating expenses		25,110			25,176

Operating margin		10,741			10,735
Depreciation and amortization		2,690			2,690
Selling, general and administrative expenses		5,915			5,915

Income from operations		2,136			2,130
Interest expense		1,662			1,662
Other income, net		(62	)		(162	)

Income from continuing operations before cumulative effect of change in accounting principle and income taxes		536			630
Provision for income taxes		31			64

Income from continuing operations	$	505		$	566

Basic earnings per share	$	0.03		$	0.03

Diluted earnings per share	$	0.03		$	0.03

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.

~~OVERVIEW~~ As discussed in Note 12 to the unaudited condensed consolidated financial statements, the Company’s financial statements for the quarter ended March 31, 2002 have been restated. The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to that restatement.

~~Our subsidiaries are organized into three divisions — the Commercial Wastewater~~Overview ~~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~~ As ~~Commercial~~of ~~Wastewater Division generated $29.1~~January ~~million~~1, ~~or 60.1%~~2003, of our ~~revenues~~ ~~for~~reporting ~~the~~was ~~quarter~~re-organized ~~ended~~into ~~September 30,~~four ~~2002. This Division derives~~divisions ~~revenues~~- ~~from~~the ~~two~~Commercial ~~principal~~Wastewater ~~sources:~~Division, ~~fees~~the ~~received~~Industrial ~~for~~Wastewater ~~collecting~~Division, ~~processing~~the ~~and~~Oilfield ~~disposing~~Waste ofDivision ~~nonhazardous~~and ~~liquid~~the ~~waste~~Beverage ~~(such~~Division. asThe ~~industrial~~Commercial ~~wastewater,~~Wastewater ~~grease~~Division ~~and~~provides ~~grit~~a ~~trap~~variety ~~waste,~~of ~~bulk~~environmental ~~liquids~~services and ~~dated~~collects, ~~beverages)~~ processes and ~~revenue obtained~~disposes ~~from~~of ~~the~~various ~~sale~~types of ~~by-products,~~nonhazardous ~~including~~liquid ~~fats,~~waste. ~~oils,~~The ~~feed~~Industrial Wastewater ~~proteins~~Division collects, ~~industrial~~ processes and ~~fuel~~disposes ~~grade~~of ~~ethanol,~~hazardous ~~solvents,~~and nonhazardous ~~aluminum,~~liquid ~~glass,~~waste ~~plastic~~ and ~~cardboard,~~ ~~recovered~~recovers saleable by-products from certain waste streams. ~~Historically,~~The ~~some~~Oilfield ofWaste ~~our by-product~~Division ~~sales~~processes ~~have~~and ~~involved~~disposes ~~the~~of ~~brokering~~waste ofgenerated in ~~industrial~~oil and ~~fuel~~gas ~~grade ethanol~~exploration ~~produced~~and ~~by third parties~~production. ~~However,~~The ~~because~~Beverage ~~these~~Division ~~brokerage activities~~collects, ~~were~~processes aand ~~very~~disposes ~~low~~of ~~margin~~dated ~~producer,~~beverages ~~beginning~~and inother ~~January~~consumer ~~2001, we began curtailing~~products ~~these~~containing ~~brokerage~~alcohol ~~activities~~or sugar and byalso ~~December 31,~~generates ~~2001~~revenue wefrom ~~had~~the ~~essentially~~sale ~~exited~~of ~~the~~by-products. ~~ethanol~~The ~~brokerage~~Beverage ~~business.~~Division ~~Collection~~was ~~and~~previously ~~processing~~included ~~fees~~in ~~charged~~the toCommercial ~~customers~~Wastewater ~~vary~~Division. ~~per~~Prior ~~gallon~~year byinformation ~~waste~~has ~~stream~~been ~~according~~reclassified to ~~the constituents of the~~conform ~~waste,~~to ~~expenses associated with processing~~ the ~~waste~~current ~~and~~year ~~competitive factors~~presentation. ~~By-products are commodities and their prices fluctuate based on market~~ ~~conditions.~~

On November 6, 2002, we completed the sale of substantially all of our 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~~ treatment and field services in Houston, Dallas and San Antonio, Texas. ~~Gross proceeds~~During ~~from~~ the ~~sale~~fourth quarter of 2002, ~~which~~the ~~are~~Company ~~subject~~decided to divest of or suspend certain operations ~~post~~at several non-~~closing~~core ~~adjustments,~~and ~~amounted to~~underperforming ~~$15 million,~~businesses ofin ~~which~~the ~~$13~~Commercial Wastewater Division.~~25 million~~ ~~was~~Some ~~received~~operations atwere divested of or suspended during the ~~closing.~~fourth ~~$9.0 million~~quarter of 2002 and the ~~proceeds~~remaining ~~were~~operations ~~used~~are expected to ~~reduce~~be ~~the~~divested ~~amount~~prior ~~outstanding~~to ~~under~~December 31, ~~our~~2003. ~~credit~~During ~~facility~~the first quarter of 2003, $1the remaining portions of our Northeast operations were sold.~~75 million~~ ~~was~~Under Statement of Financial ~~retained~~Accounting ~~for~~Standards ~~immediate~~(“SFAS”) ~~working~~No. ~~capital~~144, ~~needs~~the ~~related~~assets, toliabilities and operating results of the businesses sold and the divested/suspended operations have been ~~businesses~~restated and ~~$2.5 million~~presented ~~was~~separately ~~used~~as todiscontinued ~~complete~~operations ~~the~~in ~~Trinity~~both the ~~acquisition~~consolidated ~~described~~balance ~~below~~sheet and statement of operations for all periods presented.

The ~~Industrial~~Commercial Wastewater Division generated $1511.20 million, or 3129.48%, of ~~our~~ our revenues from continuing operations for the quarter ended ~~September~~March 3031, ~~2002~~2003. This Division derives revenues from fees ~~charged~~received ~~to customers~~ for collecting, processing ~~and~~ and disposing of ~~hazardous and~~ nonhazardous liquid waste ~~such as household hazardous wastes, plating solutions, acids, flammable~~ and ~~reactive~~providing ~~wastes,~~other ~~and~~environmental ~~industrial wastewater~~services. 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~~customers ~~liquid waste~~ vary ~~per gallon by waste stream~~ according to the constituents of the waste, expenses associated with processing the waste ~~and~~ and competitive factors.

The ~~Oilfield~~Industrial ~~Waste~~Wastewater Division generated $414.17 million, or 840.50%, of our revenues from continuing operations for the quarter ended ~~September~~March 3031, ~~2002~~2003. This Division derives revenues from fees charged to customers for collecting, processing and disposing of ~~oil~~hazardous and ~~gas exploration~~nonhazardous ~~and~~liquid ~~production~~ waste such as household hazardous wastes, ~~and~~plating ~~cleaning~~solutions, ~~tanks~~acids, ~~barges~~flammable and ~~other vessels~~reactive wastes, and ~~containers~~industrial ~~used~~wastewater. inCertain ~~the~~sludges ~~storage~~ and ~~transportation~~solid ofhazardous ~~oilfield~~wastes are ~~waste~~also processed. ~~In order~~The toIndustrial ~~match~~Wastewater ~~revenues~~Division ~~with~~also ~~their~~generates ~~related~~revenues from ~~costs,~~the ~~when~~sale ~~waste~~of isby-products ~~unloaded~~recovered atfrom ~~one of~~certain ~~our~~waste ~~sites~~streams, weincluding industrial ~~recognize~~chemicals ~~the~~and ~~related~~recycled ~~revenue~~antifreeze ~~and~~products. ~~record~~The afees ~~reserve~~charged for ~~the~~ ~~estimated~~processing ~~amount~~and disposing of ~~expenses~~hazardous towaste bevary ~~incurred~~significantly todepending ~~process~~upon the ~~and~~constituents ~~dispose~~ of the waste. AsCollection and processing ~~occurs,~~fees ~~generally~~charged ~~over~~with respect ~~nine~~ to ~~twelve~~nonhazardous ~~months,~~liquid ~~the~~waste ~~reserve is~~vary ~~depleted~~according asto ~~expenses~~the ~~are~~constituents ~~incurred.~~of ~~Our operating margins in~~ the ~~Oilfield~~ ~~Waste~~waste, ~~Division~~expenses ~~are~~associated ~~typically~~with ~~higher~~processing ~~than in~~ the ~~Commercial~~waste ~~Wastewater Division~~ and incompetitive ~~the Industrial Wastewater Division~~factors.

~~Since~~ The ~~the organization of the Company, Newpark Resources, Inc. has been the largest customer of the~~ Oilfield Waste Division. Asgenerated ~~previously reported~~$5.7 million, ~~Newpark~~ ~~elected~~or ~~not~~15.5%, ~~to exercise its option to extend the term~~ of ~~its disposal~~our ~~agreement~~revenues ~~with~~from ~~the~~continuing ~~Company~~operations ~~and,~~for ~~therefore,~~ the ~~disposal~~quarter ~~agreement~~ended ~~terminated on July~~March 131, ~~2002~~2003. AsThis Division ~~part~~derives ofrevenues ~~the~~from ~~termination~~fees ofcharged ~~this disposal agreement, our agreement not~~ to ~~compete~~customers ~~with~~for ~~Newpark~~processing ~~in the Gulf Coast~~ and ~~inland waters~~ ~~markets~~disposing ~~was also terminated. Although certain~~ of ~~our~~oil ~~landfarms~~and ~~hold~~gas ~~the permits~~exploration ~~necessary~~and toproduction ~~accept oilfield~~ waste, ~~generated offshore~~ and~~/or~~ incleaning ~~inland~~tanks, ~~waters~~barges ofand ~~the~~other ~~Gulf~~vessels ~~Coast region, in order to more effectively~~and

19 17

~~compete~~containers ~~with Newpark~~used ~~and~~in ~~other~~the ~~industry~~storage ~~participants~~and ~~for~~transportation ~~such~~of oilfield waste,. ~~on November 15,~~In ~~2002,~~order weto ~~purchased~~match ~~from~~revenues ~~Trinity~~with ~~Storage~~their ~~Services~~related costs, ~~L.P.~~when ~~(“Trinity”) six oilfield~~ waste ~~transfer~~is ~~stations~~unloaded ~~located~~at ~~along the~~one ~~Gulf Coast~~ of our ~~Louisiana~~sites, ~~and~~we ~~Texas~~recognize ~~for~~the ~~approximately $3.0 million~~related inrevenue ~~cash~~ and ~~warrants~~record toa ~~purchase~~reserve ~~100,000~~for ~~shares of~~ the estimated ~~Company’s~~expenses ~~common~~to ~~stock.~~be ~~These~~incurred ~~transfer stations, which are expected~~ to ~~generate~~process ~~annual~~and ~~revenues~~dispose of ~~approximately~~the $9waste.~~7 million,~~ ~~will~~As ~~provide~~processing ~~collection~~occurs, ~~points~~generally ~~for~~over ~~the~~nine ~~receipt~~to oftwelve ~~offshore~~months, ~~oilfield~~the ~~waste~~reserve ~~from all~~is ofdepleted ~~the~~as ~~major~~expenses ~~Gulf~~are ~~Coast markets~~incurred.

The Beverage Division generated $5.4 million, or 14.7%, of our revenues from continuing operations for the quarter ended March 31, 2003. This Division derives revenues from the collection, processing and disposal of dated beverages and other consumer products containing alcohol or sugar and from the sale of by-products, such as ethanol, solvents, plastics, cardboard, aluminum and glass. Collection and processing fees charged to customers vary per gallon depending on the sugar and alcohol content of the product, the type of packaging, expenses associated with processing the product and competitive factors. By-products are commodities and their prices fluctuate based on market conditions.

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 on 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~~Critical ~~ACCOUNTING~~Accounting ~~POLICIES~~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 ~~location~~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~~ are incurred within the same accounting period as when the associated revenue is 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.

Since revenue has been recognized at the time ofthe ~~waste~~service ~~acceptance~~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. ~~Our~~The ~~closure~~reserves ~~and~~required ~~remediation~~could ~~reserves~~be ~~have~~affected ~~remained~~by ~~fairly~~changes ~~constant~~in asregulations, ~~the~~project ~~methodology has~~progress, ~~been~~technology ~~consistent~~changes or improvements, ~~and~~identification ~~there~~of ~~has~~changed contamination ~~been~~levels, nosettlement ~~significant~~of ~~change~~liability inclaims ~~assumptions~~ or other ~~than~~factors. ~~changes~~The reserves inare ~~estimates~~then ~~due~~adjusted tobased ~~annual~~on ~~changes~~management’s inupdated ~~inflation~~knowledge ~~indices,~~of anthe ~~update~~applicable initems ~~cost~~above. ~~estimates~~We ~~associated~~review ~~with~~the ~~closure,~~status orof athe ~~change~~reserves infor ~~regulations~~each facility and monitor all activity.

Effective January 1, 2003, we adopted SFAS No. 143, “Accounting for Asset 18Retirement Obligations,” which 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 is 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. In the first quarter of each year, the fair value of the liability for the asset retirement obligation will be analyzed and reviewed for reasonableness based on the estimated lives of the respective facility, risk-free interest rate and inflation factors.

Goodwill Impairment. In accordance with ~~Statement of Financial Accounting Standards (“~~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. OnAbsent ~~an ongoing basis (absent~~ any impairment indicators), we ~~expect to~~ perform our impairment ~~tests~~test during the first fiscal quarter of each year.

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. ~~Management~~Estimated ~~regularly~~losses ~~reviews outstanding~~on accounts receivable, ~~and~~are ~~provides~~provided ~~for estimated losses~~ 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.

~~Deferred~~ Income Taxes. ~~Deferred~~We ~~income~~recognize deferred tax assets and liabilities ~~are recognized~~ for ~~differences between the book basis and the tax basis of the net~~ ~~assets~~expected offuture ~~the Company. In providing for deferred income taxes, management considers current~~ tax ~~regulations,~~consequences ~~estimates~~ of ~~future~~events ~~taxable~~that ~~income~~have ~~and available~~been ~~tax~~recognized ~~planning~~in ~~strategies. In certain cases, management has~~the ~~established~~financial ~~reserves~~statements toor ~~reduce deferred income~~ tax ~~assets to estimated realizable value~~returns. IfDeferred tax ~~regulations, operating results or the ability to implement tax planning strategies vary, adjustments to the carrying value of deferred income tax~~ assets and liabilities ~~may be required.~~are

Insurance. We maintain insurance coverage for various aspects of our business and operations. We retain a portion of losses that occur through the use of deductibles and retentions under self-insurance programs. Management regularly reviews estimates of reported and unreported claims and provides for losses through insurance reserves. As claims develop and additional information becomes available, adjustments to loss reserves may be required.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets.” The statements eliminate the pooling-of-interests method of accounting for business combinations and require that goodwill and certain intangible assets not be amortized. Instead, these assets will be reviewed for impairment annually and when there is reason to suspect that their value has been diminished or impaired. Any related losses will be recognized in earnings when incurred. The statements were effective for the Company as of January 1, 2002 for existing goodwill and intangible assets and will be effective for any business combinations completed after June 30, 2001. In connection with the adoption of SFAS No. 142 on January 1, 2002, we recorded an impairment of $91.0 million. On September 30, 2002, we recorded an additional impairment of $51.0 million.

In June 2001, the 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 will be effective for the Company as of January 1, 2003. We are considering the provisions of SFAS No. 143 and at present have not determined the impact of adopting SFAS No. 143.

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. Adoption of this statement did not have a material impact on our consolidated financial statements.

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 related to the rescission of SFAS No. 4 will be applied in fiscal years beginning after May 15, 2002. The provisions related to SFAS No. 13 will be effective for transactions occurring after May 15, 2002. All other provisions will be effective for financial statements issued on or after May 15, 2002, with early application encouraged. We do not believe that SFAS No. 145 will have a material effect on our consolidated 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 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. We will apply the effects of this statement on a prospective basis.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002

REVENUES. Revenues for the quarter ended September 30, 2002 decreased $10.1 million, or 17.2%, from $58.4 million for the quarter ended September 30, 2001 to $48.4 million for the quarter ended September 30, 2002.

The Commercial Wastewater Division contributed $34.4 million, or 58.9%, of third quarter 2001 revenues and $29.1 million, or 60.1%, of third quarter 2002 revenues. The Commercial Wastewater Division’s revenues decreased $5.3 million, or 15.4%. Collection and processing fees generated $28.7 million, or 83.4%, and $24.6 million, or 84.5%, of the Commercial Wastewater Division’s revenues for the third quarters of 2001 and 2002, respectively. Third quarter 2001 revenues benefited from a large beverage product recall project which generated revenues of approximately $1.1 million. The decrease in revenues quarter versus quarter was primarily attributable to the product recall revenue in 2001 and the sales of certain operations in the Northeast during the third quarter of 2001 that generated revenues of approximately $1.3 million. The remainder of the decrease was due to a decline in business due to general economic and industry conditions. By-product sales generated the remaining $5.7 million, or 16.6%, and $4.5 million, or 15.5%, of the Commercial Wastewater Division’s revenues for the third quarters of 2001 and 2002, respectively.

The Industrial Wastewater Division contributed $16.8 million, or 28.7%, of third quarter 2001 revenues and $15.2 million, or 31.4%, of third quarter 2002 revenues. The Industrial Wastewater Division’s revenues decreased $1.6 million, or 9.7%, primarily due to the impact of the slowdown in the technology sector on our West Coast facility. Collection and processing fees generated $15.3 million, or 91.1%, and $13.7 million, or 90.1%, of the Industrial Wastewater Division’s revenues for the third quarters of 2001 and 2002, respectively. By-product sales generated the remaining $1.5 million, or 8.9%, and $1.5 million, or 9.9%, of the Industrial Wastewater Division’s revenues for the third quarters of 2001 and 2002, respectively.

The Oilfield Waste Division contributed $7.2 million, or 12.4%, of third quarter 2001 revenues and $4.1 million, or 8.5%, of third quarter 2002 revenues. The Oilfield Waste Division’s revenues decreased approximately $3.1 million, or 43.3%, due primarily to the non-renewal of our contract with Newpark Resources effective July 1, 2002, combined with a reduction in the rig count in 2002 compared to 2001. The Newpark Resources contract generated approximately $2.2 million in revenues in the prior year quarter.

OPERATING EXPENSES. Operating expenses decreased $4.8 million, or 11.4%, from $41.7 million for the quarter ended September 30, 2001 to $36.9 million for the quarter ended September 30, 2002. As a percentage of revenues, operating expenses increased from 71.3% in the third quarter of 2001 to 76.3% in the third quarter of 2002. This increase was primarily due to the fact that the percentage reduction in our expenses was not as much as the percentage reduction in revenues, primarily because of the fixed costs associated with certain of our facilities. Overall, our margins were negatively affected by the decline in business due to general economic and industry conditions. However, the increases were offset by the favorable impact of a reduction in liability insurance premiums resulting from reduced claims experience.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses decreased approximately $1.0 million, or 21.4%, from $4.5 million for the quarter ended September 30, 2001 to $3.5 million for the quarter ended September 30, 2002. This decrease was primarily attributable to the discontinued amortization of goodwill in accordance with SFAS No. 142. Goodwill amortization in the prior year quarter amounted to approximately $1.1 million. This decrease was partially offset by the resumed recognition of depreciation expense on those operations previously classified as held for sale that are now incorporated into our core business, which amounted to approximately $0.2 million. As a percentage of revenues, depreciation and amortization expenses decreased from 7.6% in the third quarter of 2001 to 7.3% in the third quarter of 2002.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were approximately $6.9 million for both the quarter ended September 30, 2001 and the quarter ended September 30, 2002. Travel and entertainment expenses decreased approximately $0.2 million, bad debt expenses decreased approximately $0.2 million, office expenses decreased approximately $0.3 million and we recorded a credit to expense of approximately $0.4 million in our Oilfield Waste Division as a result of a one-time reimbursement from Waste Management. The amount of selling, general and administrative expenses for the current quarter remained constant compared to the prior year quarter, however, as a result of severance expenses of approximately $1.1 million incurred in the third quarter of 2002 in connection with the resignation of our former Chief Executive Officer. As a percentage of revenues, selling, general and administrative expenses increased from 11.8% in the third quarter of 2001 to 14.2% for the third quarter of 2002 as a result of decreased revenues. Excluding the severance expense, selling, general and administrative expenses would have been approximately $5.8 million in the third quarter of 2002, or 12.0% of revenues.

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, on September 30, 2002, we recorded a charge of $51.0 million.

SPECIAL INCOME, net. Special income, net was $2.9 million for the quarter ended September 30, 2001 compared to $1.8 million for the quarter ended September 30, 2002. The 2001 items consisted of (a) $3.75 million received from a claim filed under a property damage policy as a result of the closure of our Detroit facility in August 1999 and (b) additional losses of $0.8 million recorded as a result of the sales of certain operations in the Northeast. The 2002 items consisted of (a) $2.15 million received from another claim filed in connection with the closure of our Detroit facility in August 1999 and (b) an additional accrual of approximately $0.3 million to cover costs to process waste located at our Re-Claim Houston facility.

INTEREST AND OTHER EXPENSES. Net interest and other expenses increased approximately $93,000, or 4.3%, from $2.2 million for the quarter ended September 30, 2001 to $2.2 million for the quarter ended September 30, 2002. This increase resulted primarily from higher interest rates offset by reduced borrowings under our revolving credit facility.

INCOME TAXES. Income taxes decreased $6.7 million from a provision of $2.8 million for the quarter ended September 30, 2001 to a benefit of $3.9 million for the quarter ended September 30, 2002 as a result of decreased income and the release of valuation allowance on net operating losses due to tax law changes, resulting in the recognition of a benefit from a carryback claim filed by the Company. The effective income tax rate for the period ended September 30, 2001 was 45.0% compared to 7.7% for the period ended September 30, 2002. Our effective income tax rates are estimates of our expected annual effective federal and state income tax rates.

NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002

REVENUES. Revenues for the nine-month period ended September 30, 2002 decreased $34.6 million, or 19.4%, from $178.5 million for the nine-month period ended September 30, 2001 to $144.0 million for the nine-month period ended September 30, 2002.

The Commercial Wastewater Division contributed $109.6 million, or 61.4%, of revenues for the nine months ended September 30, 2001 and $83.4 million, or 57.9%, of revenues for the nine months ended September 30, 2002. The Commercial Wastewater Division’s revenues decreased $26.2 million, or 23.9%. Collection and processing fees generated $88.7 million, or 80.9%, and $70.4 million, or 84.4%, of the Commercial Wastewater Division’s revenues for the nine-month periods ended September 30, 2001 and 2002, respectively. 2001 revenues benefited from a large beverage recall project that generated revenues of approximately $3.3 million. The decrease in revenues for the nine-month period ended September 30, 2001 compared to the nine-month period in 2002 was primarily attributable to the product recall revenue in 2001, the sale of certain operations in the Northeast during 2001 that generated revenues of approximately $5.4 million, the decline in our biosolids business in New York of approximately $4.2 million and exiting unprofitable asbestos business which generated revenues of approximately $0.9 million. The remainder of the decrease was due to a decline in business due to general economic and industry conditions. By-product sales generated the remaining $20.9 million, or 19.1%, and $13.0 million, or 15.6%, of the Commercial Wastewater

~~Division’s~~determined ~~revenues~~based ~~for~~on the ~~2001~~differences between the financial statements carrying amounts and ~~2002~~the ~~periods,~~tax ~~respectively.~~basis of assets and liabilities using enacted tax ~~This~~rates ~~decrease~~and laws in ~~by-product~~effect ~~sales~~in ~~was~~the ~~due~~years ~~primarily~~which tothe ~~our~~differences ~~exit~~are ~~from~~expected ~~the~~to ~~brokered~~reverse. ~~ethanol~~We ~~business~~have ~~and~~established ~~decreased~~valuation ~~volumes~~allowances ofto ~~waste~~reduce ~~processed~~deferred income tax assets to estimated realizable value.

~~The Industrial Wastewater Division contributed $48~~ Self-Insurance.~~4 million,~~ orWe ~~27.1%,~~retain ~~of revenues for~~ the ~~nine~~risk ~~months~~for ~~ended~~uninsured ~~September 30,~~employee ~~2001~~group ~~and $45.3 million, or~~health ~~31.5%,~~claim ofdeductibles ~~revenues~~which ~~for~~are ~~the~~subject ~~nine~~to ~~months~~annual ~~ended~~aggregate ~~September 30, 2002~~limits. ~~The~~Losses ~~Industrial Wastewater~~up ~~Division’s revenues decreased $3.1 million, or 6.3%, due primarily~~ to the ~~impact~~deductible ofamount ~~the~~are ~~slowdown~~based inupon the ~~technology~~Company’s ~~sector~~known onclaims ~~our~~incurred ~~West~~and ~~Coast~~an ~~facility,~~estimate ~~offset~~of inclaims ~~part~~incurred bybut ~~improved~~not ~~performance~~reported. atWe ~~our~~also ~~Detroit~~retain ~~facility~~certain ofproperty ~~$2.6 million.~~and ~~Collection~~casualty and ~~processing~~general ~~fees~~loss ~~generated $43~~risks.~~9 million,~~ ~~or 90.7%,~~We ~~and~~have ~~$41.0 million,~~provided orfinancial ~~90.5%,~~assurance of in the ~~Industrial~~form ~~Wastewater~~of ~~Division’s revenues~~letters ~~for~~of ~~the~~credit ~~nine-month~~to ~~periods~~our ~~ended~~insurance ~~September 30, 2001 and 2002, respectively~~carrier. ~~By-product~~As ~~sales~~claims ~~generated~~develop ~~the remaining $4.5 million, or 9.3%,~~ and additional ~~$4.3 million,~~information orbecomes ~~9.5%~~available, ofadjustments ~~the~~to ~~Industrial~~loss ~~Wastewater~~reserves ~~Division’s~~and ~~revenues for~~ the amount ~~nine-month~~of ~~periods~~such ~~ended~~financial ~~September 30,~~assurance ~~2001~~may ~~and~~be ~~2002, respectively~~required.

~~The~~Results ~~Oilfield Waste Division contributed $20.6 million, or 11.5%,~~ of ~~revenues~~Operations ~~for the nine months ended September 30, 2001 and $15.3 million, or 10.6%, of~~ revenues for the nine months ended September 30, 2002. The Oilfield Waste Division’s revenues decreased approximately $5.3 million, or 25.8%, due primarily to the non-renewal of our contract with Newpark Resources, combined with a reduction in the rig count in 2002 compared to 2001. The Newpark Resources contract generated approximately $7.3 million in revenues in the prior year period compared to approximately $4.7 million in the current year period.

~~OPERATING~~ Three ~~EXPENSES.~~Months ~~Operating~~Ended ~~expenses decreased $27.1~~March ~~million~~31, or2003 ~~20.7%,~~and ~~from $131.3 million for the nine months ended September 30, 2001 to $104.2 million for the nine months ended September 30,~~ 2002~~. As a percentage of revenues,~~ ~~operating expenses decreased from 73.5% for the nine-month period ended~~ September 30, 2001 to 72.4% for the nine-month period ended September 30, 2002. This decrease was due in part to operating improvements implemented at our Texas facilities. Also, while our Detroit facility had lower margins quarter over quarter, it is performing better on a year-to-date basis than last year. In addition, the decrease in operating expenses reflects the reversal of a portion of a closure reserve for our Canadian facility and the favorable impact of a reduction in liability insurance premiums resulting from reduced claims experience, offset in part by the fact that the percentage reduction in our expenses was not as much as the percentage reduction in revenues, primarily because of the fixed costs associated with certain of our facilities.

~~DEPRECIATION~~ Revenues. ~~AND~~Revenues ~~AMORTIZATION.~~for ~~Depreciation~~the ~~and~~quarter ~~amortization~~ended ~~expenses decreased~~March 31, ~~approximately~~2003 increased $20.1 9 million, or 152.76%, from $1335.19 million for the ~~nine months~~quarter ended ~~September~~March 3031, ~~2001 to $11.0 million for the nine months ended September 30,~~ 2002. ~~This decrease was primarily attributable~~ to ~~the~~ ~~discontinued amortization of goodwill in accordance with SFAS No. 142. Goodwill amortization in the prior year period amounted to approximately~~ $336.4 million. This decrease was partially offset by the resumed recognition of depreciation expense on those operations previously classified as held for sale that are now incorporated into our core business, which amounted to approximately $1.18 million. ~~As a percentage of revenues, depreciation and amortization expenses increased from 7.3%~~ for the ~~nine-month~~quarter ~~period~~ ended ~~September 30,~~ ~~2001 to 7.7% for the nine month period ended September~~March 3031, ~~2002~~2003.

~~SELLING,~~ The ~~GENERAL~~Commercial ~~AND~~Wastewater ~~ADMINISTRATIVE~~Division ~~EXPENSES.~~contributed ~~Selling, general and administrative expenses increased approximately~~ $011.70 million, or 329.68%, ~~from~~of ~~$19.7 million~~first ~~for~~quarter ~~the~~2003 ~~nine~~revenues ~~months~~and ~~ended September 30, 2001 to~~ $2011.46 million ~~for the nine months ended September 30~~, ~~2002.~~or ~~The increase resulted primarily from severance expenses in the first and third quarters of approximately $1~~32.~~3 million~~2%, ~~partially~~of ~~offset~~first byquarter ~~decreased travel and entertainment expenses of~~2002 ~~approximately~~revenues. $0.3 million ~~and decreased office expenses~~ of ~~approximately~~the ~~$0.2 million.~~decrease Inin ~~addition,~~revenues ~~there~~ was aattributable ~~credit~~ to ~~expense of $0.4 million recorded~~a intransfer ~~our Oilfield Waste Division. This credit was the result~~ of acertain ~~one-time reimbursement~~assets byfrom ~~Waste Management. The remainder of~~ the ~~fluctuation~~Commercial ~~was~~Wastewater ~~not related~~Division to ~~any particular item, but was~~ the ~~result of smaller fluctuations in~~ ~~various~~Industrial ~~expense~~Wastewater ~~categories.~~Division As(note acorresponding ~~percentage~~increase ofin revenues, ~~selling,~~of ~~general and~~the ~~administrative~~Industrial ~~expenses~~Wastewater ~~increased~~Division ~~from~~discussed 11below).0% ~~for~~The ~~the~~remainder ~~nine~~of ~~months~~the ~~ending~~decrease ~~September 30,~~was ~~2001~~due to ~~14.2%~~decreased ~~for the nine months ending September 30, 2002~~volume.

~~GOODWILL~~ The ~~IMPAIRMENT~~Industrial Wastewater Division contributed $14.7 million, ~~During~~or ~~the~~40.0%, ~~third~~of first quarter 2003 revenues and $13.9 million, or 38.7%, of first quarter 2002, revenues. ~~several~~The ~~goodwill~~Industrial Wastewater Division’s revenues increased $0.9 ~~impairment~~million, ~~indicators~~or ~~arose~~6.2%, ~~prompting~~primarily usdue to ~~perform~~our ~~the~~Georgia, ~~impairment~~Arizona ~~test~~and Florida facilities. ~~dictated~~The byincrease ~~SFAS~~at Noour Florida facility was primarily due to a new customer contract which generated revenues of $0.4 ~~142~~million in the current year quarter. Revenues ~~Based~~at onour Georgia facility increased as a result of the ~~results~~transfer of certain assets previously accounted for in the ~~test~~Commercial Wastewater Division (see discussion above). The remainder of the increase was due to our Arizona facility, onoffset ~~September~~in part by minor decreases at our Detroit and California facilities. Collection and processing fees generated $13.4 30million, or 91.3%, and $12.5 million, or 89.6%, of the Industrial Wastewater Division’s revenues for the quarters ending March 31, 2003 and 2002, werespectively. ~~recorded~~By-product sales agenerated ~~charge~~the ofremaining $511.03 million, or 8.7%, and $1.4 million, or 10.4%, of the Industrial Wastewater Division’s revenues for quarters ending March 31, 2003 and 2002, respectively.

~~SPECIAL~~ The ~~INCOME,~~Oilfield ~~net.~~Waste ~~Special~~Division ~~income,~~contributed ~~net decreased from~~ $95.7 million, ~~for~~or ~~the nine~~15.5%, ~~months~~of ~~ended~~first quarter ~~September 30,~~2003 ~~2001~~revenues toand $15.24 million, ~~for~~or ~~the~~15.1%, ~~nine~~of ~~months~~first ~~ended September 30,~~quarter 2002 revenues. The ~~2001~~Oilfield ~~items~~Waste ~~consisted~~Division’s ofrevenues ~~(a)~~increased approximately $30.75 3 million, ~~received~~or ~~from a~~5.3%. ~~claim~~The ~~filed~~Newpark ~~under~~Resources aagreement ~~property~~generated ~~damage~~approximately ~~policy~~$2.4 million asin arevenues ~~result~~during of the ~~closure~~first ofquarter ~~our Detroit facility in August 1999, (b) losses~~ of $12002.~~5 million~~ ~~recorded~~On as a ~~result~~ ofcomparable ~~the sales~~basis, ofexcluding ~~certain operations in~~ the ~~Northeast~~prior ~~and~~year ~~(c)~~Newpark ~~$7.5 million~~business, ~~received~~revenues asincreased ~~a result~~by ~~of our settlement agreement with National Steel. The 2002 items consisted of (a)~~ $2.157 million compared ~~received~~to ~~from~~the ~~another~~prior ~~insurance~~year ~~claim~~quarter ~~filed~~due asto ~~a result of~~ the ~~closure~~effect of ~~our~~improving ~~Detroit~~market conditions ~~facility in August 1999~~ and ~~(b) charges~~our acquisition of ~~approximately~~ ~~$1.0 million~~six tooilfield ~~cover costs to process~~ waste ~~located~~transfer atstations ~~our~~from ~~Re-Claim~~Trinity ~~Houston~~Storage ~~facility~~Services L.P.

The Beverage Division contributed $5.4 million, or 14.7%, of first quarter 2003 revenues and $5.0 million, or 14.0%, of first quarter 2002 revenues. The Beverage Division’s revenues increased $0.4 million, or 7.5%, primarily due to increased volumes. Collection and processing fees generated $2.4 million, or 44.1%, and $2.1 million, or 42.4%, of the Beverage Division’s revenues for the quarters ending March 31, 2003 and 2002, respectively. By-product sales generated the remaining $3.0 million, or 55.9%, and $2.9 million, or 57.6%, of the Beverage Division’s revenues for quarters ending March 31, 2003 and 2002, respectively.

Operating Expenses. Operating expenses increased $2.7 million, or 10.9%, from $25.2 million for the quarter ended March 31, 2002 to $27.9 million for the quarter ended March 31, 2003. As a percentage of revenues, operating expenses increased from 70.1% in the first quarter 2002 to 75.8% in the first quarter 2003. The increase was primarily a result of the non-renewal of our agreement with Newpark Resources and the acquisition of the Trinity transfer stations for our Oilfield Waste Division. The operating margins generated by the Trinity transfer stations are not as great as the margins attributable to the Newpark Resources agreement. In addition, with the exception of two facilities, operating margins in our Commercial Wastewater Division also were lower in the first quarter of 2003 compared to the comparable period last year.

~~INTEREST~~ Depreciation ~~AND~~and ~~OTHER EXPENSES~~Amortization. ~~Net~~Depreciation ~~interest~~ and ~~other~~amortization expenses ~~decreased~~ decreased approximately $~~1.3 million~~12,000, or 170.145%, from $72.469 million for the ~~nine-month~~quarter ~~period~~ ended ~~September~~March 3031, ~~2001~~2002 to $62.168 million for the ~~nine-month~~quarter ~~period~~ ended ~~September~~ March 3031, ~~2002~~2003. ~~This~~As a ~~decrease~~percentage ~~resulted~~of ~~primarily~~revenues, ~~from~~depreciation ~~reduced~~and ~~borrowings~~amortization expenses decreased from ~~under~~7.5% ~~our~~in ~~revolving~~the ~~credit~~first ~~facility~~quarter ~~and~~2002 ~~lower~~to ~~interest~~7.3% ~~rates~~in the first quarter 2003.

~~INCOME~~ Selling, ~~TAXES~~General and Administrative Expenses. ~~Income~~Selling, ~~taxes~~general and administrative expenses decreased $100.68 million, ~~from~~or a13.1%, ~~provision~~from of $75.9 million for the ~~nine-month~~quarter ~~period~~ ended ~~September~~March 3031, ~~2001~~2002 to ~~a benefit of~~ $25.7 1 million for the ~~nine-month~~quarter ~~period~~ ended ~~September 30~~March 31, ~~2002~~2003. asThe adecrease ~~result~~resulted of primarily from decreased ~~income.~~salaries ~~The~~and ~~effective~~benefits of ~~income~~approximately ~~tax~~$0.5 million, ~~rate~~as ~~for~~well ~~the~~as ~~nine~~other ~~months~~cost ~~ended~~reduction initiatives ~~September 30,~~implemented ~~2001~~in ~~was~~the ~~47.0%~~fourth ~~compared~~quarter toof 52002.6% ~~for~~As ~~the~~a ~~nine~~percentage ~~months~~of ~~ended~~revenues, ~~September 30~~selling, ~~2002.~~general ~~Our~~and ~~effective~~administrative ~~income~~expenses ~~tax~~decreased ~~rates~~from ~~are~~16.5% ~~estimates~~in ofthe ~~our~~first ~~expected~~quarter ~~annual~~2002 ~~effective~~to ~~federal~~14.0% ~~and~~in ~~state~~the ~~income~~first ~~tax~~quarter ~~rates~~2003.

~~LIQUIDITY~~ Special ~~AND~~Income. ~~CAPITAL~~Special ~~RESOURCES~~income in the first quarter of 2003 was a result of an adjustment made to our Reliance liquidation reserve. Reliance Insurance Company 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 asserted against the Company for which insurance coverage was to be provided by Reliance and that were not resolved prior to Reliance being placed into liquidation. During the fourth quarter of 2001, an initial reserve of $3.5 million was established for any claims or lawsuits that were not resolved prior to Reliance being placed into liquidation. Subsequent adjustments are made to the reserve based on certain settled obligations and known claims. During the first quarter of 2003, as a result of a review of potential claims and related costs, the reserve was reduced by $0.3 million resulting in special income of a like amount.

Interest Expense and Other Income, net. Interest expense and other income, net increased approximately $1.8 million, or 117.7%, from $1.5 million for the quarter ended March 31, 2002 to $3.3 million for the quarter ended March 31, 2003. This increase resulted from higher interest rates and related financial fees on the Company’s credit facility.

Income Taxes. The provision for income taxes decreased approximately $19,000 from $64,000 for the quarter ended March 31, 2002 to $45,000 for the quarter ended March 31, 2003.

Liquidity and Capital Resources

General

Our capital requirements for continuing operations consist of our general working capital needs, scheduled principal payments on our debt obligations and capital leases, funding of our finite risk bonding program, certain contractual commitments and planned capital expenditures. Our capital resources ~~consist~~ consist of cash reserves, cash generated from operations and funds available under our revolving credit facility. ~~Our~~On ~~credit facility matures on April~~March 1531, 2003., Wewe ~~are~~received ~~evaluating~~a ~~other~~short-term extension ~~sources~~ of ~~capital, including~~ the ~~sale of non-core operations, obtaining a new~~ credit facility ~~and~~to ~~the~~provide ~~issuance~~for ~~of additional~~our ~~debt~~near-term orworking ~~equity securities. Our~~ capital ~~resources may not be~~ ~~sufficient~~needs ~~to fund our operations~~ and ~~there~~allow ~~can~~additional betime noto ~~assurance~~secure ~~that~~new wefinancing. ~~will~~The befacility, which ~~able~~matures toon ~~obtain~~July 31, a2003, ~~new~~had ~~credit~~an ~~facility~~outstanding orbalance toof ~~obtain~~$76.8 million ~~capital~~at ~~from~~March 31, ~~other sources~~2003.

~~Operating~~We ~~Cash~~continue ~~Flows~~to review all of our alternatives to reduce our indebtedness. These alternatives include sales of assets or operating divisions or issuance of common stock or other securities. The proceeds of any such transaction would be used to reduce our outstanding debt. There can be no assurance, however, that any such transaction will be successfully consummated. Any refinancing or business sale transaction is expected to result in either substantial dilution to current stockholders or significant reduction in the size of the Company.

~~Cash~~ Our ~~flows~~recent ~~from~~performance ~~operations~~has ~~were~~caused ~~$14.4 million~~us ~~and~~to ~~$10.7 million~~violate ~~for~~various ~~the nine~~financial ~~months~~covenants ~~ended~~of ~~September 30,~~our ~~2001~~credit ~~and~~facility. ~~2002~~Previously, ~~respectively.~~our ~~Cash~~lenders ~~flows~~had ~~from operations~~been ~~for the nine months ended September 30, 2001 benefited substantially~~issuing ~~from~~short-term ~~the $7~~waivers.~~5 million~~ ~~payment~~However, ~~we received in April 2001 from National Steel~~ as ~~part~~ of the ~~settlement~~date of ~~our~~this ~~lawsuit~~report, ~~against~~we ~~them~~are ~~and~~not ~~the $3.8 million payment~~in wecompliance ~~received~~with incertain ~~August~~financial ~~2001~~covenants ~~from~~set ~~our~~forth ~~insurance~~in ~~carrier~~the ~~for~~credit ~~losses~~agreement. Noncompliance ~~incurred~~with asthese ~~a result~~provisions ofpermits the ~~temporary~~lenders ~~closure~~to, ofamong ~~our~~other ~~Detroit facility in 1999. Cash flows~~things, ~~for~~accelerate the ~~nine~~debt ~~months~~under ~~ended~~the ~~September 30,~~credit ~~2002~~facility ~~benefited~~and ~~substantially~~foreclose ~~from~~on the collateral $2provided.~~2 million~~ ~~payment~~Our welenders ~~received~~have innot ~~September~~declared ~~2002~~an ~~from~~event ~~our~~of ~~secondary~~default ~~insurance carrier for losses incurred~~ as a result of ~~the temporary closure of~~ our ~~Detroit~~ ~~facility~~noncompliance; inhowever, ~~1999.~~they Wehave ~~had~~retained ~~negative~~the ~~net~~right ~~working~~to ~~capital~~do ~~of $74~~so.~~4 million~~ atWe are in ~~September 30,~~discussions ~~2002,~~with ~~compared~~our tolenders ~~net~~regarding ~~working~~amending ~~capital~~the ofcredit ~~$6.6 million~~facility atto, ~~December~~among 31other things, ~~2001.~~further ~~This~~extend ~~decrease~~the inmaturity ~~net~~date ~~working~~of ~~capital~~the ~~was~~facility, ~~due~~provide ~~primarily~~for ~~to the~~our ~~classification~~liquidity ofneeds ~~our~~and ~~credit~~bring ~~facility~~us asinto ~~short-term.~~compliance ~~Excluding~~with ~~our~~the ~~credit~~various financial ~~facility,~~covenants ~~working~~contained ~~capital~~therein. ~~would~~There ~~have~~can ~~been~~be ~~$12.6 million~~no atassurance ~~September 30,~~that ~~2002.~~we will be

At September 30, 2002, we had a $4.4 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. We have a total of $11.4 million of financial assurance in the form of letters of credit and bonds to provide for the costs of future closings of facilities. As of September 30, 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. During the next twelve months, we expect to pay approximately $0.3 million of these remediation reserves.

At September 30, 2002, we also had a $3.5 million unfunded reserve for the payment of insurance claims that may not be covered by Reliance Insurance Company, our insolvent carrier. Certain of these insurance 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. Additional payments above these commitments may be required but are unknown at this time.

In October 2002, U S Liquids of Detroit, Inc., a subsidiary of the Company, entered into an agreement with the U.S. Attorney in Detroit resolving the investigation of our Detroit facility that was commenced by the Environmental Protection Agency (“EPA”) and the Federal Bureau of Investigation 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 expected to be 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. It has not yet been determined whether interest will be assessed on the deferred payments. In 2001, we recorded a $5.0 million unfunded reserve for these payments. We believe this reserve is sufficient after considering the net present value of the total obligation. An additional reserve charge may be required in the event that interest is imposed on amounts due.

~~Many~~successful ofin ~~our~~obtaining ~~customers~~an ~~require~~extension usof tothe ~~post~~maturity ~~performance~~date ~~bonds~~of ~~to secure our performance under~~ the ~~terms of a contract and to guarantee that we will pay~~credit ~~subcontractors~~facility ~~and vendors. We are also required to provide financial assurances in order to obtain~~ or ~~renew~~amendments ~~operating permits and~~ to ~~guarantee~~any ~~that our~~of ~~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~~covenants isor ~~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 increased collateral, which collateral may not be~~contained ~~available~~therein. ~~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.~~

~~Investing~~The ~~Activities~~report issued by our auditors on our December 31, 2002 financial statements stated that the working capital deficit caused by the close proximity of the maturity of our revolving credit facility, and the recent lack of compliance with our credit facility, raise substantial doubt 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.

~~Capital~~ During ~~expenditures~~the ~~for~~first ~~our~~quarter ~~continuing~~of ~~operations~~2003, ~~during~~the terms of the ~~nine~~credit ~~months~~facility ~~ended~~were ~~September 30~~amended to change certain financial covenants, ~~2002~~add ~~were~~additional ~~$5.0 million~~weekly and monthly ~~for~~financial ~~the~~covenants, ~~last~~and ~~quarter~~to ofmake ~~2002~~various ~~are~~enhancements to the collateral ~~estimated~~documentation atsecuring ~~approximately~~the $2loans.5 toThe ~~$3.0 million.~~amendment ~~During~~also ~~the~~requires ~~nine~~that ~~months~~we ~~ended~~take ~~September 30,~~certain ~~2002,~~steps ~~our~~to ~~capital~~reduce ~~expenditures~~our ~~were~~leverage, ~~and~~including ~~during~~ the ~~fourth quarter~~sale of ~~2002~~one weor ~~anticipate~~more businesses ~~such~~that ~~expenditures~~generated ~~will~~in ~~be,~~2002 ~~primarily~~or ~~for~~are ~~plant, equipment~~expected ~~and~~to ~~vehicle~~generate ~~upgrades,~~in as2003 ~~well~~at asleast $3.0 million ~~injection~~in ~~wells~~aggregate ~~and~~earnings ~~excavation~~before deduction of interest, taxes, ~~disposal~~depreciation ~~cells~~and amortization. In ~~addition~~exchange, onthe ~~November~~maturity date of the credit facility was extended to July 1531, ~~2002~~2003, wepreviously ~~acquired~~scheduled ~~six~~loan ~~oilfield~~commitment ~~waste~~reductions ~~transfer~~were ~~stations~~eliminated, ~~from~~and, ~~Trinity.~~subject ~~The~~to ~~total~~weekly ~~consideration~~restrictions, ~~for this~~availability ~~acquisition~~under the credit facility was increased by approximately $3.05 million induring the ~~cash~~months of April through July 2003. This additional borrowing capacity is expected to provide for the working capital needs of the Company through the maturity date of the loan, including the payment of ~~which~~approximately $0.35 million of ~~was~~fees ~~paid~~that ~~during~~have ~~the~~been ~~third~~deferred ~~quarter of~~by ~~2002,~~our ~~and~~lenders ~~warrants~~until tomaturity. ~~purchase~~As ~~100~~we sell certain businesses per the amendment above,~~000 shares~~ the sale of such assets could result in an impairment below the ~~Company's~~current ~~common~~carrying ~~stock~~value.

On In ~~November 6,~~July ~~2002~~2003, ~~we completed~~ the ~~sale~~terms of ~~substantially~~the ~~all~~credit offacility ~~our Texas~~were ~~businesses~~further inamended ~~the~~to ~~Commercial~~(1) renew ~~Wastewater~~until ~~Division~~December 31, ~~for~~2003 ~~gross~~approximately ~~proceeds of~~ $158.0 million of ~~which~~letters ~~$13.25 million~~of ~~was~~credit issued ~~received~~on atour ~~closing.~~behalf, Ofand ~~the~~(2) defer ~~amount~~until ~~received at closing~~July 31, 2003 the $9.0.6 million interest ~~was~~payment ~~used~~scheduled tofor ~~pay~~payment ~~down~~on ~~our~~June 30, ~~debt~~2003. ~~balance~~In return, ~~$2.5 million~~we ~~was~~agreed ~~used~~ to ~~complete~~cash collateralize all obligations under the ~~Trinity~~letters ~~acquisition~~of ~~and~~credit $1described above on or before the termination of the credit facility.~~75 million~~ ~~was~~In ~~retained~~addition, ~~for~~we ~~immediate~~agreed ~~working~~that ~~capital~~we ~~needs~~would ~~related~~not toborrow any additional funds under the ~~sold~~credit ~~businesses~~facility without the prior consent of our lenders.

In The ~~certain~~debt ofoutstanding ~~our~~under ~~acquisitions,~~the wecredit ~~agreed~~facility tomay ~~pay~~be ~~additional~~accelerated ~~consideration~~by to the lenders ~~owners~~if, ofamong ~~the~~other ~~acquired~~things, ~~business~~a ifchange ~~the~~in ~~future~~control ~~pre-tax earnings~~ of the ~~acquired~~ ~~business~~Company ~~exceed~~occurs or certain ~~negotiated~~individuals ~~levels~~cease orto ~~other~~serve ~~specified~~as ~~events occur.~~an Toexecutive ~~the~~officer ~~extent~~of ~~that~~the ~~any~~Company ~~contingent~~and are ~~consideration~~not isreplaced ~~required~~within tosixty bedays ~~paid in~~by ~~connection with~~ an ~~acquisition,~~individual wereasonably ~~anticipate~~satisfactory ~~that~~ to the ~~related~~lenders. ~~incremental cash~~The ~~flows~~lenders ofhave ~~the~~waived ~~acquired~~through ~~business~~July 31, ~~will~~2003 bean ~~sufficient~~event toof ~~pay~~default arising from the ~~cash component~~resignation of ~~the~~Michael ~~contingent consideration~~P. ~~During 2002~~Lawlor, ~~the~~our former ~~owners~~Chief ~~of a~~Executive ~~business~~Officer. ~~that~~On weAugust 29, ~~acquired~~2002, inWilliam ~~1998~~DeArman, ~~are~~the ~~entitled~~Chairman toof ~~receive~~the ~~additional~~Board of ~~consideration~~Directors, ~~totaling~~was ~~$2.7 million~~appointed ifinterim ~~the~~Chief ~~acquired~~Executive ~~business~~Officer. ~~satisfies~~On ~~certain~~October 31, 2002, ~~targeted~~the ~~performance~~Board ~~levels.~~of ~~Management~~Directors ~~does~~made ~~not~~his ~~expect~~position ~~the~~permanent. ~~acquired~~The ~~business~~lenders have continued to ~~meet~~waive ~~these~~the ~~targets~~default ~~and,~~arising ~~therefore~~from Mr. Lawlor’s departure, webut dohave not ~~anticipate paying any such~~approved ~~amounts~~Mr. DeArman’s ~~in 2002~~appointment.

~~Financing~~To ~~Activities~~address our liquidity problems, our Board of Directors and management have taken the following actions:

At• ~~September 30,~~employed ~~2002~~a new executive management team; • engaged a financial advisor, ~~approximately~~as ~~$88.5 million~~requested ofby ~~principal~~our ~~payments~~lenders, to focus on ~~debt~~ ~~obligations~~financial ~~were~~restructuring ~~payable~~plans; ~~during~~• ~~the~~implemented ~~next~~cost ~~twelve~~cutting ~~months.~~measures ~~$87.0 million~~such as reductions in workforce and a temporary freeze on previously authorized pay increases; • sold substantially all of ~~these~~ ~~payments~~the ~~represent~~Texas ~~amounts~~and ~~due~~Northeast ~~under~~operations in our ~~revolving~~Commercial ~~credit~~Wastewater ~~facility~~Division, ~~which we~~and ~~intend~~used toa ~~extend~~substantial orportion ~~refinance~~of ~~prior~~the proceeds therefrom to ~~April~~reduce ~~2003.~~outstanding ~~The~~debt; ~~remaining~~• ~~$1.5 million~~identified offor ~~principal~~sale ~~payments~~or ~~due~~closure ~~are~~several ~~expected~~additional tounderperforming bebusinesses; ~~funded~~and ~~from~~• ~~operating~~acquired ~~cash flows~~six oilfield waste transfer stations in Louisiana and, ifTexas ~~necessary,~~to replace the business lost from ~~borrowings~~the ~~under~~non-renewal of our ~~revolving~~agreement ~~credit~~with ~~facility~~Newpark Resources.

WeManagement have a revolving credit facility with a group of banks under which we may borrow to fund working capital requirements. Amounts outstanding under the credit facility are secured by a lien on substantially all of our assets. The credit facility, which matures on April 15, 2003, contains affirmative, negative and subjective covenants, requires us 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, we must either extend the term of the credit facility or obtain an alternative source of financing. Because of our recent performance and conditions in the credit markets, it is ~~likely~~ ~~that we will need to seek an extension of our existing credit facility.~~also: ~~However, there can be no assurance we will be successful in either extending~~ ~~the term of the facility or obtaining alternative financing.~~

~~During~~• ~~the~~pursuing ~~first quarter of 2002,~~ the ~~terms~~sale of the credit facility were amended to, among other things, extend the maturity date to April 15, 2003, reduce the amount of the credit facility from $111.25 million to $99.7 million, increase the interest rates payable under the credit facility, limit the amount of capital expenditures that we may make, and waive our noncompliance with and modify the terms of certain of our financial covenants. In addition, the amount of the credit facility was permanently reduced by $250,000 on each of June 30, 2002 and September 30, 2002, and is required to be further reduced by $4.6 million on December 31, 2002 and by $2.1 million on March 31, 2003. Furthermore, the amendments provided that the amount of the credit facility will be permanently reduced by an amount equal to one businesses;

~~hundred percent~~• ofexploring the ~~net~~possibility ~~cash~~of ~~proceeds~~selling ~~received~~other ~~from~~non-core ~~any~~operations; ~~sale~~• ofanalyzing ~~assets~~each ~~not in the ordinary course~~ of ~~business,~~ the ~~issuance~~Company’s ofoperations ~~certain~~for ~~debt~~opportunities ~~or,~~to ~~with~~reduce ~~certain specified exceptions~~costs, ~~any~~improve ~~issuance~~processes ofand ~~equity.~~increase ~~The~~efficiencies; ~~terms~~and of• ~~our~~actively ~~credit~~seeking ~~facility significantly~~new ~~limit our ability to enter into leases or obtain additional debt outside of the facility~~financing.

~~During~~ As ~~1999~~of March 31, 2003 and June 25, 2003, we had aoutstanding borrowings of $1076.08 million and $79.8 million, respectively, under our revolving credit facility. Letters of credit under the credit facility ~~with~~totaled ~~BankBoston~~$8.0 million as of both March 31, N2003 and June 25, 2003.A. Advances under ~~which~~ wethe ~~were~~credit ~~able~~facility of up to ~~borrow~~$85.3 million ~~funds~~currently tobear ~~purchase~~interest ~~equipment.~~at ~~The~~the ~~commitment~~prime ~~for~~rate plus 4.0% and ~~this~~advances ~~facility~~above ~~expired~~$85.3 million onbear ~~December~~interest at the prime rate plus 6.0%. As of both March 31, ~~1999~~2003 and June 25, at2003, ~~which~~amounts ~~time~~outstanding weunder ~~had~~the ~~borrowed~~credit facility were accruing interest at approximately $28.~~5 million.~~3%, ~~This~~excluding ~~amount~~amortization of isfinancing ~~being~~costs. ~~repaid~~As inof 60June ~~monthly~~25, 2003, the unused portion of the credit ~~installments~~facility was $1.2 million, none of ~~principal~~which ~~and~~was ~~interest~~available.

~~Outlook~~ Operating Cash Flows

~~Our~~ Cash ~~recent~~flows ~~performance~~from ~~has~~operations ~~caused~~were usa tonegative ~~violate~~$2.5 million ~~various~~and ~~financial~~negative ~~covenants~~$1.1 million offor the quarters ended March 31, 2003 and 2002, respectively. Cash flows from operations for the quarter ended March 31, 2003 were negatively impacted by capitalized costs related to our ~~credit~~re-financing ~~agreement~~efforts and the $2.5 million ~~Although~~expended for our ~~lenders~~finite ~~have~~risk ~~been~~bonding ~~issuing~~program. ~~short-term~~The comparable prior year ~~waivers~~period ~~and~~was ~~amendments~~negatively ~~addressing~~impacted ~~these~~by ~~violations,~~bank weamendment ~~expect~~fees. toWe ~~again~~had benegative ~~out~~net ofworking ~~compliance~~capital ~~with~~of ~~certain~~$79.5 million ~~financial~~at ~~covenants~~March 31, ~~pending~~2003, ~~another~~compared ~~amendment~~to ofnegative net ~~our~~working ~~line~~capital of ~~credit,~~$75.9 million at December 31, 2002. This decrease in net working capital was primarily due to decreased accounts receivable and decreased cash on hand offset by decreased accounts payable and accrued liabilities as well as the investment in our finite risk bonding program.

~~Between~~ At ~~July~~March 1831, ~~2002 and November 12~~2003, ~~2002,~~we ~~the~~had ~~terms~~a ~~of the credit facility were further amended to, among other things, limit the amount of additional borrowings under the facility to~~ $1.0 ~~million, require that $1~~.26 million ofreserve ~~the insurance proceeds received during the third quarter of 2002 be paid~~ to ~~the lenders~~provide ~~and~~for ~~applied against~~ the ~~debt reduction required to be made on December~~cost ~~31,~~of ~~2002,~~future ~~require~~closures ~~the engagement~~ of afacilities. ~~financial~~The ~~advisor~~amount ~~acceptable to the lenders, permit the sale~~ of ~~our~~this ~~Texas~~unfunded ~~businesses~~reserve ~~in the Commercial Wastewater~~is ~~Division,~~primarily ~~permit~~based ~~the~~on ~~use of a portion of~~ the ~~Texas~~estimated ~~sales~~total ~~proceeds~~cost to ~~complete our~~close ~~acquisition of certain assets of Trinity, and waive our non-compliance with and modify~~ the ~~terms~~facilities ~~of certain of the financial covenants. The amendments also~~as ~~eliminated~~calculated ~~our~~in ~~ability~~accordance towith ~~borrow~~SFAS ~~funds at LIBOR~~No. 143, ~~which~~“Accounting isfor ~~expected~~Asset ~~to increase~~Retirement ~~our~~Obligations.” ~~interest~~We ~~expense~~adopted bySFAS ~~approximately~~No. 143 ~~$100,000~~in ~~per~~January ~~month~~2003. ~~The~~This ~~amendments to~~standard addresses the financial ~~covenants~~accounting ~~reduced~~and ~~the~~reporting ~~limitation~~for onobligations ~~our annual capital~~associated ~~expenditures,~~with ~~increased~~ the ~~limitation~~retirement ~~on our annual rent expenses, require that we maintain an accounts receivable coverage ratio~~ of ~~not~~tangible ~~less~~long-lived ~~than~~assets ~~0.32:1~~ and ~~adjusted~~associated ~~the~~costs. ~~debt~~SFAS No. 143 torequires ~~adjusted~~that ~~EBITDA ratio for~~ the ~~prior~~discounted ~~twelve-month period~~fair ~~required~~value ~~to be met at the end~~ of ~~each~~a ~~quarter.~~liability Wefor ~~maintained~~an ~~our debt~~asset ~~balance~~retirement ~~below~~obligation ~~the~~be ~~required~~recognized ~~3.70~~in ~~times adjusted EBITDA for~~ the ~~twelve-month~~ period ~~ended~~in ~~September 30,~~which ~~2002.~~it ~~Our~~is ~~actual~~incurred ~~debt~~if ~~balance on September 30, 2002~~a ~~was~~reasonable ~~3.50~~estimate ~~times~~of ~~adjusted EBITDA for~~ the ~~prior~~fair ~~twelve-month~~value ~~period.~~can ~~On December 31, 2002, this limitation will~~ be ~~reduced to 3~~made.00 ~~times~~The ~~adjusted~~associated ~~EBITDA, as~~asset ~~defined~~retirement incosts ~~the~~are ~~credit~~capitalized ~~agreement.~~as Wepart doof ~~not~~the ~~expect~~carrying toamount beof ~~able to meet this debt~~the ~~limitation~~long-lived asset. ~~In that event~~Historically, we ~~will~~had ~~have~~recorded tothe ~~obtain~~gross anestimated ~~additional waiver or~~retirement ~~amendment~~obligation. ~~from~~During the ~~lenders~~first ~~prior~~quarter, towe ~~year-end~~recognized $2.7 million ~~There~~of ~~can~~income ~~be no assurance that~~as wea ~~will~~result beof ~~able~~adoption ~~to obtain an additional waiver or amendment from the lenders in the event~~ of ~~default~~SFAS No. 143.

~~The~~ In ~~debt~~addition, ~~outstanding~~regulatory ~~under~~agencies ~~the~~require ~~credit~~us ~~facility~~to ~~may~~post befinancial ~~accelerated~~assurance ~~by the~~to ~~lenders~~assure ~~if,~~that ~~among~~when ~~other~~a ~~things,~~facility ais ~~change~~closed, inall ~~control~~waste ofat the ~~Company~~facility ~~occurs~~will orbe ~~John~~treated P.and ~~Miklich~~the orfacility ~~Cary~~will M.be ~~Grossman~~closed ~~ceases~~appropriately. toAs ~~serve~~of asMarch 31, an2003, ~~executive officer of~~we ~~the~~had ~~Company~~in ~~and~~place isa ~~not~~total ~~replaced~~of ~~within~~$12.2 million ~~sixty~~of ~~days~~financial byassurance anin ~~individual reasonably satisfactory to~~ the ~~lenders.~~form ~~The~~of letters ~~lenders~~of ~~have~~credit ~~waived~~and ~~through~~bonds ~~December 31,~~to ~~2002 an~~provide ~~event~~for ~~of default arising from~~ the ~~resignation~~cost of ~~Michael~~future P.closings ~~Lawlor~~of facilities. ~~On August~~As of March 2931, ~~2002~~2003, ~~William~~we ~~DeArman,~~also ~~the~~had ~~Chairman~~a of$2.5 million ~~our~~unfunded ~~Board~~reserve to ofprovide ~~Directors,~~for ~~was appointed~~the ~~interim~~costs ~~Chief~~to ~~Executive~~remediate ~~Officer~~soil ~~(“CEO”).~~and ~~Our~~groundwater ~~board~~contamination ofat ~~directors has~~our ~~requested~~facility ~~that~~in ~~Mr. DeArman~~East ~~become~~Palo ~~permanent~~Alto, ~~CEO~~California, and heour ~~has~~share ~~agreed.~~of Wethe ~~plan~~costs to remediate ~~request~~drum ~~that~~reconditioning ~~the~~or ~~lenders~~disposal ~~accept~~sites ~~Mr. DeArman~~previously asused aby ~~satisfactory~~our ~~replacement~~subsidiaries. ~~for~~In ~~Mr. Lawlor.~~the ~~There~~next ~~can~~12 months, bewe noexpect ~~assurance~~to ~~that~~pay Mrapproximately $0.3 ~~DeArman’s~~million ~~appointment~~of ~~will be~~these ~~approved~~remediation ~~by the lenders~~reserves.

To At ~~address~~March 31, 2003, we also had a $3.2 million unfunded reserve for the payment ~~factors~~of insurance claims that ~~have~~will ~~caused~~not be covered by Reliance Insurance Company, our ~~violations~~former insurance carrier that was placed into liquidation. Certain of ~~the~~these ~~credit~~insurance ~~agreement,~~claims have been resolved and we have committed to making payments of $0.7 million during the ~~Board~~remainder of ~~Directors~~2003 and ~~Company~~$0.7 million in ~~management~~2004. ~~have~~Additional ~~taken~~payments ~~the~~above ~~following~~these ~~actions:~~commitments may be required but are unknown at this time.

• In ~~employed~~October a2002, ~~new~~U ~~executive~~S ~~management~~Liquids ~~team;~~of •Detroit, ~~engaged~~Inc., aone ~~financial~~of ~~advisor~~our subsidiaries, entered asinto ~~requested~~an byagreement ~~our~~with ~~lenders,~~the toU.S. ~~focus~~Attorney onin Detroit resolving the investigation of our ~~financial~~Detroit ~~restructuring~~facility ~~plans;~~that •was ~~implemented~~commenced ~~cost~~by ~~cutting~~the ~~measures~~Environmental Protection ~~such~~Agency as(“EPA”) ~~reductions~~and the Federal Bureau of Investigation in ~~workforce~~August 1999. Payments of penalties and aother ~~temporary~~charges ~~freeze~~assessed onby ~~previously~~the ~~authorized~~government totaling ~~pay~~$5.5 million ~~increases;~~will •be ~~sold~~required over five years. $0.2 million was paid during the ~~Texas~~quarter ~~businesses~~ended March 31, 2003 and ~~used~~$1.0 million awill ~~substantial~~be ~~portion~~paid during the third quarter of ~~the~~2003. ~~proceeds~~Future topayments ~~reduce~~consist ~~outstanding~~of ~~debt;~~$1.0 million ~~and~~in •each ~~acquired~~of 2004, ~~six~~2005 ~~oilfield~~and ~~waste~~2006, ~~transfer~~and ~~stations~~$1.1 million in ~~Louisiana~~2007. ~~and~~In ~~Texas~~2001, towe ~~replace~~recorded ~~the~~a ~~business~~$5.0 million ~~lost~~unfunded ~~from~~reserve for these payments. After considering the ~~non-renewal~~net present value of ~~our~~the ~~contract~~total ~~with~~obligation, ~~Newpark.~~this

~~Management~~reserve was reduced to $4.1 million during the fourth quarter of 2002. As of March 31, 2003, the remaining net present value of the reserve was $3.9 million. The U.S. District Court will determine at the end of the five-year payment period whether and to what extent interest must be paid on the deferred payments. An additional charge may be required if interest is ~~also:~~imposed.

• Many ~~exploring~~of our customers require us to post performance bonds to secure our performance under the ~~possibility~~terms of ~~selling~~a ~~other~~contract ~~non-core~~and ~~operations;~~to •guarantee ~~analyzing~~that ~~each~~we ofwill 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 ~~company’s~~jurisdiction, ~~operations~~including letters of credit, surety bonds, trust agreements and traditional insurance. The market for ~~opportunities~~financial assurance is tightening and due to ~~reduce~~our ~~costs~~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, ~~improve~~which ~~processes~~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 ~~increase~~our ~~efficiencies;~~failure to obtain any such financial assurance would have a material adverse effect on our business, results of operations and •financial condition. ~~exploring~~In ~~other~~January ~~opportunities~~2003, we made the initial payment on a ten-year finite risk bonding program which provides up to $18 million toward potential closure obligations at our facilities, as well as up to $12.4 million of performance bonding capacity. Management believes that this program will satisfy all of our bonding needs for ~~financing~~the foreseeable future but there can be no assurance that it will be sufficient to satisfy all of our future bonding needs.

~~Management~~ Operating cash flows from continuing operations in 2003 are estimated to be approximately $8.8 million. This amount is ~~working~~net ~~aggressively~~of all projected interest costs, expected payments on reserves and obligations on the ~~above~~Company’s ~~matters~~finite risk ~~and~~bonding isprogram. ~~continuing~~Operating cash flows will be the primary source of funding our capital budget in 2003. Any remaining amounts will be used to fund ~~explore~~costs ~~opportunities~~associated ~~for~~with ~~further~~our ~~improvement~~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.

At Investing ~~September 30, 2002, we had borrowed approximately $87.0 million under the~~Activities ~~credit facility. As of November 11, 2002, the balance of the credit facility~~ had been reduced to $76.8 million by using the proceeds from the sale of our Texas businesses and insurance proceeds received on a claim related to the temporary closure of our Detroit facility in 1999. Advances under the credit facility currently bear interest at the prime rate plus 4.0%. As of September 30, 2002 and November 11, 2002, amounts outstanding under the credit facility were accruing interest at approximately 12.5% and 13.0% per year, respectively.

~~Despite~~ Capital ~~these~~expenditures ~~actions,~~during ~~it is still unlikely that we will be in compliance at December 31, 2002 with~~ the ~~funded~~first ~~debt~~quarter toof ~~adjusted~~2003 ~~EBITDA~~were ~~ratio~~$0. ~~We intend to~~4 million ~~seek~~and afor ~~waiver~~the toremainder ~~this~~of ~~covenant~~the ~~prior to~~ year~~-end.~~ ~~However,~~are ~~there~~expected ~~can~~to be ~~no assurance~~approximately ~~that such a waiver or amendment will be obtained~~$5. ~~Additionally,~~7 ~~based~~million. onThe ~~discussions~~majority ~~with our lenders, we believe that any extension~~ of the ~~line~~ ofcapital ~~credit~~expenditures ~~past~~were ~~the April 15, 2003 maturity date will require improvements~~ in our ~~operations~~Oilfield ~~and is unlikely to be granted until late March or early April~~Waste ~~2003,~~Division iffor atoperating ~~all.~~equipment ~~Management~~and isin ~~exploring~~our ~~other~~Beverage ~~alternatives~~Division for ~~financing;~~plant ~~however, those options are highly uncertain~~improvements.

~~Contractual~~ Financing ~~Obligations and Commercial Commitments~~Activities

~~Our~~At ~~future~~March 31, ~~contractual~~2003, ~~obligations~~approximately as$77.9 million of ~~September 30~~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, ~~2002~~if ~~include:~~the facility is extended.

	Payments Due by Period
	(In thousands)
	Less than		1-2		2-3		3-4		4-5
Contractual Obligations	1 year		years		years		years		years		Thereafter		Total
Debt and Capital Lease Obligations	$	88,496	$	1,126	$	465	$	423	$	16	$	991	$	91,517
Operating Lease Obligations	$	3,520	$	2,887	$	2,414	$	2,071	$	1,821	$	8,622	$	21,335
Closure and Remediation Reserves	$	289	$	392	$	342	$	230	$	51	$	5,870	$	7,174
Detroit Settlement Agreement	$	1,400	$	1,000	$	1,000	$	1,000	$	1,100	$	—	$	5,500
Reliance Insolvency Obligation	$	1,250	$	900	$	—	$	—	$	—	$	—	$	2,150

Our other commercial commitments as of September 30, 2002 expire as follows:

	Amount of Commitment Expiration Per Period
	(In thousands)
Other Commercial	Less than		1-2		2-3		3-4		4-5
Commitments	1 year		years		years		years		years		Thereafter		Total
Standby Letters of Credit	$	7,533	$	—	$	—	$	—	$	253	$	—	$	7,786
Performance Bonds	$	11,410	$	363	$	—	$	—	$	—	$	—	$	11,773

Our future contractual obligations include:

FORWARD LOOKING STATEMENTS


Contractual		Less than
Obligations:		1 year		1 -2 years		2 -3 years		3 -4 years		4 -5 years		Thereafter		Total

Debt and Capital Lease Obligations		$	77,864	$	684	$	430	$	424	$	1,000	$	—	$	80,402
Operating Lease Obligations			3,222		2,373		1,822		1,557		1,185		8,372		18,531
Finite Risk Bonding Program			2,290		500		500		500		400		1,600		5,790
Closure and Remediation Reserves			262		275		338		300		225		2,732		4,132
Detroit Settlement Agreement			832		605		684		773		974		—		3,868
Reliance Insolvency Obligations			781		429		—		—		—		—		1,210
Severance Obligations			936		601		143		—		—		—		1,680

	Totals	$	86,187	$	5,467	$	3,917	$	3,554	$	3,784	$	12,704	$	115,613

Our business, financial condition, results of operations, cash flows and prospects, and the prevailing market price and performance of our common stock, may be adversely affected by a number of factors, including the matters discussed below and in “Factors Influencing Future Results and Accuracy of Forward-Looking Statements” included in Part I, Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2001. Certain statements and information set forth herein, as well as other ~~written~~commercial orcommitments ~~oral~~expire statements made from time to time by the Company or its authorized executive officers, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement and these risk factors in order to comply with such safe harbor provisions. It should be noted that our forward-looking statements speak only as of the date of this report or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations, plans, intentions and projections reflected in our forward-looking statements are reasonable, such statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks, uncertainties and other factors that our shareholders and prospective investors should consider include, but are not limited to, the followingfollows:

• our ability to extend the term of our credit facility or obtain an alternative source of financing by April 2003; • our ability to continue to fund our operations from borrowings permitted under our credit facility and operating cash flows; • possible defaults under our credit facility if cash flows are less than we expect or we are unable to comply with the various covenants set forth in the credit agreement, and the possibility that we cannot obtain additional capital on acceptable terms if needed; • the impact of any increase in interest rates under our credit facility either as a result of increases in the prime rate or as a result of changes in the facility, and the cost of alternative financing we may obtain, if available; • the dilution in ownership that may occur if we obtain new debt or equity financing; • uncertainties caused by our inability to comply with the terms of our credit facility; • the outcome of pending litigation and administrative proceedings involving the Company, including the securities class action lawsuit and stockholder derivative action described herein; • our ability to obtain or maintain governmental permits and approvals necessary for the operation of our facilities; • our ability to obtain performance bonds, letters of credit and other financial assurances required by our customers or regulatory authorities;


Other Commercial		Less than
Commitments:		1 year		1 -2 years		2 -3 years		3 -4 years		4 -5 years		Thereafter		Total

Standby Letters of Credit		$	8,006	$	—	$	—	$	—	$	253	$	—	$	8,259
Performance Bonds(1)			11,452		443		2		—		—		—		11,897

	Totals	$	19,458	$	443	$	2	$	—	$	253	$	—	$	20,156

(1)

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

New Accounting Pronouncements

During May 2003, the Financial Accounting Standards Board issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We do not expect the adoption of SFAS No. 150 to have a significant impact on our operating results or financial position.

Forward Looking Statements

~~• changes in existing laws~~ and ~~regulations~~information ~~governing~~set ~~environmental~~forth ~~protection~~herein, ~~zoning~~as ~~and~~well as other ~~matters~~written ~~affecting~~or ~~our~~oral ~~operations;~~statements made •from ~~existing~~time ~~regulations~~to ~~affecting~~time ~~disposal~~by ofthe ~~hazardous~~Company ~~and~~or ~~nonhazardous~~its ~~waste~~authorized ~~being~~executive ~~rescinded or relaxed~~officers, constitute ~~governmental~~“forward-looking ~~authorities~~statements” ~~failing~~within tothe ~~enforce~~meaning ~~these~~of ~~regulations~~the orPrivate Securities ~~other~~Litigation ~~industry~~Reform ~~participants~~Act ~~being~~of ~~able~~1995. toWe ~~avoid~~intend orfor ~~delay compliance with these regulations; •~~ our ~~ability~~forward-looking statements to ~~compete~~be ~~with~~covered ~~Newpark~~by ~~Resources,~~the ~~Inc.~~safe ~~and~~harbor ~~other~~provisions ~~industry participants~~ for ~~oilfield~~forward-looking statements ~~waste~~contained ~~generated offshore or~~ in ~~inland waters in~~ the ~~Gulf~~Private ~~Coast~~Securities ~~region;~~Litigation •Reform ~~potential~~Act ~~liabilities~~of ~~associated~~1995, and ~~with~~we ~~the~~set ~~disposal~~forth ofthis ~~hazardous~~statement and ~~nonhazardous~~these ~~wastes;~~risk •factors ~~possible changes~~ in ~~our~~order ~~estimate~~to ofcomply ~~the~~with such ~~impact~~safe ofharbor ~~the~~provisions. ~~insolvency~~It ofshould ~~Reliance~~be ~~Insurance~~noted ~~Company,~~that ~~one of~~ our ~~former~~forward-looking statements ~~insurance~~speak ~~carriers;~~only •as ~~changes~~of in the ~~levels~~date of ~~exploration~~this ~~for~~report ~~and~~or ~~production~~when ofmade ~~oil~~ and ~~gas,~~we undertake ~~particularly~~no induty ~~the~~or ~~Gulf~~obligation ~~Coast~~to ~~region;~~update •or ~~possible~~revise ~~changes in~~ our ~~estimates~~forward-looking statements, ofwhether ~~site~~as ~~remediation~~a ~~requirements,~~result ~~final~~of ~~closure~~new ~~and post-closure obligations~~information, ~~compliance~~future ~~and~~events ~~other~~or ~~audit~~otherwise. Although ~~and~~we ~~regulatory~~believe ~~developments;~~that • the ~~sufficiency~~expectations, ofplans, ~~our~~intentions ~~insurance coverage generally~~ and ~~the~~projections reflected ~~ability~~in of our ~~insurers~~forward-looking tostatements ~~fully~~are ~~and~~reasonable, ~~timely~~such ~~meet~~statements ~~their~~are subject ~~contractual~~to ~~commitments;~~known ~~• the effect of our operational~~ and ~~contractual~~unknown ~~modifications on the profitability on our Northeast~~risks, ~~Waste~~uncertainties ~~Stream~~ and ~~Parallel~~other ~~operations;~~factors ~~• the impact~~ that ~~our financial condition~~ may cause ~~have~~actual onresults, ~~our~~performance ~~relations~~or ~~with~~achievements ~~customers,~~to ~~suppliers~~be ~~and~~materially ~~employees;~~different from •any future ~~technological~~results, ~~change~~performance ~~and~~or ~~innovation,~~achievements ~~which~~expressed ~~could~~or ~~result~~implied inby the ~~reduced~~forward-looking ~~amounts~~statements. ofThe ~~waste~~risks, ~~being~~uncertainties ~~generated~~and orother ~~alternative~~factors that ~~methods~~our ofstockholders ~~disposal~~and ~~being~~prospective ~~developed;~~investors ~~and~~should •consider ~~the~~include, ~~effects~~but are ofnot ~~general~~limited ~~economic~~to, ~~conditions.~~the following:

~~ITEM~~• 3our ability to extend the term of our credit facility or obtain an alternative source of financing by July 31, 2003; • our ability to continue to fund our operations from borrowings permitted under our credit facility and operating cash flows; • possible defaults under our credit facility if cash flows are less than we expect or we are unable to comply with the various covenants set forth in the credit agreement, and the possibility that we cannot obtain additional capital on acceptable terms if needed; • our general lack of liquidity; • the impact of any increase in interest rates under our credit facility either as a result of increases in the prime rate or as a result of changes in the facility, and the cost of alternative financing we may obtain, if available; • the dilution in ownership that may occur if we obtain new financing; • uncertainties caused by our inability to comply with the terms of our credit facility; • the outcome of pending litigation and administrative proceedings involving the Company, including the securities class action lawsuit and stockholder derivative action described herein; • our Detroit subsidiary’s ability to comply with the terms of the probation that was ordered as part of its plea agreement with the U.S. ~~QUANTITATIVE~~Attorney; ~~AND~~• ~~QUALITATIVE~~our ~~DISCLOSURES~~ability ~~ABOUT~~to ~~MARKET~~obtain ~~RISK~~ or maintain governmental permits and approvals necessary for the operation of our facilities; • our ability to obtain performance bonds, letters of credit and other financial assurances required by our customers or regulatory authorities; • changes in existing laws and regulations governing environmental protection, zoning and other matters affecting our operations; • existing regulations affecting disposal of hazardous and nonhazardous waste being rescinded or relaxed, governmental authorities failing to enforce these regulations or other industry participants being able to avoid or delay compliance with these regulations; • our ability to compete with Newpark Resources and other industry participants for oilfield waste generated offshore or in inland waters in the Gulf Coast region; • the impact of the expiration of certain non-compete agreements that we obtained from sellers of certain businesses that we previously acquired; • potential liabilities associated with the disposal of hazardous and nonhazardous wastes;

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 approximates $91.1 million as of September 30, 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 risks. Our exposure to market risk for changes in interest rates relates primarily to our obligations under our revolving credit facility. As of September 30, 2002, $87.0 million and $1.1 million had been borrowed under the revolving credit facility and the equipment credit facility, respectively. As of November 11, 2002, $76.8 million and $1.1 million had been borrowed under the revolving credit facility and the equipment credit facility, respectively. As of September 30, 2002 and November 11, 2002, amounts outstanding under the revolving credit facility were accruing interest at approximately 12.5% and 13.0% per year, respectively, and amounts outstanding under the equipment credit facility were accruing interest at approximately 8.5% per year. A ten percent increase in short-term interest rates on the variable rate debts outstanding as of September 30, 2002 would approximate 48 basis points. Such an increase in interest rates would increase our quarterly interest expense by approximately $0.1 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~~• topossible ~~such~~changes ain ~~change~~our ~~are~~estimate ~~also~~of ~~not~~the ~~considered.~~impact ~~If it~~of ~~were~~the insolvency of Reliance Insurance Company, one of our former insurance carriers; • changes in the level of exploration for and production of oil and gas, particularly in the Gulf Coast region; • possible changes in our estimate of site remediation requirements, final closure and post-closure obligations, compliance and other audit and regulatory developments; • the sufficiency of our insurance coverage generally and the ability of our insurers to ~~quantify~~fully ~~this~~and timely meet their contractual commitments; • the impact that our financial condition may have on our relations with customers, ~~the~~suppliers ~~results~~and employees; • future technological change and innovation, which could ~~well~~result bein ~~different than~~reduced ~~the~~amounts ~~sensitivity~~of waste being generated or alternative methods of disposal being developed; and • the effects ~~shown~~of ~~above~~general economic conditions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash and cash equivalents, accounts receivable, commutation balance of our finite risk bonding program, 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 $80.1 million as of March 31, 2003.

We do not utilize financial instruments for trading purposes and we do not hold any derivative financial instruments that could expose us to significant market risk. Our exposure to market risk for changes in interest rates relates primarily to our obligations under our revolving credit facility. As of June 25, 2003, $79.8 million had been borrowed under the revolving credit facility. As of June 25, 2003, amounts outstanding under the revolving credit facility were accruing interest at approximately 8.3% per year, excluding amortization of financing costs. A ten percent increase in short-term interest rates on the variable rate debts outstanding as of June 25, 2003 would approximate 43 basis points. Such an increase in interest rates would increase our quarterly interest expense by approximately $0.1 million assuming the amount of debt outstanding remains constant.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of ~~Disclosure~~disclosure ~~Controls~~controls and ~~Procedures~~procedure:

During ~~September~~the ~~and~~ninety ~~October~~day ~~2002~~period preceding the filing of this report, we carried out an evaluation, under the supervision and with the participation of ~~the Company’s~~ 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~~internal ~~Controls~~controls:

~~There~~ Except as described in the following paragraph, there have been no significant changes in ~~the~~our ~~Company’s~~ 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 procedures. In addition, we implemented a procedure requiring that a regional controller who is independent of 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 II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Regulatory Proceedings

In ~~October~~the ~~2002~~fourth quarter of 1999, Uthe SEPA ~~Liquids~~notified us of ~~Detroit,~~certain ~~Inc.,~~alleged violations aof ~~subsidiary~~the Resource Conservation and Recovery Act of U1976 Sby ~~Liquids~~our former ~~Inc~~Re-Claim Louisiana facility., ~~entered~~Among ~~into~~other anthings, ~~agreement~~the ~~with~~EPA alleged that the facility ~~U.S.~~accepted ~~Attorney~~waste infrom ~~Detroit~~Superfund ~~resolving~~remediation sites under the ~~investigation~~Comprehensive ofEnvironmental ~~our~~Response, ~~Detroit~~Compensation ~~facility~~and Liablity Act that it was not ~~commenced~~permitted byto ~~the~~accept ~~Environmental~~and then improperly disposed of such waste. In July ~~Protection~~2001, ~~Agency~~we ~~(“EPA”)~~entered ~~and~~into ~~the~~a ~~Federal~~consent ~~Bureau~~agreement ofwith ~~Investigation~~the inEPA ~~August~~resolving the EPA’s ~~1999~~allegations. Under the terms of the consent agreement, Uwe Spaid ~~Liquids~~a civil penalty of ~~Detroit~~$200,000 ~~agreed~~to the EPA and made certain improvements to ~~enter~~the facility. In May 2002, we received a ~~guilty~~subpoena ~~plea~~from tothe ~~specified~~U.S. ~~violations~~Attorney’s ofoffice ~~the~~in ~~Resource~~Shreveport, Louisiana ~~Conservation~~seeking ~~and~~various ~~Recovery~~documents relating to the Re-Claim Louisiana facility ~~Act~~covering ofthe ~~1976~~same time frame and relating to the ~~Rivers~~same ~~and~~activities ~~Harbors~~as ~~Act~~the EPA’s allegations described above. ~~The~~Based ~~agreement~~upon ~~requires,~~information ~~among other~~available ~~things,~~to ~~that~~us at the time, we ~~pay~~believed athat $4the U.~~5 million~~S. ~~penalty~~Attorney’s ~~and~~office ~~contribute~~was ~~$1.0 million~~conducting toa criminal ~~certain~~investigation ~~community~~targeting ~~service~~a ~~organizations.~~former ~~These~~employee ~~amounts~~of ~~will~~the beRe-Claim ~~paid~~Louisiana ~~over~~facility. In December 2002, we received a ~~five~~ ~~year~~follow-up ~~period~~subpoena seeking additional documentation. InShortly ~~addition~~thereafter, we were advised by the ~~agreement~~U.S. ~~provides~~Attorney’s office that the ~~United~~Company ~~States District~~has ~~Court~~not ~~for~~been ~~the~~ruled ~~Eastern~~out ~~District~~as a subject of ~~Michigan~~this investigation. ~~will~~We ~~determine~~have ~~whether~~cooperated, and will continue to ~~what~~cooperate, ~~extent~~with ~~interest~~the U.S. ~~must~~Attorney’s beoffice ~~paid~~in onconnection ~~the~~with ~~deferred~~its ~~payments~~investigation. ~~During~~We ~~the~~have also been ~~fourth~~advised ~~quarter~~by ofthe ~~2001~~U.S. Attorney’s office in Fort Worth, weTexas ~~took~~that ait ~~charge~~is considering ofbringing a ~~$5.0 million~~civil toclaim ~~establish~~against athe Company under the Federal False ~~reserve~~Claims ~~for~~Act ~~this~~to ~~matter.~~remove Wemonies ~~believe~~paid ~~this~~by ~~reserve~~the isfederal ~~sufficient~~government ~~after considering~~to the ~~net~~Company ~~present~~for processing ~~value~~and disposing of the ~~total~~allegedly ~~obligation~~unpermitted waste. AnWe ~~additional~~do not believe ~~charge~~that ~~may~~the beresults ~~required~~of ifthe ~~interest~~investigation isby ~~imposed~~the U.S. Attorney’s office in Shreveport or any such civil action by the ~~court~~U.S. Attorney’s office in Fort Worth will have a material adverse effect on ~~the~~our ~~deferred~~business, results of operations or ~~payments~~financial condition.

~~The~~ During ~~EPA~~October ~~notified~~and usNovember in 1999, ~~that~~the ~~liquid~~California ~~waste~~Department ~~received~~of byToxic Substances Control (“DTSC”) inspected our ~~Re-Claim Louisiana~~processing facility in East Palo Alto, California, and ~~stored~~our ~~off-site~~transfer ~~contained~~facility ~~hazardous~~in ~~constituents~~Redwood ~~and~~City, California. On ~~therefore~~November 29, 1999, the ~~waste~~DTSC ~~could~~issued ~~not~~a besummary ~~processed~~of byviolations ~~the~~identifying ~~facility.~~various alleged Weviolations ~~believed~~of ~~that the~~California hazardous waste ~~could~~management belaws ~~handled~~and regulations asby ~~nonhazardous~~the ~~waste~~facilities. AWe ~~reserve~~disputed ~~was~~the ~~established for~~alleged ~~costs~~violations. toBetween December be1999 ~~incurred~~and inDecember 2002, the ~~event~~DTSC ~~that~~conducted ~~this~~several ~~waste~~more ~~had~~inspections toat the betwo ~~delivered~~facilities toand ~~a third~~noted ~~party~~other ~~for~~violations, ~~processing~~which ~~and~~we ~~disposal~~also disputed. AsIn ~~previously reported~~June 2003, the ~~Re-Claim Louisiana~~Company ~~facility~~received ~~ceased~~notice ~~on-going~~from ~~operations~~the inDTSC ~~early~~of ~~2001.~~its Asintention ofto ~~September~~commence ~~30,~~enforcement ~~2002,~~action wewith ~~had~~regard ato ~~remaining~~these ~~reserve~~violations. ofWe ~~approximately~~do ~~$0.2 million~~not toanticipate ~~process~~that ~~and~~this ~~dispose~~enforcement action will have a material adverse effect on our business, results of ~~the~~operations ~~remaining~~or ~~waste~~financial condition.

~~The~~ We ~~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~~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 complete at all three sites. Based upon the information currently

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 September 30, 2002, the balance of this reserve was $2.8 million, of which $0.3 million is classified as short-term and is expected to be paid in the next twelve months. 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 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 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 our 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 discussions with the ATF, we believe 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 our customers that either have already been denied or are likely to be denied as a result of the alleged defects in the 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 September 30, 2002, the total reserve remaining was $0.5 million. Management believes that this reserve is sufficient.

Litigation

During the third quarter of 1999, six purported securities class action lawsuits were filed against the Company and certain of its officers and directors in the United States District Court for the Southern District of Texas, Houston Division. These lawsuits have been consolidated into a single action styled In re: U S Liquids Securities Litigation, Case No. H-99-2785, and the plaintiffs have filed a consolidated complaint 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 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 our March 1999 stock offering. The lawsuit is currently set for trial on April 14, 2003; however, further proceedings and discovery in 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.

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 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~~located ~~Company’s~~near ~~affairs.~~Santa ~~The~~Barbara, ~~lawsuit~~California, ~~names~~each ~~the~~of ~~Company~~which aswas a ~~nominal defendant~~drum ~~and~~reconditioning ~~seeks~~or ~~compensatory~~disposal ~~and~~site ~~punitive~~previously ~~damages~~used onby ~~behalf~~Romic. ofWith ~~the~~respect ~~Company,~~to ~~interest,~~each ~~equitable~~of ~~and/~~these drum reconditioning or ~~injunctive~~disposal ~~relief~~sites, ~~costs~~Romic and ~~such~~a number of other potentially ~~relief~~responsible asparties ~~the~~have ~~court~~entered into administrative consent orders ~~deems~~and/or ~~proper.~~agreements Weallocating ~~believe~~each ~~that~~party’s ~~the~~respective ~~stockholder~~share ~~derivative~~of ~~action~~the ~~was~~cost ~~not~~of ~~properly~~remediating ~~brought~~the sites. Romic’s share under these consent orders and/or agreements weis ~~have~~as ~~filed~~follows: aBay ~~motion~~Area to— ~~dismiss~~6.872%; ~~this~~Lorentz ~~action~~— in5.62% ~~order~~and toCasmalia ~~allow~~Resources — 0.29%. Remediation is either underway or substantially completed at all three sites. Based upon the ~~Board~~information ofavailable, ~~Directors~~we have continued to maintain ~~consider~~a ~~whether~~reserve ~~such~~to ~~litigation~~cover isRomic’s inestimated costs to remediate the ~~best~~East Palo ~~interest~~Alto offacility and the ~~Company~~three ~~and~~drum ~~its~~reconditioning ~~stockholders~~or disposal sites. As of March 31, 2003, the ~~date~~balance of this ~~report~~reserve was $2.5 million, of which $0.3 million nois ~~ruling~~classified ~~has~~as ~~been~~short-term ~~made~~and byexpected ~~the~~to ~~court~~be onpaid in the ~~motion~~next totwelve ~~dismiss~~months. Management ~~This~~believes ~~lawsuit~~that this reserve is sufficient to satisfy Romic’s ~~currently~~obligations ~~set~~under ~~for~~the ~~trial~~consent inorders ~~February~~and ~~2003~~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.

On The ~~April 21,~~operations ~~1998,~~of wethe ~~acquired~~Beverage ~~substantially~~Division ~~all~~are ofsubject to regulation by the U.S. ~~assets~~Bureau of ~~Parallel Products~~Alcohol, aTobacco ~~California~~and ~~limited~~Firearms ~~partnership~~ (“~~Parallel~~ATF”). In addition to regulating the ~~consideration~~ ~~paid~~production, atdistribution ~~closing,~~and wesale ~~agreed~~of ~~that,~~alcohol ifand alcohol containing products, the ~~earnings~~ATF ~~before~~is ~~interest, taxes,~~also ~~depreciation~~responsible ~~and~~for ~~amortization~~collecting the federal excise taxes (“~~EBITDA~~FET”) ofthat ~~the~~must ~~businesses~~be ~~acquired~~paid ~~from~~on distilled spirits, wine and beer. If ~~Parallel~~alcoholic ~~exceeded~~beverages aon ~~specified~~which ~~amount~~the inFET ~~any~~have ~~four~~been ~~consecutive~~paid ~~quarters~~are ~~during~~returned to bond at our premises for destruction, the ~~three~~party ~~year~~who ~~period~~has ~~after~~paid the ~~closing~~FET ofon the ~~acquisition,~~destroyed product weis ~~would~~entitled ~~pay~~ to a refund. When our customers return distilled spirits, ~~Parallel~~wine anor ~~additional~~beer ~~$2.1 million~~from incommerce ~~cash~~to ~~and~~one anof ~~additional~~our ~~$2.1 million~~facilities infor destruction, we ~~the~~generally ~~Company’s~~file ~~common~~a ~~stock.~~claim ~~During~~with the ~~third~~ATF ~~quarter~~on behalf of ~~2000,~~that ~~Parallel~~customer ~~filed suit~~for ~~against~~refund of the ~~Company~~FET ~~alleging~~paid on that ~~the~~product. ~~acquired~~The ~~businesses~~ATF ~~achieved~~periodically inspects the Beverage ~~specified~~Division’s ~~EBITDA~~facilities ~~amount~~both to insure compliance with its regulations and to substantiate claims for FET refunds. During 2000, the ~~four~~ATF ~~quarters~~conducted inspections ~~ended~~at ~~December 31~~our Louisville, ~~1999~~Kentucky and ~~for~~Rancho Cucamonga, California facilities. At the ~~four~~conclusion ~~quarters~~of ~~ended~~these ~~March 31~~inspections, ~~2000.~~the ~~Parallel~~ATF ispreliminarily notified ~~seeking~~us athat ~~declaratory~~it intended to deny certain refund claims, some of which had ~~judgment~~already ~~that~~been paid by the ~~EBITDA~~ATF ~~amount~~to ~~specified~~our incustomers, due to what the ~~acquisition~~ATF ~~agreement~~alleged was ~~achieved~~inadequate, ~~and~~incomplete ~~that~~or itunsubstantiated issupporting ~~entitled~~documentation. toIn addition, ~~receive~~ the ~~contingent~~ATF ~~cash~~proposed ~~and~~a ~~stock~~civil penalty of $30,000 based on the alleged ~~payments~~defects ~~described~~in ~~above~~our documentation. ~~Parallel~~During ~~also~~the ~~alleges~~third quarter of 2001, the ATF notified us that, itin isorder ~~entitled~~to recoup refund claims previously paid to ~~recover~~our ~~compensatory~~customers, ~~damages~~the ATF was assessing taxes of $41.2175 million, ~~punitive~~against ~~damages~~the facilities. During the fourth quarter of 2001, ~~interest~~we offered to pay $450,000 ~~attorneys’~~to ~~fees~~the ~~and~~ATF ~~costs,~~to resolve all of the ATF’s claims against the facilities and delivered a check for such ~~other~~amount ~~relief~~to asthe ATF. The ATF recently accepted our offer and the ~~court~~settlement ~~deems~~has ~~proper~~become final. WeThe ~~have~~assessment paid to the ATF does not ~~denied~~address approximately $525,000 of refund claims that we ~~have~~submitted ~~any~~on ~~liability~~behalf toof our ~~Parallel~~customers ~~and~~that either have ~~filed~~already abeen ~~counterclaim against~~denied ~~Parallel~~or ~~alleging~~are ~~that~~likely ~~Parallel~~to ~~breached~~be ~~certain~~denied as a result of the ~~representations and~~alleged ~~warranties~~defects ~~made~~in our documentation. We have been engaged in discussions with the ~~acquisition~~affected ~~agreement.~~customers ~~This~~concerning ~~lawsuit~~the isrefund ~~currently~~claims in ~~set~~question and settlements have been reached with all of those customers whose claims we have identified. We continue to maintain a reserve for ~~trial~~this onmatter to ~~July~~cover any potential claims that have not been previously identified. As of March 1431, 2003, the total reserve remaining was $0.3 million. Management believes that this reserve is sufficient.

~~During~~ On ~~the~~April 29, ~~third~~2003, ~~quarter~~management announced that, due to improper recording of job ~~2002~~costs and certain other items at one of its business units, we ~~settled~~would restate our results of operations for the ~~claims~~years ~~asserted~~(and ~~against~~quarters uswithin) byended ~~Keith~~December 31, ~~Betts~~2002, ~~Betts~~2001 ~~Pump~~ and ~~Betts~~2000. ~~Environmental~~In connection with this announcement, ~~Inc.~~we contacted ~~The~~the ~~cost~~SEC which has initiated an informal investigation of the issues ~~settlement~~leading ~~was~~to ~~not~~the ~~material~~restatement. We intend to ~~our~~cooperate ~~operating~~fully ~~results~~with the SEC in this investigation.

~~From September 4, 1998 through September 3, 2000, Reliance Insurance Company or~~Litigation ~~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 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 may not be 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, we established a reserve to cover the estimated costs to satisfy our obligation 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. As of September 30, 2002, the balance of this reserve was $3.5 million. 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 considering the known payments at this time, management believes that the reserve is sufficient to satisfy our obligation with respect to all such 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 During ~~February~~the ~~1998,~~third wequarter ~~into~~of an1999, ~~employment~~six ~~agreement~~purported ~~with~~securities ~~our~~class ~~former chief~~action ~~financial~~lawsuits ~~officer,~~were ~~Earl~~filed J.against ~~Blackwell.~~the ~~The~~Company ~~employment~~and ~~agreement~~certain ~~provided,~~of ~~among~~its current and former ~~other~~officers ~~things,~~and ~~that~~directors ~~(i) if~~in the ~~agreement~~United ~~was~~States ~~terminated~~District byCourt ~~Mr. Blackwell~~for ~~without~~the Southern ~~cause~~District of Texas, MrHouston Division. ~~Blackwell~~ ~~would~~These ~~not~~lawsuits bewere ~~entitled~~consolidated tointo ~~receive~~a single ~~any~~action ~~further~~styled ~~compensation or~~In ~~benefits~~re: ~~under~~U ~~the~~S ~~agreement~~Liquids Securities Litigation, ~~and~~Case ~~(ii) if~~No. H-99-2785, and the ~~agreement~~plaintiffs ~~was~~filed ~~terminated~~a byconsolidated complaint alleging ~~Mr. Blackwell~~violations ~~with~~of ~~cause~~Sections 11, ~~Mr. Blackwell~~12(a)(2) ~~would~~and be15 ~~entitled~~of tothe ~~continue~~Securities toAct of 1933 ~~receive~~(“Securities ~~his~~Act”) ~~annual~~on ~~salary~~behalf of ~~$220,000~~purchasers ~~and~~of ~~employee~~the ~~benefits~~Company’s ~~for~~common ~~the~~stock ~~remainder~~in our ofMarch ~~the~~1999 ~~term~~public ofoffering ~~the~~and ~~agreement.~~violations Onof ~~July~~Sections ~~31,~~10(b) ~~2002,~~and ~~Mr. Blackwell~~20(a) ~~terminated~~of ~~his~~the ~~employment~~Securities ~~with~~Exchange usAct ~~alleging~~of ~~that~~1934 we(“Exchange ~~breached~~Act”) ~~the~~and ~~terms~~Rule 10b-5 ofpromulgated thereunder ~~his~~on ~~employment agreement~~behalf byof ~~usurping~~purchasers ~~his~~of ~~duties~~the ~~and~~Company’s ~~responsibilities~~common asstock ~~chief~~during ~~financial~~the ~~officer.~~period Onbeginning ~~October~~on May 212, ~~2002,~~1998 ~~Mr. Blackwell~~and ~~initiated an~~ending ~~arbitration~~on ~~proceeding~~August 25, ~~against~~1999. usThe ~~seeking to recover approximately $1.1~~plaintiffs ~~million~~generally inallege ~~damages,~~that ~~interest,~~the ~~attorneys’~~defendants ~~fees~~made false and ~~costs.~~misleading Westatements ~~deny that we have~~and ~~any~~failed ~~liability~~ to ~~Mr. Blackwell.~~disclose allegedly

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 deny that we have any liability to Mr. Rosen.

~~Our~~material ~~business~~information isregarding ~~subject~~the tooperations ~~numerous~~of ~~federal,~~our ~~state~~Detroit facility and the ~~local~~Company’s ~~laws,~~financial ~~regulations and~~condition ~~policies~~in ~~that~~the ~~govern~~prospectus ~~environmental~~relating ~~protection,~~to ~~zoning~~our March 1999 stock offering and in certain other ~~matters. During~~public ~~the~~filings ~~ordinary~~and ~~course~~announcements ofmade ~~business,~~by the weCompany. ~~have~~The ~~become~~remedies ~~involved~~sought inby athe ~~variety~~plaintiffs include designation of the ~~legal~~action ~~and~~as ~~administrative~~a ~~proceedings~~class ~~relating~~action, tounspecified ~~land~~damages, ~~use~~attorneys’ and ~~environmental laws~~experts’ ~~and~~fees ~~regulations~~and costs, ~~including~~rescission ~~actions~~to orthe ~~proceedings~~extent ~~brought~~any bymembers ~~governmental~~of the class still hold common ~~agencies~~stock, ~~adjacent~~and ~~landowners,~~such orother ~~citizens’~~relief ~~groups~~as the court deems proper. In ~~the~~January ~~majority~~2001, of the ~~situations~~court ~~where~~dismissed ~~proceedings~~the ~~are~~claims ~~commenced~~asserted by ~~governmental~~the ~~agencies,~~plaintiffs ~~the~~under Sections 10(b) and ~~matters~~20(a) ~~involved~~and ~~relate~~Rule 10b-5 toof ~~alleged~~the ~~technical~~Exchange ~~violations~~Act ofand ~~licenses~~in orApril ~~permits pursuant~~2002 tothe ~~which~~court wedismissed the ~~operate~~claims orasserted ~~are~~by ~~seeking~~the toplaintiffs ~~operate,~~under orSection 12(a)(2) ~~laws~~of orthe ~~regulations~~Securities toAct. ~~which~~Accordingly, ~~our~~the ~~operations~~lawsuit ~~are~~is ~~subject~~proceeding oronly ~~are~~with ~~the~~respect ~~result~~to ofthe ~~different~~claims ~~interpretations~~asserted under Sections 11 and 15 of ~~applicable~~the ~~requirements~~Securities Act. ~~From~~In ~~time~~June ~~to time~~2002, wethe court ~~pay~~determined ~~fines~~that ortwo individuals designated by the plaintiffs are adequate ~~penalties~~class inrepresentatives ~~governmental~~for ~~proceedings~~plaintiffs’ ~~relating~~claim tounder ~~our~~Section 11 ~~operations.~~of Wethe ~~believe~~Securities ~~that~~Act. ~~these~~In ~~matters~~August ~~will~~2002, ~~not~~the ~~have~~court aentered ~~material~~an ~~adverse~~order ~~effect~~defining onthe ~~our~~plaintiff ~~business or~~class ~~consolidated~~as ~~financial~~all ~~statements.~~persons ~~However,~~who ~~the~~purchased ~~outcome~~or ofotherwise ~~any~~acquired ~~particular~~Company common stock ~~proceeding~~pursuant ~~cannot~~or betraceable ~~predicted~~to ~~with~~our ~~certainty~~March 1999 stock offering. As discussed below, further proceedings and discovery of the ~~possibility~~lawsuit ~~remains~~have ~~that~~been suspended pending ~~technological,~~the ~~regulatory~~resolution orof ~~enforcement~~our ~~developments,~~litigation ~~results~~with ofour ~~environmental studies,~~insurance orcarrier ~~other~~over ~~factors~~whether insurance ~~could~~coverage ~~materially~~exists ~~alter~~for ~~this~~the ~~expectation~~claims atasserted ~~any~~by ~~time~~the plaintiffs.

It In isaddition, ~~not~~one ~~possible~~stockholder atof ~~this~~the ~~time~~Company tohas ~~predict~~filed a lawsuit against certain of the ~~impact~~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. ~~lawsuits~~Benn Carmicia v. U S Liquids Inc., ~~proceedings~~ et al., ~~investigations~~was ~~and~~filed in ~~inquiries~~the ~~may~~United ~~have~~States District Court for the Southern District of Texas, Houston Division, on usSeptember 15, ~~nor~~1999 isand itwas ~~possible~~subsequently toconsolidated with the ~~predict~~claims ~~whether~~asserted ~~any~~in ~~other~~the ~~suits~~securities orclass ~~claims~~action ~~may~~described ~~arise~~above. ~~out~~The plaintiff purports to allege derivative claims on behalf of ~~these~~the ~~matters~~Company inagainst the ~~future.~~officers ~~However,~~and itdirectors isfor ~~reasonably~~alleged ~~possible~~breaches ~~that~~of ~~the~~fiduciary ~~outcome~~duty resulting from their oversight of ~~any~~the ~~present~~Company’s oraffairs. The lawsuit names the Company as a ~~future~~nominal ~~litigation~~defendant and seeks compensatory and punitive damages on behalf of the Company, ~~proceedings~~interest, ~~investigations~~equitable and/or ~~inquiries~~injunctive ~~may~~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 ~~material~~motion to dismiss this ~~adverse~~action ~~impact~~in onorder ~~our~~to ~~consolidated~~allow ~~financial~~the ~~statements~~Board inof ~~one~~Directors orto ~~more~~consider ~~future~~whether such ~~periods~~litigation is in the best interest of the Company and our stockholders. WeAs ~~intend~~of the date of this report, no ruling has been made by the court on our motion to dismiss. ~~defend~~Since ~~ourself~~this ~~vigorously~~lawsuit has been consolidated with the securities class action, further proceedings in ~~all~~this lawsuit have been suspended pending the resolution ~~above~~of ~~matters~~our litigation with our insurance carrier.

We After ~~are~~the ~~involved~~filing inof ~~various~~the ~~other~~securities ~~legal~~class ~~actions~~action ~~arising~~lawsuits inand the shareholder ~~ordinary~~derivative ~~course~~action described above, we made demand on our insurance carrier, National Union Fire Insurance Company of ~~business~~Pittsburgh, PA, to defend the Company and our named representatives. ~~Management~~National ~~does~~Union ~~not~~declined ~~believe~~to ~~that~~defend the Company ~~outcome~~and our named representatives and filed a declaratory action in the United States District Court for the Southern District of ~~such~~Texas, Houston Division to determine its legal rights under our insurance policy. The Company ~~actions~~and ~~will~~National ~~have~~Union asubsequently ~~material~~filed ~~adverse~~motions ~~effect~~for onsummary judgment to determine whether coverage is available under the insurance policy. During the second quarter of 2003, the court granted National Union’s motion for summary judgment that it is not obligated to defend or indemnify the Company or our named representatives in the consolidated action. We intend to appeal the court’s ruling. Proceedings in the consolidated action will continue to be suspended ~~financial~~pending ~~statements~~the outcome of our appeal.

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. The trial in this case, which was originally set for July 14, 2003, has been rescheduled for October 20, 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 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 $0.3 million during the quarter ended March 31, 2003. We have committed to making additional payments of $0.7 million during 2003 and $0.7 million in 2004. After reviewing the remaining known claims, the reserve was adjusted to $3.2 million during the quarter ended March 31, 2003. Management believes that the reserve is sufficient to satisfy our obligations with respect to all known 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 hearing took place on May 7 and 8, 2003. The outcome of the arbitration has not yet been determined.

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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On November 15, 2002, we acquired 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 is $0.50. The exercise price for the other 50,000 shares is $0.625. This sale was exempt from registration under Section 4(2) of the Securities Act, no public offering being involved.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

See Note 3 to the unaudited condensed consolidated financial statements.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

4.15		Letter agreement, dated October 4, 2002, between U S Liquids Inc., various financial institutions and Bank of America National Trust and Savings Association, as Agent.
4.18		Fourteenth 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.
4.16		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.
4.19		Fifteenth 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.
10.28		General Release, Severance and Settlement Agreement, dated August 28, 2002, between U S Liquids Inc. and Michael P. Lawlor.
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.
10.29		Term Sheet for Employment of William M. DeArman.
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.
10.30		Term Sheet for Employment of Cary M. Grossman.
10.31		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. *

10.32		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.
10.33		License Agreement, dated as of November 1, 2002, between Liquid Environmental Solutions of Texas, L.P. and U S Liquids Inc.
10.34		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. *
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.

* Schedules to these Agreements will be furnished supplementally to the Commission upon request.

(b) Reports on Form 8-K

~~On June 14, 2002, we filed a report on Form 8-K announcing a change in our independent public accountants~~ None. On July 24, 2002, we filed a report on Form 8-K announcing we have agreed to purchase certain oilfield waste transfer stations from Trinity Storage Services, L.P. On August 1, 2002, we filed a report on Form 8-K announcing that Earl J. Blackwell had terminated his employment with the Company.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		U S LIQUIDS INC.
Date: November 18, 2002		/s/ William M. DeArman William M. DeArman, Chief Executive Officer
Date: November 18, 2002		/s/ Cary M. Grossman Cary M. Grossman, Executive Vice President and Chief Financial Officer

SIGNATURES

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


		U S LIQUIDS INC

Date: July 9, 2003	By:	/s/ William M. DeArman

		William M. DeArman
		Chief Executive Officer

Date: July 9, 2003	By:	/s/ Cary M. Grossman

		Cary M. Grossman
		Chief Financial Officer

CERTIFICATION

I, William M. DeArman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of U S Liquids Inc.;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the “Evaluation Date”); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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 quarterly report (the “Evaluation Date”); and

c. presented in this quarterly 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

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 quarterly 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: November 18, 2002 /s/ William M. DeArman William M. DeArman, Chief Executive Officer~~



Date: July 9, 2003		/s/ William M. DeArman

		William M. DeArman,
		Chief Executive Officer

CERTIFICATION

I, Cary M. Grossman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of U S Liquids Inc.;

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 quarterly report (the “Evaluation Date”); and

c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

da. 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

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

U S LIQUIDS INC. ~~Date: November 18, 2002 /s/ Cary M. Grossman Cary M. Grossman, Chief Financial Officer~~


Date: July 9, 2003		/s/ Cary M. Grossman

		Cary M. Grossman,
		Chief Financial Officer

Exhibit Index

Exhibit No		Description
Exhibit
4.15		Letter agreement, dated October 4, 2002, between U S Liquids Inc., various financial institutions and Bank of America National Trust and Savings Association, as Agent.
No.		Description
4.16		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.
4.18		Fourteenth 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.
10.28		General Release, Severance and Settlement Agreement, dated August 28, 2002, between U S Liquids Inc. and Michael P. Lawlor.
4.19		Fifteenth 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.
10.29		Term Sheet for Employment of William M. DeArman.
10.30		Term Sheet for Employment of Cary M. Grossman.
10.31		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. *
10.32		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.
10.33		License Agreement, dated as of November 1, 2002, between Liquid Environmental Solutions of Texas, L.P. and U S Liquids Inc.
10.34		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. *
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.
		* Schedules to these Agreements will be furnished supplementally to the Commission upon request.

Filing Compare · U S LIQUIDS INC